We expect Red Hat Inc. (RHT - Free Report) to beat expectations when it reports fiscal second-quarter 2018 results on Sep 25.
Why a Likely Positive Surprise?
Our proven model shows that Red Hat is likely to beat earnings because it has the right combination of two key ingredients.
Zacks ESP: Red Hat’s Earnings ESP is +0.21%. A favorable ESP serves as a meaningful and leading indicator of a likely positive surprise. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.
Zacks Rank: Red Hat currently carries a Zacks Rank #2 (Buy). Note that stocks with a Zacks Rank #1 (Strong Buy), 2 or 3 (Hold) has a significantly higher chance of beating earnings estimates. Conversely, Sell-rated stocks (Zacks Rank #4 or 5) should never be considered going into an earnings announcement.
The combination of Red Hat’s Zacks Rank #2 and +0.21% ESP makes us reasonably optimistic of an earnings beat.
What’s Driving the Better-Than-Expected Earnings?
We note that in the last quarter, Red Hat delivered positive earnings surprise of 7.69%. On an average, the company has delivered a positive earnings surprise of 3.68% in the trailing four quarters.
In fiscal first-quarter 2018, revenues increased 19.2% year over year to $676.8 million, primarily driven by strong subscription revenues and cross-selling of cloud-enabled technology. The figure was better than the Zacks Consensus Estimate of $647 million and the guided range of $643–$650 million.
Non-GAAP earnings for the quarter increased 12% year over year to 56 cents per share, which also surpassed the guided range of 52-53 cents per share.
Red Hat stock has gained 53.5% year to date, substantially outperforming the 27.4% rally of the industry it belongs to.
We believe that Red Hat’s partnerships and complementary acquisitions have led to a favorable product mix, which is in turn boosting the company’s top line. It completed the acquisition of the assets of data deduplicator, Permabit in July 2017, which is expected to add to its revenues.
The company’s strong partner base that includes the likes of IBM, Intel, Dell Technologies, Google cloud platform, Microsoft (MSFT - Free Report) Azure and Amazon Web Services, which also had a recent extended partnership agreement with Red Hat’s Openshift is a major tailwind.
Moreover, Red Hat is gaining from improving recurring revenues and cross-selling of cloud-based technology. Emerging technologies have also been a driving factor. The company anticipates that revenues from on-demand Certified Cloud and Service Providers (CCSPs) will reach $200 million annual run-rate in the soon-to-be reported quarter.
Notably, the company had a significant customer win in the second quarter with the British army migrating its private cloud environment to Red Hat Enterprise Linux and adopting Ansible Tower by Red Hat for the purpose of automation and orchestration. Its customer base also witnessed the addition of Intermountain Healthcare for its digital transformation.
Additionally, the company made a few enhancements to its offerings. Per Red Hat, the industry’s first production-ready open source hyperconverged infrastructure (HCI) solution was unveiled by the company during the quarter. The company also expanded its alliance with Microsoft for simplifying the process of adoption of cloud containers.
Other Stocks to Consider
Here are a couple of companies that you may want to consider as our model shows that these have the right combination of elements to deliver an earnings beat in their upcoming release:
Yelp (YELP - Free Report) with an Earnings ESP of +23.53% and a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.
Universal Display (OLED - Free Report) with an Earnings ESP of +11.11% and a Zacks Rank #1.
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