Red Hat (RHT 146.84, -18.89, -11.40%), which is a leading open source software
solutions provider, is trading sharply lower today (-11%) after reporting Q1
(May) results last night and providing guidance for Q2 (Aug) and FY19. Non-GAAP
EPS rose 24% year/year to $0.72, which was above prior guidance of approx.
$0.68. Revenue rose 20.2% year/year to $813.5 mln, which also was above prior
guidance of $800-810 mln. Non-GAAP operating margin came in at 20.7% vs. prior
guidance of approx. 20.5%. However, MayQ billings came in at $709 mln, which
was below market expectations.
Other than the billings number, the MayQ results were largely satisfactory. However, the guidance was quite weak, which is likely a big reason why the stock is trading lower today. For Q2 (Aug), RHT sees non-GAAP EPS of $0.81 and revenue of $822-830 mln. Both numbers are well below market expectations. For the full fiscal year, RHT slightly raised non-GAAP EPS guidance to $3.44-3.48 from $3.38-3.41, although much of that increase appears to have derived from the upside achieved in MayQ.
Subscription revenue is a key metric for Red Hat. For Infrastructure-related offerings, it came in at $522 mln, an increase of 14% year/year. Subscription revenue from Application Development-related and other emerging technology offerings came in at $189 mln, up 37% year/year.
RHT says that the move to hybrid cloud architecture continues to be a strategic priority for its customers, and the company attributed revenue growth for the quarter to strong continued customer adoption of the company’s cloud-enabling technologies for support of their applications. For example, RHT is driving growth in both subscription and services revenues for its OpenShift technologies as customers increasingly seek to modernize their applications in Linux containers for initiatives involving hybrid cloud and digital transformations. RHT continues to expect strong demand for its hybrid cloud enabling technologies for the rest of this fiscal year.
On the call, management noted that it delivered a 48% year/year increase in deals over $1 mln, due in part to the fact that 70% of these deals included one or more components of its group of Application Development-related and emerging technologies offerings. Second, RHT drove strong growth in its Linux container platform, OpenShift, where it added 100+ new customers in the quarter and continued to grow median revenue per customer. Third, RHT continued to experience high demand for its services business, which grew 27%. This result was mainly driven by additional consulting demand for Ansible and OpenShift.
Management was asked on the call about the issued guidance. Basically, the full year guidance was not altered much, but the AugQ targets fell below expectations. RHT said that they see revenue skewed a little bit more towards the second half of the fiscal year. Services have continued to perform very well, but they anticipate that continuing a bit more into Q3 (Nov). RHT expects to see a pickup in revenue in 2HFY19.
In addition to earnings, RHT announced a new $1 bln stock repurchase plan. The new program is to replace the previous $1 bln repurchase program that will expire on June 30, 2018. From the program’s commencement on July 1, 2016 through June 20, 2018, the company repurchased 8.2 mln shares for $751 mln.
In sum, investors are clearly spooked by the billings number and by the Q2 (Aug) guidance. Hopefully, management is right that sales will be skewed more toward the back half of the year, but investors appear to be taking a wait-and-see approach. They will have to wait until RHT provides Q3 (Nov) guidance to be sure. On a final note, the stock has been a strong and steady climber over the past year, going from around $100 a year ago to a close around $165 yesterday. However, it traded around $144 in the pre-market as investors used the MayQ report to lock in some profits.
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