Red Hat Q1 Earnings Beat May Deliver Fuel for a Channel Bounce

Andrew Klips  |

Red Hat Inc. (RHT) reported a jump in subscriptions during the first quarter of fiscal 2014, helping drive higher revenue and bigger profits for the world’s largest commercial distributor of the Linux operating system and open source solutions.

Raleigh, North Carolina-based Red Hat recorded revenue of $363.26 million for the quarter ended May 31, up 15 percent from $314.73 million in last year’s quarter. Net income for the quarter was $40.39 million, or 21 cents per share, compared to $37.46 million, or 19 cents per share, in the year prior quarter. On an adjusted basis, which excludes one-time expenses, net income was $61.57 million, or 32 cents per share, versus $58.0 million, or 30 cents per share, in Q1 fiscal 2013.

The results were above Red Hat’s prior guidance of adjusted earnings of 30 cents to 31 cents on sales between $358 and $361 million. They were also above Wall Street expectations of profits of 31 cents per share on revenue of $360 million.

Subscription revenue, the main component of sales for Red Hat, rose 15.9 percent compared to last year’s quarter to $315.82 million. Sales from training and other services improved from $42.16 million last year to $47.44 million in the latest quarter.

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On the downside, expenses rose as well, with sales and marketing costs climbing almost 18 percent to $142.44 million. R&D costs climbed 23 percent to $73.8 million. G&A expenses inched up to $34.3 million. All tallied, expenses rose 15 percent to $250.58 million.

We delivered mid-teens revenue growth driven by customer demand for innovative open source technologies based on a high-value subscription model,” stated Jim Whitehurst, president and chief executive of Red Hat.

A challenge for Red Hat has been stiff competition from the likes of VMWare Inc. (VMW), Microsoft Corp. (MSFT) and others in the rapidly growing cloud markets. Red Hat is apparently looking to answer the call, spending to carve inroads to those markets.

“In Q1, we continued to execute against our strategy of significantly expanding our addressable market in the new cloud-centric data center," said Whitehurst.

“…we continued to invest in our long-term growth initiatives around the open hybrid cloud to deliver new technologies, in particular by ramping-up spending in R&D for cloud management,” added Charlie Peters, Executive VP and CFO of Red Hat.

Shares of Red Hat have been sliding in 2013, building a large channel for more than one year now that has steadily delivered returns of around 20 percent per bounce from bottom to top of the channel. News of the earnings beat may be coming at an opportune time as the stock is back down on the lower portion of the pattern. Extended trading on Wednesday has the stock up about 1 percent at $47.10 after closing down nearly 1 percent at $46.22 in regular trading as the markets broadly sold-off.

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