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Red Hat (RHT) CFO Resignation Eclipses Q3 Earnings Beat

Keeping its earnings streak alive, Red Hat Inc.RHT recently reported better-than-expected third-quarter fiscal 2017 bottom-line numbers, marking the 16th straight quarter of earnings beat. Also, both the top and the bottom line continued to the year-over-year growth.

Despite encouraging results, shares of this Linux and open-source distributor plunged in after-market trading yesterday, as the news of the resignation of Chief Financial Officer (CFO) Frank Calderoni and a downbeat revenue outlook for fiscal 2017 did not go well with investors. Following the announcement, shares of Red Hat plunged 10% in after-hour trade yesterday. Shares are down 10% today in the pre-market trading session.

Calderoni is stepping down from his post to become Chief Operating Officer (CEO) of another company. In a letter to Red Hat's CEO Jim Whitehurst, Calderoni described the decision as a step toward fulfilling his "personal goal" of becoming a CEO.

Calderoni's last day at Red Hat will be Jan 20, 2017, following which Eric Shander, vice president of finance and accounting and principal accounting officer, will take on the responsibility till the company finds a suitable replacement.

It should be noted that, the year so far has not been a smooth for Red Hat. The stock has underperformed the Zacks Categorized Computer-Software industry on a year-to-date basis. Red Hat has lost 3.6% of its value in this year so far as against the Computer-Software industry's gain of 11.8% over the same time frame.

We expect the downward movement to continue during today's normal trading session as well.

Now, let's discuss Red Hat's results in the third quarter of fiscal 2017.

Quarter in Detail

Revenues increased 17.5% year over year to $615.3 million mainly driven by renewal of existing large deals and cross-selling of cloud-enabled technology. However, quarterly revenues marginally fell short of the Zacks Consensus Estimate of $618 million and came toward the lower-end of its own guidance range of $613 million to $623 million.

Subscription revenues (88% of revenues) increased 18.8% year over year to $543.3 million. Subscription revenues for infrastructure related offerings increased 16% from the year-ago quarter to $431 million. Subscription revenues for application development related and emerging technologies surged 33% year over year to $112 million.

Training & services revenues (11% of revenues) increased 8.9% from the year-ago quarter to $71.9 million.

Adjusted gross profit (excluding one-time items but including stock-based compensation on a proportionate tax basis) increased 18.7% year over year to $529 million. Adjusted gross margin expanded 90 basis points (bps) to 86%.

Adjusted operating income grew 11% year over year to $88.4 million. However, as a percentage of revenues it contracted 80 bps mainly due to increased operating expenses. Adjusted operating expenses increased 20.4% year over year to $440.6 million.

The company's adjusted net income came in at $75.9 million, up 31.5% from $57.7 million in the year-ago quarter. On a per share basis, adjusted earnings were up 35.5% to 42 cents from 31 cents reported in the third-quarter of fiscal 2016. Adjusted earnings also came well ahead of the Zacks Consensus Estimate of 37 cents per share. The company's bottom-line results mainly benefited from strong revenue growth and lower share count, which was partially offset by higher operating expenses.

RED HAT INC Price, Consensus and EPS Surprise

RED HAT INC Price, Consensus and EPS Surprise | RED HAT INC Quote

Other Financial Details

The company ended the quarter with cash, cash equivalents and investments of $2 billion. The company exited the quarter with deferred revenues of $1.7 billion, an increase of 15% on a year-over-year basis.

During the third quarter, Red Hat generated operating cash flow of$136.4 million while in the first nine months of fiscal 2017 total cash flow from operational activities was $465.5 million.

Furthermore, the company repurchased 1.6 million shares worth $125 million during the third quarter. The remaining balance in its ongoing share repurchase program worth $1 billion announced in Jun 2016 was approximately $775 million as of Nov 30.

Guidance

Considering the current weak foreign currency exchange rates and current business environment, Red Hat updated its fiscal 2017 outlook. The company lowered its revenues guidance range for the fiscal to $2.397 billion - $2.405 billion (mid-point $2.401 billion) compared with the earlier projection of $2.415 billion - $2.435 billion (mid-point $2.425 billion). The Zacks Consensus Estimate for fiscal 2017 is currently pegged at $2.42 billion.

It has also lowered the operating cash flow guidance range to $770 million - $785 million compared with the earlier projection of $800 million - $820 million.

However, the company raised its non-GAAP earnings per share guidance to $2.27, up from the earlier projected range of range of $2.23 and $2.25. Moreover, it reiterated its non-GAAP operating margin guidance of 23%.

Moving into the fourth quarter outlook, Red Hat projects revenues of $614 million to $622 million and non-GAAP earnings per share of 61 cents. Non-GAAP operating margin is expected to be 24%. Currently, the Zacks Consensus Estimate for revenues is pegged at $638.4 million.

At present, Red Hat has a Zacks Rank #4 (Sell).

Stocks to Consider

Better-ranked Computer-Software stocks include Microsoft Corp. MSFT , Aspen Technology Inc. AZPN , and Imperva Inc. IMPV , all of which carry a Zacks Rank #2 (Buy). You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here .

Estimates for Microsoft moved up in the last 60 days. It has surpassed the Zacks Consensus Estimate thrice while missing it once in the trailing four quarters. It has an average positive earnings surprise of 10.55%.

Estimates for Aspen Technology also moved up in the last 60 days. It surpassed the Zacks Consensus Estimate in each of the trailing four quarters, with an average positive surprise of 23.59%.

Estimates for Imperva moved up in the last 60 days. It surpassed the Zacks Consensus Estimate twice while missing the same two times in the trailing four quarters. It has an average positive earnings surprise of 18.11%.

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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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