Red Hat (RHT, Financial) is set to reveal its fourth quarter earnings for fiscal 2015 on  March 25. After an upbeat Q3 result that sent its shares rising almost 11%, the company could well be looking to do an encore. Red Hat is the leading provider of open-source software and services based on the Linux operating system. The company competes with Microsoft Corporation (MSFT, Financial) and Oracle Corporation (ORCL, Financial) in the Enterprise Software market. Red Hat is also moving into the cloud-based software and services business with its OpenStack open-source products. Red Hat shares have surged 20.7% yearly in fiscal 2014 and are 3% up since its last earnings release.
Red Hat saw strong growth in the third quarter of fiscal 2015, with a 15% year-over-year growth in revenues to $456 million, with $395 million coming in from subscription, despite negative foreign currency headwinds. On a constant currency basis, revenue growth was 18% year-over-year. Although the company saw a drop in GAAP net income to $48 million or 26 cents per diluted share, compared to $52 million or 27cents per diluted share in the year ago quarter, both revenue and earnings for Q3 2015 beat the consensus estimate figures. For the fourth quarter, Red Hat expects revenues in the $456-$459 million range, with non-GAAP earnings expected to come in at around 41 cents a share. The company also increased the lower end of its revenue guidance for full fiscal 2015 from the prior outlook of $1.770-$1.785 billion to $1.782-$1.785 billion.
Overall Expansion Strategies Likely to Pay Off
Red Hat has been benefiting from a number of positive trends, including adoption of open-source software, cloud computing, data centre expansion and virtualization. The company has also been steadily gaining market share in the enterprise market, with its Linux servers well positioned to compete with Microsoft’s Windows servers. Moreover, experts foresee the company’s enduring investments towards portfolio expansion, its robust product pipeline, and partnerships with businesses such as Intel INTC, Dell and IBM, driving overall growth. Red Hat's core business is considerably healthy and the company expects to see a boost from the Red Hat Enterprise 7 product cycle in the course of 2015. With considerable growth potential in the open-source cloud segment over the long term, experts also believe the company’s robust set up will see it growing steadily over the medium to longer-term.
Strong Dollar, Sluggish IT Spending could Hit Bottom-lines
Conversely, Red Hat could well experience the negative impact of growing competition as well as a slowdown in IT spending across the globe. The company’s strategy to sacrifice service revenues in order to boost subscription revenues could also hurt top-line growth in the upcoming quarters, while the impact of negative margins from acquisitions is also likely to remain a near term headwind. Another major concern would be the strong dollar that has affected overseas revenues of majority businesses in the recent quarters.
Final Thoughts
Despite a number of negative headwinds working against the company, the market seems to be rather optimistic about Red Hat’s Q4 2015 results. Consensus estimates peg Red Hat’s non-GAAP earnings for the fourth quarter of fiscal 2015 at 41 cents a share, up 5.1% year-over-year, on revenues of $456.8 million. For Q1 2016, experts project 12.9% year-over-year growth in revenues to $478.5 million and a 20.5% growth in earnings to 41 cents a share. With the company beating consensus estimates by a small margin of 1-3 cents in the last four quarters, experts believe Red Hat would have to report earnings of at least 43 cents a share on revenues of over the $459 million high end of its guidance to support its bullish run. Red Hat shares have mostly traded in the $64-$70 range in the last three months, hitting a 52-week high of $71.11 in December 2014. The Red Hat stock carries a price estimate of $69.48 a share, and a ‘buy’ guidance.
