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(Update) Analyst's earnings-day jolt for Red Hat: ‘Lots of headwinds, a few tailwinds’

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• Red Hat profits beat Wall Street expectations
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RALEIGH, N.C. — Welcome to the virtualization reality of Wall Street analysts. Just as Red Hat makes a huge move into virtualization technology and prepares to announce earnings today, Jefferies & Company is taking a critical view of the world’s Linux leader.

Plus, the Wall Street turmoil could hit Raleigh-based Red Hat in a big way since its Linux-powered services and servers are used so widely in the financial sector, Jefferies noted in a report issued Wednesday morning.

Its grabber headline: "Lots of Headwinds, a Few Tailwinds."

However, the note didn't affect Red Hat shares, which closed up 6 cents on the day at $18.01.

While Katherine Egbert at Jefferies isn’t dropping out of the penguin-Linux march, she is warning that Red Hat (NYSE: RHT) paid a stiff price earlier this month in acquiring Qumranet. Not only is Red Hat supporting two brands of virtualization (enabling multiple operating systems on one machine) technology, it also paid $107 million in cash.

“We expect Red Hat to meet or beat our estimates for August,” Egbert wrote, “but we have taken down our [fiscal year 2009] estimates and price target due to the recent acquisition of Qumranet, [financial] risk, and exposure to financial services.”

Consensus on the street today is that Red Hat will report earnings of 18 cents per share. That would match what Red Hat reported last quarter – the first full three months under direction of Chief Executive Officer Jim Whitehurst.

Egbert reiterated her “hold” rating on the stock, but lowered her target for RHT shares to $19 from $20. Red Hat closed at $17.95 on Tuesday, up 10 cents.

In her note, Egbert said the Qumranet deal will represent a “dilution” and that “turmoil in the financial services” sector will hurt.

“Red Hat has a solid franchise,” she added, “but with IT spending falling in importance for many companies, and with virtualization technologies giving rise to a boom in low-cost Windows environments, we find it difficult to assign a premium multiple [value vs. earnings] to RHT shares at this time.” She noted that even at $19 a share the target is “15x” her fiscal year 2010 earnings estimates.

Digging into technical issues, Egbert also expressed reservations about Red Hat's now supporting both Qumranet [KVM-based virtualization] and another called Xen for eight years.

“We can’t feel but a little sheepish about this acquisition, given Citrix’s … less than stellar results so far from Qumranet competitor XenSource and the odd fact that Red Hat now supports two competing technologies,” Egbert wrote. As a result, she expects Red Hat execs to “guide down” earnings in the conference call.

If Whitehurst and company do that, watch out, RHT holders.

Well, Red Hat did in fact beat expectations - by 2 cents. That's good news, at least for right now.

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