Shares of Red Hat Inc. (RHT) surged 10.0% in after-hours trading on the heels of an upbeat fiscal 2014 third quarter. Earnings jumped 44.8% from the year-ago quarter to 42 cents per share.
Revenue Details
Revenues increased 15.4% year over year to $396.5 million and beat the Zacks Consensus Estimate of $382.0 million. Revenues were also ahead of management’s guided range of $381.0 million to $384.0 million.
The strong year-over-year growth in revenues was primarily driven by a 16.0% increase in subscription revenues and a 12.3% increase in revenues from training and services.
Billings increased 19.0% year over year to $453.0 million. Adjusted for currency, billings increased 21.0% from the year-ago quarter to $458.0 million. Channel contributed 70.0% of the bookings, while the rest came from direct sales.
Geographically, 55.0% of the bookings came from the Americas, 29.0% from Europe, Middle East and Africa (EMEA) and 16.0% from Asia-Pacific.
Red Hat secured more than 30 deals over $1.0 million. Four out of the top 30 deals, however, were approximately $5.0 million or greater.
Government and Financial were the top two verticals from where the company secured most of the deals.
In the third quarter of fiscal 2014, the company launched RHEL 7, which is the beta version of its award-winning Red Hat Enterprise Linux operating system. The new version of Red Hat Enterprise Linux OpenStack platform appeared in the market during the quarter. Red Hat launched Openstack 2.0 during the quarter.
Operating Details
Gross margin (excluding amortization of intangible assets) expanded 30 basis points (bps) to 84.8% on a year-over-year basis, primarily driven by improving product mix.
Operating expenses, as percentage of revenues, decreased 60 bps on a year-over-year basis to 69.4% in the quarter. Sales & marketing expenses, as percentage of revenues, decreased 20 bps while research & development increased 80 bps. General & administrative expense, as a percentage of revenues contracted 120 bps in the quarter.
Operating margin (excluding amortization of intangible assets and facility exit costs) increased to 15.3% from 14.5% in the year-ago quarter. Net income margin was 13.1% compared with 10.1% in the year-ago quarter.
Earnings including share-based compensation surged 71.2% from the year-ago quarter to 26 cents.
Balance Sheet & Cash Flow
At the end of the third quarter, cash and cash equivalents were $646.1 million compared with $596.8 million at the end of the previous quarter.
Cash flow from operating activities was $95.0 million compared with $100.0 million in the year-ago quarter. The company exited the quarter with deferred revenue of $1.12 billion, an increase of 14.0% on a year-over-year basis.
Guidance
For the fourth quarter of fiscal 2014, Red Hat expects revenues in the range of $397.0 million to $400.0 million.. Management expects operating margin to be around 24.5%.
Non-GAAP earnings per share are expected to be in the range of 36 cents to 38 cents for the upcoming quarter, which happens to be much higher than the Zacks Consensus Estimate of 24 cents.
Red Hat revised its guidance for fiscal 2014. Revenues are expected to range between $1.531 billion and $1.534 billion
Management raised its operating margin outlook by 10 bps to 24.6% for fiscal 2014. Red Hat now expects fiscal 2014 earnings to be in the range of $1.46 to $1.48 per share which happens to be much higher than the Zacks Consensus Estimate of $1.13 per share.
Operating cash flow for fiscal 2014 is expected to be between $500.0 million and $520.0 million.
Our Take
We believe that soft European macro-environment, currency headwinds, lower services revenues and sluggish IT spending are the major headwinds in the near term.
Moreover, 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).
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