Barclays Sees A 'Healthy Setup' Into Red Hat's Q1 Earnings

Red Hat Inc RHT is scheduled to report its quarterly results on June 22. Barclays’ Raimo Lenschow maintained an Overweight rating for the company, with a price target of $90. The analyst expects the company to report healthy top- and bottom-line results for 1Q17.

Red Hat continues to benefit from “a stable core RHEL business and generally strong adoption of its faster growth, emerging product offerings,” analyst Raimo Lenschow said, adding that FX impact should be minimal this quarter.

Growth-Margin Tradeoff

Lenschow mentioned that the top-line estimates for both 1Q17 and the full year implied that Red Hat would continue to generate mid-to-high teens growth. Adjusted operating margins are expected to remain flat to slightly down.

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Red Hat is likely to make further investments in growth areas since there opportunities existed. The analyst added that meaningful margin expansion was possible in the longer term, as OpenShift and OpenStack achieved greater scale. “Nevertheless, our assumptions regarding adjusted operating margin improvement remain muted over the near term.”

Improvement In VAR Results improve

“The results from our most recent reseller survey came back slightly more upbeat versus our last survey, and with a greater number of resellers exceeding their plan this quarter,” Lenschow wrote. He added that customer interest in emerging products seemed strong, which is “particularly encouraging” since OpenShift and OpenStack are expected to play a more important role in “the sustainability of Red Hat's longer-term top-line growth trajectory.”