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Red Hat Inc. (RHT - Snapshot Report) is set to release its third quarter 2013 results on December 20, 2012. In the run up to the earnings results, we do not notice any movement in analysts’ estimates.

Prior Quarter Highlights

Red Hat reported top-line growth of 14.7% year over year to $322.6 million, which was ahead of the Zacks Consensus Estimate of $322 million. However, higher-than-expected operating expenses negatively impacted the bottom line. Earnings missed the Zacks Consensus Estimate. Operating expenses, as a percentage of the total revenue, expanded 490 bps year over year to 69.7%.

For the third quarter of 2013, Red Hat expects revenues in the range of $336.0 million to $339.0 million. Earnings on a non-GAAP basis are projected to be in the range of 28 cents to 29 cents per share. Management expects non-GAAP operating margin to be around 24.0%.

For further details please read: Higher Expenses Dent Red Hat’s 2Q

Estimate Revision Trend

Over the past 30 days, none out of the 13 analysts covering the stock revised their estimates. The Zacks Consensus Estimate for the third quarter remained at 20 cents, reflecting year-over-year earnings decline of 4.8%.

On the revenue front, the Zacks Consensus Estimate for the third quarter is pinned at $338 million, 16.6% higher than the previous-year quarter.

Analysts covering the stock are bullish about Red Hat’s continuing migration from UNIX to Linux, new Linux deployments, and growth in JBoss. Analysts expect RHEV server virtualization, cloud computing market, big data storage and traction in the middleware section to be incrementally beneficial going forward.

However, near-term concerns remain in the form of sluggish macroeconomic environment leading to weaker-than-expected IT spending and slower-than-expected hardware sales.

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. Moreover, 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 sluggish IT spending and significant foreign exchange volatility will keep the stock range bound in the near term. Moreover, a sluggish services business and increasing investment may hurt profitability in the near term.

We maintain our Neutral recommendation over the long term. Currently, Red Hat has a Zacks #3 Rank (Hold).

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