December 21, 2010

Red Hat Reports Third Quarter Results

  • Revenue of $236 million, up 21% from the prior year
  • GAAP operating income up 92%, non-GAAP operating income up 26% from the prior year
  • Deferred revenue of $685 million, up 11% from the prior year
  • Operating Cash Flow of $71 million, up 31% from the prior year

RALEIGH, N.C.--(BUSINESS WIRE)-- Red Hat, Inc. (NYSE: RHT), the world's leading provider of open source solutions, today announced financial results for its fiscal year 2011 third quarter ended November 30, 2010.

Total revenue for the quarter was $235.6 million, an increase of 21% from the year ago quarter. Subscription revenue for the quarter was $198.8 million, up 21% year-over-year.

"Strong market demand and sales execution, combined with a compelling value proposition, led to organic billings growth of over 20%, or $262 million. Also in Q3, we were particularly proud that Red Hat was recognized by CIOs for the seventh consecutive year as one of the top IT vendors delivering value according to CIO Insight Magazine Vendor Value survey." stated Jim Whitehurst, President and Chief Executive Officer of Red Hat. "In addition to delivering a compelling value proposition, we continued to drive innovation for our customers' data center needs. In November, we launched the latest version of our flagship operating system, Red Hat Enterprise Linux 6, giving customers a great platform for next generation architectures such as virtualization and cloud computing."

GAAP operating income for the third quarter was $38.0 million up 92% year-over-year. GAAP operating income in the year ago quarter was $19.8 million after a charge of $8.8 million for a litigation settlement. After adjusting for stock compensation, amortization expenses and the charge for a litigation settlement in the prior year as detailed in the tables below, non-GAAP operating income for the third quarter was $58.0 million, up 26% year-over-year.

Net income for the quarter was $26.0 million, or $0.13 per diluted share, compared with $16.4 million, or $0.08 per diluted share, in the year ago quarter. Non-GAAP net income for the quarter was $39.1 million, or $0.20 per diluted share, compared to $33.5 million, or $0.17 per diluted share in the year ago quarter, after adjusting for stock compensation, amortization expenses and the charge for a litigation settlement in the prior year as detailed in the tables below.

Operating cash flow totaled $70.8 million, as compared to $54.1 million in the year ago quarter. At quarter end, the company's total deferred revenue balance was $685.2 million, an increase of 11% on a year-over-year basis. Total cash, cash equivalents and investments as of November 30, 2010 was $1.1 billion.

"Top line growth of 21% and even faster operating income growth, contributed to a 31% increase in operating cash flow," stated Charlie Peters, Executive Vice President and Chief Financial Officer of Red Hat. "We are well positioned at the confluence of several hot areas of IT; open source, virtualization and cloud computing. In addition, we are executing consistently and we are making focused investments in growth initiatives. For example, in November we acquired Makara, a developer of deployment and management solutions for applications in the cloud. Makara's technologies will accelerate the development of Red Hat's Platform-as-a-Service (PaaS) solution as part of our Cloud Foundations portfolio, one of our key growth initiatives."

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 an S&P 500 company, 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 seven 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, the effects of industry consolidation, 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.

© 2010 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 Ended Nine Months Ended

November 30,

November 30,

November 30,

November 30,

2010   2009 2010   2009
Revenue:
 
Subscriptions $198,842 $164,432 $564,101 $469,496
Training and services 36,734 29,914 100,380 82,872
 
 
Total subscription, training and services revenue 235,576 194,346 664,481 552,368
 
Cost of revenue:
 
Subscriptions 13,336 11,010 38,256 32,033
Training and services 26,408 18,588 70,427 52,474
 
 
Total cost of subscription, training and services revenue 39,744 29,598 108,683 84,507
 
 
Total gross profit 195,832 164,748 555,798 467,861
 
Operating expense:
Sales and marketing 85,138 71,498 239,136 202,242
Research and development 43,083 38,605 126,102 110,068
General and administrative 29,655 26,102 84,294 74,411
Litigation Settlement - 8,750 - 8,750
 
Total operating expense 157,876 144,955 449,532 395,471
 
Income from operations 37,956 19,793 106,266 72,390
Interest income 1,608 2,206 5,046 8,161
Other income, net 462 3,253 2,140 6,442
 
 
Income before provision for income taxes 40,026 25,252 113,452 86,993
Provision for income taxes 14,009 8,838 39,708 23,128
 
Net income $26,017 $16,414 $73,744 $63,865
 
Net income-diluted $26,017 $16,414 $73,744 $63,865
 
Net income per share:
Basic $0.14 $0.09 $0.39 $0.34
Diluted $0.13 $0.08 $0.38 $0.33
 
Weighted average shares outstanding:
Basic 191,296 187,450 189,410 187,823
Diluted 196,908 193,733 195,723 193,366
 
RED HAT, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands)
             
ASSETS

November 30,

February 28,

2010 2010
(Unaudited)
Current assets:
Cash and cash equivalents $594,914 $388,118
Investments in debt and equity securities 250,528 372,656
Accounts receivable, net 151,612 139,436
Deferred tax assets, net 37,004 57,951
Prepaid expenses 53,374 44,116
Other current assets 954 842
 
Total current assets 1,088,386 1,003,119
 
Property and equipment, net 74,860 71,708
Goodwill 463,552 438,749
Identifiable intangibles, net 112,980 108,213
Investments in debt securities 251,538 209,411
Other assets, net 37,397 39,672
 
Total assets $2,028,713 $1,870,872
 
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $19,101 $16,483
Accrued expenses 85,959 68,334
Deferred revenue 509,192 480,572
Other current obligations 638 878
 
Total current liabilities 614,890 566,267
 
Deferred lease credits 4,356 4,184
Long term deferred revenue 176,043 165,288
Other long term obligations 23,468 24,081
Stockholders' equity:
Common stock 22 22
Additional paid-in capital 1,554,214 1,444,848
Retained earnings 211,516 137,772
Treasury stock, at cost (552,001) (472,646)
Accumulated other comprehensive (loss) income (3,795) 1,056
 
Total stockholders' equity 1,209,956 1,111,052
 
Total liabilities and stockholders' equity $2,028,713 $1,870,872
 
RED HAT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
                 
 
Three Months Ended Nine Months Ended
November 30, November 30, November 30, November 30,
2010   2009 2010   2009
 
Cash flows from operating activities:
Net income $26,017 $16,414 $73,744 $63,865

Adjustments to reconcile net income to net cash

provided by operating activities:

 
Depreciation and amortization 11,829 11,595 35,240 33,847
Share-based compensation expense 15,340 12,557 44,189 34,246
Deferred income taxes 7,911 9,578 29,697 15,066
Excess tax benefits from share-based payment arrangements (10,800) (9,524) (31,999) (27,280)
Gain on sale of available-for-sale equity securities (1,726) (4,584) (2,843) (8,247)
Other 673 (198) 789 (205)
Changes in operating assets and liabilities net of effects of acquisitions:
Accounts receivable (23,762) (21,742) (11,030) (1,130)
Prepaid assets (4,613) 1,810 (9,357) 5,180
Accounts payable 5,544 (843) 2,662 6,944
Accrued expenses 16,343 14,651 24,595 16,836
Deferred revenue 26,803 23,446 39,184 35,963
Other 1,261 989 877 2,273
 
Net cash provided by operating activities 70,820 54,149 195,748 177,358
 
Cash flows from investing activities:
Purchase of available-for-sale debt securities (314,729) (245,788) (535,093) (534,260)
Proceeds from sales and maturities of available-for-sale debt securities 191,259 93,089 605,388 299,193
Proceeds from sales of available-for-sale equity securities 1,843 4,312 3,000 8,371
Acquisitions of businesses, net of cash acquired (31,381) - (31,381) -
Net purchase of strategic equity investments - (1,368) - (1,368)
Purchase of developed technologies and other intangible assets (9,481) (847) (12,426) (2,917)
Purchase of property and equipment (10,079) (8,655) (25,171) (21,318)
 
Net cash provided by (used in) investing activities (172,568) (159,257) 4,317 (252,299)
 
Cash flows from financing activities:
Excess tax benefits from share-based payment arrangements 10,800 9,524 31,999 27,280
Proceeds from exercise of common stock options 24,654 44,985 80,353 63,574
Purchase of treasury stock - (52,289) (79,355) (146,246)
Payments related to net settlement of employee share-based compensation awards (14,899) (6,754) (23,089) (9,054)
Payments on other borrowings - - (877) (900)
Proceeds from other borrowings 335 - 335 -
 
Net cash provided by (used in) financing activities 20,890 (4,534) 9,366 (65,346)
 
Effect of foreign currency exchange rates on cash and cash equivalents 6,545 6,299 (2,635) 14,448
Net increase (decrease) in cash and cash equivalents (74,313) (103,343) 206,796 (125,839)
Cash and cash equivalents at beginning of the period 669,227 493,052 388,118 515,548
 
Cash and cash equivalents at end of period $594,914 $389,709 $594,914 $389,709
 
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 Nine Months Ended
November 30, November 30, November 30, November 30,
2010 2009 2010 2009
 
Cost of revenue $1,607 $916 $4,168 $2,475
Sales and marketing 4,922 3,627 13,469 9,875
Research and development 3,960 3,239 11,395 9,588
General and administration 4,851 4,775 15,157 12,308
Total share-based compensation expense $15,340 $12,557 $44,189 $34,246
 
 
Amortization of intangible assets expense included in Consolidated Statements of Operations:
 
Three Months Ended Nine Months Ended
November 30, November 30, November 30, November 30,
2010 2009 2010 2009
 
Cost of revenue $887 $989 $2,295 $2,938
Sales and marketing 2,076 2,293 6,237 6,908
Research and development 925 925 2,775 2,776
General and administration 839 811 2,494 2,411
Total amortization of intangible assets expense $4,727 $5,018 $13,801 $15,033
 
 
Class action litigation settlement expense included in Consolidated Statements of Operations:
 
Three Months Ended Nine Months Ended
November 30, November 30, November 30, November 30,
2010 2009 2010 2009
 
Litigation settlement $0 $8,750 $0 $8,750
 
 
Three Months Ended Nine Months Ended
November 30, November 30, November 30, November 30,
2010 2009 2010 2009
 
GAAP net income $26,017 $16,414 $73,744 $63,865
 
Provision for income taxes 14,009 8,838 39,708 23,128
 
GAAP income before provision for income taxes $40,026 $25,252 $113,452 $86,993
 
Add: Non-cash share-based compensation expense 15,340 12,557 44,189 34,246
Add: Amortization of intangible assets 4,727 5,018 13,801 15,033
Add: Litigation settlement - 8,750 - 8,750
 
Non-GAAP adjusted income before provision for income taxes $60,093 $51,577 $171,442 $145,022
 
Provision for income taxes (1) 21,033 18,052 60,005 43,439
 
Non-GAAP adjusted net income $39,060 $33,525 $111,437 $101,583
 
Non-GAAP adjusted net income-diluted $39,060 $33,525 $111,437 $101,583
 
Non-GAAP adjusted net income per share:
Basic $0.20 $0.18 $0.59 $0.54
Diluted $0.20 $0.17 $0.57 $0.53
 
 
(1) Provision for income taxes:
Non-GAAP adjusted net income before income tax provision $60,093 $51,577 $171,442 $145,022
Estimated annual effective tax rate 35% 35% 35% 35%
Non-GAAP provision for income taxes before discrete tax benefit $21,033 $18,052 $60,005 $50,758
Discrete tax benefit

-

- - 7,319
Provision for income taxes on Non-GAAP adjusted net income $21,033 $18,052 $60,005 $43,439
 
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 Nine Months Ended
November 30, November 30, November 30, November 30,
2010 2009 2010 2009
 
GAAP gross profit $195,832 $164,748 $555,798 $467,861
 
Add: Non-cash share-based compensation expense 1,607 916 4,168 2,475
Add: Amortization of intangible assets 887 989 2,295 2,938
 
Non-GAAP gross profit $198,326 $166,653 $562,261 $473,274
 
Non-GAAP gross margin 84% 86% 85% 86%
 
 
Three Months Ended Nine Months Ended
November 30, November 30, November 30, November 30,
2010 2009 2010 2009
 
GAAP operating expenses $157,876 $144,955 $449,532 $395,471
 
Deduct: Non-cash share-based compensation expense (13,733) (11,641) (40,021) (31,771)
Deduct: Amortization of intangible assets (3,840) (4,029) (11,506) (12,095)
Deduct: Litigation settlement - (8,750) - (8,750)
 
Non-GAAP adjusted operating expenses $140,303 $120,535 $398,005 $342,855
 
 
Three Months Ended Nine Months Ended
November 30, November 30, November 30, November 30,
2010 2009 2010 2009
 
GAAP operating income $37,956 $19,793 $106,266 $72,390
 
Add: Non-cash share-based compensation expense 15,340 12,557 44,189 34,246
Add: Amortization of intangible assets 4,727 5,018 13,801 15,033
Add: Litigation settlement - 8,750 - 8,750
 
Non-GAAP adjusted operating income $58,023 $46,118 $164,256 $130,419
 
Non-GAAP adjusted operating margin 24.6% 23.7% 24.7% 23.6%

Media Contact:
Red Hat Inc.
Kara Schiltz, 919- 301-3002
kschiltz@redhat.com
or
Investor Relations:
Tom McCallum, 919-754-4630
tmccallum@redhat.com

Source: Red Hat, Inc.

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