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Red Hat Stumbles, Yet Again

Posted on Wednesday, Oct 3rd 2018

Linux provider Red Hat (NYSE: RHT) continues to deliver disappointing results. Despite missing expectations, the company does not appear worried. It believes that it has hit the “bottom” and things will only grow from here.

Red Hat’s Financials

Red Hat’s Q2 revenues grow 14% over the year to $822.7 million, falling short of the market’s forecast of $830 million. EPS of $0.85 was, however, better than the Street’s expected earnings of $0.83 per share for the quarter. During the quarter, Red Hat lost two large contracts. One was a contract with the US Army, and the other one was one of its 25 largest deals that was up for renewal and was not renewed. Red Hat did not divulge the name of the company who won the deal from it, but did mention that it was a legacy on-premise software provider and that it lost the deal on pricing. Red Hat has a long list of competitors ranging from traditional names like Microsoft, IBM, and VMWare to fast-growing companies like Ubuntu.

By segment, Subscription revenues grew 13% to $722.7 million, missing the market’s expected revenues of $724.1 million. Training and other services revenues came in at $100 million and were also short of the Street’s expected revenues of $104 million.

For the current quarter, Red Hat forecast revenues of $848-$856 million with an EPS of $0.87. This was significantly below the market’s forecast revenues of $862.7 million and EPS of $0.92 for the period. Red Hat revised its annual outlook downwards to $3.36-$3.40 billion in revenues with an EPS of $3.45-$3.49. The market was looking for revenues of $3.4 billion with an EPS of $3.47 for the year.

Red Hat maintains that the market needs to consider their performance long term. While the company’s stock has risen nearly 20% since the start of the year, the results sent it tumbling 6%. But its management is not concerned as it attributed the decline in the outlook to unfavorable currency conversion rates. The company also claims that “this is the bottom and it should re-accelerate from here”, as it expects “a lot more renewals” next year to drive growth.

Red Hat’s Product Expansion

Red Hat remains focused on its cloud offerings to drive growth. During the quarter, it announced the availability of the upgraded version of Ansible Tower. Ansible is Red Hat’s software platform that helps automate data center operations. The latest release includes an updated user interface and improves scaling and the ability to run Ansible Tower on Red Hat OpenShift Container Platform. OpenShift is Red Hat’s enterprise-grade Kubernetes container application platform. Red Hat is hopeful that the new release will help organizations become more nimble in managing hybrid infrastructure by being able to extend and scale automation across teams.

To expand its market reach, Red Hat recently launched an OpenShift Practice Builder program for system integrators in the Asia Pacific markets. The program is targeting to help system integrators build and monetize a modern cloud-native application development and delivery practice using Red Hat OpenShift and JBossMiddleware. The program will be targeted at the Asia Pacific markets. Red Hat believes that it will be essential in driving organizations to develop new cloud and container-based applications as well as in modernizing their existing applications. The program has already leveraged Red Hat’s existing relationships with NTT Data in Japan, Wipro in India, Sino-Bridge in China, and Integral and ANATAS in Australia in its development.

As Red Hat turned 25 this year, its CEO, Jim Whitehurst, shared his vision of what he expects open source’s future to be. According to him, open source will, one day, be the default computing choice. He puts that event to happen within ten years from now. I would like to know what your opinion is about this vision? Do you prefer the open source versions of applications for your organizations, or not?

Its stock is trading at $133.03 with a market capitalization of $23.6 billion. It touched a 52-week high of $177.70 in June this year. It has recovered from the 52-week low of $110.42 that it had fallen to nearly a year ago.

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