Red Hat Revenue Mix May Be Raising Questions

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Red Hat Inc. (NYSE: RHT) reported second quarter 2015 results after markets closed Thursday night. The Linux software distributor reported adjusted diluted earnings per share (EPS) of $0.41 on revenues of $445.9 million, compared with EPS of $0.31 on revenues of $374.42 million in the same period a year ago. The consensus estimates called for EPS of $0.38 on revenues of $437.13 million.

Red Hat reported that subscription revenue jumped 19% year-over-year to $389 million, and now accounts for 76% of total revenues. That’s also an increase of 19% from a year ago. Operating income rose 16% on a GAAP basis and GAAP net income was up from $41 million a year ago to $47 million this year.

Red Hat did not offer guidance, but consensus estimates call for third quarter EPS of $0.41 on revenues of $457.77 million. For the full 2015 fiscal year EPS is estimated at $1.54 on revenues of $1.78 billion.

The company’s CFO said:

The fastest growing part of our channel business comes from the 80+ Red Hat certified public cloud providers that provide our technologies on-demand in their clouds. The rapid revenue growth from these public cloud partners, which we recognize immediately and contains no deferred revenue, helped us to meaningfully exceed our second quarter revenue guidance.

The stock is sliding after-hours despite the solid report and that may be due to sequential growth in subscription revenue of just 4.5%. The CFO touts the revenue growth from cloud partners, but training and services accounts for less than 13% of total revenues and the margins are well below subscription margins.

Red Hat’s shares closed down about 0.7% today and slipped nearly 2% in the after-hours session at $59.60. The stock’s 52-week range is $41.89 to $62.69 The consensus price target from Thomson Reuters was around $66.90 before today’s report.

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