Analyst Conference Summary

conference date: June 22, 2010 @ 2:00 PM Pacific Time
for quarter ending: May 31, 2010 (first quarter fiscal 2011)

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

Overview: Continued solid growth in revenues and profits.

Basic data (GAAP) :

Revenue was $209.1 million, up 7% sequentially from $195.9 million and up 20% from $174.4 million in the year-earlier quarter.

Net income was $24.1 million, up 3% sequentially from $23.4 million and up 30% from $18.5 million year-earlier.

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

Guidance:

Merit increases in pay will be given in July, which will affect operating expense.

$210 to $212 Q2 revenue, 24% operating margin, $0.18 non-GAAP EPS

Conference Highlights:

Growth was driven by renewals, services, and and free-to-paid initiative. Results were above Red Hat management's expectations. Won the largest deal ("eight figure") in the company's history during the quarter, which was mostly JBoss. One major win in the quarter was free-to-paid.

Cloud offerings, including virtualization, are getting traction. All top 25 renewal opportunities went through.

Red Hat Enterprise Linux 6 (RHEL 6) will be available in the near future.

Non-GAAP net income was $35.6 million, EPS $0.18.

Subscription revenue was $179.1 million. Training and services revenue was $30.1 million.

11 deals in the quarter were $1 million or more. About 1/3 of largest deals included JBOSS middleware. Less that 5% of an 8-figure deal was recognized in the quarter. Bookings were a record at $208 million. $469 million short-term deferred revenue, $157 million long-term, both hurt by exchange rates.

Revenues by geography were 62% Amicas, 22% Europe, and 16% Asia.

Operating cash flow was $60.6 million. Cash and investments balance end of quarter was $967.8 million. Deferred revenue was $625.6 million. $74 million shares of common stock were repurchased.

Operating margin was 16.4% GAAP, 24.8% non-GAAP.

Cost of revenue was $33.2 million, leaving gross profit of $175.9 million. Operating expenses of $141.7 million included $74.6 million for sales and marketing, $40.7 million for research and development, and $26.4 million for general and administration. Income from operations was $34.2 million. Other income was $1.8 million. Income tax provision was $13.0 million.

Q&A:

JBoss growth rate? Middleware was strong, growing more than twice the base business growth rate. Middleware is services led, we are seeing some of that come back.

8-figure deal? It was a greenfield deal, not a replacement of a competitor. It will be a long term subscription arrangement.

Bookings built faster than revenues in the quarter.

Anything in particular driving the increased large deals? Our sales teams came together better. No compensation change was made. Part of the success was new greenfield opportunities due to increased functionality.

Application portability for cloud computing? That is at the heart of what we do. We allow clients to have choice at the hardware level. We certify a cloud stack will run on Red Hat.

Average contract length is still about 22 months.

The cloud deals are RHEV (Red Hat Enterprise Virtualization) deals, but they could run an OS like Windows, which is certified on RHEV.

Europe demand? It has been pretty consistent. Demand is growing for us, and they reported a good pipeline. The high Americas percentage for Q1 was due to the big single deal.

SUSE bundled free with VMware, competition from? Just validates our strategy of tight integration between the hypervisor and the operating system.

New releases do not generate revenue for Red Hat, since they come free to subscribers. So the time between releases is not about generating revenue, but about technology needs.

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