Red Hat, Inc.
Sep 21, 2011

Red Hat Reports Second Quarter Results

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 2012 second quarter ended August 31, 2011.

Total revenue for the quarter was $281.3 million, an increase of 28% from the year ago quarter. Subscription revenue for the quarter was $238.3 million, up 28% year-over-year.

"The combination of strong sales execution and customer demand led to second quarter revenue that was above our guidance and represented our fourth straight quarter of accelerating revenue growth," stated Jim Whitehurst, President and Chief Executive Officer of Red Hat. "We continued to win and strengthen relationships with enterprise customers who partner with Red Hat to reduce costs while modernizing their IT infrastructure to enable applications to run on bare metal, virtualization and in the cloud. Based on the strong first half results, we believe Red Hat remains well positioned to finish fiscal 2012 as the first billion dollar open source software vendor."

GAAP operating income for the second quarter was $52.5 million, or 18.7% operating margin. After adjusting for stock compensation and amortization expenses as detailed in the tables below, non-GAAP operating income for the second quarter was $76.4 million, up 41% year-over-year. Non-GAAP operating margin was 27.2%, up 250 basis points from the year ago quarter.

Net income for the quarter was $40.0 million, or $0.20 per diluted share, compared with $23.7 million, or $0.12 per diluted share, in the year ago quarter. After adjusting for stock compensation and amortization expenses as detailed in the tables below, non-GAAP net income for the quarter was $56.5 million, or $0.29 per diluted share, as compared to $36.8 million, or $0.19 per diluted share, in the year ago quarter. Both GAAP and non-GAAP net income for the quarter included a discrete tax benefit of $2.1 million, approximately $0.01 per diluted share. Excluding this tax benefit, GAAP earnings per share would have been $0.19 and non-GAAP earnings per share would have been $0.28 for the quarter.

Operating cash flow was $77.1 million for the second quarter, as compared to $64.3 million in the year ago quarter. At quarter end, the company's total deferred revenue balance was $813.2 million, an increase of 25% on a year-over-year basis. Total cash, cash equivalents and investments as of August 31, 2011 was $1.3 billion.

"Our investments in sales and R&D continued to pay off, producing market share gains, higher revenue and 30% year-over-year billings growth," stated Charlie Peters, Executive Vice President and Chief Financial Officer of Red Hat. "Our productivity continued to improve as evidenced by non-GAAP operating income growth of 41% and cash flow growth of 20% in Q2. Moreover, year-to-date non-GAAP operating income grew 35% and operating cash flow grew 34% compared to the first half of last fiscal year."

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 70 offices spanning the globe. Red Hat provides high-quality, affordable technology with its operating system platform, Red Hat Enterprise Linux, together with cloud, 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; the ability of the Company to compete effectively; uncertainty and adverse results in litigation and related settlements; the integration of acquisitions and the ability to market successfully acquired technologies and products; 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 the earthquakes and floods, including events in Japan. 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.

Red Hat Inc., Red Hat, the Shadowman logo and JBoss are registered trademarks of Red Hat 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   Six Months Ended
August 31,   August 31, August 31,   August 31,
2011 2010 2011 2010
Revenue:
 
Subscriptions $ 238,337 $ 186,183 $ 463,870 $ 365,259
Training and services   42,983   33,578   82,196   63,646
 
 
Total subscription, training and services revenue   281,320   219,761   546,066   428,905
 
Cost of revenue:
 
Subscriptions 16,596 12,256 31,835 24,920
Training and services   30,043   23,446   57,251   44,019
 
 
Total cost of subscription, training and services revenue   46,639   35,702   89,086   68,939
 
 
Total gross profit 234,681 184,059 456,980 359,966
 
Operating expense:
Sales and marketing 99,730 79,434 197,056 153,998
Research and development 51,488 42,361 99,776 83,019
General and administrative   30,985   28,193   62,311   54,638
 
Total operating expense   182,203   149,988   359,143   291,655
 
Income from operations 52,478 34,071 97,837 68,311
Interest income 2,127 1,775 4,063 3,438
Other income, net   326   548   59   1,677
 
 
Income before provision for income taxes 54,931 36,394 101,959 73,426
Provision for income taxes   14,963   12,738   29,542   25,699
 
Net income $ 39,968 $ 23,656 $ 72,417 $ 47,727
 
Net income-diluted $ 39,968 $ 23,656 $ 72,417 $ 47,727
 
Net income per share:
Basic $ 0.21 $ 0.13 $ 0.38 $ 0.25
Diluted $ 0.20 $ 0.12 $ 0.37 $ 0.25
 
Weighted average shares outstanding:
Basic 192,937 189,027 193,046 188,477
Diluted 196,171 193,560 196,428 193,457

 
 
RED HAT, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands)
 
ASSETS    
            August 31, February 28,
2011 2011
(Unaudited)
Current assets:
Cash and cash equivalents $ 737,458 $ 642,630
Investments in debt and equity securities 199,781 217,970
Accounts receivable, net 175,703 184,741
Deferred tax assets, net 79,707 75,720
Prepaid expenses 66,557 62,364
Other current assets   1,583     1,133  
 
Total current assets 1,260,789 1,184,558
 
Property and equipment, net 81,478 75,558
Goodwill 465,558 463,673
Identifiable intangibles, net 102,363 109,932
Investments in debt securities 363,862 331,791
Other assets, net   34,480     33,810  
 
Total assets $ 2,308,530   $ 2,199,322  
 
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 16,142 $ 16,285
Accrued expenses 88,736 90,229
Deferred revenue 601,627 572,637
Other current obligations   457     650  
 
Total current liabilities 706,962 679,801
 
Deferred lease credits 5,056 5,215
Long term deferred revenue 211,527 199,617
Other long term obligations 23,814 23,990
Stockholders' equity:
Common stock 22 22
Additional paid-in capital 1,664,433 1,610,238
Retained earnings 317,467 245,050
Treasury stock, at cost (619,744 ) (562,792 )
Accumulated other comprehensive loss   (1,007 )   (1,819 )
 
Total stockholders' equity   1,361,171     1,290,699  
 
Total liabilities and stockholders' equity $ 2,308,530   $ 2,199,322  

 
 
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,
2011 2010 2011 2010
 
Cash flows from operating activities:
Net income $ 39,968 $ 23,656 $ 72,417 $ 47,727

Adjustments to reconcile net income to net cash provided by operating activities:

Depreciation and amortization 13,147 11,689 25,886 23,411
Share-based compensation expense 18,753 15,675 34,940 28,849
Deferred income taxes 8,155 13,434 19,210 21,786
Excess tax benefits from share-based payment arrangements (8,112 ) (10,192 ) (16,672 ) (21,199 )
Gain on sale of available-for-sale equity securities (663 ) (601 ) (1,307 ) (1,117 )
Other 423 319 990 116
Changes in operating assets and liabilities:

Accounts receivable

(20,457 ) (6,794 ) 11,585 12,732
Prepaid expenses 65 (4,153 ) (3,228 ) (4,744 )
Accounts payable (286 ) 2,187 (376 ) (2,882 )
Accrued expenses 3,614 6,712 (235 ) 8,252
Deferred revenue 22,851 13,439 24,121 12,381
Other   (357 )   (1,087 )   (19 )   (384 )
 
Net cash provided by operating activities   77,101     64,284     167,312     124,928  
 
Cash flows from investing activities:
Purchase of available-for-sale debt securities (220,436 ) (110,021 ) (401,286 ) (220,364 )
Proceeds from sales and maturities of available-for-sale debt securities 208,693 215,811 381,276 414,129
Proceeds from sales of available-for-sale equity securities 681 609 1,346 1,157
Purchase of strategic equity investments (1,000 ) - (1,000 ) -
Purchase of developed technologies and other intangible assets (1,059 ) (1,324 ) (3,602 ) (2,945 )
Purchase of property and equipment   (11,523 )   (8,371 )   (20,179 )   (15,093 )
 
Net cash provided by (used in) investing activities   (24,644 )   96,704     (43,445 )   176,884  
 
Cash flows from financing activities:
Excess tax benefits from share-based payment arrangements 8,112 10,192 16,672 21,199
Proceeds from exercise of common stock options 3,370 18,011 8,413 55,699
Purchase of treasury stock (38,006 ) (4,994 ) (56,952 ) (79,355 )
Payments related to net settlement of employee share-based compensation awards (2,952 ) (1,135 ) (11,985 ) (8,190 )
Payments on other borrowings   (94 )   -     (688 )   (877 )
 
Net cash provided by (used in) financing activities   (29,570 )   22,074     (44,540 )   (11,524 )
 
Effect of foreign currency exchange rates on cash and cash equivalents 4,348 7,795 15,501 (9,179 )
Net increase in cash and cash equivalents 27,235 190,857 94,828 281,109
Cash and cash equivalents at beginning of the period   710,223     478,370     642,630     388,118  
 
Cash and cash equivalents at end of period $ 737,458   $ 669,227   $ 737,458   $ 669,227  

 
 
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, August 31,   August 31,
2011 2010 2011 2010  
 
Cost of revenue $ 1,842 $ 1,370 $ 3,631 $ 2,561
Sales and marketing 6,101 4,771 11,672 8,547
Research and development 4,883 4,080 9,077 7,435
General and administration   5,927     5,454     10,560     10,306  
Total share-based compensation expense $ 18,753   $ 15,675   $ 34,940   $ 28,849  
 
 
Amortization of intangible assets expense included in Consolidated Statements of Operations:
 
Three Months Ended Six Months Ended  
August 31, August 31, August 31, August 31,
2011 2010 2011 2010  
 
Cost of revenue $ 1,216 $ 704 $ 2,195 $ 1,408
Sales and marketing 1,958 2,075 3,918 4,161
Research and development 1,157 925 2,313 1,850
General and administration   865     833     1,711     1,655  
Total amortization of intangible assets expense $ 5,196   $ 4,537   $ 10,137   $ 9,074  
 
 
 
 
Three Months Ended Six Months Ended  
August 31, August 31, August 31, August 31,
2011 2010 2011 2010  
 
GAAP net income $ 39,968 $ 23,656 $ 72,417 $ 47,727
 
Provision for income taxes  

14,963

 

12,738

 

29,542

   

25,699

 
 
GAAP income before provision for income taxes $ 54,931 $ 36,394 $ 101,959 $ 73,426
 
Add: Non-cash share-based compensation expense 18,753 15,675 34,940 28,849
Add: Amortization of intangible assets   5,196     4,537     10,137     9,074  
 
Non-GAAP adjusted income before provision for income taxes $ 78,880   $ 56,606   $ 147,036   $ 111,349  
 
Provision for income taxes (1)   22,388     19,812     43,516     38,972  
 
Non-GAAP adjusted net income $ 56,492   $ 36,794   $ 103,520   $ 72,377  
 
Non-GAAP adjusted net income-diluted $ 56,492   $ 36,794   $ 103,520   $ 72,377  
 
Non-GAAP adjusted net income per share:
Basic $ 0.29 $ 0.19 $ 0.54 $ 0.38
Diluted $ 0.29 $ 0.19 $ 0.53 $ 0.37
 
 
(1) Provision for income taxes:
Non-GAAP adjusted net income before income tax provision $ 78,880 $ 56,606 $ 147,036 $ 111,349
Estimated annual effective tax rate   31 %   35 %   31 %   35 %
Non-GAAP provision for income taxes before discrete tax benefit $ 24,453 $ 19,812 $ 45,581 $ 38,972
Discrete tax benefit 2,065

-

2,065

-

Provision for income taxes on Non-GAAP adjusted net income $ 22,388   $ 19,812   $ 43,516   $ 38,972  

 
 
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, August 31,   August 31,

2011

2010 2011 2010
 
GAAP gross profit $ 234,681 $ 184,059 $ 456,980 $ 359,966
 
Add: Non-cash share-based compensation expense 1,842 1,370 3,631 2,561
Add: Amortization of intangible assets   1,216     704     2,195     1,408  
 
Non-GAAP gross profit $ 237,739   $ 186,133   $ 462,806   $ 363,935  
 
Non-GAAP gross margin 85 % 85 % 85 % 85 %
 
 
Three Months Ended Six Months Ended
August 31, August 31, August 31, August 31,

2011

2010 2011 2010
 
GAAP operating expenses $ 182,203 $ 149,988 $ 359,143 $ 291,655
 
Deduct: Non-cash share-based compensation expense (16,911 ) (14,305 ) (31,309 ) (26,288 )
Deduct: Amortization of intangible assets   (3,980 )   (3,833 )   (7,942 )   (7,666 )
 
Non-GAAP adjusted operating expenses $ 161,312   $ 131,850   $ 319,892   $ 257,701  
 
 
Three Months Ended Six Months Ended
August 31, August 31, August 31, August 31,

2011

2010 2011 2010
 
GAAP operating income $ 52,478 $ 34,071 $ 97,837 $ 68,311
 
Add: Non-cash share-based compensation expense 18,753 15,675 34,940 28,849
Add: Amortization of intangible assets   5,196   4,537     10,137     9,074  
 
Non-GAAP adjusted operating income $ 76,427   $ 54,283   $ 142,914   $ 106,234  
 
Non-GAAP adjusted operating margin 27.2 % 24.7 % 26.2 % 24.8 %

Red Hat Inc.
Media Contact:
Leigh Day, 919-754-4369
lday@redhat.com
or
Investor Relations:
Tom McCallum, 919-754-4630
tmccallum@redhat.com

Source: Red Hat, Inc.

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