Morningstar | Red Hat Boasts Strong Cross-Selling in Year’s End; Raising FVE to $182. See Updated Analyst Note from 25 Mar 2019
Red Hat reported strong fourth-quarter results in its likely last fiscal end before the IBM acquisition. Now that the acquisition should close in roughly half a year, we are raising our fair value estimate to $182 from $173 due to a time value money adjustment for this narrow-moat name. With shares trading at our fair value estimate, we recommend refraining from purchasing shares in the acquisition target for the time being.In the fourth quarter, total revenue increased by 14% year over year to $879 million. Revenue growth was largely driven by subscription revenue, which was up 13% year over year and comprised 88% of total revenue, as enterprises continue to shift to hybrid cloud environments. The quarter’s end brought fiscal 2019 to close with $3.4 billion in revenue--just above the company’s last full-year guidance, given in September ahead of the acquisition announcement. Past acquisitions, like Ansible, are continuing to pay off, as Ansible and OpenShift users numbers continued to climb, and likely helped the 22% increase in cross-selling for fiscal 2019, compared with fiscal 2018. Red Hat reported non-GAAP operating margin for the quarter of 25.8%, up 110 basis points from the prior quarter last year, up from 24.7% in the prior quarter.
We believe Red Hat is on its way to a $73 billion addressable market in 2020 as Linux becomes increasingly popular--even in Microsoft Azure--and its products address more and more application development needs. Additionally, we expect operating margins to continue to expand with improving sales and marketing leverage.
Red Hat is a provider of open source software solutions, using a community-powered approach to develop and provide operating system, virtualization, management, middleware, cloud, mobile and storage technologies. The company provides its software offerings primarily under annual or multi-year subscriptions as well as on-demand through its certified cloud and service providers. The company's products and services include: Infrastructure-related offerings, which consist of Red Hat Enterprise, Red Hat Satellite, and Red Hat Virtualization; and Application Development-related and Other Emerging Technology Offerings, which consist of Red Hat JBoss Middleware, and Other Emerging Technologies.
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