How Red Hat’s Subscription Revenues Were Trending in Fiscal 2Q18

Red Hat generates close to 88% of its revenues from subscriptions

Earlier in the series, we discussed Red Hat’s (RHT) fiscal 2Q18 results and the impact of open source software in the IT space. Let’s now look at why Red Hat’s revenue bodes well for the company’s prospects.

The below chart shows the contribution of subscriptions and support services toward the company’s overall revenues in fiscal 2Q18. Subscription revenues continued to contribute 88% toward the company’s overall revenues in fiscal 2Q18, as they did in fiscal 2017 and fiscal 2016. Subscription revenues are recurring, which is why they’re preferable. The IT sector’s growing preference towards cloud and subscription-based offerings is due to recurring revenues that are stable as well as predictable.

How Red Hat’s Subscription Revenues Were Trending in Fiscal 2Q18

IT sector’s increased inclination toward open source has benefited Red Hat’s subscriptions

Red Hat’s subscription revenues are largely composed of infrastructure-related offerings, which contributed ~76% towards subscription revenues. The remaining 24% of subscription revenues came from application development and other emerging technologies. Revenue from infrastructure-related offerings, which includes RHEL (Red Hat Enterprise Linux), rose 14% to $487.5 million in fiscal 1Q18. Strong demand for RHEL drove growth in this segment, according to the company’s management. Subscription revenue from application development and other emerging technologies in fiscal 2016 grew 43.2% to $149 million.

Business enterprises are increasingly migrating from traditional IT infrastructure and proprietary infrastructure software players to emerging open source technologies and cloud, a trend that has immensely benefited Red Hat.