Red Hat Reports First Quarter Results

Raleigh

June 18, 2014
  • First quarter total revenue of $424 million, up 17% year-over-year
  • First quarter subscription revenue of $372 million, up 18% year-over-year
  • First quarter operating cash flow of $165 million, up 16% year-over-year

Raleigh, NC – June 18, 2014 – Red Hat, Inc. (NYSE: RHT), the world's leading provider of open source solutions, today announced financial results for its fiscal year 2015 first quarter ended May 31, 2014.

Total revenue for the quarter was $424 million, an increase of 17% in U.S. dollars from the year ago quarter, and 17% measured in constant currency. Constant currency references in this release are as detailed in the tables below. Subscription revenue for the quarter was $372 million, up 18% in U.S. dollars year-over-year, or 17% measured in constant currency.   

“Our strong start to FY15 is a direct result of our ability to consistently deliver meaningful value to enterprise customers,” stated Jim Whitehurst, President and Chief Executive Officer of Red Hat. “We now count 94% of the Fortune 500 and 90% of the Fortune Global 500 as customers. These are some of the most sophisticated IT organizations in the world, and many continue to increase their purchases from Red Hat to modernize their IT infrastructure with cloud enabling technologies. As evidence of this demand and Red Hat’s strong market position, we closed a record number of first quarter deals of a million dollars or more.”

GAAP operating income for the first quarter was $51 million, down 10% year-over-year. After adjusting for stock compensation, amortization expenses and transaction costs related to business combinations, as detailed in the tables below, non-GAAP operating income for the first quarter was $88 million, up 2% year-over-year. For the first quarter, GAAP operating margin was 12.0% and non-GAAP operating margin was 20.8%.

GAAP net income for the quarter was $38 million, or $0.20 per diluted share, compared with $40 million, or $0.21 per diluted share, in the year ago quarter. After adjusting for stock compensation, amortization expenses and transaction costs related to business combinations, as detailed in the tables below, non-GAAP net income for the quarter was $64 million, or $0.34 per diluted share, as compared to $62 million, or $0.32 per diluted share, in the year ago quarter.   

Operating cash flow was $165 million for the first quarter, as compared to $142 million in the year ago quarter. At quarter end, the company’s total deferred revenue balance was $1.27 billion, an increase of 20% on a year-over-year basis. Total cash, cash equivalents and investments as of May 31, 2014 was $1.40 billion after repurchasing approximately $80 million, or approximately 1.6 million shares, of common stock in the first quarter.  

“Our global sales organization continued to execute at a high level during Q1, leading to double digit growth in every region. This execution, combined with the cross-selling of our expanded portfolio of innovative technologies, contributed to organic subscription revenue growth of 18% and operating cash flow growth of 16%, all of which were above the high-end of our guidance,” stated Charlie Peters, Executive Vice President and Chief Financial Officer of Red Hat.

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 is the world's leading provider of open source software solutions, using a community-powered approach to reliable and high-performing cloud, Linux, middleware, storage and virtualization technologies. Red Hat also offers award-winning support, training, and consulting services. As the connective hub in a global network of enterprises, partners, and open source communities, Red Hat helps create relevant, innovative technologies that liberate resources for growth and prepare customers for the future of IT. Learn more at 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; the integration of acquisitions and the ability to market successfully acquired technologies and products; uncertainty and adverse results in litigation and related settlements; 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 Annual Report on Form 10-K (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 earthquakes and floods. 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 this press release.

###

Red Hat, Red Hat Enterprise Linux, the Shadowman logo, 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.

Media Contact:
Stephanie Wonderlick    
Red Hat, Inc.
(571) 421-8169    
swonderl@redhat.com

Investor Relations:    
Tom McCallum
Red Hat, Inc.
(919) 754-4630
tmccallum@redhat.com

 

RED HAT, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands - except per share amounts)
                     
                     
              Three Months Ended  
              May 31,   May 31,  
              2014   2013  
Revenue:                    
                     
  Subscriptions           $371,968   $315,817  
  Training and services           51,786   47,442  
                     
                     
    Total subscription, training and services revenue         423,754   363,259  
                     
Cost of revenue:                    
                     
  Subscriptions           27,760   23,375  
  Training and services           36,683   32,682  
                     
                     
    Total cost of subscription, training and services revenue         64,443   56,057  
                     
                     
  Total gross profit           359,311   307,202  
                     
Operating expense:                    
  Sales and marketing           176,838   142,444  
  Research and development           89,939   73,802  
  General and administrative           41,571   34,333  
                     
    Total operating expense         308,348   250,579  
                     
Income from operations             50,963   56,623  
  Interest income           1,842   1,502  
  Other income (expense), net           357   (424)  
                     
                     
Income before provision for income taxes             53,162   57,701  
Provision for income taxes             15,417   17,310  
                     
Net income             $37,745   $40,391  
                     
Net income per share:                    
  Basic           $0.20   $0.21  
  Diluted           $0.20   $0.21  
                     
Weighted average shares outstanding:                    
  Basic           189,372   191,114  
  Diluted           191,457   192,969  

RED HAT, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands)
                     
ASSETS
                May 31,   February 28,
                2014   2014 (1)
                (Unaudited)    
Current assets:                    
  Cash and cash equivalents             $564,148   $646,742
  Investments in debt and equity securities             239,039   335,387
  Accounts receivable, net             265,663   360,594
  Deferred tax assets, net             114,253   108,264
  Prepaid expenses             124,523   118,387
  Other current assets             1,275   1,808
                     
      Total current assets         1,308,901   1,571,182
                     
  Property and equipment, net             172,792   173,917
  Goodwill             817,279   687,430
  Identifiable intangibles, net             141,326   133,399
  Investments in debt securities             596,895   505,300
  Other assets, net             32,817   35,391
                     
      Total assets         $3,070,010   $3,106,619
                     
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:                    
  Accounts payable and accrued expenses             $185,910   $179,468
  Deferred revenue             947,353   966,832
  Other current obligations             1,851   1,786
                     
      Total current liabilities         1,135,114   1,148,086
                     
  Long term deferred revenue             325,216   322,365
  Other long term obligations             84,877   85,003
                     
Stockholders' equity:                    
  Common stock             23   23
  Additional paid-in capital             1,908,934   1,891,848
  Retained earnings             757,917   720,172
  Treasury stock, at cost             (1,136,713)   (1,056,419)
  Accumulated other comprehensive loss             (5,358)   (4,459)
                     
      Total stockholders' equity         1,524,803   1,551,165
                     
      Total liabilities and stockholders' equity         $3,070,010   $3,106,619
                     
                     
      (1) Derived from audited financial statements              

RED HAT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
                   
                   
              Three Months Ended
              May 31,   May 31,
              2014   2013
                   
Cash flows from operating activities:                  
Net income             $37,745   $40,391
Adjustments to reconcile net income to net cash provided by                  
operating activities:                  
  Depreciation and amortization           18,924   17,932
  Share-based compensation expense           28,714   23,131
  Deferred income taxes           2,930   9,754
  Net amortization of bond premium on available-for-sale debt securities           2,033   2,051
  Other           (948)   143
Changes in operating assets and liabilities net of effects of acquisitions:                  
  Accounts receivable           96,580   72,422
  Prepaid expenses           (5,189)   3,251
  Accounts payable and accrued expenses           2,655   (12,551)
  Deferred revenue           (19,749)   (16,900)
  Other           991   2,191
                   
    Net cash provided by operating activities         164,686   141,815
                   
Cash flows from investing activities:                  
  Purchase of available-for-sale debt securities           (268,574)   (129,643)
  Proceeds from sales and maturities of available-for-sale debt securities           269,431   325,850
  Acquisition of business, net of cash acquired           (151,621)   -
  Purchase of other intangible assets           (553)   (2,344)
  Purchase of property and equipment           (8,594)   (26,677)
  Other           3,472   192
                   
    Net cash provided by (used in) investing activities         (156,439)   167,378
                   
Cash flows from financing activities:                  
  Excess tax benefits from share-based payment arrangements           986   3,033
  Proceeds from exercise of common stock options           45   453
  Purchase of treasury stock           (80,033)   (179,336)
  Payments related to net settlement of employee share-based compensation awards           (13,729)   (10,983)
  Payments on other borrowings           (355)   (305)
                   
    Net cash used in financing activities         (93,086)   (187,138)
                   
  Effect of foreign currency exchange rates on cash and cash equivalents           2,245   (11,141)
  Net increase (decrease) in cash and cash equivalents           (82,594)   110,914
  Cash and cash equivalents at beginning of the period           646,742   487,084
                   
Cash and cash equivalents at end of period             $564,148   $597,998

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  
              May 31,   May 31,  
              2014   2013  
                     
  Cost of revenue           $3,118   $2,840  
  Sales and marketing           10,238   9,375  
  Research and development           8,864   6,881  
  General and administration           6,494   4,035  
  Total share-based compensation expense           $28,714   $23,131  
                     
                     
Amortization of intangible assets expense included in Consolidated Statements of Operations:                    
                     
              Three Months Ended  
              May 31,   May 31,  
              2014   2013  
                     
  Cost of revenue           $2,615   $2,672  
  Sales and marketing           1,582   1,958  
  Research and development           959   959  
  General and administration           1,428   1,537  
  Total amortization of intangible assets expense           $6,584   $7,126  
                     
                     
Transaction costs related to business combinations included in Consolidated Statements of Operations:                    
                     
              Three Months Ended  
              May 31,   May 31,  
              2014   2013  
                     
  Transaction costs related to business combinations           $1,991   -  
                     
                     
                     
              Three Months Ended  
              May 31,   May 31,  
              2014   2013  
                     
GAAP net income             $37,745   $40,391  
                     
Provision for income taxes             15,417   17,310  
                     
GAAP income before provision for income taxes             $53,162   $57,701  
                     
Add: Non-cash share-based compensation expense             28,714   23,131  
Add: Amortization of intangible assets             6,584   7,126  
Add: Transaction costs related to business combinations             1,991   -  
                     
Non-GAAP adjusted income before provision for income taxes             $90,451   $87,958  
                     
Provision for income taxes             26,231   26,387  
                     
Non-GAAP adjusted net income (basic and diluted)             $64,220   $61,571  
                     
Non-GAAP adjusted net income per share:                    
  Basic           $0.34   $0.32  
  Diluted           $0.34   $0.32  

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    
              May 31,   May 31,    
              2014   2013    
                       
GAAP gross profit             $359,311   $307,202    
                       
Add: Non-cash share-based compensation expense             3,118   2,840    
Add: Amortization of intangible assets             2,615   2,672    
                       
Non-GAAP gross profit             $365,044   $312,714    
                       
Non-GAAP gross margin             86%   86%    
                       
                       
              Three Months Ended    
              May 31,   May 31,    
              2014   2013    
                       
GAAP operating expenses             $308,348   $250,579    
                       
Deduct: Non-cash share-based compensation expense             (25,596)   (20,291)    
Deduct: Amortization of intangible assets             (3,969)   (4,454)    
Deduct: Transaction costs related to business combinations             (1,991)   -    
                       
Non-GAAP adjusted operating expenses             $276,792   $225,834    
                       
                       
              Three Months Ended    
              May 31,   May 31,    
              2014   2013    
                       
GAAP operating income             $50,963   $56,623    
                       
Add: Non-cash share-based compensation expense             28,714   23,131    
Add: Amortization of intangible assets             6,584   7,126    
Add: Transaction costs related to business combinations             1,991   -    
                       
Non-GAAP adjusted operating income             $88,252   $86,880    
                       
Non-GAAP adjusted operating margin             20.8%   23.9%    
                       
                       
              Three Months Ended    
              May 31,   May 31,   Year-Over-Year
              2014   2013   Growth Rate
                       
GAAP subscription revenue             $371,968   $315,817   17.8%
Adjustment for currency impact             -1,235   -    
Non-GAAP subscription revenue on a constant currency basis             $370,733   $315,817   17.4%
                       
GAAP training and services revenue             $51,786   $47,442   9.2%
Adjustment for currency impact             648   -    
Non-GAAP training and services revenue on a constant currency basis             $52,434   $47,442   10.5%
                       
GAAP total subscription, training and services revenue             $423,754   $363,259   16.7%
Adjustment for currency impact             -587   -    
Non-GAAP total subscription, training and services revenue on a constant currency basis             $423,167   $363,259   16.5%