Red Hat (RHT) Continues to Outperform Peers

Summarizing bullet points from MKM Partners research after Red Hat (RHT) reported 2Q16 earnings:

Mostly Good Results — Revenue of $504mn beat consensus of $495mn and flowed through to the bottom line, resulting in an EPS beat of $0.02 to $0.47. Likewise, operating cash flows of $120mn beat consensus of $113mn. However, the key metric, billings growth, slightly missed consensus.

Billings — Proxy was $479mn, less than the $489mn consensus and up 9% Y/Y. Fully adjusted for FX, billings grew 17% Y/Y, just below the 18% consensus and 20% in F1Q16. RHT attributed the billings slowdown to average contract duration, which was again at 20 months in F2Q16 (same
as F1Q16) but down from 21 months in F1H15.

Business Mix Impacts Duration — RHT said average contract duration fell due to business mix, as its US Government sales, which tend to have 12-month contracts, was particularly strong in its seasonal period and as sales through the Cloud Service Provider channel (resellers who are
hosting RHEL) continued to grow, and in F2Q16 reached the $100mn annual run rate milestone. These sales are recorded by RHT as they are sold by the service provider and so carry a very short duration.

Guidance Raised — These shorter duration contracts are flowing through the income statement faster, which helped RHT offer higher guidance for both F3Q16 and FY16. For F3Q16, guidance of $519-$523mn for revenue is vs. the $513mn consensus and EPS of $0.47 is vs. $0.46.