Red Hat Inc. (
is set to release its second quarter 2013 results after the closing
bell on September 24, 2012. In the run up to the earnings results,
we do not notice any movement in analyst estimates. Red Hat has
outperformed the Zacks Consensus Estimate in the preceding four
quarters by a positive 10.53%. We expect this trend to continue in
the current quarter.
Prior Quarter Highlights
Red Hat reported a strong first quarter 2013, with earnings of
22 cents per share that exceeded the Zacks Consensus Estimate by 3
cents. The better-than-expected result was driven by strong
revenue, which jumped 19% year over year to $314.7 million.
The year-over-year growth in revenue was driven by 21% surge in
subscription revenue and 7.5% annual growth in training &
services. In the seasonally weak first quarter, billings increased
16.0% year over year (20.0% on constant currency) to $310.0 million
in the quarter, a normal growth rate according to management.
Gross margin expanded 130 basis points ("bps") to 85.6% in the
quarter. This was primarily driven by an increase in training &
services gross margin and a better revenue mix. Operating margin
expanded 70 bps to 25.8% in the quarter, well ahead of management's
guided range of 24.0% to 24.2%.
For the second quarter of 2013, Red Hat expects revenues in the
range of $320.0 million to $322.0 million. Earnings on a non-GAAP
basis are projected in the range of 28 cents to 29 cents per share
(Red Hat reported 24 cents in the year-ago quarter). Management
expects non-GAAP operating margin in the range of 24.5% to 25.0%
(reported 25.1% in the year-ago quarter).
Estimates Revision Trend
Over the past 30 days, none of the 13 analysts covering the
stock revised their estimates for the quarter. Thus, the Zacks
Consensus Estimate for the second quarter was pinned at 87 cents
per share. Revenue estimate is pegged at $322.0 million for the
Analysts expect Red Hat to exceed the consensus estimates on the
back of strong demand for RHEV server virtualization, JBoss and
continuing migration from UNIX to Linux. Additionally, Red Hat's
offerings in the cloud computing market, big data storage, cloud
management and traction in the middleware section are expected to
be incrementally beneficial going forward.
We believe that Red Hat is emerging as a significant cloud
computing story over the long term. Red Hat boasts an impressive
product lineup and expects to invest heavily for developing
We believe that this strong product portfolio will help Red Hat
to counter stiff competition from
Microsoft Corp. (
VMware Inc. (
Oracle Corp. (
However, we believe that billings growth in the second quarter
will be closely watched by investors due to a sluggish IT spending
environment. Moreover, increasing investments may hurt
profitability going forward.
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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