Red Hat Reports First Quarter Results

•First quarter total revenue of $481 million, up 14% year-over-year •First quarter subscription revenue of $425 million, up 14% year-over-year •First quarter operating cash flow of $209 million, up 27% year-over-year

RALEIGH, N.C.-- Red Hat, Inc. (RHT), the world's leading provider of open source solutions, today announced financial results for its fiscal year 2016 first quarter ended May 31, 2015.

Total revenue for the quarter was $481 million, an increase of 14% in U.S. dollars from the year ago quarter, and 22% measured in constant currency. Constant currency references in this release are as detailed in the tables below. Subscription revenue for the quarter was $425 million, up 14% in U.S. dollars year-over-year, or 23% measured in constant currency. Total revenue for the first quarter of fiscal 2016 included an additional $5 million of subscription revenue earned from Red Hat’s Certified Cloud Providers (CCP). This one-time adjustment results from a change in our ability to estimate revenue earned through the CCP program.

“Our solid start to fiscal year 2016 was evidenced by strong constant currency revenue growth of over 20%,” stated Jim Whitehurst, President and Chief Executive Officer of Red Hat. “This strong growth reflects in part the demand for our open, hybrid cloud technologies across four footprints: bare metal, virtualization, private cloud and public cloud deployments. Red Hat’s portfolio of technologies becomes increasingly strategic to customers who are looking to expand their capabilities and agility to build and deploy applications across these data center footprints.”

“We delivered Q1 results which exceeded the high-end of our guidance for total revenue, non-GAAP operating margin and non-GAAP EPS before the adjustment which added the incremental $5 million of earned revenue from our CCP program,” stated Charlie Peters, Executive Vice President and Chief Financial Officer of Red Hat.

GAAP operating income for the first quarter was $71 million, up 39% year-over-year. After adjusting for stock compensation, amortization expenses and transaction costs related to business combinations, as detailed in the tables below, non-GAAP operating income for the first quarter was $113 million, up 28% year-over-year. For the first quarter, GAAP operating margin was 14.7% and non-GAAP operating margin was 23.6%.

GAAP net income for the quarter was $48 million, or $0.26 per diluted share, compared with $38 million, or $0.20 per diluted share, in the year ago quarter. After adjusting for stock compensation, amortization expenses, transaction costs related to business combinations, and non-cash interest expense related to convertible debt, as detailed in the tables below, non-GAAP net income for the quarter was $81 million, or $0.44 per diluted share, as compared to $64 million, or $0.34 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. Both GAAP and non-GAAP earnings per diluted share benefited from the one-time earned revenue adjustment by approximately $0.02 in the first quarter of fiscal 2016.

Operating cash flow was $209 million for the first quarter, an increase of 27% on a year-over-year basis. At quarter end, the company’s total deferred revenue balance was $1.44 billion, an increase of 13% on a year-over-year basis. Total cash, cash equivalents and investments as of May 31, 2015 was $1.97 billion.

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 at 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 the ability of the Company to compete effectively; the ability to deliver and stimulate demand for new products and technological innovations on a timely basis; delays or reductions in information technology spending; the effects of industry consolidation; 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; 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 Annual Report on Form 10-K (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, Red Hat Enterprise Linux, the Shadowman logo, and JBoss are trademarks of Red Hat, Inc., registered in the U.S. and other countries. Linux is the registered trademark of Linus Torvalds in the U.S. and other countries.

RED HAT, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands - except per share amounts)


			Three Months Ended
			May 31,			May 31,
			2015			2014
Revenue:

	Subscriptions		$	424,793		$	371,968
	Training and services			56,208			51,786


		Total subscription, training and services revenue		481,001			423,754

Cost of revenue:

	Subscriptions			29,846			27,760
	Training and services			41,551			36,683


		Total cost of subscription, training and services revenue		71,397			64,443


	Total gross profit			409,604			359,311

Operating expense:
	Sales and marketing			198,872			176,838
	Research and development			97,431			89,939
	General and administrative			42,371			41,571


		Total operating expense		338,674			308,348

Income from operations				70,930			50,963
	Interest income			2,715			1,842
	Interest expense			5,715			53
	Other income (expense), net			(203	)		410


Income before provision for income taxes				67,727			53,162
Provision for income taxes				19,641			15,417

Net income			$	48,086		$	37,745

Net income per share:
	Basic		$	0.26		$	0.20
	Diluted		$	0.26		$	0.20

Weighted average shares outstanding:
	Basic			183,131			189,372
	Diluted			186,175			191,457

RED HAT, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands)

ASSETS
			May 31,			February 28,
			2015			2015 (1)
			(Unaudited)
Current assets:
	Cash and cash equivalents		$	990,922		$	1,047,473
	Investments in debt and equity securities			192,818			215,254
	Accounts receivable, net			284,582			468,021
	Deferred tax assets, net			81,782			86,796
	Prepaid expenses			149,163			150,715
	Other current assets			1,647			1,980

		Total current assets		1,700,914			1,970,239

	Property and equipment, net			168,391			172,151
	Goodwill			924,735			927,060
	Identifiable intangibles, net			130,722			134,276
	Investments in debt securities			784,734			546,016
	Other assets, net			50,784			53,243

		Total assets	$	3,760,280		$	3,802,985

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
	Accounts payable and accrued expenses		$	176,965		$	237,733
	Deferred revenue			1,066,254			1,095,115
	Other current obligations			1,767			1,844

		Total current liabilities		1,244,986			1,334,692

	Convertible notes			720,001			715,402
	Long term deferred revenue			369,865			387,213
	Other long term obligations			76,005			77,340
Stockholders' equity:
	Common stock			23			23
	Additional paid-in capital			2,058,046			1,963,851
	Retained earnings			948,459			900,373
	Treasury stock, at cost			(1,590,501	)		(1,515,288	)
	Accumulated other comprehensive loss			(66,604	)		(60,621	)

		Total stockholders' equity		1,349,423			1,288,338

		Total liabilities and stockholders' equity	$	3,760,280		$	3,802,985


		(1) Derived from audited financial statements

RED HAT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)


			Three Months Ended
			May 31,			May 31,
			2015			2014

Cash flows from operating activities:
Net income			$	48,086		$	37,745
Adjustments to reconcile net income to net cash provided by
operating activities:
	Depreciation and amortization			18,547			18,924
	Share-based compensation expense			36,522			28,714
	Deferred income taxes			1,914			2,930
	Net amortization of bond premium on available-for-sale debt securities			2,597			2,033
	Accretion of debt discount and amortization of debt issuance costs			5,195			-
	Other			830			(948	)
Changes in operating assets and liabilities net of effects of acquisitions:
	Accounts receivable			179,387			96,580
	Prepaid expenses			(427	)		(5,189	)
	Accounts payable and accrued expenses			(52,346	)		2,655
	Deferred revenue			(31,562	)		(19,749	)
	Other			15			991

		Net cash provided by operating activities		208,758			164,686

Cash flows from investing activities:
	Purchase of available-for-sale debt securities			(406,211	)		(268,574	)
	Proceeds from sales and maturities of available-for-sale debt securities			182,583			269,431
	Acquisition of businesses, net of cash acquired			-			(151,621	)
	Purchase of other intangible assets			(3,929	)		(553	)
	Purchase of property and equipment			(10,696	)		(8,594	)
	Other			(2,000	)		3,472

		Net cash used in investing activities		(240,253	)		(156,439	)

Cash flows from financing activities:
	Excess tax benefits from share-based payment arrangements			6,419			986
	Proceeds from exercise of common stock options			2,109			45
	Purchase of treasury stock			-			(80,033	)
	Payments related to net settlement of employee share-based compensation awards			(25,211	)		(13,729	)
	Payments on other borrowings			(351	)		(355	)

		Net cash used in financing activities		(17,034	)		(93,086	)

	Effect of foreign currency exchange rates on cash and cash equivalents			(8,022	)		2,245
	Net decrease in cash and cash equivalents			(56,551	)		(82,594	)
	Cash and cash equivalents at beginning of the period			1,047,473			646,742

Cash and cash equivalents at end of period			$	990,922		$	564,148

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
		May 31,			May 31,
		2015			2014

	Cost of revenue	$	3,727		$	3,118
	Sales and marketing		15,412			10,238
	Research and development		10,874			8,864
	General and administration		6,509			6,494
	Total share-based compensation expense	$	36,522		$	28,714


Amortization of intangible assets expense included in Consolidated Statements of Operations:

		Three Months Ended
		May 31,			May 31,
		2015			2014

	Cost of revenue	$	2,573		$	2,615
	Sales and marketing		2,005			1,582
	Research and development		250			959
	General and administration		1,052			1,428
	Total amortization of intangible assets expense	$	5,880		$	6,584


Non-cash interest expense from accretion of debt discount included in Consolidated Statements of Operations:

		Three Months Ended
		May 31,			May 31,
		2015			2014

	Total non-cash interest expense from accretion of debt discount	$	4,599			-

Transaction costs related to business combinations included in Consolidated Statements of Operations:

		Three Months Ended
		May 31,			May 31,
		2015			2014

	Transaction costs related to business combinations		-		$	1,991


		Three Months Ended
		May 31,			May 31,
		2015			2014

GAAP net income		$	48,086		$	37,745

Provision for income taxes			19,641			15,417

GAAP income before provision for income taxes		$	67,727		$	53,162

Add: Non-cash share-based compensation expense			36,522			28,714
Add: Amortization of intangible assets			5,880			6,584
Add: Non-cash interest expense from accretion of debt discount			4,599			-
Add: Transaction costs related to business combinations			-			1,991

Non-GAAP adjusted income before provision for income taxes		$	114,728		$	90,451

Provision for income taxes			33,271			26,231

Non-GAAP adjusted net income (basic and diluted)		$	81,457		$	64,220

Non-GAAP adjusted diluted weighted average shares outstanding:
	GAAP diluted weighted average shares outstanding		186,175			191,457
	Dilution offset from convertible note hedge transactions		(51	)		-
	Non-GAAP diluted weighted average shares outstanding		186,124			191,457

Non-GAAP adjusted net income per share:
	Basic	$	0.44		$	0.34
	Diluted	$	0.44		$	0.34

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
	May 31,			May 31,
	2015			2014

GAAP gross profit	$	409,604		$	359,311

Add: Non-cash share-based compensation expense		3,727			3,118
Add: Amortization of intangible assets		2,573			2,615

Non-GAAP gross profit	$	415,904		$	365,044

Non-GAAP gross margin		86.5	%		86.1	%


	Three Months Ended
	May 31,			May 31,
	2015			2014

GAAP operating expenses	$	338,674		$	308,348

Deduct: Non-cash share-based compensation expense		(32,795	)		(25,596	)
Deduct: Amortization of intangible assets		(3,307	)		(3,969	)
Deduct: Transaction costs related to business combinations		-			(1,991	)

Non-GAAP adjusted operating expenses	$	302,572		$	276,792


	Three Months Ended
	May 31,			May 31,
	2015			2014

GAAP operating income	$	70,930		$	50,963

Add: Non-cash share-based compensation expense		36,522			28,714
Add: Amortization of intangible assets		5,880			6,584
Add: Transaction costs related to business combinations		-			1,991

Non-GAAP adjusted operating income	$	113,332		$	88,252

Non-GAAP adjusted operating margin		23.6	%		20.8	%


	Three Months Ended
	May 31,			May 31,			Year-Over-Year
	2015			2014			Growth Rate

GAAP subscription revenue	$	424,793		$	371,968		14.2	%
Adjustment for currency impact		31,205			-
Non-GAAP subscription revenue on a constant currency basis	$	455,998		$	371,968		22.6	%

GAAP training and services revenue	$	56,208		$	51,786		8.5	%
Adjustment for currency impact		5,003			-
Non-GAAP training and services revenue on a constant currency basis	$	61,211		$	51,786		18.2	%

GAAP total subscription, training and services revenue	$	481,001		$	423,754		13.5	%
Adjustment for currency impact		36,208			-
Non-GAAP total subscription, training and services revenue on a constant currency basis	$	517,209		$	423,754		22.1	%

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Red Hat Inc ( RHT )

Red Hat Reports First Quarter Results