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What Else will Red Hat Acquire?

Posted on Friday, Apr 6th 2018

Linux may not be the OS of choice for desktops, but it dominates the world when it comes to Supercomputers, Web Servers, and Chromebooks. Additionally, Linux Kernel actually powers the Android OS that is used in Android-based mobile devices. According to market reports, as of 2017, Linux powered all of the top 500 supercomputers in the world.

Red Hat’s Financials

Linux provider Red Hat (NYSE: RHT) is reaping benefits from this dominance in the market. Fourth quarter revenue grew 23% over the year to $772 million, against the market’s forecast of $762 million. EPS of $0.91 was also significantly better than the Street’s expected $0.81 for the quarter. Red Hat’s deferred revenue balance rose by 25% to $2.6 billion.

By segment, Subscription revenues grew 22% to $683 million. Within the segment, infrastructure subscription revenues grew 17% to $510 million and revenue from tools for writing applications rose 39% to $173 million. Training and other services revenues grew 29% to $89 million.

Red Hat ended the year with revenues growing 21% to $2.9 billion driven by a 21% growth in subscription revenues which brought in $2.6 billion. EPS for the year grew by a cent to $1.40.

For the current quarter, the company forecast revenues of $800-$810 million, ahead of the consensus of $795 million. EPS expectation of $0.68 was below the Street’s forecast of $0.73. Red Hat expects to end the current year with revenues growing to $3.425-$3.46 billion, above consensus of $3.37 billion. It expects to end the year with an EPS of $3.38-$3.41, higher than market estimates of $3.34.

Red Hat’s Cloud Focus

Red Hat may be known widely for Linux, but it is shifting focus to other cloud-focused offerings including Ansible – the software to automate data center operations, OpenShift – the container application platform, and OpenStack – the open source alternative for virtualization. For the recent quarter, flagship Red Hat Enterprise Linux (RHEL) platform accounted for 65% of the subscription revenues. Red Hat hopes to get it down to 50% over the next few years.

As part of this initiative, earlier this year, Red Hat announced the acquisition of CoreOS for an estimated $250 million. CoreOS is a leading vendor in Kubernetes and container-native solutions. Its flagship product, Container Linux, is a lightweight Linux OS designed to run containerized applications.

Red Hat plans to leverage the acquisition to enable customers to build any application and deploy them in any environment with the flexibility afforded by open source. By integrating CoreOS’ capabilities with Red Hat’s Kubernetes and container-based portfolio, Red Hat will be able to accelerate adoption and development of hybrid cloud platform for modern application workloads. Prior to the acquisition, CoreOS had raised $48 million in funding at an undisclosed valuation.

Questions for Red Hat’s Board

Red Hat has clearly proven how open source can still deliver a successful business model. Its recent acquisition of CoreOS is expected to help it compete better with rivals like Docker, which relies on its own container orchestration tool Swarm. I would like to know what other similar acquisitions does Red Hat have in the offing?

Its stock is trading at $151.07 with a market capitalization of $26.7 billion. It touched a 52-week high of $167.36 earlier last month and has been climbing steadily from the 52-week low of $84.16 that it had fallen to in April last year.

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