uploads///Red Hat Earnings

Red Hat’s Bottom Line Falls despite Its Rise in Operating Margin

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Dec. 22 2015, Updated 9:06 a.m. ET

Operations efficiency

In this article, we’ll focus on the implementation of Red Hat’s (RHT) operations. Despite a negligible rise of 17 basis points in its gross margin, Red Hat remained slightly inefficient while implementing its operations in 3Q15. The majority of its expenses arose from its general and administrative activities, which totaled $53.0 million in 3Q15 compared to $39.5 million in 3Q14.

Likewise, its sales and marketing and research and development activities reflected expenditures of $215.8 million and $104.9 million, respectively, in 3Q15, compared to $187.2 million of $90.6 million, respectively, in 3Q14.

RHT’s income margin from operations fell to 13.2% compared to the previous quarter’s 14.7% on a GAAP basis. On a non-GAAP basis, RHT’s income margin from operations fell to 23.5% in 3Q15 compared to 23.8% in 3Q14.

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Expenses from non-core activities are rising

During 3Q15, Red Hat made an addition of around 13.8 million convertible notes, which contributed to an increase in interest expenses to $5.8 million, compared to last year’s $3.4 million.

Apart from this, other non-core expenses such as share-based compensation and amortization of intangible assets stood at $43.4 million and $7.0 million, respectively, compared to the previous year’s $33.6 million and $6.6 million, respectively. This reflects a fall in Red Hat’s net margin to 9.0% in 3Q15 compared to 10.5% in 3Q14, a loss of 1.5 percentage points.

Despite its bottom line’s being narrowed, Red Hat reported positive non-GAAP earnings per share (or EPS) of $0.48 in 3Q15, compared to $0.42 in 3Q14. However, on a GAAP basis, EPS came in at $0.25 in 3Q15 compared to $0.26 in 3Q14, a fall of 1 basis point.

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