North America

Earnings Preview: Red Hat Q2 2018 (RHT)

By: Craig Bowles

Overview

Red Hat, Inc. (RHT) is slated to report 2Q 2018 earnings after the bell on Monday, September 25th. The earnings release is expected at approximately 4:15 p.m. ET with a 5:00 p.m. webcast conference call available through Red Hat Investor Relations. Red Hat is benefiting from several positive trends, including adoption of open-source software, virtualization, data center expansion, and cloud computing.

Outliers & Strategy

Key measures:

  • Non-GAAP Earnings Per Share (EPS): Company guidance is $0.67. The current Street estimate is $0.67 (range $0.66 to $0.69). (Source: Yahoo! Finance). Consensus was $0.65 three months ago.
  • Revenues: Company guidance is for $695 mln to $702 mln. Analysts expect an increase of 16.6% y/y to $699.45 mln (range $696.48 mln to $699.45 mln). Consensus was $677.42 mln three months ago.
  • Billing Growth y/y: Q1 was over 20%.
  • Adjusted Earnings Per Share (EPS) Guidance for 3Q2018: The current Street estimate is $0.70 (range $0.68 to $0.73).
  • Revenues Guidance for 3Q2018: Analysts expect an increase of 15.5% y/y to $710.92 mln (range $702.12 mln to $719.10 mln).
  • Adjusted Earnings Per Share (EPS) Guidance for FY2018: Company guidance is $2.66 to $2.70. The current Street estimate is $2.69 (range $2.66 to $2.78).
  • Revenues Guidance for FY2018: Company guidance is for $2.785 bln to $2.825 bln. Analysts expect an increase of 16.7% y/y to $2.81 bln (range $2.80 bln to $2.85 bln).
  • P/Earnings of 73.3 compares to the 5-year average of 68.0; P/Book of 14.5 compares to the 5-year average of 8.2; P/Sales of 7.7 compares to the 5-year average of 7.5; P/Cash Flow of 24.1 compares to the 5-year average of 20.7.
  • Analysts view Red Hat with: 23 Buy ratings, 9 Hold, and 0 (1 last qtr) Sell, according to MarketBeat.com.
  • Insiders sold a net 55,106 shares the last three months and a net 222,684 shares in the past year. (source: NASDAQ.com) The company announced a $1 bln stock buyback on June 22, 2016 replacing 2015’s $500 mln plan that followed 2014’s $300 mln plan.
  • Red Hat results could impact other software solution companies, such as Microsoft (MSFT), VMware (VMW), and Oracle (ORCL).
  • Red Hat shares have a 1-day average price change on earnings of 5.22%. Options are pricing in an implied move of 5.24% off earnings.

Recent News

  • 09/19: Wells Fargo maintained an Outperform rating citing the recent momentum of large deals, the increasing uptake of its emerging technologies, and FX tailwinds. Management could raise cash flow guidance for FY2018, according to a post on StreetInsider.com.
  • 09/08: KeyBanc resumed coverage of Red Hat with an Overweight rating. Company products remain in a strong secular position citing customers seeking agile hybrid cloud PaaS and IaaS solutions coupled with increasingly levered container technologies. The analyst believes OpenShift is a key LT driver of ASP expansion which ought to sustain mid-teen subscription growth. Emerging solutions are the cornerstone to the company’s playbook, according to a post on StreetInsider.com.
  • 08/29: Red Hat named Narendra Gupta as Chairman after Hugh Shelton retired.
  • 08/22: Microsoft Corp. and Red Hat, Inc. announced an expansion of the two companies’ alliance with plans for new initiatives aimed at enabling enterprises to more easily adopt containers.
  • 07/31: Red Hat acquired the assets and technology of Permabit Technology Corporation, a provider of software for data deduplication, compression and thin provisioning.
  • 07/20: Red Hat is transforming itself into a strong player in cloud computing. They have and continue to generate a substantial percentage of their subscription revenue from their Linux Operating System business, according to a post on SeekingAlpha.com.

Technical Review

Red Hat’s stock found resistance above $80 in 2015 and 2016 before pushing back to 1999’s post-IPO highs. In 1999, RHT stock rose 1,650 percent and wasn’t even the top gaining IPO that year. Those were days… Balance area support is just below $100 and then just below $90 in the event of a reversal. (Chart courtesy of StockCharts.com)

Summary

Red Hat continues to deliver strong growth metrics but some analysts feel a ceiling has been reached. Analysts now show no sell ratings on Red Hat. Insider selling continues. Red Hat has beaten earnings estimates by an average of 2c the last four quarters. The company reported revenue above the high end of revenue guidance in three of the last four reports with two quarters ago being the exception. Estimize consensus for Non-GAAP EPS of $0.68 on revenue of $702.99 mln compares to analyst consensus of $0.67 on revenue of $699.45 mln. Billing growth was over 20% last quarter. Deferred revenue increased 21% y/y last quarter and above the 20% and 19% from previous quarters. Earnings and revenue guidance is always of interest. The stock has a tendency to react to the release and then reverse within a minute as underlying data is digested.

 

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