KeyBanc Remains Bullish On Red Hat Despite Slowing Middleware Growth, Forex Headwind

Red Hat Inc RHT shares are under pressure after the software company reported above-consensus first-quarter non-GAAP earnings per share and 20-percent year-over-year revenue growth.

Red Hat's Q2 non-GAAP EPS and revenue guidance and fiscal full year 2019 revenue guidance trailed expectations.

The Analyst

KeyBanc Capital Markets analyst Alex Kurtz maintained an Overweight rating on Red Hat with a $184 price target. 

The Thesis

Red Hat's Q1 billings were light, impacted by customers reevaluating their middleware projects, compressed bookings duration and a smaller renewal base, Kurtz said in a Thursday note. The company noted steady demand for RHEL/infrastructure, which accounted for 64 percent of its revenues, the analyst said. 

The Red Hat Enterprise Linux growth, though in double-digits in Q1, was 3 points lower than in fiscal 2018, Kurtz said. 

The analyst expects RHEL to rebound through fiscal 2019, while the company indicated that some RHEL revenue is showing up in OpenShift.

The analyst outlined the following as signals highlighted by Red Hat bulls: 

• Red Hat's reiteration of its operating cash flow guidance.
• A $1 billion repurchase program.
• Q1 results reflected tougher comparisons.
• Q1 billings performance was in-line with seasonality.
• The consensus did not account for shortened contract duration.
• Buoyant large-deal flow and OpenShift adoption.

Kurtz named the following points highlighted by bears:

• The sustainability of the strong growth of RHEL. 
• The possibility of the middleware project pauses leaking into fiscal 2020. 
• A smaller renewal base in fiscal 2019 due to the current conversion of renewals from one-year to three-year deals. 

KeyBanc adjusted its fiscal 2019 estimates for Red Hat, citing a $50 million forex impact and a lower tax rate.

The Price Action

Red Hat shares were plunging 12.63 percent to $144.80 after the open Friday. 

The shares have gained about 38 percent year-to-date.

Related Links:

Raymond James Downgrades Red Hat Ahead Of Q1 Print

Cloud Confusion: Wall Street's Mixed Reaction To Red Hat's Q4