Red Hat Q4 Earnings Up Y/Y, Rev Beats - Analyst Blog

Shares of Red Hat Inc. RHT surged 3.9% in after-hours trading as it reported an upbeat fourth quarter fiscal 2014 results. Earnings jumped 11.6% from the year-ago quarter to 28 cents per share which in turn beat the Zacks Consensus Estimate of 26 cents.

Revenue Details

Revenues increased 15.1% year over year to $400.4 million and beat the Zacks Consensus Estimate of $398.0 million. Revenues were also ahead of management's guided range of $397.0 million to $400.0 million.

The strong year-over-year growth in revenues was primarily driven by a 16.1% increase in subscription revenues and an 8.4% increase in revenues from training and services.

Billings increased 24.0% year over year to $565.0 million. Adjusted for currency, billings increased 26.0% from the year-ago quarter. Channel contributed 56.0% of the bookings, while the rest (44%) came from direct sales.

Geographically, 61.0% of the bookings came from the Americas, 26.0% from Europe, Middle East and Africa (EMEA) and 13.0% from Asia-Pacific.

Red Hat secured more than 30 deals of over $1.0 million each. Seven out of the top 30 deals were worth approximately $5.0 million or higher while two out of these seven were worth more than $10.0 million.

Government and Financial were the top two verticals from where the company secured most of the deals.

In the fourth quarter of fiscal 2014, the company expanded its partnership with Amazon Web Services' (AWS) Govcloud that will make Red Hat offerings available globally. Red Hat also deepened its strategic relationship with the leading contributor and provider of Enterprise Apache Hadoop Hortonworks.

Cross-selling was evident in the fourth quarter with three of the top five deals having an OpenStack component and two of these deals comprising an OpenStack and OpenShift component.

Moreover, during the reported quarter, the company also announced new relationships with Alcatel-Lucent and Dell to bring OpenStack-based Network Function Virtualization or NFV for telecom providers.

Operating Details

Gross margin (excluding amortization of intangible assets) expanded 10 basis points (bps) to 85.5% on a year-over-year basis, primarily driven by improving product mix.

Operating expenses, as percentage of revenues, increased 10 bps on a year-over-year basis to 68.9% in the quarter. Sales & marketing expenses, as percentage of revenues, increased 10 bps while research & development increased 10 bps. General & administrative expense, as a percentage of revenues, decreased 40 bps in the quarter.

Operating margin (excluding amortization of intangible assets and facility exit costs) increased 10bps to 16.6% in the reported quarter. Net income margin was 13.1% compared with 13.7% in the year-ago quarter.

Balance Sheet & Cash Flow

At the end of the fourth quarter, cash and cash equivalents were $646.7 million compared with $646.1 million at the end of the previous quarter.

Cash flow from operating activities was $185.0 million compared with $95.0 million in the prior quarter. The company exited the quarter with deferred revenue of $1.29 billion, an increase of 18.0% on a year-over-year basis.

Guidance

For the first quarter of fiscal 2015, Red Hat expects revenues in the range of $412.0 million to $415.0 million while the Zacks Consensus Estimate is pegged higher at $416.0 million. Management expects operating margin to be around 21.0%.

Non-GAAP earnings are expected to be in the range of 32 cents to 33 cents per share for the upcoming quarter, which happens to be much higher than the Zacks Consensus Estimate of 26 cents.

Red Hat provided guidance for fiscal 2015 too. Revenues are expected to range between $1.730 billion and $1.755 billion, slightly below the Zacks Consensus Estimate of $1.756 billion.

Management expects non-GAAP operating margin to be around 23.5% for fiscal 2015. Red Hat expects fiscal 2015 earnings to be in the range of $1.54 to $1.56 per share, much higher than the Zacks Consensus Estimate of $1.14 per share.

Operating cash flow for fiscal 2014 is expected to be between $580.0 million and $600.0 million.

Our Take

The weak outlook will remain an overhang on the stock going forward. Moreover, we believe that a soft European macro-environment, currency headwinds, lower services revenues and sluggish IT spending are the major headwinds in the near term.

Also, Red Hat's strategy of sacrificing service revenues in order to increase subscription revenues in the long run is expected to hurt top-line growth in the next couple of quarters.

Nevertheless, Red Hat continues to gain market share and its Linux servers are well positioned to compete with Microsoft's MSFT Windows servers in the enterprise market going forward. We believe that the company has significant growth potential in the public cloud segment over the long term.

We believe that Red Hat's strong product pipeline, continuing investments to expand product portfolio and partnerships with the likes of IBM IBM, Dell and Intel INTC will drive growth, going forward.

Currently, Red Hat has a Zacks Rank #3 (Hold).