$RHT Q4 Earnings Preview

by Enis March 27, 2013 3:15 pm • Commentary

Event: RHT reports its fiscal Q4 earnings after the close today.  The options are pricing in about a 8% move (based on our own implied move calculator), relative to 8.5% avg. move over the past 4 and 8 quarters.

Sentiment:  Wall Street analysts are fairly bullish on the stock with 20 Buys, 12 Holds and 1 Sell, and an average 12 month price target of around $62.  Short interest is near 1 year lows, at only 1.7% of float.  Option open interest is heavily skewed to calls, with a call to put ratio of more than 3 to 1 in terms of open interest.  The Apr 50 and 55 calls have the largest OI.

Fundamentals / Valuation:  Here is the breakdown of the key points to watch, according to GS Research:  

Red Hat will report F4Q13 results on March 27 post market close. We are modeling total revenue and non-GAAP EPS of $349mn and $0.30, which is in-line with the Street and toward the high end of the guidance range (guidance: $347-$350mn/ $0.29-0.30). We estimate a slight yoy FX headwind (120bp) to revenue for the quarter versus expectations for a neutral impact when guidance was provided. For the two most important metrics, bookings (revenue plus change in deferreds from the cash flow statement) and operating cash flow, we are modeling $472mn (+13% yoy) and $132mn (up +3% yoy), which compares with consensus at $480mn (+15% yoy) and $132mn (up +3% yoy), respectively.

On the whole, our field work suggests RHT saw a mixed business backdrop through FYE. We heard about large deal momentum related to middleware across several verticals including financial services, manufacturing, retail and oil and gas with partners generally describing positive pipeline dynamics moving into F1Q14. However, partners with exposure to Public Sector suggest spending trends through year-end were somewhat challenging, as investment to support existing projects was ongoing while new investment slowed. Of note, US government accounted for 12% of RHT’s F3Q13 revenue (11% YTD through F3Q13) which compares with 14% of revenue TTM as of the company’s June 2012 analyst day.

Over the past three F4Qs, RHT has reported an average of 2% (or $6mn) upside versus the high end of its revenue guidance range. However, given some risk related to Public Sector spend and a bigger FX headwind than initially expected, we think the potential for upside could be slightly more muted.


Price Action / Technicals: The stock has been stuck in a range for the past year, with the obvious resistance around 60-62.75, and near-term support at 46:

[caption id="attachment_24158" align="alignnone" width="635"]1 year daily chart of RHT, Courtesy of Bloomberg 1 year daily chart of RHT, Courtesy of Bloomberg[/caption]

I’ve drawn the 200 day ma in black, which sits at 53.50, essentially the middle of the range.

Volatility:  April at-the-money vol is about 55 with May around 41. IV across all months is at the upper range and what it usually spikes to going into the stock’s earnings events. Here’s a look at the last 2 years with IV30 in Red and HV30 in Blue:

[caption id="attachment_24160" align="aligncenter" width="591"]Screen Shot 2013-03-27 at 1.04.26 PM from LiveVol Pro[/caption]

Average IV tends to fall to the low 30’s and even the high 20’s following earnings so expect April and May to get hit pretty hard depending on the stock’s move.

My View:  No strong view on RHT as it’s not a name we have followed closely.  Implied move looks fair based on history, so no obvious advantage to buying or selling options to express a view.

The April 50/52.5/55 fly was discussed to play for a move up to the 53.50 level but it seemed too tight, and risked being right on direction and wrong on range if the stock broke meaningfully above its moving averages. So we didn’t seriously consider it.