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Red Hat (RHT) Beats Q1 Earnings, Shares up on Positive View

Red Hat Inc . RHT reported first-quarter 2018 adjusted earnings (including share-based compensation) of 40 cents per share, beating the Zacks Consensus Estimate by 6 cents. Adjusted earnings (excluding share-based compensation) increased 12.8% year over year to 56 cents per share, which was better-than the guided range of 52-53 cents per share.

Revenues increased 19.2% year over year to $676.8 million, primarily driven by strong subscription revenues and cross-selling of cloud-enabled technology. The figure was better than the Zacks Consensus Estimate of $647 million and also better than the guided range of $643-$650 million.

Revenues (adjusted for currency impact) increased 20.1% year over year to $681.9 million. The company noted that 72% of the revenues came from the channel, while 28% came from direct sales force compared with a 78%- 22% split in the year-ago quarter. The year-over-year change in mix was driven by a number of large deals that were closed by its direct sales team.

Americas, Europe, Middle East & Africa (EMEA) and Asia Pacific (APAC) revenues increased 19.6%, 20.1% and 22.2%, respectively. Per management, North America revenues were impacted by challenges in the LATAM region. Almost 55% of the bookings came from Americas, 24% from EMEA and 21% from APAC.

Red Hat, Inc. Price, Consensus and EPS Surprise

Red Hat, Inc. Price, Consensus and EPS Surprise | Red Hat, Inc. Quote

Based on the strong first-quarter results, management raised fiscal 2018 guidance. Shares rose more than 10% in after-hour trading.

We note that the stock returned 43.1% much better than S&P 500's gain of 9.9% on a year-to-date basis.

RHEL, Emerging Products Drove Top-line

Subscription revenues (88.1% of revenues) increased 18.9% year over year to $596.5 million. When adjusted for currency impact, revenues increased 19.8% to $600.9 million.

Subscription revenues for infrastructure related offerings increased 13.6% from the year-ago quarter to almost $458 million. Revenues adjusted for currency impact increased 14.4% to $461.3 million. Management stated that growth came on the back of strong demand for Red Hat Enterprise Linux (RHEL). The company noted that continued movement of production workloads to cloud is the key growth driver behind RHEL's robust performance.

Subscription revenues for application development related and emerging technologies surged 40.7% year over year to $138.5 million. Revenues adjusted for currency impact increased 41.8% to $139.6 million.

Red Hat's emerging technologies have gained a lot of traction in recent times. The company anticipates that revenues from the on-demand Certified Cloud and Service Providers (CCSPs) will reach $200 million annual run-rate in the current quarter.

During the quarter announced an extended strategic alliance with Amazon AMZN to further integrate OpenShift - its container platform with AWS. Per management, the partnership will allow customers to access AWS services whether using them on AWS or in an on-premise environment.

Red Hat noted that apart from AWS, Microsoft MSFT Azure and IBM Softlayer are other meaningful contributors to top-line growth.

Training & services revenues (11.9% of revenues) advanced 21.2% from the year-ago quarter to $80.3 million. When adjusted for currency impact, revenues increased 22.3% to $81 million.

Large Deals, Cross-Selling Key Catalyst

Red Hat noted total 44 deals over $1 million in the quarter. Within these deals seven were greater than $5 million and four were greater than $10 million including one deal greater than $20 million. Moreover, the company renewed all top 25 largest deals at 120% of their previous purchase price.

Red Hat signed a $5 million deal for Ansible, which was the largest in the product's history, reflecting growing demand among CIO's. The company stated that of 44 deals, six were for Ansible, five for OpenShift, six for OpenStack and nine for storage.

Management noted that 68% of the top $1 million deals included one or more components from the company's application development and emerging technologies offerings. Top verticals within the deals greater than $1 million were financial services, government and other mainstream customers in sectors such as healthcare and retail.

Operational Details

Adjusted gross margin contracted 30 basis points (bps) from the year-ago quarter to 86.3%. Including stock-based compensation, gross margin contracted 10 bps to 85.7%.

Adjusted operating expenses as a percentage of revenues increased 100 bps to 65.8%. On a reported basis, operating expenses as a percentage of revenues increased 20 bps driven by higher sales & marketing expense (up 100 bps), partially offset by lower general & administrative expense (down 70 bps). Research & development expense as percentage of revenues remained flat on a year-over-year basis.

Adjusted operating margin contracted 130 bps to 20.5% due to higher operating expenses. However, the figure was better than guidance owing to higher top-line growth.

Balance Sheet & Cash Flow

Red Hat ended the quarter with cash, cash equivalents & investments (including long term) of $2.30 billion as compared with $2.13 billion at the end of previous quarter.

The company generated operating cash flow of almost $258 million compared with $318 million in the previous quarter. Furthermore, it repurchased 700K shares worth $62 million during the quarter.

Acquisition

During the quarter, Red Hat announced the acquisition of Codenvy, which provides cloud-native development tool. The company stated that the technology is built on top of the open source Eclipse Che project, and provides cloud based integrated development environment and a workspace management system that enables development of modern container-based and cloud-native applications.

Guidance

For fiscal 2018, Red Hat forecasts revenues to be in the range of $2.785-$2.825 billion up from previous guidance of $2.720-$2.760 billion. Management expects the renewal rates to be around 120% for the fiscal year.

Non-GAAP operating margin is anticipated to be 23.6%. The forecast assumes additional focused investment on emerging technologies as well as the effects of the company's Codenvy acquisition.

Red Hat now expects fiscal non-GAAP earnings to be approximately $2.66 to $2.70 per share up from previous guidance of $2.60 to $2.64 per share.

Operating cash flow is still expected to be in a range of $850-$870 million.

Moving to the second quarter outlook, Red Hat projects revenues of $695-$702 million, while non-GAAP earnings to be 67 cents per share.

Non-GAAP operating margin is expected to be 24%.

Zacks Rank & Key Pick

Red Hat carries a Zacks Rank #3 (Hold). Oracle ORCL carrying a Zacks Rank #2 (Buy) is a stock worth-watching in the broader sector. You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here .

Oracle is set to report fourth-quarter fiscal 2017 results on Jun 21. Long-term earnings growth is currently pegged at 10.33%.

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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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