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What's in Store for Red Hat (RHT) this Earnings Season? - Analyst Blog

Zacks Equity Research
Updated

Red Hat Inc. RHT is set to report fourth-quarter fiscal 2015 results on Mar 25, 2015. In the previous quarter, the company delivered a positive earnings surprise of 11.11%. On an average, Red Hat has delivered positive earnings surprise of 9.86% in the last four quarters. Let’s see how things are shaping up for this announcement.

Factors to Consider

Red Hat reported strong results in the last quarter with both earnings and revenues surpassing the estimates.

The company has been gaining market share and its Linux servers are well positioned to compete with Microsoft’s MSFT Windows servers in the enterprise market. We believe that the company has significant growth potential in the public cloud segment over the long term.

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Additionally, Red Hat’s strong product pipeline, continuing investments to expand product portfolio and partnerships with the likes of IBM, Dell and Intel INTC will drive overall growth.

However, sluggish IT spending and intensifying competition remain headwinds in the near term. Also, Red Hat’s strategy of sacrificing service revenues to increase subscription revenues in the long run is expected to hurt top-line growth over the next couple of quarters. This coupled with negative margin impacts from acquisitions will be an overhang in the near term.

Red Hat expects revenues in the range of $456 million to $459 million for the fourth quarter of fiscal 2015. Non-GAAP earnings are expected to be approximately 41 cents per share for the upcoming quarter.

For fiscal 2015, the company increased the lower end of its revenue guidance to $1.782 billion to $1.785 billion from the prior outlook of $1.770 to $1.785 billion.

Earnings Whispers?

Our proven model does not conclusively show that Red Hat is likely to beat earnings this quarter. That is because a stock needs to have both a positive Earnings ESPand a Zacks Rank #1, 2 or 3 for this to happen. This is not the case here as you will see below.

Zacks ESP: Red Hat currently has an Earnings ESP of -3.57%. This is because the Most Accurate estimate stands at 27 cents whereas the Zacks Consensus Estimate is pegged higher at 28 cents.

Zacks Rank: Red Hat has a Zacks Rank #3 (Hold) which increases the predictive power of ESP. However, we need to have a positive ESP to be confident about an earnings surprise.

Stock to Consider

A stock that according to our model has the right combination of elements to post an earnings beat is:

CACI International Inc. CACI with an Earnings ESP of +1.56% and a Zacks Rank #3.


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