Red Hat Rallies Higher on Earnings Beat

Shares of Red Hat

rallied higher on Friday after reporting earnings Thursday evening. Red Hat shares gapped up at the open, trading up about five percent near $55.55. The move was all the more impressive given the sharp drop seen in broader market indices; the S&P 500 fell roughly 17 points at the opening bell. Earnings per share for the third quarter came in line with expectations at $0.29, while revenue beat Wall Street estimates at $344 million -- analysts were anticipating only $338.05 million. The company also provided guidance for the fourth quarter. Red Hat said fourth quarter earnings would come in around $0.29-0.30 and sales would fall around $347-350 million; analysts were expecting earnings of $0.30 on revenue of $350.9 million. As part of the earnings release, Red Hat said it would acquire ManageIQ, a producer of IT management software. The acquisition of ManageIQ seems to signal a more aggressive approach to cloud computing. ManageIQ's software is primarily focused on helping companies integrate their data centers with public clouds. Analysts at Jefferies liked Red Hat's quarter, noting, “Given strength in the core, expanding TAM and strong cash flow, we reiterate our Buy [rating] and $67PT.” However, Deutsche Bank analysts were less than impressed, noting that the stock was suffering from a lack of meaningful catalysts. Deutsche Bank noted, “RHT's billing momentum, at 20% is primarily driven by a continuing shift away from proprietary UNIX solutions to Linux...the company is investing in a host of new initiatives to take advantage of these trends, but monetization is currently limited. Looking ahead, we don't see any near-term catalyst that could step growth back up to 25%.” Year-to-date, shares of Red Hat are up over 30 percent, a fairly solid return for a mid cap company.