Red Hat (RHT) to Report Q4 Earnings: What's in the Cards?

Red Hat Inc . RHT is scheduled to report fourth-quarter fiscal 2017 results on Mar 27. In the last quarter, the company delivered positive earnings surprise of 13.51%. On an average, the company has delivered a positive earnings surprise of 8.74% in the trailing four quarters.

Revenues increased 17.5% year over year to $615.3 million, lagging the Zacks Consensus Estimate of $618 million and came toward the lower-end of its own guidance range of $613-$623 million.

Notably, the year so far has been quite good for Red Hat. The stock has outperformed the Zacks Computer-Software industry on a year-to-date basis. While the stock has gained 18.4%, the industry advanced 9.2% in the same time frame.

Let's see how things are shaping up prior to this announcement.

Factors Influencing this Quarter

Red Hat projects revenues of $614 to $622 million and non-GAAP earnings of 61 cents per share. Non-GAAP operating margin is expected to be 24%. The top line is expected to benefit from the closure of several large federal deals that the company won in third-quarter fiscal 2017.

Red Hat, Inc. Price and EPS Surprise

Red Hat, Inc. Price and EPS Surprise | Red Hat, Inc. Quote

Red Hat has been gaining market share and its Linux servers are well positioned to drive top-line growth. We believe that the company also has significant growth potential through cloud actions, especially in the public segment. Additionally, increasing demand for offerings like OpenShift and OpenStack is a positive.

Further, Red Hat's strong product pipeline, continuing investments to expand product portfolio and key partnerships with the likes of IBM Corp. IBM , Dell and Ericsson ERIC will continue to drive overall growth.

However, sluggish IT spending and intensifying competition remains headwinds. Also, Red Hat's strategy of sacrificing service revenues to boost subscription revenues over the long run is expected to hurt top-line growth.

Earnings Whispers

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

Zacks ESP : Red Hat currently has an Earnings ESP of 0.00%. This is because both the Most Accurate estimate and the Zacks Consensus Estimate are pegged at 39 cents. You can uncover the best stocks to buy or sell before they're reported with our Earnings ESP Filter .

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

We caution against stocks with a Zacks Rank #4 or 5 (Sell-rated stocks) going into the earnings announcement, especially when the company is seeing negative estimate revisions.

A Stock That Warrants a Look

Here's a company that you may want to consider as our model shows that it has the right combination of elements to post an earnings beat in its upcoming release:

Seagate Technology STX has an Earnings ESP of +3.77% and sports a Zacks Rank #1. You can see the complete list of today's Zacks #1 Rank stocks here.

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Seagate Technology PLC (STX): Free Stock Analysis Report

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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