As big deals and backlog grow, Red Hat delivers a turnaround quarter

jimwhitehurst-redhat-thecube2016

Thanks to a growing number of million-dollar-plus deals and a fatter order backlog, Red Hat Inc. today reported better-than-expected fourth-quarter revenue growth and issued a brighter outlook for the current quarter.

The results for the open-source software pioneer’s quarter ended Feb. 28 mark a distinct turnaround from a disappointing third quarter that saw deals fall through and the departure of its chief financial officer.

The Raleigh, North Carolina-based company reported a 13.4 percent rise in fourth-fiscal quarter profit before certain costs such as stock compensation, earning $110 million, or 61 cents a share, on revenues of $629 million, up 16 percent. Red Hat three months ago had guided to revenues of $614 million to $622 million, short of analysts’ expectations. Profits hit analysts’ expectations on the nose, but easily beat their 14 percent revenue growth forecast.

The company, best known for its Linux operating software used in computer servers in corporate data centers and the cloud, also topped $3 billion in bookings.

Chief Executive Jim Whitehurst (pictured) said in the release that large deals continued to grow. The number of deals over $1 million grew 30 percent, to 280, from a year ago, including a record number of deals over $20 million and its first $100 million deal, from a telecommunications service provider. In addition, the company reported a record order backlog of $2.7 billion, up 28 percent from a year ago.

“We continued to see adoption of our technologies across hybrid cloud environment … which is fueling our growth,” Whitehurst said in the conference call. He added that the larger number of big deals reflected customers’ migration to the cloud, which involves a wider range of software and services.

One big growth area was application development-related and other emerging technology subscription revenues, up 40 percent in the quarter, to $125 million, and up 36 percent for the fiscal year, to $439 million. “We’re starting to see payback from investment in emerging technologies,” acting Chief Financial Officer Eric Shander said.

The results are a reversal from the third quarter, when the company’s shares plunged on an unexpected revenue shortfall. Shares have since rebounded, rising 19 percent so far this year and closing the regular trading day down about three-quarters of a point, to $82.20 a share. In after-hours trading, they were rising more than 5 percent.

The third-quarter shortfall was partly the result of the strengthening dollar but also several other factors. For one, two large federal government deals failing to close as expected. They would have added up to $27 million in revenues and additional backlog. Whitehurst said on the call that those deals closed, adding about two to three percentage points of billings growth.

Also, customers on several large multiyear contracts paid upfront for only the first year, meaning less money upfront in the short term. That’s likely to be a continuing drag on short-term growth as customers prefer the pay-as-you-go style of cloud computing. Finally, deals in the last couple of quarters have been closing in the last month or even week of the quarter, making forecasts tough and sometimes pushing out deals.

In any case, the company indicated it’s on an upswing now. For the first quarter, Red Hat is forecasting revenues of $643 million to $650 million and an adjusted profit of 52 to 53 cents a share. Before today, analysts were estimating a 59-cent profit, up from 50 cents a year ago, on 13 percent revenue growth, to $642 million, but the brighter revenue picture apparently mattered more.

“Companies are looking to modernize the data center infrastructure and Red Hat is in good position to deliver,” along with hardware partners such as Hewlett Packard Enterprise Co., Dell EMC, Lenovo Group Ltd., said Stu Miniman, principal research contributor at Wikibon, the analyst group owned by SiliconANGLE Media.

Photo: SiliconANGLE