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Red Hat Reports Second Quarter Results

Stocks in this article: RHT

Operating cash flow was $119 million for the second quarter, as compared to $104 million in the year ago quarter. At quarter end, the company’s total deferred revenue balance was $1.06 billion, an increase of 12% on a year-over-year basis. Total cash, cash equivalents and investments as of August 31, 2013 was $1.29 billion after repurchasing approximately $20 million of common stock, or approximately 438 thousand shares, in the second quarter. Red Hat has repurchased approximately $199 million of common stock, or approximately 4.1 million shares, during the first six months of fiscal 2014.

“We delivered mid-to-high teens growth across several financial metrics including revenue, non-GAAP operating income and operating cash flow,” stated Charlie Peters, Executive Vice President and Chief Financial Officer of Red Hat. “These results were driven in particular by strong subscription revenue growth, up 17% in U.S. dollars and 18% in constant currency. The billing proxy, which we define as total revenue plus the change in deferred revenue found on the Statement of Cash Flows, was $376 million, up 8% in U.S. dollars and 9% in constant currency. This billings growth reflects modest IT spending in Europe and the impact of large deal arrangements.”

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 a 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 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, the Shadowman logo, JBoss and OpenShift are registered trademarks of Red Hat, Inc. in the U.S. and other countries. Linux is a registered trademark of Linus Torvald and OpenStack is a registered trademark of OpenStack, LLC.

RED HAT, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands - except per share amounts)
                 
 
Three Months Ended Six Months Ended
August 31, August 31, August 31, August 31,
2013 2012 2013 2012
Revenue:
 
Subscriptions $326,692 $278,800 $642,509 $551,371
Training and services 47,731 43,795 95,173 85,956
 
Total subscription, training and services revenue 374,423 322,595 737,682 637,327
 
Cost of revenue:
 
Subscriptions 23,518 18,846 46,893 36,786
Training and services 32,062 29,012 64,744 57,092
 
Total cost of subscription, training and services revenue 55,580 47,858 111,637 93,878
 
 
Total gross profit 318,843 274,737 626,045 543,449
 
Operating expense:
Sales and marketing 144,596 123,578 287,040 244,449
Research and development 78,299 63,366 152,100 123,246
General and administrative 38,203 37,813 72,537 71,724
Facility exit costs 2,171 - 2,171 3,142
 
Total operating expense 263,269 224,757 513,848 442,561
 
Income from operations 55,574 49,980 112,197 100,888
Interest income 1,527 2,154 3,029 4,448
Other income (expense), net 1,196 (656) 772 1,232
 
 
Income before provision for income taxes 58,297 51,478 115,998 106,568
Provision for income taxes 17,489 16,473 34,799 34,102
 
Net income $40,808 $35,005 $81,199 $72,466
 
Net income per share:
Basic $0.22 $0.18 $0.43 $0.38
Diluted $0.21 $0.18 $0.42 $0.37
 
Weighted average shares outstanding:
Basic 189,437 193,064 190,276 193,005
Diluted 191,432 195,795 192,230 195,929
 

RED HAT, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands)
     
ASSETS
 
August 31, February 28,
2013 2013 (1)
(Unaudited)
Current assets:
Cash and cash equivalents $596,794 $487,084
Investments in debt and equity securities 266,841 392,381
Accounts receivable, net 232,884 302,942
Deferred tax assets, net 88,325 88,765
Prepaid expenses 93,987 94,421
Other current assets 2,829 3,156
 
Total current assets 1,281,660 1,368,749
 
Property and equipment, net 167,343 141,586
Goodwill 690,342 690,911
Identifiable intangibles, net 142,247 142,243
Investments in debt securities 427,036 438,908
Other assets, net 30,953 31,263
 
Total assets $2,739,581 $2,813,660
 
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $178,904 $154,202
Deferred revenue 796,044 830,486
Other current obligations 993 1,024
 
Total current liabilities 975,941 985,712
 
Long term deferred revenue 263,553 259,466
Other long term obligations 58,483 48,321
Stockholders' equity:
Common stock 23 23
Additional paid-in capital 1,846,825 1,802,899
Retained earnings 623,079 541,880
Treasury stock, at cost (1,016,401) (816,674)
Accumulated other comprehensive loss (11,922) (7,967)
 
Total stockholders' equity 1,441,604 1,520,161
 
Total liabilities and stockholders' equity $2,739,581 $2,813,660
 
 
(1) Derived from audited financial statements
 

RED HAT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
                 
 
Three Months Ended Six Months Ended
August 31, August 31, August 31, August 31,
2013 2012 2013 2012
 
Cash flows from operating activities:
Net income $40,808 $35,005 $81,199 $72,466
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 18,439 14,568 36,371 28,647
Share-based compensation expense 29,874 23,859 53,006 46,065
Deferred income taxes 3,818 13,036 16,663 23,063
Excess tax benefits from share-based payment arrangements (2,610) (9,600) (5,643) (19,800)
Net amortization of bond premium on available-for-sale debt securities 2,285 1,748 4,336 3,420
Other (96) 529 47 (1,840)
Changes in operating assets and liabilities net of effects of acquisitions:
Accounts receivable (6,341) (18,735) 66,081 35,825
Prepaid expenses (5,645) 833 (2,394) (6,966)
Accounts payable and accrued expenses 38,902 13,502 26,293 22,928
Deferred revenue 1,880 26,430 (15,020) 21,308
Other (2,385) 2,678 (195) 3,141
 
Net cash provided by operating activities 118,929 103,853 260,744 228,257
 
Cash flows from investing activities:
Purchase of available-for-sale debt securities (217,433) (185,028) (347,076) (507,769)
Proceeds from sales and maturities of available-for-sale debt securities 153,917 190,094 479,767 417,779
Acquisition of business, net of cash acquired - (10,051) - (10,051)
Purchase of other intangible assets (10,177) (24,341) (12,521) (26,863)
Purchase of property and equipment (21,829) (20,344) (48,506) (36,243)
Other (2,126) - (1,934) 330
 
Net cash provided by (used in) investing activities (97,648) (49,670) 69,730 (162,817)
 
Cash flows from financing activities:
Excess tax benefits from share-based payment arrangements 2,610 9,600 5,643 19,800
Proceeds from exercise of common stock options 635 2,626 1,088 6,516
Purchase of treasury stock (20,009) (2,871) (199,345) (32,882)
Payments related to net settlement of employee share-based compensation awards (3,833) (3,856) (14,815) (22,688)
Payments on other borrowings (312) (213) (617) (477)
 
Net cash provided by (used in) financing activities (20,909) 5,286 (208,046) (29,731)
 
Effect of foreign currency exchange rates on cash and cash equivalents (1,576) 3,491 (12,718) (13,350)
Net increase (decrease) in cash and cash equivalents (1,204) 62,960 109,710 22,359
Cash and cash equivalents at beginning of the period 597,998 508,616 487,084 549,217
 
Cash and cash equivalents at end of period $596,794 $571,576 $596,794 $571,576
 

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 Six Months Ended
August 31, August 31, August 31, August 31,
2013 2012 2013 2012
 
Cost of revenue $3,100 $2,167 $5,939 $4,333
Sales and marketing 10,365 7,726 19,741 15,087
Research and development 9,058 7,294 15,939 14,106
General and administration 7,351 6,672 11,387 12,539
Total share-based compensation expense $29,874 $23,859 $53,006 $46,065
 
 
Amortization of intangible assets expense included in Consolidated Statements of Operations:
 
Three Months Ended Six Months Ended
August 31, August 31, August 31, August 31,
2013 2012 2013 2012
 
Cost of revenue $2,496 $1,149 $5,169 $1,819
Sales and marketing 1,958 2,120 3,916 4,196
Research and development 959 959 1,918 1,918
General and administration 1,203 1,181 2,740 2,324
Total amortization of intangible assets expense $6,616 $5,409 $13,743 $10,257
 
 
Facility exit costs included in Consolidated Statements of Operations:
 
Three Months Ended Six Months Ended
August 31, August 31, August 31, August 31,
2013 2012 2013 2012
 
Facility exit costs $2,171 - $2,171 $3,142
 
 
 
Three Months Ended Six Months Ended
August 31, August 31, August 31, August 31,
2013 2012 2013 2012
 
GAAP net income $40,808 $35,005 $81,199 $72,466
 
Provision for income taxes 17,489 16,473 34,799 34,102
 
GAAP income before provision for income taxes $58,297 $51,478 $115,998 $106,568
 
Add: Non-cash share-based compensation expense 29,874 23,859 53,006 46,065
Add: Amortization of intangible assets 6,616 5,409 13,743 10,257
Add: Facility exit costs 2,171 - 2,171 3,142
 
Non-GAAP adjusted income before provision for income taxes $96,958 $80,746 $184,918 $166,032
 
Provision for income taxes 29,088 25,839 55,475 53,130
 
Non-GAAP adjusted net income (basic and diluted) $67,870 $54,907 $129,443 $112,902
 
Non-GAAP adjusted net income per share:
Basic $0.36 $0.28 $0.68 $0.58
Diluted $0.35 $0.28 $0.67 $0.58
 

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 Six Months Ended
August 31, August 31, August 31, August 31,
2013 2012 2013 2012
 
GAAP gross profit $318,843 $274,737 $626,045 $543,449
 
Add: Non-cash share-based compensation expense 3,100 2,167 5,939 4,333
Add: Amortization of intangible assets 2,496 1,149 5,169 1,819
 
Non-GAAP gross profit $324,439 $278,053 $637,153 $549,601
 
Non-GAAP gross margin 87% 86% 86% 86%
 
 
Three Months Ended Six Months Ended
August 31, August 31, August 31, August 31,
2013 2012 2013 2012
 
GAAP operating expenses $263,269 $224,757 $513,848 $442,561
 
Deduct: Non-cash share-based compensation expense (26,774) (21,692) (47,067) (41,732)
Deduct: Amortization of intangible assets (4,120) (4,260) (8,574) (8,438)
Deduct: Facility exit costs (2,171) - (2,171) (3,142)
 
Non-GAAP adjusted operating expenses $230,204 $198,805 $456,036 $389,249
 
 
Three Months Ended Six Months Ended
August 31, August 31, August 31, August 31,
2013 2012 2013 2012
 
GAAP operating income $55,574 $49,980 $112,197 $100,888
 
Add: Non-cash share-based compensation expense 29,874 23,859 53,006 46,065
Add: Amortization of intangible assets 6,616 5,409 13,743 10,257
Add: Facility exit costs 2,171 - 2,171 3,142
 
Non-GAAP adjusted operating income $94,235 $79,248 $181,117 $160,352
 
Non-GAAP adjusted operating margin 25.2% 24.6% 24.6% 25.2%
 
 
 
 
Three Months Ended  
August 31, August 31, Year-Over-Year
2013 2012 Growth Rate
 
GAAP subscription revenue $326,692 $278,800 17.2%
Adjustment for currency impact 2,880 -
Non-GAAP subscription revenue on a constant currency basis $329,572 $278,800 18.2%
 
GAAP training and services revenue $47,731 $43,795 9.0%
Adjustment for currency impact 427 -
Non-GAAP training and services revenue on a constant currency basis $48,158 $43,795 10.0%
 
GAAP total subscription, training and services revenue $374,423 $322,595 16.1%
Adjustment for currency impact 3,307 -
Non-GAAP total subscription, training and services revenue on a constant currency basis $377,730 $322,595 17.1%
 
 
Six Months Ended  
August 31, August 31, Year-Over-Year
2013 2012 Growth Rate
 
GAAP subscription revenue $642,509 $551,371 16.5%
Adjustment for currency impact 8,600 -
Non-GAAP subscription revenue on a constant currency basis $651,109 $551,371 18.1%
 
GAAP training and services revenue $95,173 $85,956 10.7%
Adjustment for currency impact 981 -
Non-GAAP training and services revenue on a constant currency basis $96,154 $85,956 11.9%
 
GAAP total subscription, training and services revenue $737,682 $637,327 15.7%
Adjustment for currency impact 9,581 -
Non-GAAP total subscription, training and services revenue on a constant currency basis $747,263 $637,327 17.2%




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