Red Hat Inc.RHT reported third quarter fiscal 2016 adjusted earnings of 31 cents per share (including stock-based compensation but excluding one-time items), beating the Zacks Consensus Estimate of 30 cents. Earnings improved 3.3% on a year-over-year basis.
Revenues increased 15% year over year to $524 million and beat the Zacks Consensus Estimate of $521 million.
Subscription revenues (87% of revenues) increased 16% year over year to $457 million. Subscription revenues for infrastructure related offerings increased 12% from the year-ago quarter to $373 million. Subscription revenues for application development related and emerging technologies jumped 37% year over year to $84 million.
Training & services revenues (13% of revenues) increased 8% from the year-ago quarter to $66.1 million.
Gross margin (including stock-based compensation but excluding one-time items) was almost flat at 85.1%. Operating expenses as a percentage of revenues (including stock-based compensation but excluding one-time items) increased 40 bps on a year-over-year basis to 69.9%.
Operating margin (including stock-based compensation but excluding other one-time items) decreased 122 bps from the year-ago quarter to 15.2%.
Other Financial Details
At the end of the quarter, total cash and cash equivalents (including investments) were about $942 million, down from $1 billion as of Feb 28, 2015.
Cash flow from operating activities was approximately $140 million compared with $133 million in the prior-year quarter. The company exited the quarter with deferred revenues of $941.4 billion, an increase of 14.8% on a year-over-year basis.
For the fourth quarter, Red Hat projects revenues of $535 million to $539 million, and non-GAAP earnings per share of 26 cents. Non-GAAP operating margin is expected to be 22.5%.
Red Hat increased its sales expectations for fiscal 2016. Revenues are now expected to be $2.044 billion to $2.048 billion (earlier projection was $2.03 billion to $2.04 billion).
Management expects non-GAAP operating margin to be around 23.5% infiscal 2016. The company expects cash flow in the range of $695 million to $705 million (earlier projection was $690 million to $705 million).
Red Hat now expects non-GAAP earnings to be approximately $1.86 per share (earlier guidedrange was $1.85 to $1.87), assuming an annual effective tax rate of 29%.
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.
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).