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Press release

Red Hat Reports Third Quarter Results

Revenue of $236 million, up 21% from the prior year GAAP operating income up 92%, non-GAAP operating income up 26% from the prior year Deferred revenue of $685 million, up 11% from the prior year Operating Cash Flow of $71 million, up 31% from the prior y

RALEIGH, N.C.

Red Hat, Inc. (NYSE: RHT), the world's leading provider of open source solutions, today announced financial results for its fiscal year 2011 third quarter ended November 30, 2010.

Total revenue for the quarter was $235.6 million, an increase of 21% from the year ago quarter. Subscription revenue for the quarter was $198.8 million, up 21% year-over-year.

"Strong market demand and sales execution, combined with a compelling value proposition, led to organic billings growth of over 20%, or $262 million. Also in Q3, we were particularly proud that Red Hat was recognized by CIOs for the seventh consecutive year as one of the top IT vendors delivering value according to CIO Insight Magazine Vendor Value survey." stated Jim Whitehurst, President and Chief Executive Officer of Red Hat. "In addition to delivering a compelling value proposition, we continued to drive innovation for our customers' data center needs. In November, we launched the latest version of our flagship operating system, Red Hat Enterprise Linux 6, giving customers a great platform for next generation architectures such as virtualization and cloud computing."

GAAP operating income for the third quarter was $38.0 million up 92% year-over-year. GAAP operating income in the year ago quarter was $19.8 million after a charge of $8.8 million for a litigation settlement. After adjusting for stock compensation, amortization expenses and the charge for a litigation settlement in the prior year as detailed in the tables below, non-GAAP operating income for the third quarter was $58.0 million, up 26% year-over-year.

Net income for the quarter was $26.0 million, or $0.13 per diluted share, compared with $16.4 million, or $0.08 per diluted share, in the year ago quarter. Non-GAAP net income for the quarter was $39.1 million, or $0.20 per diluted share, compared to $33.5 million, or $0.17 per diluted share in the year ago quarter, after adjusting for stock compensation, amortization expenses and the charge for a litigation settlement in the prior year as detailed in the tables below.

Operating cash flow totaled $70.8 million, as compared to $54.1 million in the year ago quarter. At quarter end, the company's total deferred revenue balance was $685.2 million, an increase of 11% on a year-over-year basis. Total cash, cash equivalents and investments as of November 30, 2010 was $1.1 billion.

"Top line growth of 21% and even faster operating income growth, contributed to a 31% increase in operating cash flow," stated Charlie Peters, Executive Vice President and Chief Financial Officer of Red Hat. "We are well positioned at the confluence of several hot areas of IT; open source, virtualization and cloud computing. In addition, we are executing consistently and we are making focused investments in growth initiatives. For example, in November we acquired Makara, a developer of deployment and management solutions for applications in the cloud. Makara's technologies will accelerate the development of Red Hat's Platform-as-a-Service (PaaS) solution as part of our Cloud Foundations portfolio, one of our key growth initiatives."

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 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.

©2010 Red Hat, Inc. Red Hat, the Shadowman logo and JBoss are registered trademarks of Red Hat, Inc. 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   Nine Months Ended
             

November 30,

 

November 30,

 

November 30,

 

November 30,

              2010   2009   2010   2009
Revenue:              
                           
    Subscriptions $198,842   $164,432   $564,101   $469,496
    Training and services 36,734   29,914   100,380   82,872
                           
                           
        Total subscription, training and services revenue 235,576   194,346   664,481   552,368
                           
Cost of revenue:              
                           
    Subscriptions 13,336   11,010   38,256   32,033
    Training and services 26,408   18,588   70,427   52,474
                           
                           
        Total cost of subscription, training and services revenue 39,744   29,598   108,683   84,507
                           
                           
  Total gross profit 195,832   164,748   555,798   467,861
                           
Operating expense:              
  Sales and marketing 85,138   71,498   239,136   202,242
  Research and development 43,083   38,605   126,102   110,068
  General and administrative 29,655   26,102   84,294   74,411
  Litigation Settlement -   8,750   -   8,750
                           
    Total operating expense 157,876   144,955   449,532   395,471
                           
Income from operations 37,956   19,793   106,266   72,390
  Interest income 1,608   2,206   5,046   8,161
  Other income, net 462   3,253   2,140   6,442
                           
                           
Income before provision for income taxes 40,026   25,252   113,452   86,993
Provision for income taxes 14,009   8,838   39,708   23,128
                           
Net income $26,017   $16,414   $73,744   $63,865
                           
Net income-diluted $26,017   $16,414   $73,744   $63,865
                           
Net income per share:              
  Basic $0.14   $0.09   $0.39   $0.34
  Diluted $0.13   $0.08   $0.38   $0.33
                           
Weighted average shares outstanding:              
  Basic 191,296   187,450   189,410   187,823
  Diluted 196,908   193,733   195,723   193,366
                 
RED HAT, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands)
                     
ASSETS
               

November 30,

 

February 28,

                2010   2010
                (Unaudited)    
Current assets:        
  Cash and cash equivalents   $594,914   $388,118
  Investments in debt and equity securities   250,528   372,656
  Accounts receivable, net   151,612   139,436
  Deferred tax assets, net   37,004   57,951
  Prepaid expenses   53,374   44,116
  Other current assets   954   842
                     
    Total current assets   1,088,386   1,003,119
                     
  Property and equipment, net   74,860   71,708
  Goodwill   463,552   438,749
  Identifiable intangibles, net   112,980   108,213
  Investments in debt securities   251,538   209,411
  Other assets, net   37,397   39,672
                     
    Total assets   $2,028,713   $1,870,872
                     
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:        
  Accounts payable   $19,101   $16,483
  Accrued expenses   85,959   68,334
  Deferred revenue   509,192   480,572
  Other current obligations   638   878
                     
    Total current liabilities   614,890   566,267
                     
  Deferred lease credits   4,356   4,184
  Long term deferred revenue   176,043   165,288
  Other long term obligations   23,468   24,081
Stockholders' equity:        
  Common stock   22   22
  Additional paid-in capital   1,554,214   1,444,848
  Retained earnings   211,516   137,772
  Treasury stock, at cost   (552,001)   (472,646)
  Accumulated other comprehensive (loss) income (3,795)   1,056
                     
    Total stockholders' equity   1,209,956   1,111,052
                     
    Total liabilities and stockholders' equity   $2,028,713   $1,870,872
             
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,
              2010   2009   2010   2009
                           
Cash flows from operating activities:              
Net income $26,017   $16,414   $73,744   $63,865

Adjustments to reconcile net income to net cash

provided by operating activities:

             
             
  Depreciation and amortization 11,829   11,595   35,240   33,847
  Share-based compensation expense 15,340   12,557   44,189   34,246
  Deferred income taxes 7,911   9,578   29,697   15,066
  Excess tax benefits from share-based payment arrangements (10,800)   (9,524)   (31,999)   (27,280)
  Gain on sale of available-for-sale equity securities (1,726)   (4,584)   (2,843)   (8,247)
  Other 673   (198)   789   (205)
Changes in operating assets and liabilities net of effects of acquisitions:              
  Accounts receivable (23,762)   (21,742)   (11,030)   (1,130)
  Prepaid assets (4,613)   1,810   (9,357)   5,180
  Accounts payable 5,544   (843)   2,662   6,944
  Accrued expenses 16,343   14,651   24,595   16,836
  Deferred revenue 26,803   23,446   39,184   35,963
  Other 1,261   989   877   2,273
                           
  Net cash provided by operating activities 70,820   54,149   195,748   177,358
                           
Cash flows from investing activities:              
  Purchase of available-for-sale debt securities (314,729)   (245,788)   (535,093)   (534,260)
  Proceeds from sales and maturities of available-for-sale debt securities 191,259   93,089   605,388   299,193
  Proceeds from sales of available-for-sale equity securities 1,843   4,312   3,000   8,371
  Acquisitions of businesses, net of cash acquired (31,381)   -   (31,381)   -
  Net purchase of strategic equity investments -   (1,368)   -   (1,368)
  Purchase of developed technologies and other intangible assets (9,481)   (847)   (12,426)   (2,917)
  Purchase of property and equipment (10,079)   (8,655)   (25,171)   (21,318)
                           
  Net cash provided by (used in) investing activities (172,568)   (159,257)   4,317   (252,299)
                           
Cash flows from financing activities:              
  Excess tax benefits from share-based payment arrangements 10,800   9,524   31,999   27,280
  Proceeds from exercise of common stock options 24,654   44,985   80,353   63,574
  Purchase of treasury stock -   (52,289)   (79,355)   (146,246)
  Payments related to net settlement of employee share-based compensation awards (14,899)   (6,754)   (23,089)   (9,054)
  Payments on other borrowings -   -   (877)   (900)
  Proceeds from other borrowings 335   -   335   -
                           
  Net cash provided by (used in) financing activities 20,890   (4,534)   9,366   (65,346)
                           
Effect of foreign currency exchange rates on cash and cash equivalents 6,545   6,299   (2,635)   14,448
Net increase (decrease) in cash and cash equivalents (74,313)   (103,343)   206,796   (125,839)
Cash and cash equivalents at beginning of the period 669,227   493,052   388,118   515,548
                           
Cash and cash equivalents at end of period $594,914   $389,709   $594,914   $389,709
               
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   Nine Months Ended
              November 30,   November 30,   November 30,   November 30,
              2010   2009   2010   2009
                           
  Cost of revenue $1,607   $916   $4,168   $2,475
  Sales and marketing 4,922   3,627   13,469   9,875
  Research and development 3,960   3,239   11,395   9,588
  General and administration 4,851   4,775   15,157   12,308
  Total share-based compensation expense $15,340   $12,557   $44,189   $34,246
                           
                           
Amortization of intangible assets expense included in Consolidated Statements of Operations:
                           
              Three Months Ended   Nine Months Ended
              November 30,   November 30,   November 30,   November 30,
              2010   2009   2010   2009
                           
  Cost of revenue $887   $989   $2,295   $2,938
  Sales and marketing 2,076   2,293   6,237   6,908
  Research and development 925   925   2,775   2,776
  General and administration 839   811   2,494   2,411
  Total amortization of intangible assets expense $4,727   $5,018   $13,801   $15,033
                           
                           
Class action litigation settlement expense included in Consolidated Statements of Operations:
                           
              Three Months Ended   Nine Months Ended
              November 30,   November 30,   November 30,   November 30,
              2010   2009   2010   2009
                           
  Litigation settlement $0   $8,750   $0   $8,750
                           
                           
              Three Months Ended   Nine Months Ended
              November 30,   November 30,   November 30,   November 30,
              2010   2009   2010   2009
                           
GAAP net income $26,017   $16,414   $73,744   $63,865
                           
Provision for income taxes 14,009   8,838   39,708   23,128
                           
GAAP income before provision for income taxes $40,026   $25,252   $113,452   $86,993
                           
Add: Non-cash share-based compensation expense 15,340   12,557   44,189   34,246
Add: Amortization of intangible assets 4,727   5,018   13,801   15,033
Add: Litigation settlement -   8,750   -   8,750
                           
Non-GAAP adjusted income before provision for income taxes $60,093   $51,577   $171,442   $145,022
                           
Provision for income taxes (1) 21,033   18,052   60,005   43,439
                           
Non-GAAP adjusted net income $39,060   $33,525   $111,437   $101,583
                           
Non-GAAP adjusted net income-diluted $39,060   $33,525   $111,437   $101,583
                           
Non-GAAP adjusted net income per share:              
  Basic $0.20   $0.18   $0.59   $0.54
  Diluted $0.20   $0.17   $0.57   $0.53
                           
                           
(1) Provision for income taxes:              
Non-GAAP adjusted net income before income tax provision $60,093   $51,577   $171,442   $145,022
  Estimated annual effective tax rate 35%   35%   35%   35%
Non-GAAP provision for income taxes before discrete tax benefit $21,033   $18,052   $60,005   $50,758
  Discrete tax benefit

-

  -   -   7,319
Provision for income taxes on Non-GAAP adjusted net income $21,033   $18,052   $60,005   $43,439
               
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   Nine Months Ended
              November 30,   November 30,   November 30,   November 30,
              2010   2009   2010   2009
                           
GAAP gross profit $195,832   $164,748   $555,798   $467,861
                           
Add: Non-cash share-based compensation expense 1,607   916   4,168   2,475
Add: Amortization of intangible assets 887   989   2,295   2,938
                           
Non-GAAP gross profit $198,326   $166,653   $562,261   $473,274
                           
Non-GAAP gross margin 84%   86%   85%   86%
                           
                           
              Three Months Ended   Nine Months Ended
              November 30,   November 30,   November 30,   November 30,
              2010   2009   2010   2009
                           
GAAP operating expenses $157,876   $144,955   $449,532   $395,471
                           
Deduct: Non-cash share-based compensation expense (13,733)   (11,641)   (40,021)   (31,771)
Deduct: Amortization of intangible assets (3,840)   (4,029)   (11,506)   (12,095)
Deduct: Litigation settlement -   (8,750)   -   (8,750)
                           
Non-GAAP adjusted operating expenses $140,303   $120,535   $398,005   $342,855
                           
                           
              Three Months Ended   Nine Months Ended
              November 30,   November 30,   November 30,   November 30,
              2010   2009   2010   2009
                           
GAAP operating income $37,956   $19,793   $106,266   $72,390
                           
Add: Non-cash share-based compensation expense 15,340   12,557   44,189   34,246
Add: Amortization of intangible assets 4,727   5,018   13,801   15,033
Add: Litigation settlement -   8,750   -   8,750
                           
Non-GAAP adjusted operating income $58,023   $46,118   $164,256   $130,419
                           
Non-GAAP adjusted operating margin 24.6%   23.7%   24.7%   23.6%

About Red Hat

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 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 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.