S&P cuts Red Hat outlook to negative

Standard & Poor's revised Red Hat Inc.'s outlook to negative from stable and affirmed its ratings following the announcement that Red Hat will file an extension for its May 2004 10-Q.

Red Hat is also responding to questions from the Securities and Exchange Commission regarding its 10-K for fiscal 2004 ended February, S&P noted. The company expects to restate its audited financial statements for fiscal years 2002, 2003, and 2004, as well as restate its unaudited financial statements for the first quarter of fiscal 2005 ended May.

S&P said Red Hat plans to file its May 2004 10-Q by July 19. The company has provided estimated financial statements for the periods affected with relatively modest restatements to revenues and profits.

However, S&P is revising the outlook to reflect the delayed 10-Q filing as well as the potential for additional disclosures stemming from the financial restatements, which have not yet concluded. The negative outlook also reflects the uncertain scope of the SEC's questions.

S&P said the ratings reflect the company's very high leverage, its rapid growth, its narrow product offering, which is in the early stages of adoption, its low barriers to entry and a rapid technology evolution. These concerns are partially offset by the company's adequate liquidity and positive cash flow, as well as a good number of software applications written for Red Hat's operating systems.

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