Red Hat, Inc. (RHT) Q3 2018 Earnings Conference Call Transcript

MarketsMotley Fool

Red Hat, Inc. (NYSE: RHT)Q3 2018 Earnings Conference CallDec. 19, 2017, 5:00 p.m. ET

Contents:

Continue Reading Below

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, everyone, and welcome to today's Red Hat, Incorporated Q3 FY 2018 earnings conference call. At this time, all participants are in a listen-only mode. Later, you will have the opportunity to ask questions during a Q&A session. You may register to ask a question at any time by pressing *1 on your touchtone phone. You may withdraw yourself from the question queue by pressing the # key. Please note, we do ask that you limit yourself to one question and requeue with any follow-ups. Please note, today's call maybe recorded, and I will be standing by should you need any assistance.

It is now my pleasure to turn the conference over to Tom McCallum, Vice President of Investor Relations. Please go ahead, sir.

Tom McCallum -- Vice President, Investor Relations

Thank you, Elise. Hello everyone. And welcome to Red Hat's Earnings Call for the third quarter of fiscal '18. Speakers for today's call will be Jim Whitehurst, President and CEO; and Eric Shander, Executive Vice President and CFO.

Our earnings press release was issued today after the market closed and may be downloaded from redhat.com on the Investor Relations page. Also on this page, you'll be able to find a copy of today's prepared remarks, a schedule of currency rates, and a slide deck of financial highlights and supplemental metrics that, along with our earnings press release, include a reconciliation of GAAP to non-GAAP financial results.

10 stocks we like better than Red HatWhen investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has tripled the market.*

David and Tom just revealed what they believe are the 10 best stocks for investors to buy right now... and Red Hat wasn't one of them! That's right -- they think these 10 stocks are even better buys.

Click here to learn about these picks!

*Stock Advisor returns as of December 4, 2017

During this call, we will make forward-looking statements about our future financial performance and other future events and trends, including guidance for our fourth quarter and full fiscal year. These statements are only predictions that are based on what we know today, and actual results may differ materially.

These forward-looking statements are subject to the risks, uncertainties, assumptions and other factors that could affect our financial results and the performance of our business, and which we discuss in detail in our filings with the SEC, including today's earnings press release and the risk factors and other information contained in our most recently filed Form 10-K and Form 10-Q. Red Hat assumes no obligation to update any forward-looking statements we may make on today's call.

And with that, let me turn the call over to Jim.

James Whitehurst -- President and Chief Executive Officer

Thank you, Tom, and let me add my welcome to all of you joining us on today's call. I'm pleased to share that Red Hat delivered another strong quarter, with financial results exceeding our guidance across each metric. Demand remains strong for our hybrid cloud technologies and Red Hat is one of the key beneficiaries, based on the breadth and depth of our solution portfolio, as we have a proven track record of delivering significant business value to our customers.

Red hat is increasingly viewed as one of the top strategic technology partners to enterprise organizations, which is evidenced by our growing number of seven-figure and multi seven-figure transactions. As we look ahead, we believe we are well positioned to close out the fiscal year on a positive note and we have again increased our guidance for fiscal '18, as Eric will detail in a moment.

Some of the financial highlights of the third quarter were subscription revenue growth of 21% year-over-year and our third consecutive quarter of approximately 20% total revenue growth in constant currency. These topline results were driven by first consistent subscription revenue growth for our infrastructure related offerings, which include Bare Metal RHEL, virtualized RHEL, and RHEL on the public cloud.

Second, consistent subscription revenue growth of more than 40% in our application development related and other emerging technologies offerings. Third, our serves revenue growth continues to outperform our expectations as consulting projects for OpenShift and Ansible are driven by high demand for these technologies. Fourth, we achieved strong renewals in our largest customers, including strong growth in the number of deals greater than $1 million, as I noted earlier. Overall, we continue to experience strong demand across our broad portfolio of technologies.

Now, let me describe a few business and technology highlights from the quarter. First, we announced availability of OpenShift Container Platform as a service broker that enables cloud native services from Amazon Web Services to be easily provisioned and managed on the platform, including AWS Compute, database, analytics, machine learning, networking, and mobile application services.

Originally, we announced, at Red Hat Summit in May, this expanded alliance with AWS, which provides customers with a unified view of their own applications and public cloud capabilities. We also made a number of other announcements related to the integration of additional Red Hat technologies in the OpenShift platform. We've integrated our storage technologies as an enterprise grade software defined storage solution built from Red Hat Gluster Storage, which provides container-based storage on both on premise and on the cloud.

In addition, we announced Red Hat OpenShift Application Run Times, or RHOAR. RHOAR is a next generation set of run times for containerized microservices based application development. RHOAR stands alongside Red Hat JBoss EAP, leveraging Red Hat's years of run time experience in this brand new offering targeted at cloud native DevOps and microservices optimization.

Second, we expanded our certified cloud service provider program, including the Alibaba Cloud, which provides a comprehensive suite of cloud computing. Alibaba Cloud is among the world's top IS providers and the largest provider of public cloud services in China. Alibaba Cloud intends to offer Red Hat Enterprise Linux on a pay-as-you-go basis in the Alibaba Cloud marketplace, and Red Hat Cloud Access, which is our innovative bring-your-own-subscription for our broad portfolio of technologies.

This program gives customers additional choice and consistency when deciding on where to build and run their applications. In the coming months, Red Hat Solutions will be available directly to Alibaba Cloud customers, enabling them to take advantage of the full value of Red Hat's broad portfolio of open source cloud solutions.

Third, at OpenStack Conference held in Sydney in November, we continued to showcase our technology innovation and numerous customer references. At the conference, we announced Red Hat OpenStack Platform 12, the latest version of our massively scalable and agile cloud infrastructures of service. Based on the OpenStack Pike release, Red Hat OpenStack Platform 12 introduces containerized services, improving flexibility while decreasing complexity for faster application development.

Also at the OpenStack Conference, we announced that Insurance Australia Group Limited, or IAG, is using Red Hat OpenStack Platform to help consolidate and simplify its legacy infrastructure. A trusted partner of IAG for seven years, Red Hat is now helping IAG use the power of open source technology to bring together disparate data sources into a single scalable private cloud solution to improve customer experience.

This is a great example of how we're able to build off of the trust we've established with customers and then help them to enable new innovative technologies to address their cloud initiatives.

I'm pleased to announce that our long track record of delivering strong growth has enabled Red Hat to be added to the Fortune 1000 list of the largest companies. I'd lake to thank our Red Hat associates around the globe for the exceptional performance that made this remarkable achievement possible.

As we close out our fiscal year, we're pleased that our fourth quarter revenue outlook will exceed a $3 billion annual run rate. In addition, we're confident about our growth prospects, based on the substantial market we're addressing, combined with Red Hat's broad product portfolio and strong market position. The execution we are driving today will create additional growth opportunities for our customers and partners in the future.

With that, let me turn the call over to Eric.

Eric Shander -- Executive Vice President and Chief Financial Officer

Thank you, Jim. Let me also add my appreciation for the great execution that our associates around the world delivered during this quarter. This drove another quarter of strong financial results that were above our guidance. For the third quarter, we delivered a powerful combination of year-over-year growth of 22% for revenue, 25% for non-GAAP operating income, and 18% for operating cash flow. This quarter was also consistent with our strong year-to-date results of 20% total revenue growth, 26% non-GAAP operating income, and 21% operating cash flow growth.

Let me provide you with some additional financial highlights of our third quarter performance. In general, currency rate volatility was fairly stable year-over-year in Q3. The major foreign currencies that we transact business in have modestly weakened from the outlook we provided in the September earnings call, but the overall impact was minimal to our results.

So, for this quarter, I will keep my prepared remarks focused on reported USD results and, where appropriate, add constant currency details. In addition, you will find a table of constant currency results in our press release. Also, for a more detailed view of our results and reconciliations of our non-GAAP measures to GAAP, please refer to our press release.

Let me start with the income statement. We delivered $748 million of revenue, which was above the high end of our guidance, and represented growth of 22% in USD, or 20% in constant currency. We exceeded the high end of our guidance by $11 million, which included a foreign exchange headwind of approximately $2 million due to a weakening of some rates against the dollar. The remaining upside was mainly due to stronger performance and execution by our global sales team and additional services demand for our emerging technologies.

Subscription revenue constituted 88% of total revenue in Q3. We also experienced continued high growth across our product portfolio. Subscription revenue for our infrastructure related offerings was $495 million, an increase of 15% year-over-year. Subscription revenue for our application development related and other emerging technology offerings was $162 million, and increase of 44% year-over-year.

This past quarter marked the fourth straight quarter of 40% or higher growth in this part of our subscription revenue as demand remains strong for our container, cloud management, middleware, and private cloud technologies.

Application development related and emerging technologies revenue represented approximately 22% of total revenue, up 340 basis points from the year-ago quarter. Lastly, our services revenue of $91 million grew 27% year-over-year. As we have seen since Q4 last year, the growth of services continued to be faster than we expected, due to additional demand for consulting projects around Ansible and OpenShift.

On a non-GAAP basis, operating income of $179 million grew 25% year-over-year and non-GAAP operating margin came in at 23.9%. This quarter result was 20 basis points higher than the operating margin guidance that I provided on our last call, and 40 basis points higher than Q3 last year, due primarily to the higher revenue results.

As a reminder, non-GAAP operating income adjusts for non-cash share based compensation expense, amortization of intangible assets, and transaction costs related to business combination. Using our non-GAAP effective tax rate of 26.5% after the impact of certain discreet tax items, and debt discount expense, non-GAAP diluted earnings per share came to 73 cents, which is three cents higher than our September guidance, and up 20% year-over-year due to the stronger performance in the quarter.

Turning to the balance sheet, we ended the quarter with cash and investments of approximately $2.3 billion, which returning $100 million to our shareholders in the quarter through the repurchase of approximately 800,000 shares of stock. Our total deferred revenue at quarter end was $2.1 billion, and increase of $390 million, or 23% over the same quarter a year ago.

Our operating cash flow results were also strong. Operating cash flow of $160 million for the quarter was up from $136 million in Q3 last year. This result was driven by higher profitability as well as stronger billings and collections. The FX adjusted day sales outstanding was 60 days, a two-day improvement from last year.

On a rolling four quarters basis, the billings proxy was $776 million, up 22% year-over-year. As a reminder, the four quarters billings proxy is calculated by adding revenue plus the change in deferred revenue on the cash flow statement for the last four quarters.

I will now review the bookings metrics related to our business momentum, to renewals, and the million-dollar deals in the quarter. We drove solid bookings growth across our major geographies. This quarter, 57% of bookings came from the Americas, 28% from EMEA, and 15% from Asia Pacific, which is relatively consistent with the third quarter last year.

The third quarter route to market mix was 67% from the channel and 33% from our direct sales force, compared to the third-quarter prior year split of 72% and 28%. Our proxy for booking duration was nearly 24 months, the same that we reported in Q3 last year. This was, however, higher than we anticipated due to strong growth of multiyear deals being booked in the quarter.

Looking at the fourth quarter, we continue to expect our bookings duration metric will be lower than last year's record 25 months. Looking at our top deals, 25 out of 25 of our largest deals that were up for renewal all renewed and did so in aggregate at greater than 120% of their previous value. Our large-deal growth in the quarter was strong with a total of 94 deals over $1 million, up approximately 30% year-over-year. Within these deals, 17 were greater than $5 million, which is a record for any quarter. Included in the 17 deals were four greater than $10 million with one of those over $20 million.

Cross selling was strong with over 60% of the top deals greater than $1 million, including one or more components from our group of application development related and emerging technologies offerings. Our top industry verticals within these deals greater than $1 million were financial services, tech and media, and other mainstream sectors such as retail, energy, and transportation.

Now, I'd like to turn to guidance. Our outlook assumes current business conditions and foreign exchange rates, which generally weakened against the dollar since our September guidance. For example, our higher outlook for Q4 revenue also includes a $4 million headwind from the foreign exchange rates we used from our previous outlook. For our full year, we are raising our total revenue guidances to $2.906 billion to $2.911 billion, up approximately 21% in USD and 20% in constant currency, at the high end of the range.

Given the strong performance so far this year, along with our outlook for additional growth and investment, we are modestly raising our non-GAAP operating margin by 10 basis points, to 23.9% for the full year. We are also raising our full year non-GAAP earnings per share outlook to be approximately $2.88 per share, assuming approximately $2 million per quarter forecast for net other income, annual effective tax rate of 27%, and approximately 181 million diluted shares.

This guidance also includes a one-time gain on a strategic investment of approximately 5 cents for both GAAP and non-GAAP earnings per share. On a GAAP basis, we expect GAAP EPS to be approximately $2.02, with an estimated annual stock compensation expenses of approximately $195 million and annual amortization expense of approximately $30 million.

GAAP fully diluted EPS guidance includes non-cash interest expense related to the convertible debt discount of approximately 20 million. And finally, we are also raising our full year operating cash flow outlook to be in a range from $900 million to $910 million.

For Q4 specifically, we offer the following outlook. We expect revenue to be in the range of $758 million to $763 million, which is up approximately 21% in USD at the high end of the range and 18% in constant currency. We expect non-GAAP operating margin of approximately 24.6% and non-GAAP earnings per share of approximately 81 cents, with 182 million diluted shares. GAAP EPS is expected to be 54 cents with 186 million diluted shares.

Both GAAP and non-GAAP earnings per share will include the approximately five-cent gain I mentioned a moment ago. Although one can derive a quarterly cash flow range based on my annual guidance, we will continue our practice of not providing quarterly cash flow guidance.

In Q3, we delivered strong results that reflect a continued adoption of the technologies that address the opportunities around digital transformation and hybrid cloud computing. This momentum will enable us to finish the year with high growth across revenue, non-GAAP operating income, and cash flow. We're also optimistic that the execution this year will position us well for the future growth.

...

At this point in time, I'd like to turn the call back to Elise for the first question.

Questions and Answers:

Operator

Certainly. [Operator instructions] Our first question comes from Matt Hedberg with RBC Capital Markets. Please go ahead.

Matthew Hedberg -- RBC Capital Markets -- Analyst

Hey, guys. Thanks for taking my questions and Happy Holidays. Jim, we've talked in the past. Your Cloud Access program seems to be one of the more strategic sides of your hybrid cloud strategy. I know you've talked about it being difficult to quantify in the past. I'd love to hear your take on that, how it stacks up versus CCSP. Is there anything we can do to maybe in the future get a little better look on the size and magnitude of that business?

James Whitehurst -- President and Chief Executive Officer

Well, yeah. I think you're still seeing constant currency 14% growth in our infrastructure line. One of the things that's driving that is both Cloud Access and CCSP. It's a takeaway for us to decide when and how we can track it and show you more detail on that. Anecdotally, I can say a lot of customers are using the program and we hear very positive things about it. Again, because we don't track, and our customers don't necessarily want us to track exactly where they use subscriptions, we're in a bit of a tough spot to be able to give you color more than anecdotal. But, we'll take that as a takeaway, if there's a way we can provide you more clarity in that. Unfortunately, it's hard to do since we don't have the exact number ourselves.

Tom McCallum -- Vice President, Investor Relations

Great. Next question, please, operator.

Operator

We'll go next to Mark Murphy with JP Morgan. Please go ahead.

Mark Murphy -- JP Morgan -- Analyst

Thank you. Congrats on the solid results. Jim, I wanted to ask you how broad do you think the movement toward containers is becoming globally? Depending on who we talk to, there are people who think the containers are either the biggest trend in the software industry or you hear comments that very few companies actually are going all in on containers. Do you have any personal estimate of what percentage of workloads have been containerized or maybe will be in the very long-term? Thank you.

James Whitehurst -- President and Chief Executive Officer

I'll try to get those two different perspectives to sync. I would say that virtually every major company that we are working with is building its strategy around containers, and they are starting to work and do app dev, at a least a portion of that on containers. The intention is, long-term, the majority of their new app dev will be on containers.

That said, the majority of applications running right now were written more than a year ago. The issue you have is the vast majority -- probably 90% of our enterprise customers -- are at some phase of starting to deploy containers. But, it is a very small percentage of their workloads today because new applications are still a small percentage. To me, given both the operational benefits and the development benefits, we still believe the majority of applications will be containerized and run that way in the long run.

But, even some of our most advanced OpenShift customers, if you looked, it's still 10% or less of their total application portfolio. Growing rapidly, which is why we see so much opportunity there. But again, everyone is intending to do it at some level of adoption, but we're still in the very early days.

Again, the economic benefit is one of these odd technologies where it's cheaper to develop and it's cheaper and more efficient to run on containers. It's kind of the best of both worlds, which is why it does continue to appear to be the biggest trend in technology right now, certainly the infrastructure space.

Mark Murphy -- JP Morgan -- Analyst

Great. Thank you.

Tom McCallum -- Vice President, Investor Relations

Operator, next question please.

Operator

We'll go next to Raimo Lenschow with Barclays. Please go ahead.

Mohit Dhillon -- Barclays -- Analyst

Thanks, guys. This is Mohit Dhillon for Raimo. Thanks for taking my question. Just staying on containers, you touched on as to the option that you see coming for that. I'm confused as to -- obviously, that would be a win for your application development emerging, based on your OpenShift port. But, do you also see adoption of containers providing sustained evidence to your infrastructure segment in terms of adoption for Red Hat?

James Whitehurst -- President and Chief Executive Officer

Well, yeah. Let's be clear. Containers are a different way to distribute the Linux operating system, which basically decouples the stuff that touches the hardware -- so, the host space from the user space. So, it makes the operating system substantially more strategic for customers, and it is very much a Linux based set of technologies. I know there are Windows containers, but that is very much a small edge case.

So, the fact that it drives almost 100% share -- a very, very high share -- of Linux, and because it requires a set of consistency and a long-term life cycle to run production applications that we're good at, we think it's a long-term tailwind behind us across our portfolio products.

Tom McCallum -- Vice President, Investor Relations

Great. Operator, next question, please.

Operator

We'll go next to Siti Panigrahi with Wells Fargo. Please go ahead.

Siti Panigrahi -- Wells Fargo -- Analyst

Hi. Congrats on a great quarter. In looking at your volume and site of large deals, very impressive 30% year-over-year growth. But, more impressive even, the $5 million deals at 13 deals versus five deals last year and four last quarter. Can you give some color? What's driving such a large number of $5 million-plus kinds of deals? Is it mostly on the core Linux or is it something that you've started seeing in emerging technology? Is that driving?

As a follow-up to services, Eric you mentioned about some of the demand for emerging technology. Is that most areas of seeing proof of concepts that's driving or is it implementation?

Eric Shander -- Executive Vice President and Chief Financial Officer

Siti, I think we can perhaps answer both of those questions together. As I had mentioned in the prepared remarks, over 60% of our larger deals had cross selling in them and had multiple elements of the technology. So, certainly RHEL is in there, but we are seeing a good cross selling of the emerging technologies -- certainly, OpenShift and Ansible and OpenStack. As we look at the services activities, services for us is both a leading and lagging indicator of a lot of these projects. So, we're seeing a fair amount of proof of concepts, which are certainly leading to bigger deals. We'll also sell a subscription and we'll include OpenShift or some of the other emerging technologies in there, and then the customers will then engage us to get some support and services around it when we're training.

So, right now, we are looking at the growth. A lot of what we're seeing is early proof of concept projects on the services side, which is helping drive it. But, at the same time, too, we're also seeing a pick up of the deployment of some of the emerging technology, too.

James Whitehurst -- President and Chief Executive Officer

Yeah, looking through the 13 deals that were over $5 million, I only see one that is just RHEL and the supporting technologies around that. The vast majority have middleware components. Ansible is taking a bigger role across a lot of the deals. A lot of OpenShift and OpenStack -- the price point, especially around OpenShift is much higher. So, that leads to higher overall dollar amounts. So, without a doubt, it's the multiple technologies in the portfolio that's helping us drive that size of deals.

Siti Panigrahi -- Wells Fargo -- Analyst

Great. Thank you.

Tom McCallum -- Vice President, Investor Relations

Next question, operator, please?

Operator

We'll go next to Kirk Materne with Evercore ISI. Please go ahead.

Kirk Materne -- Evercore ISI -- Analyst

Thanks very much. I'll add my Happy Holidays to everyone. Jim, you mentioned financial services being strong, and I think we've heard that from some other software companies over the last three to four months. I was just kind of curious, in your view, is this some catch-up spending perhaps that they didn't get to over the last couple of years, that you see these companies coming back to you guys? Or, are we at just a complete paradigm shift in terms of the way they think about partnering with you, so that this isn't sort of just the period of catch-up spending? There's a real tail to this when you look out say 12-18 months? Thanks.

James Whitehurst -- President and Chief Executive Officer

So, we're a subscription model business and so people are using what they are consuming. They're paying for what they're consuming. I don't see a lot of catch-up in that. I think what you're seeing is -- and this is driven by a bunch of things and certainly containers is one of those things -- we're becoming more strategic to our customers and so we go to have a discussion about containers and all of a sudden we're selling more EAP and other middleware.

Ansible has been a great cross sell because it's come into organizations in a different way and really exploded. That allows us to come in, and many of the deals I've talked about -- 17 of the top deals had Ansible. Virtually all of those also brought in other technologies. So, the cross sell across the technologies is allowing these to get bigger, specifically in financial services. There are a lot of financial services in that set of numbers. I think the first top three were all financial services. It's a whole mix of technologies there. None of those are catch-ups. They're all just expansion of relationships personally.

Kirk Materne -- Evercore ISI -- Analyst

Thank you.

Tom McCallum -- Vice President, Investor Relations

Great. Next question, please.

Operator

We'll go next to Karl Keirstead with Deutsche Bank. Please go ahead.

Karl Keirstead -- Deutsche Bank -- Analyst

Thanks very much. A question for Eric on the seasonality of billings. Eric, as we set up our models to think about the fourth-quarter calculated billings, you did caution us that the contract duration could come in. But, I guess the other issue is too that in a year-ago fourth quarter, you guys had an amazing quarter. So, the comparison is tough.

Maybe the way I want to phrase this is just around seasonality. If last year things were quite skewed to fourth quarter, I think something like 36% of your billings last fiscal year dropped in in the fourth quarter. Are you expecting fiscal '18 to have a similar 4Q skew? Thanks very much.

Eric Shander -- Executive Vice President and Chief Financial Officer

Karl, I appreciate the question. As you all know, and we've said continually, billings are something that's extremely hard for us to really predict. First off, we're pleased with the billings performance this quarter. We're optimistic as we go into Q4 about the pipeline we have. But again, as we've said before, you do get the situation where, when you get near the end of the year, depending on the size of the deals, from time to time, we run into situations where a customer may want to only pay one year in advance versus us having to give an unusual discounting to get three years in advance.

Certainly, we're not going to incent the team to do anything unusual just to get a billing in, but I would just say that we're remaining focused and our big thing right now is delivering on the quarter as we get into Q4. I really don't want to comment too much in terms of what our expectation is for billings.

James Whitehurst -- President and Chief Executive Officer

Billings, because we have various terms that can bounce around some -- that's why we don't provide any guidance. I will say that the big market motion in our business is renewal and upsell against our big customers. So, obviously, last year and how we did last year is important in terms of that base. For instance, we talked about last Q3 we had $20 million worth of deals move out of Q3 into Q4l. Guess what? Those are now permanently in Q4 and renewing in Q4. So, last year is an indicator of the business and how that flows through the bookings is a little bit of a looser correlation because it depends a lot on billing terms.

Karl Keirstead -- Deutsche Bank -- Analyst

Okay, great. Thank you both.

Tom McCallum -- Vice President, Investor Relations

Thanks, Karl. Operator, next question please.

Operator

We'll go next to Zane Chrane with Bernstein Research. Please go ahead.

Zane Chrane -- Bernstein -- Analyst

Hi. Thanks for getting me in. A question for Jim. I was wondering, what are the buying factors you've found are most important to customers in choosing a vendor for their containerized app dev? Is it having Kubernetes as the orchestration system? Is it pricing? Just what leads customers to adopting OpenShift versus Docker and some of the other container vendors out there? Thank you.

James Whitehurst -- President and Chief Executive Officer

We've had two main selling points and I think it's been a little bit split. One is Kubernetes. Without a doubt, people see Kubernetes as the Lytics equivalent, the wining open source technology in orchestrating containers. That's been helpful. As the second largest contributor to the Kubernetes project, that's positioned us well to be able to help drive road maps and confidently support our customers there.

The other is just life cycle of the operating system. A lot of people forget that we all have security vulnerabilities. The user space of the operating system is inside the container. People like to abstract and say, "Oh, the container is the source code for the application," but it's also all of the user space dependencies. Over 90% of the security vulnerabilities that are patched in Linux happen in user space. Therefore, if you're going to deploy an application that you plan to run a production context, you need to make sure you have a vendor you feel confident can support and patch the operating system components that are inside the container.

For virtually all of our big customers, they trust Red Hat to do it. We've been doing it for a long time, so that's a big selling -- in fact, we had one significant financial services institution that had gone down another path and their security group ultimately vetoed use of different container technology because they said, "Well, the operating system component's in that. We don't' have a life cycle or feel confident in support around that." So, they then came and since have migrated to OpenShift. So, again our credibility in the operating systems and containers are Linux as well as our current ability and Kubernetes combined, are what's driven our momentum in OpenShift.

Zane Chrane -- Bernstein -- Analyst

Thanks very much. Happy Holidays, guys.

Tom McCallum -- Vice President, Investor Relations

Same to you. Operator, next question please.

Operator

We'll go next to Walter Pritchard with Citi. Please go ahead.

Walter Pritchard -- Citi -- Analyst

Hi. Thanks. Eric, could you talk about from a revenue perspective -- it seems like you are realizing more revenue in the quarter and showing stronger revenue results. I'm wondering if that's a result of more cloud flow through or a result of earlier linearity in the quarter in terms of signing contracts? Relative to our modeling the last couple of quarters, that's what we've noted.

Eric Shander -- Executive Vice President and Chief Financial Officer

Walter, it's a couple of things. As we've shown, a lot of strength in services each quarter. That's a contributor we have. As we've been calculating externally, we've been doing a lot of focus around business linearity and we are, in fact, closing business earlier in the quarter. We've had more on-time renewals than ever, which obviously that translates to in-quarter revenue. So, we're seeing improved linearity. Again, as I mentioned last quarter, this quarter as well as Q4 being our biggest volume quarters, are really going to test a lot of the management and cadence and process improvements we've made.

Before we say that we're 100% confident that all of the linearity improvements we've made will be sustainable, we've really got to get through Q4 and see how that shakes out. But, we're very optimistic. We saw nice linearity improvement this year over last year. And certainly, the CCSP program continues to grow and we're pleased with the performance of that as well. All of that really results in a lot more in-quarter revenue.

James Whitehurst -- President and Chief Executive Officer

Walter, we've said that the CCSP business is growing faster than any other part of our business and we've disclosed other parts of our business so you can see the growth rate's pretty solid. That's all immediately revenue recognition. That specific component is driving revenue faster than billings because it's obviously billed in arears.

Walter Pritchard -- Citi -- Analyst

Great. Thank you.

Tom McCallum -- Vice President, Investor Relations

You're welcome. Operator, next question please.

Operator

Our next question comes from Gregg Moskowitz with Cowen. Please go ahead.

Gregg Moskowitz -- Cowen and Company -- Analyst

Thank you and Happy Holidays, guys. Jim, OpenStack has been a meaningful contributor to large-deal activity for Red Hat for quite some time, and with Telco obviously a big part of that. How would you assess the likelihood of OpenStack to be more broadly adopted by enterprises going forward?

James Whitehurst -- President and CE

We expect it to be fairly widely adopted by enterprises in the long run. Like any infrastructure technology, it's a ramp. In fact, we have been investing hard on the Telco side and we've talked a lot about our successes there because it's the big wow deals. But, if we look, even in Q3, six of the top ten customer deals were non-Telco. We're seeing solid verticals. We saw 16% of the deals were financial services. We saw services, manufacturing, and median entertainment. Again, we're starting to see real growth on the enterprise side, and so when you start thinking about on premise, you're either kind of stuck in the old expensive world of VMware or you're moving to OpenStack if you want scale out infrastructure.

So, it's doing well, and we expect that to grow nicely over time. Also, the synergy of OpenShift on OpenStack. When people are going to deploy new infrastructure for OpenShift rather than put it on an existing infrastructure, we're seeing a lot of traction in attach of OpenStack underneath OpenShift. So, we feel good about it long-term. It's just these technologies -- again, these are as you add servers and retire other servers. It's more gradual there in the growth that we see in enterprise than we do in Telco, where just the sizes of those deals can be enormous.

Gregg Moskowitz -- Cowen and Company -- Analyst

Very helpful. Thank you.

Tom McCallum -- Vice President, Investor Relations

Next question please, operator.

Operator

We'll go next to Adam Holt with MoffettNathanson. Please go ahead.

Adam Holt -- MoffettNathanson -- Analyst

Hi, guys. Thank you. Happy Holidays. I was hoping to go back to a comment Jim made about middleware and OpenShift. There's a debate in the market about whether OpenShift is good or bad for the JBoss business. We have the view that OpenShift could actually be a positive for JBoss and pull through some JBoss business. But, I wanted to see if that's actually what you're seeing and how you see that relationship unfolding over the next couple of years. Thanks.

James Whitehurst -- President and Chief Executive Officer

Yeah. I would say that OpenShift is good for virtually every product in middleware except EAP. EAPs, we actually have some good traction there as well. But, there is some movement off of JE, as people look at containerized more microservices oriented architectures. We're seeing really good cross sell -- people who have installed OpenShift over time, consume more and more of our middleware services. That becomes more pronounced as people use the stuff longer. I think it's really good long-term for our middleware business.

Even for OpenShift, we're seeing that you'll get an enterprise and you'll put through OpenShift and now they're looking to figure out how to save more money. They'll look and say, "Wow, I have a lot of WebLogic applications around. Let me get those moved over. Those are JEE, so those require EAP. I think it's going to long-term be good for EAP as well. But, it's certainly immediately very good for the rest of the portfolio. We expect that to be true for the long run.

You're exactly right, in that as people build modern applications, it's less likely to be JEE. One could argue with some net new workloads, it's a replacement of one versus the other. But, if you look at it on the whole, it's good for the rest of the portfolio and it is driving more share shift from WebSphere and WebLogic to EAP.

Tom McCallum -- Vice President, Investor Relations

Great. Next questions please, operator.

Operator

We'll go next to Keith Weiss with Morgan Stanley. Please go ahead.

Keith Weiss -- Morgan Stanley -- Analyst

Thank you, guys, for taking the question. A very nice quarter. We talked a little bit about Telco and they continue to be a strong contributor around OpenStack. To what extent is the move forward in it contributing today -- or, to what extent is this still sort of off on the horizon, particularly when we see the big pick-up in large deals you've been seeing?

James Whitehurst -- President and Chief Executive Officer

It's yes and yes, in the sense that it does help with large-deal traction. I think we said we have three of the big four US telcos with eight-figure OpenStack commitments. We've had a number of large commitments from the global telcos as well. Frankly, that was not a factor in this quarter's large deal traction. Just the way those have all seemed to cluster around Q4, so the large deal traction from this quarter wasn't really driven by telcos. I'm trying to look to make sure I didn't miss any of this very large -- there was one.

Eric Shander -- Executive Vice President and Chief Financial Officer

Just one, yeah.

James Whitehurst -- President and Chief Executive Officer

There was one of the very large deals with the telco, but the telco pipeline and the way they've all fallen are all Q4 deals. So, the answer is yes, those deals are large, assuming that we get what we think we can get as NFE rolls out 5G. We think those could be very, very large deals and a large stand-alone business on its own. Certainly, those are big deals. But, over the last couple of quarters, the large-deal traction is outside of telco.

Keith Weiss -- Morgan Stanley -- Analyst

Got it. Any sense of how the federal business turned out for you guys in the most recent quarter?

James Whitehurst -- President and Chief Executive Officer

It was strong. It was very strong. So, obviously we had a couple of deals last year in the federal space that moved from Q3 to Q4, so those are still in Q4. Given the strong growth year-over-year, we should have strong quarter this quarter with those big deals in Q4.

Tom McCallum -- Vice President, Investor Relations

Great. Next questions, operator, please.

Operator

We'll go next to John DiFucci with Jefferies. Please go ahead.

Howard Ma -- Jefferies -- Analyst

Hi, thanks. This is Howard Ma for John DiFucci. Thanks for taking the question. Just a follow-up on the conversation about containers. So, VMware and Pivotal were recently announced. Google announced Pivotal Container Service. What's the value prop of Red Hat's -- what's OpenShift versus Pivotal and are you seeing Pivotal more already pushing their container service more? Just generally, what are you hearing in terms of changes on the competitive front?

James Whitehurst -- President and Chief Executive Officer

First off, the good news about that is it validates that Kubernetes is the right technology, which puts more momentum behind Kubernetes, which is good for us as the largest commercial provider of Kubernetes. There's certainly a net positive there. Competing on a combination of Linux and Kubernetes, which is what a container platform is, we feel very confident competing in that environment. I think we're competing very, very well. PKS -- I'm not even sure what flavor of Linux is underneath that, but certainly nothing that has the life cycle and all the other components that RHEL has. Again, as far as I know, Pivotal's not a material contributor to Kubernetes, so putting together we're happy to compete on that. I think it does provide more interest around Kubernetes. It's no longer this versus that. It's Kubernetes and Linux. Again, given our leadership position in both of those technologies, we think that bodes well.

Tom McCallum -- Vice President, Investor Relations

Great. Next question, operator, please.

Operator

We'll go next to Brian White with Drexel. Please go ahead.

Brian White -- Drexel Hamilton -- Analyst

Jim, as we look forward here to calendar '18, I'm wondering what you're most excited about for the new year? How do you think the year will be different than calendar '17? Obviously, this year was a phenomenal year for Red Hat, so hats off, but how were you thinking about next year?

James Whitehurst -- President and Chief Executive Officer

It's obviously early on and this is a business that moves quickly. But, we have several significant drivers of the business. Obviously, the move to cloud has allowed RHEL growth to continue at a solid double-digit pace. As we look forward, not providing guidance at this point, we see a solid pipeline and ability for RHEL to continue to grow that quickly. Our emerging products -- OpenShift, OpenStack, and Ansible -- are all continuing to grow really, really quickly. As they get bigger, certainly we haven't done all of the math as we get into next year, but if we can maintain those kinds of growth rates, it keeps our core growth rate accelerating. We're not guiding to that at this point by any stretch.

But, one of the things I think you're seeing, our overall growth rates have accelerated this year because RHEL has stayed constant. Our other product growth has stayed constant. Because those have gotten bigger, the mix of the two allows a faster growth rate. So, we're not calling that yet, but right now we have solid pipelines, a lot of momentum -- Ansible we haven't talked a lot about on this call. It's just been an extraordinary technology, both in its own commercial traction as well as driving the other products. OpenShift does the same across the middleware portfolio, so we continue to be -- I'm more bullish than I've ever been about our long-term prospects right now.

Eric Shander -- Executive Vice President and Chief Financial Officer

Brian, the other thing we'd say is we talk to customers. Certainly, customers are really putting their hybrid cloud strategies in play for next year, and that's something that plays right into the strategy of how we've aligned the projects. So, I think that's one of the things that gives us a lot of excitement about next year and years beyond. Some of these are going to be multiyear transformations that our customers and industries are going through.

Brian White -- Drexel Hamilton -- Analyst

Thank you.

Tom McCallum -- Vice President, Investor Relations

Operatory, next question, please.

Operator

Our next question comes from Abhey Lamba with Mizuho Securities. Please go ahead.

Abhey Lamba -- Mizuho Securities -- Analyst

Thanks. This is [Unintelligible] [00:48:19] for Abhey. I give my congrats for the quarter. I wanted to clarify the source of the full-year EPA subset. I think you called five cents from a one-time gain. Is there anything else we should be thinking about -- any cost pushouts to fiscal '19 from the fourth quarter.

James Whitehurst -- President and Chief Executive Officer

No, no. No cost pushouts. We have a strategic investment which is being dispositioned that's contributing to the five cents. But, there are no cost pushouts.

Tom McCallum -- Vice President, Investor Relations

We have time for one final question.

Operator

Our final question comes from Jason Ader with William Blair. Please go ahead.

Jason Ader -- William Blair -- Analyst

Thank you. Eric, I have one for you on the operating margin outlook. You had a nice expansion this year. How are you thinking about fiscal '19 at this point?

Eric Shander -- Executive Vice President and Chief Financial Officer

I was actually surprised that it took this long for somebody to ask the question. Here's what I can tell you. Yes, we are thinking about the margin for next year. Certainly, our primary focus is on executing and delivering on Q4 as a big priority. How we do in Q4 sets us up for next year. We will, in our next quarter, as we have traditionally, is provide our guidance for FY19. At this point, it's a little premature. We are working through some different scenarios of what the various margins may look like based off revenue growth, etc. But rest assured that, as we get into Q4, we'll provide the FY19 guidance from a margin standpoint included in there. But, at this point, our primary focus is on delivering Q4 and then, based on how we do there, we'll certainly guide appropriately as we get into FY19.

Jason Ader -- William Blair -- Analyst

That's why nobody asked the question, because you didn't answer it.

Tom McCallum -- Vice President, Investor Relations

There you go. On that note, Jason, I just want to say thank you to everybody for the support this year. Happy Holidays and we look forward to speaking to you in the next year.

James Whitehurst -- President and Chief Executive Officer

Happy Holidays, everyone.

Eric Shander -- Executive Vice President and Chief Financial Officer

Happy Holidays. Thanks.

...

Operator

Thank you. This does conclude today's conference. We appreciate your participation. You may disconnect at any time. Have a great day.

Duration: 51 minutes

Call participants:

Tom McCallum -- Vice President, Investor Relations

James Whitehurst -- President and Chief Executive Officer

Eric Shander -- Executive Vice President and Chief Financial Officer

Mark Murphy -- JP Morgan -- Analyst

Walter Pritchard -- Citi -- Analyst

Siti Panigrahi -- Wells Fargo -- Analyst

Adam Holt -- MoffettNathanson -- Analyst

Keith Weiss -- Morgan Stanley -- Analyst

Mohit Dhillon -- Barclays -- Analyst

Kirk Materne -- Evercore ISI -- Analyst

Karl Keirstead -- Deutsche Bank -- Analyst

Gregg Moskowitz -- Cowen and Company -- Analyst

Matthew Hedberg -- RBC Capital Markets -- Analyst

Zane Chrane -- Bernstein -- Analyst

Jason Ader -- William Blair -- Analyst

Howard Ma -- Jefferies -- Analyst

Abhey Lamba -- Mizuho Securities -- Analyst

Brian White -- Drexel Hamilton -- Analyst

More RHT analysis

This article is a transcript of this conference call produced for The Motley Fool. While we strive for our Foolish Best, there may be errors, omissions, or inaccuracies in this transcript. As with all our articles, The Motley Fool does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company's SEC filings. Please see our Terms and Conditions for additional details, including our Obligatory Capitalized Disclaimers of Liability.

10 stocks we like better than Red HatWhen investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has tripled the market.*

David and Tom just revealed what they believe are the 10 best stocks for investors to buy right now... and Red Hat wasn't one of them! That's right -- they think these 10 stocks are even better buys.

Click here to learn about these picks!

*Stock Advisor returns as of December 4, 2017

The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.