Red Hat (RHT, Financial) cheered the street with its second quarter results, which were better than the analysts' consensus on all metrics. And for the upcoming quarter as well, the management seems to be positive, anticipating higher than expected revenue, while earnings are expected to be in line with the estimates. Such confidence from the company stems from strong fundamentals of the business along with increasing demand from enterprises for its software products, which have varied applications such as in data-centers, for cloud computing and others. Let’s start with its numbers and have a descriptive analysis of this stock.
Moving forward nicely
Its revenue for the quarter rose 17% to $424 million from a year-ago period and topped the Street's expectations of $413.4 million. Earnings increased to 34 cents a share from 32 cents last year and edged the consensus of 33 cents per share. Apart from this, its infrastructure subscription increased 14 % on a year-over-year basis to $319 million, and similar growth can be observed in other areas as well.
These numbers are encouraging not only for the company but also for investors. The open source software company has various tailwinds around it, attracting lot of attention from analysts who are kicking the tires and expecting strong quarters in the coming months. Red Hat has announced its plans to acquire eNovance, which is a Paris-based software company offering services for running the open-source OpenStack software platform for machine virtualization.
The deal is finalized for $95 million and is a step further in its effort to develop the OpenStack open-source cloud software, which has found increasing demand with companies who subscribe to storage, software and computing services that are hosted on remote servers. This new acquisition is in addition to the purchase of Inktank in April, which makes data center storage software.
Product launches
Red Hat also launched the Manage IQ Community, which has a leading open-source cloud management platform with advanced governance and automation capabilities. Manage IQ is a great tool for developers and administrators as it provides access to DevOps with a single interface and API for resource utilization. This will further enhance its contribution to open source platform aimed to develop cloud management with the help of open source innovation.
Apart from this, the company also reported strong demand for its Red Hat Linux operating system. To enhance this further, it launched RHEL 7, which is aimed to meet the requirements of both modern data centers and next generation IT for cloud, Linux containers and Big Data. The new RHEL 7 has various advantages such as improved security, files system, management and performance among others.
Red Hat’s contribution to open stack development seems to be a good move, which could yield a handsome return in the coming years. According to 451 Research LLC, “Business sales related to OpenStack will exceed $1 billion by 2015.” Apart from this, its reported year-over-year subscriptions increased, which again is a positive indicator of growth. It had strong cross selling during the quarter from its group of offering including Middleware, OpenStack, OpenShift and CloudForms on storage.
The management cited that its top deals came from telecom, healthcare, government sectors and anticipates even stronger performance in the days ahead. It has a strong financial position, and all in all, we can say Red Hat seems to be well positioned for growth.
Conclusion
Red Hat has a trailing P/E of 59.84, and has an improving forward P/E of 30.9 reflecting that its earnings would improve in the coming months. The company delivered solid results during the quarter. The stock touched its 52-week high just few months back and looking at its future prospects we could see more upside to this stock. Therefore in the light of all the above factors, investors can consider adding Red Hat to their portfolio.
