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Red Hat (RHT) Crushes Q2 Earnings Estimates, Raises '18 View

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Red Hat Inc reported second-quarter fiscal 2018 non-GAAP earnings of 77 cents per share, which beat the Zacks Consensus Estimate as well as management’s guidance by a dime. The figure increased 38.7% on a year-over-year basis primarily driven by strong top-line growth and operating margin expansion.

Revenues increased 20.6% year over year to $723.4 million, primarily driven by strong subscription revenues and cross selling of cloud-enabled technology. The figure was better than the Zacks Consensus Estimate of $699 million as well as management’s guided range of $695-$702 million.

Revenues (adjusted for currency impact) increased 20.1% year over year to $720.6 million. The company noted that 79% of the revenues (as compared with 81% in the year-ago quarter) came from the channel, while 21% came from direct sales force (as compared with 19% in the year-ago quarter). The year-over-year change in mix was driven by a number of  deals that were closed by the company’s direct sales team.

Americas, Europe, Middle East & Africa (EMEA) and Asia Pacific (APAC) revenues increased 20.2%, 21.3% and 18.1%, respectively. Almost 57% of the bookings came from Americas, 24% from EMEA and 19% 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-half fiscal 2018 results, management again raised fiscal 2018 guidance.

Shares climbed 3.35% in after-hour trading. Red Hat’s stock has gained 57% year to date, substantially outperforming the 24.5% rally of the industry it belongs to.


RHEL, Emerging Products Drove Top Line

Subscription revenues (88.1% of revenues) increased 20% year over year to $637.6 million. When adjusted for currency impact, revenues increased 19.6% to $635.1 million.

Infrastructure related subscription revenues (67% of total revenue) increased 14% from the year-ago quarter to almost $487.4 million. Management stated that growth came on the back of strong demand for Red Hat Enterprise Linux (“RHEL”).

Application development & emerging technologies (OpenShift and OpenStack) subscriptions revenues (21% of total revenue) surged 44% year over year to $150.1 million. Revenues when adjusted for currency impact increased 43%.

During the quarter, Red Hat expended partnership with Microsoft (MSFT - Free Report) with plans for new initiatives aimed at enabling enterprises to more easily adopt containers. The extended collaboration now supports Windows Server containers on OpenShift, OpenShift Dedicated on Microsoft Azure and SQL Server on both RHEL and OpenShift.

Training & services revenues (12% of total revenue) advanced 25% from the year-ago quarter to $85.8 million. The growth was driven by consulting projects for OpenShift and Ansible.

Recently, Red Hat announced the availability of Ansible Tower 3.2, which includes several new and enhanced features. The company also launched a new offering that provides support for the open source Ansible Engine. This product is also available with a new networking add-on and includes full integration support for Arista, Cisco Systems Inc (CSCO - Free Report) , Juniper Networks Inc (JNPR - Free Report) and VyOS technologies.

Cross-Selling Key Catalyst

Red Hat noted total 66 deals over $1 million in the quarter. Within these deals four were greater than $5 million. Moreover, the company renewed all top 25 largest deals at approximately 115% of prior deal value.

Management noted that 61% of the 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 retail, energy and transportation.

Operational Details

Non-GAAP gross margin contracted 30 basis points (bps) from the year-ago quarter to 86.4%.

Adjusted operating expenses, as a percentage of revenues, decreased 390 bps to 60%. On a reported basis, operating expenses, as a percentage of revenues, decreased 510 bps driven by lower sales & marketing expense (down 370 bps), general & administrative expense (down 80 bps) and research & development expense (down 60 bps).

Non-GAAP operating margin expanded 360 bps to 26.4% due to lower operating expenses. Moreover, the figure was better than management’s guidance.
Balance Sheet & Cash Flow

Red Hat ended the quarter with cash, cash equivalents & investments (including long term) of $2.31 billion as compared with $2.30 billion at the end of the previous quarter.

The company generated operating cash flow of almost $143 million compared with $258 million in the previous quarter.

Furthermore, Red Hat repurchased 800K shares worth $75 million during the quarter. The company had $499 million under its current share repurchase program.


During the quarter, Red Hat announced the acquisition of Permabit Technology Corporation, a provider of software for data deduplication, compression and thin provisioning. The addition of Permabit’s technology into the RHEL platform helps Red Hat to offer more efficient storage options to its customers.


For fiscal 2018, Red Hat forecasts revenues to be in the range of approximately $2.880-$2.90 billion up from previous guidance of almost $2.79-$2.83 billion. Management expects the renewal rates to be around 120% for the fiscal year.

Non-GAAP operating margin is anticipated to be 23.8%, 20 bps better than previous guidance.

Red Hat now expects fiscal non-GAAP earnings to be in the range of $2.77-$2.79 per share, up from prior guidance of $2.66-$2.70.

Operating cash flow is still expected to be in a range of $880-$900 million, up from $850-$870 million.

Moving to the third quarter outlook, Red Hat projects revenues of $730-$737 million, while non-GAAP earnings is expected to be 70 cents per share.

Non-GAAP operating margin is expected to be 23.7%.

Red Hat carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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