Why Red Hat's Bottom-Line Beat Wasn't Enough for Investors

When Red Hat Inc. (NYSE: RHT) reported its fiscal second-quarter financial results after the markets closed on Wednesday, the company said that it had $0.85 in earnings per share (EPS) and $822.7 million in revenue. The consensus estimates had called for $0.81 in EPS and revenue of $827.6 million. And the same period of last year reportedly had EPS of $0.77 and $723.4 million in revenue.

At the end of the second quarter, the company’s total deferred revenue balance was $2.4 billion, an increase of 17% year over year. The negative impact to total deferred revenue from changes in foreign exchange rates was $40 million year over year. On a constant currency basis, total deferred revenue would have been up 19% year over year.

In terms of its segments, the company reported as follows:

  • Subscription revenue increased 13.4% year over year to $722.7 million.
  • Training and Services revenue increased 16.6% to $100.0 million.

Looking ahead to the fiscal third quarter, the company expects to see EPS of $0.87 and revenue between $848 million and $856 million. Consensus estimates call for $0.92 in EPS and $862.72 million in revenue for the quarter.

Jim Whitehurst, president and CEO of Red Hat, commented:

Customers continue to prioritize their digital transformation initiatives, and they are adopting Red Hat’s hybrid cloud enabling technologies to modernize their applications and drive greater efficiency and effectiveness in their business. The expansion of our technology portfolio has increased our strategic importance with customers, which is evidenced by the number of deals over five million dollars in the second quarter more than doubling year-over-year.

Shares of Red Hat traded down 7% early Thursday to $133.11. The stock has consensus analyst price target of $164.71 and a 52-week trading range of $104.51 to $177.70.

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