Red Hat Reports Third Quarter Results for Fiscal Year 2017

• Third quarter total revenue of $615 million, up 18% year-over-year or 17% in constant currency
• Third quarter total subscription revenue of $543 million, up 19% year-over-year or 18% in constant currency
• Third quarter Application development-related and other emerging technology revenue of $112 million, up 33% year-over-year or 32% in constant currency

RALEIGH, N.C.--(BUSINESS WIRE)-- Red Hat, Inc. (NYSE: RHT), the world's leading provider of open source solutions, today announced financial results for the third quarter of fiscal year 2017 ended November 30, 2016.

“Enterprise and service provider customers continue to adopt a hybrid cloud strategy for developing, deploying and managing the life-cycle of their critical applications. Red Hat is uniquely positioned to address this need. In aggregate, customers utilizing our cloud-enabling technologies either on-premise or in the public cloud are spending more with Red Hat than customers that have not yet embraced our cloud-enabling technologies," said Jim Whitehurst, President and Chief Executive Officer of Red Hat.

CFO Transition: Frank Calderoni notified Red Hat of his decision to step down as Executive Vice President, Operations and Chief Financial Officer of Red Hat, effective in late January 2017, to enable him to accept a chief executive officer position at another company. Mr. Calderoni has indicated that he would make himself available to Red Hat after the effective date of the resignation for transitional support, as needed. Jim Whitehurst, President and CEO, after consulting with the Board of Directors of Red Hat, announced that upon Mr. Calderoni’s resignation in January, Red Hat intends to appoint Eric Shander, Vice President, Finance and Accounting and our principal accounting officer, to act as the CFO of Red Hat, pending a decision on a permanent replacement.

Jim Whitehurst said, “Our warm thanks to Frank for his contributions to Red Hat and for helping prepare Red Hat for the rich business opportunity we have before us.”

Frank Calderoni said, “I want to thank the associates around the globe for the opportunity to be part of the Red Hat team. I am most proud of the leadership team we were able to build. We also enhanced the strong operational and financial foundation that has enabled the company’s continued growth. Red Hat is an exceptional company and well positioned to continue to leverage the broad transformation that is occurring in the IT industry.”

Revenue: Total revenue for the quarter was $615 million, up 18% in U.S. dollars year-over-year, or 17% measured in constant currency. Constant currency references in this release are detailed in the tables below. Subscription revenue for the quarter was $543 million, up 19% in U.S. dollars year-over-year, or 18% measured in constant currency. Subscription revenue in the quarter was 88% of total revenue.

Subscription Revenue Breakout: Subscription revenue from Infrastructure-related offerings for the quarter was $431 million, an increase of 16% in U.S. dollars year-over-year and 14% measured in constant currency. Subscription revenue from Application development-related and other emerging technologies offerings for the quarter was $112 million, an increase of 33% in U.S. dollars year-over-year and 32% measured in constant currency.

Operating Income: GAAP operating income for the quarter was $81 million, up 17% year-over-year. After adjusting for non-cash share-based compensation expense, amortization of intangible assets, and transaction costs related to business combinations, non-GAAP operating income for the third quarter was $143 million, up 16% year-over-year. Non-GAAP references in this release are detailed in the tables below. For the third quarter, GAAP operating margin was 13.1% and non-GAAP operating margin was 23.3%.

Net Income: GAAP net income for the quarter was $68 million, or $0.37 per diluted share, compared with $47 million, or $0.25 per diluted share, in the year-ago quarter. During the third quarter of fiscal year 2017, GAAP net income and earnings per diluted share benefited by $6 million and approximately $0.03, respectively, from the adoption of Accounting Standards Update 2016-09 ("ASU 2016-09") in the first quarter of fiscal year 2017.

After adjusting for non-cash share-based compensation expense, amortization of intangible assets, transaction costs related to business combinations, and non-cash interest expense related to the debt discount, non-GAAP net income for the quarter was $111 million, or $0.61 per diluted share, as compared to $89 million, or $0.48 per diluted share, in the year-ago quarter. Non-GAAP diluted weighted average shares outstanding excludes any dilution resulting from the convertible notes because any potential dilution is expected to be offset by our convertible note hedge transactions.

Cash: Operating cash flow was $136 million for the third quarter, a decrease of 8% on a year-over-year basis. Total cash, cash equivalents and investments as of November 30, 2016 was $2.0 billion after repurchasing approximately $125 million, or approximately 1.6 million shares, of common stock in the third quarter. The remaining balance in the current repurchase authorization as of November 30, 2016 was approximately $775 million.

Deferred revenue: At the end of the third quarter, the company’s total deferred revenue balance was $1.7 billion, an increase of 15% year-over-year. The full year positive impact to total deferred revenue from changes in foreign exchange rates was $9 million year-over-year. On a constant currency basis, total deferred revenue would have been up 14% year-over-year.

Outlook: Red Hat’s outlook assumes current foreign currency exchange rates, which have weakened since the outlook provided on September 21, 2016, and current business conditions.

For the full year:

• Revenue guidance is expected to be $2.397 billion to $2.405 billion in U.S. dollars.
• GAAP operating margin is expected to be approximately 13.5% and non-GAAP operating margin is expected to be approximately 23.0%.
• Fully diluted GAAP earnings per share (EPS) is expected to be approximately $1.33 per share. Fully diluted non-GAAP EPS is expected to be approximately $2.27 per share. Both GAAP and non-GAAP EPS assume a $1 million to $2 million per quarter forecast for other income. Both GAAP and non-GAAP EPS also assume an estimated annual effective tax rate of 27% before discrete tax items and 183 million fully diluted shares outstanding.
• Operating cash flow guidance range is expected to be approximately $770 million to $785 million.

For the fourth quarter:

• Revenue guidance is $614 million to $622 million.
• GAAP operating margin is expected to be approximately 14.0% and non-GAAP operating margin is expected to be approximately 24.0%.
• Fully diluted GAAP EPS is expected to be approximately $0.33 per share. Fully diluted non-GAAP EPS is expected to be approximately $0.61. Both GAAP and non-GAAP EPS assume a $1 million to $2 million forecast for other income. Both GAAP and non-GAAP EPS also assume an estimated annual effective tax rate of 27% before discrete tax items and 181 million fully diluted shares outstanding.

GAAP to non-GAAP reconciliation:

Full year non-GAAP operating margin guidance is derived by subtracting the estimated full year impact of non-cash share-based compensation expense of approximately $195 million, amortization of intangible assets of approximately $32 million, and transaction costs related to business combinations of $2 million. Full year fully diluted non-GAAP EPS guidance is derived by subtracting the expenses listed in the previous sentence and the full year impact of non-cash interest expense related to the debt discount of approximately $19 million and an estimated annual effective tax rate of 27% before discrete tax items. Additionally, full year fully diluted non-GAAP EPS excludes approximately $16 million of discrete tax benefits related to share-based compensation that are included in full year fully diluted GAAP EPS.

Fourth quarter non-GAAP operating margin guidance is derived by subtracting the estimated impact of non-cash share-based compensation expense of approximately $54 million and amortization of intangible assets of approximately $8 million. Fourth quarter fully diluted non-GAAP EPS guidance is derived by subtracting the expenses listed in the previous sentence and non-cash interest expense related to the debt discount of approximately $5 million and an estimated annual effective tax rate of 27% before discrete tax items. Additionally, fourth quarter fully diluted non-GAAP EPS excludes approximately $1 million of discrete tax benefits related to share-based compensation that are included in fourth quarter fully diluted GAAP EPS.

Webcast and Website Information

A live webcast of Red Hat's results will begin at 5:00 pm ET today. The webcast, in addition to a copy of our prepared remarks and slides containing financial highlights and supplemental metrics, 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. Additional information on Red Hat's reported results, including a reconciliation of the non-GAAP adjusted results, are included in the financial tables below.

About Red Hat, Inc.

Red Hat is the world's leading provider of open source software solutions, using a community-powered approach to provide reliable and high-performing cloud, Linux, middleware, storage and virtualization technologies. Red Hat also offers award-winning support, training, and consulting services. As a 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 the ability of the Company to compete effectively; the ability to deliver and stimulate demand for new products and technological innovations on a timely basis; delays or reductions in information technology spending; the integration of acquisitions and the ability to market successfully acquired technologies and products; fluctuations in exchange rates; the effects of industry consolidation; 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; risks related to data and information security vulnerabilities; the ability to meet financial and operational challenges encountered in our international operations; ineffective management of, and control over, the Company's growth and international operations; 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.

Red Hat and the Shadowman logo are trademarks or registered trademarks of Red Hat, Inc. or its subsidiaries in the U.S. and other countries.Linux® is the registered trademark of Linus Torvalds in the U.S. and other countries.

(1) Provision for income taxes for the three and nine months ended November 30, 2016 includes the impact of early adoption of ASU 2016-09. ASU 2016-09 requires that the amendment related to accounting for income taxes be adopted on a prospective basis. Accordingly, the provision for income taxes for the three and nine months ended November 30, 2015 has not been adjusted. The provision for income taxes for the three and nine months ended November 30, 2016 includes the effect of discrete tax benefits of $6.2 million and $15.2 million, respectively, related to excess tax benefits from share-based compensation.

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Red Hat, Inc.
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Source: Red Hat, Inc.