Red Hat Inc.
) reported first-quarter 2014 adjusted earnings per share
(including share based compensation expense) of 24 cents, beating
the Zacks Consensus Estimate of 22 cents per share. On a non-GAAP
basis, Red Hat's first-quarter earnings of 32 cents per share
increased 6.7% from the year-ago quarter.
Revenues for the quarter increased 15.4% year over year to
$363.3 million, which came marginally ahead of the Zacks
Consensus Estimate of $362 million. Accounting for currency
related adjustments of $6.2 million, revenues for the quarter
increased 17.4% year over year to $369.4 million. Reported
non-GAAP revenues also surpassed management's guided range of
$358.0 million to $361.0 million.
The strong year-over-year growth in revenues was primarily
driven by a 15.9% (17.9% increase when adjusted for currency
impact) surge in subscription revenues and 12.5% (13.8% increase
when adjusted for currency impact) increase in revenues from
training and services on a year-over-year basis.
In the reported quarter, billings increased 12.0% year over
year to $346.0 million. Channel contributed 68.0% of the
bookings, while the rest came from direct sales.
Geographically, 54.0% of the bookings came from the Americas,
25.0% from Europe, Middle East and Africa (EMEA) and 21.0% from
Asia-Pacific. Additionally, Red Hat secured 30 deals worth $1.0
million each, of which 28 deals are worth over $1 million each
and the remaining two in excess of $5.0 million.
Among the secured deals, 60% had a middleware component and
five of them were standalone middleware deals. Red Hat's deals
included companies which provide telecom, hosting and cloud
services. The quarter also featured Red Hat's deals with some
financial services companies.
During the quarter the company announced new technologies that
are to be released in July. These include Red Hat Enterprise
Linux OpenStack platform and Red Hat Cloud Infrastructure.
Moreover, Red Hat's OpenShift online Platform-as-a-Service (Paas)
public cloud offering was launched during the quarter.
Additionally, Red Hat made significant progress on Red Hat
OpenStack Cloud Infrastructure Partner Network which has partners
International Business Machines Corp
). It has also reported that companies such Acxiom, NewLease and
Verizon Terremark have joined the Red Hat Certified Cloud
Red Hat's non-GAAP gross profit surged 15.2% year over year to
$312.7 million. Gross margin contracted 20 basis points (bps) to
86.1% in the quarter. Including share-based compensation of $2.8
million, gross profit came in at $309.9 million with margins of
Operating expenses on a non-GAAP basis increased 18.6% year
over year to $225.8 million. The year-over-year growth was
primarily attributable to higher sales & marketing (up 17.8%
year over year), research & development (up 23.2% year over
year) and general & administrative (up 1.2% year over year)
expenses. Operating expenses, as a percentage of the total
revenue, expanded 170 bps to 62.2% in the quarter. Including
stock based compensation of $20.3 million, operating expenses
came in at $246.1 million.
Non-GAAP operating income increased 7.1% from the year-ago
quarter to $86.9 million while operating margin declined
approximately 190 bps to 23.9% due to higher operating expenses.
Including stock based compensation of $23.1 million, operating
income came in at $63.7 million while margins came at 17.5%.
Red Hat's non-GAAP net income (excluding share-based
compensation and amortization) was $61.6 million or 32 cents per
share compared with $57.9 million or 30 cents per share in the
year-ago quarter. However, including stock-based compensation of
$23.1 million, net income stood at $46.3 million or 24 cents per
At the end of the first quarter, cash and cash equivalents
were $597.9 million compared with $487.1 million in the previous
quarter. Cash flow from operating activities was $142.0 million
compared with $136.9 million in the previous quarter.
For the second quarter of 2014, Red Hat expects revenues in
the range of $370.0 million to $373.0 million. Earnings on a
non-GAAP basis are projected in the range of 32 cents to 33 cents
Management expects non-GAAP operating margin to be around
23.9%. Red Hat also expects interest income of $1.0 million in
the upcoming quarter. Moreover, management expects federal
business to improve during the quarter.
Red Hat also reiterated its guidance for fiscal 2014. Revenues
are expected to range between $1.51 billion and $1.54 billion, an
approximate growth of 16.0% from the year-ago period..
Subscription revenues are expected to grow at twice the pace of
Operating cash flow for fiscal 2014 is expected between $500
million to $520 million. Red Hat expects non-GAAP earnings per
share of $1.31-$1.35, ahead of the Zacks Consensus Estimate of 94
cents. The company plans to spend $75 million on various projects
that are nearing completion.
We expect the investments made by the company to expand its
product portfolio through new product launches in the cloud and
virtualization segments, and acquisitions are the near-term
positives for Red Hat. Moreover, we believe that increase in the
customer base in various verticals as well as the deal wins are
expected to be the positive catalysts for the company.
However, we believe that the sluggish macroeconomic
environment could negatively impact IT spending and significant
foreign exchange volatility will act as a headwind in the near
Currently, Red Hat has a Zacks Rank #2 (Buy).
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