Red Hat, Inc. (NYSE: RHT) had a red letter quarter for the period ended November 30, 2018. The company reported total revenue of $847 million, double digit revenue growth for its third quarter of fiscal year 2019, at a rate of 13 percent. Subscription revenue was $741 million, a 13 percent increase year-over-year. In the third quarter, subscription revenue comprised 87 percent of total revenue.
Of that subscription revenue, infrastructure-related offerings brought in $534 million, an 8 percent increase. Subscription revenue from application development-related and other emerging technology brought in $207 million, a 28 percent increase.
Jim Whitehurst, president and CEO of Red Hat, commented on the strong quarter in a December 17 news release:
“Adoption of Red Hat's technologies that enable customers to build and deploy applications more securely and consistently across hybrid and multi-cloud environments continued to drive our growth in Q3,” said Whitehurst. “For instance, our Certified Cloud and Service Providers (CCSP) program reached the $300 million annualized run-rate milestone in Q3 with 25 percent year-over-year growth of Red Hat Enterprise Linux on-demand in the public clouds. In addition, we continue to experience strong customer growth in Red Hat OpenShift, our enterprise Kubernetes platform, and Red Hat Ansible Automation, both of which added more than 100 customers in Q3.”
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Additional quarterly highlights included:
- Deferred revenue was $2.5 billion, a 20 percent increase year-over-year.
- GAAP operating income was $109 million, an 8 percent decrease year-over-year.
- GAAP and non-GAAP operating cash flows were $137 million, a 15 percent decrease year-over-year.
- GAAP operating margin was 12.9 percent.
- GAAP net income was $94 million, or $0.51 diluted earnings per share, compared to $102 million, or $0.55 diluted earnings per share, for the same period last year.
- Total cash, cash equivalents and investments at the end of the quarter was $2.2 billion after $13 million in repurchased shares.
Eric Shander, executive vice president and CFO for Red Hat, had additional good news to share:
- In the third quarter, Red Hal closed 100 deals over $1 million.
- Total backlog was $3.5 billion, representing 22 percent growth year-over-year.
“Strong renewals of our largest deals also helped drive results with all of our top 25 deals renewing at an upsell rate above 120 percent,” Shander said.
Of course, the biggest third quarter news for Red Hat is the announcement that IBM intends to acquire Red Hat for approximately $34 billion, or $190 per share, in cash. At $190 per share, this is a premium price. On October 29, the day after the deal was announced, Red Hat stock was valued at $169.63 per share. The previous business day – October 26 – Red Hat stock was valued at $116.68, so this was a significant spike. As of 7:59 p.m. EST on December 18, Red Hat stock was valued at $176.00 A year ago, on December 19, 2017, Red Hat stock was valued at $128.86.
As a result of this acquisition, Red Hat did not update its guidance for the full fiscal year 2019, nor did it host a conference call to discuss third quarter results.
In late October, IBM and Red Hat made a joint announcement about the deal, calling it the “most significant tech acquisition of 2018.”
“Joining forces with IBM will provide us with a greater level of scale, resources and capabilities to accelerate the impact of open source as the basis for digital transformation and bring Red Hat to an even wider audience – all while preserving our unique culture and unwavering commitment to open source innovation,” said Whitehurst of the acquisition.
Ginni Rometty, IBM chairman, president and CEO said, “The acquisition of Red Hat is a game-changer. It changes everything about the cloud market. IBM will become the world's #1 hybrid cloud provider, offering companies the only open cloud solution that will unlock the full value of the cloud for their businesses.”
The deal has been approved by the boards of directors of IBM and Red Hat. It is subject to shareholder approval as well as regulatory approval. They anticipate the deal to close in the second half of 2019. Whitehurst and his management team will continue to lead Red Hat. Whitehurst will also join the IBM senior management team, reporting directly to Ginn Rometty. Red Hat will retain its existing headquarters, facilities, brands and business practices.
“IBM's commitment to keeping the things that have made Red Hat successful – always thinking about the customer and the open source community first – make this a tremendous opportunity for not only Red Hat but also open source more broadly,” said Paul Cormier, President, Products and Technologies, Red Hat in the October 28 announcement. “Since the day we decided to bring open source to the enterprise, our mission has remained unchanged. And now, one of the biggest enterprise technology companies on the planet has agreed to partner with us to scale and accelerate our efforts, bringing open source innovation to an even greater swath of the enterprise.”
This was quite a quarter for Red Hat. Not only did it enjoy double digit revenue growth, but the announcement of the acquisition by IBM raised Red Hat's profile and its stock value while maintaining the company's belief in open source products. The company added 100 new high value clients, and it sounds like it will retain autonomy even after the deal closes next year. It will be exciting to see what an expanded partnership between IBM and Red Hat might look like.