Red Hat (RHT 133.46, -9.70, -6.78%), a leading open source software
solutions provider, is trading lower today after reporting Q2 (Aug)
results last night and providing guidance for Q3 (Nov) and FY19.
Relative to the company’s own prior guidance, those second quarter results might be described as mixed. Non-GAAP EPS rose 10% year/year to $0.85, which was above prior guidance of approximately $0.81. Meanwhile, revenue rose 13.7% year/year to $822.8 mln, which was at the lower end of prior guidance of $822-830 mln, and which compares somewhat weakly to the first quarter, when Red Hat beat top line expectations and its own prior outlook pretty handily. Non-GAAP operating margin declined to 23.9% from 26.4% last year, but this was above prior guidance of approximately 23%. Billings were $789 mln.
The new round of guidance was a bit weak, and this is partly why the stock is trading lower. For Q3 (Nov), RHT sees non-GAAP EPS of $0.87 and revenue of $848-856 mln. Both numbers are below market expectations. For the full fiscal year, RHT slightly raised non-GAAP EPS guidance to $3.45-3.49 from $3.44-3.48, although much of the increase appears to have come from the upside AugQ EPS. RHT also reaffirmed prior full-year guidance for non-GAAP operating margin of 23.9%.
Subscription revenue is a key metric for Red Hat. Total subscription revenue rose 13% to $723 mln. Breaking this down a bit, subscription revenue from Infrastructure-related offerings rose 8% year/year to $527 mln. Subscription revenue from Application Development-related and other emerging technology offerings rose 31% year/year to $196 mln.
On the call, management noted that on deals over $1 mln this quarter, RHT closed a total of 73 deals, up 11% year/year. Within these deals, 11 were greater than $5 mln, which is a record in a Q2 for RHT, and one deal was greater than $10 mln. Cross selling was strong in this cohort. Over 76% of the top deals greater than $1 mln included one or more components of its Application Development-related and emerging technologies offerings.
Looking at its top deals, 24 out of its top 25 deals that were up for renewal did so at an aggregate value of more than 100% of their previous value. The one deal that did not renew is a rare competitive loss to a legacy on-premise provider based on pricing. Total backlog, driven by strong bookings, grew 20% year/year. Its major geographic regions each grew bookings at double-digit rates.
Last week, RHT announced a multi-partner relationship with Hortonworks and IBM Cloud Private to bring their big data and analytics products onto OpenShift. This is designed to enable customers to develop and run data-intensive applications on OpenShift, bringing them the power of hybrid cloud. RHT's Ansible technology reached approximately 2 million managed nodes at the end of Q2, essentially doubling the number of managed nodes since Q4 of last year. Overall, RHT continues to drive significant adoption of its hybrid cloud technologies even as the company works through some headwinds in middleware and its renewal base.
In sum, investors are clearly disappointed with AugQ revenue coming in at the low end of guidance after a large beat last quarter. Also, the NovQ guidance for EPS and revenue is being seen as a negative. After a series of strong results, RHT has now posted-back-to-back guide downs. Our sense is that the stock would have moved down more in reaction, but it was weak heading into this report as investors are cautious on this name.
The stock took a big hit in June when RHT reported earnings. The MayQ results were good, but the billings number was weak, and the AugQ revs/EPS guidance was well below consensus. Prior to that MayQ report, the stock had been a strong and steady climber, going from around $75 at the start of 2017 to about $165 going into that earnings report. The stock is now around $135 following back-to-back lackluster guidance quarters. As such, investors are understandably nervous. The weak guidance may at least in part be connected to RHT’s tendency to guide conservatively, but we shall have to wait and see whether this quarter’s guidance belongs to that trend. Hopefully the company can pick up the pace in late 2018 and early 2019.
- OUR VIEW
- LEARNING CENTER