Linux software maker Red Hat (RHT) reported strong fiscal third-quarter results that showed excellent growth across the board, but the company’s deferred revenue growth and revenue outlook failed to impress some of the most bullish investors.
Sales advanced 23% from last year’s quarter led by subscription revenue, while non-GAAP operating income and non-GAAP EPS increased 36% and 40%, respectively, from the same period a year ago. Non-GAAP EPS came in at $0.28 per share in the quarter (topping consensus estimates of $0.26), thanks to non-GAAP operating margin improvement of 260 basis points. Third-quarter operating cash flow also had a nice showing in the period, up an impressive 36%. Deferred revenue, however, advanced 20% from last year’s quarter, signaling the potential for a slight slowdown in future sales growth. Organic billings growth, however, was 23% in the period, the best showing in years.
Looking ahead, Red Hat expects fourth-quarter revenue to come in between $289 million to $292 million, just shy of consensus expectations, and non-GAAP EPS to be $0.26, matching consensus. Despite the disappointing top-line outlook relative to expectations, we’re keeping the firm on our watch list, as we believe its enterprise Linux software solution continues to gain traction with companies seeking cloud computing offerings. For investors looking for ideas in the software space, we prefer Microsoft (MSFT) at this time, on the basis of its attractive valuation and best-in-class dividend yield.