Weak Billings Growth Likely To Dominate The Red Hat Story Both Near And Long Term

Keith Bachman of BMO Capital Markets downgraded Red Hat Inc RHT to Market Perform from Outperform, as he believes the billings pressure will keep the stock range-bound.

For the November quarter, Red Hat’s billings were $679 million versus the BMO estimate of $713 million. Moreover, billings growth fell 10 percent in constant currency compared with 19 percent in the August quarter and 20 percent in the year-ago period.

Deferred revenue balance though increased 14 percent was also lower than the growth in the August quarter.

Concerning Trends

“[W]e believe the trends over the past year are concerning, with ongoing deceleration. Further, to try and improve growth, we have concerns that management may sacrifice margins,” Bachman wrote in a note.

If billings duration were contracting, the analyst expects long-term growth to slow more so than short-term growth.

Analyst's Billings, Free Cash Flow Estimate Adjustments

As such, Bachman cut his FY 2018 billings growth estimate to 10.5 percent from 13.2 percent, and lowered his free cash flow estimate to $784 million from $842 million.

“We forecast billings growth of 15 percent in Q4, but think billings growth will decelerate to 10–11 percent in FY2018,” Bachman added.

Disappointing Print

Meanwhile, Red Hat reported disappointing quarterly results, especially on the revenue front:

• Q3 EPS of $0.61 versus estimated $0.58.
• Q3 revenue of $615 million versus estimated $618 million.
• Q4 adjusted EPS ~$0.61 versus $0.61 estimate.
• Q4 sales at $614 million–$622 million versus the estimated $637 million.
• FY 2017 sales $2.397 billion–$2.405 billion versus $2.42 billion estimate.
• FY 2017 adjusted EPS ~$2.27 versus $2.22 estimate.

2018 Revenue Estimates, Target Price Trimmed By BMO

To reflect weak results and guidance, Bachman trimmed his FY2018 revenue estimate to $2.68 billion from $2.76 billion and EPS view to $2.58 from $2.61.

The analyst also slashed his target price to $75 from $89.

At last check, shares of Red Hat had plunged 13.22 percent on the day to $69.24.