Red Hat Reports Third Quarter Results for Fiscal Year 2018

Red Hat, Inc. (NYSE: RHT), the world's leading provider of open source solutions, today announced financial results for the third quarter of fiscal year 2018 ended November 30, 2017.

"We again delivered over 20% year-over-year growth in both subscription revenue and total revenue due to strong customer demand for hybrid cloud technologies, including our core technologies, container platforms and solutions that enable and manage multiple cloud and private cloud environments," stated Jim Whitehurst, President and Chief Executive Officer of Red Hat. "Our growing strategic position within enterprise IT organizations is evidenced by the strong cross selling of our broad portfolio of technologies, which led to 30% year-over-year growth in deals over $1 million and over 40% growth in Application Development-related and other emerging technology subscription revenue."

"In the third quarter, strong execution contributed to a powerful combination of 22% total revenue growth, 47% GAAP operating income growth, 25% non-GAAP operating income growth, and 18% operating cash flow growth," stated Eric Shander, Executive Vice President and Chief Financial Officer of Red Hat. "Based on our third quarter results, we anticipate exiting the fiscal year with an annualized run-rate of approximately $3 billion for total revenue."

Revenue: Total revenue for the quarter was $748 million, up 22% in USD year-over-year, or 20% measured in constant currency. Constant currency references in this release are detailed in the tables below. Subscription revenue for the quarter was $657 million, up 21% in USD year-over-year, or 19% measured in constant currency. Subscription revenue in the quarter was 88% of total revenue.

Subscription Revenue Breakout: Subscription revenue from Infrastructure-related offerings for the quarter was $495 million, an increase of 15% in USD year-over-year, or 14% measured in constant currency. Subscription revenue from Application Development-related and other emerging technology offerings for the quarter was $162 million, an increase of 44% in USD year-over-year, or 42% measured in constant currency.

Operating Income: GAAP operating income for the quarter was $118 million, up 47% 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 third quarter was $179 million, up 25% year-over-year. For the third quarter, GAAP operating margin was 15.8% and non-GAAP operating margin was 23.9%. Non-GAAP references in this release are detailed in the tables below.

Net Income: GAAP net income for the quarter was $101 million, or $0.54 per diluted share, compared with $68 million, or $0.37 per diluted share, 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 $133 million, or $0.73 per diluted share, as compared to $111 million, or $0.61 per diluted share, 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.

Cash: Operating cash flow was $160 million for the third quarter, an increase of 18% on a year-over-year basis. Total cash, cash equivalents and investments as of November 30, 2017 was $2.32 billion after repurchasing approximately $100 million, or 838 thousand shares, of common stock in the third quarter. The remaining balance in the current repurchase authorization as of November 30, 2017 was approximately $399 million.

Deferred revenue: At the end of the third quarter, the company’s total deferred revenue balance was $2.11 billion, an increase of 23% year-over-year. The full year impact to total deferred revenue from changes in foreign exchange rates was $69 million year-over-year. On a constant currency basis, total deferred revenue would have been up 19% year-over-year.

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 $2.906 billion to $2.911 billion in USD.
• GAAP operating margin is expected to be approximately 16.1% and non-GAAP operating margin is expected to be approximately 23.9%.
• Fully diluted GAAP earnings per share (EPS) is expected to be approximately $2.02 per share, assuming 184 million fully diluted shares outstanding. Fully diluted non-GAAP EPS is expected to be approximately $2.88 per share, assuming 181 million fully diluted shares outstanding. Both GAAP and non-GAAP EPS assume a $2 million per quarter forecast for other income and an estimated annual effective tax rate of approximately 27% before discrete tax items. This outlook includes a one-time gain on a strategic investment which benefits GAAP and non-GAAP EPS by $0.05.
• Operating cash flow is expected to be approximately $900 million to $910 million.

For the fourth quarter:

• Revenue is expected to be approximately $758 million to $763 million.
• GAAP operating margin is expected to be approximately 16.7% and non-GAAP operating margin is expected to be approximately 24.6%.
• Fully diluted GAAP EPS is expected to be approximately $0.54 per share, assuming 186 million fully diluted shares outstanding. Fully diluted non-GAAP EPS is expected to be approximately $0.81 per share, assuming 182 million fully diluted shares outstanding. Both GAAP and non-GAAP EPS assume a $2 million forecast for other income and an estimated annual effective tax rate of 27% before discrete tax items. This outlook includes a one-time gain on a strategic investment which benefits GAAP and non-GAAP EPS by $0.05.

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 $195 million, amortization of intangible assets of approximately $30 million and transaction costs related to business combinations of approximately $1.3 million. Full year fully 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 27% before discrete tax items. Additionally, full year fully diluted non-GAAP EPS excludes approximately $30 million of discrete tax benefits related to share-based compensation that are included in full year fully diluted GAAP EPS. Full year fully diluted non-GAAP EPS excludes approximately 3 million diluted shares related to the convertible notes which are expected to be offset by our convertible note hedge transactions.

Fourth quarter non-GAAP operating margin guidance is derived by subtracting the estimated impact of non-cash share-based compensation expense of approximately $52 million and amortization of intangible assets of approximately $8 million. Fourth quarter fully 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 27% before discrete tax items. Additionally, fourth quarter fully diluted non-GAAP EPS excludes approximately $1 million of discrete tax benefits related to share-based compensation that are included in fourth quarter fully diluted GAAP EPS. Fourth quarter fully diluted non-GAAP EPS excludes approximately 4 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 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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