Deep Dive Into Red Hat's Q2 2013

Oct. 02, 2012 5:17 AM ETRed Hat, Inc. (RHT)
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While the market was generally disappointed by Red Hat, Inc.'s (NYSE:RHT) fiscal Q2 2013, we think it was a solid quarter that was masked by challenging currency headwinds. The stock's hefty valuation of 31x our 2013 EPS (excluding cash) warranted a minor sell-off, but we are hanging on tight to our long position, given the company's exposure to several favorable secular trends - cloud, virtualization, storage, and open source.

Key metrics remain healthy

We love to track key metrics outlined by management because if these are the metrics it's using to define success and determine business strategy, then there is tremendous value in the data.

The first key metric we follow is the renewal rate for the largest 25 deals in the quarter, which is normally in the 120%-130% range. Results in this quarter were within this band and suggest that customers are finding value in Red Hat's products.

Click to enlargeTop Renewal RateThe second key metric we follow is the size and quantity of large deals. Specifically, management announces how many deals in the quarter were larger than $1M and $5M. For the quarter, Red Hat booked 27 deals over $1M, inline with recent trends, and booked 4 deals over $5M, at the high end of recent trends.

Importantly, management indicated that it won two deals worth more than $10M each, the first time ever it has won deals of that size. This implies that Red Hat is taking a larger "wallet share" from its customers as its product offerings expand. We expect this trend to continue if the company builds out its storage business and enhances its middleware offering.

Red Hat Large Deal Analysis

Revenue growth disappointed, but core was strong

The company posted +15% yoy revenue growth, a deceleration from +19% last quarter and +28% last year. However, it's important to note that Red Hat is facing major currency headwinds, as 25% of revenue comes

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