Red Hat Earnings Surge on Linux Open Source Cloud Software

Open source Linux software provider Red Hat reported better than expected Q4 earnings after the close Monday. $RHT new products OpenShift and OpenStack have been ramping up revenue from hybrid cloud computing.

Open source Linux software provider Red Hat reported better than expected Q4 earnings after the close Monday. $RHT new products OpenShift and OpenStack have been ramping up revenue from hybrid cloud computing.

RedHat Cloud

Red Hat Earnings Beat Consensus Estimates

Adjusted fiscal fourth-quarter earnings of 91 cents a share, up 50% from a year ago on revenue up 23% to $772 million, ahead of estimates of EPS of 81 cents on revenue of $762 million. A year earlier Red Hat earned 61 cents a share on sales of $629 million.

Market Reaction> Red Hat Inc NYSE: $RHT

Mar 26, 2018 Close $153.09U +5.19 (+3.51%)

After-hours: $160.50 +7.41 (+4.84%)

Red Hat’s subscription revenue growth was up 22 percent year over year to $683 million. The bulk of subscription revenue came from infrastructure related products, with application development related technologies accounting for the rest.

“Red Hat continued to expand its position with customers as a trusted adviser and strategic technology partner, enabling initiatives focused on digital transformation and cloud computing, This position helped drive a 50 percent year-over-year increase in the number of deals over $1 million during the fourth quarter, as we benefited from strong cross selling and high renewal rates within our top deals.” said Red Hat CEO Jim Whitehurst.

Outlook

For the current quarter Red Hat expects revenue of  between $800 million to $810 million with earnings at 68 cents per share. This is higher than previously analysts expecting revenue of $795 million with earnings of 72 cents a share.

This report has been updated after the release

Preview Prior to Red Hat’s Release

Barclays issued a note on Monday raising its price target to $165 from 145, citing Red Hat’s “hybrid cloud positioning and momentum in both core and emerging products.” Hybrid refers to private/public cloud computing. Stifel projects billings of $1.109 billion, a 12.4-percent jump from a year ago and below the consensus figure of 13.6 percent. 

On the flip side earlier in the month Mizuho downgraded $RHT from buy to hold on valuation. Mizuho said Red Hat is performing well but not enough to justify a higher share price at this time.

Red Hat Three Core Business Segments

  • Infrastructure business

Red Hat derives two-thirds of it’s revenues from it’s infrastructure core. This segment continues to grow, up 15% last quarter. The free cash flow from this segment has grown 14 out of the past 15 years, the only fall during the GFC in 2008. This consistency from it’s subscription business model demonstrates a highly stable basis where margins are defensible.

  • Training & Consulting 

This segment has taken off with Red Hat’s growth stategy, growing 27% last quarter. Red Hat has a strong partner base that includes IBM, Intel, Dell Technologies, Google cloud platform, Microsoft Azure and Amazon Web Services (“AWS”) to drive growth. The company’s collaborations with cloud providers like Amazon, Google and Alibaba positions it for significant top-line growth. This is helping Red Hat to cross-sell cloud-based technology across its customer base.

  • Apps and Emerging Technology 

The segment that excites many analysts is apps and emerging technology which surged over 40% last quarter. Morgan Stanley in a note  is looking for “Acceleration of growth in the emerging business segment aided by growing demand for the OpenShift and OpenStack platforms. Rising margins that push cash flow growth above the 20-percent mark.” 

Stifel says that Red Hat’s Q4 report should confirm the company still manages to “elevate its strategic positioning” and can sustain a low-to-mid-teens growth rate, 30-percent emerging product growth and billings growth in the mid-teens.. 

Aquisition Strategy

Complementary acquisitions have led to a favorable product mix which is boosting overall results. Red Hat has made the following complementary acquisitions; 3scale, Ansible, FeedHenry, eNovance, Inktank and Codenvy.

This has enabled an expanded product portfolio into higher-growth segments, such as Hybrid cloud and other emerging technologies including Cloud Management, OpenShift, OpenStack, and Storage.

During Q4 Red Hat acquired CoreOS, an innovator and leader in Kubernetes and container-native solutions, for $250 million. 

Source: Red Hat, Stifel

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