Analyst Conference Summary

conference date: September 23, 2009 @ 2:00 PM Pacific Time
for quarter ending: August 31, 2009 (2nd quarter fiscal 2010)

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

Overview: Continues to grow revenues, and great sequential increase in GAAP net income.

Basic data (GAAP) :

Revenue was $183.6 million, up 5% sequentially from $174.4 million and up 12% from $164.4 million year-earlier.

Net income was $28.9 million, up 56% sequentially from $18.5 million, and up 37% from $21.1 million year earlier.

EPS (diluted earnings per share were) were $0.15, up 50% sequentially from $0.10 and also up 50% from $0.10 year-earlier.

Guidance:

If currency steady, $187 to $189 million revenue. Operating margins flat from Q2. $0.15 to $0.16 non-GAAP EPS.

For full year confident will reach high end of ranges previously stated.

Conference Highlights:

Revenue was better than expected because Red Hat offers great value for its customers and solid execution. Red Hat was added to the S&P 500 during the quarter. Annual subscription revenue growth was 15%.

All top 25 deals up for renewals did renew, and at an increased value. One major former customer returned. Contract duration average grew to 22 months.

Non-GAAP net income was $39.4 million, or $0.20.

Operating margin was 15.0% GAAP, 23.7% non-GAAP, up 170 basis points y/y.

A tax benefit of $7.3 million for the quarter was included in both GAAP and non-GAAP numbers.

Operating cash flow hit $62.0 million, up 14% y/y. Deferred revenue ended at $580.9 million. Cash and equivalents ended at $911.8 million. 47 million dollars worth of shares were repurchased.

Subscriptions accounted for $156.3 million of revenue; training and services for $27.4 million.

Cost of revenue was $28.4 million, leaving gross profit of $155.2 million. Operating expense of $127.7 million included $66.8 million for sales & marketing; $36.4 million for R&D, and $24.5 million for general and administrative expense. Income from operations was $27.5 million, other income was $5.8 million. Income tax provision was $4.3 million.

JBoss Enterprise Application Platform 5 was released in the quarter. Red Hat Network Satellite had a new release. Red Hat Enterprise Linux (RHEL) 5.4 was released. Virtualization portfolio (REV) was also updated.

There were a number of free-to-pay Linux deals in the quarter. A large technology company had been trying to support Red Hat Linux on its own, and decided it was less expensive and more secure to pay for Red Hat subscriptions.

Billings were $194 million.

Analyst day is October 6th.

Q&A:

Demand environment for servers? At this point it looks more like we are taking share from other operating systems rather than increasing server purchase volume.

EMEA demand? They made some progress. We booked the largest deal in EMEA history in q 2.

JBoss growth? It is growing faster than the core business. We are typically able to sell JBoss when we have a RHEL account.

Pipelines? Overall pipelines remain good.

Migration to Advanced Platform Linux? In top 30 customers in quarter, 23 had the Advanced Platform component. Certainly the big customers and new customers are moving that way, if that is what they need.

Is your sales force continuing to expand? We have added people every quarter this year, mostly in sales and engineering.

We are benefiting from the turmoil around Sun. But we are also hearing rumors about new projects from our sales force. So that is good news.

Operating margins? They will continue to improve, but we also want to take advantage of the opportunities we are seeing for growth.

Any replacement of VMware by REV? There are potential replacement opportunities, but our primary focus will be on green fields.

Any metric on virtualization? A lot are getting their virtualization as part of the Advanced Platform. The greatest interest in our virtualization so far is by current RHEL customers. But we are seeing interest from companies that are not Red Hat customers yet.

15% of our business was in the government vertical and the pipeline looks good.

Did billings growth bottom, are we seeing acceleration now? The duration of the deals affects that metric, and duration has grown, so you should not read too much into the billings number.

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