Red Hat Reports Third Quarter Fiscal Year 2008 Results

Raleigh

United States, December 20, 2007

Revenue of $135.4 million, up 28% year-over-year Net Income of $20.3 million, up 39% year-over-year Record Billings and Cash-flow

Red Hat, Inc. (NYSE: RHT), the world's leading provider of open source solutions, today announced financial results for its third fiscal quarter ended November 30, 2007. Red Hat's current fiscal year will end February 29, 2008.

Total revenue for the quarter was $135.4 million, an increase of 28% from the year ago quarter and 6% from the prior quarter. Subscription revenue was $115.7 million, up 30% year-over-year and 6% sequentially.

Net income for the quarter was $20.3 million, or $0.10 per diluted share, compared with $18.2 million, or $0.09 per diluted share, for the prior quarter and $14.6 million, or $0.07 per diluted share, in the year ago quarter. Non-GAAP adjusted net income for the quarter was $39.7 million, or $0.19 per diluted share, after adjusting for stock compensation and tax expense as detailed in the tables below. This compares to non-GAAP adjusted net income of $36.9 million, or $0.17 per diluted share, in the prior quarter and $30.1 million, or $0.14 per diluted share, in the year ago period.

Non-GAAP operating cash flow, as detailed in the tables below, totaled $76.7 million for the quarter, up 24% from the year ago quarter and 20% sequentially. Total cash, cash equivalents and investments as of November 30, 2007 were $1.3 billion. At quarter end, Red Hat's total deferred revenue balance was $422.6 million, an increase of 36% year-over-year and 12% sequentially.

Other highlights of the quarter included the following:

 

  • Red Hat has been named the leader in vendor value and satisfaction by the independent Ziff Davis' 2007 "CIO Insight Vendor Value" survey, which polls IT executives on the value and reliability delivered by vendors. This marks the third time in four years that the company has been ranked #1 among all global IT vendors, and the fourth consecutive year Red Hat has been named the most valued enterprise software vendor. Red Hat also received a remarkable 97% customer loyalty rating from the CIOs polled in the survey.
  • Red Hat introduced the JBoss Advanced Partner Program, that offers value-added resellers (VARs) and systems integrators (SIs) in North America the tools, resources and support to increase their share in the middleware segment. Red Hat has already teamed with over 70 JBoss-specific channel partners worldwide.

 

"We are very pleased to be recognized by CIO's for the fourth consecutive year as the most valued Enterprise Software Vendor and best overall IT Vendor for the third time in four years," stated Charlie Peters, Executive Vice President and Chief Financial Officer of Red Hat. "There is a direct correlation between our ability to deliver real business value and the loyalty of our large and growing customer base. As a result of strong market demand and solid execution from our worldwide organization, we were able to deliver another strong financial performance in the third quarter and we are optimistic about our outlook."

JBoss World Orlando, the third-annual conference and exhibition, will take place at the Marriott Orlando World Center Resort in Orlando, FL, February 12-15, 2008. The fourth-annual Red Hat Summit will take place June 18-20, 2008 at the Hynes Convention Center in Boston, MA.

Additional information on Red Hat's reported results, including a reconciliation of the non-GAAP adjusted results, are included in the financial tables below. A live webcast of Red Hat's results will begin at 5:00 pm ET today and can be accessed by the general public at Red Hat's investor relations website at http://investors.redhat.com. A replay of the webcast will be available shortly after the live event will have ended.

About Red Hat, Inc.

Red Hat, the world's leading open source solutions provider, is headquartered in Raleigh, NC with over 50 offices spanning the globe. CIOs have ranked Red Hat first for value in Enterprise Software for four consecutive years in the CIO Insight Magazine Vendor Value study. Red Hat provides high-quality, affordable technology with its operating system platform, Red Hat Enterprise Linux, together with applications, management and Services Oriented Architecture (SOA) solutions, including the JBoss Enterprise Middleware Suite. Red Hat also offers support, training and consulting services to its customers worldwide. Learn more: www.redhat.com.

Forward-Looking Statements

Certain statements contained in this press release may constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements provide current expectations of future events based on certain assumptions and include any statement that does not directly relate to any historical or current fact. Actual results may differ materially from those indicated by such forward-looking statements as a result of various important factors, including: risks related to the integration of acquisitions; the ability of the Company to effectively compete; the inability to adequately protect Company intellectual property and the potential for infringement or breach of license claims of or relating to third party intellectual property; risks related to data and information security vulnerabilities; ineffective management of, and control over, the Company's growth and international operations; adverse results in litigation; and changes in and a dependence on key personnel, as well as other factors contained in our most recent Quarterly Report on Form 10-Q (copies of which may be accessed through the Securities and Exchange Commission's website at http://www.sec.gov), including those found therein under the captions "Risk Factors" and "Management's Discussion and Analysis of Financial Condition and Results of Operations". In addition, the forward-looking statements included in this press release represent the Company's views as of the date of this press release and these views could change. However, while the Company may elect to update these forward-looking statements at some point in the future, the Company specifically disclaims any obligation to do so. These forward-looking statements should not be relied upon as representing the Company's views as of any date subsequent to the date of the press release.

LINUX is a trademark of Linus Torvalds. RED HAT and JBOSS are registered trademarks of Red Hat, Inc. and its subsidiaries in the US and other countries.

Tables follow:

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


                               Three Months Ended   Nine Months Ended
                               ------------------- -------------------
                               Nov 30,  Nov. 30,  Nov. 30,  Nov. 30,
                                 2007      2006      2007      2006
                               ------------------- -------------------
Revenue:

  Subscriptions                $115,732  $ 88,860  $327,949  $245,300
  Training and services          19,649    16,966    53,575    44,202
                               --------- --------- --------- ---------


    Total subscription,
     training and services
     revenue                    135,381    105,82   381,524   289,502

                               --------- --------- --------- ---------

Cost of revenue:

  Subscriptions                   8,099     6,741    24,192    20,123
  Training and services          12,827    10,699    35,062    27,183
                               --------- --------- --------- ---------


    Total cost of subscription,
     training and services
     revenue                     20,926    17,440    59,254    47,306
                               --------- --------- --------- ---------


 Total gross profit             114,455    88,386   322,270   242,196

Operating expense:
 Sales and marketing             47,653    37,575   139,955   105,883
 Research and development        25,930    19,200    71,101    51,084
 General and administrative      21,419    18,024    59,013    49,579
                               --------- --------- --------- ---------

  Total operating expense        95,002    74,799   270,069   206,546
                               --------- --------- --------- ---------

Income from operations           19,453    13,587    52,201    35,650
Other income, net                14,440    11,113    42,048    31,288
Interest expense                 (1,581)   (1,494)   (4,641)   (4,467)
                               --------- --------- --------- ---------

Income before provision
 (benefit) for income taxes      32,312    23,206    89,608    62,571
Provision (benefit) for income
 taxes                           12,029     8,586    34,947    23,151
                               --------- --------- --------- ---------

Net income                     $ 20,283  $ 14,620  $ 54,661  $ 39,420
                               ========= ========= ========= =========

Net income-diluted             $ 21,177  $ 15,543  $ 57,342  $ 42,189
                               ========= ========= ========= =========

Net income per share:
 Basic                         $   0.10  $   0.08  $   0.28  $   0.21
 Diluted                       $   0.10  $   0.07  $   0.26  $   0.19

Weighted average shares
 outstanding:
 Basic                          194,038   191,298   194,741   188,379
 Diluted                        221,547   219,458   222,740   218,591

Diluted net income per share
 computation:
GAAP Net income, basic         $ 20,283  $ 14,620  $ 54,661  $ 39,420
Interest expense on convertible
 debentures, net of related
 GAAP tax effects                   435       449     1,304     1,347
Amortization of debt issuance
 costs, net of related GAAP tax
 effects                            459       474     1,377     1,422

GAAP Net income, diluted       $ 21,177  $ 15,543  $ 57,342  $ 42,189
                               ========= ========= ========= =========


Note: certain prior year amounts have been reclassified to conform
 with current year presentation.
RED HAT, INC.
                     CONSOLIDATED BALANCE SHEETS
                            (In thousands)

                    ASSETS
                                                Nov. 31,    Feb. 28,
                                                  2007        2007
                                               ----------- -----------
                                               (unaudited)
Current assets:
 Cash and cash equivalents                     $  586,959  $  527,239
 Investments in debt securities                   454,361     350,827
 Accounts receivable, net                         108,329      87,973
 Prepaid expenses and other current assets         74,126      41,026
                                               ----------- -----------

   Total current assets                         1,223,775   1,007,065

 Property and equipment, net                       58,138      45,258
 Goodwill                                         339,739     328,837
 Identifiable intangibles, net                     95,778      94,314
 Investments in debt securities                   288,381     278,028
 Other assets, net                                 31,929      32,352
                                               ----------- -----------

   Total assets                                $2,037,740  $1,785,854
                                               =========== ===========

     LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
 Accounts payable                              $   10,439  $   12,062
 Accrued expenses                                  48,176      38,472
 Deferred revenue                                 301,704     249,615
 Other current obligations                             58         214
                                               ----------- -----------

  Total current liabilities                       360,377     300,363

 Deferred lease credits                             5,103       5,235
 Long term deferred revenue                       120,890      89,020
 Other long term obligations                       23,543           -
 Convertible debentures                           570,000     570,000
Stockholders' equity:
 Common stock                                          21          20
 Additional paid-in capital                     1,135,002   1,040,892
 Accumulated deficit                              (50,208)    (92,092)
 Treasury stock, at cost                         (126,406)   (125,789)
 Accumulated other comprehensive loss                (582)     (1,795)
                                               ----------- -----------

   Total stockholders' equity                     957,827     821,236
                                               ----------- -----------

   Total liabilities and stockholders' equity  $2,037,740  $1,785,854
                                               =========== ===========


Note: certain prior year amounts have been reclassified to conform
 with current year presentation.
RED HAT, INC.
                CONSOLIDATED STATEMENTS OF CASH FLOWS
                             (Unaudited)
                            (In thousands)


                      Three Months Ended         Nine Months Ended
                   ------------------------- -------------------------

                   November 30, November 30, November 30, November 30,
                       2007         2006         2007         2006
                   ------------ ------------ ------------ ------------

Cash flows from
 operating
 activities:
Net income            $20,283      $14,620      $54,661       $39,420
Adjustments to
 reconcile net
 income to net cash
 provided by
 operating
 activities:
  Depreciation and
   amortization         8,443        6,594       23,897        17,691
  Deferred income
   taxes               10,343        3,501       28,557        13,003
  Share-based
   compensation
   expense              9,455        8,495       26,422        24,421
  Excess tax
   benefits from
   share-based
   payment
   arrangements       (17,087)      (2,368)     (44,206)       (5,243)
  Provision for
   doubtful
   accounts               469          281          856           983
  Amortization of
   debt issuance
   costs                  752          752        2,257         2,256
  Other                     8          (16)         165          (305)
Changes in
 operating assets
 and liabilities
 net of effects of
 acquisitions:
  Accounts
   receivable and
   earnings in
   excess of
   billings           (16,986)     (10,446)     (16,741)      (10,628)
  Prepaid expenses
   and other
   current assets      (1,674)         243       (1,673)       (2,002)
  Accounts payable        148        3,030       (1,959)        3,539
  Accrued expenses      9,660        9,595        7,278         9,438
  Deferred revenue     35,759       25,486       69,181        63,565
  Other assets             65          (91)        (132)         (206)

  Net cash provided
   by operating
   activities          59,638       59,676      148,563       155,932
                   -----------  -----------  -----------  ------------

Cash flows from
 investing
 activities:
 Purchase of
  investment
  securities         (354,569)           -     (863,159)       (7,444)
 Proceeds from
  sales and
  maturities of
  investment
  securities          344,345      166,810      753,303       522,862
 Acquisitions of
  businesses, net
  of cash acquired          -         (302)     (11,784)     (149,864)
 Purchase of
  property and
  equipment           (10,971)      (5,766)     (25,752)      (14,751)
 Purchase of
  developed
  software and
  other intangible
  assets                 (422)           -       (4,775)            -
                   -----------  -----------  -----------  ------------

  Net cash provided
   by (used in)
   investing
   activities         (21,617)     160,742     (152,167)      350,803
                   -----------  -----------  -----------  ------------

Cash flows from
 financing
 activities:
 Excess tax
  benefits from
  share-based
  payment
  arrangements         17,087        2,368       44,206         5,243
 Net proceeds from
  issuance of
  common stock
  under Employee
  Stock Purchase
  Plan                      -            -            -           306
 Proceeds from
  exercise of
  common stock
  options               5,390        2,966       13,920        14,650
 Purchase of
  treasury stock         (482)         (66)        (618)       (1,598)
 Structured stock
  repurchase                -        1,514            -         1,514
 Proceeds from
  other borrowings          -            -        2,898             -
 Payments on other
  borrowings                -         (223)        (757)         (255)
                   -----------  -----------  -----------  ------------

  Net cash provided
   by financing
   activities          21,995        6,559       59,649        19,860
                   -----------  -----------  -----------  ------------

Effect of foreign
 currency exchange
 rates on cash and
 cash equivalents       2,324          834        3,675         1,850
Net increase in
 cash and cash
 equivalents           62,340      227,811       59,720       528,445
Cash and cash
 equivalents at
 beginning of the
 period               524,619      568,181      527,239       267,547
                   -----------  -----------  -----------  ------------

Cash and cash
 equivalents at end
 of period           $586,959     $795,992     $586,959      $795,992
                   ===========  ===========  ===========  ============



Note: certain prior year amounts have been reclassified to conform
 with current year presentation.
RED HAT, INC.
NON CASH SHARE-BASED COMPENSATION AND RECONCILIATION OF GAAP RESULTS
                     TO NON-GAAP ADJUSTED RESULTS
                             (Unaudited)
              (In thousands - except per share amounts)


Non cash share-based compensation expense included in
 Consolidated Statements of Operations:

                      Three Months Ended         Nine Months Ended
                   ------------------------- -------------------------

                   November 30, November 30, November 30, November 30,
                       2007         2006         2007         2006
                   ------------ ------------ ------------ ------------

 Cost of revenue          $583         $558       $1,736        $1,607
 Sales and
  marketing              2,637        2,181        7,587         6,753
 Research and
  development            2,208        1,882        6,452         5,150
 General and
  administration         4,027        3,874       10,647        10,911
                   -----------  -----------  -----------  ------------
 Total stock based
  compensation
  expense               $9,455       $8,495      $26,422       $24,421
                   ===========  ===========  ===========  ============




Reconciliation of GAAP results
 to non-GAAP adjusted results

                      Three Months Ended         Nine Months Ended
                   ------------------------  -------------------------

                   November 30, November 30, November 30, November 30,
                       2007         2006         2007         2006
                   ------------ ------------ ------------ ------------

GAAP net income        $20,283      $14,620      $54,661       $39,420

GAAP provision for
 income taxes           12,029        8,586       34,947        23,151
                   -----------  -----------  -----------  ------------

GAAP income before
 provision for
 income taxes          $32,312      $23,206      $89,608       $62,571

Add: Share-based
 compensation per
 FAS 123R                9,455        8,495       26,422        24,421
                   -----------  -----------  -----------  ------------

Non-GAAP adjusted
 income before
 provision for
 income taxes          $41,767      $31,701     $116,030       $86,992

Non-GAAP cash
 provision for
 income taxes           $2,088       $1,585       $5,801        $4,350
                   -----------  -----------  -----------  ------------

Non-GAAP adjusted
 net income            $39,679      $30,116     $110,229       $82,642
                   ===========  ===========  ===========  ============

Non-GAAP adjusted
 net income-diluted    $41,071      $31,508     $114,404       $86,817
                   ===========  ===========  ===========  ============

Non-GAAP adjusted
 net income per
 share:
 Basic                   $0.20        $0.16        $0.57         $0.44
 Diluted                 $0.19        $0.14        $0.51         $0.40


Non-GAAP diluted
 net income per
 share computation:
Non-GAAP adjusted
 net income            $39,679      $30,116     $110,229       $82,642
Interest expense on
 convertible
 debentures, net of
 related 5% cash
 tax effects               677          677        2,031         2,031
Amortization of
 debt issuance
 costs, net of
 related 5% cash
 tax effects               715          715        2,144         2,144
                   -----------  -----------  -----------  ------------

Non-GAAP adjusted
 net income-diluted    $41,071      $31,508     $114,404       $86,817
                   ===========  ===========  ===========  ============


Reconciliation of GAAP cash flows from operating activities to non-
 GAAP adjusted cash flows from operating activities

                      Three Months Ended         Nine Months Ended
                   ------------------------- -------------------------

                   November 30, November 30, November 30, November 30,
                       2007         2006         2007         2006
                   ------------ ------------ ------------ ------------

GAAP net cash
 provided by
 operating
 activities            $59,638      $59,676     $148,563      $155,932

Add: Excess tax
 benefits from
 share-based
 payment
 arrangements           17,087        2,368       44,206         5,243
                   -----------  -----------  -----------  ------------

Non-GAAP net cash
 provided by
 operating
 activities            $76,725      $62,044     $192,769      $161,175
                   ===========  ===========  ===========  ============

RED HAT, INC.
     RECONCILIATION OF GAAP RESULTS TO NON-GAAP ADJUSTED RESULTS
                             (Unaudited)
              (In thousands - except per share amounts)


Reconciliation of GAAP results
 to non-GAAP adjusted results

                      Three Months Ended         Nine Months Ended
                   ------------------------- -------------------------

                   November 30, November 30, November 30, November 30,
                       2007         2006         2007         2006
                   ------------ ------------ ------------ ------------

GAAP Gross profit    $114,455      $88,386     $322,270      $242,196

Add: Non-cash
 share-based
 compensation per
 FAS 123R                 583          558        1,736         1,607
                   ----------   ----------   ----------   -----------

Non-GAAP gross
 profit              $115,038      $88,944     $324,006      $243,803
                   ----------   ----------   ----------   -----------

Non-GAAP gross
 margin                    85%          84%          85%           84%


                      Three Months Ended         Nine Months Ended
                   ------------------------- -------------------------

                   November 30, November 30, November 30, November 30,
                       2007         2006         2007         2006
                   ------------ ------------ ------------ ------------

GAAP operating
 expenses             $95,002      $74,799     $270,069      $206,546

Deduct: Non-cash
 share-based
 compensation per
 FAS 123R              (8,872)      (7,937)     (24,686)      (22,814)
                   -----------  -----------  -----------  ------------

Non-GAAP adjusted
 operating expenses   $86,130      $66,862     $245,383      $183,732
                   ----------   ----------   ----------   -----------


                      Three Months Ended         Nine Months Ended
                   ------------------------- -------------------------

                   November 30, November 30, November 30, November 30,
                       2007         2006         2007         2006
                   ------------ ------------ ------------ ------------

GAAP operating
 income               $19,453      $13,587      $52,201       $35,650

Add: Non-cash
 share-based
 compensation per
 FAS 123R               9,455        8,495       26,422        24,421
                   ----------   ----------   ----------   -----------

Non-GAAP adjusted
 operating income     $28,908      $22,082      $78,623       $60,071
                   ----------   ----------   ----------   -----------

Non-GAAP adjusted
 operating margin        21.4%        20.9%        20.6%         20.7%