Red Hat Inc.
) surged 3.9% in after-hours trading as it reported an upbeat
fourth quarter fiscal 2014 results. Earnings jumped 11.6% from
the year-ago quarter to 28 cents per share which in turn beat the
Zacks Consensus Estimate of 26 cents.
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Revenues increased 15.1% year over year to $400.4 million and
beat the Zacks Consensus Estimate of $398.0 million. Revenues
were also ahead of management's guided range of $397.0 million to
The strong year-over-year growth in revenues was primarily driven
by a 16.1% increase in subscription revenues and an 8.4% increase
in revenues from training and services.
Billings increased 24.0% year over year to $565.0 million.
Adjusted for currency, billings increased 26.0% from the year-ago
quarter. Channel contributed 56.0% of the bookings, while the
rest (44%) came from direct sales.
Geographically, 61.0% of the bookings came from the Americas,
26.0% from Europe, Middle East and Africa (EMEA) and 13.0% from
Red Hat secured more than 30 deals of over $1.0 million each.
Seven out of the top 30 deals were worth approximately $5.0
million or higher while two out of these seven were worth more
than $10.0 million.
Government and Financial were the top two verticals from where
the company secured most of the deals.
In the fourth quarter of fiscal 2014, the company expanded its
partnership with Amazon Web Services' (AWS) Govcloud that will
make Red Hat offerings available globally. Red Hat also deepened
its strategic relationship with the leading contributor and
provider of Enterprise Apache Hadoop Hortonworks.
Cross-selling was evident in the fourth quarter with three of the
top five deals having an OpenStack component and two of these
deals comprising an OpenStack and OpenShift component.
Moreover, during the reported quarter, the company also announced
new relationships with Alcatel-Lucent and Dell to bring
OpenStack-based Network Function Virtualization or NFV for
Gross margin (excluding amortization of intangible assets)
expanded 10 basis points (bps) to 85.5% on a year-over-year
basis, primarily driven by improving product mix.
Operating expenses, as percentage of revenues, increased 10 bps
on a year-over-year basis to 68.9% in the quarter. Sales &
marketing expenses, as percentage of revenues, increased 10 bps
while research & development increased 10 bps. General &
administrative expense, as a percentage of revenues, decreased 40
bps in the quarter.
Operating margin (excluding amortization of intangible assets and
facility exit costs) increased 10bps to 16.6% in the reported
quarter. Net income margin was 13.1% compared with 13.7% in the
Balance Sheet & Cash Flow
At the end of the fourth quarter, cash and cash equivalents were
$646.7 million compared with $646.1 million at the end of the
Cash flow from operating activities was $185.0 million compared
with $95.0 million in the prior quarter. The company exited the
quarter with deferred revenue of $1.29 billion, an increase of
18.0% on a year-over-year basis.
For the first quarter of fiscal 2015, Red Hat expects revenues in
the range of $412.0 million to $415.0 million while the Zacks
Consensus Estimate is pegged higher at $416.0 million. Management
expects operating margin to be around 21.0%.
Non-GAAP earnings are expected to be in the range of 32 cents to
33 cents per share for the upcoming quarter, which happens to be
much higher than the Zacks Consensus Estimate of 26 cents.
Red Hat provided guidance for fiscal 2015 too. Revenues are
expected to range between $1.730 billion and $1.755 billion,
slightly below the Zacks Consensus Estimate of $1.756 billion.
Management expects non-GAAP operating margin to be around 23.5%
for fiscal 2015. Red Hat expects fiscal 2015 earnings to be in
the range of $1.54 to $1.56 per share, much higher than the Zacks
Consensus Estimate of $1.14 per share.
Operating cash flow for fiscal 2014 is expected to be between
$580.0 million and $600.0 million.
The weak outlook will remain an overhang on the stock going
forward. Moreover, we believe that a soft European
macro-environment, currency headwinds, lower services revenues
and sluggish IT spending are the major headwinds in the near
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 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).