It has been about a month since the last earnings report for Red Hat, Inc. . Shares have added about 4.9% in that time frame.
Will the recent positive trend continue leading up to its next earnings release, or is RHT due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.
Red Hat reported fourth-quarter fiscal 2018 non-GAAP earnings of 91 cents per share, surpassing the Zacks Consensus Estimate of 80 cents. The figure increased 49.2% on a year-over-year basis, primarily driven by strong top-line growth and operating margin expansion.
Revenues increased 22.8% year over year to almost $772.3 million, primarily driven by strong demand for hybrid cloud technology solutions as well as aggressive cross-selling. The figure was better than the Zacks Consensus Estimate of $762 million.
Revenues (adjusted for currency impact) increased 18.5% year over year to $745.1 million. The company noted that 71% of the revenues (compared with 69% in the year-ago quarter) came from the channel, while 21% came from direct sales force (as compared with 31% in the year-ago quarter).
Americas, Europe, Middle East & Africa (“EMEA”) and Asia Pacific (“APAC”) revenues (adjusted for currency impact) increased 18.1%, 19.8% and 18.4%, respectively. Almost 58% of the bookings came from Americas, 27% from EMEA and 15% from APAC.
Subscription revenues (88% of revenues) increased 22% year over year to $683.3 million. When adjusted for currency impact, revenues increased 17.9% to $659.7 million.
Infrastructure related subscription revenues (adjusted for currency impact) increased 13.4% from the year-ago quarter to $494.4 million.
Application development & emerging technologies (Ansible, OpenShift and OpenStack) subscription revenues surged 33.6% year over year to $166.3 million.
Training & services revenues (22% of total revenues) advanced 29% from the year-ago quarter to $89 million. When adjusted for currency impact, revenues increased 23.3% to $85.4 million. The solid top-line growth was driven by additional demand for consulting projects around Ansible and OpenShift.
Cross-Selling a Key Catalyst
Red Hat inked 169 deals worth more than $1 million in the quarter, which increased 50% year over year. Among these deals, 26 were worth more than $5 million. There were 14 deals worth more than $10 million and two deals of more than $20 million.
Moreover, the company renewed 24 out of 25 largest deals at greater than 120% of prior deal value.
Management noted that 81% 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, technology and media and other mainstream sectors such as retail, healthcare and manufacturing.
Non-GAAP gross margin contracted 10 basis points (bps) from the year-ago quarter to 86.5%.
Adjusted operating expenses, as a percentage of revenues, decreased 40 bps to 61.9% on the back of lower sales & marketing expense, general & administrative expense and research & development expense.
Non-GAAP operating margin expanded 30 bps to 24.6% due to lower operating expenses.
Balance Sheet & Cash Flow
Red Hat ended the quarter with cash, cash equivalents & investments of $2.5 billion as compared with $2.32 billion at the end of the previous quarter.
The company generated operating cash flow of almost $362.1 million compared with $160 million in the previous quarter.
Furthermore, Red Hat repurchased 2.3 million shares worth $237 million in the fiscal. The company has $399 million under its current share repurchase program.
At the end of the fourth quarter, total deferred revenue balance was $2.6 billion, up 25% year over year.
During the quarter, Red Hat announced the acquisition of CoreOS, a leading provider of Kubernetes and container-native solutions, for $250 million. The addition of CoreOS technology will enrich Red Hat’s capability in assisting customers to build applications and deploy them across hybrid cloud platform.
For fiscal 2019, Red Hat forecasts revenues in the range of approximately $3.425-$3.460 billion. Management expects the renewal rates to be around 120% for the fiscal year.
Non-GAAP operating margin is anticipated to be 23.9%. Red Hat now expects fiscal non-GAAP earnings of $3.38-3.41 per share.
Operating cash flow is expected to be in a range of $1.035-$1.045 billion.
Moving to the first quarter outlook, Red Hat projects revenues of $800-$810 million, while non-GAAP earnings are expected to be 68 cents per share.
Non-GAAP operating margin is expected to be 20.5%.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed a downward trend in fresh estimates. There have been two revisions higher for the current quarter compared to eight lower.
At this time, RHT has a great Growth Score of A, a grade with the same score on the momentum front. However, the stock was allocated a grade of F on the value side, putting it in the bottom 20% for this investment strategy.
Overall, the stock has an aggregate VGM Score of B. If you aren't focused on one strategy, this score is the one you should be interested in.
Zacks style scores indicate that the company's stock is suitable for growth and momentum investors.
Estimates have been broadly trending downward for the stock and the magnitude of these revisions indicates a downward shift. Notably, RHT has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.