Software company Red Hat Inc (NYSE:RHT) surged more than 11% on Thursday and hit a new 52-week high after reporting quarterly results that the market clearly liked.
I wrote about Red Hat in an article last month about the best opportunities available to us in the cloud. To refresh your memory, RHT is the world’s leading provider of open-source solutions, providing software to 90% of Fortune 500 companies.
Some of Red Hat’s customers include well-known names like Sprint Corp (NYSE:S), Adobe Systems Incorporated (NASDAQ:ADBE) and Cigna Corporation (NYSE:CI). We’ve owned RHT since mid-January in my GameChangers service and are now sitting on some nice returns.
Red Hat management’s goal is to become the undisputed leader of enterprise cloud computing and sees its popular Linux operating system as a way to the top. If RHT is successful — as I expect it will be — Red Hat should have a lengthy period of expanded growth as corporations increasingly move into the cloud.
Red Hat’s operating results clearly demonstrate that its solutions are gaining greater acceptance in IT departments, with revenues more than doubling in the past five fiscal years from $748 million to $1.53 billion. For the first nine months of the 2015 fiscal year (which ended Feb. 28), RHT stock’s revenues grew 16% to $1.32 billion.
I expected to see the strong sales growth continue, and they did. Red Hat earned 43 cents per share in the fourth quarter, up from 39 cents per share the prior year and beating expectations by 2 cents per share. RHT revenues increased 16% (22% on a constant currency basis), while analysts had only estimated 14% growth.
The revenue gains were divided pretty evenly between software subscriptions and services, driven primarily by strong demand for cloud technologies that allow companies to create, deploy and modernize their applications.
I was also pleased to see that Red Hat is digging deeper into its customers’ IT budgets. For the first time ever, the value of all of Red Hat’s top 30 deals exceeded $2 billion. CEO Jim Whitehurst was very upbeat on the conference call, reiterating his previous statements that RHT has never been better position for growth — and I agree.
While large increases in sales and marketing expenses limited both margin expansion and earnings-per-share gains, this was expected and didn’t catch the Street off guard. Guidance for earnings of $1.79 – $1.82 a share in fiscal year 2016 did come in below expectations for $1.84, but this still represents growth of close to 12%.
I wasn’t surprised to see conservative EPS guidance, as revenues are forecasted to grow 13% to $2.02 billion in the year, and I continue to see impressive growth in Red Hat’s future.
With this week’s big move, upside in the near term may get a little harder to come by, especially in a more volatile market. The stronger U.S. dollar could also put some pressure on RHT stock. Looking further out, as corporations continue their adoptions of additional cloud technologies, Red Hat stands to gain — especially given its already strong presence in enterprise IT departments.