Red Hat (RHT) Beats on Q2 Earnings, Raises FY17 Outlook

Red Hat Inc. RHT reported better-than-expected second-quarter fiscal 2017 results and raised its guidance for the fiscal sending shares up 6.6% in aftermarket trading.

Adjusted earnings of 37 cents per share (including stock-based compensation but excluding one-time items) beat the Zacks Consensus Estimate of 35 cents and improved 8.8% on a year-over-year basis. The company reported non GAAP earnings of 55 cents, up 17% year over year.

Revenues increased 19% year over year to $599.8 million and beat the Zacks Consensus Estimate of $590.8 million.

Subscription revenues (89% of revenues) increased 20% year over year to $531 million. Subscription revenues for infrastructure related offerings increased 18% from the year-ago quarter to $427 million. Subscription revenues for application development related and emerging technologies surged 33% year over year to $104 million.

Training & services revenues (11% of revenues) increased 9.5% from the year-ago quarter to $68.6 million.

Margins

Gross margin was up 50 basis points (bps) to 85.4%. Operating expenses, as a percentage of revenues, increased 190 bps on a year-over-year basis to 71.7%.

Operating margin, on a non-GAAP basis, was 22.8%.

Other Financial Details

At the end of the quarter, total cash and cash equivalents (including investments) were about $2 billion, up from $1.20 billion as of Feb 29, 2016.

For the first half of the fiscal, cash flow from operating activities was approximately $330 million compared with $338.3 million generated in the first six months of fiscal 2016. The company exited the quarter with deferred revenues of $1.68 billion, an increase of 19% on a year-over-year basis.

The company repurchased 1.8 million shares worth $127 million. In Jun 2016, management announced a new $1 billion share repurchase program to replace the $500 million plan that was terminated on Jun 30, 2016.

RED HAT INC Price, Consensus and EPS Surprise

RED HAT INC Price, Consensus and EPS Surprise | RED HAT INC Quote

Guidance

For the third quarter, Red Hat projects revenues of $613 million to $623 million and non-GAAP earnings per share of 58 cents. Non-GAAP operating margin is expected to be 23.3%.

For 2016, Red Hat raised its sales expectations. Revenues are expected to be $2.415 billion to $2.435 billion compared with the earlier projection of $2.380 billion to $2.420 billion; non GAAP earnings per share are expected in the range of $2.23 and $2.25, up from the earlier projected range of $2.19 and $2.23

However, the company continues to expect cash flow in the range of $800 million to $820 million. Management expects non-GAAP operating margin to be around 23% in fiscal 2016.

At present, Red Hat has a Zacks Rank #3 (Hold). Better-ranked stocks in the tech space are Facebook Inc FB, NetEase Inc NTES and NetApp, Inc. NTAP. All sport a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

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