Most importantly, the company’s deferredrevenue rose  32% from last year and 1% sequentially to $496.9million.  That number represents nearly 70% of Red Hat’s expected 2008revenue.

Unfortunately, no earnings and revenue guidance was offered.  Ithas a conference call at 5:00 PM EST.  Shares closed down 0.3% at$17.90 in after-hours trading and shares are indicated marginallyhigher pre-market.

Jon C. Ogg
September 24, 2008

• ensuring open connections;
• promoting data portability;
• enhancing support for industry standards;
• fostering more open engagement with customers and the industry, including open source communities.

This isn’t a full open-source initiative.  We wouldn’t expect that the company will ever make all of its efforts open source, although "ever" is quite a long time.  It is also aimed at being being more EU-compliant.  We’d encourage you to go straight to the guts of the company release because the list of initiatives and comments is rather long.

Microsoft shares have pulled back about 1% since this news first broke as traders are not looking at this as any major change to its revenue or earnings structure.  Shares are still up 0.7% at $28.42 in mid-morning trading.

Jon C. Ogg
February 21, 2008

There is no doubt that this one is a beneficiary of ongoing window dressing and the tech-markup with the other key tech stocks outlined as we enter the end of the year for many fund managers in October.  But even with what we labeled as the "VMWARE CONUNDRUM" because of a low float exaggerating it’s price moves, money managers’ and traders’ demand for stock in the virtualization king seems tireless.

There is no doubt that the company is the leader in virtualization and there is no doubt that the company wants to exceed its targets and will do whatever it can to beat targets.  It has already made itself an acquirer and will likely do so at each new virtualization conference it attends.  But at a closing price of $101.61 what does this stock look like in valuation?

Wall Street has estimates set at $0.65 EPS & $1.27 Billion revenuesfor fiscal December 2007, and has $0.92 EPS and $1.84 Billion revenuesfor fiscal 2008.  With the hype of virtualization and the ever-cheaperprices of multi-core processors and ever-cheaper DRAM prices, you knowthose numbers are probably way too low if you are like myself and muchof Wall Street that believes virtualization is "the next next thing"for the IT sector and investors. So lets pretend that the companymanages 30% better earnings and 20% better growth in revenues using thecurrent expected growth rates.  You’d have nearly  $0.84 EPS and $1.6Billion in revenues for 2007, and then using the same upside surpriseAND the expected growth rates on top of these new hypothetical numbersyou would end up with a magical $1.54 EPS and $2.78 Billion in revenuesfor fiscal 2008.

Forget the 2007 projected P/E ratio of 156right now and the 2008 projected P/E ratio of 110.4.  Use the newmagical "upside surprise" numbers and the new forward P/E ratio is120.95 for 2007 and ‘only’ 66-times for 2008.  These almost becomeacceptable at this point.  But with a roughly a $38.9 Billion marketcap and even with the sustained upside surprise to revenue growthmodels, this would have an implied forward revenue multiple of 24.3 for2007 and 14 for 2008.

At today’s current valuations, it ispossible that VMware stock is trading at anywhere from over 3-times tounder 5-times the sales of the entire virtualization marketindustry-wide to 2010.  These levels aren’t just starting to look likemagic.  They are starting to look like wizardry.  It is even nearlyimpossible to blame traders for using stock options as a "less risky way" of having  exposure to the stock.

This isn’t one of Cramer’s "new four horsemen of tech"but it may be the horse trader.  When you start calculating EMC Corp.’s(NYSE:EMC) 86% ownership valued on paper before flooding the marketwith VMware shares at $33.45 Billion and compare it EMC’s own marketcap of $45.7 Billion, you will begin to scratch your head evenconsidering EMC ran more than 50% since announcing the partial spin-off.  The math starts getting fuzzy.

Keep in mind that with extremely low-float stocks of this sort, logic may not prevail for quite some time yet.  Even after lofty analyst projections,it has continued. Very soon, analysts may have to either boost their targets or make the dreaded "downgrades based upon valuation" calls that would be rather unpopular.  If the company doesn’t vote to allow employees tobreak the lock-up dates early or if EMC doesn’t vote to release Inteland Cisco (and maybe even some of its own VMW shares) early from the180-day lock-up periods, then you could literally see another 4-monthsor more of this.  Stranger things have happened, and in the stockmarket you can still go bankrupt even if your thesis ultimately provestrue.

We are getting ready to release our updated "watch list" of small cap Internet stocks to subscribers of our Special Situation Investing Newsletter,and trials are available.  Our watch list is not all only made ofactive buyout targets today, but under the right circumstances any ofthese could easily become subsidiaries of larger web-based properties.This year alone we have discussed how aQuantive, 24/7 Real Media, and Web.com were acquired off this list;and you can see samples of this.

Jon C. Ogg
October 10, 2007

Jon Ogg can be reached at jonogg@247wallst.com; he produces the Special Situation Investing Newsletter and he does not own securities in the companies he covers.

• Total revenue for the quarter was $127.3 million, an increase of 28% from the year ago quarter and 7% from the prior quarter. Subscription revenue was $109.2 million, up 29% year-over-year and 6% sequentially. Total revenue expectations from First Call were $117 million.
• Net income for the quarter was $18.2 million, or $0.09 per diluted share, compared with $16.2 million, or $0.08 per diluted share, for the prior quarter and $11.0 million, or $0.05 per diluted share, in the year ago quarter.
• Non-GAAP adjusted net income for the quarter was $36.9 million, or $0.17 per diluted share, after adjusting for stock compensation and tax expense as detailed in the tables below. This compares to non-GAAP adjusted net income of $33.7 million, or $0.16 per diluted share, in the prior quarter and $24.5 million, or $0.12 per diluted share, in the year ago period. Non-GAAP expectations from First Call were $0.17 EPS.
• Guidance was issued for the quarter was $131 to $133 million in revenues, and non-GAAP EPS of $0.18; estimates are $0.18 EPS and $132.5 million revenues.

Red Hat released the beta version of the Red Hat Developer Studio, an integrated Eclipse-based set of open source development tools and runtime environment.  VMware’s (NYSE:VMW) rapid launch and faster investor absorption tied with cheaper RAM and multi-core processors are both lining up to be just what the doctor ordered for Red Hat and other Linux players in general (read about that on the Red Hat site on virtualization).

In addition, Red Hat today announced that its Board of Directors had authorized the continuation of the Company’s stock and debenture repurchase program. Under the program, the Company is authorized to repurchase in aggregate up to $250 million of the Company’s common stock and in aggregate up to $75 million of the Company’s 0.5% Convertible Senior Debentures due 2024.

If Red Hat just meets fiscal FEB-2008 EPS targets at $0.70 then even after the 4% jump in after-hours prices its forward P/E ratio on a non-GAAP basis is becoming more than easy to mentally absorb at 27.5.  The company does have more competition, but this new opening up of the desktops from virtualization in 2008 to 2009 and beyond may really open up the market for this company. 

The wildcard for this one tomorrow is going to be the Wall Street research calls with upgrades or downgrades.  These numbers on the surface have no WOW-factor to them, but the flip side is that these numbers are also starting to look more normalized.

Jon C. Ogg
September 25, 2007

Jon Ogg produces the 24/7 Wall St., LLC Special Situation Investing Newsletter; he does not own securities in the companies he covers.

To throw another wrench in the machine, Friday is September stock options expiration date.  We recently noted how traders have been using stock options as a stealthy way of having exposure to VMware.  We have referred to a "VMware conundrum" and this may be contributing to the option trading as "less risky" trade if you can imagine that.

Some analysts have already started coverage, but the real researchfrom the underwriters is what Wall Street investors will be keying offof most.  Depending upon how the bulk of the analysts of theunderwriting firms initiate coverage this could be a large positive ornegative for the stock.  Virtualization is the next "next thing," andnow it will all boil down to how certain analysts are willing to valuea major growth story.

VMware now also has close to the same market cap of Adobe Systems(NASDAQ:ADBE).  You will have to determine your own valuations as thecompanies are at entirely different stages in the respective businesscycles, but this is worth a review.  VMware has already made an acquisition after less than a month of its IPO.  It also has an East Coast virtualization conference in the coming days and has made its plans for its European VMWORLD in early 2008.

Here were the firms that were in the final underwriting syndicatethat can begin coverage, although investors should be well aware thatnot all are obligated to cover the stock and we have not been given anyindications from the research departments of whether they will issuefavorable or cautious coverage:  Citigroup, J.P.Morgan, LehmanBrothers, Credit Suisse, Merrill Lynch, and Deutsche Bank.  Here arethe independent brokerage firms that VMware lists on its site thatalready cover the stock (plus current ratings we have found, whichcould have changed already):  Caris & Co. "Above Average"… Cowen & Co. "Neutral"… Jefferies "Buy"… RBC Capital "Sector Perform"… R.W.Baird "Neutral"… ThinkEquity "Source of Funds"… Bernstein (pre-IPO coverage)… and Benchmark (unknown).

Here you can also see how we covered the Special Situation specificallyregarding EMC Corp. (NYSE:EMC) and how we expected the VMware to playout for holders of EMC shares before and after the IPO.  We arebelievers in the sector and are not against these companies, but wedidn’t pull out the pom-poms with simple math calculations over "EMC has X-Billion all of a sudden in hidden value on the books."  This was sent out to subscribers of the Special Situation Investing Newsletter.

Stay tuned.  Once the coverage universe from underwriters opens up,there is going to more than likely be a lot of sudden volatility aroundthe shares.  If you take a look at the manner in which Goldman Sachsmerely removed EMC from its beloved Conviction Buy List, you’ll see what sort of volatility can be created in both stocks.

Jon C. Ogg
September 21, 2007

Jon Ogg can be reached at jonogg@247wallst.com; he produces the 24/7 Wall St. Special Situation Investing Newsletter and does not own securities in the companies he covers.

But there does exist this stock conundrum because of the EMC Corp. (NYSE:EMC) relationship and ownership.  The float is tiny, so it takes a far lower amount of money in and out of this stock to manipulate the price of a $25 Billion market cap.  To top it off, we noted earlier how investors are starting to use out of the money stock options as a manner of gathering exposure to the company.  While it is risky and while many of the strike prices may expire worthless, it is too hard to blame anyone for using a stock option to play the stock.  We just noted how this new $90 target from an analyst may be hard to justify, but this stock does have a mind of its own.

The VMWORLD CONFERENCE 2007 in San Francisco was a big catalyst for the company.  VMware even announced an acquisition of a private virtualization company after less than a month of being public.  That is good, because the company has a whole lot of market cap to grow into.  It cannot justify that market cap entirely on its own, so more partnerships and acquisitions would make sense.

But interestingly enough, there are some more virtualization conferences coming up.  There was a release out yesterday showing the InfoWorld Virtualization Executive Forum at the end of this month.
What’s good about this is now virtualization is on the map, and this one is in New York closer to the analysts and fund managers that may be looking for other ways to invest in the sector.  VMware also today announced the first annual VMworld Europe conference in Cannes, France from 26th-28th February 2008. 

There are many developments in this space and virtualization is going to be helped by cheaper and cheaper RAM and multi-core processing power.  Now the company itself has to demonstrate that its stock is worth the $25 Billion on paper.

Jon C. Ogg
September 13, 2007

Jon Ogg can be reached at jonogg@247wallst.com; he produces the 24/7 Wall St. Special Situation Investing Newsletter and he does not own securities in the companies he covers.

EMC Corp. (NYSE:EMC) made its buyout of VMware (NYSE:VMW), which was the huge IPO Tuesday, for some $635 million in a deal that was completed in early 2004.  The value of VMware and the market penetration is far better, and right now it seems that the market is treating the XenSource buy as a ‘me-too’ acquisition trying to catch a fad (although virtualization won’t be a fad).  With Microsoft (NASDAQ:MSFT) coming out with its own virtualization soon and with another competitor named Virtual Iron and others out there it seems like the space may get treated as crowded before it gets to even go mainstream.  We gave in our special situation investor newsletter subscriber service (sample now unembargoed) our playbook for capturing the downside in EMC right for after the IPO and that now seems to have mostly played itself out.

XenSource was VC-backed with a total of $41.5 million raised.  Virtual Iron was VC-backed, but also had Goldman Sachs (NYSE:GS) and Intel (NASDAQ:INTC) as investors.  VMware announced that Intel (NASDAQ:INTC) and later Cisco Systems (NASDAQ:CSCO) had each taken stakes before the IPO, but those were much larger investments with Intel putting in more than $200 million.  VirtualIron’s investment in 2005 was led by Intel with a whole group placing $8.5 million and an option for $2 million more with a strategic go-to-market partner. 

The industry pricing is roughly equal to the capital raised with VM’s Virtual Infrastructure running over $5,000 (and on up and up more) and XenSource running under half that for starters and then with VirtualIron running less than half again.  Being a lower cost provider works if you can out sell and out-partner a competitor, but only if you have more realistic goals and expectations.  Beating EMC at this is going to be more than tough even at its competitive pricing.

Symantec (NASDAQ:SYMC) also owns Altiris, which is also a virtualization package.  Intel has also dabbled in another virtualization player called SWsoft in 2005 and Intel also invested in VirtualLogix in the same space this June.  Oracle (NASDAQ:ORCL) seems like it is not in the fray here, so it might not be a shock to see them either make investments in these companies or buy one to see what it can do so it doesn’t cost billions in a few years.

You would think with the VMware IPO success that Citrix Systems would be viewed better, but maybe they are paying too much for too little and too late.  Even at the end of the day when the market went from -300 to positive before a slight down close, Citrix shares still closed on the downside by about 1.5% at $31.79.  It closed down roughly 1.5% on Wednesday as well, and that was the day the deal was announced.  Its 52-week trading range is $26.10 to $39.77, and looking at the trading shows a chart that seemingly wants to act a weaker than the market regardless of direction. 

Jon Ogg is a partner in 24/7 Wall St.; he is the publisher of the 24/7 Wall St. Special Situation Investing Newsletter and does not own securities in the companies he covers.

Maybe this new web search functionality within the suite is a help, but it is hard to imagine that very much of the tech geared technorati out there is going to instantly dump MS Office 2007 (or 2003) for the sudden cost savings.  Even if this is compatible under the OpenOffice and in support of the Open Document Format, how many businesses and how many well to do tech-oriented persons are going to TRULY dump Microsoft?  Exactly.  I have had hopes for Linux for literally 8 years and can even remember my first "Linux For Windows" software package that was nothing more than a demo after it was all said and done.

Linux in theory is great.  StarOffice(TM) in theory is great.  Open Office and the Open Document Format is great, in theory.  But when governments and major businesses use the Microsoft linchpin OFFICE the rest of this is just theory as far as total dollars spent is concerned.  Open source software is a great concept, but the fact that most of the initiative was too open has created a model set to fail.  It takes more than brains alone because the money flow and incentive has to be there.  Until a major "Linux-Only" initiative comes marching down Wall Street with Wall Street’s blessing then we are just having a theoretical discussion. 

The truth is that we’ll probably try this out personally.  But we aren’t scrubbing our Microsoft programs yet.  Until all of these new initiatives are able to get a major world government to unilaterally dump Microsoft for one of these open source formats then this is still cottage industry that will stay a cottage industry.  The cottage may turn into a manor, but that manor hasn’t proven it can become a citadel.  These are controversial statements and some readers may think "these are fighting words," but so far history has been more than on Microsoft’s side. 

We have cheered for a dual system universe since the 1990′s, but here we are still wishing.  Same old same old.  We may be running much of the same version of a future story in 10 years.  Maybe by then the prevalence of alternative software may have taken more share.  VMware’s (NYSE:VMW) virtualization packages may help this process, but in case you hadn’t noticed none of the ‘add on’ and virtualization packages out there really get rid of Microsoft and its expensive bulky products.  Most of us will still probably be buying some form of Office or Windows for another generation, if not more.

Sometimes the easiest solution isn’t the best solution, even if it makes sense in the long haul.  Logic dictates that a citadel can have many cottages, but not many cottages will become citadels.

Jon C. Ogg
August 16, 2007

Jon Ogg can be reached at jonogg@247wallst.com; he does not own securities in the companies he covers.