Red Hat Inc. (
reported first-quarter 2014 earnings of 23 cents per share
(including stock-based compensation but excluding one-time items),
beating the Zacks Consensus Estimate by a penny. However, earnings
decreased 2.9% year over year due to margin contraction in the
Revenues increased 16.7% year over year to $423.8 million and beat
the Zacks Consensus Estimate of $415.0 million. Revenues were
higher than management's guided range of $412.0 to $415.0 million.
Subscription revenues (87.8% of revenues) increased 17.0% year over
year to $372.0 million. Subscription revenues for infrastructure
related offerings (RHEL) increased 14.0% from the year-ago quarter
to $319.0 million.
Subscription revenues for the application development related and
emerging technologies jumped 45.0% year over year to $53.0 million.
Training & services revenues (12.2% of revenues) increased 9.2%
from the year-ago quarter to $51.8 million.
Billings increased 17.0% year over year to $404.0 million. Channel
contributed 67.0% of the bookings, while the rest came from direct
sales. Geographically, 56.0% of the bookings came from the
Americas, 25.0% from Europe, Middle East and Africa (EMEA) and
19.0% from Asia-Pacific.
Red Hat was able to renew all 25 deals scheduled in the quarter.
The top 30 deals were over $1.0 million in value. Four deals were
in excess of $5.0 million and one deal was greater than $10.0
million. Cross-selling was strong and top verticals were telecom,
cloud and healthcare.
During the quarter, the company expanded its relationship with
SAP AG (
. The company also previewed its recently launched flagship product
During the quarter, Red Hat acquired Inktank. Most recently, the
company announced the acquisition of eNovance, a cloud-based
infrastructure provider. eNovance has a strong clientele of
approximately 150 customers that include Alcatel-Lucent,
, Cloudwatt and Ericsson.
Gross margin (including stock-based compensation) expanded 10 basis
points (bps) to 85.4% on a year-over-year basis. However, gross
margin (excluding stock-based compensation and other one-time
items) contracted 20 bps to 84.8% in the quarter.
Subscription gross margin declined 10 bps to 92.5%, while training
& services gross margin fell 190 bps to 29.2%.
Operating expenses as percentage of revenues (including stock-based
compensation but excluding one-time items) increased 360 bps on a
year-over-year basis to 71.4% in the quarter.
Operating expenses as percentage of revenues (excluding stock-based
compensation and one-time items) surged 380 bps to 72.8%. Sales
& marketing expenses, as a percentage of revenues, increased
250 bps, while research & development increased 90 bps. General
& administrative expense, as a percentage of revenues,
increased 30 bps in the quarter.
Operating margin (including stock-based compensation but excluding
other one-time items) contracted 340 bps from the year-ago quarter
to 14.1% due to higher operating expense.
Operating margin (excluding stock-based compensation and other
one-time items) contracted 310 bps to 20.8% in the quarter,
more-or-less in line with management's guidance. The Inktank
acquisition negatively impacted operating margin.
Net income (excluding stock-based compensation and other one-time
items) was $64.2 million or 34 cents compared with $61.6 million or
32 cents in the year-ago quarter. Earnings were slightly better
than management's guided range of 32 to 33 cents per share.
Balance Sheet & Cash Flow
At the end of the first quarter, cash and cash equivalents were
$564.1 million compared with $646.7 million at the end of the
Cash flow from operating activities was $164.6 million compared
with $185.0 million in the prior quarter. The company exited the
quarter with deferred revenues of $1.27 billion, an increase of
20.0% on a year-over-year basis.
For the second quarter of fiscal 2015, Red Hat expects revenues in
the range of $432.0 to $436.0 million, while the Zacks Consensus
Estimate is pegged at $428.0 million. Management expects operating
margin to be around 23.0%.
Non-GAAP earnings are expected to be approximately 38 cents per
share for the upcoming quarter, much higher than the Zacks
Consensus Estimate of 25 cents.
For fiscal 2015, revenues are expected to range between $1.760
billion and $1.785 billion (up from prior outlook of $1.730 to
$1.755 billion), slightly above the Zacks Consensus Estimate of
$1.748 billion. Inktank and eNovance are expected to contribute
approximately $2.0 million of subscription revenues and $8.0
million of services revenues for the rest of the year.
However, these acquisitions will negatively impact operating margin
and earnings per share. Management expects non-GAAP operating
margin to be around 23.0% (down from prior guidance of 23.5%) for
Red Hat expects fiscal 2015 earnings to be in the range of $1.52 to
$1.54 (down from $1.54 to $1.56 per share), much higher than the
Zacks Consensus Estimate of $1.07 per share.
Operating cash flow for fiscal 2015 is expected to be between
$580.0 million and $600.0 million.
Red Hat's raised revenue guidance is a positive. Although
acquisitions will hurt margin and earnings per share in 2015, we
believe they are a good addition to Red Hat's product portfolio and
will drive top-line growth over the long term.
Red Hat continues to gain market share and its Linux servers are
well positioned to compete with
Windows servers in the enterprise market. We believe that the
company has significant growth potential in the public cloud
segment over the long term.
Additionally, Red Hat's strong product pipeline, continuing
investments to expand product portfolio and partnerships with the
likes of IBM, Dell and Intel will drive overall growth.
However, sluggish IT spending and intensifying competition remain
the major headwinds in the near term. Also, Red Hat's strategy of
sacrificing service revenues in order to increase subscription
revenues in the long run is expected to hurt top-line growth over
the next couple of quarters. This coupled with negative margin
impacts from the acquisitions will be an overhang in the near term.
Currently, Red Hat has a Zacks Rank #3 (Hold).
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