E Red Hat: Selling For Our Bad Beat Investing Portfolio, Here Is Why

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.

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Quad 7 Capital 11 months ago Author's comment

Here is a link to the BAD BEAT Investing portfolio.... seekingalpha.com/author/quad-7-capital/research