Red Hat Reports Second Quarter Results for Fiscal Year 2018

• Second quarter total revenue of $723 million, up 21% year-over-year, or 20% in constant currency
• Second quarter Application Development-related and other emerging technology subscription revenue of $150 million, up 44% year-over-year, or 43% in constant currency
• Quarter-end deferred revenue balance of $2.05 billion, up 22% year-over-year
• Second quarter operating cash flow of $143 million, up 48% year-over-year and year-to-date operating cash flow of $401 million, up 22% year-over-year

Red Hat, Inc. (NYSE: RHT), the world's leading provider of open source solutions, today announced financial results for the second quarter of fiscal year 2018 ended August 31, 2017.

“Strong demand for our technologies that enable hybrid cloud computing has contributed to accelerated revenue growth in the first half of the fiscal year. In the second quarter, we delivered total revenue growth of 21%, fueled by over 40% growth in our Application Development-related and other emerging technology revenue," stated Jim Whitehurst, President and Chief Executive Officer of Red Hat. "IT organizations continued to turn to Red Hat as a strategic technology partner to help them transform and modernize their applications and infrastructure for the hybrid cloud."

"Strong execution and global demand for Red Hat technologies continued to drive financial results which exceeded expectations for the second quarter and the first half of fiscal year 2018," stated Eric Shander, Executive Vice President and Chief Financial Officer of Red Hat. "For the first half of fiscal 2018, Red Hat delivered a powerful combination of 20% total revenue growth, 41% GAAP operating income growth, 26% non-GAAP operating income growth, and 22% operating cash flow growth. Given our first half results and ongoing momentum, we are increasing our outlook for the full year."

Revenue:Total revenue for the quarter was $723 million, up 21% in USD year-over-year, or 20% measured in constant currency. Constant currency references in this release are detailed in the tables below. Subscription revenue for the quarter was $638 million, up 20% in USD year-over-year, and 20% measured in constant currency. Subscription revenue in the quarter was 88% of total revenue.

Subscription Revenue Breakout: Subscription revenue from Infrastructure-related offerings for the quarter was $487 million, an increase of 14% in USD year-over-year, and 14% as measured in constant currency. Subscription revenue from Application Development-related and other emerging technology offerings for the quarter was $150 million, an increase of 44% in USD year-over-year, or 43% measured in constant currency.

Operating Income:GAAP operating income for the quarter was $135 million, up 64% year-over-year. After adjusting for non-cash share-based compensation expense, amortization of intangible assets, and transaction costs related to business combinations, non-GAAP operating income for the second quarter was $191 million, up 40% year-over-year. For the second quarter, GAAP operating margin was 18.6% and non-GAAP operating margin was 26.4%. Non-GAAP references in this release are detailed in the tables below.

Net Income:GAAP net income for the quarter was $97 million, or $0.53 per diluted share, compared with $59 million, or $0.32 per diluted share, in the year-ago quarter.

After adjusting for non-cash share-based compensation expense, amortization of intangible assets, transaction costs related to business combinations and non-cash interest expense related to the debt discount, non-GAAP net income for the quarter was $138 million, or $0.77 per diluted share, as compared to $101 million, or $0.55 per diluted share, in the year-ago quarter. Non-GAAP diluted weighted average shares outstanding excludes any dilution resulting from our convertible notes because any potential dilution is expected to be offset by our convertible note hedge transactions.

Cash:Operating cash flow was $143 million for the second quarter, an increase of 48% on a year-over-year basis. Total cash, cash equivalents and investments as of August 31, 2017 was $2.31 billion after repurchasing approximately $75 million, or 765 thousand shares, of common stock in the second quarter. The remaining balance in the current repurchase authorization as of August 31, 2017 was approximately $499 million.

Deferred revenue:At the end of the second quarter, the company’s total deferred revenue balance was $2.05 billion, an increase of 22% year-over-year. The full year positive impact to total deferred revenue from changes in foreign exchange rates was $37 million year-over-year. On a constant currency basis, total deferred revenue would have been up 20% year-over-year.

Outlook: Red Hat’s outlook assumes current business conditions and current foreign currency exchange rates.

For the full year:

• Revenue is expected to be approximately $2.880 billion to $2.895 billion in USD.
• GAAP operating margin is expected to be approximately 15.9% and non-GAAP operating margin is expected to be approximately 23.8%.
• Fully diluted GAAP earnings per share (EPS) is expected to be approximately $1.89 to $1.91 per share, assuming 183 million fully diluted shares outstanding. Fully diluted non-GAAP EPS is expected to be approximately $2.77 to $2.79 per share, assuming 180 million fully diluted shares outstanding. Both GAAP and non-GAAP EPS assume a $1 million to $2 million per quarter forecast for other income and an estimated annual effective tax rate of approximately 28% before discrete tax items.
• Operating cash flow is expected to be approximately $880 million to $900 million.

For the third quarter:

• Revenue is expected to be approximately $730 million to $737 million.
• GAAP operating margin is expected to be approximately 15.2% and non-GAAP operating margin is expected to be approximately 23.7%.
• Fully diluted GAAP EPS is expected to be approximately $0.48 per share, assuming 184 million fully diluted shares outstanding. Fully diluted non-GAAP EPS is expected to be approximately $0.70 per share, assuming 181 million fully diluted shares outstanding. Both GAAP and non-GAAP EPS assume a $2 million per quarter forecast for other income and an estimated annual effective tax rate of 28% before discrete tax items.

GAAP to non-GAAP reconciliation:

Full year non-GAAP operating margin guidance is derived by subtracting the estimated full year impact of non-cash share-based compensation expense of approximately $200 million, amortization of intangible assets of approximately $30 million and transaction costs related to business combinations of approximately $1.4 million. Full year fully diluted non-GAAP EPS guidance is derived by subtracting the expenses listed in the previous sentence and the full year impact of non-cash interest expense related to the debt discount of approximately $20 million and an estimated annual effective tax rate of approximately 28% before discrete tax items. Additionally, full year fully diluted non-GAAP EPS excludes approximately $26 million of discrete tax benefits related to share-based compensation that are included in full year fully diluted GAAP EPS. Full year fully diluted non-GAAP EPS excludes approximately 3 million diluted shares resulting from the convertible notes because any potential dilution is expected to be offset by our convertible note hedge transactions.

Third quarter non-GAAP operating margin guidance is derived by subtracting the estimated impact of non-cash share-based compensation expense of approximately $54 million and amortization of intangible assets of approximately $8 million. Third quarter fully diluted non-GAAP EPS guidance is derived by subtracting the expenses listed in the previous sentence and non-cash interest expense related to the debt discount of approximately $5 million and an estimated annual effective tax rate of 28% before discrete tax items. Additionally, third quarter fully diluted non-GAAP EPS excludes approximately $12 million of discrete tax benefits related to share-based compensation that are included in third quarter fully diluted GAAP EPS. Third quarter fully diluted non-GAAP EPS excludes approximately 3 million diluted shares resulting from the convertible notes because any potential dilution is expected to be offset by our convertible note hedge transactions.

Webcast and Website Information

A live webcast of Red Hat's results will begin at 5:00 pm ET today. The webcast, in addition to a copy of our prepared remarks and slides containing financial highlights and supplemental metrics, 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. Additional information on Red Hat's reported results, including a reconciliation of the non-GAAP adjusted results, are included in the financial tables below.