RHT Red Hat

• Quarterly total revenue of $504 million, up 13% year-over-year
• Quarterly subscription revenue of $442 million, up 13% year-over-year
• Quarterly operating cash flow of $120 million, up 12% year-over-year

Red Hat, Inc. (NYSE: RHT), the world's leading provider of open source solutions, today announced financial results for the second quarter of fiscal year 2016 ended August 31, 2015.

“Strong execution in Q2 contributed to total revenue results that exceeded 21% year-over-year growth on a constant currency basis. We were pleased with the progress of our technologies that address cloud deployments across multiple footprints. Specifically in this quarter, we achieved a public cloud milestone in our Certified Cloud and Service Provider program of an annualized run-rate of $100 million.” stated Jim Whitehurst, President and Chief Executive Officer of Red Hat. “We are also thrilled to be the first open source company to achieve an annualized run-rate of $2 billion in revenue this quarter. In addition, we believe Red Hat is well-positioned for the second half of the fiscal year as we continue to benefit from delivering innovation to our customers.”

“We exceeded guidance across a number of financial metrics. Our growth in revenue led to strong growth of non-GAAP operating income and non-GAAP EPS of 13% and 15%, respectively. We also continued to invest in our initiatives to deliver open, hybrid cloud solutions which support our long-term growth opportunities,” stated Frank Calderoni, Executive Vice President, Operations and Chief Financial Officer of Red Hat. “Our year-to-date operating cash flow was $329 million, up 21% compared to the first half of FY15. We also returned additional value to shareholders in the form of a $70 million share repurchase in the quarter”.

Revenue: Total revenue for the quarter was $504 million, up 13% in U.S. dollars year-over-year, or 21% measured in constant currency. Constant currency references in this release are as detailed in the tables below. Subscription revenue for the quarter was $442 million, up 13% in U.S. dollars year-over-year, or 21% measured in constant currency.

Subscription Revenue Breakout: Subscription revenue in Infrastructure-related offerings for the quarter was $363 million, an increase of 9% in U.S. dollars year-over-year and 17% measured in constant currency. Subscription revenue in Application Development-related and other emerging technologies offerings for the quarter was $79 million, an increase of 37% in U.S. dollars year-over-year and 48% measured in constant currency.

Operating Income: GAAP operating income for the quarter was $76 million, up 19% year-over-year. After adjusting for non-cash share-based compensation expense, amortization of intangible assets and transaction costs related to business combinations, as detailed in the tables below, non-GAAP operating income for the second quarter was $123 million, up 13% year-over-year. For the second quarter, GAAP operating margin was 15.2% and non-GAAP operating margin was 24.4%.

Net Income: GAAP net income for the quarter was $51 million, or $0.28 per diluted share, compared with $47 million, or $0.25 per diluted share, in the year-ago quarter. After adjusting for non-cash share-based compensation expense, amortization of intangible assets, transaction costs related to business combinations, and non-cash interest expense from accretion of debt discount, as detailed in the tables below, non-GAAP net income for the quarter was $88 million, or $0.47 per diluted share, as compared to $78 million, or $0.41 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 $120 million for the second quarter, an increase of 12% on a year-over-year basis. Total cash, cash equivalents and investments as of August 31, 2015 was $2.0 billion after repurchasing approximately $70 million, or approximately 895 thousand shares, of common stock in the second quarter. As of August 31, 2015, the remaining balance in the current repurchase authorization was approximately $430 million.

Deferred Revenue: At quarter end, the company’s total deferred revenue balance was $1.41 billion, an increase of 13% on a year-over-year basis. The negative impact to total deferred revenue from changes in foreign exchange rates was $91 million year-over-year. On a constant currency basis, total deferred revenue would have been up 20% year-over-year as detailed in the tables below.

Outlook

Red Hat’s outlook assumes similar business conditions and foreign exchange rates as of September 18, 2015. The full year revenue guidance is increased to $2.034 billion to $2.044 billion. Full year non-GAAP operating margin is targeted to 23.6%, and cash flow is increased to $690 million to $705 million. Full year diluted non-GAAP earnings per share guidance is in the range of $1.85-$1.87 per share, assuming a $1 million per quarter forecast for other income, a 29% annual effective tax rate and 186 million fully diluted shares outstanding. Non-GAAP guidance is derived by subtracting the estimated full year impact of non-cash share-based compensation expense of approximately $160 million, amortization of intangible assets expense of approximately $24 million and non-cash interest expense from accretion of debt discount of approximately $19 million.

For the third quarter, Red Hat’s outlook is for revenue of $519 million to $523 million, non-GAAP operating margin of approximately 23.0% and non-GAAP earnings per share of $0.47. Non-GAAP guidance is derived by subtracting the estimated third quarter impact of non-cash share-based compensation expense of approximately $42 million and amortization of intangible assets of approximately $6 million, and non-cash interest expense from accretion of debt discount of approximately $5 million.

These statements are forward-looking and actual results may differ materially. Refer to the Forward-Looking Statements below for information on the factors that could cause our actual results to differ materially.

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 transcript of prepared remarks and a presentation 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 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 effects of industry consolidation; 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; 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.

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

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, 2015 2014 2015 2014 Revenue:   Subscriptions $441,526 $389,495 $866,319 $761,462 Training and services 62,622 56,404 118,830 108,191     Total subscription, training and services revenue 504,148 445,899 985,149 869,653   Cost of revenue:   Subscriptions 30,996 27,791 60,843 55,551 Training and services 44,968 39,383 86,519 76,066     Total cost of subscription, training and services revenue 75,964 67,174 147,362 131,617     Total gross profit 428,184 378,725 837,787 738,036   Operating expense: Sales and marketing 205,101 174,520 403,973 351,358 Research and development 102,488 95,265 199,919 185,204 General and administrative 44,125 44,713 86,496 86,284     Total operating expense 351,714 314,498 690,388 622,846   Income from operations 76,470 64,227 147,399 115,190 Interest income 2,895 2,010 5,611 3,852 Interest expense 5,733 - 11,448 - Other income (expense), net (1,245) (289) (1,448) 68     Income before provision for income taxes 72,387 65,948 140,114 119,110 Provision for income taxes 20,992 19,125 40,633 34,542   Net income $51,395 $46,823 $99,481 $84,568   Net income per share: Basic $0.28 $0.25 $0.54 $0.45 Diluted $0.28 $0.25 $0.53 $0.44   Weighted average shares outstanding: Basic 183,179 188,162 183,155 188,767 Diluted 186,750 190,755 186,493 191,135     RED HAT, INC. CONSOLIDATED BALANCE SHEETS (In thousands)               ASSETS August 31, February 28, 2015 2015 (1) (Unaudited) Current assets: Cash and cash equivalents $991,607 $1,047,473 Investments in debt and equity securities 180,806 215,254 Accounts receivable, net 302,098 468,021 Deferred tax assets, net 99,184 86,796 Prepaid expenses 130,413 150,715 Other current assets 1,853 1,980   Total current assets 1,705,961 1,970,239   Property and equipment, net 164,718 172,151 Goodwill 928,178 927,060 Identifiable intangibles, net 127,888 134,276 Investments in debt securities 823,417 546,016 Other assets, net 51,309 53,243   Total assets $3,801,471 $3,802,985   LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable and accrued expenses $212,828 $237,733 Deferred revenue 1,047,732 1,095,115 Other current obligations 1,839 1,844   Total current liabilities 1,262,399 1,334,692   Convertible notes 724,621 715,402 Long term deferred revenue 365,708 387,213 Other long term obligations 80,693 77,340 Stockholders' equity: Common stock 23 23 Additional paid-in capital 2,094,202 1,963,851 Retained earnings 999,854 900,373 Treasury stock, at cost (1,660,580) (1,515,288) Accumulated other comprehensive loss (65,449) (60,621)   Total stockholders' equity 1,368,050 1,288,338   Total liabilities and stockholders' equity $3,801,471 $3,802,985     (1) Derived from audited financial statements     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, 2015 2014 2015 2014   Cash flows from operating activities: Net income $51,395 $46,823 $99,481 $84,568 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 18,538 19,539 37,085 38,463 Share-based compensation expense 40,537 36,605 77,059 65,319 Deferred income taxes (3,843) 975 (1,929) 3,905 Net amortization of bond premium on available-for-sale debt securities 3,139 2,525 5,736 4,558 Accretion of debt discount and amortization of debt issuance costs 5,222 595 10,417 - Other 1,078 - 1,908 (353) Changes in operating assets and liabilities net of effects of acquisitions: Accounts receivable (17,908) (18,349) 161,479 78,231 Prepaid expenses 13,077 (2,391) 12,651 (7,580) Accounts payable and accrued expenses 34,415 27,266 (17,932) 29,921 Deferred revenue (25,017) (6,209) (56,579) (25,957) Other (356) 358 (340) 1,349   Net cash provided by operating activities 120,277 107,737 329,036 272,424   Cash flows from investing activities: Purchase of available-for-sale debt securities (196,613) (50,567) (602,824) (319,141) Proceeds from sales and maturities of available-for-sale debt securities 170,617 140,101 353,200 409,532 Acquisition of businesses, net of cash acquired (1,700) (66,183) (1,700) (217,804) Purchase of other intangible assets (2,068) (1,198) (5,997) (1,751) Purchase of property and equipment (10,277) (14,290) (20,973) (22,884) Other (1,159) (1,038) (3,158) 2,434   Net cash provided by (used in) investing activities (41,200) 6,825 (281,452) (149,614)   Cash flows from financing activities: Excess tax benefits from share-based payment arrangements 2,812 423 9,231 1,409 Proceeds from exercise of common stock options 480 644 2,589 689 Purchase of treasury stock (70,079) (80,028) (70,079) (160,061) Payments related to net settlement of employee share-based compensation awards (7,726) (3,831) (32,937) (17,561) Payments on other borrowings (385) (1,635) (737) (1,990)   Net cash used in financing activities (74,898) (84,427) (91,933) (177,514)   Effect of foreign currency exchange rates on cash and cash equivalents (3,494) (8,902) (11,517) (6,657) Net increase (decrease) in cash and cash equivalents 685 21,233 (55,866) (61,361) Cash and cash equivalents at beginning of the period 990,922 564,148 1,047,473 646,742   Cash and cash equivalents at end of period $991,607 $585,381 $991,607 $585,381     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, 2015 2014 2015 2014   Cost of revenue $4,151 $3,425 $7,877 $6,543 Sales and marketing 16,782 13,691 32,194 23,929 Research and development 12,022 11,098 22,897 19,962 General and administration 7,582 8,391 14,091 14,885 Total share-based compensation expense $40,537 $36,605 $77,059 $65,319     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, 2015 2014 2015 2014   Cost of revenue $2,618 $2,486 $5,192 $5,102 Sales and marketing 2,010 1,992 4,014 3,574 Research and development 292 959 542 1,917 General and administration 1,160 1,607 2,212 3,035 Total amortization of intangible assets expense $6,080 $7,044 $11,960 $13,628     Non-cash interest expense from accretion of debt discount included in Consolidated Statements of Operations:   Three Months Ended Six Months Ended August 31, August 31, August 31, August 31, 2015 2014 2015 2014   Total non-cash interest expense from accretion of debt discount $4,620 - $9,219 -   Transaction costs related to business combinations included in Consolidated Statements of Operations:   Three Months Ended Six Months Ended August 31, August 31, August 31, August 31, 2015 2014 2015 2014   Transaction costs related to business combinations $51 $949 $51 2,940     Three Months Ended Six Months Ended August 31, August 31, August 31, August 31, 2015 2014 2015 2014   GAAP net income $51,395 $46,823 $99,481 $84,568   Provision for income taxes 20,992 19,125 40,633 34,542   GAAP income before provision for income taxes $72,387 $65,948 $140,114 $119,110   Add: Non-cash share-based compensation expense 40,537 36,605 77,059 65,319 Add: Amortization of intangible assets 6,080 7,044 11,960 13,628 Add: Non-cash interest expense from accretion of debt discount 4,620 - 9,219 - Add: Transaction costs related to business combinations 51 949 51 2,940   Non-GAAP adjusted income before provision for income taxes $123,675 $110,546 $238,403 $200,997   Provision for income taxes 35,866 32,058 69,137 58,289   Non-GAAP adjusted net income (basic and diluted) $87,809 $78,488 $169,266 $142,708   Non-GAAP adjusted diluted weighted average shares outstanding: GAAP diluted weighted average shares outstanding 186,750 190,755 186,493 191,135 Dilution offset from convertible note hedge transactions (585) - (329) - Non-GAAP diluted weighted average shares outstanding 186,165 190,755 186,164 191,135   Non-GAAP adjusted net income per share: Basic $0.48 $0.42 $0.92 $0.76 Diluted $0.47 $0.41 $0.91 $0.75     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, 2015 2014 2015 2014   GAAP gross profit $428,184 $378,725 $837,787 $738,036   Add: Non-cash share-based compensation expense 4,151 3,425 7,877 6,543 Add: Amortization of intangible assets 2,618 2,486 5,192 5,102   Non-GAAP gross profit $434,953 $384,636 $850,856 $749,681   Non-GAAP gross margin 86.3% 86.3% 86.4% 86.2%     Three Months Ended Six Months Ended August 31, August 31, August 31, August 31, 2015 2014 2015 2014   GAAP operating expenses $351,714 $314,498 $690,388 $622,846   Deduct: Non-cash share-based compensation expense (36,386) (33,180) (69,182) (58,776) Deduct: Amortization of intangible assets (3,462) (4,558) (6,768) (8,526) Deduct: Transaction costs related to business combinations (51) (949) (51) (2,940)   Non-GAAP adjusted operating expenses $311,815 $275,811 $614,387 $552,604     Three Months Ended Six Months Ended August 31, August 31, August 31, August 31, 2015 2014 2015 2014   GAAP operating income $76,470 $64,227 $147,399 $115,190   Add: Non-cash share-based compensation expense 40,537 36,605 77,059 65,319 Add: Amortization of intangible assets 6,080 7,044 11,960 13,628 Add: Transaction costs related to business combinations 51 949 51 2,940   Non-GAAP adjusted operating income $123,138 $108,825 $236,469 $197,077   Non-GAAP adjusted operating margin 24.4% 24.4% 24.0% 22.7%     Three Months Ended

 

August 31, August 31, Year-Over-Year 2015 2014 Growth Rate   GAAP subscription revenue by offering type Infrastructure-related offerings $362,926 $331,967 9.3% Adjustment for currency impact $24,781 - Non-GAAP Infrastructure-related subscription revenue on a constant currency basis $387,707 $331,967 16.8%   Application development-related and other emerging technology offerings $78,600 $57,528 36.6% Adjustment for currency impact 6,341 - Non-GAAP Application development-related and other emerging technology subscription revenue on a constant currency basis $84,941 $57,528 47.7%   GAAP subscription revenue 441,526 389,495 13.4% Adjustment for currency impact 31,122 - Non-GAAP subscription revenue on a constant currency basis $472,648 $389,495 21.3%   GAAP training and services revenue $62,622 $56,404 11.0% Adjustment for currency impact 5,688 - Non-GAAP training and services revenue on a constant currency basis $68,310 $56,404 21.1%   GAAP total subscription, training and services revenue $504,148 $445,899 13.1% Adjustment for currency impact 36,810 - Non-GAAP total subscription, training and services revenue on a constant currency basis $540,958 $445,899 21.3%     Six Months Ended     August 31, August 31, Year-Over-Year 2015 2014 Growth Rate   GAAP subscription revenue by offering type Infrastructure-related offerings $716,667 $651,018 10.1% Adjustment for currency impact $49,786 - Non-GAAP Infrastructure-related subscription revenue on a constant currency basis $766,453 $651,018 17.7%   Application development-related and other emerging technology offerings $149,652 $110,444 35.5% Adjustment for currency impact 12,593 - Non-GAAP Application development-related and other emerging technology subscription revenue on a constant currency basis $162,245 $110,444 46.9%   GAAP subscription revenue 866,319 761,462 13.8% Adjustment for currency impact 62,379 - Non-GAAP subscription revenue on a constant currency basis $928,698 $761,462 22.0%   GAAP training and services revenue $118,830 $108,191 9.8% Adjustment for currency impact 10,714 - Non-GAAP training and services revenue on a constant currency basis $129,544 $108,191 19.7%   GAAP total subscription, training and services revenue $985,149 $869,653 13.3% Adjustment for currency impact 73,093 - Non-GAAP total subscription, training and services revenue on a constant currency basis $1,058,242 $869,653 21.7%     RED HAT, INC. Supplemental Information (Unaudited) (In thousands - except per share amounts)             Change in deferred revenue balances

CurrentDeferredRevenue

Long TermDeferredRevenue

TotalDeferredRevenue

  Balance at August 31, 2014 920,605 331,192 1,251,797 Constant currency change in deferred revenue 186,313 65,947 252,260 Impact from foreign currency translation (59,186) (31,431) (90,617) Balance at August 31, 2015 1,047,732 365,708 1,413,440   Year-over-year growth rate 13.8% 10.4% 12.9%   Year-over-year growth rate on a constant currency basis 20.2% 19.9% 20.2%

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