Red Hat Inc.(RHT - Snapshot Report) reported first-quarter fiscal 2015 earnings of 31 cents per share (including stock-based compensation but excluding one-time items), beating the Zacks Consensus Estimate of 27 cents. Earnings improved 29% on a year-over-year basis.
Red Hat Inc. - Earnings Surprise | FindTheBest
Revenues
Revenues increased 13.4% year over year to $481 million and beat the Zacks Consensus Estimate of $472 million.
Subscription revenues (88.4% of revenues) increased 14.2% year over year to $424.8 million. Subscription revenues for infrastructure related offerings increased 11% from the year-ago quarter to $354 million. Subscription revenues for application development related and emerging technologies jumped 34% year over year to $71 million.
Training & services revenues (11.6% of revenues) increased 8.5% from the year-ago quarter to $56.2 million.
Margins
Gross margin increased to 85.2% from 84.7% in the prior-year quarter while that for subscription came in at 94%, an increase of 30 basis points (bps) on a year-over-year basis. Operating expenses as a percentage of revenues (including stock-based compensation but excluding one-time items) decreased 210 bps on a year-over-year basis to 69.7%.
Sales & marketing expense, as a percentage of revenues, decreased 40 bps while research & development expense, as a percentage of total revenue, declined 79 bps on a year-over-year basis. General & administrative expense, as a percentage of revenue, decreased 88 bps in the quarter.
Operating margin (including stock-based compensation but excluding other one-time items) increased 180 bps from the year-ago quarter to 13.4%.
Other Financial Details
At the end of the quarter, cash and cash equivalents (including investments) were about $1.2 billion compared with $1.3 billion at the end of the previous quarter.
Cash flow from operating activities was $208.7 million compared with $164.7 million in the prior quarter. The company exited the quarter with deferred revenues of $1.44 billion, an increase of 13% on a year-over-year basis.
Guidance
For fiscal 2016, Red Hat continues to expect revenues in the range of $1.99 billion to $2.02 billion including the impact of currency translations. Management expects operating margin to be around 23.3%. The company expects cash flow in the range of $670 million to $690 million for fiscal 2016.
Red Hat increased its guidance for earnings to be in the range of $1.81 to $1.84 per share (earlier projection was $1.79 or $1.82 per share), assuming the annual effective tax rate of 29%.
Our Take
Red Hat continues to gain market share and its Linux servers are well positioned to compete with Microsoft’s (MSFT - Analyst Report) 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 - Analyst Report), Dell, Intel (INTC - Analyst Report) 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 acquisitions will be an overhang in the near term.
Red Hat has a Zacks Rank #3 (Hold).
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