Red Hat Reports Second Quarter Results

Wednesday, September 24, 2008 4:08 PM

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.

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	%

Red Hat, Inc.
Corporate Communications:
Kerrin Catallozzi, 919-754-4268
kcatallo@redhat.com
or
Investor Relations:
Tom McCallum, 919-754-4630
investors@redhat.com

(Source: Business Wire )

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