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What Drove Red Hat's Fiscal 2Q18 Earnings?

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Part 10
What Drove Red Hat's Fiscal 2Q18 Earnings? PART 10 OF 18

How Red Hat’s Margin Looked in Fiscal 2Q18

Operating segments’ performance

So far in this series, we’ve discussed the factors that enabled Red Hat (RHT) to post better-than-expected fiscal 2Q18 earnings. Infrastructure-related subscription revenues and continued strong demand for RHEL (Red Hat Enterprise Linux) drove growth in the subscription segment, which rose 20% to $637.6 million. Subscription revenues contributed ~88% towards overall revenues.

OpenShift and OpenStack drove growth in the application development and emerging technologies segment, which rose 44% on a YoY (year-over-year) basis to $150.1 million. This segment contributed 21% towards overall revenues. OpenShift enables programmers to write software that can run in a variety of settings like Amazon’s (AMZN) AWS and Microsoft’s (MSFT) Azure. Consulting projects for Ansible and OpenShift drove growth in the company’s Training and Services division’s revenues, which rose 25% to ~$86 million. This segment contributed 12% towards the company’s total revenue.
How Red Hat&#8217;s Margin Looked in Fiscal 2Q18

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Margin expansion and R&D comparison

As the above chart shows, Red Hat’s net margins improved in fiscal 2Q18 on a YoY as well as a sequential basis. Reduction in sales and marketing expenses, general and administrative expenses, and R&D (research & development) expenses helped Red Hat to achieve this.

Reduction in operating expenses to attain cost efficiency is a widely adopted strategy. However, reduction in R&D can cost the company in the long run. Red Hat spends approximately 20.1% of its revenues on R&D. In comparison, VMware (VMW), Hortonworks, and Cloudera, leading players in open source and virtualization space, spend ~21.2%, ~54%, and ~30% of their revenues on R&D, respectively.

Considering growing competition and technological breakthroughs, Red Hat should continually invest in developing cutting-edge and improved technologies. Investment in R&D helps the company maintain a competitive edge, especially in the rapidly growing cloud space.

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