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Red Hat Reports Second Quarter Results

Red Hat (NYSE: RHT), the world's leading provider of open source solutions, today announced financial results for its fiscal year 2010 second quarter ended August 31, 2009.

Total revenue for the quarter was $183.6 million, an increase of 12% from the year ago quarter. Subscription revenue for the quarter was $156.3 million, up 15% year-over-year.

“IT organizations continue to move ahead with purchases of high value solutions, and Red Hat is capitalizing on this demand as a result of our strong customer relationships and proven value proposition. These factors contributed to our better than expected total revenue in the second quarter, and drove annual subscription revenue growth of 15% for both the quarter and first half of fiscal year 2010. We continue to be optimistic about Red Hat’s future and believe the company is well positioned when the economic and IT spending environment improves,” stated Jim Whitehurst, President and Chief Executive Officer of Red Hat. “In addition to solid second quarter results, we also marked a new milestone in Red Hat’s ten year history as a public company by our inclusion in July as a component of the S&P 500.”

GAAP operating income for the quarter was $27.5 million, up 29% from $21.4 million in the year ago quarter. After adjusting for stock compensation and amortization expenses as detailed in the tables below, non-GAAP operating income for the quarter was $43.6 million, up 21% year-over-year. GAAP operating margin was 15.0%. Non-GAAP operating margin was 23.7%, up 170 basis points from the year ago quarter.

GAAP net income for the quarter was $28.9 million, or $0.15 per diluted share, compared with $21.1 million, or $0.10 per diluted share, in the year ago quarter. Non-GAAP adjusted net income for the quarter was $39.4 million, or $0.20 per diluted share, after adjusting for stock compensation and amortization expenses as detailed in the tables below, as compared to $30.1 million, or $0.14 per diluted share, in the year ago quarter. Both GAAP and non-GAAP net income for the quarter include a discrete tax benefit of $7.3 million, adding approximately $0.04 per diluted share. Excluding this tax benefit, GAAP earnings per share would have been $0.11 and non-GAAP earnings per share would have been $0.16.

Operating cash flow totaled $62.0 million compared to $54.3 million from the year ago quarter, up 14% year-over-year. At quarter end, the company’s total deferred revenue balance was $580.9 million, an increase of 17% on a year-over-year basis. Total cash, cash equivalents and investments as of August 31, 2009 were $911.8 million.

“During the second quarter, Red Hat’s financial performance was strong across all of our key metrics. We delivered double digit growth in revenue and deferred revenue, expanded our non-GAAP operating margins and generated strong cash flow from operations,” stated Charlie Peters, Executive Vice President and Chief Financial Officer of Red Hat. “We are particularly pleased with the growth of the current portion of deferred revenue combined with the lengthening of our average subscription duration.”

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 open source solutions provider, 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 five 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 applications, management and Services Oriented Architecture (SOA) solutions, including 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 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; adverse results in litigation; 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.

© 2009 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 Six Months Ended
August 31, August 31, August 31, August 31,
  2009       2008     2009       2008  
Revenue:
 
Subscriptions $ 156,273 $ 135,709 $ 305,063 $ 266,403
Training and services   27,360     28,674     52,958     54,615  
 
 
Total subscription, training and services revenue   183,633     164,383     358,021     321,018  
 
Cost of revenue:
 
Subscriptions 10,972 9,720 21,023 18,677
Training and services   17,468     17,788     33,886     35,260  
 
 
Total cost of subscription, training and services revenue   28,440     27,508     54,909     53,937  
 
 
Total gross profit 155,193 136,875 303,112 267,081
 
Operating expense:
Sales and marketing 66,768 59,566 130,745 118,837
Research and development 36,360 31,728 71,462 60,639
General and administrative   24,523     24,177     48,308     46,291  
 
Total operating expense   127,651     115,471     250,515     225,767  
 
Income from operations 27,542 21,404 52,597 41,314
Other income, net 5,759 14,778 9,240 24,798
Interest expense   (43 )   (1,530 )   (96 )   (3,116 )
 
Income before provision for income taxes 33,258 34,652 61,741 62,996
Provision for income taxes   4,321     13,514     14,290     24,568  
 
Net income $ 28,937   $ 21,138   $ 47,451   $ 38,428  
 
Net income-diluted $ 28,937   $ 22,032   $ 47,451   $ 40,215  
 
Net income per share:
Basic $ 0.15 $ 0.11 $ 0.25 $ 0.20
Diluted $ 0.15 $ 0.10 $ 0.25 $ 0.18
 
Weighted average shares outstanding:
Basic 187,099 191,485 188,007 191,132
Diluted 192,659 220,039 193,060 219,472
 
Diluted net income per share computation:
Net income, basic $ 28,937 $ 21,138 $ 47,451 $ 38,428
Interest expense on convertible debentures, net of related GAAP tax effects 0 435 0 869
Amortization of debt issuance costs, net of related GAAP tax effects   0   459   0   918
 
Net income, diluted $ 28,937   $ 22,032   $ 47,451   $ 40,215  

RED HAT, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands)
               
ASSETS

August 31

February 28,
  2009     2009  
(Unaudited)
Current assets:
Cash and cash equivalents $ 493,052 $ 515,548
Investments in debt and equity securities 228,384 147,178
Accounts receivable, net 112,837 128,669
Prepaid expenses and other current assets   106,550     99,437  
 
Total current assets 940,823 890,832
 
Property and equipment, net 70,276 67,913
Goodwill 439,035 438,109
Identifiable intangibles, net 115,611 122,177
Investments in debt securities 190,370 183,363
Other assets, net   36,957     51,242  
 
Total assets $ 1,793,072   $ 1,753,636  
 
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 17,938 $ 9,576
Accrued expenses 57,033 54,123
Deferred revenue 419,505 382,050
Other current obligations   878     900  
 
Total current liabilities 495,354 446,649
 
Deferred lease credits 4,191 4,470
Long term deferred revenue 161,430 161,032
Other long term obligations 34,573 35,432
Stockholders' equity:
Common stock 21 21
Additional paid-in capital 1,320,005 1,281,469
Retained earnings 97,970 50,519
Treasury stock, at cost (330,240 ) (236,283 )
Accumulated other comprehensive income   9,768     10,327  
 
Total stockholders' equity   1,097,524     1,106,053  
 
Total liabilities and stockholders' equity $ 1,793,072   $ 1,753,636  

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,
  2009   2008   2009   2008
 
Cash flows from operating activities:
Net income $ 28,937 $ 21,138 $ 47,451 $ 38,428
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 11,442 9,828 22,252 18,925
Share-based compensation expense 11,013 10,870 21,689 21,431
Deferred income taxes (940 ) 11,462 5,489 20,229
Excess tax benefits from share-based payment arrangements (3,556 ) (15,489 ) (17,756 ) (24,456 )
Gain on sale of available-for-sale equity securities (3,465 ) (4,996 ) (3,663 ) (4,996 )
Other (80 ) 807 (6 ) 1,367
Changes in operating assets and liabilities net of effects of acquisitions:
Accounts receivable (5,666 ) 2,018 20,612 21,338
Prepaid expenses and other current assets 4,288 (1,908 ) 4,932 (6,910 )
Accounts payable 4,790 (2,404 ) 7,788 (7,974 )
Accrued expenses 5,214 7,816 2,185 9,802
Deferred revenue 10,155 15,261 12,516 30,714
Other assets, net   (127 )   (137 ) (281 )   (270 )
 
Net cash provided by operating activities   62,005     54,266     123,208     117,628  
 
Cash flows from investing activities:
Purchase of available-for-sale debt securities (131,437 ) (26,059 ) (288,472 ) (331,705 )
Proceeds from sales and maturities of available-for-sale debt securities 83,655 133,282 206,104 349,816
Proceeds from sales of available-for-sale equity securities 3,838 5,568 4,059 5,568
Acquisitions of businesses, net of cash acquired - (3,052 ) - (46,802 )
Purchase of developed technologies and other intangible assets (1,081 ) (727 ) (2,070 ) (2,342 )
Purchase of property and equipment   (6,635 )   (4,430 )   (12,662 )   (13,952 )
 
Net cash provided by (used in) investing activities   (51,660 )   104,582     (93,041 )   (39,417 )
 
Cash flows from financing activities:
Excess tax benefits from share-based payment arrangements 3,556 15,489 17,756 24,456
Proceeds from exercise of common stock options 14,189 5,342 18,589 16,789
Purchase of treasury stock (47,186 ) - (93,957 ) (8,347 )
Payments related to net settlement of employee share-based compensation awards (502 ) (219 ) (2,300 ) (1,019 )
Structured stock repurchase - - - 1,989
Proceeds from other borrowings - - - -
Payments on other borrowings   -     (66 )   (900 )   (23 )
 
Net cash provided by (used in) financing activities   (29,943 )   20,546     (60,812 )   33,845  
 
Effect of foreign currency exchange rates on cash and cash equivalents 2,034 (2,477 ) 8,149 (2,319 )
Net increase (decrease) in cash and cash equivalents (17,564 ) 176,917 (22,496 ) 109,737
Cash and cash equivalents at beginning of the period   510,616     610,540     515,548     677,720  
 
Cash and cash equivalents at end of period $ 493,052   $ 787,457   $ 493,052   $ 787,457  

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,
  2009   2008   2009   2008
 
Cost of revenue $ 759 $ 643 $ 1,560 $ 1,324
Sales and marketing 3,138 2,205 6,248 6,202
Research and development 3,075 3,547 6,348 6,054
General and administration   4,041     4,475     7,533     7,851  
Total share-based compensation expense $ 11,013   $ 10,870   $ 21,689   $ 21,431  
 
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,
  2009   2008   2009   2008
 
Cost of revenue $ 989 $ 810 $ 1,949 $ 1,545
Sales and marketing 2,293 2,305 4,615 4,560
Research and development 925 0 1,851 0
General and administration   804     754     1,601     1,457  
Total amortization of intangible assets expense $ 5,011   $ 3,869   $ 10,016   $ 7,562  
 
Three Months Ended Six Months Ended
August 31, August 31, August 31, August 31,
  2009   2008   2009   2008
 
GAAP net income $ 28,937 $ 21,138 $ 47,451 $ 38,428
 
Provision for income taxes   4,321   13,514   14,290   24,568
 
GAAP income before provision for income taxes $ 33,258 $ 34,652 $ 61,741 $ 62,996
 
Add: Non-cash share-based compensation expense per FAS 123R 11,013 10,870 21,689 21,431
Add: Amortization of intangible assets   5,011   3,869   10,016   7,562
 
Non-GAAP adjusted income before provision for income taxes $ 49,282 $ 49,391 $ 93,446 $ 91,989
 
Provision for income taxes (1) $ 9,930   $ 19,263   $ 25,387   $ 35,876  
 
Non-GAAP adjusted net income $ 39,352   $ 30,128   $ 68,059   $ 56,113  
 
Non-GAAP adjusted net income-diluted $ 39,352   $ 31,022   $ 68,059   $ 57,900  
 
Non-GAAP adjusted net income per share:
Basic $ 0.21 $ 0.16 $ 0.36 $ 0.29
Diluted $ 0.20 $ 0.14 $ 0.35 $ 0.26
 
 
Non-GAAP diluted net income per share computation:
Non-GAAP adjusted net income $ 39,352 $ 30,128 $ 68,059 $ 56,113
Interest expense on convertible debentures, net of related GAAP tax effects 0 435 0 869
Amortization of debt issuance costs, net of related GAAP tax effects   0   459   0   918
 
Non-GAAP adjusted net income-diluted $ 39,352   $ 31,022   $ 68,059   $ 57,900  
 
(1) Provision for income taxes:
Non-GAAP adjusted net income before income tax provision $ 49,282 $ 49,391 $ 93,446 $ 91,989
Estimated annual effective tax rate   35 %   39 %   35 %   39 %
Non-GAAP provision for income taxes before discrete tax benefit $ 17,249 $ 19,263 $ 32,706 $ 35,876
Discrete tax benefit   7,319   0   7,319   0
Provision for income taxes on Non-GAAP adjusted net income $ 9,930   $ 19,263   $ 25,387   $ 35,876  

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,
  2009   2008   2009   2008
 
GAAP gross profit $ 155,193 $ 136,875 $ 303,112 $ 267,081
 
Add: Non-cash share-based compensation expense per FAS 123R 759 643 1,560 1,324
Add: Amortization of intangible assets   989   810   1,949   1,545
 
Non-GAAP gross profit $ 156,941 $ 138,328 $ 306,621 $ 269,950
 
Non-GAAP gross margin 85 % 84 % 86 % 84 %
 
Three Months Ended Six Months Ended
August 31, August 31, August 31, August 31,
  2009   2008   2009   2008
 
GAAP operating expenses $ 127,651 $ 115,471 $ 250,515 $ 225,767
 
Deduct: Non-cash share-based compensation expense per FAS 123R (10,254 ) (10,227 ) (20,129 ) (20,107 )
Deduct: Amortization of intangible assets   (4,022 )   (3,059 )   (8,067 )   (6,017 )
 
Non-GAAP adjusted operating expenses $ 113,375 $ 102,185 $ 222,319 $ 199,643
 
Three Months Ended Six Months Ended
August 31, August 31, August 31, August 31,
  2009   2008   2009   2008
 
GAAP operating income $ 27,542 $ 21,404 $ 52,597 $ 41,314
 
Add: Non-cash share-based compensation expense per FAS 123R 11,013 10,870 21,689 21,431
Add: Amortization of intangible assets   5,011   3,869   10,016   7,562
 
Non-GAAP adjusted operating income $ 43,566 $ 36,143 $ 84,302 $ 70,307
 
Non-GAAP adjusted operating margin 23.7 % 22.0 % 23.5 % 21.9 %

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