Red Hat Beats, Reaffirms Guidance – Analyst Blog

Red Hat Inc. (RHT), a leading provider of open source solutions, reported first quarter 2011 non-GAAP earnings (including share-based compensation but excluding amortization of intangible assets) of 15 cents per share, above the Zacks Consensus Estimate of 13 cents and 25% higher from 12 cents in the year-ago period.

 

Red Hat reported GAAP earnings of 12 cents per share, up 20% from 10 cents in the first quarter 2010. The year-over-year improvement was primarily driven by strong organic revenue growth based on robust bookings and backlog, higher subscription renewals and strong results from the services business.

 

Customer signings in the quarter increased as the company signed 11 deals out of top 30. Red Hat earned more than $5.0 million from a single deal. Besides, the company also signed its largest ever contract, a multiyear, middleware deal worth several million dollars.

 

 

Total revenue was $209.1 million, well above the Zacks Consensus Estimate of $203.0 million and the company’s guidance range of $202.0 to $204.0 million. Total revenue increased 20.0% from $174.4 million in the year-ago period.  

 

Robust growth in subscription renewals and higher demand for new projects drove the outperformance in total revenue. Red Hat’s top 25 subscription renewals fetched more than 120.0% of their original value in the quarter.

 

Subscription revenues (86.0% of total revenue) jumped 20.4% to $179.1 million from $148.8 million in the first quarter of 2010.

 

Training and services revenues (14.0% of total revenue) spiked up 14.9% to $30.7 million from $25.6 million in the year-ago period.

 

Bookings increased significantly in the quarter, with channel contributing 54% and direct sales contributing 46%. Higher renewal rates on large deals and an increasing number of deals were the primary growth drivers.

 

The Americas, Europe and Middle East Asia (EMEA) and Asia-Pacific contributed 62.0%, 22.0% and 16.0% of the quarterly bookings, respectively.   

In first quarter 2011, non-GAAP gross margin (including share-based compensation but excluding amortization of intangible assets) was 84.4%, down 100 bps from 85.4% in the year-ago period.

 

Non-GAAP operating expenses soared 16.0% year over year to $137.8 million. However, non-GAAP operating expenses, as a percentage of total revenue, decreased 280 bps in the quarter. Red Hat remains focused on managing discretionary costs effectively while increasing investments simultaneously in growth areas such as middleware, virtualization and cloud computing.

 

Non-GAAP operating margin was 18.5%, up 130 bps from 17.2% reported in the year- ago period, primarily driven by strong revenue growth. 

 

 

At the end of the first quarter 2011, cash and cash equivalents were $968.0 million versus $978.2 million at the end of fourth quarter 2010. Operating cash flow decreased sequentially by $0.6 million to $60.6 million. Total deferred revenue at the end of first quarter was $626.0 million, down 3.0% from $645.9 million reported in the fourth quarter of 2010.

 

Red Hat repurchased 2.5 million of common stock for $74.0 million in the reported quarter. 

 

 

For the second quarter, Red Hat expects revenues in the range of $210.0 million to $212.0 million. Operating margin is expected to be approximately 24.0% and non-GAAP earnings per share are projected to be 18 cents, in line with the Street estimates, assuming 35.0% of tax rate.

 

Red Hat reaffirmed its full year 2011 guidance. The company continues to expect full year revenues in the range of $835.0 million to $850.0 million and non-GAAP earnings per share in the range of 71 cents to 74 cents. 

 

Red Hat continues to expect operating cash flow for the full year between $280.0 million and $290.0 million. Capital Expenditure is projected to remain in the range of $30.0 million to $35.0 million.

 

Strong execution, a huge backlog and continued investments in growing areas are expected to drive Red Hat’s results in 2011. However, foreign currency volatility, primarily due to troubles in Europe and increasing compensation costs, may hurt earnings in the near term.

 

Red Hat faces stiff competition from Microsoft Corporation (MSFT), Novell Inc. (NOVL) and Oracle Corporation (ORCL).

 

We maintain a Neutral recommendation on Red Hat.