Morningstar | RHT Updated Forecasts and Estimates from 18 Dec 2018
Red Hat’s third-quarter result largely followed its second-quarter performance with its infrastructure subscription business growing in the high-single digits, while its application subscription business grew roughly 30% in constant currency. With IBM set to acquire Red Hat in the second half of calendar 2019, Red Hat didn’t provide an updated outlook for fiscal 2019 or host a conference call. Given the pending transaction, we maintain our $173 fair value estimate for Red Hat which includes a time value of money discount to IBM’s $190 acquisition price. With shares at our fair value and implying IBM’s acquisition price, we wouldn’t recommend new investment in the firm at this time.The firm continues to position itself at the intersection of hybrid and multi-cloud environments and we see value in Red Hat’s critical infrastructure software. In addition, we believe the firm’s Red Hat Enterprise Linux operating system is a significant point of customer stickiness, which solidifies the firm’s narrow economic moat rating. As Red Hat looks to layer in additional middleware, storage, virtualization, and cloud management solutions, we think the company can create added value for new and existing customers which is exhibited by the firm’s ability to both renew and upsell customers (in the quarter all of Red Hat’s top 25 deals renewed at an upsell rate above 120%).
For the quarter, total revenue rose 13% year over year to $847 million. Subscription revenue grew 13% to $741 million and amounted to 87% of total revenue, signifying the company’s high degree of recurring revenue. Infrastructure-related products increased 8% to $534 million and Application Development-related products surged 28% to $207 million. The company’s non-GAAP operating margin held mostly steady at 24% and we forecast operating margin expansion over the mid-to long-term as the firm throttles back on research and development, and as Red Hat gains scale over its sales and marketing expenses.
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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