Let there be no doubt that Red Hat
The sales numbers validate that the story is a success. By using partnerships with server vendors such as IBM
I believe management is correct that the company will grow like gangbusters and that there is room for plenty of growth internationally. But whether or not Red Hat is a market-beating investment is a mixed bag at today's prices, because it depends on growth robust enough to outstrip dilution by a material amount. In the company's fact-laden press release, you'll find that Red Hat had cash flow from operations -- not free cash flow mind you, which was $86.2 million -- of $122.2 million for the year, but spent $54.8 million during the last quarter to stem dilution and just less than $100 million on the year.
Taking the time to back out all of the money that was spent to buy stock and mask the dilution of stock options, you'll find that Red Hat didn't generate any free cash flow for shareholders this year. In fact, due to the dilution-masking, the company was free cash flow negative. This free cash flow calculation I've used is not as you'll find it normally explained because I'm pulling the share repurchases number from the financing activities section of the cash flow statement. You can make an argument that the share buybacks should not be counted toward free cash flow, but my take is that this is compensation expense, and because compensation expense is an operating expense, I'm just putting it back in where it belongs.
While management referenced a flat share count of 210 million shares as its target for fiscal year 2006, it remains to be seen how expensive it will be for Red Hat to meet that number. It will be interesting to see the most up-to-date numbers on possible dilution in the company's proxy statement and 10-K when they're filed with the SEC, which should be in the not too distant future.
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Fool contributor Nathan Parmelee has no financial interest in any of the companies mentioned.
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