Red Hat Announces Plan to Change Method of Revenue Recognition for Subscription Agreements and to Restate Financial Statements to Reflect Change


United States, July 13, 2004

# Change confined to revenue recognition for subscription agreements # No anticipated material effect on annual revenues # No effect on operating cash flows or number of new subscriptions sold in each quarter

Red Hat, Inc. (NASDAQ: RHAT) today announced that it has corrected the manner in which it recognizes revenues for certain of its subscription agreements and, as a result, will restate its audited financial statements for the fiscal years ended February 29, 2004, February 28, 2003, and February 28, 2002, and its unaudited financial statements for the fiscal quarter ended May 31, 2004.

The decision results from recent discussions between the Company and the Company's independent auditors, PricewaterhouseCoopers, following the normal rotation of audit partners required by the accounting profession's rotation rules. As a result of these discussions, the Company determined it would be appropriate to stop recognizing revenue for subscription agreements on a monthly basis - a method it has consistently applied for the last five years � and start recognizing revenue on a daily basis over the particular contract term.

The restatement is due entirely to the correction in the Company's method of recognizing revenue for subscription agreements. The effect of using the new method is to defer a portion of the revenue that had been previously recognized in the month of commencement of a subscription to the month in which the subscription ends.

This correction in method has no effect on the amount of revenues that the Company will ultimately recognize from the subscriptions to the Company's Red Hat Enterprise Linux product that the Company has sold over the last 24 months, nor does it affect the sequential quarterly growth in the number of subscriptions sold over the last two fiscal years or the increase in operating cash flows that has resulted from the increase in the number of new subscriptions sold over this period.

While the new accounting method is not expected to materially affect annual revenues and will not affect operating cash flows or the number of new subscriptions for any quarterly period, it is expected to result in significant percentage differences in certain items such as quarterly operating profit and net income. Attached is a summary of the estimated range of effects of the accounting change on the Company's annual and quarterly historical results.

"The restatement is not expected to reflect any material difference in the meaningful historical trends of our business, nor will it adversely affect our business outlook, which remains strong," said Matthew Szulik, Chairman and Chief Executive Officer at Red Hat. "We remain committed to meeting high standards in providing timely, accurate and transparent financial reporting, and our planned restatement reflects this commitment. The restatement will also assure that future comparisons to past periods are made on a consistent basis."

The Company recognized revenues, prior to the correction, using a method that resulted in revenue recognition as if the subscription commenced on the first day of the month in which the subscription was sold. For example, the Company would have recognized one-twelfth of the revenue of a twelve-month subscription in the calendar month during which the subscription commenced, and the remaining subscription revenue over the next eleven calendar months.

On June 16, 2004, the Company's independent auditors informed the Company that it should consider recognizing revenue from a subscription over the term of the subscription (for example, the number of days in the subscription period), which ultimately resulted in the Company deciding to change to this method. The resulting change in method will now mean that the Company will begin to recognize revenue on the date of commencement of a subscription and ratably over the remaining term of the subscription. The effect of the Company's decision is to defer a portion of the subscription revenues that would have been recognized in the month of the commencement of the subscription to the last month of the subscription term.

Red Hat is currently not aware of any other adjustments that will be required to its historical financial statements in addition to those reflected in the estimates in the attached summary. It is possible, however, that other items may be identified in the process of restating the Company's financial statements. In addition, the Company is in the process of responding to prior comments and questions from the SEC regarding its Annual Report on Form 10-K. Although the Company does not anticipate that the review by the Staff will result in any material changes to previously reported financial results, the Company cannot provide assurances that such changes will not be required.

The Company will be filing a Form 12b-25 extending the deadline for the filing of its Form 10-Q for the fiscal quarter ended May 31, 2004, and currently anticipates filing its Form 10-Q for that fiscal quarter on or before July 19, 2004. As soon as practicable, the Company will amend its Form 10-K for the fiscal year ended February 29, 2004.


Investor Call Details:

The dial-in information is as follows:

Date and Time: July 13, 2004, at 8am ET
Domestic: 800-216-6592
International: 706-634-0636
Replay: 800-642-1687 or 706-645-9291
Passcode: 8733382

The replay will be available from July 13, 2004, at 6pm ET until July 20, 2004, at midnight ET. This call is being webcast by CCBN and can be accessed at the Investor Relations page of Red Hat's web site:

This call is also being distributed over CCBN's Investor Distribution Network to both institutional and individual investors. Individual investors can listen to the call through CCBN's individual investor center at or by visiting any of the investor sites in CCBN's Individual Investor Network. Institutional investors can access the call via CCBN's password-protected event management site, StreetEvents (

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:

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

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