Red Hat Inc.RHT reported fourth-quarter fiscal 2015 earnings of 30 cents per share (including stock-based compensation but excluding one-time items), beating the Zacks Consensus Estimate by 3 cents. Earnings improved 1 cent on a year over year basis.
Revenues
Non-GAAP revenues increased 21.9% year over year to $487.9 million and beat the Zacks Consensus Estimate of $457 million. GAAP revenues of $464 million were also greater than the higher end of management’s guided range of $456 million to $459 million.
Subscription revenues (87.3% of revenues) increased 15.2% year over year to $405.1 million. Subscription revenues for infrastructure related offerings increased 12% from the year-ago quarter to $341 million. Subscription revenues for application development related and emerging technologies jumped 38% year over year to $64 million.
Training & services revenues (12.7% of revenues) increased 20.4% from the year-ago quarter to $58.9 million.
Margins
Gross margin remained flat on a year-over-year basis at 84.9%. Subscription gross margin increased 20 basis points (bps) to 92.9%, while training & services gross margin improved 90 bps to 29.5%.
Operating expenses as a percentage of revenues (including stock-based compensation but excluding one-time items) increased 50 bps on a year over year basis to 69.4%.
Sales & marketing expense, as percentage of revenues, increased 88 bps while research & development expense as a percentage of total revenue declined 78 bps on a year-over-year basis. General & administrative expense, as a percentage of revenues, decreased 3 bps in the quarter.
Operating margin (including stock-based compensation but excluding other one-time items) contracted 62 bps from the year-ago quarter to 16%.
Other Financial Details
At the end of the fourth quarter, cash and cash equivalents were over $1 billion compared with $646.7 million at the end of the previous quarter.
Cash flow from operating activities was $217.4 million compared with $184.7 million in the prior quarter. The company exited the quarter with deferred revenues of $1.48 billion, an increase of 15% on a year-over-year basis.
Management also authorized a new $500 million share repurchase program which will replace the existing $300 million repurchase program that is due to expire on Mar 31, 2015. As of Mar 25, the company had repurchased shares worth $220 million under the previous plan.
Guidance
For fiscal 2016, Red Hat expects revenues in the range of $1.99 billion to $2.02 billion including the impact of currency translations. On a constant currency basis, the company expects annual revenue growth of 9%. Management expects operating margin to be around 23.3%. Non-GAAP earnings are expected to be in the range of $1.79 or $1.82 per share.
Operating cash flow for fiscal 2016 is expected to range from $670 million to $690 million.
Our Take
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. We believe that the company has significant growth potential in the public cloud segment over the long term.
Additionally, Red Hat’s strong product pipeline, continuing investments to expand product portfolio and partnerships with the likes of IBM IBM, Dell, Intel INTC and the most-recent partnership extension with NEC will drive overall growth.
However, sluggish IT spending and intensifying competition are major headwinds in the near term. Also, Red Hat’s strategy of sacrificing service revenues to increase subscription revenues in the long run is expected to hurt top-line growth going forward. This coupled with negative margin impacts from the acquisitions will be an overhang in the near term.
Red Hat has a Zacks Rank #3 (Hold).
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