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Red Hat Outlook Disappoints

Posted on Thursday, Jul 26th 2018

Recently Linux provider Red Hat (NYSE: RHT) reported its first quarter results. While the quarter’s performance outpaced market expectations, its outlook was disappointing, sending its stock crashing. Since the results, the company’s stock has fallen nearly 12%.

Red Hat’s Financials

Red Hat saw Q1 revenues grow 20% over the year to $814 million, against the market’s forecast of $807 million. On a constant currency basis, revenues grew 17% over the year to $791 million. EPS of $0.72 was also better than the Street’s expected $0.68 for the quarter.

By segment, Subscription revenues grew 19% to $712 million. Within the segment, infrastructure subscription revenues grew 14% to $522 million, and revenue from tools for writing applications rose 37% to $189 million. Training and other services revenues grew 27% to $102 million.

For the current quarter, the company forecast revenues of $822-$830 million with an EPS of $0.81. The market was looking for revenues of $855 million with an EPS of $0.89. Red Hat expects to end the current year with revenues of $3.375-$3.41 billion, reducing its outlook from the earlier forecast of $3.425-$3.46 billion. It expects to end the year with an EPS of $3.44-$3.48, better than the earlier outlook of $3.38-$3.41. The market was looking for revenues of $3.4 billion with an EPS of $3.47.

The market was not pleased with Red Hat’s outlook. But the company was unfazed and it wants investors to look “long term”. Red Hat defended the miss to a strong previous year that makes it a tough year for comparison.

Red Hat’s Container Growth

Red Hat is driving growth through focus on its cloud offerings including OpenShift – the container application platform. As part of this initiative, it has expanded its tie-up with cloud providers including AWS, Microsoft Azure, and IBM.

Its alliance with AWS will allow it to integrate AWS services within OpenShift Container Platform for hybrid users. The expansion of the alliance with Microsoft will enable enterprise developers to run container-based applications across both Microsoft Azure and on-premise environments. As part of the alliance, Red Hat will introduce OpenShift offering in the public cloud to make it easier for organizations to manage containers. Red Hat OpenShift will also allow enterprise developers to get the benefit of hybrid clouds by moving applications between both on-premise environments and Azure using OpenShift.

Its tie-up with IBM will also provide organizations with the ability to adopt hybrid cloud computing. IBM and Red Hat customers can now maximize existing technology investments and move more easily to the hybrid cloud with IBM Cloud Private and Red Hat OpenShift. While the migration to container environments will be helpful to Red Hat, in the short run, the transition is expected to hurt top-line growth this fiscal.

Red Hat is also dealing with growing competition from the likes of IBM and Oracle who are pushing their middleware offering through heavy price discounts. The tech giants are giving as much as 98% discounts to remain active in the market.

Despite the product innovations, the market is not pleased with Red Hat’s performance. Its stock is trading at $146 with a market capitalization of $26 billion. It touched a 52-week high of $177.70 in June this year.  It has recovered from the year low of $95.80 that it had fallen to nearly a year ago.

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