Galloping greenback rocks Red Hat

Q1 2019 beat guidance, but FY 19 forecasts were cut and investors bit back

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Red Hat has posted a fine set of results for the first quarter of its 2019 financial year, but offered reduced guidance for the rest of the year and been punished by investors as a result.

Q1 saw US$814 million in revenue roll in, up 20 per cent on the same quarter last year and $7m ahead of guidance. The company also experienced strong growth in operating income and 48 per cent year-on-year growth in deals over $1m. 30 per cent growth in emerging technologies came in part from 100 new customers signing up for the company’s OpenShift container platform.

The company’s services business grew nicely and president and CEO Jim Whitehurst proudly pointed out that Red Hat now has over 1,000 subscribers, up 70 per cent year on year.

87 per cent of all revenue was subscription, just the sort of thing Wall Street likes in these SaaS-y and cloudy times.

Yet the company’s shares traded at around $145 apiece after the bell, well below the $169.50 from earlier in the day!

Why the plunge? Because the company adjusted its guidance downwards, that’s why.

But not by much: Q2 was downgraded to between $822M and $830M, about $25m less than expected. Earnings per share were lopped from $0.89 to $0.81 too. Annual revenue guidance was forecast at $3.375bn to $3.41bn, down from $3.425bn to $3.46bn.

CFO Eric Shander Red Hat said the reason for the change was that “many of the foreign exchange rates we conduct business in have weakened against the dollar since we gave guidance in March.”

With the US economy roaring, it’s likely other currencies will continue to weaken against the greenback. But Red Hat’s $50m guidance slice took into account only current foreign exchange trends.

The company also admitted to some weakness in its middleware business, but Whitehurst said that should turn around as sales of OpenShift pick up because it needs middleware. However Shander said Oracle and IBM are discounting middleware by 98 per cent “or whatever it takes to hold onto that tail of the business”, making the field hard.

Red Hat’s execs tried to be upbeat on the company’s earnings call. But the market didn’t buy it, even though folks like Reg readers are increasingly happy to sign up for the company’s wares. ®

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