Analyst Conference Summary

conference date: March 28, 2012 @ 2:00 PM Pacific Time
for quarter ending: February 29, 2012 (Q4, fourth quarter fiscal 2012)

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

Overview: Revenue climbing quickly. Profits not so quickly. Announced yet another stock buy back.

Basic data (GAAP) :

Revenue was $297.0 million, up 2% sequentially from $290.0 million and up 21% from $244.8 million year-earlier.

Net income was $36.0 million, down 6% sequentially from $38.2 million but up 7.5% from $33.5 million year-earlier.

EPS (diluted earnings per share) were $0.18, down 5% sequentially from $0.19, but up 6% from $0.17 year-earlier.

Guidance:

Fiscal year 2013: Assumes weaker yen and euro. Revenue $1.34 to $1.36 billion. Will ramp investment for storage and sales. Non-GAAP 24.7% to 24.9% operating margin. Tax rate 32% non-cash, 5% cash. Non-GAAP EPS $1.16 to $1.20. $440 to $460 million operating cash flow. Will add around 1000 employees. Capital spending $150 million, more than most years.

Fiscal Q1 revenue $307 to $311 million, Non-GAAP operating margin 24.0% to 24.2%. Non-GAAP EPS $0.25 to $0.27.

Conference Highlights:

Results exceeded high end of prior guidance. Full fiscal year revenue over $1 billion, the first pure open source company to achieve that.

At $128.0 million, operating cash flow is far higher than GAAP net income.

Subscription revenue was $255.2 million. Services revenue was $41.8 million.

Growth has been accelerated by international expansion of sales force. Demand was both broad and deep.

Invested aggressively in growth opportunities. Gaining market share from competitors.

24 of 25 largest deals were renewed. A record financial services deal was made with a global bank. Million dollar deals were up 50% y/y. Two large deals included free-to-pay components (had been using free version, now paying). All top 30 deals were over $1 million. 3 deals were over $5 million. Financial services dominated the list, but mainstream customers were second. Bookings up over 30% y/y.

Non-GAAP numbers: operating income $77.2 million, operating margin $26.0, net income $57.2 million, EPS $0.29. Year-earlier net income was $55.7 million, so up under 3%.

Deferred revenue balance ended at $946.7 million, up 23% y/y and up 16% sequentially. Cash and investment balance was $1.3 billion. Repurchased $76.3 million of shares in the quarter. New $300 million stock repurchase plan has been authorized.

Won significant deals with non-security U.S. government agencies. Continues to add clients in the financial verticals, resulting in more large deals.

Operating systems and middleware had record bookings. RHEV 3 launched for virtualization. Red Hat storage appliance for unstructured data launched. Building out certified cloud ecosystem. RHEL 6.2 (enterprise Linux) released.

Billings up 31% y/y for the quarter.

Bookings by Geography: 60% Americas, 26% EMEA, 14% Asia.

Cost of revenue was $44.3 million, leaving gross profit of $252.7 million. Operating expenses of $204.2 million included: sales and marketing $115.0 million; research and development $55.1 million; general and administrative $34.1 million. Leaving income from operations of $48.5 million. Interest and other income was $2.1 million. Income taxes $14.7 million.

Red Hat added 800 employees during the year. Continuing to hire aggressively.

Q&A:

Demand trends in quarter? Back to normal, about 25-25-50 by month. RHEV 3.0 was introduced early in the quarter, so it had no impact on linearity.

Storage segment? Acquired Gluster in October, we just introduced our product, so it had no impact on revenue or even bookings in Q4. But the demand pipeline is very strong.

Margins? We believe after costs from Gluster behind us margins should trend upward again.

Cloud details? We do extremely well with private clouds in datacenters. Public clouds, we just got certified on Amazon and are seeing strong growth. It is hard to say what will be the specific big drivers.

JBoss middleware? 40% of top 30 deals had a middleware component. Middleware grew at about the same place as platform.

There is no specific guidance for deferred revenue growth, but that growth is necessary to hit the guidance numbers.

Our normal capital expense rate is about $50 million per year. Much of the coming expense will be for new buildings for new employees.

Sales and marketing expense was higher than expected, and higher as a percentage than we've seen in 8 years. What is happening there? With Gluster storage acquisition, we added engineering and sales aggressively. Also internationally, we entered four new countries. It takes 6 to 9 months to get full productivity from a sales hire.

Length of time for modernization of datacenters? We are in about the third inning, but it varies by vertical. We are more advanced in banking, in some we have hardly even started. There are still massive opportunities out there.

We had no deals slip from Q3 to Q4, so no revenue acceleration from that.

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