Analyst Conference Summary

conference date: June 27, 2007
for quarter ending: May 31, 2007 (1st quarter fiscal 2008)

Forward-looking statements

Overview: Continued strong revenue growth, beat their own guidance.

Basic data:

$118.9 million revenues are up 7% sequentially and up 42% from year earlier.

GAAP Net income was $16.2 million, up 17% from $13.8 million year earlier. Non-GAAP net income given as $33.7 million.

GAAP EPS was $0.08 per share, up 14% from $0.07 year earlier. Non-GAAP EPS was $0.16.

Guidance:

Fiscal Q2 revenues $124 to $126 million. Non-GAAP EPS $0.17 per share.

Full fiscal year $30 to $35 million in capital expenditures.

Conference Highlights:

Revenue was above high end of prior guidance. Red Hat Enterprise Linux 5 released in quarter; JBoss Enterprise version also released; customers like integrated OS with middleware. $0.9 million of revenue was from strong Euro.

Subscription revenue was $103.0 million, up 7% sequentially and 44% from year earlier. Training and service revenue was $15.8 million, up 27% from $12.5 million year earlier.

Sales and marketing expense increased to $46.2 million from $30.5 million year earlier. R&D was $21.8 v. $13.8 million; General and administrative $17.7 v. $13.6 million; total operating expense $85.7, up from $57.9 million year earlier. Accelerated investment in R&D and marketing due to opportunities.

Cash and equivalents ended at $1.2 billion. Non-GAAP cash flow from operations $52.3 million, down slightly sequentially due to timing of payments and receipts.

$363.1 million in deferred revenues.

RHX not to make substantial revenue contributions this fiscal year.

24 of 25 top renewal opportunities were successful; the other should close this quarter. Indirect sales channels now 50% globally. Two JBoss sales of over $500,000 were delivered to partners. Expanded presence in IBM Z mainframes.

Customers want a single point of responsibility despite multiple vendors and Red Hat has set up support to accomplish that. Eclipse based software development tools released.

57% of bookings from channel, 43% from direct sales.

Revenue by 56% Americas, 25% EMEA, 19% Asia Pacific.

Non-GAAP gross margin was 85%. Operating margin of 20%.

Q&A:

Positive take up on advanced platform? It is early, but pre-production test environment is being used.

JBoss? Delivering as integrated product rather than stand-alone. Used by developers all over the world. Clients are moving to it from proprietary solutions.

Virtualization uses? No one major is moving virtualization near to production environments. Still seen as a young technology with application-specific testing needed.

Virtualization choices? Has had VMWare relation for years. Said good things about all 3 products.

Red Hat Xchange? Magnitude of investment in this is not yet determined. Will evaluate on month to month basis. Will have a metric when numbers become material.

Currency impact on deferred revenue? About $2 million.

Prepaid expense hike? Increase in long term obligations related to new accounting standards.

Pricing environment? No changes.

Cash flow this year? Don't want to give quarterly guidance. Full year, reaffirmed prior estimates.

Had a $0.5 million bad debt write-off due to aging.

Does not share bearish predictions of impact of virtualization. Legacy apps will move faster to Linux. Unix will move faster to Linux. Customers will see superior economic benefits of Linux ecosystem.

Multiple thousands of customers added this quarter.

Bookings increased sequentially this quarter, even excluding JBoss.

JBoss consultancy demand? Way to look at it is we are a multiple product company where applications and 24 hour service are critical to the customers. Strong support for JBoss among partners. Working on making customers JBoss literate.

Non-GAAP operating margin going forward? 21 to 22% this year, higher later.

Slow growth of deferred revenue? Q4 was great quarter, so it was a tough compare. Better to look at a 4 quarter rolling average.

Metmatrix acquisition? Happened in last week of quarter. Had no material impact on revenue or expenses in the quarter.

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