A month has gone by since the last earnings report for Red Hat (RHT). Shares have lost about 0.2% in that time frame, underperforming the S&P 500.
Will the recent negative trend continue leading up to its next earnings release, or is Red Hat due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important catalysts.
Strong Demand for Hybrid Cloud Aids Red Hat Q3 Results
Red Hat reported non-GAAP earnings of 96 cents per share in third-quarter fiscal 2019, comfortably surpassing the Zacks Consensus Estimate of 87 cents. The figure also increased 31.5% on a year-over-year basis.
Revenues increased 13.2% year over year to $846.8 million, primarily driven by strong demand for hybrid cloud technology solutions as well as aggressive cross-selling. However, the figure lagged the Zacks Consensus Estimate of $854 million.
Revenues, adjusted for currency impact, increased 15.3% year over year to $862.3 million.
Americas; Europe, Middle East & Africa (EMEA); and Asia-Pacific (APAC) revenues increased 11.8%, 14.4% and 17.8%, respectively. After adjusting for currency impact, Americas, EMEA and APAC revenues increased 13.1%, 17.5% and 21.6%, respectively.
Almost 62.3% of the bookings came from Americas, 23.5% from EMEA and 14.3% from APAC. Additionally, total backlog grew 22% from the year-ago quarter to $3.5 billion.
Quarter Details
Subscription revenues (87.5% of revenues) increased 12.8% year over year to $740.7 million. When adjusted for currency impact, revenues increased 14.6% to $752.5 million.
Infrastructure-related subscription revenues increased 7.9% from the year-ago quarter to $534.1 million. After adjusting for currency impact, revenues increased 9.4% to $541.5 million. Moreover, Application Development-related and other emerging technology subscription revenues increased 27.6% from the year-ago quarter to $206.6 million. After adjusting for currency impact, revenues increased 30.3% to $210.9 million.
Training & services revenues (12.5% of revenues) increased 16.4% from the year-ago quarter to $106 million. When adjusted for currency impact, revenues increased 20.5% to $109.8 million.
Red Hat inked 100 deals worth more than $1 million in the quarter. Moreover, the company’s Certified Cloud and Service Providers (CCSP) program reached an annualized run-rate of $300 million, recording 25% year-over-year growth of “Red Hat Enterprise Linux on-demand in the public clouds.” Further, Red Hat OpenShift and Red Hat Ansible Automation experienced strong customer growth, adding more than 100 customers in the quarter.
On Oct 28, 2018, International Business Machines Corporation (NYSE:IBM) entered into a definitive agreement to acquire Red Hat for approximately $34 billion in cash. Following this, Red Hat set a special meeting on Jan 16, 2019 for its stockholders to vote on the proposed agreement.
Operating Details
Non-GAAP gross profit increased 13.7% year over year to $733.3 million. Non-GAAP gross margin expanded 40 basis points on a year-over-year basis to 86.6%.
Non-GAAP operating expenses increased 13.9% from the year-ago quarter to $530.5 million.
Non-GAAP operating expenses increased 13.9% from the year-ago quarter to $530.5 million.
Non-GAAP operating income increased 13.3% from the year-ago quarter to $202.9 million, while non-GAAP operating margin almost remained flat at 24%.
Balance Sheet & Cash Flow
Red Hat ended the quarter with cash, cash equivalents & investments of $1.9 billion compared with $2.2 billion at the end of the second quarter of fiscal 2019.
The company generated operating cash flow of almost $136.7 million compared with $165.4 million in the fiscal second quarter.
At the end of the third quarter, total deferred revenue balance was $2.5 billion, up 20% year over year.
How Have Estimates Been Moving Since Then?
It turns out, fresh estimates have trended downward during the past month.
VGM Scores
At this time, Red Hat has a nice Growth Score of B, though it is lagging a bit on the Momentum Score front with a C. However, the stock was allocated a grade of F on the value side, putting it in the lowest quintile for this investment strategy.
Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.
Outlook
Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Red Hat has a Zacks Rank #2 (Buy). We expect an above average return from the stock in the next few months.
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