Analyst Conference Summary

conference date: December 20, 2007 @ 2:00 PM Pacific Time
for quarter ending: November 30, 2007 (3rd quarter fiscal 2008)

Forward-looking statements

Overview: Rapid growth continues, unimpeded by macroeconomics.

Basic data:

Revenues were $135.4 million, 6% sequentially from $127.3 million and up 28% from $105.8 million year-earlier.

Net income was $20.3 million, up 11% sequentially from $18.2 million and up 39% from $14.6 million year-earlier.

EPS (earnings per share) were $0.10, up 11% sequentially from $0.09 and up 43% from $0.07 year-earlier.

Guidance:

Fiscal Q4 revenues around $139.5 to $141.5; non-GAAP EPS $0.19. Stock compensation expense $11 million.

Full fiscal 2008: $521-$523 million with non-GAAP EPS $0.70 cents.

Will give fiscal 2009 guidance at next conference.

Conference Highlights:

Strong bookings momentum and cash flow with revenues above guidance. We deliver real business value to customers. Linux Automation allows IT to maximize its productivity.

MRG Beta builds value into the core of IT infrastructure. JBoss middleware is gaining traction. All 25 major contracts up for renewal were renewed, with 128% of prior revenues.

Rapid growth is global. Opened offices in several countries, notably Taiwan. Good progress with channel partners, including middleware. Results were not skewed this quarter by any particularly large deals, but had more $1 million+ deals than in any prior quarter.

Subscription revenue was $115.7 million, up 6% sequentially and 30% y/y. Training and services revenue was $19.6 million.

Non-GAAP adjusted net income was $39.7 million or $0.19 per share.

Operating cash flow was $76.7 million, up 24% from year-earlier. Total cash and equivalents ended at $1.3 billion.

Deferred revenues were $422.6 million, up 36% from year-earlier.

Cost of revenue was $20.9 million. Gross profit was $114.5 million. Operating expense totaled $95.0 million, consisting of: Sales and Marketing, $47.7 million, R&D $25.9 million, General and Administrative $21.4 million. Other income was $14.4 million, interest was $1.6 million, income tax provision was $12.0 million.

Foreign exchange rate benefits were responsible for about $1 million of revenue improvement over year earlier.

Revenues by geography: 58% from Americas, 27% from EMEA, 15% from Asia Pacific. Grew particularly fast in Latin America.

Upgrades are taking place from RHEL to RHEL Advanced Platform, with new customers often choosing Advanced Platform.

Q&A:

Does the hiring of Jim Whitehurst mean anything? No, we chose him to further what we have already done. He runs 4 versions of Linux; he is technically savvy but also has strong financial and strategic skills.

New areas for entry? Looking for 50% of worldwide server marketplace by 2015. High performance computing is a big part of that. We see opportunity in developing countries for our middleware solutions.

Said that Windows is growing faster than Linux? Don't know why there is a disconnect of value proposition. Also we are seeing a rapid Linux penetration; maybe these reports are not counting "free" Linux use.

Compression effect from virtualization? Customers are moving from virtualization pilots to implementation. We have a good partnership with VMWare. Open source work on virtualization is going well, so we expect to give a low-cost, high value virtualization alternative in 2008.

Billing acceleration causes? Very large number of new accounts in quarter, in many different regions. Latin America really helped.

Operating Margins going forward? 21.4% non-GAAP for quarter. Balancing investment for growth with expansion of operating margins. Will guide for fiscal 2009 on next call.

Renewal revenue growth was due both to JBoss adoption and moves to Advanced Platform.

Deferred revenue sources? Mix of long and short term, but all from customer satisfaction, which leads to willingness to do long term contracts.

Cash uses? No change in strategy. We look at acquisition candidates all the time.

Financial services industry exposure? We have some, but less than 15% of revenues and all over the world.

When will NOL exhaustion occur? NOLs were $300 million at end of Q3. Cash tax rate for next 2 to 3 years should be roughly 5%.

Would you consider buying a closed source business or selling closed source products? We have bought businesses and converted them to open source. We plan to remain a pure open source company.

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