Red Hat Reports Fourth Quarter and Fiscal Year 2011 Results

Raleigh

United States, March 23, 2011

Fourth quarter revenue of $245 million, up 25% year-over-year Fourth quarter subscription revenue of $209 million, up 24% year-over-year.Fourth quarter GAAP EPS of $0.17, up 42% year-over-year; non-GAAP EPS of $0.26, up 37% year-over-year.Fourth quarter operating cash flow of $95 million, up 22%

Red Hat, Inc. (NYSE: RHT), the world's leading provider of open source solutions, today announced financial results for its fiscal fourth quarter and fiscal year ended February 28, 2011.

Total revenue for the quarter was $244.8 million, an increase of 25% from the year ago quarter. Subscription revenue for the quarter was $209.3 million, up 24% year-over-year. For the full year, total revenue was $909.3 million, an increase of 22% over the prior year, and subscription revenue was $773.4 million, up 21% year-over-year.

"With record bookings and billings in the fourth quarter, we are on a run rate to become the first pure-play open source company to achieve a billion dollars in revenues next fiscal year, a milestone achievement for Red Hat and the open source community," stated Jim Whitehurst, President and Chief Executive Officer of Red Hat. "We believe the strong demand we experienced was largely driven by customers who are modernizing their data centers and preparing their infrastructure for cloud computing. The comprehensive portfolio that Red Hat has developed with platform, virtualization and middleware products provides enterprise customers with a foundation to deploy the next generation infrastructure."

GAAP operating income for the fourth quarter and the full fiscal year 2011 was $39.4 million and $145.7 million, respectively. GAAP operating margin was 16.1% in the fourth quarter and 16.0% for the full year. After adjusting for stock compensation, amortization expenses, and in the prior year, the charge for a litigation settlement as detailed in the tables below, non-GAAP operating income for the quarter was $61.0 million, or a 24.9% operating margin, and full year non-GAAP operating income was $225.2 million. Full year non-GAAP operating margin was 24.8%, representing an increase of 110 basis points from the prior year.

GAAP net income for the fourth quarter was $33.5 million, or $0.17 per diluted share, compared with $26.0 million, or $0.13 per diluted share, for the prior quarter and $23.4 million, or $0.12 per diluted share, in the year ago quarter. Non-GAAP adjusted net income for the fourth quarter was $51.4 million, or $0.26 per diluted share, after adjusting for stock compensation and amortization expenses as detailed in the tables below. This compares to non-GAAP adjusted net income of $39.1 million, or $0.20 per diluted share in the prior quarter and $36.5 million, or $0.19 per diluted share in the year ago quarter.

For the full year, GAAP net income was $107.3 million or $0.55 per diluted share, compared with $87.3 million or $0.45 per diluted share in the prior year. After adjusting for stock compensation, amortization expenses, and in the prior year, the charge for a litigation settlement, as detailed in the tables below, non-GAAP adjusted net income for the year was $162.8 million or $0.83 per diluted share, compared to $138.1 million and $0.71 per diluted share for the fiscal year ended February 28, 2010.

Fourth quarter GAAP and non-GAAP net income benefited by approximately $0.02/share as a result of the retroactive reenactment in December 2010, of the research tax credit into US tax law. This, together with other tax benefits, including additional US foreign tax credits, reduced the fourth quarter fiscal 2011 effective tax rate for both GAAP and non-GAAP to 17%. The resulting full year effective tax rate for both GAAP and non-GAAP for fiscal 2011 is 30%.

GAAP operating cash flow totaled $95.0 million for the fourth quarter and $290.7 million for the full year. At year end, the company's total deferred revenue balance was $772.3 million, an increase of 20% on a year-over-year basis and 13% sequentially. Cash and investments at February 28, 2011 totaled $1.2 billion after repurchasing approximately $11 million, or approximately 250,000 shares, of common stock in the quarter. For the full fiscal year, Red Hat repurchased approximately $90 million, or 2.9 million shares, of common stock.

"Our fourth quarter results were strong and capped off a year of accelerated billings growth. Broad-based, global demand for our products and services, coupled with strong execution by our associates, resulted in over 30% year-over-year growth in billings this quarter; our fastest billings growth in 12 quarters," stated Charlie Peters, Executive Vice President and Chief Financial Officer of Red Hat. "This year we focused on growth with aggressive hiring for sales and engineering, launched major product releases and invested in technologies focused on cloud computing. These investments produced greater than 20% growth in revenues and non-GAAP operating income for both the quarter and the year. At the same time, we increased non-GAAP operating margins by 110 basis points and improved cash flow. It was a good year."

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 has ended.

About Red Hat, Inc.

Red Hat, the world's leading provider of open source solutions and a component of the S&P 500, is headquartered in Raleigh, NC with over 65 offices spanning the globe. CIOs ranked Red Hat as one of the top vendors delivering value in Enterprise Software for seven consecutive years in the CIO Insight Magazine Vendor Value survey. Red Hat provides high-quality, affordable technology with its operating system platform, Red Hat Enterprise Linux, together with virtualization, applications, management and Services Oriented Architecture (SOA) solutions, including Red Hat Enterprise Virtualization and JBoss Enterprise Middleware. Red Hat also offers support, training and consulting services to its customers worldwide. Learn more: http://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 delays or reductions in information technology spending, the effects of industry consolidation, uncertainty and adverse results in litigation and related settlements, the integration of acquisitions and the ability to market successfully acquired technologies and products; 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; the ability to deliver and stimulate demand for new products and technological innovations on a timely basis; risks related to data and information security vulnerabilities; ineffective management of, and control over, the Company's growth and international operations; fluctuations in exchange rates; 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 to these factors, actual future performance, outcomes, and results may differ materially because of more general factors including (without limitation) general industry and market conditions and growth rates, economic conditions, and governmental and public policy changes. 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.

Red Hat and JBoss are trademarks of Red Hat, Inc., registered in the U.S. and other countries. Linux® is the registered trademark of Linus Torvalds in the U.S. and other countries

 
RED HAT, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands - except per share amounts)
 
      Three Months Ended     Twelve Months Ended
      February 28,     February 28,     February 28,     February 28,
      2011     2010     2011     2010
Revenue:                        
                         
Subscriptions     $209,303     $169,158     $773,404     $638,654
Training and services     35,493     26,710     135,873     109,582
                         
                         
Total subscription, training and services revenue     244,796     195,868     909,277     748,236
                         
Cost of revenue:                        
                         
Subscriptions     14,742     11,393     52,997     43,426
Training and services     26,862     17,945     97,290     70,419
                         
Total cost of subscription, training and services revenue     41,604     29,338     150,287     113,845
                         
Total gross profit     203,192     166,530     758,990     634,391
                         
Operating expense:                        
Sales and marketing     88,273     70,462     327,408     272,705
Research and development     45,150     38,293     171,253     148,360
General and administrative     30,359     29,816     114,653     104,227
Litigation Settlement     -     -     -     8,750
                         
Total operating expense     163,782     138,571     613,314     534,042
                         
Income from operations     39,410     27,959     145,676     100,349
Interest income     1,697     2,220     6,743     10,381
Other income (expense), net     (866)     4,329     1,275     10,772
                         
                         
Income before provision for income taxes     40,241     34,508     153,694     121,502
Provision for income taxes     6,707     11,120     46,416     34,249
                         
Net income     $33,534     $23,388     $107,278     $87,253
                         
Net income-diluted     $33,534     $23,388     $107,278     $87,253
                         
Net income per share:                        
Basic     $0.17     $0.12     $0.56     $0.46
Diluted     $0.17     $0.12     $0.55     $0.45
                         
Weighted average shares outstanding:                        
Basic     192,996     187,911     190,294     187,845
Diluted     197,878     193,822     196,353     193,546

 

 
RED HAT, INC.
CONSOLIDATED BALANCE SHEETS
 
(In thousands)
 
ASSETS
      February 28,     February 28,
      2011     2010 (1)
      (Unaudited)      
Current assets:            
Cash and cash equivalents     $642,630     $388,118
Investments in debt and equity securities     217,970     372,656
Accounts receivable, net     184,741     139,436
Deferred tax assets, net     75,720     57,951
Prepaid expenses     62,364     44,116
Other current assets     1,133     842
             
Total current assets     1,184,558     1,003,119
             
Property and equipment, net     75,558     71,708
Goodwill     463,673     438,749
Identifiable intangibles, net     109,932     108,213
Investments in debt securities     331,791     209,411
Other assets, net     33,810     39,672
             
Total assets     $2,199,322     $1,870,872
             
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:            
Accounts payable     $16,285     $16,483
Accrued expenses     90,229     68,334
Deferred revenue     572,637     480,572
Other current obligations     650     878
             

Total current liabilities

    679,801     566,267
             
Deferred lease credits     5,215     4,184
Long term deferred revenue     199,617     165,288
Other long term obligations     23,990     24,081
Stockholders' equity:            
Common stock     22     22
Additional paid-in capital     1,610,238     1,444,848
Retained earnings     245,050     137,772
Treasury stock, at cost     (562,792)     (472,646)
Accumulated other comprehensive (loss) income     (1,819)     1,056
             
Total stockholders' equity     1,290,699     1,111,052
             
Total liabilities and stockholders' equity     $2,199,322     $1,870,872
             
(1) Derived from audited financial statements

 

 
RED HAT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
 
      Three Months Ended     Twelve Months Ended
      February 28,     February 28,     February 28,     February 28,
      2011     2010     2011     2010
                         
Cash flows from operating activities:                        
Net income     $33,534     $23,388     $107,278     $87,253

Adjustments to reconcile net income to net cash provided by operating activities:

                       
Depreciation and amortization     12,757     12,014     47,997     45,861
Share-based compensation expense     16,408     14,042     60,597     48,288
Deferred income taxes     4,151     5,570     33,848     20,636
Excess tax benefits from share-based payment arrangements     (10,292)     (8,289)     (42,291)     (35,569)
Gain on sale of available-for-sale equity securities     (903)     (4,409)     (3,746)     (12,656)
Other     716     1,453     1,505     1,248
Changes in operating assets and liabilities net of effects of acquisitions:                        
Accounts receivable     (30,481)     (6,159)     (41,512)     (7,290)
Prepaid expenses     (7,863)     (5,810)     (17,220)     (630)
Accounts payable     (3,043)     (375)     (381)     6,569
Accrued expenses     5,320     (1,414)     29,915     15,423
Deferred revenue     73,540     46,662     112,724     82,625
Other     1,157     1,220     2,034     3,491
                         
Net cash provided by operating activities     95,001     77,893     290,748     255,249
                         
Cash flows from investing activities:                        
Purchase of available-for-sale debt securities     (216,327)     (132,630)     (751,420)     (666,890)
Proceeds from sales and maturities of available-for-sale debt securities     165,472     113,321     770,860     412,514
Proceeds from sales of available-for-sale equity securities     939     4,681     3,938     13,053
Acquisitions of businesses, net of cash acquired     -     -     (31,381)     -
Net purchase of strategic equity investments     -     (400)     -     (1,768)
Purchase of developed technologies and other intangible assets     (1,667)     (1,775)     (14,093)     (4,692)
Purchase of property and equipment     (7,588)     (7,103)     (32,759)     (28,420)
                         
Net cash used in investing activities     (59,171)     (23,906)     (54,855)     (276,203)
                         
Cash flows from financing activities:                        
Excess tax benefits from share-based payment arrangements     10,292     8,289     42,291     35,569
Proceeds from exercise of common stock options     4,090     39,758     84,443     103,332
Purchase of treasury stock     (10,791)     (90,147)     (90,146)     (236,393)
Payments related to net settlement of employee share-based compensation awards     (3,162)     (2,801)     (26,250)     (11,855)
Payments on other borrowings     (16)     -     (876)     (900)
Proceeds from other borrowings     -     -     318     -
                         
Net cash provided by (used in) financing activities     413     (44,901)     9,780     (110,247)
                         
Effect of foreign currency exchange rates on cash and cash equivalents     11,473     (10,677)     8,839     3,771
Net increase (decrease) in cash and cash equivalents     47,716     (1,591)     254,512     (127,430)
Cash and cash equivalents at beginning of the period     594,914     389,709     388,118     515,548
                         
Cash and cash equivalents at end of period     $642,630     $388,118     $642,630     $388,118

 

 
RED HAT, INC.
RECONCILIATION OF CERTAIN 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     Twelve Months Ended
      February 28,     February 28,     February 28,     February 28,
      2011     2010     2011     2010
                         
Cost of revenue     $1,884     $1,155     $6,053     $3,630
Sales and marketing     5,502     4,166     18,971     14,041
Research and development     4,244     4,026     15,639     13,614
General and administration     4,778     4,695     19,934     17,003
Total share-based compensation expense     $16,408     $14,042     $60,597     $48,288
                         
                         
Amortization of intangible assets expense included in Consolidated Statements of Operations:
                         
      Three Months Ended     Twelve Months Ended
      February 28,     February 28,     February 28,     February 28,
      2011     2010     2011     2010
                         
Cost of revenue     $979     $724     $3,274     $3,662
Sales and marketing     2,085     2,148     8,322     9,056
Research and development     1,250     925     4,025     3,702
General and administration     846     816     3,340     3,228
Total amortization of intangible assets expense     $5,160     $4,613     $18,961     $19,648
                         
                         
Class action litigation settlement expense included in Consolidated Statements of Operations:
                         
      Three Months Ended     Twelve Months Ended
      February 28,     February 28,     February 28,     February 28,
      2011     2010     2011     2010
                         
Litigation settlement     -     -     -     $8,750
                         
                         
      Three Months Ended     Twelve Months Ended
      February 28,     February 28,     February 28,     February 28,
      2011     2010     2011     2010
                         
GAAP net income     $33,534     $23,388     $107,278     $87,253
                         
Provision for income taxes     6,707     11,120     46,416     34,249
                         
GAAP income before provision for income taxes     $40,241     $34,508     $153,694     $121,502
                         
Add: Non-cash share-based compensation expense     16,408     14,042     60,597     48,288
Add: Amortization of intangible assets     5,160     4,613     18,961     19,648
Add: Litigation settlement     -     -     -     8,750
                         
Non-GAAP adjusted income before provision for income taxes     $61,809     $53,163     $233,252     $198,188
                         
Provision for income taxes (1)     10,437     16,624     70,442     60,065
                         
Non-GAAP adjusted net income     $51,372     $36,539     $162,810     $138,123
                         
Non-GAAP adjusted net income-diluted     $51,372     $36,539     $162,810     $138,123
                         
Non-GAAP adjusted net income per share:                        
Basic     $0.27     $0.19     $0.86     $0.74
Diluted     $0.26     $0.19     $0.83     $0.71
                         
                         
(1) Provision for income taxes:                        
Non-GAAP adjusted net income before income tax provision     $61,809     $53,163     $233,252     $198,188
Estimated annual effective tax rate     16.9%     31.3%     30.2%     34.0%
Non-GAAP provision for income taxes before discrete tax benefit     $10,437     $16,624     $70,442     $67,384
Discrete tax benefit     -     -     -     7,319
Provision for income taxes on Non-GAAP adjusted net income     $10,437     $16,624     $70,442     $60,065

 

 
RED HAT, INC.
RECONCILIATION OF CERTAIN 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     Twelve Months Ended
      February 28,     February 28,     February 28,     February 28,
      2011     2010     2011     2010
                         
GAAP gross profit     $203,192     $166,530     $758,990     $634,391
                         
Add: Non-cash share-based compensation expense     1,884     1,155     6,053     3,630
Add: Amortization of intangible assets     979     724     3,274     3,662
                         
Non-GAAP gross profit     $206,055     $168,409     $768,317     $641,683
                         
Non-GAAP gross margin     84.2%     86.0%     84.5%     85.8%
                         
                         
      Three Months Ended     Twelve Months Ended
      February 28,     February 28,     February 28,     February 28,
      2011     2010     2011     2010
                         
GAAP operating expenses     $163,782     $138,571     $613,314     $534,042
                         
Deduct: Non-cash share-based compensation expense     (14,524)     (12,887)     (54,544)     (44,658)
Deduct: Amortization of intangible assets     (4,181)     (3,889)     (15,687)     (15,986)
Deduct: Litigation settlement     -     -     -     (8,750)
                         
Non-GAAP adjusted operating expenses     $145,077     $121,795     $543,083     $464,648
                         
                         
      Three Months Ended     Twelve Months Ended
      February 28,     February 28,     February 28,     February 28,
      2011     2010     2011     2010
                         
GAAP operating income     $39,410     $27,959     $145,676     $100,349
                         
Add: Non-cash share-based compensation expense     16,408     14,042     60,597     48,288
Add: Amortization of intangible assets     5,160     4,613     18,961     19,648
Add: Litigation settlement     -     -     -     8,750
                         
Non-GAAP adjusted operating income     $60,978     $46,614     $225,234     $177,035
                         
Non-GAAP adjusted operating margin     24.9%     23.8%     24.8%     23.7%

Red Hat, Inc.
Media Contact:
Kara Schiltz, 919-301-3002
kschiltz@redhat.com
or
Investor Relations:
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tmccallum@redhat.com