Red Hat Inc. (
reported earnings of 18 cents per share (including stock-based
compensation of $25.8 million) in the second quarter of 2013,
missing the Zacks Consensus Estimate of 21 cents. The miss was
primarily due to higher operating expenses that fully offset strong
top-line growth in the quarter.
Total revenue jumped 14.7% year over year to $322.6 million,
which inched past management's guided range of $320.0 to $322.0
million as well as the Zacks Consensus Estimate of $322.0 million.
The strong year-over-year growth was driven by a 17.0% surge in
subscription revenue. Training and services revenue climbed 1.9%
In the reported quarter, billings increased 15.0% year over year
to $349.0 million. Channel contributed 66.0% of the bookings, while
the rest came from direct sales. Geographically, 58.0% of the
bookings came from the Americas, 24.0% from Europe, Middle East and
Africa ("EMEA") and 18.0% from Asia-Pacific.
In the reported quarter, Red Hat secured 27 deals worth over
$1.0 million, including four deals in excess of $5.0 million and
two deals over $10.0 million. Of the top 30 deals, approximately
50% were related to middleware component and four were standalone
middleware ("JBoss") deals.
In the reported quarter, gross profit (including stock-based
compensation of $2.2 million) surged 17.0% year over year to $275.9
million. Gross margin expanded 160 basis points ("bps") to 85.5% in
the quarter. This was primarily driven by a favorable revenue
In the quarter, operating expenses (including stock-based
compensation of $21.7 million) soared 23.7% annually to $220.5
million. The year-over-year growth was primarily attributable to
higher sales & marketing (up 23.9% year over year), research
& development (up 23.1% year over year) and general &
administrative (up 22.0% year over year) expenses. Operating
expenses, as a percentage of the total revenue, expanded 490 bps to
69.7% in the quarter.
This higher-than-expected jump in operating expenses had a
negative impact on operating income, which declined 4.0% year over
year to $55.4 million in the reported quarter. Operating margin
contracted 330 bps to 17.2% in the quarter.
Net income (excluding share-based compensation and amortization)
was $54.9 million or 28 cents per share compared with $56.5 million
or 29 cents per share in the year-ago quarter.
At the end of the second quarter, cash and investments
(including long term) was $1.36 billion compared with $1.30 billion
reported in the previous quarter. Cash flow from operating
activities was $103.9 million compared with $124.4 million in the
previous quarter. Total deferred revenue (including long term)
increased $31.1 million sequentially to $944.4 million.
During the quarter, Red Hat acquired a couple of companies
namely FuseSource and Polymita, which it expects to integrate with
JBoss technologies going forward.
For the third quarter of 2013, Red Hat expects revenues in the
range of $336.0 million to $339.0 million. Earnings on a non-GAAP
basis are projected in the range of 28 cents to 29 cents per share.
Management expects non-GAAP operating margin to be around
Red Hat trimmed its outlook for fiscal 2013. The company now
expects revenue of $1.32 billion to $1.33 billion (down from the
prior guidance of $1.34 billion to $1.36 billion). Operating margin
is expected to be in the range of 24.4% to 24.6% (down from prior
guidance 24.7% to 24.9%).
Earnings are expected to be in the range of $1.15 to $1.17 (down
from prior guidance $1.16 to $1.20 per share). Moreover, management
expects operating cash flow of $460.0 million for fiscal 2013
(prior outlook was $440.0 million to $460.0 million).
We believe that Red Hat is emerging as a significant cloud
computing story over the long term. Red Hat boasts an impressive
product lineup and expects to invest heavily for developing
innovative products. However, we believe that sluggish IT spending
and significant foreign exchange volatility will keep the stock
range bound in the near term. Moreover, a sluggish services
business and increasing investment may hurt profitability in the
We maintain our Neutral recommendation over the long term (6-12
months). Currently, Red Hat has a Zacks #3 Rank, which implies a
Hold rating in the short term.
RED HAT INC (RHT): Free Stock Analysis Report
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