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.

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