Red Hat Soars On Strong Q2; Merrill, S&P Upgrade

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Red Hat (RHT) shares are sharply higher this morning after the open-source software provider last night posted better-than-expected results for its fiscal second quarter ended August 31.

As I noted last night, the company reported revenue for the quarter of $183.6 million, above the Street at $179.1 million, and non-GAAP EPS of 20 cents, topping the Street at 15 cents.

On a conference call yesterday, the company said it sees Q3 revenue of $187 million to $189 million, with non-GAAP EPS of 15-16 cents a share. The Street had been expecting $184.9 million and 16 cents.

Bank of America/Merrill Lynch analyst Kash Rangan this morning raised his rating on the company to Buy from Neutral, lifting his price target to $29, from $23.50. (The stock closed yesterday at $24.88.) He writes in a research note that “RHT could see significant re acceleration in billings and cash flow” as it emerges from a first-half billings growth trough “and given its unique position to gain share from a weakening competitor,” a reference to Novell (NOVL).

Rangan adds that Red Hat, as a low-cost alternative, “is taking wallet share of tight IT spending.” He notes that year-over-year billings growth was 8% in the latest quarter, up from 3% one quarter earlier.

Standard & Poor’s analyst Jim Yin this morning upped his rating on the shares to Hold from Sell, with a new price target of $27, up from $18. “We see revenue and bookings growth ticking up near term as customers become more confident in the economy,” he writes. He lifts his February 2010 EPS estimate to 49 cents, from 43 cents.

RHT today is up $3.26, or 13.1%, to $28.14.