The Raleigh, N.C.-based company reported third-quarter GAAP net income of $48 million, or 26 cents a share, compared with $52 million, or 27 cents a share, in the year-earlier quarter. Adjusted earnings per share of 42 cents came in higher than analysts' expectations of 40 cents. Revenue jumped 15% to $456 million.
"Our strong Q3 results marked the eleventh straight quarter of mid-to-high teens revenue growth as we continued to reinforce and expand our strategic relationship with our customers," Red Hat CEO Jim Whitehurst said in the company's earnings release. "Cloud computing and big data trends are driving increased demand for open-source technologies. We believe our leadership position in the open-source industry and broad portfolio of Open Hybrid Cloud technologies creates a strong position for Red Hat to capture market share in the cloud-enabled data center."
Red Hat shares hit a new intraday 52-week-high of $70.11 on Friday. The stock was last trading late Friday morning up 11.8% to $68.78. Here's what analysts said.
Rob Owens, Pacific Crest Securities (Sector Perform)
We believe in Red Hat's longer-term vision. It has an advantageous position as the steward of meaningful open-source projects, which positions the company well for success, in our view. However, shares have appreciated significantly and the slowing core business remains a sizeable portion of the revenue mix. The company is transitioning to a more diversified revenue stream but it will take time. We remain neutral on RHT.
Brian Schwartz, Oppenheimer (Outperform; $80 PT)
Red Hat reported strong FY:3Q results and raised FY:2015 guidance again (despite FX headwinds) as good execution has strengthened its leading positioning in a tough neighborhood (enterprise infrastructure software). RHT's app development-related and emerging technologies portfolio (45% growth in 3Q & YTD) is not cannibalizing its other businesses, and should reach ~$500M in two years, a scale and growth profile that only WDAY and NOW project within our SaaS universe. Management's tone sounds confident and a record number of big-deals won indicates RHT is becoming a more strategic IT supplier.
Bottom Line: Red Hat appears set to close FY:2015 with strong momentum which strengthens our confidence in the name. Reiterate Outperform and raise our previous Street-high target of $74 to $80 (20x 2016 FCF).
James Gilman, Drexel Hamilton (Buy; $75 PT)
We are adjusting our estimates to reflect F3Q15 results and our long-term expectations for Red Hat. We think there could be upside to our estimates due to our belief that management guided conservatively when accounting for the revenue from its cloud partners.
We maintain our Buy rating, but increase our price target by $8 to $75. We use a 20x FCF per share relative valuation multiple, which is in line with the industry multiple. We are able to use a lower multiple than previously because the company has reduced its CapEx spend following a year of investment in expanding operations.
Joel Fishbein, BMO Capital Markets (Outperform; $77 PT)
Red Hat's 3Q delivered results ahead of expectations. Improving execution and broader adoption of the broadening portfolio continues to be overshadowed by continued FX headwinds. The FY4Q outlook is expected to come in slightly ahead of the current consensus on a constant currency basis. CFO Charles Peters is expected to retire in the next 12 months.
In our view, Red Hat is one of the best-positioned companies in infrastructure software, and we expect the multiple to expand as improving growth appears sustainable. We reiterate our Outperform rating and increase our price target to $77 (from $68), which implies 21x our FY2016 EV/FCF.
Sitikantha Panigrahi, Credit Suisse (Outperform; $75 PT)
Despite significant FX headwinds, Red Hat reported strong November quarter results with revenue, billings, and EPS above consensus expectations, driven by large deals , strong demand for Red Hat Linux, and cross selling of emerging technologies. Specifically, the company closed three deals greater than $10 million and 12 deals more than $5 million versus four and none in the year ago quarter, respectively. Additionally, 55% of the top 30 deals included one or more components of application development-related and other emerging technologies (versus 50% in the year ago quarter), which grew 45% year over year in revenue and accounted for 15.7% of total subscription revenue (versus 12.5% in the year ago quarter). Although management provided Q4 guidance of $456-459 million in revenue and EPS of $0.40-0.41 versus consensus expectations of $459 million and $0.41, considering the FX impact of -4% Y/Y, Q4 guidance appears ahead of consensus estimates.
Red Hat's outperformance in the quarter reinforces our thesis that the continued momentum of RHEL, coupled with growing adoption of open source in enterprises, has enabled Red Hat to increasingly upsell its emerging products. In the long term, we believe that Red Hat is well positioned to benefit from the growing adoption of OpenStack and the cloud computing trend. Therefore, we reiterate our Outperform rating.
Raimo Lenschow, Barclays (Overweight, $77 PT)
Red Hat reported healthy Q3 results ahead of consensus on most key metrics, despite FX headwinds that were meaningful. Underlying momentum in the core business, emerging product groups, and better large deal activity reinforce our positive view on the stock. The billings proxy (calculated based on cash flow) was up 19% y/y and beat consensus comfortably. Total revenue and profitability were also better than expected, though deferred was just below consensus estimates. We expect a positive reaction in the shares and reiterate our OW rating, and raise our price target to $77 (from $71).
We believe Red Hat can continue to grow billings and revenue in the mid-teens range, which together with modest expected margin improvement, should grow free cash flow in the high-teens. As such, we remain comfortable with our OW rating, and given the increases to our estimates, we are raising our price target to $77, which is based on an EV/FCF of 18x, and a CY16 FCF estimate of $738mn.