Red Hat Inc. recently reported better-than-expected fourth-quarter fiscal 2017 results. Earnings (including stock base compensation) of 42 cents per share easily surpassed the Zacks Consensus Estimate by 3 cents.

Adjusted earnings (excluding stock-base compensation) increased 17.3% year over year to 61 cents per share, which was in line with the guidance.

Revenues increased 15.7% year over year to $629 million, primarily driven by strong subscription revenues and cross-selling of cloud-enabled technology. The figure was better than the Zacks Consensus Estimate of $620 million and the guided range of $614 - $622 million.

In fiscal 2017, earnings increased 18.8% to $2.27 per share, driven by 17.5% revenue growth, which totaled $2.41 billion. Backlog increased 28% over fiscal 2016 to more than $2.7 billion.

Red Hat closed more than 280 deals over $1 million, up approximately 30% year over year in fiscal 2017. Within this group, the company closed a record 35 deals over $5 million and a record seven deals over $20 million.

Following the announcement, shares of Red Hat increased 5.3% in after-hour trade yesterday. Shares are also up 5.6% today in the pre-market trading session.

We note that Red Hat has outperformed the Zacks Computer-Software industry on a year-to-date basis. Red Hat has returned 23.3% as against the industry’s gain of 10.2% over the same time frame.

We expect the strong results to back the momentum in shares going ahead.

Revenue Details

Subscription revenues (89% of revenues) increased 16.7% year over year to $559.6 million. Subscription revenues for infrastructure related offerings increased 11% from the year-ago quarter to $435 million. Subscription revenues for application development related and emerging technologies surged 40% year over year to $125 million.

Training & services revenues (11% of revenues) increased 8.4% from the year-ago quarter to $69.3 million.

Red Hat entered into 30 big deals in the fourth quarter with valuation of $1 million or more. Management noted that 16 deals were greater than $5 million. Out of these deals four were more than $20 million.

Red Hat’s emerging technologies continued to gain momentum. Approximately one-third of the biggest deals contained an OpenStack private cloud component, approximately one-third had an OpenShift container platform component and more than a third of the deals contained Ansible, the company’s automation management technology.

OpenStack collaborations continue to expand and now include the likes of HP and Huawei. The company recently inked an expanded cloud computing partnership with International Business Machines (IBM Quick QuoteIBM - Free Report) to sell Red Hat's distribution of OpenStack as a private cloud offering to their customers.

During the quarter, Red Hat won several deals in the telecommunications vertical including a $100 million contract. Financial services were the second largest vertical in the quarter.

Operational Details

Adjusted gross profit (excluding one-time items but including stock-based compensation) increased 16.1% year over year to $536.6 million. Adjusted gross margin expanded 30 basis points (bps) to 86%.

Adjusted operating expenses increased 13.4% year over year to $439 million. As a percentage of revenues, adjusted operating expense declined 140 bps to 69.8%. The decline resulted from lower general & administrative expense (G&A) as well as research & development expense (R&D), partially offset by higher sales & marketing expense.

Adjusted operating income grew 29% year over year to $101.5 million. Further, operating margin expanded 170 bps due to lower operating expenses as a percentage of revenues.

Balance Sheet & Cash Flow

Red Hat ended the year with cash, cash equivalents & investments of $1.46 billion.

Red Hat generated operating cash flow of $318 million compared with $136.4 million in the previous quarter. Furthermore, the company repurchased 1.9 million shares worth $139 million during the quarter.

Guidance

For fiscal 2018, Red Hat forecasts revenues to be in the range of $2.720 – $2.760 billion. The Zacks Consensus Estimate for fiscal 2018 is currently pegged at $2.71 billion. Management expects the renewal rates to be around 120% for the fiscal year.

Non-GAAP operating margin is expected to be 23.6%. Red Hat expects fiscal non-GAAP earnings to be approximately $2.60 to $2.64 per share. The Zacks Consensus Estimate (including stock based compensation) is pegged at $1.74 per share.

Operating cash flow is expected to be in a range of $850 - $870 million.

Moving to the first quarter outlook, Red Hat projects revenues of $643 - $650 million. Currently, the Zacks Consensus Estimate for revenues is pegged at $643.7 million. Non-GAAP earnings are expected to be in the range of 52 to 53 cents per share.

The Zacks Consensus Estimate (including stock based compensation) is pegged at 40 cents.

Non-GAAP operating margin is expected to be 20%.

Our Take

Red Hat is benefiting from strong deal win, improving recurring revenues and cross-selling of its cloud-based technology. The company has a strong customer as well as partner base including the likes of IBM, Intel (INTC Quick QuoteINTC - Free Report) , Dell Technologies, Google cloud platform and Microsoft (MSFT Quick QuoteMSFT - Free Report) Azure.

Red Hat has a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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