Red Hat will report fiscal first quarter 2015 results Wednesday, July 9th, after the markets close. Analysts expect healthy results, with constant-currency billings roughly 300‐400 basis points above our sense of the current consensus expectation of 12%‐13%. Our checks with original equipment manufacturers, value added resellers (VARs), and system integrator indicate that Red Hat continues to witness healthy demand for RHEL 6 and JBoss despite the uncertain macroeconomic environment. Analysts were pleasantly surprised by the VAR checks, which were better than in the year ago period. Further, we were pleased to hear of more VARs looking to KVM as alternatives to VMware. We remind investors that Red Hat typically outperforms its peers in constrained budget environments given its subscription revenue model and lower cost.
Server shipments decreased during the quarter, but Linux server revenue continued to be healthy, growing 3.4% year-over-year, in our estimation. Linux servers now represent 23% of server shipment revenue, implying mid‐ to high‐single‐digit growth in Linux server shipments. In addition, the company’s newer offerings, such as RHEV and Red Hat Storage, continue to track well.
Analysts expect fiscal 2014 guidance for revenue, EPS, and cash flow to be maintained given that it is still early in the year and this management team is typically conservative. Given the pullback in Red Hat’s stock and that the fundamental story remains unchanged, we believe that Red Hat offers the only viable enterprise‐ready data center operating system and is increasingly being used in public cloud environments. We remain aggressive buyers of the stock, which trades at an enterprise value of 19 times projected calendar 2014 free cash flow, below the software-as-a-service peer group at 29 times.