Analyst Conference Summary

conference date: December 22 , 2008 @ 2:00 PM Pacific Time
for quarter ending: November 30, 2008 (3rd quarter fiscal 2009)

Forward-looking statements

Overview: Revenue growth largely offset by increased operating expenses and negative currency exchange impact, so increased net income due to reduction in income taxes. Doing very well in these tough times.

Basic data (GAAP) :

Revenue was $165.3 million, up 0.5% sequentially from $164.4 million, and up 22% from $135.4 million year-earlier.

Net income was $24.3 million, up 15% sequentially from $21.1 million, and up 20% from $20.3 million year-earlier.

EPS (diluted earnings per share were) were $0.12, up 9% sequentially from $0.11 and up 20% from $0.10 year-earlier.

Guidance:

For fiscal Q4, excluding foreign currency changes: revenue $166 to $167.5 million. Increased non-GAAP operating expenses. 21 to 23% non-GAAP operating margin. Lower interest income. 5% tax rate. $0.19 to $0.20 non-GAAP EPS. Remaining convertible debt of $285 million will be eliminated January 15.

Conference Highlights:

"IT professionals are adopting open source and more specifically Red Hat to save money and enhance their competitiveness." Outlook positive despite challenging business environment. Renewals and upsells strong, including with financial services firms.

Qumranet acquisition integration almost complete; new virtualization product announcements will be made in the near future. Middleware solutions (JBoss) continue to gain traction. Free to paid initiative going well. New MRG ("merge") platform integrates messaging, real-time, and grid technologies; will give customers a competitive advantage. In Q3 had key wins for MRG in government and financial verticals.

Says revenues were within guidance once currency exchange rates are taken into account; they reduced revenue by $6.9 million, and expenses by $4.8 million.

Subscription revenue was $135.5 million, flat sequentially and up 17% y/y. Training and services revenue was $29.9 million, up 52% y/y.

Operating margin was 12.7% (GAAP).

Non-GAAP (excludes stock compensation and amortization): gross margin 85%; operating income $38.4 million; operating margin 23.2%. Net income $48.4 million, up 13% from year-earlier, or $0.24 per share.

Operating cash flow was $59.1 million, down slightly from year-earlier. $15 million additional cash was generated from tax savings from NOLs (Net Offsetting Losses). Deferred revenue balance was $505.1 million. Cash and equivalents were $1.1 billion. $285 million convertible debentures were retired and 2 million shares of stock repurchased. $55 million free cash flow. $4 million used for capital expenditures.

A new stock repurchase program of $250 million was announced.

Cost of revenue was $26.5 million, leaving $238.8 million gross profit. Operating expenses of $117.8 million included $58.5 for sales and marketing, $34.5 million for R&D, and $24.8 million for general and administrative. Income from operations was $21.0 million, other income $12.5 million, income taxes $9.2 million.

45% of revenues are now non-U.S. 57% of revenues are from the Americas, EMEA 25%, 17% Asia-Pacific.

55% of bookings were from channel, 45% from direct sales.

$193 million billings in quarter. 14 deals at $1 million or more. 20% of top deals had a middleware component.

Q&A:

JBoss long term percentage of revenue? Expected to grow faster than core Linux business. Still early in game. Large deals closed have been increasing, pipeline is strong.

Confidence in 2009 revenue growth? In Q4 we will provide 2009 guidance.

Operating margins going forward? 120 basis point improvement Q3 to Q4, we will moderate the operating margin depending on how fast revenue growth is. There probably is room for margin growth over time.

Exchange rate assumptions? All at average Q3, for Euro was 1.35, but that has been swinging rapidly.

Europe was relatively strong in Q3 due to willingness to adopt open source.

Government vertical? It has been healthy because they need to cut IT costs. One European country in particular is desperate to cut costs.

Cloud computing impacting demand? Engaging much more on internal cloud side. We have a lot of traction there that is helping our business.

Renewal percentage increase on largest contracts below past? 106% of prior year, yes we did have 120% quarters. Take one or two financial services deal out of mix, and we would have been up to more normal numbers. Does not believe this is a trend.

No plans for reducing workweeks. Still hiring, but judiciously.

Any change of expectations for close rates on deals? Every customer is examining purchases. This makes selling time longer, but we are not making any changes in our close rate model. Our pipeline remains strong.

Three of top 25 deals in quarter were with financial services companies. We have renewed all of the significant financial services companies we have out there.

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