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Red Hat Fourth Quarter Earnings Call
Author: Staff
Last Update: 5:09 PM EDT April 12 2007


Red Hat reported profit decrease to $20.5 million from $27.3 million a year ago. Results were pulled down by higher operating expenses, which were up 66% to $77.1 million. Excluding stock compensation and tax expense, the company earned $32.7 million, or 15 cents a share, meeting the analysts’ expectations. The company expects to report full-year non-GAAP earnings per share of 67 to 72 cents on revenue of $510 million to $520 million.

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This summary is based on the fourth quarter fiscal 2007 earnings call conducted by Red Hat, Inc. (RHT) on March 29, 2007.

Key Investors Issues

- Earnings per share fell to 10 cents from 13 cents a year ago.
- Net income fell to $20.5 million from $27.3 million during the period a year earlier.
- Revenue grew to $111.1 million from $78.7 million last year.

Fourth Quarter Highlights

Total revenue was $111.1 million, an increase of 5% from last quarter and 41% from the same quarter in fiscal year 2006.

Total revenue was below guidance of $112 million to $113 million as a result of training revenue coming in lighter than expected.

- Driven by continued strength in bookings and renewal rates, subscription revenue was $95.9 million, up 8% sequentially and 44% year-over-year.
- Training and services revenue was $15.2 million and it was up 26% from the same quarter last year, but down 10% from last quarter. This sequential decline in training was attributable to seasonality resulting from fewer training days available in the quarter.
- Billings proxy, which was defined as revenue plus change in deferred revenue, was $138.1 million, up 35% year-over-year and more than 3% sequentially.

The channel generated 52% of bookings and 48% came from direct sales versus a 50%-50% split in the previous quarter.

In terms of geography:

- Bookings from the Americas came at 61% compared to 60% last quarter,
- Bookings from EMEA (Europe, Middle East and Africa) came at 25% compared to 24% last quarter,
- Bookings from Asia-Pacific came at 14% compared to 16% last quarter.

- Percentage of bookings value beyond one year was 25%, down from 29% last quarter, but up from 21% last year.
- All 25 of the top 25 deals expected to renew during this quarter did renew in a total value in excess of 120% higher than the original value. That is 98 out of a 100 for the full year.

Non-GAAP gross margin was 85%, which is 90 basis points better than last quarter and 70 basis points better than last fourth quarter.

- Non-GAAP operating expense, which excludes only FAS 123R stock compensation expense, came in at $70.2 million, which is up 4.1% from last quarter.
- Non-GAAP operating income was $24.1 million, which translates to an operating margin of 22%. This is an increase from non-GAAP operating income of $21.5 million and operating margin of 20% last quarter and compares to non-GAAP operating income of $19.8 million and a 25% operating margin in the fourth quarter a year ago.

- Other income net, which is attributable primarily to investment income, was $11.9 million.
- Non-GAAP tax rate, which reflects natural cash taxes, which the company expects to pay for the foreseeable future, is still approximately 5%, resulting in non-GAAP net income of $32.7 million, up 11% from last quarter and up 34% from the year ago quarter.
- Non-GAAP earnings per share were 15 cents, an increase of 25% from the year ago quarter and at the top of the previously guided range.

GAAP net income was positively impacted by decision to release the $2.9 million valuation allowance again to deferred tax asset related to prior year’s operating losses.

On a GAAP basis, operating income, net income and EPS were $16.6 million, $20.5 million and 10 cents per share per share respectively.

After 36 successive months of generating positive taxable income, the company no longer believes that the valuation allowance asset is necessary.

This benefit is a one-time event and it is the primary reason why the fourth quarter and the annual GAAP patch rates of 24% and 33% respectively differ from the 37% estimated annual effective tax rate used in earlier quarters and fiscal year of 2007. This has no effect on the non-GAAP results.

The company ended the quarter with approximately $1.2 billion in cash and investments, an increase of $59 million from the end of the third quarter.

It was driven by strong cash flow from operations and cash receipts related to employee stock option exercises.
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Sources: Data collected by and from company press releases, filings and corporate websites.
Market data: BATS Exchange. Inc.

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