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Red Hat Reports Second Quarter Results

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Red Hat, Inc. (NYSE:RHT) , the world’s leading provider of open source solutions, today announced financial results for its fiscal year 2015 second quarter ended August 31, 2014.

Total revenue for the quarter was $446 million and subscription revenue for the quarter was $389 million, both increased 19% year-over-year.

“Broad demand for open source technologies, combined with Red Hat’s value proposition and market leadership position, has helped to drive organic revenue growth in the mid-to-high teens for the last 10 quarters,” stated Jim Whitehurst, President and Chief Executive Officer of Red Hat. “Our high level of execution and commitment to investing across our technology stack, including enabling open, hybrid cloud computing in the enterprise, has led to Red Hat being recognized once again by Forbes, Inc. on its list of the World’s Most Innovative Companies.”

GAAP operating income for the second quarter was $64 million, up 16% year-over-year. After adjusting for stock compensation, amortization expenses, certain facility exit costs and transaction costs related to business combinations, as detailed in the tables below, non-GAAP operating income for the second quarter was $109 million, up 15% year-over-year. For the second quarter, GAAP operating margin was 14.4% and non-GAAP operating margin was 24.4%.

GAAP net income for the quarter was $47 million, or $0.25 per diluted share, compared with $41 million, or $0.21 per diluted share, in the year ago quarter. After adjusting for stock compensation, amortization expenses, certain facility exit costs and transaction costs related to business combinations, as detailed in the tables below, non-GAAP net income for the quarter was $78 million, or $0.41 per diluted share, as compared to $68 million, or $0.35 per diluted share, in the year ago quarter.

Operating cash flow was $108 million for the second quarter, as compared to $119 million in the year ago quarter. At quarter end, the company’s total deferred revenue balance was $1.25 billion, an increase of 18% on a year-over-year basis. Total cash, cash equivalents and investments as of August 31, 2014 was $1.32 billion, after repurchasing approximately $80 million of common stock, or approximately 1.5 million shares, in the second quarter. Red Hat has repurchased approximately $160 million of common stock, or approximately 3.0 million shares, during the first six months of fiscal year 2015.

“We experienced strong growth across our routes to market during the second quarter,” stated Charlie Peters, Executive Vice President and Chief Financial Officer of Red Hat. “The fastest growing part of our channel business comes from the 80+ Red Hat certified public cloud providers that provide our technologies on-demand in their clouds. The rapid revenue growth from these public cloud partners, which we recognize immediately and contains no deferred revenue, helped us to meaningfully exceed our second quarter revenue guidance.”

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 the 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 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, 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 Six Months Ended
August 31, August 31, August 31, August 31,
2014 2013 2014 2013
Revenue:
Subscriptions $389,495 $326,692 $761,462 $642,509
Training and services 56,404 47,731 108,191 95,173
Total subscription, training and services revenue 445,899 374,423 869,653 737,682
Cost of revenue:
Subscriptions 27,791 23,518 55,551 46,893
Training and services 39,383 32,062 76,066 64,744
Total cost of subscription, training and services revenue 67,174 55,580 131,617 111,637
Total gross profit 378,725 318,843 738,036 626,045
Operating expense:
Sales and marketing 174,520 144,596 351,358 287,040
Research and development 95,265 78,299 185,204 152,100
General and administrative 44,713 38,203 86,284 72,537
Facility exit costs 2,171 2,171
Total operating expense 314,498 263,269 622,846 513,848
Income from operations 64,227 55,574 115,190 112,197
Interest income 2,010 1,527 3,852 3,029
Other income (expense), net (289) 1,196 68 772
Income before provision for income taxes 65,948 58,297 119,110 115,998
Provision for income taxes 19,125 17,489 34,542 34,799
Net income $46,823 $40,808 $84,568 $81,199
Net income per share:
Basic $0.25 $0.22 $0.45 $0.43
Diluted $0.25 $0.21 $0.44 $0.42
Weighted average shares outstanding:
Basic 188,162 189,437 188,767 190,276
Diluted 190,755 191,432 191,135 192,230
RED HAT, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands)
ASSETS
August 31, February 28,
2014 2014 (1)
(Unaudited)
Current assets:
Cash and cash equivalents $585,381 $646,742
Investments in debt and equity securities 217,659 335,387
Accounts receivable, net 283,952 360,594
Deferred tax assets, net 111,522 108,264
Prepaid expenses 125,256 118,387
Other current assets 1,794 1,808
Total current assets 1,325,564 1,571,182
Property and equipment, net 175,844 173,917
Goodwill 870,063 687,430
Identifiable intangibles, net 146,904 133,399
Investments in debt securities 513,903 505,300
Other assets, net 35,026 35,391
Total assets $3,067,304 $3,106,619
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable and accrued expenses $211,552 $179,468
Deferred revenue 920,605 966,832
Other current obligations 1,852 1,786
Total current liabilities 1,134,009 1,148,086
Long term deferred revenue 331,192 322,365
Other long term obligations 87,447 85,003
Stockholders’ equity:
Common stock 23 23
Additional paid-in capital 1,942,659 1,891,848
Retained earnings 804,740 720,172
Treasury stock, at cost (1,216,741) (1,056,419)
Accumulated other comprehensive loss (16,025) (4,459)
Total stockholders’ equity 1,514,656 1,551,165
Total liabilities and stockholders’ equity $3,067,304 $3,106,619
(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,
2014 2013 2014 2013
Cash flows from operating activities:
Net income $46,823 $40,808 $84,568 $81,199
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 19,539 18,439 38,463 36,371
Share-based compensation expense 36,605 29,874 65,319 53,006
Deferred income taxes 975 1,208 3,905 11,020
Net amortization of bond premium on available-for-sale debt securities 2,525 2,285 4,558 4,336
Other 595 (96) (353) 47
Changes in operating assets and liabilities net of effects of acquisitions:
Accounts receivable (18,349) (6,341) 78,231 66,081
Prepaid expenses (2,391) (5,645) (7,580) (2,394)
Accounts payable and accrued expenses 27,266 38,902 29,921 26,293
Deferred revenue (6,209) 1,880 (25,957) (15,020)
Other 358 (2,385) 1,349 (195)
Net cash provided by operating activities 107,737 118,929 272,424 260,744
Cash flows from investing activities:
Purchase of available-for-sale debt securities (50,567) (217,433) (319,141) (347,076)
Proceeds from sales and maturities of available-for-sale debt securities 140,101 153,917 409,532 479,767
Acquisition of business, net of cash acquired (66,183) (217,804)
Purchase of other intangible assets (1,198) (10,177) (1,751) (12,521)
Purchase of property and equipment (14,290) (21,829) (22,884) (48,506)
Other (1,038) (2,126) 2,434 (1,934)
Net cash provided by (used in) investing activities 6,825 (97,648) (149,614) 69,730
Cash flows from financing activities:
Excess tax benefits from share-based payment arrangements 423 2,610 1,409 5,643
Proceeds from exercise of common stock options 644 635 689 1,088
Purchase of treasury stock (80,028) (20,009) (160,061) (199,345)
Payments related to net settlement of employee share-based compensation awards (3,831) (3,833) (17,561) (14,815)
Payments on other borrowings (1,635) (312) (1,990) (617)
Net cash used in financing activities (84,427) (20,909) (177,514) (208,046)
Effect of foreign currency exchange rates on cash and cash equivalents (8,902) (1,576) (6,657) (12,718)
Net increase (decrease) in cash and cash equivalents 21,233 (1,204) (61,361) 109,710
Cash and cash equivalents at beginning of the period 564,148 597,998 646,742 487,084
Cash and cash equivalents at end of period $585,381 $596,794 $585,381 $596,794
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,
2014
August 31,
2013
August 31,
2014
August 31,
2013
Cost of revenue $3,425 $3,100 $6,543 $5,939
Sales and marketing 13,691 10,365 23,929 19,741
Research and development 11,098 9,058 19,962 15,939
General and administration 8,391 7,351 14,885 11,387
Total share-based compensation expense $36,605 $29,874 $65,319 $53,006
Amortization of intangible assets expense included in Consolidated Statements of Operations:
Three Months Ended Six Months Ended
August 31,
2014
August 31,
2013
August 31,
2014
August 31,
2013
Cost of revenue $2,486 $2,496 $5,102 $5,169
Sales and marketing 1,992 1,958 3,574 3,916
Research and development 959 959 1,917 1,918
General and administration 1,607 1,203 3,035 2,740
Total amortization of intangible assets expense $7,044 $6,616 $13,628 $13,743
Facility exit costs included in Consolidated Statements of Operations:
Three Months Ended Six Months Ended
August 31,
2014
August 31,
2013
August 31,
2014
August 31,
2013
Facility exit costs $2,171 $2,171
Transaction costs related to business combinations included in Consolidated Statements of Operations:
Three Months Ended Six Months Ended
August 31,
2014
August 31,
2013
August 31,
2014
August 31,
2013
Transaction costs related to business combinations $949 $2,940
Three Months Ended Six Months Ended
August 31,
2014
August 31,
2013
August 31,
2014
August 31,
2013
GAAP net income $46,823 $40,808 $84,568 $81,199
Provision for income taxes 19,125 17,489 34,542 34,799
GAAP income before provision for income taxes $65,948 $58,297 $119,110 $115,998
Add: Non-cash share-based compensation expense 36,605 29,874 65,319 53,006
Add: Amortization of intangible assets 7,044 6,616 13,628 13,743
Add: Facility exit costs 2,171 2,171
Add: Transaction costs related to business combinations 949 2,940
Non-GAAP adjusted income before provision for income taxes $110,546 $96,958 $200,997 $184,918
Provision for income taxes 32,058 29,088 58,289 55,475
Non-GAAP adjusted net income (basic and diluted) $78,488 $67,870 $142,708 $129,443
Non-GAAP adjusted net income per share:
Basic $0.42 $0.36 $0.76 $0.68
Diluted $0.41 $0.35 $0.75 $0.67
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,
2014
August 31,
2013
August 31,
2014
August 31,
2013
GAAP gross profit $378,725 $318,843 $738,036 $626,045
Add: Non-cash share-based compensation expense 3,425 3,100 6,543 5,939
Add: Amortization of intangible assets 2,486 2,496 5,102 5,169
Non-GAAP gross profit $384,636 $324,439 $749,681 $637,153
Non-GAAP gross margin 86.3% 86.7% 86.2% 86.4%
Three Months Ended Six Months Ended
August 31,
2014
August 31,
2013
August 31,
2014
August 31,
2013
GAAP operating expenses $314,498 $263,269 $622,846 $513,848
Deduct: Non-cash share-based compensation expense (33,180) (26,774) (58,776) (47,067)
Deduct: Amortization of intangible assets (4,558) (4,120) (8,526) (8,574)
Deduct: Facility exit costs (2,171) (2,171)
Deduct: Transaction costs related to business combinations (949) (2,940)
Non-GAAP adjusted operating expenses $275,811 $230,204 $552,604 $456,036
Three Months Ended Six Months Ended
August 31,
2014
August 31,
2013
August 31,
2014
August 31,
2013
GAAP operating income $64,227 $55,574 $115,190 $112,197
Add: Non-cash share-based compensation expense 36,605 29,874 65,319 53,006
Add: Amortization of intangible assets 7,044 6,616 13,628 13,743
Add: Facility exit costs 2,171 2,171
Add: Transaction costs related to business combinations 949 2,940
Non-GAAP adjusted operating income $108,825 $94,235 $197,077 $181,117
Non-GAAP adjusted operating margin 24.4% 25.2% 22.7% 24.6%
Three Months Ended
August 31,
2014
August 31,
2013
Year-Over-Year
Growth Rate
GAAP subscription revenue $389,495 $326,692 19.2%
Adjustment for currency impact (1,004)
Non-GAAP subscription revenue on a constant currency basis $388,491 $326,692 18.9%
GAAP training and services revenue $56,404 $47,731 18.2%
Adjustment for currency impact 893
Non-GAAP training and services revenue on a constant currency basis $57,297 $47,731 20.0%
GAAP total subscription, training and services revenue $445,899 $374,423 19.1%
Adjustment for currency impact (111)
Non-GAAP total subscription, training and services revenue on a constant currency basis $445,788 $374,423 19.1%
Six Months Ended
August 31,
2014
August 31,
2013
Year-Over-Year
Growth Rate
GAAP subscription revenue $761,462 $642,509 18.5%
Adjustment for currency impact (2,301)
Non-GAAP subscription revenue on a constant currency basis $759,161 $642,509 18.2%
GAAP training and services revenue $108,191 $95,173 13.7%
Adjustment for currency impact 1,597
Non-GAAP training and services revenue on a constant currency basis $109,788 $95,173 15.4%
GAAP total subscription, training and services revenue $869,653 $737,682 17.9%
Adjustment for currency impact (704)
Non-GAAP total subscription, training and services revenue on a constant currency basis $868,949 $737,682 17.8%

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