In summary our business model enables us to deliver solid results in challenging times while continuing to invest in future opportunities. We believe the trends in virtualization, cloud computing, and middleware clearly align with our technology roadmap and extent our technology leadership in the datacenter. Our progress in these key areas is also strengthening Red Hat’s market position by creating additional long-term growth opportunities. Before turning this call over to Charlie, I’d like to thank our associates around the globe. Their hard work to deliver value to our customers is the driver of our continued success.
With that let me turn the call over to Charlie.
Charlie Peters – Chief Financial Officer
Thanks Jim, I’m pleased to report solid financial results in Q1 highlighted by double-digit revenue growth, in both US dollars and constant currencies. In light of the economic environment we also remained focused on managing costs and improving efficiencies, while investing in important new opportunities. Combined with Red Hat’s strong market position and high level of execution, this focus enabled us to grow first quarter revenue in constant dollars by 17% on a year-over-year basis assuming Q1 fiscal year 2009 average rates. We spanned the non-GAAP operating margin by 160 basis points year-over-year, grow earnings per share by 25%, and a view to generate strong operating cash flow and reduce our diluted shares outstanding by 11% on a year-over-year basis including an additional 2.7 million shares repurchased in the first quarter.
In addition to the strength within the renewals that Jim talked about, here are the stats, concerning our top 30 deals overall. In the first quarter they included five deals of a million dollars or more and with one deal in excess of $5 million. Approximately 30% of these deals included a middleware component with two being stand alone middleware deals. Enterprise customers continue to make significant commitments to Red Hat to optimize the performance and efficiency of their IT infrastructure. In the current challenging IT spending environment the ability to save money compared to existing and alternative solutions is particularly appealing. Now let’s talk about our financial performance. First quarter revenue was $174 million, an increase of 11% year-over-year, 5% sequentially, above our guidance range. On a constant currency basis, using Q1 ‘09 average rates, our revenue would have been $8 million higher representing 17% growth as I already mentioned. We believe this is more indicative of the underlying growth of the business. The driver of our total revenue growth was subscription revenue, which was up 14% year-over-year and 7% sequentially, at $149 million. Subscription revenue which is renewable constituted 85% of total revenue.
Training and services component of revenue was $26 million, consistent with the prior year quarter and down 5% sequentially. Services continues to be the heir of our business but has been most impacted by the current economic environment as a result of customers cutting travel, and discretionary training spending. Regarding bookings the channel generated 61% of our Q1 bookings, 39% came from direct sales versus a 56%/44% split in Q4. This in part reflects the progress that we are making on our key initiatives to build out our channel business. In terms of geography, 53% of bookings came from the Americas, 25% from EMEA, and 22% from Asia Pacific. Our billings proxy for the quarter was $177 million, up 3% in US dollars for $185 million, up 8% in constant currency, when compared to the prior year quarter. As I’ve noted on previous calls, billings can vary quarter to quarter. In addition to seeing the typical decline from Q4 to Q1, our billings proxy was influenced by the fact that the percentage of one year deals increased 80% and the average deal length was 19 months as compared to 24 months of recent quarters.
Within this mix there were a small number of large deals in which the customer opted to be billed for one year instead of multiple years. It’s not overly surprising considering the current economic environment. Most important is the fact that we continue to sign a significant level of new and renewal based business. Our renewal rates on the larger deals remains very high which are the drivers to reiterating our full year revenue guidance for fiscal 2010. However it does impact the presentation of our billings proxy.
So let me now shift back to the income statement. On a non-GAAP basis, including stock compensation and amortization expense, overall gross margin was 85.8% for Q1, in line sequentially and up 180 basis points year-over-year primarily due to the strong subscription sales. Subscription gross margin was 94.1%, up 20 basis points both sequentially and year-over-year. Moving on to non-GAAP operating expenses, we remain focused on managing discretionary costs while continuing to invest in growth opportunities such as middleware, virtualization, and cloud computing. Q1 non-GAAP operating expense came in at $109 million, up 6% sequentially, 12% year-over-year. On a constant currency basis using Q1 ‘09 average rates, our non-GAAP operating expenses would have been $8 million higher resulting in no change in constant currency operating income.
Q1 non-GAAP operating income was $41 million producing an operating margin of 23.4%, up 160 basis points year-over-year and down 50 basis points sequentially, slightly better than our guidance. Other income net which is primarily attributable to investment income was $3 million, in line with our guidance, lower than last year, due mainly to lower interest rates and lower investment balances. Our estimated annual effective tax rate is 35% for both GAAP and non-GAAP results. Non-GAAP diluted earnings per share came to $0.15 which is $0.01 above the high end of our guidance, up 25% from the adjusted non-GAAP result of $0.12 a share last year, in line with the prior quarter.
Now let’s turn to the balance sheet and the cash flow statement. We ended the quarter with cash and investments of $885 million, which is an increase of $38 million after the repurchase of 2.7 million shares. Quarterly operating cash flow of $61 million was essentially consistent with the previous year ago quarters. We appreciate that many investors analyzed cash flow of companies including Red Hat by per share basis. For those that do as a result the company’s use of its cash substantially reduced the diluted share count. On a per share basis, operating cash flow and free cash flow was up 9%, 15% respectively year-over-year. Strong collections led to a foreign exchange adjusted DSO of 54 days, down slightly from 56 days in Q4 and 60 days in Q1 last year. As a reminder since days’ sales outstanding is traditionally a measure of receivables versus billings, our DSO calculation includes revenue plus the change in deferred revenue from the cash flow statement. Total deferred revenue at quarter end was $567 million, an increase of $76 million, or 15% over the same quarter a year ago and an increase of $24 million, 5% over last quarter. Breaking it down further, $403 million was in current deferred revenue while $164 million was in long-term deferred revenue.
I would like to turn to guidance for Q2. Revenue is estimated to be approximately $178 to $180 million. Operating margin is estimated to be around 23%, non-GAAP EPS is estimated to be in the $0.14 to $0.15 per share range, assuming the same 35% tax rate. Full year guidance remains unchanged.
In summary the company continues to execute well in this difficult economic environment. We are managing costs and improving efficiencies, which enables us to continue investing in long-term growth opportunities. We believe Red Hat remains well positioned from a short and long-term perspective as a result of our unique and industry leading suite of open source solutions to help our customers save money. Our customer satisfaction and top renewals remain at very high levels and we continue to distance ourselves from the competition. Before turning the call over to your operator, I would like to extend an invitation to the financial community to attend our fiscal year 2010 Analyst Day on October 7 in New York City.
Invitations with further details will be forthcoming. Operator I’ll now turn it back over to you for the first question.
Question-and-Answer Session
Operator
(Operator Instructions) At this time I’d like to remind everyone in order to ask a question please press * and then the number 1 on your telephone keypad. Your first question comes from the line of Adam Holt of Morgan Stanley. Your line is now open.
Adam Holt – Morgan Stanley
Hi thanks for taking my question. My first question is can you talk, you talked a little bit about the success with the largest customers that came up for renewal? Can you talk a little bit about the customers outside of the top 25 or 30, what renewal rates were like and maybe a little bit for the total billings, what the mix between new billings and renewals was like in the quarter?
Charlie Peters
First on renewal rates, the only renewal rates statistics that we share are those in the largest, but I would add this color that we have had recently been working on various efforts to incrementally improve renewal rates overall. What we know we have shared previously is that where we have direct deals regardless of the size. Our renewal rates are quite high. When we have indirect deals and through possibly multiple layers of distribution, renewal rates historically have not been high. So over the last couple of years we’ve engaged in multiple efforts to gather the data about the end customer economically and incent the partners to help with renewals and various other things to improve that renewal rate. I’m happy to say that we’ve seen improvement there and those efforts are continuing.
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