Red Hat Inc.
) surged 10.0% in after-hours trading on the heels of an upbeat
fiscal 2014 third quarter. Earnings jumped 44.8% from the
year-ago quarter to 42 cents per share.
Revenues increased 15.4% year over year to $396.5 million and
beat the Zacks Consensus Estimate of $382.0 million. Revenues
were also ahead of management's guided range of $381.0 million to
The strong year-over-year growth in revenues was primarily driven
by a 16.0% increase in subscription revenues and a 12.3% increase
in revenues from training and services.
Billings increased 19.0% year over year to $453.0 million.
Adjusted for currency, billings increased 21.0% from the year-ago
quarter to $458.0 million. Channel contributed 70.0% of the
bookings, while the rest came from direct sales.
Geographically, 55.0% of the bookings came from the Americas,
29.0% from Europe, Middle East and Africa (EMEA) and 16.0% from
Red Hat secured more than 30 deals over $1.0 million. Four out of
the top 30 deals, however, were approximately $5.0 million or
Government and Financial were the top two verticals from where
the company secured most of the deals.
In the third quarter of fiscal 2014, the company launched RHEL 7,
which is the beta version of its award-winning Red Hat Enterprise
Linux operating system. The new version of Red Hat Enterprise
Linux OpenStack platform appeared in the market during the
quarter. Red Hat launched Openstack 2.0 during the quarter.
Gross margin (excluding amortization of intangible assets)
expanded 30 basis points (bps) to 84.8% on a year-over-year
basis, primarily driven by improving product mix.
Operating expenses, as percentage of revenues, decreased 60 bps
on a year-over-year basis to 69.4% in the quarter. Sales &
marketing expenses, as percentage of revenues, decreased 20 bps
while research & development increased 80 bps. General &
administrative expense, as a percentage of revenues contracted
120 bps in the quarter.
Operating margin (excluding amortization of intangible assets and
facility exit costs) increased to 15.3% from 14.5% in the
year-ago quarter. Net income margin was 13.1% compared with 10.1%
in the year-ago quarter.
Earnings including share-based compensation surged 71.2% from the
year-ago quarter to 26 cents.
Balance Sheet & Cash Flow
At the end of the third quarter, cash and cash equivalents were
$646.1 million compared with $596.8 million at the end of the
Cash flow from operating activities was $95.0 million compared
with $100.0 million in the year-ago quarter. The company exited
the quarter with deferred revenue of $1.12 billion, an increase
of 14.0% on a year-over-year basis.
For the fourth quarter of fiscal 2014, Red Hat expects revenues
in the range of $397.0 million to $400.0 million.. Management
expects operating margin to be around 24.5%.
Non-GAAP earnings per share are expected to be in the range of 36
cents to 38 cents for the upcoming quarter, which happens to be
much higher than the Zacks Consensus Estimate of 24 cents.
Red Hat revised its guidance for fiscal 2014. Revenues are
expected to range between $1.531 billion and $1.534 billion
Management raised its operating margin outlook by 10 bps to 24.6%
for fiscal 2014. Red Hat now expects fiscal 2014 earnings to be
in the range of $1.46 to $1.48 per share which happens to be much
higher than the Zacks Consensus Estimate of $1.13 per share.
Operating cash flow for fiscal 2014 is expected to be between
$500.0 million and $520.0 million.
We believe that soft European macro-environment, currency
headwinds, lower services revenues and sluggish IT spending are
the major headwinds in the near term.
Moreover, 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 in the next couple of quarters.
Nevertheless, Red Hat continues to gain market share and its
Linux servers are well positioned to compete with
) Windows servers in the enterprise market going forward. We
believe that the company has significant growth potential in the
public cloud segment over the long term.
We believe that Red Hat's strong product pipeline, continuing
investments to expand product portfolio and partnerships with the
), Dell and
) will drive growth, going forward.
Currently, Red Hat has a Zacks Rank #3 (Hold).
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