Analyst Conference Summary

conference date: March 23, 2011 @ 2:00 PM Pacific Time
for quarter ending: February 28, 2011 (fourth quarter fiscal 2011)

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

Overview: Excellent revenues and net income.

Basic data (GAAP) :

Revenue was $244.8 million, up 4% sequentially from $235.6 million, and up 25% from 195.9 million in the year-earlier quarter.

Net income was $33.5 million, up 29% sequentially from $26.0 million, and up 43% from $23.4 million year-earlier.

EPS (diluted earnings per share were) were $0.17, up 21% sequentially from $0.14, and up 42% from $0.12 year-earlier.

Guidance:

Expects $1.05 to $1.07 billion in revenue in fiscal 2012. 25.7% non-GAAP operating margin. Effective tax rate of 31%, but cash tax rate 5%. Non-GAAP EPS $0.94 to $0.96. $330 to $340 operating cash flow. Capital expense $40 to $50 million.

Q1 fiscal 2012 revenue $252 to $255 million. Non-GAAP operating margin 24.5% to 24.9%. Non-GAAP EPS $0.21 to $0.22.

Conference Highlights:

Revenue and profitability were well above guidance. Q4 saw record bookings and billings. Subscription revenue was $209.3 million, up 24% y/y, and training and services revenue was $34.5 million, up 33% y/y.

Strong demand came from data center modernization and cloud computing. Red Hat is continuing to gain market share.

GAAP operating margin was 16.1%; non-GAAP 24.9% margin. 84.2% gross margin.

Non-GAAP net income was $51.4 million, EPS $0.26.

Won many RHEL deals against Unix, Windows, and other Linux operating systems.

Middleware sales (JBOSS) were strong.

RHEV virtualization product did well in cloud space.

$318 million billings in quarter, up over 30% y/y. Average contract length has expanded to over 21 months. Backlog over $190 million at end of year.

24 of 25 top customers up for renewal did renew, at 130% of prior revenue. Free to paid conversion program did well. Routes to market have been enhanced to 59/39 split channel to direct sales. All top 30 deals were for over $30 million.

By geography: 57% Americas, 27% EMEA 16% Asia.

Retroactive R&D tax credit added $0.02 per share.

Cash and investment balance ended at $1.2 billion. Cash flow from operations was $95.0 million, a record. Deferred revenue balance $772.3 million. $11 million was spent to repurchase stock in the quarter.

This year focused on "aggressive hiring for sales and engineering," as well as product releases and cloud computing technology.

Cost of revenue was $41.6 million. Gross profit $203.2 million. Operating expenses of $163.8 million included $88.3 million for sales and marketing, $45.2 million R&D, and $30.4 million for general and administrative. Leaving income from operations of $39.4 million. Other income was $0.8 million. Income tax provision was $6.7 million.

Sales linearity in the quarter was good.

Our Osaka, Japan offices and employees are safe and operational. Because we have a subscription model we expect no interuption in revenue. But could have about a $5 million impact on billings.

Q&A:

Operating expense due to Japan? Q1 typically has lower expenses. Does not see anything unusual from Japan for expenses.

Server unit slowdown predicted in industry? We have a very large installed base. Server growth rate is becoming a smaller factor for us. We are getting help from middleware, free-to-pay initiative. We believe our guidance is consistent with past practices.

RHEL 6 renewal impact? It is too early to see, but renewals have been improving.

Upselling and cross-selling comments? RHEV is bought by same buyer as RHEL, but middleware sales capabilities increased and that led to better than expected results.

Data center adoption of RHEV? RHEL users like RHEV. We are also going at green field opportunities, not going directly at VMWare.

$5 million Japan billing impact would be caught later. If they renew late, we would still see the revenue. Only long term problem would be a major macroeconomic impact.

Leverage (revenues to profit) color? We have said we will deliver 1% of margin improvement per year, other than that we reinvest in growth through improved sales. We could create more leverage short term, but choose to increase the growth rate.

Do you have any special incentives in place? No. Channel collects upfront and pays upfront.

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