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Why Is Red Hat (RHT) Up 0.3% Since Last Earnings Report?

Zacks Equity Research

A month has gone by since the last earnings report for Red Hat (RHT). Shares have added about 0.3% in that time frame, underperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Red Hat due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.

Strong Demand for Hybrid Cloud Aids Red Hat Q4 Results

Red Hat reported fourth-quarter fiscal 2019 non-GAAP earnings of $1.16 per share, which surpassed the Zacks Consensus Estimate by 15 cents. The figure increased 26.1% on a year-over-year basis.

Revenues increased 14% year over year to $879 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 $886 million.

Revenues, adjusted for currency impact, increased 16.9% year over year to $902.6 million.

Americas, Europe, Middle East & Africa (EMEA), and Asia-Pacific (APAC) revenues increased 13.6%, 12.9% and 16.3%, respectively. After adjusting for currency impact, Americas, EMEA and APAC revenues increased 14.9%, 20.3% and 20.2%, respectively.

Almost 62.6% of the bookings came from Americas, 23.1% from EMEA and 14.3% from APAC.

Quarter Details

Subscription revenues (88% of revenues) increased 13% year over year to $774 million. When adjusted for currency impact, revenues increased 16% to $793.5 million.

Infrastructure related subscription revenues increased 8% from the year-ago quarter to $549 million. After adjusting for currency impact, revenues increased 10.2% to $561.8 million.

Application development & emerging technologies (Ansible, OpenShift, OpenStack, Storage and cloud management) subscription revenues surged 30% year over year to $225 million. After adjusting for currency impact, revenues increased 34% to $231.7 million.

Training & services revenues (12% of revenues) increased 18% from the year-ago quarter to $105 million. When adjusted for currency impact, revenues increased 23% to $109.1 million.

Non-GAAP gross profit increased 13.5% year over year to $758.2 million. Non-GAAP gross margin contracted 20 bps to 86.3%.

Non-GAAP operating expenses increased 11.2% from the year-ago quarter to $531.1 million.

Non-GAAP operating margin increased 110 bps to 25.8%, due to lower operating expenses.

Fiscal 2019 in Detail

For fiscal 2019, non-GAAP earnings came in at $3.69 per share compared with $3 per share in fiscal 2018.

Total revenues for Red Hat stood at $3.4 billion, up 15% year-over-year, and 16% in constant currency. While, Subscription revenues for the full fiscal year were $2.9 billion, up 15% year over year and in constant currency.

Additionally, total backlog grew 22% from the year-ago quarter to $4.1 billion.

Red Hat witnessed a 33% year-over-year increase in active subscriptions greater than $5 million in fiscal 2019. This was particularly driven by increasing number of Ansible and OpenShift customers, which totaled 1,300 and 1,000, respectively.

The company continues to strengthen its strategic relationship with enterprise organizations. Notably, the number of deals over $1 million in fiscal 2019 increased 17% year over year.

Further, Red Hat also benefited from 22% increase in cross-selling across its different platforms in fiscal 2019.

Balance Sheet & Cash Flow

Red Hat ended the quarter with cash, cash equivalents & investments of $1.88 billion compared with $1.9 billion at the end of the previous quarter.

The company generated operating cash flow of almost $424 million compared with $136.7 million in the previous quarter.

Furthermore, Red Hat spent $413 million on share repurchase in fiscal 2019. Notably, the remaining balance in the current stock repurchase authorization as of the reported quarter was $737.2 million.

How Have Estimates Been Moving Since Then?

Fresh estimates followed a downward path over the past two months.

VGM Scores

At this time, Red Hat 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 D on the value side, putting it in the bottom 40% 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.

Outlook

Red Hat has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.



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