Red Hat Inc. saw its stock price slide nearly 7 percent Thursday after the software company reported revenue lower than expectations for its second quarter and projected lower-than-expected results for the current quarter.
Analysts expected the Raleigh-based cloud software provider’s revenue to be $828 million according to Yahoo Finance for the quarter, but the company reported revenue of $823 million.
In an earnings call Wednesday evening, Chief Financial Officer Eric Shander explained the revenue miss: Software subscription renewals in Red Hat’s Enterprise Linux program dropped, market competition was stiff, and the U.S. Army decreased its appetite for Red Hat’s services following a contract change.
“Certainly the lower renewal base has impacted [revenue growth],” said Shander. “We do believe that we’ve bottomed out in terms of the [Enterprise Linux] growth slowing down.”
Shander remained confident that revenue growth will pick up in the near future. “Our expectation from here and through the second half of the year and into next year [is] that we will see a re-acceleration of the growth rate,” he said.
However, the company forecast revenue between $848 million and $856 million for the third quarter, below current analyst projections of $862 million. And it said it expected earnings to be 87 cents per share in the third quarter, below the current projection of 92 cents per share.
CEO James Whitehurst told analysts over the phone that the firm’s strategy nearly three years ago was to source multi-year deals.
“Well, obviously, 2.5 years into that,” Whitehurst said, “We’ve done our best to get people in three-year deals, so our renewal base is quite small relative to where it’s been in the past.”
Whitehurst says that Red Hat is gaining traction with new products, including OpenShift and Ancible. Red Hat saw deal growth at 130 percent in the first quarter of 2018, and 120 percent this most recent quarter, according to Whitehurst.
“A lot of these deals will start smaller and it will certainly take a couple of years to cultivate them into larger strategic enterprise customers,” Whitehurst said, “but that absolutely is the strategy that we’re on.”
Per the release, Red Hat beat earnings per share estimates of 82 cents by 3 cents, hitting 85 cents per share. Earnings in the same quarter a year ago were 77 cents.
For the quarter, net income dropped to $86.8 million, down 10.5 percent from $97 million earned in the same period during 2017.
The company’s stock was trading at $133.53, down $9.63, or 6.7 percent, in Thursday afternoon trading.
