How the Dollar Affects Red Hat’s Top-Line Growth

Geographic contributions

Earlier in the series, we discussed Red Hat’s better-than-expected fiscal 2Q18 earnings. Red Hat’s (RHT) largest segment is its Americas segment, which accounted for ~64% of its total revenues in 2Q18. The remaining ~22% and 14% of the company’s revenues came from the EMEA (Europe, the Middle East, and Africa) region and the Asia-Pacific region.

Among all the company’s regions, EMEA reported the highest growth of 25.3% on a YoY basis. However, on a constant currency basis, this growth was only 21.3% primarily due to the strengthening of the euro in comparison to other currencies. In early September, the euro (FXE) recorded its three-year high against the US dollar. The company’s Asia-Pacific region reported 15.5% growth. On a constant currency basis, this growth was 18.1%.

How the Dollar Affects Red Hat’s Top-Line Growth

Dollar remains a concern for S&P 500 companies

The strengthening of the US dollar (UUP) has been pressuring the entire technology sector, and Red Hat’s top-line growth is also vulnerable to fluctuations in the dollar. Microsoft (MSFT), Oracle (ORCL), and IBM (IBM) are among the other tech players that derive the majority of their revenues from outside the United States.

The above chart from Factset shows that the US dollar (UUP) was cited by the majority of companies “in the index to date as a factor that either had a negative impact on earnings or revenues in Q2 or is expected to have a negative impact on earnings and revenues in future quarters.”

The US dollar got some strength on the back of President Donald Trump’s tax reform plan proposal. The plan calls for a reduction of the top income tax rate for high-earning individuals, decreased corporate tax rates, and reduced taxes for small businesses. The US dollar, which hit a 2.5-year low of 91.4 in the middle of this month, rose 2.5%.