Red Hat (RHT) is an information technology name that provides open source software solutions to develop and offer operating system, virtualization, management, middleware, cloud, mobile, and storage technologies. The company has been widely successful in offering infrastructure-related solutions, such as Red Hat Enterprise Linux, an operating system platform that runs on hardware for use in hybrid cloud environments. It also operates the popular Red Hat Satellite, a system management offering that helps to deploy, scale, and manage in a hybrid cloud environment. These are just a few examples of the company’s innovative products. What about the stock?

The stock has run up tremendously in the last 52 weeks. In fact, it is one of the top performing holdings in the BAD BEAT Investing portfolio that is managed by Quad 7 Capital. Take a look at the tear the stock has been on:

Source: Yahoo finance

This performance has been incredible and has generated stellar returns for the portfolio. However, after such a major run, does performance still justify hanging on to the name here? Let us turn to recent performance in the most recent quarter and the year.

Top-line in the quarter, and year

Total revenue for the quarter was $772 million, up 23% year-over-year, or 18% measured in constant currency. Much of the revenue comes from recurring subscriptions, which is a primary reason we like the company. Subscription revenue for the quarter was $683 million, up 22% in year-over-year, or 18% measured in constant currency.

What about for the year? Well for the full fiscal year 2018 total revenue was $2.9 billion, up 21% year-over-year, or 20% measured in constant currency. Subscription revenue for the full year was $2.6 billion, up 21% year-over-year, or 19% measured in constant currency. For the year, subscription revenue in the full fiscal year was 88% of total revenue. This recurring revenue is very positive.

We like what we are seeing from subscriptions in the quarter. Subscription revenue from infrastructure-related offerings for the quarter was $510 million, an increase of 17% year-over-year, or 13% measured in constant currency. There was strong subscription revenue from application development-related and other emerging technology offerings for the quarter was $173 million, an increase of 39% year-over-year, or 34% measured in constant currency.

The trend in subscriptions was also strong on the year. What do we mean? Well, full fiscal year subscription revenue from infrastructure-related offerings was $2.0 billion, an increase of 15% year-over-year or 14% measured in constant currency. Full fiscal year subscription revenue from application development-related and other emerging technology offerings was $624 million, an increase of 42% from last year.

Operating Income

Factoring on the cost of revenues and their generation, we saw that operating income for the quarter was $132 million, up 40% year-over-year. After making adjustments impacting comparability, operating income for the fourth quarter was $190 million, up 24% year-over-year, and well ahead of our expectations for a 15% gain. Wow. For the fourth quarter, adjusted operating margin was 24.6%, above the 23% we were targeting. What about for the year?

Well for the year operating income was $472 million, an increase of 42% year-over-year. After adjusting for items, we see that operating income for the full fiscal year was $698 million, up 25% year-over-year, while adjusted margins were up 23.9%. A strong year overall.

The bottom line figures

So we saw a top line driven by subscription revenue, and operating income better than we expected. When we look to the reports, we see that net loss for the quarter was $13 million, or $0.07 diluted loss per share, compared with GAAP net income of $66 million, or $0.36 last year,. Much of the decline stemmed from taxation changes. As such, it is best to look at adjusted numbers.

After adjusting for items, we see net income for the quarter was $167 million, or $0.91 per share, as compared to $110 million, or $0.61 per share in the year-ago quarter. This is an incredible improvement.  For the year on an adjusted basis, net income was $540 million, or $2.98 per share, versus $414 million, or $2.27 per share last year.

Valuation

After this runup, shares are pretty expensive. However, we have been hearing this argument for several quarters, yet the company continues to deliver. Still, the stock is trading at 80 times earnings, and 50 times forward earnings. In addition, the price-to-earnings growth ratio is rather unfavorable, those the enterprise value to EBIT ratio is still somewhat modest, but still above sector average.

Our move

The BAD BEAT Investing portfolio is selling 75% of the position in the stock and letting the rest run. We have been in the name for nearly a year and have to lock in profits. Overall, we see the stock as a hold.