Red Hat Reports Fourth Quarter and Fiscal Year 2018 Results

Red Hat, Inc. (NYSE: RHT), the world's leading provider of open source solutions, today announced financial results for the fourth quarter of fiscal year 2018 ended February 28, 2018.

"The fourth quarter was a strong finish to the year for Red Hat. We maintained strong subscription revenue growth in both of our major technology categories during the year, enabling Red Hat to exceed a $3 billion annualized revenue run-rate exiting the year,” stated Jim Whitehurst, President and Chief Executive Officer of Red Hat. "Red Hat continued to expand its position with customers as a trusted adviser and strategic technology partner, enabling initiatives focused on digital transformation and cloud computing. This position helped drive a 50% year-over-year increase in the number of deals over $1 million during the fourth quarter, as we benefited from strong cross selling and high renewal rates within our top deals.”

"We are pleased to deliver 21% revenue growth during fiscal year 2018, up from 18% growth in the prior year. In addition, a strong performance in the fourth quarter enabled the company to exit the year with a total backlog increase of 24% year-over-year. We believe our total backlog, along with continued demand for our technologies, will enable us to deliver strong growth in fiscal year 2019,” stated Eric Shander, Executive Vice President and Chief Financial Officer of Red Hat.

Revenue: Total revenue for the quarter was $772 million, up 23% in USD year-over-year, or 18% measured in constant currency. Constant currency references in this release are detailed in the tables below. Subscription revenue for the quarter was $683 million, up 22% in USD year-over-year, or 18% measured in constant currency. Subscription revenue in the quarter was 88% of total revenue.

Full fiscal year 2018 total revenue was $2.9 billion, up 21% in USD year-over-year, or 20% measured in constant currency. Subscription revenue for the full year was $2.6 billion, up 21% in USD year-over-year, or 19% measured in constant currency. Subscription revenue in the full fiscal year was 88% of total revenue.

Subscription Revenue Breakout: Subscription revenue from Infrastructure-related offerings for the quarter was $510 million, an increase of 17% in USD year-over-year, or 13% measured in constant currency. Subscription revenue from Application Development-related and other emerging technology offerings for the quarter was $173 million, an increase of 39% in USD year-over-year, or 34% measured in constant currency.

Full fiscal year subscription revenue from Infrastructure-related offerings was $2.0 billion, an increase of 15% in USD year-over-year or 14% measured in constant currency. Full fiscal year subscription revenue from Application Development-related and other emerging technology offerings was $624 million, an increase of 42% in USD year-over-year, or 40% measured in constant currency.

Operating Income: GAAP operating income for the quarter was $132 million, up 40% year-over-year. After adjusting for non-cash share-based compensation expense, amortization of intangible assets, and transaction costs related to business combinations, non-GAAP operating income for the fourth quarter was $190 million, up 24% year-over-year. For the fourth quarter, GAAP operating margin was 17.1% and non-GAAP operating margin was 24.6%. Non-GAAP references in this release are detailed in the tables below.

Full fiscal year GAAP operating income was $472 million, an increase of 42% year-over-year. After adjusting for non-cash share-based compensation expense, amortization of intangible assets, and transaction costs related to business combinations, non-GAAP operating income for the full fiscal year was $698 million, up 25% year-over-year. Full fiscal year GAAP operating margin was 16.2% and non-GAAP operating margin was 23.9%.

Provision for Income Taxes: GAAP provision for income taxes for the fourth quarter and full fiscal year included a one-time tax charge of $123 million related to the Tax Cuts and Jobs Act enacted into law in December 2017. The new law includes significant changes to the U.S. corporate income tax system, including a permanent reduction in the corporate income tax rate from 35% to 21%, effective January 1, 2018. The one-time tax charge resulted primarily from re-measurement of deferred tax assets and liabilities and the transition tax associated with deemed repatriation of foreign earnings.

Non-GAAP provision for income taxes excludes the one-time impact related to the Tax Cuts and Jobs Act as well as discrete tax benefits related to share-based compensation.

Net Income/Loss: GAAP net loss for the quarter was $13 million, or $0.07 diluted loss per share, compared with GAAP net income of $66 million, or $0.36 diluted earnings per share ("EPS”), in the year-ago quarter.

After adjusting for non-cash share-based compensation expense, amortization of intangible assets, transaction costs related to business combinations and non-cash interest expense related to the debt discount, non-GAAP net income for the quarter was $167 million, or $0.91 diluted EPS, as compared to $110 million, or $0.61 diluted EPS, in the year-ago quarter. Non-GAAP diluted weighted average shares outstanding excludes dilution that is expected to be offset by our convertible note hedge transactions.

Full fiscal year GAAP net income was $259 million, or $1.40 diluted EPS, compared with $254 million, or $1.39 diluted EPS, in the prior fiscal year. After adjusting for non-cash share-based compensation expense, amortization of intangible assets, transaction costs related to business combinations and non-cash interest expense related to the debt discount, non-GAAP net income for the full fiscal year was $540 million, or $2.98 diluted EPS, as compared to $414 million, or $2.27 diluted EPS, in the prior fiscal year.

Cash: Operating cash flow was $362 million for the fourth quarter, an increase of 14% on a year-over-year basis. Total cash, cash equivalents and investments as of February 28, 2018 was $2.5 billion. The remaining balance in the current repurchase authorization as of February 28, 2018 was approximately $399 million.

Deferred revenue and backlog: Total backlog for fiscal year 2018 was in excess of $3.4 billion, up 24% year-over-year. We defined total backlog as the value of non-cancellable subscription and service agreements, including total deferred revenue, which is billed, plus the value of non-cancellable subscription and services agreements to be billed in the future not reflected in our financial statements. At the end of the fiscal year, the company’s total deferred revenue balance was $2.6 billion, an increase of 25% year-over-year. The full year positive impact to total deferred revenue from changes in foreign exchange rates was $92 million year-over-year. On a constant currency basis, total deferred revenue would have been up 21% year-over-year.

The portion of total backlog to be billed in the future not reflected in our financial statements was in excess of $775 million as of February 28, 2018, compared with the ending balance in excess of $650 million reported for fiscal year 2017. The portion of total backlog to be billed during fiscal year 2019 was in excess of $450 million as of February 28, 2018, compared with in excess of $330 million for the fiscal year ended February 28, 2017.

Outlook: Red Hat’s outlook assumes current business conditions and current foreign currency exchange rates.

For the full year:

• Revenue is expected to be approximately $3.425 billion to $3.460 billion in USD.
• GAAP operating margin is expected to be approximately 16.6% and non-GAAP operating margin is expected to be approximately 23.9%.
• Diluted GAAP EPS is expected to be approximately $2.25 to $2.28, assuming 187 million diluted shares outstanding. Diluted non-GAAP EPS is expected to be approximately $3.38 to $3.41, assuming 185 million diluted shares outstanding. Both GAAP and non-GAAP EPS assume a $4 million per quarter forecast for other income and an estimated annual effective tax rate of approximately 25% before discrete tax items.
• Operating cash flow is expected to be approximately $1.035 billion to $1.045 billion.

For the first quarter:

• Revenue is expected to be approximately $800 million to $810 million.
• GAAP operating margin is expected to be approximately 13.4% and non-GAAP operating margin is expected to be approximately 20.5%.
• Diluted GAAP EPS is expected to be approximately $0.42, assuming 187 million diluted shares outstanding. Diluted non-GAAP EPS is expected to be approximately $0.68, assuming 185 million diluted shares outstanding. Both GAAP and non-GAAP EPS assume a $4 million forecast for other income and an estimated annual effective tax rate of 25% before discrete tax items.

GAAP to non-GAAP reconciliation:

Full year non-GAAP operating margin guidance is derived by subtracting the estimated full year impact of non-cash share-based compensation expense of approximately $215 million and amortization of intangible assets of approximately $38 million. Full year diluted non-GAAP EPS guidance is derived by subtracting the expenses listed in the previous sentence and the full year impact of non-cash interest expense related to the debt discount of approximately $20 million and an estimated annual effective tax rate of approximately 25% before discrete tax items. Additionally, full year diluted non-GAAP EPS excludes approximately $30 million of discrete tax benefits related to share-based compensation that are included in full year diluted GAAP EPS. Full year diluted non-GAAP EPS excludes approximately 2 million diluted shares related to the convertible notes, which are expected to be offset by our convertible note hedge transactions.

First quarter non-GAAP operating margin guidance is derived by subtracting the estimated impact of non-cash share-based compensation expense of approximately $48 million and amortization of intangible assets of approximately $9.5 million. First quarter diluted non-GAAP EPS guidance is derived by subtracting the expenses listed in the previous sentence and non-cash interest expense related to the debt discount of approximately $5 million and an estimated annual effective tax rate of 25% before discrete tax items. Additionally, first quarter diluted non-GAAP EPS excludes approximately $1 million of discrete tax benefits related to share-based compensation that are included in first quarter diluted GAAP EPS. First quarter diluted non-GAAP EPS excludes approximately 2 million diluted shares related to the convertible notes, which are expected to be offset by our convertible note hedge transactions.

Webcast and Website Information

A live webcast of Red Hat's results will begin at 5:00 pm ET today. The webcast, in addition to a copy of our prepared remarks and slides containing financial highlights and supplemental metrics, 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. Additional information on Red Hat's reported results, including a reconciliation of the non-GAAP adjusted results, are included in the financial tables below.

About Red Hat, Inc.

Red Hat is the world's leading provider of open source software solutions, using a community-powered approach to provide 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 integration of acquisitions and the ability to market successfully acquired technologies and products; fluctuations in exchange rates; the effects of industry consolidation; 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 defects in our offerings and third-party hardware upon which our offerings depend; risks related to the security of our offerings and other data security vulnerabilities; changes in and a dependence on key personnel; the ability to meet financial and operational challenges encountered in our international operations; and ineffective management of, and control over, the Company's growth and international operations, 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.

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⁽¹⁾ Change in deferred revenue includes approximately $0.9 million acquired as part of a business combination.

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