Shares of Red Hat Inc. (NYSE: RHT) were little changed on Friday even after the Raleigh-based Linux firm reported sizzling first-quarter results that surpassed analysts’ expectations.

 

Q1 2019 Summary

  • Earnings: $1.00 per share
  • Revenue: $934.11 million

Red Hat Beats on Top and Bottom Lines

Red Hat’s first-quarter financials were much better than expected on both the top and bottom lines. The open-source software company reported per-share earnings of $1.00 for the quarter ended May 2019 on revenue of $934.11 million. Earnings were 17.7% higher than analysts’ expectations. Revenues beat forecasts by around $2.4 million.

Large business deals and solid recurring revenue growth underpinned Red Hat’s strong quarter. The company said the number of deals over $5 million doubled over year-ago levels while the number of deals valued at more than $1 million grew 15%. This included a contract with OpenStack worth more than $5 million.

Subscription revenue, which is the lifeblood of Red Hat’s business model, grew 15% to $815 million.

Shares of RHT weren’t immediately impacted by the results. The stock is currently trading around $188 and is up more than 8% since the start of 2019.

Redhat Share Price YTD - Jun 21 2019

Source: Yahoo Finance

Red Hat-IBM Merger

IBM has made it clear that Red Hat will remain independent after the merger is finalized.

The latest earnings report comes on the heels of speculation that Red Hat will soon become part of IBM after the U.S. Department of Justice approved the merger last month. IBM announced its intent to purchase Red Hat last October in a deal worth $34 billion.

The two companies are still awaiting regulatory approvals from the European Union as well as Brazil. And while Red Hat didn’t comment on the merger in its latest earnings report, the deal is expected to be finalized in the second half of 2019.

IBM has made it clear that Red Hat will remain independent after the merger is finalized, quelling fears that the Raleigh-based company would lose its innovative spirit once absorbed by a much larger entity.

Ginni Rometty, IBM’s chair and CEO, told the Red Hat Summit in Boston last month that the Linux firm would not lose what made it such a great acquisition in the first place.

“I don’t have a death wish for $34 billion,” Rometty said, according to Business Insider, in reference to IBM’s merger with Red Hat. “I’m not buying them to destroy them. It’s a win win for our clients. It’s a way to drive more innovation.”

 

Conclusion

Red Hat’s stock has underperformed the broader market this year, but that’s to be expected given that its days as an independent company are numbered. Once the acquisition by IBM is complete, investors will probably take greater innovation at International Business Machines. Red Hat will be an integral part of IBM’s future growth strategy, which is increasingly centred on cloud computing.

Disclaimer: Author holds no investment position in Red Hat at the time of writing.