Analyst Conference Summary

conference date: December 19, 2011 @ 2:00 PM Pacific Time
for quarter ending: November 30, 2011 (Q3, third quarter fiscal 2012)

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

Overview: Revenue and profits continue to grow rapidly.

Basic data (GAAP) :

Revenue was $290.0 million, up 3% sequentially from $281.3 million and up 23% from $235.6 million in the year-earlier quarter.

Net income was $38.2 million, down 4.5% sequentially from $40.0 million but up 47% from $26.0 million year-earlier.

EPS (diluted earnings per share) were $0.19, down 5% sequentially from $0.20 but up 46% from $0.13 year-earlier.

Guidance:

Assuming foreign exchange rates constant:

Raising full year 2012 guidance. Non-GAAP operating margin over 26%. Non-GAAP EPS $1.07 to $1.08. Cash flow exceeding $370 to $375 million.

Q4 $289-292 million revenue. Non-GAAP operating margin over 25.5%. Non-GAAP EPS $0.26 to $0.27.

Conference Highlights:

Executed well into healthy market demand. Results were at or above Red Hat expectations. Completed acquisition and integration of Gluster and launched the unstructured data storage software product. Believes Red Had Storage can deliver "disruptive solutions" in the storage market.

Subscription revenue was $246.5 million up 24% y/y and 3% sequentially. Training and service revenue was $43.5 million up 18% y/y and 1% sequentially.

Continues to gain market share in the datacenter. The billings growth rate was the highest for a Q3 in four years.

Of top 30 deals, 27 were for over $1 million. 5 exceeded $5 million. About 40% included a middleware (JBOSS) component. Largest verticals for top 30 deals were financial services, technology and government.

Channel represented 64% of volume. Direct sales were 36%. By geography 60% was Americas, 24% EMEA, 16% Asia Pacific. Americas was exceptionally strong in the quarter.

Non-GAAP numbers: operating income $78.8 million. Net income $55.7 million. EPS $0.28. 85% gross margin.

RHEL 6.2 Linux was launched in the quarter. RHEV virtualization new version in public beta.

Cash and equivalents balance ended at $1.2 billion. Cash flow from operations was $97 million. Deferred revenue ended at $819.6 million.

Added over 250 new employees in quarter and increased operating expense to invest in sales and development, as well as the new storage effort.

Cost of revenue was $45.2 million, leaving gross profit of $244.8 million. Total operating expense of $191.3 million consisted of: sales and marketing $107.6 million, research and development $53.7 million, and general and administrative expense $30.0 million. Income from operations was $53.6 million. Interest income $2.1 million. Income taxes $17.2 million.

Q&A:

We had a weird Thanksgiving holiday with about a week to recognize revenue, so that affected revenue flow.

Q4 pipeline? We had the best Q3 billings growth rate in 4 years. Bookings pipeline remains strong.

Difficult comparison for billings growth rate? Bookings pipeline remains strong. Currency rates could affect us, but we have a natural hedge between revenue and expenses.

We see no impact from the disk drive shortage.

Geographic color? We had some really large deals in the Americas. But we did well, with double digit growth, in every region. EMEA, including Europe, had a good growth rate.

Services? Historic growth rate was 5 to 10%, so 18% growth was outstanding. In Q4 we are seeing good demand for services.

Top renewals color? Financial services was well represented, largest vertical this quarter. The Q2 150% number was an outlier, not a trend. Q3 130% was a strong result, from increased units, not a price increase.

Long term storage revenue opportunity? Our products provide choice and eliminate lock-in. We expect the same kind of market penetration over time that we saw in Linux and virtualization. We are also still early in middleware. We believe the unstructured storage market is $4 billion and exploding. Modest share gains would be large opportunities.

8% of revenue for General and Administrative expense? In the long term we can continue to make progress there.

Do larger, more complex sales lead to a change in linearity? In Q3 it was partly the holiday timing, but also larger deals take longer, but they are not done within a quarter and should not impact linearity in a quarter.

The storage business is new for us, so will require some investment in engineering and sales. We will offer detailed guidance on the Q4 call.

Share buy backs? We have $168 million authorization remaining. We have been consistent buyers of our stock, except in quarters where we made acquisitions.

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