Red Hat Inc. (RHT) reported third quarter 2013 earnings of 20 cents (including stock-based compensation of $26.7 million), which came in line with the Zacks Consensus Estimate. However, earnings per share declined 4.8% from the previous-year quarter. The year-over-year decline was a result of higher operating expenses.
Quarter Details
Revenue for the quarter increased 18.5% year over year to $343.6 million and was well ahead of the Zacks Consensus Estimate of $338 million. Including currency related adjustments of $6.7 million, revenue for the quarter increased 20.8% year over year to $350.3 million. Reported revenue also surpassed management’s guided range of $336.0 million to $339.0 million.
The strong year-over-year growth was primarily driven by 19.3% surge in subscription revenue (86.0% of total revenue). Moreover, revenue from training and services (14.0% of total revenue) was up 13.6% on a year-over-year basis due to growth in new online classes in North America and enrollment registrations in Europe.
In the reported quarter, billings increased 18.0% year over year to $379.0 million. Channel contributed 65.0% of the bookings, while the rest came from direct sales. Geographically, 60.0% of the bookings came from Americas, 23.0% from Europe, Middle East and Africa (“EMEA”), and 17.0% from Asia-Pacific. Additionally, Red Hat secured 30 deals worth over $1.0 million, including 5 deals in excess of $5.0 million and 1 deal was over $10.0 million.
Red Hat’s gross profit (including stock-based compensation) surged 18.9% year over year to $291.9 million. Gross margin expanded 30 basis points (“bps”) to 85.0% in the quarter. This was primarily driven by a favorable revenue mix.
Operating expenses (including stock-based compensation) increased 25.9% annually to $236.1 million. The year-over-year growth was primarily attributable to higher sales & marketing (up 24.3% year over year), research & development (up 27.9% year over year) and general & administrative (up 27.0% year over year) expenses. Operating expenses, as a percentage of the total revenue, expanded 400 bps to 68.7% in the quarter.
This higher-than-expected jump in operating expenses had a negative impact on operating income, which declined 3.6% year over year to $55.9 million in the reported quarter. Operating margin contracted 380 bps to 16.2% in the quarter.
Non-GAAP net income (excluding share-based compensation and amortization) was $56.9 million or 29 cents per share compared with $55.7 million or 28 cents per share in the year-ago quarter. However, including stock based compensation of $26.7 million, net income came at $38.8 million, which was down from $41.3 million in the previous-year quarter.