Red Hat (RHT) Q4 Earnings To Gain From Portfolio Strength

Red Hat Inc. (NYSE:RHT) is set to report fourth-quarter fiscal 2018 results on Mar 26.

We note that, on an average, the company has delivered a positive earnings surprise of 6.73% in the trailing four quarters. In the last quarter, Red Hat delivered positive earnings surprise of 4.29%.

Earnings increased 20.2% on a year-over-year basis primarily driven by strong top-line growth and operating margin expansion.

Revenues increased 21.6% year over year to almost $748 million, primarily on the back of strong demand for hybrid cloud solutions. The figure was better than the Zacks Consensus Estimate of $734 million.

Red Hat's top-line growth is benefiting from improving linearity owing to on-time renewal of deals reflecting strong demand for hybrid cloud technology solutions as well as aggressive cross-selling.

Buoyed by solid results, Red Hat stock has returned 28.7% year to date, substantially outperforming the 7.8% rally in the industry it belongs to.

Outlook Positive

For the fourth quarter of fiscal 2018, Red Hat expects revenues between $758 million and $763 million. The Zacks Consensus Estimate for revenues currently stands at $761.96 million, up 21.2% year over year.

Non-GAAP earnings are anticipated to be 81 cents per share. The Zacks Consensus Estimate for earnings is currently pegged at 80 cents, reflecting year-over-year growth of 31.15%.

Moreover, non-GAAP operating margin is expected to be 24.6%.

Strong Partner Base, Acquisitions to Drive Growth

We believe that Red Hat’s strong partner base that includes the likes of IBM (NYSE:IBM), Intel (NASDAQ:INTC), Dell Technologies, Google (NASDAQ:GOOGL) cloud platform, Microsoft (NASDAQ:MSFT) Azure and Amazon (NASDAQ:AMZN) Web Services (“AWS”) will continue to drive growth. The company’s collaborations with cloud providers like Amazon, Google and now Alibaba (NYSE:BABA) positions it for significant top-line growth.

This is helping Red Hat to cross-sell cloud-based technology across its customer base. Emerging technologies have also been a driving factor.

Additionally, complementary acquisitions have led to a favorable product mix, which is in turn bolstering overall results. The company’s strategy of making acquisitions (3scale, Ansible, FeedHenry, eNovance, Inktank, Codenvy) that can be easily integrated into current business has expanded its product portfolio into higher-growth segments, such as Hybrid cloud and other emerging technologies (Cloud Management, OpenShift, OpenStack, and Storage).

Red Hat continued to win customer in the soon-to-be-reported quarter. Enterprises like Follett School Solutions, SIX Group, ZTE Corporation, and Elo selected Red Hat OpenShift Container Platform as their enterprise Kubernetes solution of choice in the quarter.

During the quarter, Red Hat acquired CoreOS, an innovator and leader in Kubernetes and container-native solutions, for a purchase price of $250 million.

What Our Model Says?

According to the Zacks model, a company with a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) has a good chance of beating estimates if it also has a positive Earnings ESP. Sell-rated stocks (Zacks Rank #4 or 5) are best avoided.

Red Hat has a Zacks Rank #3 and an Earnings ESP of +2.24%, which indicates a likely positive earnings surprise. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Stocks to Consider

Here is a stock you may want to consider as our proven model shows that it has the right combination of elements to post an earnings beat this quarter.

Lam Research (NASDAQ:LRCX) has an Earnings ESP of +0.37% and a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.

Cognizant Technology Solutions (NASDAQ:CTSH) has an Earnings ESP of +1.02% and a Zacks Rank #1.

Seagate (NASDAQ:STX) has an Earnings ESP of +2.97% and a Zacks Rank #1.

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