Red Hat Reports Third Quarter Fiscal Year 2007 Results

RALEIGH, N.C.--(BUSINESS WIRE)--Red Hat, Inc. (NYSE: RHT), the world's leading provider of open source solutions, today announced financial results for its fiscal year 2007 third quarter.

“Management's Discussion and Analysis of Financial Condition and Results of Operations”

Total revenue for the quarter was $105.8 million, an increase of 45% from the year-ago quarter and 6% from the prior quarter. Subscription revenue was $88.9 million, up 48% year-over-year and 5% sequentially.

Net income for the quarter was $14.6 million or $0.07 per diluted share compared with $11.0 million or $0.05 per diluted share for the prior quarter. Non-GAAP adjusted net income for the quarter was $29.6 million, or $0.14 per diluted share, after adjusting for stock compensation and tax expense as detailed in the tables below. This compares to non-GAAP adjusted net income of $22.7 million, or $0.11 per diluted share in the third quarter of last fiscal year.

At quarter end, the company's total deferred revenue balance was $311.7 million, an increase of $27.6 million, or 10%, when compared to the end of the last fiscal quarter.

Other highlights from the quarter included:

Operating income of $13.6 million was up 44% from $9.5 million in the prior quarter.
Total cash and investments as of November 30, 2006 were $1.1 billion.
We added over 12,000 net new customers during the quarter.
Red Hat held its European developer and middleware event, JBossWorld Europe in Berlin.

“This quarter's performance was characterized by strong market demand and solid execution,” stated Charlie Peters, Executive Vice President and Chief Financial Officer. “We are particularly pleased to be named by CIO Insight, for the third consecutive year, as the number one enterprise software vendor in delivering value to customers.”

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 and can be accessed by the general public at the Company's investor relations website at http://investors.redhat.com. A replay of the webcast will be available shortly after the live event will have ended.

About Red Hat, Inc.

Red Hat, the world's leading open source and Linux provider, is headquartered in Raleigh, NC with satellite offices spanning the globe. Red Hat is leading Linux and open source solutions into the mainstream by making high quality, low cost technology accessible. Red Hat provides operating system software along with applications, management, and middleware solutions, including JBoss Enterprise Middleware Suite (JEMS). Red Hat is accelerating the shift to service-oriented architectures (SOA) and enabling the next generation of web-enabled applications running on a low-cost, secure open source platform. Red Hat also offers support, training and consulting services to its customers worldwide and through top-tier partnerships. Red Hat's open source strategy offers customers a long term plan for building infrastructures that are based on and leverage open source technologies with focus on security and ease of management. 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: 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; risks related to data and information security vulnerabilities; ineffective management of, and control over, the Company's growth and international operations; risks related to the integration of acquisitions; adverse results in litigation; the 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, 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.

LINUX is a trademark of Linus Torvalds. RED HAT and JBOSS are registered trademarks of Red Hat, Inc. in the US and other countries. All other names and trademarks are the property of their respective owners.

RED HAT, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands - except per share amounts)


				Three Months Ended				Nine Months Ended
				Nov 30,		Nov 30,		Nov 30,		Nov 30,
				2006		2005			2006	2005
Revenue:

		Subscriptions		$	88,860	$	60,211	$	245,300	$	163,779
		Training and services			16,966		12,901		44,202		35,831


			Total subscription, training and services revenue		105,826		73,112		289,502		199,610

Cost of revenue:

		Subscriptions			6,741		4,952		20,123		15,788
		Training and services			10,699		6,905		27,183		20,291


			Total cost of subscription, training and services revenue		17,440		11,857		47,306		36,079


	Total gross profit				88,386		61,255		242,196		163,531

Operating expense:
	Sales and marketing				37,575		20,505		105,883		61,296
	Research and development				19,200		9,644		51,084		29,846
	General and administrative				18,024		12,357		49,579		34,067

		Total operating expense			74,799		42,506		206,546		125,209

Income from operations					13,587		18,749		35,650		38,322
Other income (expense), net					11,113		6,645		31,388		22,601
Interest expense					(1,494)		(1,490)		(4,467)		(4,612)

Income before provision for income taxes					23,206		23,904		62,571		56,311
Provision for income taxes					8,586		701		23,151		3,942

Net income				$	14,620	$	23,203	$	39,420	$	52,369

Net income-diluted				$	15,543	$	24,565	$	42,189	$	56,529

Net income per share:
	Basic			$	0.08	$	0.13	$	0.21	$	0.30
	Diluted			$	0.07	$	0.12	$	0.19	$	0.27

Weighted average shares outstanding:
	Basic				191,298		177,615		188,379		177,200
	Diluted				219,458		211,783		218,591		208,964

Diluted net income per share computation:
GAAP Net income, basic				$	14,620	$	23,203	$	39,420	$	52,369
Interest expense on convertible debentures, net of related GAAP tax effects					449		662		1,347		2,017
Amortization of debt issuance costs, net of related GAAP tax effects					474		700		1,422		2,143

GAAP Net income, diluted				$	15,543	$	24,565	$	42,189	$	56,529


Note: certain prior year amounts have been reclassified to conform with current year presentation.

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

ASSETS
					Nov. 30,		February 28,
					2006		2006
					(unaudited)
Current assets:
	Cash and cash equivalents				$	795,992	$	267,547
	Investments in debt securities					180,873		537,324
	Accounts receivable, net					81,251		59,792
	Prepaid expenses and other current assets					34,123		16,576

			Total current assets			1,092,239		881,239

	Property and equipment, net					42,278		35,822
	Goodwill					327,264		75,942
	Identifiable intangibles, net					97,574		13,467
	Investments in debt securities					120,313		272,669
	Other assets, net					33,238		35,102

			Total assets		$	1,712,906	$	1,314,241

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
	Accounts payable				$	10,742	$	5,627
	Accrued expenses					40,370		31,960
	Deferred revenue					227,786		162,934
	Other current obligations					359		401

		Total current liabilities				279,257		200,922

	Deferred lease credits					5,329		4,994
	Long term deferred revenue					83,909		60,554
	Other long term obligations					-		213
	Convertible debentures					570,000		570,000
Stockholders' equity:
	Minority interest					-		771
	Common stock					20		19
	Additional paid-in capital					1,015,376		763,906
	Deferred compensation					-		(2,418)
	Accumulated deficit					(112,579)		(152,113)
	Treasury stock, at cost					(125,723)		(124,125)
	Accumulated other comprehensive loss					(2,683)		(8,482)

			Total stockholders' equity			774,411		477,558

			Total liabilities and stockholders' equity		$	1,712,906	$	1,314,241


				Note: certain prior year amounts have been reclassified to conform with current year presentation.

RED HAT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)


				Three Months Ended				Nine Months Ended
				Nov 30,		Nov 30,		Nov 30,		Nov 30,
				2006		2005		2006		2005

Cash flows from operating activities:
Net income				$	14,620	$	23,203	$	39,420	$	52,369
Adjustments to reconcile net income to net cash provided by operating activities:

		Depreciation and amortization			6,594		4,145		17,691		11,443
		Deferred income taxes			3,501		293		13,003		(507)
		Share-based compensation expense			8,495		1,299		24,421		3,794
		Excess tax benefits from share-based payment arrangements			(2,368)		-		(5,243)
		Gain from repurchase of convertible debentures					-				(3,140)
		Provision for doubtful accounts			281		228		983		369
		Amortization of debt issuance costs			752		752		2,256		2,304
		(Gain) loss on disposal of property and equipment			(16)		128		(22)		1,125
		Other			-		546		(283)		568
Changes in operating assets and liabilities net of effects of acquisitions:
		Accounts receivable			(10,446)		2,968		(10,628)		(6,274)
		Prepaid expenses and other current assets			243		(1,731)		(2,002)		(2,521)
		Accounts payable			3,030		337		3,539		(3,030)
		Accrued expenses			9,595		3,966		9,438		11,521
		Deferred revenue			25,486		17,983		63,565		68,229
		Other assets			(91)		(4)		(206)		223

		Net cash provided by operating activities			59,676		54,113		155,932		136,473

Cash flows from investing activities:
	Purchase of investment securities						(223,900)		(7,444)		(363,077)
	Proceeds from sales and maturities of investment securities				166,810		221,956		522,862		332,972
	Acquisitions of businesses, net of cash acquired				(302)		(303)		(149,864)		(2,803)
	Purchase of other investments						(20,000)				(20,767)
	Purchase of property and equipment				(5,766)		(4,401)		(14,751)		(12,389)

		Net cash provided by (used in) investing activities			160,742		(26,648)		350,803		(66,064)

Cash flows from financing activities:
	Excess tax benefits from share-based payment arrangements				2,368		-		5,243		-
	Repurchase of convertible debentures						-				(26,301)
	Structured stock repurchases				1,514		-		1,514		1,031
	Net proceeds from issuance of common stock under Employee Stock Purchase Plan						833		306		2,330
	Proceeds from exercise of common stock options				2,966		6,978		14,650		14,102
	Purchase of treasury stock				(66)		-		(1,598)		(16,688)
	Other financing				(223)		470		(255)		553

		Net cash provided by (used in) financing activities			6,559		8,281		19,860		(24,973)

Effect of foreign currency exchange rates on cash and cash equivalents					834		(1,856)		1,850		(3,659)
Net increase in cash and cash equivalents					227,811		33,890		528,445		41,777
Cash and cash equivalents at beginning of the period					568,181		148,056		267,547		140,169

Cash and cash equivalents at end of period				$	795,992	$	181,946	$	795,992	$	181,946

			Note: certain prior year amounts have been reclassified to conform with current year presentation.

RED HAT, INC.
NON CASH SHARE-BASED COMPENSATION AND RECONCILIATION OF 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				Nine Months Ended
		Nov 30,		Nov 30,		Nov 30,		Nov 30,
			2006	2005			2006		2005

	Cost of revenue	$	558	$	-	$	1,607	$	-
	Sales and marketing		2,181		87		6,753		117
	Research and development		1,882		99		5,150		205
	General and administration		3,874		1,113		10,911		3,472
	Total stock based compensation expense	$	8,495	$	1,299	$	24,421	$	3,794




Reconciliation of GAAP Results to non-GAAP adjusted Results (for prior year comparison purposes only)

		Three Months Ended				Nine Months Ended
		Nov 30,		Nov 30,		Nov 30,		Nov 30,
		2006		2005			2006		2005

GAAP Net income		$	14,620	$	23,203	$	39,420	$	52,369

GAAP Provision for income taxes			8,586		701		23,151		3,942

GAAP Income before provision for income taxes		$	23,206	$	23,904	$	62,571	$	56,311

Add: Share-based compensation per FAS 123R (Nov 06 only)			8,495		1,299		24,421		3,794
Deduct: Intrinsic value of stock options per APB No. 25			(566)		(1,299)		(1,910)		(3,794)
	Incremental non-cash share-based compensation expense		7,929		0		22,511		0

Non-GAAP adjusted income before provision for income taxes		$	31,135	$	23,904	$	85,082	$	56,311

Non-GAAP cash provision for income taxes		$	1,557	$	1,195	$	4,254	$	2,816

Non-GAAP adjusted net income		$	29,578	$	22,709	$	80,828	$	53,495

Non-GAAP adjusted net income-diluted		$	30,970	$	24,101	$	85,003	$	57,744

Non-GAAP adjusted net income per share:
	Basic	$	0.15	$	0.13	$	0.43	$	0.30
	Diluted	$	0.14	$	0.11	$	0.39	$	0.28


Non-GAAP diluted net income per share computation:
Non-GAAP adjusted net income		$	29,578	$	22,709	$	80,828	$	53,495
Interest expense on convertible debentures, net of related 5% cash tax effects			677		677		2,031		2,060
Amortization of debt issuance costs, net of related 5% cash tax effects			715		715		2,144		2,189

Non-GAAP adjusted net income-diluted		$	30,970	$	24,101	$	85,003	$	57,744


Reconciliation of GAAP cash flow from operating activities to non-GAAP adjusted cash flow from operating activities
	(for prior year comparison purposes only)

		Three Months Ended				Nine Months Ended
		Nov 30,		Nov 30,		Nov 30,		Nov 30,
		2006		2005		2006		2005

GAAP Net cash provided by operating activities		$	59,676	$	54,113	$	155,932	$	136,473

Add: Excess tax benefits from share-based payment arrangements			2,368		0		5,243		0

Non-GAAP Net cash provided by operating activities		$	62,044	$	54,113	$	161,175	$	136,473