Analyst Conference Summary

Red Hat

conference date: March 29, 2007 @ 2:00 PM PT
for quarter ending: February 28, 2007 (4th quarter fiscal 2007)

Forward-looking statements

Overview: New competition from Novell and Oracle did not prevent ongoing rapid growth, but net income was down compared to year-earlier.

Basic data:

Revenue was $111.1 million, up 5% sequentially and 41% from year-earlier quarter. Full 2007 revenue was $400.6 million.

Net income was $20.5 million, up 40.4% sequentially from $14.6 million but down 25% from $27.3 million in fiscal Q4 2006. EPS was $0.10.

Non-GAAP adjusted net income was listed at $32.7 million, or $0.15 per share.

Cash and investments ended at $1.2 billion, up $59 million sequentially.


Q1 EPS $0.15 non-GGAP. 2008 full year $510-520 million revenue. 21-22% operating margin. $0.67 to $0.72 non-GAAP EPS.

$9 million compensation expense per quarter (so we can guess at GAAP EPS). GAAP tax rate 39%.

Conference Highlights:

Added more than 10,000 new customers in Q4 and over 42,000 in FY 2007. Introduced Enterprise Linux 5 and Advanced Platform during the quarter. Fifth year anniversary of release of original enterprise Linux.

Revenue from subscriptions was $95.9 million. From training and services was $15.2 million. Other income was $11.9 million (mostly investment income).

Cost of revenue was $17.4 million. Operating expense was $77.0 million.

Three initiates for 2008: deepening enterprise relationships to expand offerings; expanding global distribution; continuing technology leadership and service innovation (pipeline).

2007 was a year for internal investment, expansion, and acquisitions.

Quarter revenue was below guidance due to lower than expected training revenue, which dropped sequentially due to holidays in quarter.

All 25 top renewable deals did renew in quarter, 98 out of 100 in full year.

Multi-year booking were sequentially strong in Q3 and Q4.

Non-GAAP gross margin was 85%. Non-GAAP tax rate 5%.

GAAP net income positively impacted by one-time release of $2.9 million allowance against deferred tax asset.

$338.6 million deferred revenue at end of quarter.


Product pricing going forward? Discipline in pricing will continue. Deliver more value at a very fair price. May see some improvement in prices over time.

Virtualization effect on pricing? Belief will reduce Linux demand is misplaced logic. Multicore will drive away from UNIX and towards Linux. Virtualization increases push to update to newer Linux versions for older applications.

Cash flow constant while bookings increased each quarter? Increase in deferred revenue by 52%.

Microsoft-Novell? Continues to work with Microsoft on interoperability, did not get publicity for it. Working on using common standards to increase interoperability.

JBoss integration color? Integration completed at end of Q3. Global sales force able to sell all products.

Yahoo relationship? Spoke with Yahoo yesterday. Execs chose Oracle Linux to run just on Oracle database servers, but expect to continue to have excellent relationship with Red Hat.

JBoss so good people aren't taking support contract? JBoss is now integral component of Linux sales and support contracts. Distributing JBoss in Europe and Asia, where it had no prior presence.

GPL (General Public License) 3? Lot's of opinion and interaction; recent draft is an improvement. Red Hat works through the committee.

JBoss revenue? No longer breaks out separately. But fasting growing product line in 2007.

Red Hat Exchange (RHX)? Expect to be successful, but nothing material was included in guidance.

Macro environment for software? Subscription model and deferred revenue helps make business more predictable. Macro environment seems good.

Average length of contract varies within 18 to 21 months; has been in that range for 3 years.

Non-OS product % of revenue? Over 10%, but does not intend to break out.

JBoss did not make earn-out targets for year.

Will R&D expense come down not that version 5 is released? Will stay in same percent for fy 2008 as for 2007.

Billings and expectations of billings continue to be good.

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Disclaimer: Our analyst summaries may include both our condensations of statements made by company representatives and our own analysis. They are not covered by any warranty. We cannot guarantee anything said by company representatives is true. We try not to make errors, but it is possible. Before making or terminating an investment you should always verify any factual basis of your decision.

Copyright 2007 William P. Meyers