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Red Hat (RHT) Beats Q1 Earnings, Middleware Weakness to Hurt

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Red Hat Inc. (RHT - Free Report) reported first-quarter fiscal 2019 non-GAAP earnings of 72 cents per share, surpassing the Zacks Consensus Estimate by 4 cents. The figure increased 24% on a year-over-year basis, primarily driven by strong top-line growth.

Revenues increased 20% year over year to $814 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 $807 million.

Revenues, adjusted for currency impact, increased 17% year over year to $791 million. The company noted that 75% of the revenues (compared with 72% in the year-ago quarter) came from the channel, while 25% came from direct sales force (compared with 28% in the year-ago quarter).

Americas; Europe, Middle East & Africa (“EMEA”) and Asia Pacific (“APAC”) revenues increased 14.1%, 35.8% and 24.6%, respectively. After adjusting for currency impact, Americas, EMEA and APAC revenues increased 14.6%, 21.2% and 22%, respectively.

Almost 50% of the bookings came from Americas, 28% from EMEA and 15% from APAC.

Shares plunged 13.2% in pre-market trading. Red Hat shares have returned 46.8% year-to-date, significantly outperforming industry’s rally of 16.7%.

 



 

Top-line Details

Subscription revenues (87.5% of revenues) increased 19.3% year over year to $711.5 million. When adjusted for currency impact, revenues increased 16% to $691.5 million.

Infrastructure related subscription revenues increased 14.1% from the year-ago quarter to $522.4 million. After adjusting for currency impact, revenues increased 11% to $508.5 million.
 

Red Hat, Inc. Price, Consensus and EPS Surprise

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

 

Application development & emerging technologies (Ansible, OpenShift, OpenStack, Storage and cloud management) subscription revenues surged 36.5% year over year to $189.1 million. After adjusting for currency impact, revenues increased 32.1% to $183 million.

Red Hat stated that strong performance from the emerging technologies was partially offset by moderate growth in middleware offerings. The ongoing transition of workloads, from traditional physical deployments to container environments, was blamed for weakness in middleware growth.

Training & services revenues (12.5% of revenues) advanced 27.1% from the year-ago quarter to $102 million. When adjusted for currency impact, revenues increased 24% to $99.6 million.

The top-line growth in the services business was primarily driven by strong consulting demand for Ansible and OpenShift.

Cross-Selling a Key Catalyst

Red Hat inked 65 deals worth more than $1 million in the quarter, which increased 48% year over year. Among these deals, 5 were worth more than $5 million. Only one deal was worth more than $10 million.

Moreover, the company renewed all of the 25 largest deals at more than 120% of prior deal value.

Mid-market deals valued more than $250k increased 138% on a year-over-year basis from 21 deals to 50 deals, with notable growth in Ansible and OpenShift. The partnerships with global systems integrators are a major driver in the mid-market segment.

Red Hat’s Linux Container platform, OpenShift, continues to gain strong traction. The platform was selected by more than 100 new customers. Also, median revenue per customer increased in the quarter.

Red Hat has expanded its partnership with Microsoft (MSFT - Free Report) , which will enable enterprise developers to run container-based applications across both Microsoft Azure and on premise environments.

Moreover, the company also extended its collaboration with International Business Machines (IBM - Free Report) to combine OpenShift and IBM Cloud Private with a number of IBM’s software and cloud solutions.

Further, Ansible crossed 1,000 subscribers in the quarter, up almost 70% year over year.

Management noted that 71% 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 other mainstream sectors such as healthcare, hospitality and transportation. The company’s second largest industry vertical was the Government.

Operating Details

Non-GAAP gross profit increased 20.2% year over year to $702.1 million. Non-GAAP gross margin remained flat on a year-over-year basis at 86.3%.

Non-GAAP operating expenses increased 20.5% from the year-ago quarter to $534 million.

Non-GAAP operating margin contracted 10 bps to 20.7%, due to lower operating expenses.

Balance Sheet & Cash Flow

Red Hat ended the quarter with cash, cash equivalents & investments of $2.53 billion compared with $2.47 billion at the end of the previous quarter.

The company generated operating cash flow of almost $346.2 million compared with $362.1 million in the previous quarter.

Furthermore, Red Hat spent $150 million on share repurchase. Management authorized a new program worth $1 billion that replaces the old program, under which the company had spent $751 million worth of shares.

At the end of the first quarter, total deferred revenue balance was $2.4 billion, up 19% year over year.

Guidance

For fiscal 2019, Red Hat forecasts revenues in the range of approximately $3.375-$3.410 billion, down from previous guidance range of $3.425-$3.460 billion, primarily due to the negative impact from a strong U.S. dollar.

Moreover, weakness in middleware, primarily due to ongoing workload shifting from legacy physical deployments to container environments, is expected to hurt top-line growth this fiscal.

Non-GAAP operating margin is anticipated to be 23.9%. Red Hat now expects fiscal non-GAAP earnings between $3.44 and $3.48, better than previous guidance range of $3.38-$3.41 per share. This is primarily due to lower effective tax rate.

Operating cash flow is expected to be in a range of $1.035-$1.045 billion.

Moving to the second quarter outlook, Red Hat projects revenues in the band of $822-$830 million, while non-GAAP earnings are expected to be 81 cents per share.

Non-GAAP operating margin is expected to be 23%.

Zacks Rank and Stocks to Consider

Red Hat carries a Zacks Rank #3 (Hold).

Citrix Systems (CTXS - Free Report) is a stock worth considering in the same sector, as it sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Long-term earnings growth for Citrix is pegged at 9.1%.

 

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