Red Hat Reports Fiscal Third Quarter Results

Research Triangle Park

United States, December 18, 2001

Profitability and positive cash flows from operations, adjusted for non-cash items, highlight the quarter

Red Hat, Inc. (Nasdaq:RHAT), the global leader in Linux and open source solutions, today reported an adjusted net income of $1,300,000, or $0.01 per share, excluding amortization of goodwill and stock based compensation and restructuring charges, for the third quarter of fiscal 2002, compared to an adjusted net loss of $100,000, or break even per share, for the second quarter of fiscal 2002.

The company reported revenue of $21.5 million for the third quarter ended November 30, 2001, an increase of 2% over the second quarter of fiscal 2002.

On a GAAP basis, the company reported a net loss of $15 million, or $0.09 per share, compared with a net loss of $55.3 million, or $0.33 per share in the second quarter fiscal 2002.

For the last nine months ended on November 30, 2001, the company reported revenues of $68.2 million, a decrease of 10% over the same period in year 2000. In terms of earnings, for the last nine months ended on November 30, 2001, the company reported an adjusted net income of $1,800,000, or $0.01 per share, compared to an adjusted net loss of $10,000,000, or $0.06 per share, for the last nine months of last year. On a GAAP basis, the company reported a net loss of $97.9 million - or $0.58 per share - for the last nine months ended on November 30, 2001, compared to a net loss of $62.5 million - or $0.38 per share - for the last nine months of last year.

"Significant growth of Enterprise Subscription and Open Source Services revenues are validating the acceptance of Red Hat Linux as an Enterprise Computing Platform and Red Hat's ability to monetize the adoption of Red Hat Linux by the Large Enterprise", stated Kevin Thompson, Executive Vice President and Chief Financial Officer.

 RED HAT, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Excludes amortization of goodwill and intangibles,
stock-based compensation, merger, acquisition and other
costs, and restructuring charges)
(In thousands - except per share amounts)


Three Months Ended Nine Months Ended
November 30, August 31, November 30, November 30,
2001 2001 2001 2000
(Unaudited) (Unaudited)

Subscription and services revenue:
Subscription:
Enterprise $ 9,447 $ 8,422 $ 27,591 $ 26,771
Embedded 1,443 1,573 4,648 6,938

Total subscription
revenue 10,890 9,995 32,239 33,709
Services:
Network consulting 2,370 3,682 11,248 18,702
Embedded development
services 2,889 3,489 11,076 14,180
Open source services 5,327 3,959 13,641 9,041

Total services
revenue 10,586 11,130 35,965 41,923

Total subscription
and services
revenue 21,476 21,125 68,204 75,632

Cost of subscription and services revenue:
Subscription:
Enterprise 2,081 2,326 7,063 9,667
Embedded 145 146 665 1,412

Total cost of
subscription
revenue 2,226 2,472 7,728 11,079
Services:
Network consulting 1,923 2,049 7,084 12,314
Embedded development
services 1,738 1,251 5,355 8,228
Open source services 2,628 2,226 7,477 4,627

Total cost of
services revenue 6,289 5,526 19,916 25,169

Total cost of
subscription and
services revenue 8,515 7,998 27,644 36,248

Gross profit on
subscription and
services revenue 12,961 13,127 40,560 39,384

Hardware resale, net - - - 131

Operating expense:
Sales and marketing 8,019 9,329 28,032 37,221
Research and
development 3,717 4,213 12,227 11,935
General and
administrative 3,412 3,662 10,445 16,553

Total operating
expense 15,148 17,204 50,704 65,709

Loss from operations (2,187) (4,077) (10,144) (26,194)

Other interest income
(expense), net 3,514 3,984 11,979 16,168

Net Income (loss) $ 1,327 $ (93) $ 1,835 $ (10,026)

Net Income (loss) per common share:
Basic $0.01 ($0.00) $0.01 ($0.06)
Diluted $0.01 ($0.00) $0.01 ($0.06)
Weighted average shares outstanding:
Basic 169,242 169,968 169,405 163,515
Diluted 169,242 169,968 169,405 163,515




RED HAT, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands - except per share amounts)


Three Months Ended Nine Months Ended
November 30, August 31, November 30, November 30,
2001 2001 2001 2000
(Unaudited) (Unaudited)
Subscription and
services revenue:
Subscription:
Enterprise $ 9,447 $ 8,422 $ 27,591 $ 26,771
Embedded 1,443 1,573 4,648 6,938

Total subscription
revenue 10,890 9,995 32,239 33,709
Services:
Network consulting 2,370 3,682 11,248 18,702
Embedded development
services 2,889 3,489 11,076 14,180
Open source services 5,327 3,959 13,641 9,041

Total services
revenue 10,586 11,130 35,965 41,923

Total subscription
and services
revenue 21,476 21,125 68,204 75,632

Cost of subscription and services revenue:
Subscription:
Enterprise 2,081 2,326 7,063 9,667
Embedded 145 146 665 1,412

Total cost of
subscription
revenue 2,226 2,472 7,728 11,079
Services:
Network consulting 1,923 2,049 7,084 12,314
Embedded development
services 1,738 1,251 5,355 8,228
Open source services 2,628 2,226 7,477 4,627

Total cost of
services revenue 6,289 5,526 19,916 25,169

Total cost of
subscription and
services revenue 8,515 7,998 27,644 36,248

Gross profit on
subscription and
services revenue 12,961 13,127 40,560 39,384

Hardware resale, net - - - 131

Operating expense:
Sales and marketing 8,019 9,329 28,032 37,221
Research and
development 3,717 4,213 12,227 11,935
General and
administrative 3,412 3,662 10,445 16,553
Amortization of
goodwill and
intangibles 12,468 14,911 44,707 33,617
Stock-based
compensation 1,506 3,171 8,353 11,938
Merger, acquisition
and other - - 7,156 6,914
Restructuring charges 2,409 37,175 39,584 -

Total operating
expense 31,531 72,461 150,504 118,178

Loss from operations (18,570) (59,334) (109,944) (78,663)

Other interest income
(expense), net 3,514 3,984 11,979 16,168

Net Income (loss) $ (15,056) $ (55,350) $ (97,965) $ (62,495)

Net Income (loss) per common share:
Basic ($0.09) ($0.33) ($0.58) ($0.38)
Diluted ($0.09) ($0.33) ($0.58) ($0.38)
Weighted average shares outstanding:
Basic 169,242 169,968 169,405 163,515
Diluted 169,242 169,968 169,405 163,515



RED HAT, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands)

ASSETS
November, 30 February 28,
2001 2001

Assets:
Cash and investments
in debt and equity securities $ 291,634 $ 302,681
Accounts receivable, net 15,127 21,826
Subcontractor receivable 567 3,441
Costs and estimated earnings
in excess of billings 5,155 3,378
Inventory 1,060 740
Prepaid expenses and other assets 7,443 11,197
Property and equipment, net 16,296 14,591
Goodwill and intangibles, net 70,100 147,397

Total assets $ 407,382 $ 505,251

LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Accounts payable $ 8,038 $ 9,681
Accrued expenses 8,419 15,916
Deferred revenue 9,773 12,151
Other short-term liabilities 11,200 3,221

Total liabilities 37,430 40,969
Commitments and contingencies - -
Stockholders' equity:
Noncontrolling interest in subsidiary 86 -
Preferred stock - -
Common stock 17 17
Additional paid-in capital 627,945 643,712
Deferred compensation (9,785) (36,051)
Accumulated deficit (241,554) (143,589)
Treasury stock, at cost (6,672) -
Accumulated other comprehensive
income (loss) (85) 193

Total stockholders' equity 369,952 464,282

Total liabilities and
stockholders' equity $ 407,382 $ 505,251

LINUX is a trademark of Linus Torvalds. RED HAT is a registered trademark of Red Hat, Inc. All other names and trademarks are the property of their respective owners.

About Red Hat, Inc.

Red Hat, the world's leading open source and Linux provider, is headquartered in Raleigh, NC with satellite offices spanning the globe. Red Hat is leading Linux and open source solutions into the mainstream by making high quality, low cost technology accessible. Red Hat provides operating system software along with middleware, applications and management solutions. Red Hat also offers support, training and consulting services to its customers worldwide and through top-tier partnerships. Red Hat's open source strategy offers customers a long term plan for building infrastructures that are based on and leverage open source technologies with focus on security and ease of management. Learn more: http://www.redhat.com

Forward-Looking Statements

Forward-looking statements in this press release are made pursuant to the safe harbor provisions of Section 21E of the Securities Exchange Act of 1934. Investors are cautioned that statements in this press release that are not strictly historical statements, including, without limitation, management's plans and objectives for future operations, and management's assessment of market factors, constitute forward-looking statements which involve risks and uncertainties. These risks and uncertainties include, without limitation, reliance upon strategic relationships, management of growth, the possibility of undetected software errors, the risks of economic downturns generally, and in Red Hat's industry specifically, the risks associated with competition and competitive pricing pressures, the viability of the Internet, and other risks detailed in Red Hat's filings with the Securities and Exchange Commission, copies of which may be accessed through the SEC's Web site at http://www.sec.gov.

LINUX is a trademark of Linus Torvalds. RED HAT is a registered trademark of Red Hat, Inc. All other names and trademarks are the property of their respective owners.