Red Hat (RHT) analyst conference summary

Red Hat

RHT

conference date: December 22, 2009 @ 2:00 PM Pacific Time

for quarter ending: November 30, 2009 (3rd quarter fiscal 2010)

[at the time this is written] See also "I Sell Red Hat"

Forward-looking statements

Overview: Another excellent quarter for revenue for the commercial Linux leader, but earnings continue to lag.

Basic data (GAAP) :

Revenue was $194.3 million, up 4% sequentially from $183.6 million, and up 18% from $165.3 million year-earlier.

Net income was $16.4 million, down 43% sequentially from $28.9 million, and down 32% from $24.3 million year-earlier.

EPS (diluted earnings per share were) were $0.08, down 47% sequentially from $0.15, and down 33% from $0.12 year-earlier.

Guidance:

Assuming stable currency exchange rates: Q4 revenue $191 to $193 million. Services and training expected down $2 to $3 million due to holidays. 23.8% non-GAAP operating margin. Non-GAAP EPS $0.15 to $0.16 per share. Cash flow expected up.

Conference Highlights:

Subscription revenue was $164.4 million, up 21% y/y. Training and services revenue was $29.9 million, flat y/y.

Towards the end of the quarter RHEV virtualization software was released. Interest is strong among established customers. Cloud initiative is attracting clients.

There was an $8.8 million charge for litigation settlement in GAAP numbers. Non-GAAP operating income was $46.1 million, up 20% y/y; operating margin 23.7%, up 50 basis points y/y. Non-GAAP net income was $33.5 million (down from $36.9 million year-earlier), for EPS of $0.18.

Operating cash flow was $54.1 million, down from $59.1 million year-earlier. Accounts receivable increased $24 million y/y due to record billings in the quarter. Total cash, equivalents and investments ended at $959 million, up $47 million sequentially. $52.3 million was spent repurchasing stock.

Bookings were particularly strong in North America.

Cost of revenues was $29.6 million, leaving $164.7 million in GAAP gross profit. Operating expense of $145.0 million consisted of: sales and marketing $71.5 million (up $13 million y/y), R&D $36.8 million, general and administrative $26.1 million, and the $8.8 million litigation settlement. Leaving $19.8 million income from operations. Interest and other income was $5.5 million. Income tax provision was $8.8 million. Some of the expense increase was due to the October Red Had summit.

Linux is now 18 years old. Red Hat remains the number one contributor to the kernel.

All of the largest 25 deals that were up for renewal did renew, at a total value of 120% of last-year's value. 14 deals in the quarter were for over $1 million. 8 deals included JBoss.

Deferred revenue was up 23% y/y to $619 million. Average deal length was 22 months.

Q&A:

Economy effects? We are beginning to see some recovery in certain markets, like the financial sector. Does not think this is generally a year-end budget flush, instead there are indications of optimism from COOs.

JBoss? Continues to grow at a faster pace than the main business. The pipeline looks strong.

Lower earnings on higher revenues? Exchange rate pushed operating expenses up in quarter; Red Hat summit expense; launch of RHEV expenses. We continue to invest in the future, including hiring new employees.

Implication that a lot of billing was right at the end of the quarter? The quarter was similar to most other quarters, 20/20/60 linearity. This is why we don't forecast cash flow by quarter. There was a 21% increase in unleveraged quarterly cash flow y/y.

Goal is to find another 100 basis points (1%) in operating margin each year.

We are growing because of an ASP benefit as we add products, we are picking up market share from other Linux providers, and server shipments are improving.

Geographic? Strong Americas performance. Asia Pacific and Europe are solid. This quarter Americas is picking up more quickly than EMEA.

RHEL AP is not just for the largest customers, it is useful to smaller customers as well.

Earlier in the year we invested a lot in sales training globally, which has had a positive effect.

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