Red Hat Inc. RHT is set to report second-quarter fiscal 2017 results on Sep 21. In the last quarter, the company delivered a positive earnings surprise of 6.06%. On an average, Red Hat has delivered a positive earnings surprise of 9.08% 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 topline growth. We believe that the company also has significant growth potential in the public cloud segment over the long term. In addition, the increasing demand for its offerings like OpenShift and OpenStack is a positive.
Additionally, Red Hat’s strong product pipeline, continuing investments to expand product portfolio and key partnerships with the likes of IBM Corp. IBM, Dell and Intel INTC will drive overall growth. Also, extensive share repurchase program is an added positive. At its last earnings call, management announced a new $1 billion share repurchase program to replace the $500 million plan that ended on Jun 30, 2016. The company also announced the acquisition of 3scale, an application programming interface (API) management technology firm.
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.
For the second quarter, Red Hat projects revenues of $587 million to $593 million and non-GAAP earnings per share of 54 cents including 1 cent impact from the 3scale acquisition. Non-GAAP operating margin is expected to be 22.8%.
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 (Strong Buy), 2 (Buy) or 3 (Hold) 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 are pegged at 35 cents.
Zacks Rank: Red Hat has a Zacks Rank #3, 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:
SYNNEX Corp. SNX has an Earnings ESP of +1.92% and a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.
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