Red Hat Reports Third Quarter Results

  • Total revenue of $456 million, up 15% year-over-year
  • Subscription revenue of $395 million, up 15% year-over-year
  • Third quarter operating cash flow of $133 million, up 40% year-over-year

RALEIGH, N.C.--()--Red Hat, Inc. (NYSE: RHT), the world's leading provider of open source solutions, today announced financial results for its fiscal year 2015 third quarter ended November 30, 2014.

Total revenue for the quarter was $456 million, an increase of 15% in U.S. dollars from the year ago quarter, and 18% measured in constant currency. Constant currency references in this release are as detailed in the tables below. Subscription revenue for the quarter was $395 million, up 15% in U.S. dollars year-over-year, or 18% measured in constant currency.

“Our strong Q3 results marked the eleventh straight quarter of mid-to-high teens revenue growth as we continued to reinforce and expand our strategic relationship with our customers,” said Jim Whitehurst, President and Chief Executive Officer of Red Hat. “Cloud computing and big data trends are driving increased demand for open source technologies. We believe our leadership position in the open source industry and broad portfolio of Open Hybrid Cloud technologies creates a strong position for Red Hat to capture market share in the cloud-enabled data center.”

GAAP operating income for the third quarter was $67 million, up 11% year-over-year. After adjusting for stock compensation, amortization expenses, transaction costs related to business combinations, and non-cash interest expense related to convertible debt as detailed in the tables below, non-GAAP operating income for the third quarter was $109 million, up 10% year-over-year. For the third quarter, GAAP operating margin was 14.7% and non-GAAP operating margin was 23.8%.

GAAP net income for the quarter was $48 million, or $0.26 per diluted share, compared with $52 million, or $0.27 per diluted share, in the year ago quarter. After adjusting for stock compensation, amortization expenses, transaction costs related to business combinations, and non-cash interest expense related to the convertible debt as detailed in the tables below, non-GAAP net income for the quarter was $79 million, or $0.42 per diluted share, as compared to $81 million, or $0.42 per diluted share, in the year ago quarter. The year ago third quarter included a $4 million discrete tax benefit and cumulative adjustment that lowered last year’s estimated annual effective tax rate and increased last year’s Q3 GAAP EPS and non-GAAP EPS results by approximately $0.04 per share and $0.06 per share, respectively.

Operating cash flow was $133 million for the third quarter, up 40% as compared to $95 million in the year ago quarter. At quarter end, the company’s total deferred revenue balance was $1.30 billion, an increase of 16% on a year-over-year basis. Total cash, cash equivalents and investments as of November 30, 2014 was $1.65 billion. The company also completed a convertible debt offering of $805 million during the quarter. The company used a portion of the proceeds to enter into convertible note hedge transactions for net cost of approximately $68 million and an accelerated stock repurchase transaction for $375 million which resulted in the delivery to the company during Q3 of approximately 5.3 million shares of its common stock.

“Outstanding sales execution in the third quarter drove strong performance across the board. We excelled on virtually every key financial metric we track,” stated Charlie Peters, Executive Vice President and Chief Financial Officer of Red Hat. “We have had sequential quarterly revenue growth at Red Hat every quarter for 51 straight quarters. The sales performance this quarter with large deals was exceptional, setting new records in number of deals over $5 million in a quarter and deals over $10 million in a Q3. We believe the growing number and size of large deals reflects the increasingly strategic relationship that Red Hat is building with customers, in addition to customer demand for our broadening product portfolio.”

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 is the world's leading provider of open source software solutions, using a community-powered approach to reliable and high-performing cloud, Linux, middleware, storage and virtualization technologies. Red Hat also offers award-winning support, training and consulting services. As the connective hub in a global network of enterprises, partners and open source communities, Red Hat helps create relevant, innovative technologies that liberate resources for growth and prepare customers for the future of IT. Learn more at 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 effects of industry consolidation; the ability of the Company to compete effectively; the integration of acquisitions and the ability to market successfully acquired technologies and products; uncertainty and adverse results in litigation and related settlements; 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; 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 and political conditions, governmental and public policy changes and the impact of natural disasters such as earthquakes and floods. 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 this press release.

Red Hat, Red Hat Enterprise Linux, the Shadowman logo and JBoss are trademarks of Red Hat, Inc., registered in the U.S. and other countries. Linux is the registered trademark of Linus Torvalds in the U.S. and other countries.

RED HAT, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands - except per share amounts)
                 
 
Three Months Ended Nine Months Ended
November 30, November 30, November 30, November 30,
2014 2013 2014 2013
Revenue:
 
Subscriptions $394,699 $342,770 $1,156,161 $985,279
Training and services 61,196 53,766 169,387 148,939
 
 
Total subscription, training and services revenue 455,895 396,536 1,325,548 1,134,218
 
Cost of revenue:
 
Subscriptions 28,574 24,544 84,125 71,437
Training and services 42,791 35,883 118,857 100,627
 
 
Total cost of subscription, training and services revenue 71,365 60,427 202,982 172,064
 
 
Total gross profit 384,530 336,109 1,122,566 962,154
 
Operating expense:
Sales and marketing 187,218 153,528 538,576 440,568
Research and development 90,613 82,519 275,817 234,619
General and administrative 39,502 39,270 125,786 111,807
Facility exit costs - - - 2,171
 
 
Total operating expense 317,333 275,317 940,179 789,165
 
Income from operations 67,197 60,792 182,387 172,989
Interest income 2,196 1,579 6,048 4,608
Interest expense 3,441 51 3,591 114
Other income (expense), net 1,559 (389) 1,777 446
 
 
Income before provision for income taxes 67,511 61,931 186,621 177,929
Provision for income taxes 19,578 9,906 54,120 44,705
 
Net income $47,933 $52,025 $132,501 $133,224
 
Net income per share:
Basic $0.26 $0.27 $0.71 $0.70
Diluted $0.26 $0.27 $0.70 $0.69
 
Weighted average shares outstanding:
Basic 185,039 189,514 187,533 190,024
Diluted 187,674 191,365 190,081 192,049

RED HAT, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands)
             
ASSETS
November 30, February 28,
2014 2014 (1)
(Unaudited)
Current assets:
Cash and cash equivalents $883,989 $646,742
Investments in debt and equity securities 231,420 335,387
Accounts receivable, net 354,870 360,594
Deferred tax assets, net 106,282 108,264
Prepaid expenses 126,827 118,387
Other current assets 1,629 1,808
 
Total current assets 1,705,017 1,571,182
 
Property and equipment, net 173,599 173,917
Goodwill 939,574 687,430
Identifiable intangibles, net 144,176 133,399
Investments in debt securities 531,112 505,300
Other assets, net 54,393 35,391
 
Total assets $3,547,871 $3,106,619
 
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $229,272 $179,468
Deferred revenue 941,441 966,832
Other current obligations 1,908 1,786
 
Total current liabilities 1,172,621 1,148,086
 
Convertible notes 710,844 -
Long term deferred revenue 358,684 322,365
Other long term obligations 71,915 85,003
Stockholders' equity:
Common stock 23 23
Additional paid-in capital 1,928,179 1,891,848
Retained earnings 852,673 720,172
Treasury stock, at cost (1,515,288) (1,056,419)
Accumulated other comprehensive loss (31,780) (4,459)
 
Total stockholders' equity 1,233,807 1,551,165
 
Total liabilities and stockholders' equity $3,547,871 $3,106,619
 
 
(1) Derived from audited financial statements

RED HAT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
                   
 
Three Months Ended Nine Months Ended
November 30, November 30, November 30, November 30,
2014 2013 2014 2013
 
Cash flows from operating activities:
Net income $47,933 $52,025 $132,501 $133,224
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 18,651 18,955 57,114 55,326
Share-based compensation expense 33,623 30,190 98,942 83,196
Deferred income taxes (780) (1,412) 3,125 9,608
Net amortization of bond premium on available-for-sale debt securities 2,407 2,301 6,965 6,637
Accretion of debt discount and amortization of debt issuance costs 3,085 - 3,085 -
Other (175) 438 (527) 485
Changes in operating assets and liabilities net of effects of acquisitions:
Accounts receivable (75,917) (75,330) 2,314 (9,249)
Prepaid expenses (5,922) (1,109) (13,502) (3,503)
Accounts payable and accrued expenses 26,254 12,272 56,175 38,565
Deferred revenue 83,912 56,019 57,955 40,999
Other (83) 805 1,264 610
 
Net cash provided by operating activities 132,988 95,154 405,411 355,898
 
Cash flows from investing activities:
Purchase of available-for-sale debt securities (141,928) (101,636) (461,069) (448,712)
Proceeds from sales and maturities of available-for-sale debt securities 93,578 118,084 503,110 597,851
Acquisition of businesses, net of cash acquired (78,317) - (296,121) -
Purchase of other intangible assets (2,160) (682) (3,911) (13,203)
Purchase of property and equipment (12,201) (13,327) (35,085) (61,833)
Other 482 (150) 2,917 (2,084)
 
Net cash provided by (used in) investing activities (140,546) 2,289 (290,159) 72,019
 
Cash flows from financing activities:
Excess tax benefits from share-based payment arrangements 3,488 3,428 4,897 9,071
Proceeds from exercise of common stock options 465 223 1,154 1,311
Purchase of treasury stock (375,000) (40,018) (535,062) (239,363)
Payments related to net settlement of employee share-based compensation awards (21,754) (18,307) (39,314) (33,122)
Proceeds from issuance of convertible notes, net of issuance costs 790,394 - 790,394 -
Purchase of convertible note hedges (148,040) - (148,040) -
Proceeds from issuance of warrants 79,776 - 79,776 -
Payments on other borrowings (402) (362) (2,392) (979)
 
Net cash provided by (used in) financing activities 328,927 (55,036) 151,413 (263,082)
 
Effect of foreign currency exchange rates on cash and cash equivalents (22,761) 2,910 (29,418) (9,808)
Net increase in cash and cash equivalents 298,608 45,317 237,247 155,027
Cash and cash equivalents at beginning of the period 585,381 596,794 646,742 487,084
 
Cash and cash equivalents at end of period $883,989 $642,111 $883,989 $642,111

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 Nine Months Ended
November 30, November 30, November 30, November 30,
2014 2013 2014

2013

 
Cost of revenue $3,915 $2,922 $10,458 $8,861
Sales and marketing 15,866 10,268 39,794 30,009
Research and development 8,129 9,161 28,091 25,100
General and administration 5,713 7,839 20,599 19,226
Total share-based compensation expense $33,623 $30,190 $98,942 $83,196
 
 
Amortization of intangible assets expense included in Consolidated Statements of Operations:
 
Three Months Ended Nine Months Ended
November 30, November 30, November 30, November 30,
2014 2013 2014 2013
 
Cost of revenue $2,995 $2,504 $8,097 $7,672
Sales and marketing 1,958 2,479 5,533 6,395
Research and development 250 959 2,167 2,877
General and administration 1,439 1,288 4,473 4,028
Total amortization of intangible assets expense $6,642 $7,230 $20,270 $20,972
 
 
Non-cash interest expense from accretion of debt discount included in Consolidated Statements of Operations:
 
Three Months Ended Nine Months Ended
November 30, November 30, November 30, November 30,
2014 2013 2014 2013
 
Total non-cash interest expense from accretion of debt discount $2,734 - $2,734 -
 
Facility exit costs included in Consolidated Statements of Operations:
 
 
Three Months Ended Nine Months Ended
November 30, November 30, November 30, November 30,
2014 2013 2014 2013
 
Facility exit costs - - - $2,171
 
 
Transaction costs related to business combinations included in Consolidated Statements of Operations:
 
Three Months Ended Nine Months Ended
November 30, November 30, November 30, November 30,
2014 2013 2014 2013
 
Transaction costs related to business combinations $1,061 - $4,001 -
 
 
Three Months Ended Nine Months Ended
November 30, November 30, November 30, November 30,
2014 2013 2014 2013
 
GAAP net income $47,933 $52,025 $132,501 $133,224
 
Provision for income taxes 19,578 9,906 54,120 44,705
 
GAAP income before provision for income taxes $67,511 $61,931 $186,621 $177,929
 
Add: Non-cash share-based compensation expense 33,623 30,190 98,942 83,196
Add: Amortization of intangible assets 6,642 7,230 20,270 20,972
Add: Non-cash interest expense from accretion of debt discount 2,734 - 2,734 -
Add: Facility exit costs - - - 2,171
Add: Transaction costs related to business combinations 1,061 - 4,001 -
 
Non-GAAP adjusted income before provision for income taxes $111,571 $99,351 $312,568 $284,268
 
Provision for income taxes 32,356 18,474 90,645 73,949
 
Non-GAAP adjusted net income (basic and diluted) $79,215 $80,877 $221,923 $210,319
 
Non-GAAP adjusted net income per share:
Basic $0.43 $0.43 $1.18 $1.11
Diluted $0.42 $0.42 $1.17 $1.10
 
 
(1) Provision for income taxes:
Non-GAAP adjusted net income before income tax provision $111,571 $99,351 $312,568 $284,268
Estimated annual effective tax rate 29.0% 22.8% 29.0% 27.5%
Non-GAAP provision for income taxes before discrete tax benefit $32,356 $22,699 $90,645 $78,174
Discrete tax benefit - 4,225 - 4,225
Provision for income taxes on Non-GAAP adjusted net income $32,356 $18,474 $90,645 $73,949

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 Nine Months Ended
November 30, November 30, November 30, November 30,
2014 2013 2014 2013
 
GAAP gross profit $384,530 $336,109 $1,122,566 $962,154
 
Add: Non-cash share-based compensation expense 3,915 2,922 10,458 8,861
Add: Amortization of intangible assets 2,995 2,504 8,097 7,672
 
Non-GAAP gross profit $391,440 $341,535 $1,141,121 $978,687
 
Non-GAAP gross margin 85.9% 86.1% 86.1% 86.3%
 
 
Three Months Ended Nine Months Ended
November 30, November 30, November 30, November 30,
2014 2013 2014 2013
 
GAAP operating expenses $317,333 $275,317 $940,179 $789,165
 
Deduct: Non-cash share-based compensation expense (29,708) (27,268) (88,484) (74,335)
Deduct: Amortization of intangible assets (3,647) (4,726) (12,173) (13,300)
Deduct: Facility exit costs - - - (2,171)
Deduct: Transaction costs related to business combinations (1,061) - (4,001) -
 
Non-GAAP adjusted operating expenses $282,917 $243,323 $835,521 $699,359
 
 
Three Months Ended Nine Months Ended
November 30, November 30, November 30, November 30,
2014 2013 2014 2013
 
GAAP operating income $67,197 $60,792 $182,387 $172,989
 
Add: Non-cash share-based compensation expense 33,623 30,190 98,942 83,196
Add: Amortization of intangible assets 6,642 7,230 20,270 20,972
Add: Facility exit costs - - - 2,171
Add: Transaction costs related to business combinations 1,061 - 4,001 -
 
Non-GAAP adjusted operating income $108,523 $98,212 $305,600 $279,328
 
Non-GAAP adjusted operating margin 23.8% 24.8% 23.1% 24.6%
 
 
Three Months Ended
November 30, November 30, Year-Over-Year
2014 2013 Growth Rate  
 
GAAP subscription revenue $394,699 $342,770 15.1%
Adjustment for currency impact 10,368 -
Non-GAAP subscription revenue on a constant currency basis $405,067 $342,770 18.2%
 
GAAP training and services revenue $61,196 $53,766 13.8%
Adjustment for currency impact 2,804 -
Non-GAAP training and services revenue on a constant currency basis $64,000 $53,766 19.0%
 
GAAP total subscription, training and services revenue $455,895 $396,536 15.0%
Adjustment for currency impact 13,172 -
Non-GAAP total subscription, training and services revenue on a constant currency basis $469,067 $396,536 18.3%
 
 
Nine Months Ended
November 30, November 30, Year-Over-Year
2014 2013 Growth Rate  
 
GAAP subscription revenue $1,156,161 $985,279 17.3%
Adjustment for currency impact 7,836  
Non-GAAP subscription revenue on a constant currency basis $1,163,997 $985,279 18.1%
 
GAAP training and services revenue $169,387 $148,939 13.7%
Adjustment for currency impact 4,327  
Non-GAAP training and services revenue on a constant currency basis $173,714 $148,939 16.6%
 
GAAP total subscription, training and services revenue $1,325,548 $1,134,218 16.9%
Adjustment for currency impact 12,163  
Non-GAAP total subscription, training and services revenue on a constant currency basis $1,337,711 $1,134,218 17.9%

Contacts

Red Hat, Inc.
Media Contact:
Stephanie Wonderlick, 571-421-8169
swonderl@redhat.com
or
Investor Relations:
Tom McCallum, 919-754-4630
tmccallum@redhat.com

Release Summary

quarterly earnings report

Contacts

Red Hat, Inc.
Media Contact:
Stephanie Wonderlick, 571-421-8169
swonderl@redhat.com
or
Investor Relations:
Tom McCallum, 919-754-4630
tmccallum@redhat.com