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Red Hat Inc. (RHT - Snapshot Report) 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 second quarter.

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.

Recommendation

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 innovative products.

We believe that this strong product portfolio will help Red Hat to counter stiff competition from Microsoft Corp. (MSFT - Analyst Report), VMware Inc. (VMW - Snapshot Report) and Oracle Corp. (ORCL - Analyst Report) going forward.

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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