Analyst Conference Summary

conference date: December 21, 2010 @ 2:00 PM Pacific Time
for quarter ending: November 30, 2010 (third quarter fiscal 2011)

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

Overview: Red Hat shows it can generate earnings growth that could justify its stock price.

Basic data (GAAP) :

Revenue was $235.6 million, up 7% sequentially from $219.8 million, and up 21% from $194.3 million in the year-earlier quarter.

Net income was $26.0 million, up 10% sequentially from $23.7 million, and up 59% from $16.4 million year-earlier.

EPS (diluted earnings per share were) were $0.14, up 17% sequentially from $0.12, and up 75% from $0.08 year-earlier.

Guidance:

Q4 revenue $234 to $236 million, assuming normal seasonality. 24.6 to 25.0% operating margin. Non-GAAP EPS $0.21 to $0.22. That excludes a $3 million R&D tax credit.

Full year revenue estimate is $898 to $900 million.

Conference Highlights:

Market demand was strong and sales execution was good. Billings growth was 20% y/y to $262 million. Red Hat Enterprise Linux 6 (RHEL 6) was launched in November, and has been very well received, especially for its virtualization capabilities.

All of top 25 deals up for renewal in the quarter did renew, at total of 120% of prior billings. Red Hat is now preferred more for technological leadership and security, not low cost. Of top 30 deals, 16 were for over $1 million. Half of the deals included a middleware component. Many included other value added software. Government and financial verticals were particularly strong.

Non-GAAP operating income was $58.0 million. Non-GAAP net income was $39.1 million, for EPS of $0.20. Operating cash flow was $70.8 million, up from $54.1 million year-earlier. Deferred revenue balance ended at $658.2 million. Cash and equivalents balance ended at $1.1 billion, up $47 million sequentially.

Makara was acquired in November for its cloud deployment and management software.

Subscription revenue was $198.8 million, up 21% y/y. Training and services revenue was $36.7 million, up 23% y/y.

84% gross margin. 24.6% non-GAAP operating margin.

Cost of revenue was $39.7 million. Operating expenses were $157.9 million, including sales and marketing $85.1 million, R&D $43.1 million, and $29.7 million for general and administrative expense. GAAP income from operations was $38.0 mllion. Interest and other income was $2.1 million. Income taxes were $14.0 million.

Has been hiring all year and expects to continue hiring. Rapid growth has led to higher working capital requirements.

Q&A:

Free to fee conversion process? Continues selling to free, open source users, and are getting good results from that, but don't break out revenues for that.

Virtualization upsell? Another 100 customers adopted RHEV in the quarter, now over 400 customers.

JBoss middleware? We are taking market share and gaining new clients. Doing well with former Sun customers.

Weakness in Asia? Nothing different there, typically 16 to 19% of revenue total, still within that range.

$260 million is left for share buy backs, but priorities are growth and acquisitions.

RHEL 6 pricing? We don't force upgrades. Mostly new workloads will go to RHEL 6. Customers like the new pricing approach, but don't need to make decisions until they renew. Pricing in segments eliminates standard vs. premium pricing of RHEL 5.

Makara meaning? Their functionalities will be integrated into our cloud services portfolio. It allows investments in datacenters to be moved to or integrated with clouds. As a service, it is used to grow the subscription business.

We are definitely going after the Windows market and doing well there. We are seeing some customers virtualize Windows workloads like Exchange of RHEV, but it is an early phenomena.

Six deals out of the top 30 were exclusively or substantially middleware.

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