Financial Analysis of Red Hat Inc. for Investment Committee

Financial Analysis of Red Hat Inc. for Investment CommitteeAbhishek Modak07/10/2016

RED HAT Inc. BackgroundLeading global provider of open source software solutionsHeadquartered in Raleigh, NC, founded in 1993Listed on NYSEGlobally recognized brand name with offices in Americas, EMEA and Asia Pacific

RED HAT Inc. Product SegmentsCloud computingMiddlewareOperating system (bread and butter)StorageVirtualizationMobile - Iot

RED HAT Inc. Product SegmentsCloud computing red hat satelliteMiddleware red hat jBossOperating system red hat enterprise linuxStorage red hat storageVirtualization red hat enterprise virtualizationMobile red hat Mobile

RED HAT Inc. Risk FactorsHighly competitive enterprise software marketLow barrier for entry into marketToo much dependency on one productIndustry trend towards saturationChannel and h/w and s/w provider dependencyHigh exposure to international markets

RED HAT Inc. F/S HighlightsTotal Assets: $4,155,099Total Liabilities: $2,820,667Total Stockholder's Equity: $1,334,432Net Sales: $2,052,230Net Income: $199,365Earnings Per Share: 1.09, Basic; 1.07, Diluted

RED HAT Inc. I/S Highlights201520142013Gross Profit %85%85%85%Net Change in Cash($120M)$400M$159MStock Repurchases$263M$535M$239MFree Cash Flow$689M$583M$461M% of revenue in Americas66%64%63.50%

Steady Gross Profit with significant free cash flow

RED HAT Inc. Growth Indicators2015-142014-132013-12Total Assets22.4%10.4%13%Net Sales16.6%15.5%17.2%Net Income1%18.7%2.5%

RHT has been able to sustain Net Sales but the fluctuating NI Margin clearly indicates the increasing Operating expensesNet Income Margin extremely volatile with 10.6% for 2016-15Result of an extremely competitive Software Industry Comparatively more pressure on Red Hat due to challenges of Open Source Software Implementation

RED HAT Inc. Liquidity Indicators201520142013Current Ratio1.21.41.4Quick Ratio 1.11.31.16

RHT is mostly in par with the software industry in terms of liquidityAvg Quick Ratio in Software = 1.14 2014-13 increase in liquidity ratios due to Company issuing Bonds worth $805M

RED HAT Inc. Financing Indicators201520142013Financed by Creditors67.9%66.1%50%Financed by Investors 32.1%33.9% 50%

In the recent years, RHT has been increasingly being financed by CreditorsPrimarily due to $805M Bond issues in 2014 With the Gross Profits remaining Steady it implies that RHT has been using Leverage to sustain its growth

RED HAT Inc. ROI Indicators201520142012Return on C.E.15% 13%10%Return on Assets5%5%5%

RHT has been using Leverage to get increased returns to the ShareHoldersThe ROA is steady at 5%

RED HAT Inc. Profitability Indicators201520142013N.I. as a % of Sales9.7%10%11.3%Earnings per Share:Basic$1.09$0.97$0.78Diluted$1.07$0.95$0.77

Profitability has been Stable in the 9-11% rangeMain Competitor MSFT has a downward Profitability trend with NI Margin reduced to 13% last yearEPS growth has been sustained by use of Financial Leverage by Increasing Assets with issue of Bond

RED HAT Inc. Operating Capability201520142013Total Asset Turnover0.520.520.52Leverage3.112.952.0

Operational Efficiency has been Steady similar to ProfitabilityBased on Du Pont Analysis all the ROE growth is being driven by Financial Leverage

RED HAT Inc. 2016 PlanIncreased investment in growth markets Hybrid cloud and Mobile services$1 Billion Stock repurchase on top of $500M already planned for 2015-2016 Expects FY17 (ends Feb. '17) revenue of $2.38B-$2.42B and EPS of $2.22-$2.26 (revised to 2.19-2.23 in June,2016)Future Earnings growth of 17.35%Strengthen partnership with amazon on cloud servicesStart working w/ Microsoft azure cloud services

RED HAT Inc. GrowthCloud traffic expected to dominate 90% traffic by 2019

RED HAT Inc. GrowthIOT expected to grow at 35% till 2019

RED HAT Inc. Growth Area PerfApplication development-related and other emerging technology offerings 2015 - $322,986 37% Growth rate2014 - $236,541 2013 - $165,668

RED HAT Inc. WeaknessesGrowth indicators stagnant looking at overall picture Huge Stock repurchases planned to increase return to stock holders but w/o growth cannot be sustainedHighly competitive software application and enterprise platform industry

RED HAT Inc. StrengthsManagement team capable of driving double digit growth for past 5 yearsIndustry leadership in open source enterprise software Early to recognize opportunity in cloud and iot servicesReputed brand name

RED HAT Inc. Stock BUYRecommend to include RHT in BUY list as:Huge opportunity in cloud and iot marketsRHT is established leader in enterprise software with steady growthManagement with proven track record of delivering resultsGood liquidity to support near term investment need