December 19, 2013

Red Hat Reports Third Quarter Results

  • Total revenue of $397 million, up 15% year-over-year
  • Subscription revenue of $343 million, up 17% year-over-year
  • GAAP operating income of $61 million, up 22% year-over-year; non-GAAP operating income of $98 million, up 19% year-over-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 2014 third quarter ended November 30, 2013.

Total revenue for the quarter was $397 million, an increase of 15% in U.S. dollars from the year ago quarter, or 17% measured in constant currency. Constant currency references in this release are as detailed in the tables below. Subscription revenue for the quarter was $343 million, up 17% in U.S. dollars year-over-year, or 18% measured in constant currency.

"Strong demand in Q3 for our core Red Hat Enterprise Linux and JBoss Middleware technologies led to results that exceeded guidance across several key financial metrics," stated Jim Whitehurst, President and Chief Executive Officer of Red Hat. "Red Hat's technologies address the high growth opportunities in the data center to modernize and move away from legacy proprietary software in order to deploy open hybrid cloud technologies that drive IT velocity, efficiency and scalability."

GAAP operating income for the third quarter was $61 million, up 22% year-over-year. After adjusting for stock compensation expense and amortization of intangible assets, as detailed in the tables below, non-GAAP operating income for the third quarter was $98 million, up 19% year-over-year. For the third quarter, GAAP operating margin was 15.3% and non-GAAP operating margin was 24.8%.

Net income for the quarter was $52 million, or $0.27 per diluted share, compared with $35 million, or $0.18 per diluted share, in the year ago quarter. After adjusting for stock compensation expense and amortization of intangible assets, as detailed in the tables below, non-GAAP net income for the quarter was $81 million, or $0.42 per diluted share, as compared to $57 million, or $0.29 per diluted share, in the year ago quarter. As a result of a discrete tax benefit and cumulative adjustments that lowered the estimated annual effective tax rate, GAAP EPS and non-GAAP EPS results benefited by approximately $0.04 per share and $0.06 per share, respectively.

Operating cash flow was $95 million for the third quarter, as compared to $100 million in the year ago quarter. At quarter end, the company's total deferred revenue balance was $1.12 billion, an increase of 14% on a year-over-year basis. Total cash, cash equivalents and investments as of November 30, 2013 was $1.33 billion after repurchasing approximately $40 million of common stock, or approximately 920 thousand shares, in the third quarter. Red Hat has repurchased approximately $239 million of common stock, or approximately 5.0 million shares, during the first nine months of fiscal 2014.

"We experienced an acceleration in our billings proxy growth in Q3, both year-over-year and sequentially, due in part to the strengthening of our European and U.S. federal government businesses," stated Charlie Peters, Executive Vice President and Chief Financial Officer of Red Hat. "The billings proxy, which we define as total revenue plus the change in deferred revenue found on the Statement of Cash Flows, was $453 million, up 19% in U.S. dollars and 21% in constant currency compared to last year. Red Hat associates executed well."

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 is the world's leading provider of open source software solutions, using a community-powered approach to reliable and high-performing cloud, Linux, middleware, storage and virtualization technologies. Red Hat also offers award-winning support, training, and consulting services. As the connective hub in a global network of enterprises, partners, and open source communities, Red Hat helps create relevant, innovative technologies that liberate resources for growth and prepare customers for the future of IT. Learn more at 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; the integration of acquisitions and the ability to market successfully acquired technologies and products; uncertainty and adverse results in litigation and related settlements; 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 earthquakes and floods. 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 this press release.

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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,
2013 2012 2013 2012
Revenue:
 
Subscriptions $342,770 $294,186 $985,279 $845,557
Training and services 53,766 49,420 148,939 135,375
 
 
Total subscription, training and services revenue 396,536 343,606 1,134,218 980,932
 
Cost of revenue:
 
Subscriptions 24,544 21,153 71,437 57,939
Training and services 35,883 31,965 100,627 89,056
 
 
Total cost of subscription, training and services revenue 60,427 53,118 172,064 146,995
 
 
Total gross profit 336,109 290,488 962,154 833,937
 
Operating expense:
Sales and marketing 153,528 133,792 440,568 378,240
Research and development 82,519 68,655 234,619 191,901
General and administrative 39,270 38,122 111,807 109,847
Facility exit costs - - 2,171 3,142
 
Total operating expense 275,317 240,569 789,165 683,130
 
Income from operations 60,792 49,919 172,989 150,807
Interest income 1,579 1,936 4,608 6,384
Other income (expense), net (440) (730) 332 502
 
 
Income before provision for income taxes 61,931 51,125 177,929 157,693
Provision for income taxes 9,906 16,360 44,705 50,462
 
Net income $52,025 $34,765 $133,224 $107,231
 
Net income per share:
Basic $0.27 $0.18 $0.70 $0.56
Diluted $0.27 $0.18 $0.69 $0.55
 
Weighted average shares outstanding:
Basic 189,514 193,374 190,024 193,127
Diluted 191,365 195,666 192,049 195,898

RED HAT, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands)
             
ASSETS
November 30, February 28,
2013 2013 (1)
(Unaudited)
Current assets:
Cash and cash equivalents $642,111 $487,084
Investments in debt and equity securities 324,424 392,381
Accounts receivable, net 309,753 302,942
Deferred tax assets, net 93,711 88,765
Prepaid expenses 96,142 94,421
Other current assets 2,459 3,156
 
Total current assets 1,468,600 1,368,749
 
Property and equipment, net 168,604 141,586
Goodwill 687,490 690,911
Identifiable intangibles, net 136,073 142,243
Investments in debt securities 360,114 438,908
Other assets, net 30,487 31,263
 
Total assets $2,851,368 $2,813,660
 
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $190,868 $154,202
Deferred revenue 833,671 830,486
Other current obligations 1,007 1,024
 
Total current liabilities 1,025,546 985,712
 
Long term deferred revenue 289,622 259,466
Other long term obligations 64,997 48,321
Stockholders' equity:
Common stock 23 23
Additional paid-in capital 1,857,738 1,802,899
Retained earnings 675,104 541,880
Treasury stock, at cost (1,056,419) (816,674)
Accumulated other comprehensive loss (5,243) (7,967)
 
Total stockholders' equity 1,471,203 1,520,161
 
Total liabilities and stockholders' equity $2,851,368 $2,813,660
 
 
(1) Derived from audited financial statements

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,
2013 2012 2013 2012
 
Cash flows from operating activities:
Net income $52,025 $34,765 $133,224 $107,231
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 18,955 16,126 55,326 44,773
Share-based compensation expense 30,190 26,678 83,196 72,743
Deferred income taxes 2,016 6,686 18,679 29,749
Excess tax benefits from share-based payment arrangements (3,428) (8,100) (9,071) (27,900)
Net amortization of bond premium on available-for-sale debt securities 2,301 1,675 6,637 5,094
Other 438 (552) 485 (2,393)
Changes in operating assets and liabilities net of effects of acquisitions:
Accounts receivable (75,330) (35,291) (9,249) 534
Prepaid expenses (1,109) 2,652 (3,503) (4,314)
Accounts payable and accrued expenses 12,272 19,879 38,565 42,809
Deferred revenue 56,019 35,207 40,999 56,515
Other 805 431 610 3,572
 
Net cash provided by operating activities 95,154 100,156 355,898 328,413
 
Cash flows from investing activities:
Purchase of available-for-sale debt securities (101,636) (123,318) (448,712) (631,087)
Proceeds from sales and maturities of available-for-sale debt securities 118,084 169,743 597,851 587,522
Acquisition of business, net of cash acquired - (21,188) - (31,239)
Purchase of other intangible assets (682) (5,577) (13,203) (32,440)
Purchase of property and equipment (13,327) (28,309) (61,833) (64,552)
Other (150) (66) (2,084) 264
 
Net cash provided by (used in) investing activities 2,289 (8,715) 72,019 (171,532)
 
Cash flows from financing activities:
Excess tax benefits from share-based payment arrangements 3,428 8,100 9,071 27,900
Proceeds from exercise of common stock options 223 4,294 1,311 10,810
Purchase of treasury stock (40,018) (52,018) (239,363) (84,900)
Payments related to net settlement of employee share-based compensation awards (18,307) (22,924) (33,122) (45,612)
Payments on other borrowings (362) (205) (979) (682)
 
Net cash used in financing activities (55,036) (62,753) (263,082) (92,484)
 
Effect of foreign currency exchange rates on cash and cash equivalents 2,910 5,647 (9,808) (7,703)
Net increase in cash and cash equivalents 45,317 34,335 155,027 56,694
Cash and cash equivalents at beginning of the period 596,794 571,576 487,084 549,217
 
Cash and cash equivalents at end of period $642,111 $605,911 $642,111 $605,911

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,
2013 2012 2013 2012
 
Cost of revenue $2,922 $2,444 $8,861 $6,777
Sales and marketing 10,268 8,875 30,009 23,962
Research and development 9,161 7,935 25,100 22,040
General and administration 7,839 7,424 19,226 19,964
Total share-based compensation expense $30,190 $26,678 $83,196 $72,743
 
 
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,
2013 2012 2013 2012
 
Cost of revenue $2,504 $1,433 $7,672 $3,252
Sales and marketing 2,479 2,076 6,395 6,272
Research and development 959 959 2,877 2,877
General and administration 1,288 1,476 4,028 3,800
Total amortization of intangible assets expense $7,230 $5,944 $20,972 $16,201
 
 
Facility exit costs included in Consolidated Statements of Operations:
 
Three Months Ended Nine Months Ended
November 30, November 30, November 30, November 30,
2013 2012 2013 2012
 
Facility exit costs - - $2,171 $3,142
 
 
 
Three Months Ended Nine Months Ended
November 30, November 30, November 30, November 30,
2013 2012 2013 2012
 
GAAP net income $52,025 $34,765 $133,224 $107,231
 
Provision for income taxes 9,906 16,360 44,705 50,462
 
GAAP income before provision for income taxes $61,931 $51,125 $177,929 $157,693
 
Add: Non-cash share-based compensation expense 30,190 26,678 83,196 72,743
Add: Amortization of intangible assets 7,230 5,944 20,972 16,201
Add: Facility exit costs - - 2,171 3,142
 
Non-GAAP adjusted income before provision for income taxes $99,351 $83,747 $284,268 $249,779
 
Provision for income taxes (1) 18,474 26,799 73,949 79,929
 
Non-GAAP adjusted net income (basic and diluted) $80,877 $56,948 $210,319 $169,850
 
Non-GAAP adjusted net income per share:
Basic $0.43 $0.29 $1.11 $0.88
Diluted $0.42 $0.29 $1.10 $0.87
 
 
(1) Provision for income taxes:
Non-GAAP adjusted net income before income tax provision $99,351 $83,747 $284,268 $249,779
Estimated effective tax rates, excluding discrete tax items 22.8% 32.0% 27.5% 32.0%
Non-GAAP provision for income taxes before discrete tax benefit $22,699 $26,799 $78,174 $79,929
Discrete tax benefit 4,225 - 4,225 -
Provision for income taxes on Non-GAAP adjusted net income $18,474 $26,799 $73,949 $79,929

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,
2013 2012 2013 2012
 
GAAP gross profit $336,109 $290,488 $962,154 $833,937
 
Add: Non-cash share-based compensation expense 2,922 2,444 8,861 6,777
Add: Amortization of intangible assets 2,504 1,433 7,672 3,252
 
Non-GAAP gross profit $341,535 $294,365 $978,687 $843,966
 
Non-GAAP gross margin 86% 86% 86% 86%
 
 
Three Months Ended Nine Months Ended
November 30, November 30, November 30, November 30,
2013 2012 2013 2012
 
GAAP operating expenses $275,317 $240,569 $789,165 $683,130
 
Deduct: Non-cash share-based compensation expense (27,268) (24,234) (74,335) (65,966)
Deduct: Amortization of intangible assets (4,726) (4,511) (13,300) (12,949)
Deduct: Facility exit costs

-

-

(2,171) (3,142)
 
Non-GAAP adjusted operating expenses $243,323 $211,824 $699,359 $601,073
 
 
Three Months Ended Nine Months Ended
November 30, November 30, November 30, November 30,
2013 2012 2013 2012
 
GAAP operating income $60,792 $49,919 $172,989 $150,807
 
Add: Non-cash share-based compensation expense 30,190 26,678 83,196 72,743
Add: Amortization of intangible assets 7,230 5,944 20,972 16,201
Add: Facility exit costs - - 2,171 3,142
 
Non-GAAP adjusted operating income $98,212 $82,541 $279,328 $242,893
 
Non-GAAP adjusted operating margin 24.8% 24.0% 24.6% 24.8%
 
 
 
Reconciliation of constant currency revenue growth rates
 
Three Months Ended
November 30, November 30, Year-Over-Year
2013 2012 Growth Rate
 
GAAP subscription revenue $342,770 $294,186 16.5%
Adjustment for currency impact 4,481 -
Non-GAAP subscription revenue on a constant currency basis $347,251 $294,186 18.0%
 
GAAP training and services revenue $53,766 $49,420 8.8%
Adjustment for currency impact 757 -
Non-GAAP training and services revenue on a constant currency basis $54,523 $49,420 10.3%
 
GAAP total subscription, training and services revenue $396,536 $343,606 15.4%
Adjustment for currency impact 5,238 -
Non-GAAP total subscription, training and services revenue on a constant currency basis $401,774 $343,606 16.9%
 
 
Nine Months Ended
November 30, November 30, Year-Over-Year
2013 2012 Growth Rate
 
GAAP subscription revenue $985,279 $845,557 16.5%
Adjustment for currency impact 13,011 -
Non-GAAP subscription revenue on a constant currency basis $998,290 $845,557 18.1%
 
GAAP training and services revenue $148,939 $135,375 10.0%
Adjustment for currency impact 1,750 -
Non-GAAP training and services revenue on a constant currency basis $150,689 $135,375 11.3%
 
GAAP total subscription, training and services revenue $1,134,218 $980,932 15.6%
Adjustment for currency impact 14,761 -
Non-GAAP total subscription, training and services revenue on a constant currency basis $1,148,979 $980,932 17.1%

Red Hat, Inc.
Media Contact:
Stephanie Wonderlick, 571-421-8169
swonderl@redhat.com
or
Investor Relations:
Tom McCallum, 919-754-4630
tmccallum@redhat.com

Source: Red Hat, Inc.

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