Red Hat, Inc.
Dec 22, 2009

Red Hat Reports Third Quarter Results

RALEIGH, N.C., Dec 22, 2009 (BUSINESS WIRE) -- Red Hat (NYSE: RHT), the world's leading provider of open source solutions, today announced financial results for its fiscal year 2010 third quarter ended November 30, 2009.

Total revenue for the quarter was $194.3 million, an increase of 18% from the year ago quarter. Subscription revenue for the quarter was $164.4 million, up 21% year-over-year.

"Continued solid execution drove another quarter of strong results for Red Hat. Our double digit growth in the current economic environment was driven by our compelling value proposition and outstanding service. Our customer focus has clearly differentiated us from the competition. Red Hat was recently ranked as #1 among software vendors by IT executives for the fifth time in six years in the Ziff Davis CIO Insight Study, with the highest marks for reliability and value," stated Jim Whitehurst, President and Chief Executive Officer of Red Hat. "We also continued to introduce new products, including the November release of RHEV that advances our position in server virtualization and cloud computing. RHEV provides customers the choice of a high-value, low cost, open management solution that was not previously available in the $2 billion virtualization market."

GAAP operating income for the quarter was $19.8 million, including a previously announced charge of $8.8 million for a litigation settlement, compared to $21.0 million in the year ago quarter. After adjusting for stock compensation, amortization expenses and the charge for the litigation settlement as detailed in the tables below, non-GAAP operating income for the quarter was $46.1 million, up 20% year-over-year. GAAP operating margin was 10.2%. Non-GAAP operating margin was 23.7%, up 50 basis points from the year ago quarter.

GAAP net income for the quarter was $16.4 million, or $0.08 per diluted share, compared with $24.3 million, or $0.12 per diluted share, in the year ago quarter. The current quarter GAAP net income was reduced by $0.03 per diluted share due to the charge for the litigation settlement. Non-GAAP adjusted net income for the quarter was $33.5 million, or $0.17 per diluted share, after adjusting for stock compensation, amortization expenses and the charge for the litigation settlement as detailed in the tables below, as compared to $36.9 million, or $0.18 per diluted share, in the year ago quarter.

Operating cash flow totaled $54.1 million, compared to $59.1 million from the year ago quarter. Due to record billings, accounts receivable increased $24 million compared to last year even as days sales outstanding (DSO) improved to 54 days compared to 59 days last year. At November 30, the company's total deferred revenue balance was $618.7 million, an increase of 23% on a year-over-year basis. Total cash, cash equivalents and investments as of November 30, 2009 were $959.1 million after repurchasing $52.3 million, or 1.9 million shares, of common stock.

"Strong bookings, particularly in North America, led to strong billings and greater than 20% growth in subscription revenue and deferred revenue, as well as further improvement of non-GAAP operating margins," stated Charlie Peters, Executive Vice President and Chief Financial Officer of Red Hat. "This type of consistent performance, combined with our strong balance sheet, led to our third debt rating upgrade in 20 months by Standard and Poors rating agency."

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, the world's leading provider of open source solutions and a component of the S&P 500, is headquartered in Raleigh, NC with over 65 offices spanning the globe. CIOs ranked Red Hat as one of the top vendors delivering value in Enterprise Software for six 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 virtualization, applications, management and Services Oriented Architecture (SOA) solutions, including Red Hat Enterprise Virtualization and JBoss Enterprise Middleware. 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 delays or reductions in information technology spending, uncertainty and adverse results in litigation and related settlements, the integration of acquisitions and the ability to market successfully acquired technologies 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; 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 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.

© 2009 Red Hat, Inc. Red Hat, the Shadowman logo and JBoss are registered trademarks of Red Hat, Inc. in the U.S. and other countries. Linux is a registered trademark of Linus Torvalds.

RED HAT, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands - except per share amounts)
Three Months EndedNine Months Ended
November 30,November 30,November 30,November 30,
2009200820092008
Revenue:
Subscriptions $ 164,432 $ 135,451 $ 469,496 $ 401,854
Training and services 29,914 29,881 82,872 84,497
Total subscription, training and services revenue 194,346 165,332 552,368 486,351
Cost of revenue:
Subscriptions 11,010 8,771 32,033 27,448
Training and services 18,588 17,765 52,474 53,025
Total cost of subscription, training and services revenue 29,598 26,536 84,507 80,473
Total gross profit 164,748 138,796 467,861 405,878
Operating expense:
Sales and marketing 71,498 58,514 202,242 177,350
Research and development 38,605 34,544 110,068 95,184
General and administrative 26,102 24,768 74,411 71,060
Litigation Settlement 8,750 - 8,750 -
Total operating expense 144,955 117,826 395,471 343,594
Income from operations 19,793 20,970 72,390 62,284
Interest income 2,206 9,294 8,161 30,568
Other income (expense), net 3,295 4,501 6,580 8,025
Interest expense (42 ) (1,249 ) (138 ) (4,365 )
Income before provision for income taxes 25,252 33,516 86,993 96,512
Provision for income taxes 8,838 9,211 23,128 33,779
Net income $ 16,414 $ 24,305 $ 63,865 $ 62,733
Net income-diluted $ 16,414 $ 25,147 $ 63,865 $ 65,392
Net income per share:
Basic $ 0.09 $ 0.13 $ 0.34 $ 0.33
Diluted $ 0.08 $ 0.12 $ 0.33 $ 0.30
Weighted average shares outstanding:
Basic 187,450 190,665 187,823 190,978
Diluted 193,733 208,408 193,366 215,605
Diluted net income per share computation:
Net income, basic $ 16,414 $ 24,305 $ 63,865 $ 62,733
Interest expense on convertible debentures, net of related GAAP tax effects - 387 - 1,273
Amortization of debt issuance costs, net of related GAAP tax effects - 455 - 1,386
Net income, diluted $ 16,414 $ 25,147 $ 63,865 $ 65,392
RED HAT, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands)
ASSETS
November 30,February 28,
20092009
(Unaudited)
Current assets:
Cash and cash equivalents $ 389,709 $ 515,548
Investments in debt and equity securities 348,187 147,178
Accounts receivable, net 137,237 128,669
Prepaid expenses and other current assets 96,585 99,437
Total current assets 971,718 890,832
Property and equipment, net 73,220 67,913
Goodwill 439,497 438,109
Identifiable intangibles, net 112,046 122,177
Investments in debt securities 221,191 183,363
Other assets, net 38,157 51,242
Total assets $ 1,855,829 $ 1,753,636
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 17,496 $ 9,576
Accrued expenses 72,874 54,123
Deferred revenue 446,685 382,050
Other current obligations 878 900
Total current liabilities 537,933 446,649
Deferred lease credits 4,067 4,470
Long term deferred revenue 172,051 161,032
Other long term obligations 34,578 35,432
Stockholders' equity:
Common stock 21 21
Additional paid-in capital 1,370,795 1,281,469
Retained earnings 114,384 50,519
Treasury stock, at cost (382,528 ) (236,283 )
Accumulated other comprehensive income 4,528 10,327
Total stockholders' equity 1,107,200 1,106,053
Total liabilities and stockholders' equity $ 1,855,829 $ 1,753,636
RED HAT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
Three Months EndedNine Months Ended
November 30,November 30,November 30,November 30,

2009

200820092008
Cash flows from operating activities:
Net income $ 16,414 $ 24,305 $ 63,865 $ 62,733
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 11,595 10,561 33,847 29,486
Share-based compensation expense 12,557 12,251 34,246 33,682
Deferred income taxes 9,578 7,031 15,066 27,260
Excess tax benefits from share-based payment arrangements (9,524 ) (14,790 ) (27,280 ) (39,246 )
Gain on sale of equity securities (4,584 ) - (8,247 ) (4,996 )
Gain on repurchase of convertible debentures - (4,129 ) - (4,129 )
Other (198 ) 941 (205 ) 2,308
Changes in operating assets and liabilities net of effects of acquisitions:
Accounts receivable (21,742 ) (7,650 ) (1,130 ) 13,687
Prepaid expenses and other current assets 2,923 (7,400 ) 7,855 (14,308 )
Accounts payable (843 ) 1,836 6,944 (6,138 )
Accrued expenses 14,651 8,774 16,836 18,576
Deferred revenue 23,446 27,503 35,963 58,217
Other assets, net (124 ) (85 ) (402 ) (355 )
Net cash provided by operating activities 54,149 59,148 177,358 176,777
Cash flows from investing activities:
Purchase of available-for-sale debt securities (245,788 ) - (534,260 ) (331,705 )
Proceeds from sales and maturities of available-for-sale debt securities 93,089 77,498 299,193 427,314
Proceeds from sales of available-for-sale equity securities 4,312 - 8,371 5,568
Acquisitions of businesses, net of cash acquired - (101,338 ) - (148,140 )
Net purchase of strategic equity investments (1,368 ) - (1,368 ) -
Purchase of developed technologies and other intangible assets (847 ) (779 ) (2,917 ) (3,121 )
Purchase of property and equipment (8,655 ) (4,212 ) (21,318 ) (18,164 )
Net cash used in investing activities (159,257 ) (28,831 ) (252,299 ) (68,248 )
Cash flows from financing activities:
Excess tax benefits from share-based payment arrangements 9,524 14,790 27,280 39,246
Proceeds from exercise of common stock options 44,985 - 63,574 -
Repurchase of convertible debentures - (280,058 ) - (280,058 )
Purchase of treasury stock (52,289 ) (29,999 ) (146,246 ) (39,365 )
Payments related to net settlement of employee share-based compensation awards (6,754 ) (772 ) (9,054 ) 16,017
Structured stock repurchase - - - 1,989
Proceeds from other borrowings - - - -
Payments on other borrowings - (48 ) (900 ) (72 )
Net cash used in financing activities (4,534 ) (296,087 ) (65,346 ) (262,243 )
Effect of foreign currency exchange rates on cash and cash equivalents 6,299 (1,850 ) 14,448 (4,169 )
Net decrease in cash and cash equivalents (103,343 ) (267,620 ) (125,839 ) (157,883 )
Cash and cash equivalents at beginning of the period 493,052 787,457 515,548 677,720
Cash and cash equivalents at end of period $ 389,709 $ 519,837 $ 389,709 $ 519,837
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 EndedNine Months Ended
November 30,November 30,November 30,November 30,
2009200820092008
Cost of revenue $ 916 $ 723 $ 2,475 $ 2,047
Sales and marketing 3,627 3,352 9,875 9,554
Research and development 3,239 3,715 9,588 9,769
General and administration 4,775 4,461 12,308 12,311
Total share-based compensation expense $ 12,557 $ 12,251 $ 34,246 $ 33,681
Amortization of intangible assets expense included in Consolidated Statements of Operations:
Three Months EndedNine Months Ended
November 30,November 30,November 30,November 30,
2009200820092008
Cost of revenue $ 989 $ 989 $ 2,938 $ 2,534
Sales and marketing 2,293 2,301 6,908 6,861
Research and development 925 1,049 2,776 1,049
General and administration 811 797 2,411 2,254
Total amortization of intangible assets expense $ 5,018 $ 5,136 $ 15,033 $ 12,698
Class action litigation settlement expense included in Consolidated Statement of Operations:
Three Months EndedNine Months Ended
November 30,November 30,November 30,November 30,
2009200820092008
Litigation Settlement $ 8,750 - $ 8,750 -
Three Months EndedNine Months Ended
November 30,November 30,November 30,November 30,
20092008 20092008
GAAP net income $ 16,414 $ 24,305 $ 63,865 $ 62,733
Provision for income taxes 8,838 9,211 23,128 33,779
GAAP income before provision for income taxes $ 25,252 $ 33,516 $ 86,993 $ 96,512
Add: Non-cash share-based compensation expense per FAS 123R 12,557 12,251 34,246 33,681
Add: Amortization of intangible assets 5,018 5,136 15,033 12,698
Add: Litigation settlement 8,750 - 8,750 -
Non-GAAP adjusted income before provision for income taxes $ 51,577 $ 50,903 $ 145,022 $ 142,891
Provision for income taxes (1) $ 18,052 $ 13,998 $ 43,439 $ 49,875
Non-GAAP adjusted net income $ 33,525 $ 36,905 $ 101,583 $ 93,016
Non-GAAP adjusted net income-diluted $ 33,525 $ 37,747 $ 101,583 $ 95,646
Non-GAAP adjusted net income per share:
Basic $ 0.18 $ 0.19 $ 0.54 $ 0.49
Diluted $ 0.17 $ 0.18 $ 0.53 $ 0.44
Non-GAAP diluted net income per share computation:
Non-GAAP adjusted net income $ 33,525 $ 36,905 $ 101,583 $ 93,016
Interest expense on convertible debentures, net of related GAAP tax effects - 387 - 1,257
Amortization of debt issuance costs, net of related GAAP tax effects - 455 - 1,373
Non-GAAP adjusted net income-diluted $ 33,525 $ 37,747 $ 101,583 $ 95,646
(1) Provision for income taxes:
Non-GAAP adjusted net income before income tax provision $ 51,577 $ 50,903 $ 145,022 $ 142,891
Estimated annual effective tax rate 35 % 28 % 35 % 35 %
Non-GAAP provision for income taxes before discrete tax benefit $ 18,052 $ 13,998 $ 50,758 $ 49,875
Discrete tax benefit 0 0 7,319 0
Provision for income taxes on Non-GAAP adjusted net income $ 18,052 $ 13,998 $ 43,439 $ 49,875
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 EndedNine Months Ended
November 30,
2009
November 30,
2008
November 30,
2009
November 30,
2008
GAAP gross profit $ 164,748 $ 138,796 $ 467,861 $ 405,878
Add: Non-cash share-based compensation expense per FAS 123R 916 723 2,475 2,047
Add: Amortization of intangible assets 989 989 2,938 2,534
Non-GAAP gross profit $ 166,653 $ 140,508 $ 473,274 $ 410,459
Non-GAAP gross margin 86 % 85 % 86 % 84 %
Three Months EndedNine Months Ended
November 30,November 30,November 30,November 30,
2009200820092008
GAAP operating expenses $ 144,955 $ 117,826 $ 395,471 $ 343,594
Deduct: Non-cash share-based compensation expense per FAS 123R (11,641 ) (11,528 ) (31,771 ) (31,634 )
Deduct: Amortization of intangible assets (4,029 ) (4,147 ) (12,095 ) (10,164 )
Deduct: Litigation Settlement (8,750 ) - (8,750 ) -
Non-GAAP adjusted operating expenses $ 120,535 $ 102,151 $ 342,855 $ 301,796
Three Months EndedNine Months Ended
November 30,November 30,November 30,November 30,
2009200820092008
GAAP operating income $ 19,793 $ 20,970 $ 72,390 $ 62,284
Add: Non-cash share-based compensation expense per FAS 123R 12,557 12,251 34,246 33,681
Add: Amortization of intangible assets 5,018 5,136 15,033 12,698
Add: Litigation Settlement 8,750 - 8,750 -
Non-GAAP adjusted operating income $ 46,118 $ 38,357 $ 130,419 $ 108,663
Non-GAAP adjusted operating margin 23.7 % 23.2 % 23.6 % 22.3 %

SOURCE: Red Hat Inc.

Red Hat Inc.
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