This week, Red Hat (NYSE:RHT) delivered another batch of solid proof that its unique business model makes sense. Pairing the concept of open-source software development with high-quality support services, Red Hat saw its second-quarter sales surging 21% higher year over year while earnings enjoyed a 40% boost, easily exceeding analyst targets on both counts. Share prices jumped 4% on the news.
What Red Hat did in the second quarter
To be fair, Red Hat’s guidance for this quarter didn’t exactly set the bar too high. Management expected sales to land near $699 million, lifting adjusted earnings to $0.67 per diluted share. Instead, Red Hat’s revenue stopped at $723 million, yielding non-GAAP earnings of $0.77 per share.
No particular product line drove the company’s surging results this quarter. Instead, Red Hat CEO Jim Whitehurst described it as a period of broad-based success across many technologies.
“I will say that this was one of the more balanced quarters in recent years,” Whitehurst said in an exclusive post-earnings call with yours truly. “We got asked a lot about OpenShift and we saw some real strength in OpenStack, and Ansible had a good, strong quarter. 12 of our million-dollar-plus deals had Ansible, 12 had OpenStack, 10 had OpenShift, so it really was a nice mix across the portfolio.”
To be clear, very few of Red Hat’s large orders focus on a single product. Instead, Whitehurst explained, nearly all of the larger contracts are packages of Red Hat Enterprise Linux plus one or more of the components mentioned above. The OpenStack cloud computing platform is starting to mature while the OpenShift software container solution is the hot topic right now. Coming up from behind is IT automation platform Ansible. All three of these high-growth products are popular among Red Hat’s enterprise customers, and should continue to power the company’s growth for years to come.
Looking ahead, Red Hat’s third-quarter guidance placed sales near $734 million and adjusted earnings close to $0.70 per share, up from $615 million and $0.61 per share, respectively, in the year-ago period. The existing full-year targets were also raised by 3%-4% each.
Shares have gained a market-stomping 50% over the last 52 weeks, amid accelerating revenue and earnings growth. I see no reason why the long-term rally should stop anytime soon. In fact, I could see myself owning Red Hat shares basically forever. After a quarter like this one, you might agree.