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TMCNet: Red Hat Reports First Quarter Results

[June 18, 2015]

Red Hat Reports First Quarter Results

Red Hat, Inc. (NYSE: 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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