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$RHT Beats
Q4 $0.91 v $0.80e, Rev $772M v $762Me;
Guides FY19 $3.38-3.41 v $3.31e,
Rev $3.43-3.46B v $3.37BeBarclays Note on Red Hat
Red Hat Inc.: Hybrid Cloud Positioning Continues To Drive Upside
Stock Rating Overweight
Industry View Positive
Price Target USD 170.00
Price (26 Mar 2018) USD 153.09
EPS FY1 (E) 3.41
EPS FY2 (E) 3.98
Market Cap (USD bn) 27.0976
Ticker RHT
U.S. Software
Raimo Lenschow, CFA
+1 212 526 2712
raimo.lenschow@barclays.com
BCI, US
27 March 2018Strong End to FY18: RHT delivered a beat across the board in Q4, with 25% y/y billings growth despite tough comps as the main highlight. The results this quarter provide further evidence that RHT is becoming more of a strategic partner to its customers. While shares have rallied YTD (up 27% vs. S&P down 1%), we would expect the continued healthy execution this quarter and the scarcity value for investors in infrastructure software (given the current Dell/VMware situation) to drive further upside and hence, we reiterate our OW rating.
Healthy Large Deal Activity Driven by Cross-Selling Across the Portfolio:
RHT saw record large deal activity in Q4, with 169 deals over $1mn (>50% y/y growth). 81% of these large deals involved some cross-selling with the emerging technologies portfolio, which posted ~34% cc growth this quarter. Management noted strong traction in emerging technologies such as OpenShift and Ansible, but moderate growth in JBoss as some customers opt to consume middleware as a service within
OpenShift. Core RHEL saw healthy ~13% cc y/y growth, with public cloud RHEL growing twice as fast as the overall business, demonstrating continued tailwinds from the hybrid cloud opportunity.Margin Impact from CoreOS, Underlying Operating Leverage Intact: Management guided to flat operating margins for FY19 driven by a 100bps impact from the CoreOS acquisition. As such, we believe the underlying operating leverage in the model remains intact, and note that management discussed expectations of 25-50bps margin expansion in FY20. We also highlight the weaker than expected cash flow guidance for FY19, which seems to be based on the impact from lower bookings duration (expected to be 1 month less than FY18) and business inearity.
Attractive LT Story, Raising PT:
While we recognize the moving parts around margins and cash flow conversion, the continued healthy execution and the company’s attractive hybrid cloud positioning give us further confidence in the LT story. Hence, we reiterate our OW rating and raise our PT to $170 (was $165)
based on 26x CY19 EV/FCF (was 25x) and revised FCF estimate of $1.11bn (was $1.12bn).YES – Red Hat is EXCELLENT corporate Linux provider & company …They also have fantastic JAVA enterprise platform called JBOSS/EE which I’ve taken some courses for at work 🙂 They are great low-cost corporate hosting technologies 8) I always used Red Hat at work rather than Suse or other NIX providers 8)
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