On Monday, open source technology provider Red Hat, Inc. (NYSE: RHT) announced its second quarter fiscal year 2018 financials for the period ended August 31, 2017. Among the highlights for the quarter are sizable increases in subscription revenue and results that exceeded expectations. For Q2 FY2018, Red Had Reported total revenue of $723 million, a 21 percent increase over the same period last year.

This included subscription revenue of $638 million, a 20 percent increase year-over-year, broken down into application development-related and other emerging technology revenue of $150 million, a 44 percent increase year-over-year, and infrastructure-related revenue of $487 million, a 14 percent increase. Subscription revenue now makes up 88 percent of total revenue for Red Hat.

Other highlights included:

• Quarter-end deferred revenue balance was $2.05 billion, a 22 percent increase year-over-year.
• Services revenue was $86 million, a 25 percent increase year-over-year.
• Operating cash flow was $143 million, a 48 percent increase year-over-year.
• Year-to-date operating cash flow was $401 million, a 22 percent increase.
• GAAP operating income was $135 million, a 64 percent increase year-over-year.
• GAAP operating margin was 18.6 percent.
• GAAP net income was $97 million, or $0.53 per diluted share, compared to $59 million, or $0.32 per diluted share, for the same period last year.

Operational highlights included:

• All 25 of their largest deals renewed at 115 percent of the previous value.
• During the quarter, there were 66 deals over $1 million, a 20 percent increase. Four deals were greater than $5 million.
• More than 60 percent of the total deals over $1 million included one or more components from application development-related and emerging technology offerings.
• The top industry verticals within deals higher than $1 million were government, financial services, retail, energy and transportation.

‘In the second quarter, we continued to experience high levels of demand across our portfolio of technologies,’ said Jim Whitehurst, Red Hat president and CEO in the earnings call. ‘Our strong second quarter results are further evidence that IT organizations are increasingly turning to Red Hat as a strategic technology partner as they modernize their IT infrastructure for the hybrid cloud and digital transformation.’

Whitehurst said subscription revenue growth was driven, in part, by the company’s flagship RHEL technologies and on-demand RHEL revenue from public cloud provider partners, which exceeds a $200 million annualized run rate. Growth was also driven by 40 percent growth in application development-related and other emerging technologies including cloud enabling technologies like OpenShift and OpenStack.

In the earnings call, Whitehurst reiterated several recent announcements including a partnership with Microsoft, the launch of Ansible Tower 3.2, and the acquisition of Permabit Technology Corporation, an open source provider of software for data deduplication, compression and thin provisioning.

‘It was a great start to the year, and we are excited about the growth opportunity in front of us as Red Hat is well positioned to capitalize on a generational shift in the infrastructure technologies that underpin IT strategies,’ Whitehurst said. ‘We remain focused on delivering compelling business value to our customers, and enable them to further drive innovation and flexibility into their organizations.’

Given current business conditions and foreign exchange rates, Red Hat provided the following guidance for the full fiscal year 2018, an increase over previously provided guidance:

• Full-year revenue will range between $2.88 billion and $2.895 billion.
• Non-GAAP operating margin will be about 23.8 percent for the full year.
• Non-GAAP earnings per share will be between $2.77 and $2.79 per share.
• Full-year operating cash flow will range between $880 million and $900 million.

For the third quarter of fiscal year 2018, Red Hat offered the following guidance:

• Revenue will range between $730 million and $737 million.
• Non-GAAP operating margin will be 23.7 percent.
• Non-GAAP earnings per share will be approximately $0.70 per share.

‘In Q2, we continued to seize the opportunities around digital transformation and hybrid cloud computing. This momentum drove strong results for the quarter and year-to-date,’ said Eric Shander, executive vice president and CFO, in the earnings call. ‘We’re also pleased with the rate at which customers are embracing our multiple cloud enabling technologies. We believe this trust from customers and partners for Red Hat as a strategic advisor will help drive additional value for our shareholders.’

­Investors reacted favorably to Monday’s financial report. On September 25, at 3 PM, Red Hat stock was valued at $105.01 on the New York Stock Exchange. As of 4:38 PM yesterday (September 27), Red Hat stock was valued at $109.92.

Insider Take:

Red Hat has been growing steadily quarter to quarter, exceeding expectations and performance over the prior year. Partnerships with companies like Microsoft and acquisitions of complementary products and services will help Red Hat continue to grow and to scale operations to support their multi-million dollar deals as more companies undergo their digital transformation.