Red Hat Inc: Why Is Red Hat Stock on a Free Fall?

red hat stockRed Hat Stock Gets Hit by Uncertainties

Red Hat Inc (NYSE:RHT) announced its third-quarter results for fiscal year 2017, and the aftermath is not pretty. The open-source solutions provider announced results that beat profit expectations but missed revenue forecasts. Moreover, the company also announced the departure of its Chief Financial Officer, Frank Calderoni.

RHT stock plunged more than 10% in after-hours trading. The company reported adjusted earnings of $0.61 per share on revenue of $615.0 million.  

Total revenue for the quarter was $615.0 million, up 18% in U.S. dollars year-over-year, or 17% measured in constant currency. “Enterprise and service provider customers continue to adopt a hybrid cloud strategy for developing, deploying and managing the life-cycle of their critical applications. Red Hat is uniquely positioned to address this need.” said Jim Whitehurst, President and Chief Executive Officer of Red Hat. (Source: “Red Hat Reports Third Quarter Results for Fiscal Year 2017,” Red Hat Inc, December 21, 2016.)

The company provided guidance that disappointed investors and hit RHT stock. For the full year, Red Hat provided revenue guidance in the range of $2.397 billion to $2.405 billion. For the fourth quarter, revenue guidance is in the range of $614.0 million to $622.0 million.

Frank Calderoni notified Red Hat of his decision to step down as Executive Vice President, Operations and Chief Financial Officer. He will be joining another company as CEO and will be replaced at Red Hat on an interim basis by principal accounting officer Eric Shander.   

In the earnings call, Calderoni explained that Q3 was driven by strong renewals in large deals, cross-selling of the company’s cloud-enabling technologies, and lengthening of customer commitments to Red Hat. This sales traction is reflected in deals greater than a million, which are up 20% year-over-year. Moreover, Red Hat closed several large multi-year deals, including two deals over $20.0 million that did not bill beyond the first year. (Source: “Q3 FY17 prepared remarks 12/21/16,” Red Hat Inc, December 21, 2016.)

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Chart courtesy of StockCharts.com

Red Hat stock has shown a dismal year-to-date performance, posting losses of almost four percent. The broader S&P 500 index posted gains of over 13% in the same period. However, as is clear from the chart above, RHT stock has been a good performer over the past three years and has gone up by almost 13%. This is way ahead of the benchmark index. Although the short-term troubles are weighing on the stock at the moment, the company’s fundamentals look strong.

As Red Hat’s management clarified, there were unexpected challenges in the quarter. Foreign exchange volatility negatively impacted the company’s Q3 revenue by more than $3.0 million, and the previously-implied guidance for Q4 by $16.0 million. Also, some sizable November deals in the U.S. federal space have taken longer than initially expected to close.

These deals are expected to move forward in the fourth quarter, and management is confident that its customer base will continue to grow. Red Hat stock will be buoyed again as the current headwinds are cleared.