This summary is based on the first quarter fiscal 2008 earnings call conducted by Red Hat, Inc. (RHT) on June 25, 2008.
Management:
President, Chief Executive Officer, Director: James M. Whitehurst
Chief Financial Officer, Executive Vice President: Charles E. Peters Jr.
Vice President Investor Relations: Tom McCallum
Key Investors Issues
- EPS were 8 cents a share compared to 8 cents a share last year.
- Profit was $17.3 million compared to $16.2 million during the same period a year ago.
- Revenue was $156.6 million compared to $118.9 million last year.
First Quarter Highlights
Revenue was $156.6 million, an increase of nearly 11% from last quarter and 32% from the same quarter in fiscal 2008 and it was above guidance.
- Subscription revenue continued to grow rapidly resulting in $130.7 million in subscription revenue or greater than 7% sequential growth. Year-over-year subscriptions were up 27% and constituted 83% of total revenue.
- The training and services component of revenue was $25.9 million, up 64% from last year principally as the result of the Amentra acquisition which was completed in mid-March.
- As regard to bookings, the channel generated 51% of first quarter bookings and 49% came from direct sales versus a 54/46% split in the fourth quarter. This shift in percentage reflects several large direct deals in the quarter including one eight-figure three year deal which skewed the mix somewhat. Goal remains to increase the amount of revenues through the channel 60% of total bookings.
- In terms of geography, 59% of bookings came from the Americas, 24% from EMEA and 17% from Asia Pacific. This breakdown reflects a solid quarter in the U.S. including the large direct deal and acceleration in Japan which helped drive APAX results this quarter.
- Billings, using billings proxy, was $172.1 million, up 23% or approximately $32 million when compared to the same quarter last year.
On a non-GAAP basis excluding stock based compensation expense, overall gross margin was 83.6%, lower than last quarter and last year because of a higher services mix.
- Subscription gross margin was approximately 93.4%, up 90 basis points from last quarter while training and services gross margin was down from last quarter but in line with the quarter of a year ago.
- Non-GAAP operating expense came in at $100.4 million, up $7.9 million from last quarter. The increase in operating expense was attributable principally to the spending of sales, marketing and engineering offsetting some reduction in G&A.
- Non-GAAP operating income was $30.5 million producing an operating margin of 19.5% compared to non-GAAP operating income of $28.2 million and operating margin of 19.9% last quarter and non-GAAP operating income and operating margin of $23.3 million and 19.6% for the year ago quarter.
- Other income net primarily attributable to investment income was $8.4 million, about $1 million short of guidance reflecting even lower interest rates than expected when forecast last quarter.
- Non-GAAP tax rate, which reflects actual cash taxes the company expects to pay, is still approximately 5% resulting in non-GAAP net income of $37 million. This is lower than last quarter due to the lower interest and other income but it is up 10% from the year ago quarter.
- Non-GAAP earnings per share came to 18 cents which is in line with guidance.
The company ended the quarter with cash and investments of $1.35 billion.
This balance is net of an additional stock repurchase made in the first quarter of $9.1 million for approximately 500,000 shares of common stock. The company executed a structured stock repurchase transaction which settled in cash rather than Red Hat stock resulting in a cash gain of approximately $2 million which is not recorded in the income statement but rather is recorded as a direct increase in equity.
DSO was 60 days and in line with the fourth quarter and the first quarter last year and within target range for this metric. As a reminder, since days sales outstanding are traditionally a measure of receivables versus billings DSO calculation includes revenue plus the change in deferred revenue. Total deferred revenue at quarter end was $491.8 million, an increase of $128.8 million or 36% over the same quarter a year ago and an increase of 4% over last quarter. Breaking it down further, $351.2 million was in current deferred revenue while $140.6 million was in long-term deferred revenue.
GAAP cash flow from operations was $63.4 million, up from $39.7 million last year.
This cash flow growth was approximately 16% higher than the fourth quarter and 60% higher than the prior year. The company continued to generate additional cash from tax benefits related to NOL’s shown under the heading “Cash Flow from Financing Activities.” This quarter the company used approximately $37 million of NOL’s related to stock options and the remaining balance of these NOL’s is approximately $190 million.
The company released the latest version of award-winning Linux Distribution, Red Hat Enterprise Linux 5.2, which further advances virtualization capabilities for large enterprises.
The company launched major releases of management products including Red Hat Network Satellite 5.1, which gives customers enhanced comprehensive lifecycle management with tools to manage systems, provision new systems, manage updates and monitor performance and JBoss Operations Network 2.0 which drives application deployment and simplifies application lifecycle management to enhance enterprise middleware manageability.
The company launched Fedora 9 to the Open Source community. This version of Fedora delivered a number of cutting edge features in enhanced systems management. Fedora another open source project functioned as a virtual R&D laboratory for products.
- The company has over 2,000 global channel partners. Many of these partners are investing heavily in training and enablement programs to effectively become Red Hat’s quota carrying channel partners.
- The company continues to expand the number of JBoss advanced partners who will have the pre and post sale capability to drive additional sales of middleware offerings. The company has appointed both a global head of sales and business development and a global head of channel sales to lead these efforts.
