Red Hat exited its fiscal 2018 on a high note as the company continued to show strong growth from new platforms expected to drive long-term growth. And even better, investors this time appear to be on board.
At a high level, Red Hat’s financial results were robust with strong growth for both the quarter and full year, which ended Feb. 28. Quarterly revenues surged nearly 23 percent year-over-year to $772 million, while full-year revenues were up more than 21 percent to $2.9 billion.
The bottom line was a bit more mixed. Net income for the quarter dropped from a return of $65.8 million in Q4 2017, to a loss of $12.6 million in Q4 2018. Full-year net income improved 2 percent to $258.8 million. However, taking out provisions for income taxes resulted in Q4 net income increasing 55 percent and full-year net income surging 48 percent. (Aren’t numbers fun!)
Red Hat CFO Eric Shander explained that subscription-based services accounted for 88 percent of the company’s Q4 revenues. He then singled out strong growth from the company’s trio of OpenShift, OpenStack, and Ansible automation products as segment drivers.
Analysts took note.
“Fiscal 2018 was the year where Red Hat proved once and for all that it was no longer a one-trick Linux pony and could broaden its portfolio to more strategic areas such as software containers and infrastructure automation,” said Jason Ader, analyst at William Blair, speaking to Investor’s Business Daily.
Red Hat doubled down on its container plans in January when it announced plans to acquire CoreOS for $250 million. The deal gives Red Hat access to CoreOS’ container platform expertise with a specific focus on its Kubernetes-based Tectonic platform.
Analysts noted the deal could help Red Hat position itself as a differentiated player in the increasingly competitive Kubernetes and container market.
“[Red Hat] wants to differentiate themselves from being just another Kubernetes provider,” said Dan Conde, senior analyst at Enterprise Strategy Group. “Everyone has some sort of Kubernetes offering, and they want to make the OpenShift offering something more distinctive than being perceived as a potentially undifferentiated [Kubernetes] offerings by offering technical chops via solutions like Tectonic from CoreOS.”
As part of the deal, Red Hat noted that CoreOS’ Tectonic platform is destined to run alongside Red Hat’s OpenShift efforts, with cross-over set to bolster the latter. Tectonic is designed as a single platform that can run across cloud and bare metal environments. It supports the running, managing, scaling, and sharing of cloud resources across an organization.
In speaking to investors following the latest results, Red Hat CEO Jim Whitehurst pointed to Red Hat’s position as being second only to Google in terms of the overall Kubernetes ecosystem.
“There is such a far gap between our contribution and No. 3,” Whitehurst said, according to a Seeking Alpha transcript. “So I think it would take someone a very long time to build a credible position to offer an on premise or a hybrid Kubernetes offering. … I think we have a very substantial lead in being able to help enterprise customers implement Kubernetes.”
Red Hat management said it expects the CoreOS deal to dampen margins heading into fiscal 2019, although analysts seem to take that trade-off in stride.
“Given Red Hat’s leadership in containers and the growth potential of the market, we believe that pursuing market leadership at the expense of near-term margins is appropriate,” said BMO Capital Markets Analyst Keith Bachman.
Red Hat’s latest growth with OpenShift and OpenStack came at the expense of its JBoss middleware platform. Middleware is typically software that is not part of a traditional operating system but connects a kernel and an end-user’s application.
Shander explained that customers were shifting their workloads from traditional physical deployments to containers where they would run middleware as a service within the OpenShift environment. “We believe these initial efforts to use middleware as a service will increase over time as customers shift more applications to container environments, benefiting our middleware results over the long run,” he said.
Red Hat also continue to rely on its flagship Enterprise Linux (RHEL) platform to drive a majority of its revenues, but it expects that reliance to fall over the next several years.
Red Hat posted solid Q3 2018 results in late 2017, but those were hampered by investor expectations of stronger year-over-year growth. When that failed to materialize to lofty expectations, Red Hat’s stock suffered.
For Q4, expectations were more moderate, and thus the company’s robust showing came as a welcome surprise to investors. But, Red Hat’s stock has also been impacted by overall market volatility. Its stock surged more than 7.5 percent at open following the release of its Q4 2018 results, before hitting a new 52-week high of $167.36 during the trading day. However, by the end of the day it had given back nearly all of its gains.
And since then, Red Hat’s stock has fallen more than 6 percent. It should also be noted that the broader Nasdaq has dropped 2 percent over the same time frame.