By: Craig Bowles
Red Hat, Inc. (RHT) is slated to report 3Q 2017 earnings after the bell on Wednesday, December 21st. The earnings release is expected at approximately 4:05 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
- Non-GAAP Earnings Per Share (EPS): Company guidance is $0.58. The current Street estimate is $0.58 (range $0.56 to $0.65). (Source: Yahoo! Finance). Consensus was $0.57 three months ago.
- Revenues: Company guidance is for $613 mln to $623 mln. Analysts expect an increase of 18.7% y/y to $621.5 mln (range $613.5 mln to $699.9 mln). Consensus was $614.9 mln three months ago.
- Billing Growth y/y: 2Q growth y/y was 19.56% after averaging 15.4% the previous four quarters.
- Adjusted Earnings Per Share (EPS) Guidance for 4Q2017: The current Street estimate is $0.61 (range $0.58 to $0.62).
- Revenues Guidance for 4Q2017: Analysts expect an increase of 17.3% y/y to $637.44 mln (range $626.1 mln to $643.7 mln).
- Adjusted Earnings Per Share (EPS) Guidance for FY2017: Company guidance is for $2.23 to $2.25. The current Street estimate is $2.24 (range $2.21 to $2.26).
- Revenues Guidance for FY2017: Company guidance is for $2.415 bln to $2.435 bln. Analysts expect an increase of 18.1% y/y to $2.42 bln (range $2.41 bln to $2.43 bln).
- P/Earnings of 67.6 compares to the 5-year average of 69.3; P/Book of 11.0 compares to the 5-year average of 7.5; P/Sales of 6.6 compares to the 5-year average of 8.0; P/Cash Flow of 21.0 compares to the 5-year average of 21.1.
- Analysts view Red Hat with: 22 Buy ratings, 5 Hold, and 1 Sell and a consensus price target of $89.30, according to MarketBeat.com.
- Insiders sold a net 54,902 (31,660 last qtr) shares the last three months and have bought a net 31,192 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 4.36%. Options are pricing in an implied move of 5.37% off earnings.
- 12/12: Evercore ISI estimates increased exchange-rate headwinds to be an 82 basis-points impact to revenue but otherwise expects a solid quarter for Red Hat citing the strong positioning in the infrastructure space. The core Red Hat Enterprise Linux (RHEL) business remains steady, while emerging technologies, including OpenStack and OpenShift, continue to gain momentum, according to a post on Barron’s.com.
- 12/09: Red Hat is expanding its OpenShift Platform-as-a-Service (PaaS) cloud to the Google Cloud Platform. This move comes days after Red Hat completed bringing its JBoss software stack to OpenStack, according to a post on zdnet.com.
- 11/29: T. Rowe Price Science & Technology fund manager Ken Allen’s top holdings include Red Hat which is actually a beneficiary of cloud computing, but the market is viewing it as if were on the wrong side of the cloud. In data centers, Windows is about 60% of computing and Linux is about 40%. That’s flipped in the public cloud, where Linux constitutes more than 60%, according to a post on Barron’s.com.
- 09/22: CEO Jim Whitehurst thinks no one is paying enough attention to Open Stack, the freely-available software stack. “We had three deals over a million dollars last quarter,” according to a post on Barron’s.com.
Red Hat’s stock found resistance above $80 in 2015 and approached that area again before the last two earnings reports, so here we are again. Point and figure technicians have a bullish price objective of $95 and previously had a bearish target of $61. (Chart courtesy of StockCharts.com)
Analysts remain bullish on Red Hat despite increased forex headwinds likely affecting revenue. Insider selling has slowly increased over the past six months. Red Hat has beaten earnings estimates by an average of 2c the last four quarters and beaten the high end of revenue guidance in each of those reports. Estimize consensus for Non-GAAP EPS of $0.59 on revenue of $622.0 mln compares to analyst consensus of $0.58 on revenue of $621.5 mln. Deferred revenue has increased 13%, 14%, 16%, 18%, and then 19% y/y the last five quarters, and has been an item of interest. 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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