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Red Hat Q2 Earnings & Revenues Beat, Outlook Raised

Red Hat Inc.RHT reported second-quarter fiscal 2016 adjusted earnings of 34 cents per share (including stock-based compensation but excluding one-time items), beating the Zacks Consensus Estimate of 29 cents. Earnings improved 17.2% on a year-over-year basis.

Revenues

Revenues increased 13% year over year to $504 million and beat the Zacks Consensus Estimate of $495 million.

Subscription revenues (87.6% of revenues) increased 13.4% year over year to $441.5 million. Subscription revenues for infrastructure related offerings increased 9% from the year-ago quarter to $363 million. Subscription revenues for application development related and emerging technologies jumped 37% year over year to $79 million.

Training & services revenues (12.4% of revenues) increased 11% from the year-ago quarter to $62.6 million.

Margins

Gross margin (including stock-based compensation but excluding one-time items) was flat at 85.5%. Operating expenses as a percentage of revenues (including stock-based compensation but excluding one-time items) decreased 40 bps on a year-over-year basis to 69.1%.

Operating margin (including stock-based compensation but excluding other one-time items) increased 40 bps from the year-ago quarter to 16.4%.

Other Financial Details

At the end of the quarter, total cash and cash equivalents (including investments) were about $2 billion.

Cash flow from operating activities was $120.3 million compared with $107.7 million in the prior quarter. The company exited the quarter with deferred revenues of $1.41 billion, an increase of 13% on a year-over-year basis.

Guidance

Red Hat increased its expectations for fiscal 2016. Revenues are now expected to be $2.03 billion to $2.04 billion compared with the earlier projection of $1.99 billion to $2.02 billion including the impact of currency translations. Management expects non-GAAP operating margin to be around 23.6% for fiscal 2016. The company expects cash flow in the range of $690 million to $705 million, up from $670 million to $690 million projected earlier.

Red Hat now expects non-GAAP earnings to be in the range of $1.85 to $1.87 (earlier projection was $1.81 or $1.84 per share), assuming the annual effective tax rate of 29%.

For the third quarter, Red Hat projects revenues of $519 million to $523 million, and non-GAAP earnings per share of 47 cents. Non-GAAP operating margin is expected to be 23%.

Our Take

Red Hat continues to gain market share and its Linux servers are well positioned to compete with Microsoft's MSFT 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 IBM , Dell, Intel INTC and the most-recent partnership extension with NEC will drive overall growth.

However, sluggish IT spending and intensifying competition are major headwinds in the near term. Also, Red Hat's strategy of sacrificing service revenues to increase subscription revenues in the long run is expected to hurt top-line growth going forward. This coupled with negative margin impacts from acquisitions will be an overhang in the near term.

Red Hat has a Zacks Rank #3 (Hold).

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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