Analyst Conference Summary

conference date: March 24, 2010 @ 2:00 PM Pacific Time
for quarter ending: February 28, 2010 (fourth quarter fiscal 2010)

[at the time this is written]
Forward-looking statements

Overview: Finally showing some earnings leverage on nearly flat sequential revenue.

Basic data (GAAP) :

Revenue was $195.9 million, up 1% sequentially from $194.3 million and up 18% from $166.2 million in the year-earlier quarter.

Net income was $23.4 million, up 43% sequentially from $16.4 million and up 46% from $16.0 million year-earlier.

EPS (diluted earnings per share were) were $0.12, up 50% sequentially from $0.08 and also up 50% from $0.08 year-earlier.

Guidance:

Fiscal 2011 depends on exchange rates. Assuming March 23, 2010 rates:

Revenue $835 to $850 million. Non-GAAP operating margin expansion up 100 basis points. $8 million investment income. Non-GAAP tax rate 35%, but 5% cash tax rate. Non-GAAP EPS $0.71 to $0.74. $15 million stock compensation expense. $280 to $290 operating cash flow, plus $30 to $50 million in additional, non-operating cash flow. Capital expense $30 to $35 million.

For Q1 $202 to $204 million. Non-GAAP EPS $0.17 to $0.18.

Conference Highlights:

"We are well positioned at the confluence of several major technology trends in the data center, including cloud computing, virtualization, and middleware." Billings in the quarter set a record, $243 million. Bookings grew sequentially.

Telecommunications segment resurged. Attach rate for non-Linux products was higher. JBOSS 5.0 shipped in the quarter. Renewals were strong (24 of 25 top deals) and average value was 30% higher that year-earlier. 18 deals were for over $1 million; one was a free-to-paid subscription deal.

Half of the world's equity trading volume now runs on Red Hat products. Global government sector seeing increased adoption; 9 of 10 largest public clouds run on Red Hat. Also saw growth in a number of verticals outside the core ones.

Subscription revenue was $169.2 million, up 21% y/y. Training revenue was $26.7 million, up 1% y/y.

Non-GAAP numbers given as: operating income $46.6 million, 23.8% operating margin, net income $36.5 million for $0.19 EPS. 86% gross margin.

Operating cash flow was $77.9 million after $8.8 million litigation settlement expense reported in Q3. Deferred revenue balance was $645.9 end-of-quarter. Cash and investment balance was $970.2 million. $90 million in shares were repurchased in the quarter.

350 employees were added during 2009.

Cost of revenues was $29.3 million, leaving gross profit of $166.5 million. Operating expenses of $138.6 million included $70.5 million sales and marketing, $38.3 million research and development, and $29.8 million general and administrative. Other income was $6.6 million. Tax provision $11.1 million.

56% channel, 44% direct sales.

Geographic: 59% Americas, 26% EMEA, 15% Asia.

Q&A:

Server cycle impact? Server growth does matter, but as shipped from OEMs it is a minority of our business. Other drivers are servers going to clouds, JBOSS.

RHEV? New version was brought out in November. A number of major companies are already running clouds on RHEV.

Where are you gaining market share? Advanced Platform is seeing increased adoption. Wins like IBM are for the technology. Some are core customers running RHEL, so it makes sense to run it on RHEV.

Deferred revenue, difference between short and long term? Strong government business in Q4, with 1 year terms. All the change y/y in deferred was in the short-term. Long term customers may pay 3 years in advance. New customers usually do 1 year subscriptions.

Where are you adding staff? Engineering and sales.

Are you seeing any conversions to RHEV from Hyper-V or VMWare? We are just getting started. Most customers want two platforms, taking RHEV as second after VMWare. Cost is an issue that favors us.

Pricing on virtualization? We are reviewing the pricing; will probably announce something in June.

Desktop virtualization? It is secondary to the server product. But desktop management tools roadmap should be announced at the June summit.

Macro environment? It has been improving one vertical at a time. Financial improved earlier in 2009, government in Q4. Server refresh getting underway should favor us.

Novell for sale? No comment.

Geography color? Americas was strong, EMEA strong, but it is country by country in Europe. Asia not so strong.

Windows to RHEL? In quarter, none of the top 30 deals came from Windows, but we saw smaller deals of that sort.

Billings growth higher than cash flow growth? Look carefully at the changes in interest income, which was a very large number.

Non-renewed deal? Tech industry. Motivation was cost. They found a free alternative. This happens on occasion. In the past these customers have returned to Red Hat.

Services business? Services business was hit in 2009 due to macroeconomy. It should improve in 2010, but in low single digits.

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