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What's in the Card for Red Hat (RHT) in Q4 Earnings?

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Red Hat Inc.  is set to report fourth-quarter fiscal 2016 results on Mar 22. In the last quarter, the company delivered a positive earnings surprise of 3.33%. On an average, Red Hat has delivered a positive earnings surprise of 11.62% over the past four quarters. Let’s see how things are shaping up for this announcement.

Factors to Consider

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 in the public cloud segment over the long term.

Additionally, Red Hat’s strong product pipeline, continuing investments to expand product portfolio and key partnerships with the likes of IBM Corp. (IBM - Free Report) , Dell and Intel (INTC - Free Report) will drive overall growth. The company also struck a deal with Samsung to provide the next generation of mobile solutions. It further extended contract with Lenovo to provide RHEL open stack platform for hybrid cloud deployments.

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 over the next few quarters.

Given the good performance in the year so far, the company raised its fiscal 2016 outlook. The company now expects revenues to be $2.044 billion to $2.048 billion (earlier projection was $2.03 billion to $2.04 billion). For the fourth quarter, Red Hat projects revenues of $535 million to $539 million, and non-GAAP earnings per share of 26 cents. Non-GAAP operating margin is expected to be 22.5%.

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, 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 the Most Accurate estimate and the Zacks Consensus Estimate are pegged at 31 cents.

Zacks Rank: Red Hat has a Zacks Rank #3 (Hold), 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 momentum.

Stock to Consider

The following stock can be considered at the moment as our model shows that it has the right combination of elements to post an earnings beat in its upcoming release:

GameStop Corp. (GME - Free Report) with an earnings ESP of +0.44% and a Zacks Rank #3.

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