Red Hat Reports Second Quarter Results for Fiscal Year 2016

RALEIGH, N.C. — September 21, 2015 —

Red Hat, Inc. (NYSE: RHT), the world's leading provider of open source solutions, today announced financial results for the second quarter of fiscal year 2016 ended August 31, 2015.

“Strong execution in Q2 contributed to total revenue results that exceeded 21% year-over-year growth on a constant currency basis. We were pleased with the progress of our technologies that address cloud deployments across multiple footprints. Specifically in this quarter, we achieved a public cloud milestone in our Certified Cloud and Service Provider program of an annualized run-rate of $100 million.” stated Jim Whitehurst, President and Chief Executive Officer of Red Hat. “We are also thrilled to be the first open source company to achieve an annualized run-rate of $2 billion in revenue this quarter. In addition, we believe Red Hat is well-positioned for the second half of the fiscal year as we continue to benefit from delivering innovation to our customers.”

“We exceeded guidance across a number of financial metrics. Our growth in revenue led to strong growth of non-GAAP operating income and non-GAAP EPS of 13% and 15%, respectively. We also continued to invest in our initiatives to deliver open, hybrid cloud solutions which support our long-term growth opportunities,” stated Frank Calderoni, Executive Vice President, Operations and Chief Financial Officer of Red Hat. “Our year-to-date operating cash flow was $329 million, up 21% compared to the first half of FY15. We also returned additional value to shareholders in the form of a $70 million share repurchase in the quarter”.

Revenue: Total revenue for the quarter was $504 million, up 13% in U.S. dollars year-over-year, or 21% measured in constant currency. Constant currency references in this release are as detailed in the tables below. Subscription revenue for the quarter was $442 million, up 13% in U.S. dollars year-over-year, or 21% measured in constant currency.

Subscription Revenue Breakout: Subscription revenue in Infrastructure-related offerings for the quarter was $363 million, an increase of 9% in U.S. dollars year-over-year and 17% measured in constant currency. Subscription revenue in Application Development-related and other emerging technologies offerings for the quarter was $79 million, an increase of 37% in U.S. dollars year-over-year and 48% measured in constant currency.

Operating Income: GAAP operating income for the quarter was $76 million, up 19% year-over-year. After adjusting for non-cash share-based compensation expense, amortization of intangible assets and transaction costs related to business combinations, as detailed in the tables below, non-GAAP operating income for the second quarter was $123 million, up 13% year-over-year. For the second quarter, GAAP operating margin was 15.2% and non-GAAP operating margin was 24.4%.

Net Income: GAAP net income for the quarter was $51 million, or $0.28 per diluted share, compared with $47 million, or $0.25 per diluted share, in the year-ago quarter. After adjusting for non-cash share-based compensation expense, amortization of intangible assets, transaction costs related to business combinations, and non-cash interest expense from accretion of debt discount, as detailed in the tables below, non-GAAP net income for the quarter was $88 million, or $0.47 per diluted share, as compared to $78 million, or $0.41 per diluted share, in the year-ago quarter. Non-GAAP diluted weighted average shares outstanding excludes any dilution resulting from the convertible notes because any potential dilution is expected to be offset by our convertible note hedge transactions.

Cash: Operating cash flow was $120 million for the second quarter, an increase of 12% on a year-over-year basis. Total cash, cash equivalents and investments as of August 31, 2015 was $2.0 billion after repurchasing approximately $70 million, or approximately 895 thousand shares, of common stock in the second quarter. As of August 31, 2015, the remaining balance in the current repurchase authorization was approximately $430 million.

Deferred Revenue: At quarter end, the company’s total deferred revenue balance was $1.41 billion, an increase of 13% on a year-over-year basis. The negative impact to total deferred revenue from changes in foreign exchange rates was $91 million year-over-year. On a constant currency basis, total deferred revenue would have been up 20% year-over-year as detailed in the tables below.

Outlook

Red Hat’s outlook assumes similar business conditions and foreign exchange rates as of September 18, 2015. The full year revenue guidance is increased to $2.034 billion to $2.044 billion. Full year non-GAAP operating margin is targeted to 23.6%, and cash flow is increased to $690 million to $705 million. Full year diluted non-GAAP earnings per share guidance is in the range of $1.85-$1.87 per share, assuming a $1 million per quarter forecast for other income, a 29% annual effective tax rate and 186 million fully diluted shares outstanding. Non-GAAP guidance is derived by subtracting the estimated full year impact of non-cash share-based compensation expense of approximately $160 million, amortization of intangible assets expense of approximately $24 million and non-cash interest expense from accretion of debt discount of approximately $19 million.

For the third quarter, Red Hat’s outlook is for revenue of $519 million to $523 million, non-GAAP operating margin of approximately 23.0% and non-GAAP earnings per share of $0.47. Non-GAAP guidance is derived by subtracting the estimated third quarter impact of non-cash share-based compensation expense of approximately $42 million and amortization of intangible assets of approximately $6 million, and non-cash interest expense from accretion of debt discount of approximately $5 million.