By: Craig Bowles
Red Hat, Inc. (NYSE:RHT) is slated to report 1Q 2015 earnings after the bell on Wednesday, June 18th. The earnings release is expected at approximately 4:05 p.m. EST with a 5:00 p.m. webcast conference call available through Red Hat Investor Relations. Red Hat is benefiting from a several positive trends, including adoption of open-source software, virtualization, data-center expansion, and cloud-computing. The company's open source products for enterprise customers received CRN's top rating for the second year in a row.
Outliers & Strategy
- Non-GAAP Earnings Per Share: The current Street estimate is $0.33 with a range of $0.32 to $0.33. (Source: Yahoo! Finance). Consensus was $0.37 three months ago.
- Revenues: Expectations are to increase 14.0% y/y to $413.97 mln (range $412.22 mln to $416.57 mln).
- Billing Growth: Analysts expect+12.7%, according to Zacks Institutional Services.
- Insiders have sold 93,267 shares the last six months. The company has been doing $300 mln buybacks the last few years and announcements have historically occurred in late March or April, so it's interesting that no 2014 announcement has occurred.
- Last quarter's earnings beat estimates by 2c causing an initial 3.3% rally before slumping off a minute after the release as the underlying data was digested. Similarly, a 2c beat in 2Q sold off 40 seconds after the release.
- Red Hat shares have a 1-day average price change on earnings of 8.98%. Options are pricing in an implied move of 7.45% on earnings.
- 06/05: Red Hat CEO Jim Whitehurst discussed "the business opportunity of a generation in what he calls a computing paradigm shift from client server to cloud architectures, in a post on Forbes.com.
- 06/05: Analysts show more optimism in recent quarters: 18 Buy ratings, 5 Hold ratings, and 0 Sell ratings with a consensus price target is $61.91, according to AnalystRatings.net.
- 05/29: Oppenheimer's survey of Red Hat customers suggested secular trends remain favorable while product demand appears healthy, according to Your Daily Buzz.
- 05/21: Cisco, when discussing takeover rumors, said Red Hat is an important partner of Cisco and integral part of data centers around the world, according to posts on StreetInsider.com.
- 05/19: Cowen and Co. said Red Hat's progress to date with OpenStack has been greater than anticipated, according to post on Barron's Blog.
Red Hat's stock has ranged mostly between $45.00 and $62.00 since 2011 most recently testing the low side of the range. $48 provided more recent support with 200-day moving average acting as resistance just above $51. Moving averages were recently inverted, so this is a good trend test. Trades above $51 have potential to move back up to the top of the range and below $48 gets into spotty support. (Chart courtesy of StockCharts.com)
Analysts have shown more optimism for Red Hat in recent quarters but the stock sold off since the last earnings release despite solid numbers due to shrinking operating margins. Margin shrinkage was caused by large investments in areas such as the OpenStack cloud structure. The broad trading range of the last two years increases the potential of an eventual breakout one way or the other. Red Hat beating estimates by 2c hasn't been enough recently for a positive market reaction but expectations are in a tight range. If the company reports $0.35 on revenue close to $415 mln, that would put earnings above analysts' range with revenue firmly above the expectation midpoint $414.4 mln. Billing growth is expected to slow to 13.5% this year from last year's 16.7% and above 12.7% would be a positive for the current quarter.
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