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Is Red Hat's (RHT) Q1 Earnings Likely to Surprise Estimates?

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Red Hat Inc. (RHT - Free Report) is set to report first-quarter fiscal 2016 results on Jun 18. In the last quarter, the company delivered a positive earnings surprise of 11.11%. On an average, Red Hat has delivered positive earnings surprise of 10.71% in the past four quarters. Let’s see how things are shaping up for this announcement.

Factors to Consider

Red Hat reported strong results in the last quarter with both earnings and revenues surpassing the respective Zacks Consensus Estimate.

The company has been gaining market share and its Linux servers are well positioned to compete with Microsoft’s (MSFT - Free Report) Windows servers in the enterprise market. We believe that the company has significant growth potential in the public cloud segment over the long term.

Additionally, Red Hat’s strong product pipeline, continuing investments to expand product portfolio and partnerships with the likes of IBM Corp. (IBM - Free Report) , Dell and Intel (INTC - Free Report) will drive overall growth.

However, sluggish IT spending and intensifying competition remain the headwinds in the to-be-reported quarter and beyond. Also, Red Hat’s strategy of sacrificing service revenues to boost subscription revenues over the long run is expected to hurt top-line growth over the next couple of quarters. This, coupled with negative margin impacts from acquisitions, is likely to hurt first-quarter results.

For fiscal 2016, Red Hat expects revenues in the range of $1.99 billion to $2.02 billion including the impact of currency translations. On a constant currency basis, the company expects annual revenue growth of 9%. Management expects operating margin to be around 23.3%. Non-GAAP earnings are expected in the range of $1.79 or $1.82 per share.

Earnings Whispers

Our proven model does not conclusively show that Red Hat is likely to beat earnings this quarter. That is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1, 2 or 3 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 stand at 27 cents.

Zacks Rank: Red Hat has a Zacks Rank #3 (Hold) which when combined with a 0.00% ESP makes surprise prediction difficult.

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 momentum.

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