Shares of Red Hat Inc. (RHT) were slumping 2.5% to $125.50 in pre-market trading on Wednesday, even after it reported better-than-expected earnings Tuesday evening, gave upbeat guidance and secured a record number of seven-figure software deals in the third quarter. 

Red Hat CEO Jim Whitehurst told TheStreet that investors may have had higher expectations for growth in the cloud infrastructure company's billings segment, which is a metric that measures recurring payments from customers. Billings grew 14% quarter-over-quarter in the most recent period compared to billings growth of 18% in the fiscal 2016 third quarter. The company landed some bigger deals in the 2016 fourth quarter, which generated a 29% increase in billings. 

Investors may have thought that those big deals would fuel higher growth in the current quarter, but Whitehurst explained that Red Hat's recurring revenue structure entails that money from those deals will stay in the fourth quarter. 

"We literally beat every line -- revenue, billings, earnings per share," Whitehurst said in a phone interview following Red Hat's call with investors. "I think people thought that it should be an easy comparison this year, that we should've had really high growth. I think there was a little confusion. That's the best that we can understand." 

For the third quarter, Red Hat posted adjusted earnings of 73 cents per share with $747.9 million in sales, which exceeded Wall Street's projected 70 cents per share and revenue of $734.9 million. Application development and emerging technology subscription revenue soared 44% year-over-year, as Red Hat's newer business lines, including containers, cloud management, middleware and private cloud, continue to gain traction. Its core business, Red Hat Enterprise Linux, still accounts for the bulk of revenues. 

Red Hat said it landed a record 17 deals worth more than $5 million during the quarter, with the biggest deals coming from telecommunications companies, followed by deals with financial services, manufacturing, media and entertainment. 

The company has been a huge beneficiary of the growing shift toward the hybrid cloud, as companies who run Red Hat Enterprise Linux on datacenters work with Red Hat to transition to an off-premises model. That's partly why Red Hat's stock has skyrocketed this year, as it becomes increasingly unlikely that Red Hat won't be hurt by the rise of public cloud providers, including Amazon.com Inc.'s (AMZN) Amazon Web Services, Microsoft Inc.'s (MSFT) Azure or Alphabet Inc.'s (GOOGL) Google Cloud.

Shares of the company have surged more than 84% this year vs. the S&P 500's gain of 19.7%.

Red Hat's stock has been on a tear this year.
Red Hat's stock has been on a tear this year.

"Moving to a public cloud doesn't replace our business," Whitehurst explained. "When we look at the public cloud, we do have a different set of competitors, but our ability to be truly hybrid is a compelling argument. So net-net, we think it's a positive for us."

Red Hat is also at the forefront of the rise of software containers, which pack code into smaller components so that it can be run across a variety of systems. It's threatening to put an end to the virtualization software used by Red Hat rivals such as VMWare (VMW) , while Red Hat's OpenShift Container Platform is integrated into more and more public clouds, including Amazon Web Services, Microsoft Azure and others. Red Hat has also secured a partnership with Alibaba Group Holding Ltd. (BABA) around its Linux software. 

"As containers have taken off...people see that as a whole new growth avenue for us," Whitehurst said. "There's been a realization that our growth is not materially decelerating around the cloud, which has really changed the sentiment on Red Hat from very negative to very positive."

Jim Cramer and the AAP team hold positions in Alphabet and Microsoft for their Action Alerts PLUS Charitable Trust Portfolio. Want to be alerted before Cramer buys or sells GOOGL or MSFT? Learn more now.

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