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Red Hat Reports Second Quarter (Q2FY15) Results

RALEIGH, N.C.

 

  • Total revenue of $446 million, up 19% year-over-year
  • Subscription revenue of $389 million, up 19% year-over-year
  • GAAP EPS of $0.25, up 19% year-over-year; non-GAAP EPS of $0.41, up 17% 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 2015 second quarter ended August 31, 2014.

Total revenue for the quarter was $446 million and subscription revenue for the quarter was $389 million, both increased 19% year-over-year.   

“Broad demand for open source technologies, combined with Red Hat’s value proposition and market leadership position, has helped to drive organic revenue growth in the mid-to-high teens for the last 10 quarters,” stated Jim Whitehurst, President and Chief Executive Officer of Red Hat. “Our high level of execution and commitment to investing across our technology stack, including enabling open, hybrid cloud computing in the enterprise, has led to Red Hat being recognized once again by Forbes, Inc. on its list of the World’s Most Innovative Companies.”  

GAAP operating income for the second quarter was $64 million, up 16% year-over-year. After adjusting for stock compensation, amortization expenses, certain facility exit costs and transaction costs related to business combinations, as detailed in the tables below, non-GAAP operating income for the second quarter was $109 million, up 15% year-over-year. For the second quarter, GAAP operating margin was 14.4% and non-GAAP operating margin was 24.4%.

GAAP net income for the quarter was $47 million, or $0.25 per diluted share, compared with $41 million, or $0.21 per diluted share, in the year ago quarter. After adjusting for stock compensation, amortization expenses, certain facility exit costs and transaction costs related to business combinations, as detailed in the tables below, non-GAAP net income for the quarter was $78 million, or $0.41 per diluted share, as compared to $68 million, or $0.35 per diluted share, in the year ago quarter.   

Operating cash flow was $108 million for the second quarter, as compared to $119 million in the year ago quarter. At quarter end, the company’s total deferred revenue balance was $1.25 billion, an increase of 18% on a year-over-year basis. Total cash, cash equivalents and investments as of August 31, 2014 was $1.32 billion, after repurchasing approximately $80 million of common stock, or approximately 1.5 million shares, in the second quarter. Red Hat has repurchased approximately $160 million of common stock, or approximately 3.0 million shares, during the first six months of fiscal year 2015.

“We experienced strong growth across our routes to market during the second quarter,” stated Charlie Peters, Executive Vice President and Chief Financial Officer of Red Hat. “The fastest growing part of our channel business comes from the 80+ Red Hat certified public cloud providers that provide our technologies on-demand in their clouds. The rapid revenue growth from these public cloud partners, which we recognize immediately and contains no deferred revenue, helped us to meaningfully exceed our second quarter revenue guidance.”

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.

 

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,
              2014   2013   2014   2013
Revenue:                          
                           
  Subscriptions           $389,495   $326,692   $761,462   $642,509
  Training and services           56,404   47,731   108,191   95,173
                           
                           
    Total subscription, training and services revenue         445,899   374,423   869,653   737,682
                           
Cost of revenue:                          
                           
  Subscriptions           27,791   23,518   55,551   46,893
  Training and services           39,383   32,062   76,066   64,744
                           
                           
    Total cost of subscription, training and services revenue         67,174   55,580   131,617   111,637
                           
                           
  Total gross profit           378,725   318,843   738,036   626,045
                           
Operating expense:                          
  Sales and marketing           174,520   144,596   351,358   287,040
  Research and development           95,265   78,299   185,204   152,100
  General and administrative           44,713   38,203   86,284   72,537
  Facility exit costs           -   2,171   -   2,171
                           
    Total operating expense         314,498   263,269   622,846   513,848
                           
Income from operations             64,227   55,574   115,190   112,197
  Interest income           2,010   1,527   3,852   3,029
  Other income (expense), net           (289)   1,196   68   772
                           
                           
Income before provision for income taxes             65,948   58,297   119,110   115,998
Provision for income taxes             19,125   17,489   34,542   34,799
                           
Net income             $46,823   $40,808   $84,568   $81,199
                           
Net income per share:                          
  Basic           $0.25   $0.22   $0.45   $0.43
  Diluted           $0.25   $0.21   $0.44   $0.42
                           
Weighted average shares outstanding:                          
  Basic           188,162   189,437   188,767   190,276
  Diluted           190,755   191,432   191,135   192,230

 

RED HAT, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands)
                     
ASSETS
                August 31,   February 28,
                2014   2014 (1)
                (Unaudited)    
Current assets:                    
  Cash and cash equivalents             $585,381   $646,742
  Investments in debt and equity securities             217,659   335,387
  Accounts receivable, net             283,952   360,594
  Deferred tax assets, net             111,522   108,264
  Prepaid expenses             125,256   118,387
  Other current assets             1,794   1,808
                     
      Total current assets         1,325,564   1,571,182
                     
  Property and equipment, net             175,844   173,917
  Goodwill             870,063   687,430
  Identifiable intangibles, net             146,904   133,399
  Investments in debt securities             513,903   505,300
  Other assets, net             35,026   35,391
                     
      Total assets         $3,067,304   $3,106,619
                     
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:                    
  Accounts payable and accrued expenses             $211,552   $179,468
  Deferred revenue             920,605   966,832
  Other current obligations             1,852   1,786
                     
      Total current liabilities         1,134,009   1,148,086
                     
  Long term deferred revenue             331,192   322,365
  Other long term obligations             87,447   85,003
Stockholders' equity:                    
  Common stock             23   23
  Additional paid-in capital             1,942,659   1,891,848
  Retained earnings             804,740   720,172
  Treasury stock, at cost             (1,216,741)   (1,056,419)
  Accumulated other comprehensive loss             (16,025)   (4,459)
                     
      Total stockholders' equity         1,514,656   1,551,165
                     
      Total liabilities and stockholders' equity         $3,067,304   $3,106,619
                     
                     
      (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,
              2014   2013   2014   2013
                           
Cash flows from operating activities:                          
Net income             $46,823   $40,808   $84,568   $81,199
Adjustments to reconcile net income to net cash provided by                          
operating activities:                          
  Depreciation and amortization           19,539   18,439   38,463   36,371
  Share-based compensation expense           36,605   29,874   65,319   53,006
  Deferred income taxes           975   1,208   3,905   11,020
  Net amortization of bond premium on available-for-sale debt securities           2,525   2,285   4,558   4,336
  Other           595   (96)   (353)   47
Changes in operating assets and liabilities net of effects of acquisitions:                          
  Accounts receivable           (18,349)   (6,341)   78,231   66,081
  Prepaid expenses           (2,391)   (5,645)   (7,580)   (2,394)
  Accounts payable and accrued expenses           27,266   38,902   29,921   26,293
  Deferred revenue           (6,209)   1,880   (25,957)   (15,020)
  Other           358   (2,385)   1,349   (195)
                           
    Net cash provided by operating activities         107,737   118,929   272,424   260,744
                           
Cash flows from investing activities:                          
  Purchase of available-for-sale debt securities           (50,567)   (217,433)   (319,141)   (347,076)
  Proceeds from sales and maturities of available-for-sale debt securities           140,101   153,917   409,532   479,767
  Acquisition of business, net of cash acquired           (66,183)   -   (217,804)   -
  Purchase of other intangible assets           (1,198)   (10,177)   (1,751)   (12,521)
  Purchase of property and equipment           (14,290)   (21,829)   (22,884)   (48,506)
  Other           (1,038)   (2,126)   2,434   (1,934)
                           
    Net cash provided by (used in) investing activities         6,825   (97,648)   (149,614)   69,730
                           
Cash flows from financing activities:                          
  Excess tax benefits from share-based payment arrangements           423   2,610   1,409   5,643
  Proceeds from exercise of common stock options           644   635   689   1,088
  Purchase of treasury stock           (80,028)   (20,009)   (160,061)   (199,345)
  Payments related to net settlement of employee share-based compensation awards           (3,831)   (3,833)   (17,561)   (14,815)
  Payments on other borrowings           (1,635)   (312)   (1,990)   (617)
                           
    Net cash used in financing activities         (84,427)   (20,909)   (177,514)   (208,046)
                           
  Effect of foreign currency exchange rates on cash and cash equivalents           (8,902)   (1,576)   (6,657)   (12,718)
  Net increase (decrease) in cash and cash equivalents           21,233   (1,204)   (61,361)   109,710
  Cash and cash equivalents at beginning of the period           564,148   597,998   646,742   487,084
                           
Cash and cash equivalents at end of period             $585,381   $596,794   $585,381   $596,794

 

 

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,
              2014   2013   2014   2013
                           
  Cost of revenue           $3,425   $3,100   $6,543   $5,939
  Sales and marketing           13,691   10,365   23,929   19,741
  Research and development           11,098   9,058   19,962   15,939
  General and administration           8,391   7,351   14,885   11,387
  Total share-based compensation expense           $36,605   $29,874   $65,319   $53,006
                           
                           
Amortization of intangible assets expense included in Consolidated Statements of Operations:                          
                           
              Three Months Ended   Six Months Ended
                  August 31,       August 31,
              2014   2013   2014   2013
                           
  Cost of revenue           $2,486   $2,496   $5,102   $5,169
  Sales and marketing           1,992   1,958   3,574   3,916
  Research and development           959   959   1,917   1,918
  General and administration           1,607   1,203   3,035   2,740
  Total amortization of intangible assets expense           $7,044   $6,616   $13,628   $13,743
                           
                           
Facility exit costs included in Consolidated Statements of Operations:                          
                           
              Three Months Ended   Six Months Ended
                  August 31,       August 31,
              2014   2013   2014   2013
                           
  Facility exit costs           -   $2,171   -   $2,171
                           
                           
Transaction costs related to business combinations included in Consolidated Statements of Operations:                          
                           
              Three Months Ended   Six Months Ended
                  August 31,       August 31,
              2014   2013   2014   2013
                           
  Transaction costs related to business combinations           $949   -   $2,940   -
                           
                           
              Three Months Ended   Six Months Ended
                  August 31,       August 31,
              2014   2013   2014   2013
                           
GAAP net income             $46,823   $40,808   $84,568   $81,199
                           
Provision for income taxes             19,125   17,489   34,542   34,799
                           
GAAP income before provision for income taxes             $65,948   $58,297   $119,110   $115,998
                           
Add: Non-cash share-based compensation expense             36,605   29,874   65,319   53,006
Add: Amortization of intangible assets             7,044   6,616   13,628   13,743
Add: Facility exit costs             -   2,171   -   2,171
Add: Transaction costs related to business combinations             949   -   2,940   -
                           
Non-GAAP adjusted income before provision for income taxes             $110,546   $96,958   $200,997   $184,918
                           
Provision for income taxes             32,058   29,088   58,289   55,475
                           
Non-GAAP adjusted net income (basic and diluted)             $78,488   $67,870   $142,708   $129,443
                           
Non-GAAP adjusted net income per share:                          
  Basic           $0.42   $0.36   $0.76   $0.68
  Diluted           $0.41   $0.35   $0.75   $0.67

 

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,
              2014   2013   2014   2013
                           
GAAP gross profit             $378,725   $318,843   $738,036   $626,045
                           
Add: Non-cash share-based compensation expense             3,425   3,100   6,543   5,939
Add: Amortization of intangible assets             2,486   2,496   5,102   5,169
                           
Non-GAAP gross profit             $384,636   $324,439   $749,681   $637,153
                           
Non-GAAP gross margin             86.3%   86.7%   86.2%   86.4%
                           
                           
              Three Months Ended   Six Months Ended
                  August 31,       August 31,
              2014   2013   2014   2013
                           
GAAP operating expenses             $314,498   $263,269   $622,846   $513,848
                           
Deduct: Non-cash share-based compensation expense             (33,180)   (26,774)   (58,776)   (47,067)
Deduct: Amortization of intangible assets             (4,558)   (4,120)   (8,526)   (8,574)
Deduct: Facility exit costs             -   (2,171)   -   (2,171)
Deduct: Transaction costs related to business combinations             (949)   -   (2,940)   -
                           
Non-GAAP adjusted operating expenses             $275,811   $230,204   $552,604   $456,036
                           
                           
              Three Months Ended   Six Months Ended
                  August 31,       August 31,
              2014   2013   2014   2013
                           
GAAP operating income             $64,227   $55,574   $115,190   $112,197
                           
Add: Non-cash share-based compensation expense             36,605   29,874   65,319   53,006
Add: Amortization of intangible assets             7,044   6,616   13,628   13,743
Add: Facility exit costs             -   2,171   -   2,171
Add: Transaction costs related to business combinations             949   -   2,940   -
                           
Non-GAAP adjusted operating income             $108,825   $94,235   $197,077   $181,117
                           
Non-GAAP adjusted operating margin             24.4%   25.2%   22.7%   24.6%
                           
                           
              Three Months Ended        
                  August 31,   Year-Over-Year    
              2014   2013   Growth Rate    
                           
GAAP subscription revenue             $389,495   $326,692   19.2%    
Adjustment for currency impact             (1,004)   -        
Non-GAAP subscription revenue on a constant currency basis             $388,491   $326,692   18.9%    
                           
GAAP training and services revenue             $56,404   $47,731   18.2%    
Adjustment for currency impact             893   -        
Non-GAAP training and services revenue on a constant currency basis             $57,297   $47,731   20.0%    
                           
GAAP total subscription, training and services revenue             $445,899   $374,423   19.1%    
Adjustment for currency impact             (111)   -        
Non-GAAP total subscription, training and services revenue on a constant currency basis             $445,788   $374,423   19.1%    
                           
                           
              Six Months Ended        
                  August 31,   Year-Over-Year    
              2014   2013   Growth Rate    
                           
GAAP subscription revenue             $761,462   $642,509   18.5%    
Adjustment for currency impact             (2,301)   -        
Non-GAAP subscription revenue on a constant currency basis             $759,161   $642,509   18.2%    
                           
GAAP training and services revenue             $108,191   $95,173   13.7%    
Adjustment for currency impact             1,597   -        
Non-GAAP training and services revenue on a constant currency basis             $109,788   $95,173   15.4%    
                           
GAAP total subscription, training and services revenue             $869,653   $737,682   17.9%    
Adjustment for currency impact             (704)   -        
Non-GAAP total subscription, training and services revenue on a constant currency basis             $868,949   $737,682   17.8%    

 

 

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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.