Red Hat Reports Second Quarter Results

Raleigh

United States, September 24, 2008

Revenue of $164.4 Million, up 29% Year-over-Year Deferred Revenue of $496.9 Million, up 32% 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 2009 second quarter ended August 31, 2008.

"Our focused execution has delivered another quarter of solid growth and financial results," stated Jim Whitehurst, President and Chief Executive Officer of Red Hat. "Also in Q2, we continued to execute on our virtualization strategy with our award winning RHEL platform as the solid, certified foundation. Our goal is for Red Hat to deliver a comprehensive virtualization solution from server to desktop which will enable our customers to deploy any application, anywhere, anytime."

Total revenue for the quarter was $164.4 million, an increase of 29% from the year ago quarter and 5% from the prior quarter. Subscription revenue for the quarter was $135.7 million, up 24% year-over-year and 4% sequentially.

Net income for the quarter was $21.1 million, or $0.10 per diluted share, compared with $18.2 million, or $0.09 per diluted share, in the year ago quarter. Non-GAAP adjusted net income for the quarter was $43.2 million, or $0.20 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 year ago quarter.

Operating cash flow totaled $54.3 million, compared to $49.2 million from the year ago quarter and $63.4 million from the prior quarter. At quarter end, the company's total deferred revenue balance was $496.9 million, an increase of 32% on a year-over-year basis and 1% sequentially. Total cash, cash equivalents and investments as of August 31, 2008 were $1.4 billion.

Other highlights include the following:

  • JBoss Enterprise Application Platform is now available along with Red Hat Enterprise Linux on the Amazon EC2 Cloud.
  • Red Hat Enterprise Linux was named the 2008 Product of the Year by Channel Insider, in the Server Operating Systems category.
  • Red Hat's annual customer and user event, the Red Hat Summit, was held in Boston this year to record attendance.
  • In early September, Red Hat announced the acquisition of Qumranet, Inc. which is expected to accelerate the time to market to deliver an expanded virtualization solution portfolio to the rapidly growing virtualization market. This acquisition increases Red Hat's investment in and stewardship of core open source virtualization technology including KVM, the only hypervisor embedded in the Linux Kernel. The acquisition also establishes Red Hat in the nascent Virtual Desktop Infrastructure (VDI) market.

"Our performance this quarter demonstrated strong demand for our products and services, good execution, and the consistency of results afforded by our subscription business model," stated Charlie Peters, Executive Vice President and Chief Financial Officer of Red Hat. "Key factors to our growth include the value message, the cost efficiencies of open source solutions and our world-class customer service."

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 60 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 survey. 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: 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 the integration of acquisitions and the ability to market successfully acquired technology 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; 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 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.

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     Six Months Ended
                           --------------------  ---------------------
                           August 31, August 31, August 31, August 31,
                             2008       2007       2008        2007
                           ---------- ---------  ---------- ----------
Revenue:

  Subscriptions            $135,709   $109,172   $266,403    $212,217
  Training and services      28,674     18,098     54,615      33,926
                           ---------  ---------  ---------  ----------


    Total subscription,
     training and services
     revenue                164,383    127,270    321,018     246,143
                           ---------  ---------  ---------  ----------

Cost of revenue:

  Subscriptions               9,720      8,492     18,677      16,093
  Training and services      17,788     11,572     35,260      22,235
                           ---------  ---------  ---------  ----------


    Total cost of
     subscription,
     training and services
     revenue                 27,508     20,064     53,937      38,328
                           ---------  ---------  ---------  ----------


 Total gross profit         136,875    107,206    267,081     207,815

Operating expense:
 Sales and marketing         59,566     46,093    118,837      92,302
 Research and development    31,728     23,384     60,639      45,171
 General and
  administrative             24,177     19,933     46,291      37,594
                           ---------  ---------  ---------  ----------

  Total operating expense   115,471     89,410    225,767     175,067
                           ---------  ---------  ---------  ----------

Income from operations       21,404     17,796     41,314      32,748
Other income, net            14,778     14,030     24,798      27,608
Interest expense             (1,530)    (1,565)    (3,116)     (3,060)
                           ---------  ---------  ---------  ----------

Income before provision
 for income taxes            34,652     30,261     62,996      57,296
Provision for income taxes   13,514     12,104     24,568      22,918
                           ---------  ---------  ---------  ----------

Net income                 $ 21,138   $ 18,157   $ 38,428    $ 34,378
                           =========  =========  =========  ==========

Net income-diluted         $ 22,032   $ 19,050   $ 40,215    $ 36,165
                           =========  =========  =========  ==========

Net income per share:
 Basic                     $   0.11   $   0.09   $   0.20    $   0.18
 Diluted                   $   0.10   $   0.09   $   0.18    $   0.16

Weighted average shares
 outstanding:
 Basic                      191,485    193,634    191,132     193,358
 Diluted                    220,039    221,688    219,472     221,559

Diluted net income per
 share computation:
GAAP Net income, basic     $ 21,138   $ 18,157   $ 38,428    $ 34,378
Interest expense on
 convertible debentures,
 net of related GAAP tax
 effects                        435        434        869         869
Amortization of debt
 issuance costs, net of
 related GAAP tax effects       459        459        918         918
                           --------   --------   --------   ---------

GAAP Net income, diluted   $ 22,032   $ 19,050   $ 40,215    $ 36,165
                           =========  =========  =========  ==========
RED HAT, INC.
                     CONSOLIDATED BALANCE SHEETS
                            (In thousands)

                                ASSETS
                                               August 31,   February
                                                               29,
                                                  2008        2008
                                               ----------- -----------
                                               (Unaudited)
Current assets:
 Cash and cash equivalents                     $  787,457  $  677,720
 Investments in debt and equity securities        274,268     312,442
 Accounts receivable, net                         110,898     127,002
 Prepaid expenses and other current assets         69,201      75,192
                                               ----------- -----------

   Total current assets                         1,241,824   1,192,356

 Property and equipment, net                       70,803      68,557
 Goodwill                                         359,989     340,314
 Identifiable intangibles, net                    110,562      93,823
 Investments in debt securities                   368,235     341,781
 Other assets, net                                 63,973      43,151
                                               ----------- -----------

   Total assets                                $2,215,386  $2,079,982
                                               =========== ===========

                 LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
 Accounts payable                              $    9,313  $   17,341
 Accrued expenses                                  51,658      43,260
 Deferred revenue                                 346,900     339,088
 Convertible debentures                           570,000     570,000
 Other current obligations                            934          59
                                               ----------- -----------

  Total current liabilities                       978,805     969,748

 Deferred lease credits                             4,704       4,977
 Long term deferred revenue                       149,959     133,805
 Other long term obligations                       19,349      20,261
 Convertible debentures                                 -           -
Stockholders' equity:
 Common stock                                          21          21
 Additional paid-in capital                     1,243,258   1,170,328
 Accumulated earnings (deficit)                    10,226     (28,202)
 Treasury stock, at cost                         (202,312)   (192,946)
 Accumulated other comprehensive income            11,376       1,990
                                               ----------- -----------

   Total stockholders' equity                   1,062,569     951,191
                                               ----------- -----------

   Total liabilities and stockholders' equity  $2,215,386  $2,079,982
                                               =========== ===========

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,
                           2008        2007        2008        2007
                         ---------------------  ----------------------

Cash flows from operating
 activities:
Net income               $ 21,138   $  18,157   $  38,428   $  34,378
Adjustments to reconcile
 net income to net cash
 provided by operating
 activities:
  Depreciation and
   amortization             9,828       8,219      18,925      15,453
  Deferred income taxes    11,462       9,884      20,229      18,214
  Excess tax benefits
   from share-based
   payment arrangements   (15,489)    (14,509)    (24,456)    (27,119)
  Share-based
   compensation expense    10,870       8,581      21,431      16,967
  Gain on sale of
   strategic equity
   investments             (4,996)          -      (4,996)          -
  Amortization of debt
   issuance costs             752         752       1,504       1,505
  Other                        55         (39)       (137)        543
Changes in operating
 assets and liabilities
 net of effects of
 acquisitions:

  Accounts receivable       2,018       4,162      21,338         245
  Prepaid expenses and
   other current assets    (1,908)        736      (6,910)          -
  Accounts payable         (2,404)      2,116      (7,974)     (2,107)
  Accrued expenses          7,816        (617)      9,802      (2,382)
  Deferred revenue         15,261      11,858      30,714      33,421
  Other assets               (137)        (99)       (270)       (193)
                          --------   ---------   ---------   ---------

  Net cash provided by
   operating activities    54,266      49,201     117,628      88,925
                         ---------  ----------  ----------  ----------

Cash flows from investing
 activities:
 Purchase of investment
  securities              (26,059)   (167,415)   (331,705)   (508,590)
 Proceeds from sales and
  maturities of
  investment securities   133,282     193,478     349,816     408,958
 Acquisitions of
  businesses, net of cash
  acquired                 (3,052)          -     (46,802)    (11,784)
 Proceeds from sale of
  strategic equity
  investments               5,568           -       5,568           -
 Purchase of property and
  equipment                (4,430)     (8,375)    (13,952)    (14,782)
 Purchase of developed
  software and other
  intangible assets          (727)       (865)     (2,342)     (4,352)
                         ---------  ----------  ----------  ----------

  Net cash provided by
   (used in) investing
   activities             104,582      16,823     (39,417)   (130,550)
                         ---------  ----------  ----------  ----------

Cash flows from financing
 activities:
 Excess tax benefits from
  share-based payment
  arrangements             15,489      14,509      24,456      27,119
 Proceeds from exercise
  of common stock options   5,342       5,455      16,789       8,530
 Purchase of treasury
  stock                      (219)       (136)     (9,366)       (136)
 Structured stock
  repurchase                    -           -       1,989           -
 Proceeds from other
  borrowings                    -           -           -       2,898
 Payments on other
  borrowings                  (66)        (90)        (23)       (757)
                         ---------  ----------  ----------  ----------

  Net cash provided by
   financing activities    20,546      19,738      33,845      37,654
                         ---------  ----------  ----------  ----------

Effect of foreign
 currency exchange rates
 on cash and cash
 equivalents               (2,477)      1,473      (2,319)      1,351
Net increase (decrease)
 in cash and cash
 equivalents              176,917      87,235     109,737      (2,620)
Cash and cash equivalents
 at beginning of the
 period                   610,540     437,384     677,720     527,239
                         ---------  ----------  ----------  ----------

Cash and cash equivalents
 at end of period        $787,457   $ 524,619   $ 787,457   $ 524,619
                         =========  ==========  ==========  ==========
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     Six Months Ended
                           --------------------  ---------------------
                           August 31, August 31, August 31, August 31,
                               2008       2007       2008        2007
                           --------------------  ---------------------

 Cost of revenue             $   643    $   571    $ 1,324     $ 1,153
 Sales and marketing           2,205      2,437      6,202       4,950
 Research and development      3,547      2,118      6,054       4,243
 General and
  administration               4,475      3,455      7,851       6,621
                           ---------  ---------  ---------  ----------
    Total stock based
    compensation expense     $10,870    $ 8,581    $21,431     $16,967
                           =========  =========  =========  ==========




Reconciliation of GAAP
 results to non-GAAP
 adjusted results

                            Three Months Ended     Six Months Ended
                           --------------------  ---------------------
                           August 31, August 31, August 31, August 31,
                               2008       2007       2008        2007
                           --------------------  ---------------------

GAAP net income              $21,138    $18,157    $38,428     $34,378

GAAP provision for income
 taxes                        13,514     12,104     24,568      22,918
                           ---------  ---------  ---------  ----------

GAAP income before
 provision for income
 taxes                       $34,652    $30,261    $62,996     $57,296

Add: Non-cash share-based
 compensation expense per
 FAS 123R                     10,870      8,581     21,431      16,967
                           ---------  ---------  ---------  ----------

Non-GAAP adjusted income
 before provision for
 income taxes                $45,522    $38,842    $84,427     $74,263

Non-GAAP cash provision
 for income taxes            $ 2,276    $ 1,942    $ 4,221     $ 3,713
                           ---------  ---------  ---------  ----------

Non-GAAP adjusted net
 income                      $43,246    $36,900    $80,206     $70,550
                           =========  =========  =========  ==========

Non-GAAP adjusted net
 income-diluted              $44,638    $38,292    $82,990     $73,334
                           =========  =========  =========  ==========

Non-GAAP adjusted net
 income per share:
 Basic                       $  0.23    $  0.19    $  0.42     $  0.36
 Diluted                     $  0.20    $  0.17    $  0.38     $  0.33


Non-GAAP diluted net
 income per share
 computation:
Non-GAAP adjusted net
 income                      $43,246    $36,900    $80,206     $70,550
Interest expense on
 convertible debentures,
 net of related 5% cash
 tax effects                     677        677      1,354       1,354
Amortization of debt
 issuance costs, net of
 related 5% cash tax
 effects                         715        715      1,430       1,430
                           ---------  ---------  ---------  ----------

Non-GAAP adjusted net
 income-diluted              $44,638    $38,292    $82,990     $73,334
                           =========  =========  =========  ==========
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     Six Months Ended
                           --------------------  ---------------------
                           August 31, August 31, August 31, August 31,
                             2008       2007       2008        2007
                            -------------------  ---------------------

GAAP Gross profit          $136,875   $107,206   $267,081    $207,815

Add: Non-cash share-based
 compensation expense per
 FAS 123R                       643        571      1,324       1,153
                           --------   --------   --------   ----------

Non-GAAP gross profit      $137,518   $107,777   $268,405    $208,968
                           --------   --------   --------   ----------

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


                            Three Months Ended     Six Months Ended
                           --------------------  ---------------------
                           August 31, August 31, August 31, August 31,
                             2008       2007       2008        2007
                           --------------------  ---------------------

GAAP operating expenses    $115,471   $ 89,410   $225,767    $175,067

Deduct: Non-cash share-
 based compensation
 expense per FAS 123R       (10,227)    (8,010)   (20,107)    (15,814)
                           ---------  ---------  ---------  ----------

Non-GAAP adjusted
 operating expenses        $105,244   $ 81,400   $205,660    $159,253
                           ---------  ---------  ---------  ----------


                            Three Months Ended     Six Months Ended
                           --------------------  ---------------------
                           August 31, August 31, August 31, August 31,
                             2008       2007       2008        2007
                           --------------------  ---------------------

GAAP operating income      $ 21,404   $ 17,796   $ 41,314    $ 32,748

Add: Non-cash share-based
 compensation expense per
 FAS 123R                    10,870      8,581     21,431      16,967
                           ---------  ---------  ---------  ----------

Non-GAAP adjusted
 operating income          $ 32,274   $ 26,377   $ 62,745    $ 49,715
                           ---------  ---------  ---------  ----------

Non-GAAP adjusted
 operating margin              19.6%      20.7%      19.5%       20.2%