Red Hat Back In The Groove; 34% Upside Seen For Shares

Reviewing Red Hat Inc RHT's fourth-quarter results, Drexel Hamilton said investors are back in the Red Hat groove, as the company's performance rebounded in the fourth quarter after a tumultuous third quarter.

Delivering Strong Growth

Analyst Brian White noted that OpenStack and other emerging technologies delivered strong growth in the fourth quarter. The analyst also stated that he will be keyed into more details about these businesses at the Red Hat Summit, its analyst meeting, scheduled for May 2–4.

Key Q4 Metrics

On specific metrics, Drexel Hamilton noted that the company reported fourth-quarter sales of $628.8 million, up 16 percent year-over-year and ahead of its estimate and the consensus. The pro forma earnings per share of $0.61 was in line with estimates, the firm noted.

Other Numbers

• Subscription revenues — $559.6 million, up 17 percent.
• ADOET revenues — $124.5 million, up 40 percent.
• Deferred revenue — $2.07 billion, up 20 percent.
• Calculated billings — $990.8 million.

The firm clarified that all these metrics were above its estimates.

Big Deals Benefit

Drexel Hamilton clarified that Red Hat delivered record performance around large-sized deals, with 110 over $1 million deals in the quarter. This, according to the firm, also included the company's first-ever $100 million deal.

"Approximately one-third of Red Hat's largest deals in 4Q:FY17 contained OpenStack and the company now has over 500 customers running OpenStack," the firm added.

Looking Ahead

The firm noted that Red Hat guided fiscal first quarter 2018 sales to $643 million to $650 million and pro forma earnings per share to $0.52 to $0.53. The company also provided its initial 2018 outlook, expecting pro forma earnings per share of $2.60–$2.64 and sales of $2.72 billion to $2.76 billion, the firm added.

Consequently, the firm raised its first-quarter sales estimate for Red Hat to $648.4 million from $640.4 million, but lowered its earnings per share estimate to $0.53 from $0.57. The firm raised its 2018 earnings per share and sales estimates, with the current estimates at $2.72 billion in sales and $2.61 in earnings per share.

Drexel Hamilton raised its price target for the shares of Red Hat to $110 from $105, up about 34 percent from Monday's closing level. The firm has a Buy rating on the shares.

At the time of writing, Red Hat shares were up 6.18 percent at $87.27.

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