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Red Hat (RHT) Q2 Earnings Beat, Revenues Miss Estimates

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Red Hat (RHT) Q2 Earnings Beat, Revenues Miss Estimates

Red Hat's (RHT) second-quarter results benefit from strong cross-selling and robust demand for Ansible and OpenShift. However, RHEL's lower renewal base is likely to hurt top-line growth.

Red Hat Inc. RHT reported second-quarter fiscal 2019 non-GAAP earnings of 85 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 13.7% year over year to $822.7 million, primarily driven by strong demand for hybrid cloud technology solutions as well as aggressive cross-selling. However, the figure lagged the Zacks Consensus Estimate of $828 million.

Revenues, adjusted for currency impact, increased 14.3% year over year to $826.9 million. The company noted that 77% of the revenues (compared with 79% in the year-ago quarter) came from the channel, while 23% came from direct sales force (compared with 21% in the year-ago quarter).

Americas; Europe, Middle East & Africa (EMEA); and Asia-Pacific (APAC) revenues increased 11%, 18.5% and 18.8%, respectively. After adjusting for currency impact, Americas, EMEA and APAC revenues increased 12%, 17.4% and 20.3%, respectively.

Almost 54% of the bookings came from Americas, 26% from EMEA and 20% from APAC. Bookings duration was approximately 22 months, up nearly one month from the year-ago quarter. Total backlog grew 20% from the year-ago quarter to $3.3 billion.
 

Red Hat, Inc. Price, Consensus and EPS Surprise

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

 

Top-Line Details

Subscription revenues (88% of revenues) increased 13.4% year over year to $722.7 million. When adjusted for currency impact, revenues increased 13.8% to $725.3 million.

Infrastructure related subscription revenues increased 8.1% from the year-ago quarter to $526.7 million. After adjusting for currency impact, revenues increased 8.3% to $528.1 million. The segment revenues were negatively impacted by lower available renewal base and renewal value for Red Hat Enterprise Linux (RHEL).

Moreover, the company lost one renewal deal to a legacy on-premise provider, primarily due to pricing. This coupled with reduced scope of an Army project hurt top-line growth.

However, management expects RHEL growth to reaccelerate in the next fiscal year (later part of the first quarter or early second quarter) to reach more than 10%, driven by a higher renewal base.

Application development & emerging technologies (Ansible, OpenShift, OpenStack, Storage and cloud management) subscription revenues surged 30.6% year over year to $196 million. After adjusting for currency impact, revenues jumped 31.3% to $197.1 million.

Red Hat stated that strong performance from the emerging technologies was partially offset by moderate growth (8-10%) 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% of revenues) advanced 16.6% from the year-ago quarter to $100 million. When adjusted for currency impact, revenues increased 18.5% to $101.7 million.

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

Cross-Selling a Key Catalyst

Red Hat inked 73 deals worth more than $1 million in the quarter, which increased 11% year over year. Among these deals, 11 were worth more than $5 million, out of which one deal was worth more than $10 million.

Moreover, the company renewed 24 of the prior 25 largest deals at more than 100% of prior deal value.

Mid-market deals valued more than $250k soared 120% on a year-over-year basis. Both OpenShift and Ansible continue to gain strong traction by adding almost a hundred new customers each, since the first quarter. Median revenue per customer also continues to grow.

Most recently, the company inked partnership with Hortonworks HDP and IBM IBM to integrate their big data and analytics products onto OpenShift.

Moreover, Ansible reached approximately 2 million managed nodes at the end of the quarter, almost double the number of managed nodes since fourth-quarter 2017.

Management noted that 77% of the deals included one or more components from the company’s application development and emerging technologies offerings. Top verticals within the deals worth more than $1 million were financial services and Government.

Operating Details

Non-GAAP gross profit increased 14.3% year over year to $714.4 million. Non-GAAP gross margin expanded 40 basis points (bps) on a year-over-year basis to 86.8%.

Non-GAAP operating expenses increased 19.2% from the year-ago quarter to $517.4 million.

Non-GAAP operating margin contracted 250 bps to 23.9% due to higher operating expenses. However, the figure was 90 bps higher than management’s guidance, owing to the postponement of some hiring and marketing programs to the second half of the year.

Balance Sheet & Cash Flow

Red Hat ended the quarter with cash, cash equivalents & investments of $2.20 billion compared with $2.53 billion at the end of the previous quarter.

The company generated operating cash flow of almost $165.4 million compared with $346.2 million in the previous quarter.

Furthermore, Red Hat spent $250 million on share repurchase and has $750 million remaining under the program.

At the end of the second quarter, total deferred revenue balance was $2.4 billion, up 17% year over year.

Guidance

For fiscal 2019, Red Hat forecasts revenues in the range of approximately $3.360-$3.395 billion, down from previous guidance of $3.375-$3.410 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 still anticipated to be 23.9%. Red Hat now expects fiscal non-GAAP earnings between $3.45 and $3.49, better than previous guidance of $3.44-$3.48 per share. This is primarily due to lower effective tax rate.

Operating cash flow is still expected to be $1.035-$1.045 billion.

Moving to the third quarter outlook, Red Hat projects revenues of $848-$856 million, while non-GAAP earnings are expected to be 87 cents per share.

Non-GAAP operating margin is expected to be 24%.

Zacks Rank and Stocks to Consider

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

Salesforce.com CRM 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 salesforce is pegged at 25%.

 

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