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September 20, 2018updated 21 Jul 2022 10:56am

Red Hat Q2 Lower than Estimates As Client Moves to Legacy Provider

"There's just so much momentum around OpenShift right now, that it does kind of eat into selling time on RHEL."

By CBR Staff Writer

Red Hat Q2 earnings showed a total revenue of £626 million ($823), a 14 percent rise year-over-year for the company as they post their second quarter earnings for the fiscal year 2019.

Subscription based revenue growth for the quarter was £548 million ($723) up 13 percent year-over-year, Red Hat’s subscription revenue amounts to 88 percent of the enterprises total revenue.

The results were a few percentage points below the market estimates and resulted in an after hours trading drop of 5 percent in the company shares.

Out of Red Hats top 25 customer accounts that were up for renewal, the company reported that 24 out of the 25 had been renewed. The one large deal that was lost was to an on-premise provider who was more competitive on pricing.

Red Hat CEO Jim Whitehurst commented in a conference call with investors that: “The one deal that did not renew is a rare competitive loss to a legacy on-premise provider based on pricing.”

“We are actively pursuing future business with this customer as they evaluate additional technologies, such as adopting OpenShift as a multi-cloud platform for the digital transformation of their business.”

”Removing the one lost deal and using the next largest deal that did renew, the adjusted top 25 deals for the quarter would have renewed at an aggregate value of approximately 115% of their previous value.”

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CFO Eric Shander commented about the loss of the client that: “During this period, the customer was in the process of phasing out their activities and they were in the process of making some decisions.”

He highlights this non-renewal by the client as the cause of the lower than estimated revenue posted by the company: “So, unfortunately, it was this competitive loss to a legacy on-premise provider. It certainly was unfortunate. But as Jim said, we’re already working some new leads with this customer.”

Red Hat Q2

Red Hat Q2

The companies’ infrastructure-related offerings brought in £399 million ($527) in this quarter, showing an increase of 8 percent. While application development-related and emerging technology related products saw an increases of 31 percent.

Red Hat Enterprise Linux (RHEL) went from 11 percent constant currency in Q1 to 8 percent in Q2. Investors showed concern that this would see a wider deceleration for the company’s revenue. The RHEL was affected by the non-renewal of Red Hats’ above mentioned large client.

Jim Whitehurst reassured an investor that the company would see reacceleration in RHEL growth, but admitted as the growth of Openshift gains momentum that the: “Better OpenShift does and the more time we’re spending on that, the less time we’re selling RHEL.”

CFO Eric Shander jumped in to point out to the investor that: “Just as a reminder, and we continue to always say this, but Linux is containers. So, even as Jim was articulating the fact that customers are starting to purchase OpenShift, Linux RHEL is embedded into that. We certainly don’t break it out.”

“We don’t necessarily view it as a bad thing, as OpenShift is continuing to gain momentum and gain traction because by default, they are using RHEL in that product.”

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