Red Hat, of Raleigh, N.C., provides open source software to enterprise customers around the world. The company reported fiscal fourth-quarter profit of $48 million, or 26 cents a share, up from $45 million, or 24 cents a share, in the year earlier quarter. Adjusted earnings rose to $81 million, or 43 cents a share, compared to $75 million, or 39 cents a share, in last year's quarter. Analysts were expecting earnings of 41 cents a share, according to Thomson Reuters
Revenue rose 16% from last year (22% when measured in constant currency) to $464 million. Subscription revenue rose 15% (21% in constant currency) to $405 million.
The company projected first-quarter adjusted earnings of 41 cents a share on revenue between $469 million to $474 million, below estimates. For the full year, Red Hat forecast adjusting earnings of $1.79 a share to $1.84 a share, also below expectations, on revenue between $1.99 billion and $2.02 billion, Bloomberg said.
Management said on the earnings call that many analysts haven't updated their estimates to reflect the effect of foreign exchange, Bloomberg reported.
Shares were surging 8.6% to $74.35. Here's what analysts said.
Brian White, Cantor Fitzgerald (Buy; $85 price target)
Last night, Red Hat overcame a significant FX headwind to beat our 4Q:FY15 estimates and the Street, while the company offered up a solid outlook for both FY:16 and 1Q:FY16. Furthermore, Red Hat announced a new $500 million stock repurchase program.
In our view, last night's performance demonstrates that Red Hat is operating on all cylinders as RHEL continues to show momentum, while younger product areas are gaining traction in the market and the open source movement marches forward.
We are adjusting our estimates and raising our price target to $85.00 (from $81.00) on FX impact.
Joel Fishbein, BMO Capital Markets (Outperform; $83 price target)
Red Hat is benefiting from improving execution and the maturing breadth of its emerging product portfolio. Accelerated revenue in the core (+17% y/y CC) continues to be augmented with cross-sales in emerging products, namely OpenStack and OpenShift.
This was the first quarter where all of the top 30 deals were over $2 million and cross-sale metrics accelerated: over 80% had a technology component outside of core RHEL, OpenStack and OpenShift deals tripled over last year, 10 included OpenStack, 7 included OpenShift, and 5 included Storage. All of the top 25 deals renewed at more than 115% of the prior year's value.
Based on the acceleration in reported backlog (+19% y/y) and bookings (+25% y/y) we are raising our billings outlook to +15 y/y from +14% y/y, which looks conservative. Guidance calls for 20% CC growth, a slight uptick into FY16 and margins are expected to be flat y/y, below the Street, but as expected as investments continue into growth areas.
Red Hat remains one of the few infrastructure software providers gaining wallet share. We continue to recommend shares based on improving secular positioning, execution, expanding product set, and accelerating core growth. We reiterate our Outperform rating and increase our price target to $83 (from $77), which implies 22.5x our FY16 EV/FCF.
Walter Pritchard, Citigroup (Neutral; $73 price target)
Emerging technologies setting stage for next growth leg: Core RHEL continues to drive ~85% of RHT's revenue stream and is growing ~12% while emerging tech areas showed increasing momentum. In particular, there was a $10M (3 yr) OpenShift deal announced and impressive cross-selling metrics in top 30 deals: 10 had OpenStack, 7 had OpenShift (OpenShift/Openstack 3x increase y/y), 5 had storage.
It is not clear if we are at an inflection point as it is Q4 and business can all come together with fiscal year-end sales incentives. However, the breadth of emerging tech performance is notable.
We expect the stock to trade higher following very solid Q4 results, although maintaining 21.6x FY16E EV/FCF valuation likely requires sustained billings growth @ ~20% which still seems best case. We are raising our PT to $73 from $70 as we roll forward valuation to FY17E EV/FCF (19x FCF of $656M discounted back which is at higher end of historical trading range).
TheStreet Ratings team rates RED HAT INC as a Buy with a ratings score of B. TheStreet Ratings Team has this to say about their recommendation:
"We rate RED HAT INC (RHT) a BUY. This is driven by some important positives, which we believe should have a greater impact than any weaknesses, and should give investors a better performance opportunity than most stocks we cover. The company's strengths can be seen in multiple areas, such as its revenue growth, good cash flow from operations, largely solid financial position with reasonable debt levels by most measures, expanding profit margins and notable return on equity. We feel these strengths outweigh the fact that the company has had sub par growth in net income."
Highlights from the analysis by TheStreet Ratings Team goes as follows:
- RHT's revenue growth has slightly outpaced the industry average of 9.9%. Since the same quarter one year prior, revenues rose by 15.0%. This growth in revenue does not appear to have trickled down to the company's bottom line, displayed by a decline in earnings per share.
- Net operating cash flow has increased to $132.99 million or 39.75% when compared to the same quarter last year. The firm also exceeded the industry average cash flow growth rate of -6.67%.
- RED HAT INC' earnings per share from the most recent quarter came in slightly below the year earlier quarter. This company has reported somewhat volatile earnings recently. But, we feel it is poised for EPS growth in the coming year. During the past fiscal year, RED HAT INC increased its bottom line by earning $0.93 versus $0.77 in the prior year. This year, the market expects an improvement in earnings ($1.58 versus $0.93).
- The gross profit margin for RED HAT INC is currently very high, coming in at 87.64%. Regardless of RHT's high profit margin, it has managed to decrease from the same period last year. Despite the mixed results of the gross profit margin, RHT's net profit margin of 10.51% is significantly lower than the industry average.
- Despite currently having a low debt-to-equity ratio of 0.58, it is higher than that of the industry average, inferring that management of debt levels may need to be evaluated further. Regardless of the somewhat mixed results with the debt-to-equity ratio, the company's quick ratio of 1.25 is sturdy.
- You can view the full analysis from the report here: RHT Ratings Report