Earnings Preview: Red Hat (RHT)

Red Hat Inc. (RHT) is set to release its second quarter 2012 results on Wednesday, Sept 21, 2011. In the run up to the earnings results, we do not notice any substantial movement in analysts’ estimates for the quarter.

Looking Back at 1Q12

Red Hat reported earnings per share (EPS) of 18 cents (including stock-based compensation expenses but excluding amortization), which increased 28.6% year over year from 14 cents reported in the year-earlier quarter.

The year-over-year earnings growth was driven by strong revenues, which increased 26.6% year over year to $225.5 million in the first quarter. The strong revenue growth was driven by higher demand for cloud-computing technologies, as customers increasingly upgraded their datacenters to facilitate the adoption of cloud computing.

For further details please refer to: Red Hat Beats; Raises Outlook

Expectations in 2Q12

For the second quarter of 2012, Red Hat expects revenues in the range of $270.0 million to $272.0 million. The Zacks Consensus Estimate pins revenues at $269.0 million.

Non-GAAP EPS is projected in the range of 24 cents to 25 cents. The Zacks Consensus Estimate is pegged at 19 cents, below the guided range.

Operating margin is expected in the range of 25.4% to 25.6% and the expected tax rate is 31.0%.

Red Hat expects its fiscal 2012 revenues to be in the range of $1.07 billion to $1.08 billion (prior guidance $1.05 billion to $1.07 billion). The Zacks Consensus Estimate is pegged at $1.08 billion.

Non-GAAP EPS (excluding stock-based compensation) is expected in the range of 98 cents to $1.00 (prior guidance 94 cents to 96 cents). The Zacks Consensus Estimate is pegged at 75 cents.

Management expects non-GAAP operating income of 25.7% for fiscal 2012.

Red Hat continues to expect the operating cash flow to be between $330.0 million and $340.0 million for fiscal 2012.

Estimates Revision Trend

For the quarter, none of the 12 analysts covering the stock revised their estimates in the last thirty days. However, for fiscal 2012, out of the 13 analysts covering the stock, 2 analysts lowered their estimates. Nonetheless, the Zacks Consensus Estimate remained at 75 cents.

Analysts expect the company’s top-line to be positively impacted by currency rates. Analysts are also positive on the financial services vertical and expect Red Hat to be better positioned to benefit from its initiatives in the virtualization, middleware and cloud computing segment.

Our Take

Red Hat Inc. has consistently exceeded, or has matched estimates over the preceding four quarters. The average surprise in the preceding four quarters is a positive 6.25%, and another positive earnings surprise is expected from the company.

Red Hat is emerging as a significant cloud-computing provider. The company introduced a number of products during the first quarter, which includes CloudForms, an Infrastructure-as-a-Service offering and Openshift, a Platform-as-a-Service offering. These new solutions position Red Hat as a premier vendor of cloud technologies going forward.

Red Hat boasts an impressive product line up and expects to invest heavily for developing innovative products.

However, Red Hat faces competition from Microsoft Corp (MSFT) and Oracle Corp (ORCL) that could be a headwind going forward. The company’s increasing investment in the business will also pressure near term earnings.

We maintain our Neutral recommendation over the long term (6-12 months). Currently, Red Hat has a Zacks #3 Rank, which implies a Hold rating in the short-term.

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