Analyst Conference Summary

conference date: September 21, 2011 @ 2:00 PM Pacific Time
for quarter ending: August 31, 2011 (Q2, second quarter fiscal 2012)

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

Overview: Continued rapid revenue and product growth. Raised full year guidance

Basic data (GAAP) :

Revenue was $281.3 million, up 6% sequentially from $264.7 million and up 28% from $219.8 million in the year-earlier quarter.

Net income was $40.0 million, up 23% sequentially from $32.5 million and up 69% from $23.7 million year-earlier.

EPS (diluted earnings per share) were $0.20, up 18% sequentially from $0.17 and up 67% from $0.12 year-earlier.

Guidance:

Assuming foreign exchange rates remain at current level: raising full fiscal year guidance, based on pipeline, by $45 million to $1.12 to $1.13 billion with $1.03 to $1.05 non-GAAP EPS. Cash flow $350 to $360 million.

For fiscal Q3 revenue of $288 to $290 million. Non-GAAP EPS $0.25 to $0.26.

Conference Highlights:

Revenue was above guidance and growth accelerated based on strong sales execution. "We believe Red Hat remains well positioned to finish fiscal 2012 as the first billion dollar open source software vendor." Billings grew 30% y/y. Raised full year guidance.

There were a number of large wins from customers switching from proprietary software. All top 25 deals renewed, at total value over 150% of original value. In particular U.S. government customers are looking for modularity and interoperability, which open source can provide. Telstra is a new customer for cloud computing. Top 30 deals (including new deals) set a record, all deals were over $1 million, 40% included middleware, with government and financial services the strongest verticals.

Revenue by geography: 58% Americas, 25% Europe & Middle East, 17% Asia.

Subscription revenue was $238.3 million, while services generated $43.0 million.

Non-GAAP numbers: operating income $76.4 million, operating margin 27.2%, net income $56.5 million, EPS $0.29, up 53% y/y.

Cash and investment balance ended $1.3 billion. Operating cash flow was $77.1 million. $38 million was used to repurchase stock. $813 million deferred revenue.

Virtualization, RHEV 3, was introduced in Beta in the quarter.

Cost of revenue was $46.6 million, leaving GAAP gross profit of $234.7 million. Operating expenses of $182.2 million included $99.7 million for sales and marketing, $51.5 million for research and development, and $31.0 million for general and administrative expense. Leaving income from operations at $52.5 million. Interest and other income was $2.5 million. Income tax provision was $15.0 million.

Q&A:

Contract and billing period extensions? Average contract duration had been about 20 to 21 months. This quarter came back to normal. Billings typically follows contract duration.

Renewals strength color? It was out of the norm, one reason was increased cross-selling, even within existing products. RHEL pricing increase had little impact. Large accounts continue to deploy higher volumes. We have a larger portfolio, so sales force has more to sell, like middleware.

We intend to keep investing for growth, so we did not increase margin guidance.

We have an exploding number of P.O.C.s on RHEV 3.0, because it is still in Beta. Some customers of the other virtualization vendor did not like the price increases. Also Linux users are wanting an open source virtualization solutions.

CloudForms is getting good feedback, but we are not selling it yet.

For renewal growth, RHEL was the largest revenue adders, JBOSS the second. BRMS is also popular.

UNIX migration? We are taking share from UNIX, free Linux, and Windows. This quarter the trend for this was normal.

Services vs. macroeconomics? Services pipeline continues to be strong. If it were weak, that might be an indicator of weakening overall demand.

Small and medium business customers? We continue to make incremental improvements in renewal rates for SMB customers.

We opened offices in four new nations this year. We are seeing a lot of interest in Asia from UNIX users.

Cash use? Priority is for organic business growth and strategic acquisitions. We still have $168 million authorized in our share buy back program.

We believe the IDC data on UNIX underestimates how much UNIX is still out there. It is still a big opportunity for us.

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