The complex world of foreign currency exchange and lower than expected billings cratered what was an otherwise strong start for Red Hat’s fiscal 2019.
The company had to readjust its full-year expectations due to what Red Hat CFO Eric Shander said were “headwinds that have developed in foreign exchange rates.” And lower billings caused some analysts to pull back a bit on their full-year expectations for Red Hat.
Shander explained that foreign exchange weakness during its first fiscal quarter of 2019 slashed about $3 million from revenues during the quarter. That weakness also forced the company to reduce full-year revenue guidance by $50 million to between $3.375 billion and $3.41 billion.
However, Shander noted that the reduction should also lower the company’s tax rate by 2.5 percent for the year but that it was modeling that decrease only for this year.
Red Hat posted $708.9 million in billings for Q1, which was between 1 percent and 5 percent below expectations. Shander said the company was seeing billings skewed toward the second half of its fiscal year.
Red Hat CEO Jim Whitehurst explained that some of that was tied to customers migrating from legacy middleware products like its JBoss platform to newer cloud-based offerings like OpenShift and OpenStack products.
“So that has probably impacted the growth rate a bit in that some of the prior kind of lift and shifts are happening less as people are just sticking to what they have until they’re looking to move to more container-based technology,” Whitehurst said.
Analysts said that transition needed to be monitored.
“Longer-term, we believe the growth in OpenShift could offset middleware slowdown due to higher mix, but potential cannibalization of JBoss due to OpenShift bears watching,” wrote BMO Capital Markets Analyst Keith Bachman in a research note.
Investors took the news to heart as Red Hat’s stock plunged on the news, trading down as much as 13 percent early Friday at around $145 per share. The drop could also be seen as some profit taking as Red Hat’s stock just last week hit a new 52-week high of $177.70 per share.
Red Hat was also coming off a fiscal fourth quarter of 2018 high that included strong growth for both the quarter and full year. That resulted in the company’s stock hitting a then 52-week high on the heels of that earning’s release.
As for its latest financials, Red Hat posted a 20 percent year-over-year increase in revenues, hitting $813.5 million for its latest quarter. That result was in line with analyst forecasts and was the company’s fourth straight quarter with at least a 20 percent increase in revenues.
Total cost of revenues increased a similar percentage resulting in gross profit’s rising 20 percent year-over-year to $690.8 million.
Total operating expenses increased a slightly more modest 19 percent year over year, which along with the tax benefits helped boost net income 50 percent year over year to $113.2 million.
$1B Buyback Extension
Red Hat’s board of directors also announced the extension of a share buyback program valued at up to $1 billion.
The original plan was scheduled to run through June 20 and had seen the company purchase 8.2 million shares for $751 million. The extension pushes the targeted end date to June 30.