Red Hat Reports Second Quarter Results

Raleigh

NC, United States, September 21, 2011

* Second quarter revenue of $281 million, up 28% year-over-year * Second quarter GAAP EPS of $0.20, up 67% year-over-year; non-GAAP EPS of $0.29, up 53% year-over-year * Second quarter deferred revenue of $813 million, up 25% year-over-year

Red Hat, Inc. (NYSE: RHT), the world's leading provider of open source solutions, today announced financial results for its fiscal year 2012 second quarter ended August 31, 2011.

Total revenue for the quarter was $281.3 million, an increase of 28% from the year ago quarter. Subscription revenue for the quarter was $238.3 million, up 28% year-over-year.

"The combination of strong sales execution and customer demand led to second quarter revenue that was above our guidance and represented our fourth straight quarter of accelerating revenue growth," stated Jim Whitehurst, President and Chief Executive Officer of Red Hat. "We continued to win and strengthen relationships with enterprise customers who partner with Red Hat to reduce costs while modernizing their IT infrastructure to enable applications to run on bare metal, virtualization and in the cloud. Based on the strong first half results, we believe Red Hat remains well positioned to finish fiscal 2012 as the first billion dollar open source software vendor."

GAAP operating income for the second quarter was $52.5 million, or 18.7% operating margin. After adjusting for stock compensation and amortization expenses as detailed in the tables below, non-GAAP operating income for the second quarter was $76.4 million, up 41% year-over-year. Non-GAAP operating margin was 27.2%, up 250 basis points from the year ago quarter.

Net income for the quarter was $40.0 million, or $0.20 per diluted share, compared with $23.7 million, or $0.12 per diluted share, in the year ago quarter. After adjusting for stock compensation and amortization expenses as detailed in the tables below, non-GAAP net income for the quarter was $56.5 million, or $0.29 per diluted share, as compared to $36.8 million, or $0.19 per diluted share, in the year ago quarter. Both GAAP and non-GAAP net income for the quarter included a discrete tax benefit of $2.1 million, approximately $0.01 per diluted share. Excluding this tax benefit, GAAP earnings per share would have been $0.19 and non-GAAP earnings per share would have been $0.28 for the quarter.

Operating cash flow was $77.1 million for the second quarter, as compared to $64.3 million in the year ago quarter. At quarter end, the company's total deferred revenue balance was $813.2 million, an increase of 25% on a year-over-year basis. Total cash, cash equivalents and investments as of August 31, 2011 was $1.3 billion.

"Our investments in sales and R&D continued to pay off, producing market share gains, higher revenue and 30% year-over-year billings growth," stated Charlie Peters, Executive Vice President and Chief Financial Officer of Red Hat. "Our productivity continued to improve as evidenced by non-GAAP operating income growth of 41% and cash flow growth of 20% in Q2. Moreover, year-to-date non-GAAP operating income grew 35% and operating cash flow grew 34% compared to the first half of last fiscal 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 an S&P 500 company, is headquartered in Raleigh, NC with over 70 offices spanning the globe. Red Hat provides high-quality, affordable technology with its operating system platform, Red Hat Enterprise Linux, together with cloud, 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; the ability of the Company to compete effectively; uncertainty and adverse results in litigation and related settlements; the integration of acquisitions and the ability to market successfully acquired technologies and products; 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 and political conditions, governmental and public policy changes and the impact of natural disasters such as the earthquakes and floods, including events in Japan. 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 Inc., Red Hat, the Shadowman logo and JBoss are registered trademarks of Red Hat in the U.S. and other countries. Linux is a registered trademark of Linus Torvalds.

 

 
 
RED HAT, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands - except per share amounts)
 
 
                Three Months Ended   Six Months Ended
                August 31,   August 31,   August 31,   August 31,
                2011   2010   2011   2010
Revenue:                
                             
    Subscriptions   $ 238,337   $ 186,183   $ 463,870   $ 365,259
    Training and services     42,983     33,578     82,196     63,646
                             
                             
        Total subscription, training and services revenue     281,320     219,761     546,066     428,905
                             
Cost of revenue:                
                             
    Subscriptions     16,596     12,256     31,835     24,920
    Training and services     30,043     23,446     57,251     44,019
                             
                             
        Total cost of subscription, training and services revenue     46,639     35,702     89,086     68,939
                             
                             
  Total gross profit     234,681     184,059     456,980     359,966
                             
Operating expense:                
  Sales and marketing     99,730     79,434     197,056     153,998
  Research and development     51,488     42,361     99,776     83,019
  General and administrative     30,985     28,193     62,311     54,638
                             
    Total operating expense     182,203     149,988     359,143     291,655
                             
Income from operations     52,478     34,071     97,837     68,311
  Interest income     2,127     1,775     4,063     3,438
  Other income, net     326     548     59     1,677
                             
                             
Income before provision for income taxes     54,931     36,394     101,959     73,426
Provision for income taxes     14,963     12,738     29,542     25,699
                             
Net income   $ 39,968   $ 23,656   $ 72,417   $ 47,727
                             
Net income-diluted   $ 39,968   $ 23,656   $ 72,417   $ 47,727
                             
Net income per share:                
  Basic   $ 0.21   $ 0.13   $ 0.38   $ 0.25
  Diluted   $ 0.20   $ 0.12   $ 0.37   $ 0.25
                             
Weighted average shares outstanding:                
  Basic     192,937     189,027     193,046     188,477
  Diluted     196,171     193,560     196,428     193,457

 

 
 
RED HAT, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands)
 
ASSETS        
                August 31,   February 28,
                2011   2011
                (Unaudited)    
Current assets:        
  Cash and cash equivalents   $ 737,458     $ 642,630  
  Investments in debt and equity securities     199,781       217,970  
  Accounts receivable, net     175,703       184,741  
  Deferred tax assets, net     79,707       75,720  
  Prepaid expenses     66,557       62,364  
  Other current assets     1,583       1,133  
                     
      Total current assets     1,260,789       1,184,558  
                     
  Property and equipment, net     81,478       75,558  
  Goodwill     465,558       463,673  
  Identifiable intangibles, net     102,363       109,932  
  Investments in debt securities     363,862       331,791  
  Other assets, net     34,480       33,810  
                     
      Total assets   $ 2,308,530     $ 2,199,322  
                     
LIABILITIES AND STOCKHOLDERS' EQUITY        
Current liabilities:        
  Accounts payable   $ 16,142     $ 16,285  
  Accrued expenses     88,736       90,229  
  Deferred revenue     601,627       572,637  
  Other current obligations     457       650  
                     
    Total current liabilities     706,962       679,801  
                     
  Deferred lease credits     5,056       5,215  
  Long term deferred revenue     211,527       199,617  
  Other long term obligations     23,814       23,990  
Stockholders' equity:        
  Common stock     22       22  
  Additional paid-in capital     1,664,433       1,610,238  
  Retained earnings     317,467       245,050  
  Treasury stock, at cost     (619,744 )     (562,792 )
  Accumulated other comprehensive loss     (1,007 )     (1,819 )
                     
      Total stockholders' equity     1,361,171       1,290,699  
                     
      Total liabilities and stockholders' equity   $ 2,308,530     $ 2,199,322  

 

 
 
RED HAT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
 
 
          Three Months Ended   Six Months Ended
          August 31,   August 31,   August 31,   August 31,
          2011   2010   2011   2010
                       
Cash flows from operating activities:                
Net income   $ 39,968     $ 23,656     $ 72,417     $ 47,727  

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

               
Depreciation and amortization     13,147       11,689       25,886       23,411  
Share-based compensation expense     18,753       15,675       34,940       28,849  
Deferred income taxes     8,155       13,434       19,210       21,786  
Excess tax benefits from share-based payment arrangements     (8,112 )     (10,192 )     (16,672 )     (21,199 )
Gain on sale of available-for-sale equity securities     (663 )     (601 )     (1,307 )     (1,117 )
Other     423       319       990       116  
Changes in operating assets and liabilities:                

Accounts receivable

    (20,457 )     (6,794 )     11,585       12,732  
Prepaid expenses     65       (4,153 )     (3,228 )     (4,744 )
Accounts payable     (286 )     2,187       (376 )     (2,882 )
Accrued expenses     3,614       6,712       (235 )     8,252  
Deferred revenue     22,851       13,439       24,121       12,381  
Other     (357 )     (1,087 )     (19 )     (384 )
                       
Net cash provided by operating activities     77,101       64,284       167,312       124,928  
                       
Cash flows from investing activities:                
Purchase of available-for-sale debt securities     (220,436 )     (110,021 )     (401,286 )     (220,364 )
Proceeds from sales and maturities of available-for-sale debt securities     208,693       215,811       381,276       414,129  
Proceeds from sales of available-for-sale equity securities     681       609       1,346       1,157  
Purchase of strategic equity investments     (1,000 )     -       (1,000 )     -  
Purchase of developed technologies and other intangible assets     (1,059 )     (1,324 )     (3,602 )     (2,945 )
Purchase of property and equipment     (11,523 )     (8,371 )     (20,179 )     (15,093 )
                       
Net cash provided by (used in) investing activities     (24,644 )     96,704       (43,445 )     176,884  
                       
Cash flows from financing activities:                
Excess tax benefits from share-based payment arrangements     8,112       10,192       16,672       21,199  
Proceeds from exercise of common stock options     3,370       18,011       8,413       55,699  
Purchase of treasury stock     (38,006 )     (4,994 )     (56,952 )     (79,355 )
Payments related to net settlement of employee share-based compensation awards     (2,952 )     (1,135 )     (11,985 )     (8,190 )
Payments on other borrowings     (94 )     -       (688 )     (877 )
                       
Net cash provided by (used in) financing activities     (29,570 )     22,074       (44,540 )     (11,524 )
                       
Effect of foreign currency exchange rates on cash and cash equivalents     4,348       7,795       15,501       (9,179 )
Net increase in cash and cash equivalents     27,235       190,857       94,828       281,109  
Cash and cash equivalents at beginning of the period     710,223       478,370       642,630       388,118  
                       
Cash and cash equivalents at end of period   $ 737,458     $ 669,227     $ 737,458     $ 669,227  

 

   
   
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   Six Months Ended  
                August 31,   August 31,   August 31,   August 31,  
                2011   2010   2011   2010  
                               
  Cost of revenue   $ 1,842     $ 1,370     $ 3,631     $ 2,561  
  Sales and marketing     6,101       4,771       11,672       8,547  
  Research and development     4,883       4,080       9,077       7,435  
  General and administration     5,927       5,454       10,560       10,306  
  Total share-based compensation expense   $ 18,753     $ 15,675     $ 34,940     $ 28,849  
                               
                               
Amortization of intangible assets expense included in Consolidated Statements of Operations:    
                               
                Three Months Ended   Six Months Ended  
                August 31,   August 31,   August 31,   August 31,  
                2011   2010   2011   2010  
                               
  Cost of revenue   $ 1,216     $ 704     $ 2,195     $ 1,408  
  Sales and marketing     1,958       2,075       3,918       4,161  
  Research and development     1,157       925       2,313       1,850  
  General and administration     865       833       1,711       1,655  
  Total amortization of intangible assets expense   $ 5,196     $ 4,537     $ 10,137     $ 9,074  
                               
                               
                               
                               
                Three Months Ended   Six Months Ended  
                August 31,   August 31,   August 31,   August 31,  
                2011   2010   2011   2010  
                               
GAAP net income   $ 39,968     $ 23,656     $ 72,417     $ 47,727  
                               
Provision for income taxes    

14,963

     

12,738

     

29,542

     

25,699

 
                               
GAAP income before provision for income taxes   $ 54,931     $ 36,394     $ 101,959     $ 73,426  
                               
Add: Non-cash share-based compensation expense     18,753       15,675       34,940       28,849  
Add: Amortization of intangible assets     5,196       4,537       10,137       9,074  
                               
Non-GAAP adjusted income before provision for income taxes   $ 78,880     $ 56,606     $ 147,036     $ 111,349  
                               
Provision for income taxes (1)     22,388       19,812       43,516       38,972  
                               
Non-GAAP adjusted net income   $ 56,492     $ 36,794     $ 103,520     $ 72,377  
                               
Non-GAAP adjusted net income-diluted   $ 56,492     $ 36,794     $ 103,520     $ 72,377  
                               
Non-GAAP adjusted net income per share:                  
  Basic   $ 0.29     $ 0.19     $ 0.54     $ 0.38  
  Diluted   $ 0.29     $ 0.19     $ 0.53     $ 0.37  
                               
                               
(1) Provision for income taxes:                  
Non-GAAP adjusted net income before income tax provision   $ 78,880     $ 56,606     $ 147,036     $ 111,349  
  Estimated annual effective tax rate     31 %     35 %     31 %     35 %
Non-GAAP provision for income taxes before discrete tax benefit   $ 24,453     $ 19,812     $ 45,581     $ 38,972  
  Discrete tax benefit     2,065      

-

      2,065    

-

 
Provision for income taxes on Non-GAAP adjusted net income   $ 22,388     $ 19,812     $ 43,516     $ 38,972  

 

 
 
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   Six Months Ended
                August 31,   August 31,   August 31,   August 31,
               

2011

  2010   2011   2010
                             
GAAP gross profit   $ 234,681     $ 184,059     $ 456,980     $ 359,966  
                             
Add: Non-cash share-based compensation expense     1,842       1,370       3,631       2,561  
Add: Amortization of intangible assets     1,216       704       2,195       1,408  
                             
Non-GAAP gross profit   $ 237,739     $ 186,133     $ 462,806     $ 363,935  
                             
Non-GAAP gross margin     85 %     85 %     85 %     85 %
                             
                             
                Three Months Ended   Six Months Ended
                August 31,   August 31,   August 31,   August 31,
               

2011

  2010   2011   2010
                             
GAAP operating expenses   $ 182,203     $ 149,988     $ 359,143     $ 291,655  
                             
Deduct: Non-cash share-based compensation expense     (16,911 )     (14,305 )     (31,309 )     (26,288 )
Deduct: Amortization of intangible assets     (3,980 )     (3,833 )     (7,942 )     (7,666 )
                             
Non-GAAP adjusted operating expenses   $ 161,312     $ 131,850     $ 319,892     $ 257,701  
                             
                             
                Three Months Ended   Six Months Ended
                August 31,   August 31,   August 31,   August 31,
               

2011

  2010   2011   2010
                             
GAAP operating income   $ 52,478     $ 34,071     $ 97,837     $ 68,311  
                             
Add: Non-cash share-based compensation expense     18,753       15,675       34,940       28,849  
Add: Amortization of intangible assets     5,196       4,537       10,137       9,074  
                             
Non-GAAP adjusted operating income   $ 76,427     $ 54,283     $ 142,914     $ 106,234  
                             
Non-GAAP adjusted operating margin     27.2 %     24.7 %     26.2 %     24.8 %

 

Red Hat Inc.
Media Contact:
Leigh Day, 919-754-4369
lday@redhat.com
or
Investor Relations:
Tom McCallum, 919-754-4630
tmccallum@redhat.com