Analyst Conference Summary

Red Hat

conference date: June 22, 2011 @ 2:00 PM Pacific Time
for quarter ending: May 28, 2011 (first quarter fiscal 2012)

[at the time this is written]
Forward-looking statements

Overview: Very strong revenue quarter.

Basic data (GAAP) :

Revenue was $264.7 million, up 8% sequentially from $244.8 million and up 27% from $209.1 million year-earlier.

Net income was $32.5 million, down 5% sequentially from $33.5 million, but up 35% from $24.1 million year-earlier.

EPS (diluted earnings per share) were $0.17, flat sequentially from $0.17, but up 42% from $0.12 year-earlier.


Assuming foreign exchange rates stay constant with Q1: Q2 revenue $270 to $272 million. Non-GAAP operating margin 25.4 to 25.6%. Non-GAAP EPS $0.24 to $0.25. Full fiscal year: $1.07 to $1.085 . Non-GAAP EPS $0.98 to $1.00. That is raised guidance.

Conference Highlights:

Results were above high end of Red Hat management expectations led by 28% billings growth. Red Hat is capturing the enterprise spending shift to cloud computing and virtualization.

Non-GAAP numbers: operating income $66.5 million, up 28% y/y. Net income $47.0 million, up from $35.6 million year-earlier, with EPS of $0.24, up 33% y/y, up from $0.18 year-earlier.

Cash and investment balance $1.27 billion. Operating cash flow was $90.2 million. Deferred revenue incrased to $786.0 million. $44 million cash was used for stock repurchases.

Marketing spend and R&D were both ramped up. OpenShift and CloudForms introduced. RHEL 6.1 released. Expanded services to NTT, IBM, and

Subscription revenue was $225.5 million. Training and services revenue was $39.2 million.

All top 25 deals up for renewal did renew, and total was over 130% of prior contracts. 14 deals were over $1 million. 40% of top deals included a middleware (JBoss) component.

Revenue by geography: 56% Americas, 24% EMEA, 20% Asia-Pacific.

Cost of revenue was $42.4 million, leaving GAAP gross profit of $222.3 million. Operating expenses of $176.9 million included: sales and marketing $97.3 million; R&D $48.3 million; general and administrative $31.3 million. Leaving income from operations of $45.4 million. Other (interest) income was $1.6 million. Income tax provision $14.6 million.


Cash flow guidance? We did well in Q1. We don't forecast quarterly cash flow, but we started with very high accounts receivable. Too early to change full year estimate because we continue to invest for growth.

Renewal rates? Efforts to improve renewal rates for smaller deals continue. RHEL 6 not likely to influence renewal rate, which is already very good?

Japan? Japan did very well, coming right back to plan, so no negative $5 million impact that we had previously guessed.

RHEV? Virtualization doing well with the larger accounts. RHEV goes mostly into the installed RHEL base.

Strength in Europe, Asia? Currency was a factor, but Asia was strong. Surprise in Europe was on the services and training side.

Increased sales capacity? We have been adding to the global sales force consistently for four quarters now.

Public vs. private cloud businesses? Red Hat serves both markets. Customers are interested in a hybrid environment.

Almost all Fortune 500 companies now are using Red Hat to some extent. Pricing seems to be a positive for customers.

Middleware, JBoss? Performed quite well, included in 40% of top 30 deals.

Open Source strategy? We try to participate in the best of the best, and pull those into our commercial solutions.

Top two verticals in quarter? Government and Financial.

Delta cloud APIs? We are seeing the interest in that grow, as opposed to getting stuck in a vertical stack. It is an essential part of CloudForms.

A Linux-based console for RHEV is on our roadmap, it should be fully available this calendar year.

Competition change as move to cloud? There are a lot of new competitors, certainly VMWare and many smaller startups, in addition to Microsoft, Cisco, and IBM. We are working off our installed base to sell our new cloud products. Our cloud offerings are based on RHEL, RHEV, and JBoss.

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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 2011 William P. Meyers