Analyst Conference Summary

conference date: March 25, 2009 @ 2:00 PM Pacific Time
for quarter ending: February 28, 2009 (4th quarter fiscal 2009)

Forward-looking statements

Overview: Still growing despite the economic downturn, but rate of growth slowed. In fact revenues have been just above flat for a couple of quarters now.

Basic data (GAAP) :

Revenue was $166.2 million, up 1% sequentially from $165.3 million and up 17.5% from $141.5 million year-earlier.

Net income was $16.0 million, down 34% sequentially from $24.3 million and down 27% from $22.0 million year-earlier.

EPS (diluted earnings per share were) were $0.08, down 33% sequentially from $0.12 and down 27% from $0.11 year-earlier.

Guidance:

Effective GAAP tax rate will be 30% for coming year. Cash tax rate about 5% for new fiscal year due to NOLs (net outstanding losses).

Forecasting is challenging, but based on current foreign exchange rates: we expect continued double digit y/y revenue growth rates. $720 to $735 million in revenue for the full fiscal year. Non-GAAP operating margin can expand by 1%. Interest income will drop, leaving other income at about $3 million per quarter. Diluted non-GAAP $0.58 to $0.62 EPS. Operating cash flow $240 to $250 million. Share count should shrink to 195 million by end of fiscal year. Capital expenditures around $25 to $30 million.

For Q1, $171 to $173 million revenues. 23% non-GAAP operating margin. Non-GAAP EPS $0.13 to $0.14.

Conference Highlights:

We continue to be the open source leaders because of our value proposition; our open source development model; and customer-led innovation, in which partners weave Red Hat products into their own products.

Renewals were strong, including all the top 25 deals in the quarter, which renewed at 125% of prior value. JBoss Middleware continued to grow, with 30% of largest deals including a middleware component. SOA now has over 75 customers.

We continue to perfect virtualization solutions and have become a leader in that field. RHEL (Red Hat Enterprise Linux) will have virtualization built in, starting with the next release.

Priorities for 2009: datacenter solutions; investment in our own infrastructure; partner ecosystem build-out. We are driving for broader mainstream adoption; free to paid conversions; channel business build-out.

With 47% of revenue from outside the U.S., the higher dollar did mask our overall performance.

Subscription revenue was $139.4 million, up 3% sequentially and 14% from year-earlier. Service and training revenue was $27 million.

Non-GAAP numbers: operating income was $39.8 million for a 23.9% operating margin. Net income was $42.3 million or $0.22 EPS, down sequentially from $48.4 million and also down from $45.7 million year-earlier. But both the compared quarters included one-time gains of over $4 million; no similar gain was recorded this quarter.

Operating cash flow was $59.7 million. Cash and equivalents ended at $846.1 million, down after redeeming $285.5 million of convertible debentures. So essentially debt free.

Deferred revenue balance ended at $543 million.

(GAAP) Cost of revenues was $25.7 million, leaving gross profit of $140.6 million. Operating expenses of $120.3 million included $61.2 million for sales, $35.0 for research, and $24.1 million for administrative. Leaving operating income of $20.2 million. Other income was $4.8 million. Income tax provision was $9.0 million.

Bookings and billings both exceeded $200 million, records. Large numbers of new customers signed up, including many major deals.

We are growing faster than the server growth rate because of tendency to use our products on blade servers and conversions

56% of sales were through the channel, 44% from direct sales.

Americas revenue was 57% of total; 28% EMEA 15% from Asia-Pacific.

Q&A:

Virtualization adoption rate? Unfortunately this in anecdotal so far, with an interest in saving on number of servers and power.

Free to paid conversions? One big customer tried to do their own support, and decided it was better to buy a subscription. In Latin America most new deals are free to paid; they start on free, as they need to go mission critical they convert to paid.

70% of RHEL are on ES version, the standard. 50% of renewals include an AP (advanced platform) component, but a higher percentage of new customers go there to begin with.

Non-GAAP operating margin steady-state? Goal for this year is 100 basis point improvement (1%). We continue to invest in sales and training, which will take it down a bit in Q1.

DDI is still a nascent market, but is doing better than we expected.

We are not in the netbook space, even though some are run on Fedora [which is free].

IBM and Sun merger? At this point it is just a rumor.

Server growth rate assumption? We do look at server growth rate estimates, but it is only one factor among many. Our pipeline is strong, so we have good visibility from that.

Are we at the bottom for growth rates? Our operating cash flow guidance implies we expect growth in deferred revenues and billings as we go through the year.

What are customers saying now? Interest in open source continues. Budgets are set for this year; we think that is good for us in open source.

The big opportunity is with companies that are hiring engineers to do their own support and finding it is less costly to subscribe with us.

Any shift of duration of deals? No substantial change; average is 23 to 24 months, which is a month or two longer from two years ago. Pricing continues to be consistent.

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