Open-source software provider Red Hat (click ticker for report: ) reported solid third-quarter results last week. The firm that is synonymous with Linux posted revenue growth of 18% (21% excluding currency) year-over-year to $344 million, a touch better than consensus estimates. Non-GAAP earnings per share ticked up a penny to $0.29, also in-line with consensus expectations. We plan to update our report soon.
On the revenue side, subscription sales increased 19% year-over-year to $294 million, while training and services revenue increased 14% to $49 million. We were even more impressed by the company’s growth in deferred revenue, which totaled $988 million—21% higher than at the same time a year ago.
The firm has done an excellent job of retaining its enterprise contracts. CEO James Whitehurst noted that of the 25 deals that were up for renewal this quarter, not only did all of them renew, but they did so at over 120% of the original contract value. Whitehurst indicated that this is a great endorsement of Red Hat’s customers for the firm’s reliable, open source solutions.
In addition to strong financial results, Red Hat announced the acquisition of ManageIQ, a cloud management software provider. ManageIQ is mostly cloud agnostic, as it works not only for Red Hat’s cloud product, but also with offerings from Microsoft (click ticker for report: ), Amazon (click ticker for report: ), and VMWare (click ticker for report: ). The firm announced the deal will cost Red Hat approximately $104 million in cash, and it won’t materially impact revenue during the current fiscal year. We don’t think the deal puts any financial strain on the software maker’s balance sheet, which remains strong with cash and equivalents of $1.35 billion and no debt.
Going forward, the company expects to earn $0.29-$0.30 per share during the fourth quarter on revenue of $347 million to $351 million, both roughly in-line with the consensus estimate. Though cash flow generation remains strong (over $100 million generated in operating cash flow year-to-date), we believe the market is overly optimistic about Red Hat’s future prospects. Shares trade above the high-end of our fair value range, and score just a 3 on the Valuentum Buying Index (our stock-selection methodology) at the time of this writing, so we won’t be adding shares to our Best Ideas Newsletter any time soon. We prefer adding firms to our Best Ideas portfolio and Dividend Growth portfolio when they register a 9 or 10 on our scale.