Analyst Conference Summary

Red Hat

conference date: September 24, 2008 @ 2:00 PM Pacific Time
for quarter ending: August 31, 2008 (2nd quarter fiscal 2009)

Forward-looking statements

Overview: Back to a healthy growth pace.

Basic data (GAAP) :

Revenue was $164.4 million, up 5% sequentially from $156.6 million and up 29% from $127.3 million year-earlier.

Net income was $21.1 million, up 22% sequentially from $17.3 million and up 16% from $18.2 million year-earlier.

EPS (diluted earnings per share were) $0.11, up 22% sequentially from $0.09 and also up 22% from $0.09 year-earlier.


At current exchange rates:

Fiscal Q3 $169-171 million revenue. Operating expense up $6 million. Non-GAAP operating margin 17.5%. Other income $7 million. Non-GAAP EPS $0.16 to $0.17.

Conference Highlights:

Revenue was above guidance. "Solid growth and financial results." Working on a comprehensive virtualization solution for customers. Key factors include the value message, cost efficiencies, and world-class customer service.

Strong renewals and upsells from current customer base. Middleware (JBoss) continues to grow at over twice the rate as Linux.

Subscription revenue was $135.7 million, up 24% y/y. Training and services revenue was $28.7 million, up 58% y/y.

Non-GAAP: net income $43.2 million up, 17% sequentially, or $0.20 EPS. 83.7% gross margin. A one-time gain increased Non-GAAP EPS by about $0.02.

Operating cash flow was $54.3 million. $15 million cash tax benefits from NOLs. Deferred revenue balance was $496.9 million, up 32% y/y. Total cash, equivalents and investments was $1.4 billion.

39% GAAP and non-GAAP tax rates for fiscal 2010 due to ending of NOLs.

JBoss and RHEL (Red Hat Enterprise Linux) are both available on Amazon EC2 Cloud.

Qumranet acquired for virtualization effort. This broadens open source virtualization leadership. Also allows more imput into KVM Linux hypervisor. Feedback from customers and partners is overwhelmingly positive.

Cost of revenue was $27.5 million, leaving gross profit of $136.9 million. Operating expenses of $115.5 million included $59.6 million sales and marketing, $31.8 million R&D, and $24.2 million general and administrative. Operating income was $21.4 million, other income $13.2 million, income tax provision $13.5 million.

All top 25 deals in quarter renewed, with average value 125% of prior. There was new demand from customers in verticals hit by the soft economy, including financials and telecom.

52% of sales were from channel, 48% direct

Revenues by georgraphy: 58 Americas, 25 EMEA, 17% Asia Pacific.

$180 million in billings in quarter.


September market uncertainty impact? We are in the early days of this round of impact. Our pipeline remains strong. The financial vertical is 10% of our revenues. With big investment banks we typically have multi-year deals, they don't all come up at once.

RHEL 5 impact? We are seeing more adoption and moving to Advanced level at same time. We believe the hypervisor will be relatively unimportant over time. We will talk more about KVM on analyst day.

Qumranet revenue? No significant revenue from Qumranet this year.

Are you reiterating full-year guidance? We are back to quarter by quarter forecasting due to uncertain economy, but will update full year guidance when possible.

Foreign exchange impact? Impact this quarter was negative $1 million compared to prior quarter.

Could you charge for Fedora? It is our community development platform, we develop an enterprise class piece of software from it. We have no plans to monetize it.

JBoss? We are seeing a lot more interest now that there is an enterprise edition. Many are displacements of proprietary software.

Cash flow from operations for full year? Partly down because of lower interest rates, also because of impact from acquisitions.

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Copyright 2008 William P. Meyers