Red Hat (RHT, Financial) reported better-than-expected fourth quarter fiscal 2018 results on Monday, as a result of strong growth in subscription revenue. The open-source software leader pleased investors by topping estimates and issuing solid guidance. As a result, company shares were up 3.7% and reached an all-time high of $158.71.
A healthy spending environment has been working in favor of the company. All this has set a favorable environment for Red Hat, which is quite evident from its latest earnings report. CEO Jim Whitehurst appeared upbeat about the company’s future in the earnings conference call. Here’s a brief look at results.
Performance at a glance
The software giant reported fourth-quarter revenue of $772 million for the February quarter, which was up 23% over the same period last year. Adjusted earnings per share came in at 91 cents. Both revenue and earnings topped consensus estimates of $762 million and 81 cents, respectively. Red Hat reported $1.23 billion in billings, up 25% from last year. Analysts had expected the metric to hover around $1.12 billion. Billings may be defined as the summation of revenue and the sequential change in deferred revenue.
The open-source software giant registered a net loss of $12.5 million, which translates to 7 cents a share. This unusual net loss for the quarter is attributable to the recent US tax reform.
Overall, the company’s quarter was bolstered by the solid growth witnessed in subscription revenue. Red Hat's subscription revenue rose 17% from a year earlier to $510 million. Infrastructure-related products accounted for the majority of subscription revenue and the remaining came from application-development related technologies. Application-development revenue was $173 million, up a staggering 39% over last year. Whitehurst said:
"Red Hat continued to expand its position with customers as a trusted adviser and strategic technology partner, enabling initiatives focused on digital transformation and cloud computing…This position helped drive a 50% year-over-year increase in the number of deals over $1 million during the fourth quarter, as we benefited from strong cross selling and high renewal rates within our top deals."
What’s in favor
The company’s performance was also aided by solid demand for its "emerging technologies" portfolio. This includes Red Hat’s offerings such as the OpenStack cloud infrastructure software, the OpenShift platform required for running server app containers, and the Ansible platform that automates the configuration and deployment of server apps.
What to expect
The guidance for quarter ended May is mixed with revenue ahead of consensus estimates and adjusted earnings per share falling short. Red Hat expects its top line to range in between $800 million to $810 million, while earnings at $0.68 a share. Analysts forecast revenue generation of around $795 million and earnings of 72 cents a share.
However, Red Hat has given a strong guidance for fiscal 2019, ending $3.43 billion to $3.46 billion with adjusted EPS of $3.38 to $3.41. That compares with consensus revenue and adjusted earnings per share estimate of $3.37 billion and $3.34, respectively.
The only weak spot in Red Hat's earnings report remains its margin guidance for fiscal 2019. Though the company guides a 17% to 18% revenue growth, it expects operating margin to come in flat at 23.9%. Red Hat's recent acquisition of CoreOS should have a bearing on its margin by around a percentage point. However, considering the overall scenario, Red Hat is poised for growth.
Disclosure: I do not hold any position in the stock mentioned in this article.
