Red Hat Reports Second Quarter Results

Raleigh

September 23, 2013
  • Total revenue of $374 million, up 16% year-over-year
  • Subscription revenue of $327 million, up 17% year-over-year
  • GAAP EPS of $0.21, up 17% year-over-year; non-GAAP EPS of $0.35, up 25% year-over-year
  • Operating cash flow of $119 million, up 15% year-over-year

Raleigh, NC – September 23, 2013 – Red Hat, Inc. (NYSE: RHT), the world's leading provider of open source solutions, today announced financial results for its fiscal year 2014 second quarter ended August 31, 2013.

Total revenue for the quarter was $374 million, an increase of 16% in U.S. dollars from the year ago quarter, or 17% measured in constant currency.  Constant currency references in this release are as detailed in the tables below.  Subscription revenue for the quarter was $327 million, up 17% in U.S. dollars year-over-year, or 18% measured in constant currency.   

“We are a market leader for new innovations based on open source technologies that are driving the transformation of the data center toward an open, hybrid cloud infrastructure. ” stated Jim Whitehurst, President and Chief Executive Officer of Red Hat.  “We recently added infrastructure-as-a-service, Red Hat Enterprise Linux OpenStack Platform, to our portfolio of cloud offerings.  The combination of this powerful technology with our platform-as-a-service, open software-defined storage and cloud management solutions create a compelling road map for our customers in the move to cloud computing.”  

GAAP operating income for the second quarter was $56 million, up 11% year-over-year.  After adjusting for stock compensation, amortization of intangible assets and facility exit expenses, as detailed in the tables below, non-GAAP operating income for the second quarter was $94 million, up 19% year-over-year.  For the second quarter, GAAP operating margin was 14.8% and non-GAAP operating margin was 25.2%.

Net income for the quarter was $41 million, or $0.21 per diluted share, compared with $35 million, or $0.18 per diluted share, in the year ago quarter.  After adjusting for stock compensation, amortization of intangible assets and facility exit expenses, as detailed in the tables below, non-GAAP net income for the quarter was $68 million, or $0.35 per diluted share, as compared to $55 million, or $0.28 per diluted share, in the year ago quarter.   

Operating cash flow was $119 million for the second quarter, as compared to $104 million in the year ago quarter.  At quarter end, the company’s total deferred revenue balance was $1.06 billion, an increase of 12% on a year-over-year basis.  Total cash, cash equivalents and investments as of August 31, 2013 was $1.29 billion after repurchasing approximately $20 million of common stock, or approximately 438 thousand shares, in the second quarter.  Red Hat has repurchased approximately $199 million of common stock, or approximately 4.1 million shares, during the first six months of fiscal 2014.

“We delivered mid-to-high teens growth across several financial metrics including revenue, non-GAAP operating income and operating cash flow,” stated Charlie Peters, Executive Vice President and Chief Financial Officer of Red Hat.  “These results were driven in particular by strong subscription revenue growth, up 17% in U.S. dollars and 18% in constant currency.  The billing proxy, which we define as total revenue plus the change in deferred revenue found on the Statement of Cash Flows, was $376 million, up 8% in U.S. dollars and 9% in constant currency.  This billings growth reflects modest IT spending in Europe and the impact of large deal arrangements.”

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 a 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 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.


###

Red Hat, the Shadowman logo, JBoss and OpenShift are registered trademarks of Red Hat, Inc. in the U.S. and other countries. Linux is a registered trademark of Linus Torvald and OpenStack is a registered trademark of OpenStack, LLC.

 

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,
              2013     2012     2013   2012
Revenue:                            
                               
Subscriptions         $326,692     $278,800     $642,509   $551,371
Training and services         47,731     43,795     95,173   85,956
                               
Total subscription, training and services revenue         374,423     322,595     737,682   637,327
                               
Cost of revenue:                          
                               
Subscriptions         23,518     18,846     46,893   36,786
Training and services         32,062     29,012     64,744   57,092
                               
Total cost of subscription, training and services revenue         55,580     47,858     111,637   93,878
                               
                               
Total gross profit         318,843     274,737     626,045   543,449
                               
Operating expense:                          
Sales and marketing         144,596     123,578     287,040   244,449
Research and development         78,299     63,366     152,100   123,246
General and administrative         38,203     37,813     72,537   71,724
Facility exit costs         2,171     -     2,171   3,142
                               
Total operating expense         263,269     224,757     513,848   442,561
                               
Income from operations         55,574     49,980     112,197   100,888
Interest income         1,527     2,154     3,029   4,448
Other income (expense), net         1,196     (656)     772   1,232
                               
                               
Income before provision for income taxes         58,297     51,478     115,998   106,568
Provision for income taxes         17,489     16,473     34,799   34,102
                               
Net income         $40,808     $35,005     $81,199   $72,466
                               
Net income per share:                          
Basic             $0.22     $0.18     $0.43   $0.38
Diluted             $0.21     $0.18     $0.42   $0.37
                               
Weighted average shares outstanding:                          
Basic             189,437     193,064     190,276   193,005
Diluted             191,432     195,795     192,230   195,929
                               

 

RED HAT, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands)
             
ASSETS
 
      August 31,     February 28,
      2013     2013 (1)
      (Unaudited)      
Current assets:        
Cash and cash equivalents $596,794     $487,084
Investments in debt and equity securities 266,841     392,381
Accounts receivable, net 232,884     302,942
Deferred tax assets, net 88,325     88,765
Prepaid expenses 93,987     94,421
Other current assets 2,829     3,156
             
Total current assets 1,281,660     1,368,749
             
Property and equipment, net 167,343     141,586
Goodwill   690,342     690,911
Identifiable intangibles, net 142,247     142,243
Investments in debt securities 427,036     438,908
Other assets, net 30,953     31,263
             
Total assets $2,739,581     $2,813,660
             
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:        
Accounts payable and accrued expenses $178,904     $154,202
Deferred revenue 796,044     830,486
Other current obligations 993     1,024
             
Total current liabilities 975,941     985,712
             
Long term deferred revenue 263,553     259,466
Other long term obligations 58,483     48,321
Stockholders' equity:        
Common stock 23     23
Additional paid-in capital 1,846,825     1,802,899
Retained earnings 623,079     541,880
Treasury stock, at cost (1,016,401)     (816,674)
Accumulated other comprehensive loss (11,922)     (7,967)
             
Total stockholders' equity 1,441,604     1,520,161
             
Total liabilities and stockholders' equity $2,739,581     $2,813,660
             
             
(1) Derived from audited financial statements        
         

 

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,
            2013     2012     2013   2012
                             
Cash flows from operating activities:                          
Net income         $40,808     $35,005     $81,199   $72,466
Adjustments to reconcile net income to net cash provided by                          
operating activities:                          
Depreciation and amortization         18,439     14,568     36,371   28,647
Share-based compensation expense         29,874     23,859     53,006   46,065
Deferred income taxes         3,818     13,036     16,663   23,063
Excess tax benefits from share-based payment arrangements         (2,610)     (9,600)     (5,643)   (19,800)
Net amortization of bond premium on available-for-sale debt securities         2,285     1,748     4,336   3,420
Other           (96)     529     47   (1,840)
Changes in operating assets and liabilities net of effects of acquisitions:                          
Accounts receivable         (6,341)     (18,735)     66,081   35,825
Prepaid expenses         (5,645)     833     (2,394)   (6,966)
Accounts payable and accrued expenses         38,902     13,502     26,293   22,928
Deferred revenue         1,880     26,430     (15,020)   21,308
Other           (2,385)     2,678     (195)   3,141
                             
Net cash provided by operating activities         118,929     103,853     260,744   228,257
                             
Cash flows from investing activities:                          
Purchase of available-for-sale debt securities         (217,433)     (185,028)     (347,076)   (507,769)
Proceeds from sales and maturities of available-for-sale debt securities         153,917     190,094     479,767   417,779
Acquisition of business, net of cash acquired         -     (10,051)     -   (10,051)
Purchase of other intangible assets         (10,177)     (24,341)     (12,521)   (26,863)
Purchase of property and equipment         (21,829)     (20,344)     (48,506)   (36,243)
Other           (2,126)     -     (1,934)   330
                             
Net cash provided by (used in) investing activities         (97,648)     (49,670)     69,730   (162,817)
                             
Cash flows from financing activities:                          
Excess tax benefits from share-based payment arrangements         2,610     9,600     5,643   19,800
Proceeds from exercise of common stock options         635     2,626     1,088   6,516
Purchase of treasury stock         (20,009)     (2,871)     (199,345)   (32,882)
Payments related to net settlement of employee share-based compensation awards         (3,833)     (3,856)     (14,815)   (22,688)
Payments on other borrowings         (312)     (213)     (617)   (477)
                             
Net cash provided by (used in) financing activities         (20,909)     5,286     (208,046)   (29,731)
                             
Effect of foreign currency exchange rates on cash and cash equivalents         (1,576)     3,491     (12,718)   (13,350)
Net increase (decrease) in cash and cash equivalents         (1,204)     62,960     109,710   22,359
Cash and cash equivalents at beginning of the period         597,998     508,616     487,084   549,217
                             
Cash and cash equivalents at end of period         $596,794     $571,576     $596,794   $571,576
                           

 

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,
  2013     2012     2013   2012
                   
Cost of revenue $3,100     $2,167     $5,939   $4,333
Sales and marketing 10,365     7,726     19,741   15,087
Research and development 9,058     7,294     15,939   14,106
General and administration 7,351     6,672     11,387   12,539
Total share-based compensation expense $29,874     $23,859     $53,006   $46,065
                   
                   
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,
  2013     2012     2013   2012
                   
Cost of revenue $2,496     $1,149     $5,169   $1,819
Sales and marketing 1,958     2,120     3,916   4,196
Research and development 959     959     1,918   1,918
General and administration 1,203     1,181     2,740   2,324
Total amortization of intangible assets expense $6,616     $5,409     $13,743   $10,257
                   
                   
Facility exit costs included in Consolidated Statements of Operations:                
                   
  Three Months Ended     Six Months Ended
  August 31,     August 31,     August 31,   August 31,
  2013     2012     2013   2012
                   
Facility exit costs $2,171     -     $2,171   $3,142
                   
                   
                   
  Three Months Ended     Six Months Ended
  August 31,     August 31,     August 31,   August 31,
  2013     2012     2013   2012
                   
GAAP net income $40,808     $35,005     $81,199   $72,466
                   
Provision for income taxes 17,489     16,473     34,799   34,102
                   
GAAP income before provision for income taxes $58,297     $51,478     $115,998   $106,568
                   
Add: Non-cash share-based compensation expense 29,874     23,859     53,006   46,065
Add: Amortization of intangible assets 6,616     5,409     13,743   10,257
Add: Facility exit costs 2,171     -     2,171   3,142
                   
Non-GAAP adjusted income before provision for income taxes $96,958     $80,746     $184,918   $166,032
                   
Provision for income taxes 29,088     25,839     55,475   53,130
                   
Non-GAAP adjusted net income (basic and diluted) $67,870     $54,907     $129,443   $112,902
                   
Non-GAAP adjusted net income per share:                  
Basic $0.36     $0.28     $0.68   $0.58
Diluted $0.35     $0.28     $0.67   $0.58
                   

 

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,
          2013       2012     2013       2012
                                 
GAAP gross profit         $318,843       $274,737     $626,045       $543,449
                                 
Add: Non-cash share-based compensation expense         3,100       2,167     5,939       4,333
Add: Amortization of intangible assets         2,496       1,149     5,169       1,819
                                 
Non-GAAP gross profit         $324,439       $278,053     $637,153       $549,601
                                 
Non-GAAP gross margin         87%       86%     86%       86%
                                 
                                 
          Three Months Ended     Six Months Ended
          August 31,       August 31,     August 31,       August 31,
          2013       2012     2013       2012
                                 
GAAP operating expenses         $263,269       $224,757     $513,848       $442,561
                                 
Deduct: Non-cash share-based compensation expense         (26,774)       (21,692)     (47,067)       (41,732)
Deduct: Amortization of intangible assets         (4,120)       (4,260)     (8,574)       (8,438)
Deduct: Facility exit costs         (2,171)       -     (2,171)       (3,142)
                                 
Non-GAAP adjusted operating expenses         $230,204       $198,805     $456,036       $389,249
                                 
                                 
          Three Months Ended     Six Months Ended
          August 31,       August 31,     August 31,       August 31,
          2013       2012     2013       2012
                                 
GAAP operating income         $55,574       $49,980     $112,197       $100,888
                                 
Add: Non-cash share-based compensation expense         29,874       23,859     53,006       46,065
Add: Amortization of intangible assets         6,616       5,409     13,743       10,257
Add: Facility exit costs         2,171       -     2,171       3,142
                                 
Non-GAAP adjusted operating income         $94,235       $79,248     $181,117       $160,352
                                 
Non-GAAP adjusted operating margin         25.2%       24.6%     24.6%       25.2%
                                 
                                 
                                 
                                 
          Three Months Ended              
          August 31,       August 31,     Year-Over-Year        
          2013       2012     Growth Rate        
                                 
GAAP subscription revenue         $326,692       $278,800     17.2%        
Adjustment for currency impact         2,880       -              
Non-GAAP subscription revenue on a constant currency basis         $329,572       $278,800     18.2%        
                                 
GAAP training and services revenue         $47,731       $43,795     9.0%        
Adjustment for currency impact         427       -              
Non-GAAP training and services revenue on a constant currency basis         $48,158       $43,795     10.0%        
                                 
GAAP total subscription, training and services revenue         $374,423       $322,595     16.1%        
Adjustment for currency impact         3,307       -              
Non-GAAP total subscription, training and services revenue on a constant currency basis         $377,730       $322,595     17.1%        
                                 
                                 
          Six Months Ended              
          August 31,       August 31,     Year-Over-Year        
          2013       2012     Growth Rate        
                                 
GAAP subscription revenue         $642,509       $551,371     16.5%        
Adjustment for currency impact         8,600       -              
Non-GAAP subscription revenue on a constant currency basis         $651,109       $551,371     18.1%        
                                 
GAAP training and services revenue         $95,173       $85,956     10.7%        
Adjustment for currency impact         981       -              
Non-GAAP training and services revenue on a constant currency basis         $96,154       $85,956     11.9%        
                                 
GAAP total subscription, training and services revenue         $737,682       $637,327     15.7%        
Adjustment for currency impact         9,581       -              
Non-GAAP total subscription, training and services revenue on a constant currency basis         $747,263       $637,327     17.2%