Thanks, RHEL and IoT: Red Hat Inc Stock Jumps on Q4 Earnings

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Image source: Red Hat.

Linux veteran Red Hat reported results for the fourth quarter and full fiscal year of 2015 Wednesday afternoon, leaving analyst projections in the dust. Moreover, the company renewed its share buyback program with a much higher dollar figure.

Investors caught on to this impressive one-two punch. Red Hat shares soared as much as 12% higher overnight, setting new 52-week and 15-year highs. Red Hat stock closed Thursday up 10% from the previous day's close.

Just the news, please
Red Hat's adjusted earnings rose 10% year over year to land at $0.43 per share. Analysts would have settled for $0.41 per share. On the top line, fourth-quarter sales grew 16%, to $464 million, also ahead of Wall Street's $457 million consensus estimate. That's in spite of heavy currency-related headwinds; in constant currency terms, Red Hat's revenue increased by 22%.

"We continued to experience strong demand for our open, hybrid cloud technologies, as evidenced by increased cross-selling in our top 30 deals which were all over $2 million for the first time," said CEO Jim Whitehurst in a prepared statement.

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As for the share repurchase policy, the $300 million authorization that was launched in 2013 was about to hit its two-year deadline at the end of March. It was also nearly exhausted, because Red Hat had bought back $220 million of its own shares under that plan.

The new policy gives Red Hat another two years to spend $500 million on share buybacks. The new authorization is 40% larger than the expiring one, but then again, Red Hat's market value has grown 49% since the previous plan was announced. The company is simply keeping pace with changing market realities, ready to retire another 3% or so of the outstanding share count from the open market.

Paul Cormier, EVP and president of products and services at Red Hat. Image source: Red Hat.

I'd like more meat on these bones!
The earnings release didn't dive much deeper into the reasons behind Red Hat's fantastic results. To get a fresh view of that crucial information, I hopped on a private call with Paul Cormier, Red Hat's president of products and technologies.

Right away, Cormier pounced on the heart of the matter: Red Hat's emerging technology products are growing at a breakneck pace, taking the entire company along for the ride. According to Cormier:

We have two broad product categories now. One is infrastructure, which is mainly Red Hat Enterprise Linux, Red Hat Enterprise Virtualization and associated products; and then the applications development category, which is all of our new products. Both grew very strongly, but the applications side reported 43% growth. I think the fact that they're both growing together is important, especially when you consider that all the products are driven by Linux and RHEL.

Application development has indeed become the little growth engine that could. After another year of more than doubling the sales growth of Red Hat's larger infrastructure division, the emerging technologies now account for 16% of the company's overall subscription sales. That's up from 13% a year ago.

Source: Red Hat.

That's not to say that RHEL is growing obsolete, by any means. Rather, customers use Red Hat's core product in different ways nowadays.

"When we started RHEL 12 years ago, it was really a commoditization play," Cormier said. "But over the last decade, it has become an innovation edge. It's really where all the innovation is happening now. Whether it be [cloud platform] OpenStack, [application development suite] OpenShift, storage management -- all of those are driven by new technologies that are developed and conceived and deployed on RHEL."

In other words, it's getting harder and harder to separate the Enterprise Linux system's business impact from other sales. Customers tend to order up entire packages, with RHEL simply sitting at the heart of it all.

For example, Red Hat landed its largest-ever OpenShift sale this quarter, a deal north of $10 million to a large, but unnamed, enterprise customer. "It's a major company, retooling their entire application development model and standardizing on OpenShift," Cormier said, deftly resisting my attempts to score clues to the identity of this mystery client. "And they literally are retooling to more of the DevOps model."

That means embracing the open source development philosophy, either straight up or modified to stay open within the confines of the app-building organization. OpenShift and DevOps is all about sharing code and information on a large scale, helping other teams and remote developers pull their weight in a flexible way.

This idea would have been anathema to most enterprises just a few years ago. In many cases, coding was done under tight wraps, sometimes separating even developers in the same company from each other's code.

But the times, they are a-changing. And Red Hat gets to reap the rewards of this shift, while also helping to steer the trend itself.

More detail on the Internet of Things
Just as RHEL is involved in nearly everything Red Hat does, the Internet of Things also drives the business forward without attracting a whole lot of attention to itself. Cormier explained:

The Internet of Things is really a higher-level solutions play. There's no SKU that you order to buy '10 Internet of Things things.' Instead, it's a usage pattern applied to many of our products. A lot of the deals that we saw this quarter can be categorized as that, where it's not just about the operating system anymore.

We're seeing solutions that take the OS as a base, adding in JBoss middleware with JBoss messaging as part of the overall solution. The customers may take storage, may even take OpenStack to support things like IoT applications -- both on the device side and on the back-end server end.

Here, Cormier revisited some familiar ground, since I've discussed the Internet of Things with him before. Some companies might specialize in this emerging market, but it's simply another tailwind for Red Hat.

Growing demand for robust computing solutions is almost automatically good news for all-stars like Red Hat, Microsoft , and IBM . The Internet of Things delivers that in spades, with a particular focus on secure data communications. That means platform sales plus JBoss Messaging growth for Red Hat, a boost to the time-tested MQ messaging suite for IBM, and MSMQ for Microsoft.

The Internet of Things is almost always a multipart sales opportunity for these ninjas of secure messaging, stacking several solutions together both on the server side and among devices in the field. Don't expect Red Hat -- or anybody else, really -- to break out IoT sales from their general results anytime soon, but do expect this macro trend to keep driving sales upward across the industry.

"We don't report an Internet of Things product, but indirectly, that's a big contributor to our whole product portfolio getting more robust," said Cormier.

Final thoughts
There you have it. Red Hat is both driving and riding a handful of enormous industry trends right now, resulting in great sales growth and equally impressive profits. The stock was recently stuck in neutral for a while, but investors can now look back at a market-crushing 44% return over the last year.

This is a great time to own Red Hat. And you shouldn't feel like you missed the boat on this growth stock. I expect the good times to last at least as long as the Internet of Things explosion unfolds. That means many more years of strong growth ahead; maybe even decades.

The article Thanks, RHEL and IoT: Red Hat Inc Stock Jumps on Q4 Earnings originally appeared on Fool.com.

Anders Bylund owns shares of Red Hat, He does not actually own a red hat, unless you count his collection of garnet and gold baseball caps. The Motley Fool owns shares of International Business Machines. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.