Analyst Conference Summary

conference date: March 27, 2008 @ 2:00 PM Pacific Time
for quarter ending: February 29, 2008 (4th quarter fiscal 2008)

Forward-looking statements

Overview: Solid sequential and y/y revenue gains, but GAAP profits flat. Cash flow strong. Operating expenses going forward mean guiding to slight non-GAAP EPS decline in Q1.

Basic data:

Revenues were $141.5 million, up 5% sequentially from $135.4 million and 27% from $111.1 million year-earlier.

Net income was $22.0 million, up 8% sequentially from $20.3 million and also up 8% from $20.5 million year-earlier.

EPS (earnings per share) were $0.10, flat sequentially from $0.10 and from $0.10 in year-earlier quarter.

Guidance:

Full Fiscal 2009 revenue $665 to $680 million. Non-GAAP operating income to grow in line with revenue. Since interest rates are falling, $9 million per quarter in net interest income. Diluted non-GAAP EPS $0.78 to $0.82. GAAP $240 and $250 million cash flow.

Q1 revenue $152 to $154 million. Operating margin 19%. Other income net $9.4 million. Non-GAAP EPS $0.18.

Conference Highlights:

Believes customers are still excited about open source solutions and adoption rates are increasing, if anything. Optimistic about fiscal 2009. Investments in sales efforts are paying off. Middleware (JBoss) had best bookings ever. SOA (Service Oriented Architecture) revenues growing rapidly. International expansion is led by governments rallying around open standards.

Non-GAAP numbers: net income $42.7 million, up sequentially from $39.7 million. EPS $0.20, up sequentially from $0.19. Difference with GAAP numbers is due to stock-based employee compensation of $10.0 million and $10.7 million difference in provision for income taxes. 85% gross margin. Cash tax rate is still about 5%.

Operating cash flow was $71.6 million, or about 50% of revenue. Deferred revenue balance ended at $472.9 million, up 40% y/y. Cash and equivalents ended at $1.3 billion. Holds no mortgage-backed or auction-based securities. Convertible bonds are now listed as a liability.

3.7 million shares repurchased in quarter for $66 million.

JBoss business growing strongly.

Amentra acquisition was announced after the quarter closed.

Subscription revenue was $121.9 million up 27% y/y, training and services revenue $19.6 million.

Cost of revenue was $21.4 million. Gross profit $120.1 million. Operating expense of $101.9 million consisted of sales and marketing, $52.1 million, r&d $26.3 million and general and administrative $23.5 million. Income from operations was $18.2 million. Other income and interest was $16.7 million.

Over $200 million in bookings, a record. 54% from channel, 46% from direct sales. Geographic: 57% Americas, 28% EMEA, 15% Asia Pacific. 99 of 100 largest deals that came up in quarter were renewed. Billings were strong too.

Red Hat lowers TCO (total cost of ownership) and therefore can take advantage of a weak economy.

Operating expense increase was mainly due to sales expenses that are driving new bookings.

$225 million in NOLs are left [tax rate will go up when these run out].

Q&A:

ASPs (prices)? REL (Red Hat Enterprise Linux) 5.0 updates. People move gradually over time, when they are prepared. Top 25 renewals were at 25% higher than year-earlier partly due to upgrades to 5.0. Over 20 million free downloads of JBoss out there, very few are paying for support yet. People are willing to pay when they use Enterprise edition in datacenters.

Indirect renewal rates? There is a higher volume of deals, pipeline is strong. We have put in process improvements for renewals. We saw substantial increase in renewal rates on smaller accounts.

Seasonality in business? Our business is not very seasonal, but we do usually see a surge in Q4 and drop in Q1. Patterns repeat because much income is from renewals, which are annual. This year business was strong even in holiday period.

Are larger deals seeing delays? JBoss sales cycle is typically longer than Linux. No change in cycles that we have seen. BEA and Oracle merger creates uncertainty, which creates opportunity. Saw spike in JBoss downloads the day BEA deal was announced.

Amentra impact? Logic is around driving additional JBoss sales. They did $25 million in revenue last calendar year. This quarter partial revenue should be around $5 million. Services percentage of revenue should increase to 16 to 17% of total.

Currency impact on expenses? Sequentially revenue and expenses increased by about $1 million mainly due to Europe.

Middleware growth? We believe middleware bookings will grow about twice as fast as mainstream bookings.

Pricing? We already give a lot of value, we have been consistent in our pricing for years and we expect that to continue next year. JBoss pricing is good.

Capital expenditures? We expanded and opened multiple offices internationally. Also infrastructure improvements including datacenter hardware. This year was over 7% of revenue. Fiscal 2009 may be the same, with another 10 countries being added. In Fiscal 2010 should decrease again. We now have 59 offices in 28 countries.

Deal slippage at end of quarter? Did not see anything different or unusual.

Virtualization adoption? We don't have numbers. It comes for free in REL 5. Customers seem to like it.

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