Financial Performance

Red Hat Shares Dive on Disappointing Guidance

After five strong quarters where the enterprise software firm beat and raised estimates, "it came back to earth a bit," one analyst says.
Matthew HellerJune 25, 2018

Red Hat shares had their worst trading day since 2006 after the enterprise software company issued lower-than-expected second-quarter guidance.

The stock plunged 14.2% to $142.14 on Friday even though Red Hat’s first-quarter earnings beat analysts’ estimates. Before Friday’s tumble, the shares were up 84% over the past 12 months.

“Following a string of five strong quarters where Red Hat beat and raised estimates, it came back to earth a bit due to a number of what seem to be company-specific headwinds,” RBC Capital Markets analyst Matthew Hedberg wrote in a research note to clients.

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Red Hat CFO Eric Shander said the company continues to “expect strong demand for our hybrid cloud enabling technologies.” It provides open-source Linux software products that companies use to run servers in data centers and for cloud computing operations, getting most of its revenue from subscriptions.

But for the current quarter, Red Hat forecast revenue with a midpoint of $826 million and adjusted profit of 81 cents a share. Analysts had projected revenue of $855 million and earnings of 89 cents a share.

According to Investor’s Business Daily, there were several reasons for the weaker-than-expected guidance, including “unfavorable foreign exchange rates and increased competition. There was also some unexpected weakness with subscription revenue and renewals. Some customers were also re-evaluating business plans.”

The stock “had been on a roll, making it more vulnerable to quick market corrections,” The Motley Fool said.

Red Hat reported that in the first quarter, it earned 72 cents per share on revenue that rose 20% to $813.5 million. Analysts’ estimates were for earnings of 69 cents per share on revenue of $807.5 million.

Subscription revenue grew 19.3%, coming in at $711.5 million versus the $713 million consensus estimate.

“The move to hybrid cloud architecture continues to be a strategic priority for our customers,” CEO Jim Whitehurst said in a news release. “We again delivered strong revenue growth in Q1 as customers continued to adopt our cloud enabling technologies for their applications.”

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