Red Hat Reports Third Quarter Results for Fiscal Year 2016

RALEIGH, N.C. — December 17, 2015 —

Red Hat, Inc. (NYSE: RHT), the world's leading provider of open source solutions, today announced financial results for the third quarter of fiscal year 2016 ended November 30, 2015.

“Our investments in technologies and partnerships continued to generate strong results as customers transform their IT infrastructure through the increasing adoption of open source technologies and cloud computing” stated Jim Whitehurst, President and Chief Executive Officer of Red Hat. “During the third quarter, we strengthened our leadership position in the open hybrid cloud by introducing new technologies and launching a strategic partnership with Microsoft and its Azure Cloud. Our initiatives are focused on enabling our customers to build, deploy and manage their applications across multiple environments and infrastructures.”

“We delivered another strong quarter as we exceeded our guidance. We have now had four consecutive quarters of total revenue growth of 20% or higher on a year-over-year constant currency basis,” stated Frank Calderoni, Executive Vice President, Operations and Chief Financial Officer of Red Hat. “While we continued to invest in our business, strong revenue growth has driven non­-GAAP operating income growth of 18% and operating cash flow growth of 16% year­-to-­date for fiscal 2016.”

Revenue: Total revenue for the quarter was $524 million, up 15% in U.S. dollars year-over-year, or 21% measured in constant currency. Constant currency references in this release are detailed in the tables below. Subscription revenue for the quarter was $457 million, up 16% in U.S. dollars year-over-year, or 22% measured in constant currency. Subscription revenue was 87% of total revenue.

Subscription Revenue Breakout: Subscription revenue from Infrastructure-related offerings for the quarter was $373 million, an increase of 12% in U.S. dollars year-over-year and 18% measured in constant currency. Subscription revenue from Application Development-related and other emerging technologies offerings for the quarter was $84 million, an increase of 37% in U.S. dollars year-over-year and 45% measured in constant currency.

Operating Income: GAAP operating income for the quarter was $69 million, up 3% year-over-year. After adjusting for non-cash share-based compensation expense, amortization of intangible assets and transaction costs related to business combinations, non-GAAP operating income for the third quarter was $123 million, up 13% year-over-year. Non-GAAP references in this release are detailed in the tables below. For the third quarter, GAAP operating margin was 13.2% and non-GAAP operating margin was 23.5%.

Net Income: GAAP net income for the quarter was $47 million, or $0.25 per diluted share, compared with $48 million, or $0.26 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, non-GAAP net income for the quarter was $89 million, or $0.48 per diluted share, as compared to $79 million, or $0.42 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 $140 million for the third quarter, an increase of 5% on a year-over-year basis and 16% year­-to-­date. Total cash, cash equivalents and investments as of November 30, 2015 was $1.87 billion after repurchasing approximately $78 million, or approximately 987 thousand shares, of common stock in the third quarter. As of November 30, 2015, the remaining balance in the current repurchase authorization was approximately $352 million.

Deferred Revenue: At quarter end, the company’s total deferred revenue balance was $1.49 billion, an increase of 14% on a year-over-year basis. The negative impact to total deferred revenue from changes in foreign exchange rates was $78 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 currency exchange rates as of December 17, 2015. For the full year:

• Revenue guidance is increased to $2.044 billion to $2.048 billion in U.S. dollars.
• Full year GAAP operating margin is expected to be approximately 14.1% and non-GAAP operating margin is expected to be approximately 23.5%.
• Full year fully-diluted GAAP earnings per share (EPS) is expected to be approximately $1.05 per share. Full year fully-diluted non-GAAP EPS is expected to be approximately $1.86 per share. Both GAAP and non-GAAP EPS assume a $1 million per quarter forecast for other income, a 29% annual effective tax rate and 186 million fully-diluted shares outstanding.
• Operating cash flow guidance range is increased to $695 million to $705 million.

For the fourth quarter:

• Revenue guidance is $535 million to $539 million.
• GAAP operating margin is expected to be approximately 13.3% and non-GAAP operating margin is expected to be approximately 22.5%.
• Fully-diluted GAAP EPS is expected to be approximately $0.26 per share. Fully-diluted non-GAAP EPS is expected to be approximately $0.47. As disclosed in the press release issued on October 16, 2015, EPS guidance includes an increase of $4 million of operating expenses, or ($0.02) per share impact related to the acquisition of Ansible, Inc.

GAAP to non-GAAP reconciliation:

Full year non-GAAP operating margin guidance is derived by subtracting the estimated full year impact of non-cash share-based compensation expense of approximately $163 million, amortization of intangible assets of approximately $26 million and transaction costs related to business combinations of approximately $4 million. Full year fully-diluted non-GAAP EPS guidance is derived by subtracting the expenses listed in the previous sentence and the full year impact of non-cash interest expense from accretion of debt discount of approximately $19 million.

Fourth quarter non-GAAP operating margin guidance is derived by subtracting the estimated impact of non-cash share-based compensation expense of approximately $42 million and amortization of intangible assets of approximately $7 million. Fourth quarter fully-diluted non-GAAP EPS guidance is derived by subtracting the expenses listed in the previous sentence and non-cash interest expense from accretion of debt discount of approximately $5 million.

These statements are forward-looking and actual results may differ materially. Refer to the Forward-Looking Statements below for information on the factors that could cause our actual results to differ materially.

Webcast and Website Information

A live webcast of Red Hat's results will begin at 5:00 pm ET today. The webcast, in addition to a copy of our prepared remarks and slides containing financial highlights and supplemental metrics, 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. Additional information on Red Hat's reported results, including a reconciliation of the non-GAAP adjusted results, are included in the financial tables below.