Analyst Conference Summary

conference date: June 20, 2012 @ 2:00 PM Pacific Time
for quarter ending: May 31, 2012 (Q1, first quarter fiscal 2013)

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

Overview: Continued rapid revenue growth.

Basic data (GAAP) :

Revenue was $314.7 million, up 6% sequentially from $297.0 million, and up 19% from $264.7 million in the year-earlier quarter.

Net income was $37.5 million, up 4% sequentially from $36.0 million and up 15% from $32.5 million year-earlier.

EPS (diluted earnings per share) were $0.19, up 6% sequentially from $0.18 and up 12% from $0.17 year-earlier.

Guidance:

Assumes Euro 1.26 per $. Q2 revenue $320 to $322 million. 24.5 to 25% operating margin. Non-GAAP EPS $0.28 to $0.29.

Conference Highlights:

There was broad global demand for Red Hat technologies, resulting in results above expectations. Believes gain market share, partly because of open source cost savings benefits to customers.

Customer portal is recognized for its support. All top 25 deals in the quarter renewed, with revenue up 120% of original value.

Next week is the Red Hat summit. CloudForms and OpenShift have been introduced to help customers build Clouds. JBOSS Enterprise Application Platform 6 was released today.

Non-GAAP numbers: gross margin over 86%, operating income $81.1 million, operating margin 25.8%, net income $58.0 million, EPS $0.30, up 25% from $0.24 year-earlier.

Foreign exchange rates differed significantly from year-earlier. Constant currency growth rates were higher than dollar growth rates.

16% billings growth y/y; sub revenue growth of 21%. Top 30 deals had 25 over $1 million deals. 2 deals over $5 million. Over 40% included middleware. Tech, media, and financial services were best verticals. Transportation vertical was also strong. Won a major financial Windows to REL conversion. 11 of top 30 deals were from EMEA.

Bookings were 55% Americas, 25% EMEA, 20% Asia.

Subscription revenue was $272.6 million, services revenue $42.2 million, up 8% y/y.

Cash and equivalents balance was $1.3 billion. Cash flow from operations was $124 million, helped by strong collections. $30 million was used for stock repurchases. $913 million deferred revenue.

Cost of revenue was $46.0 million, leaving gross profit of $268.7 million. Operating expense was $217.8 million, including: sales and marketing $120.9 million; research and development $59.9 million; general and administrative $33.9 million; facility exit expense $3.1 million. Leaving income from operations of $50.9 million. Interest and other income $4.1 million. Income tax provision $17.6 million.

Hired about 200 new employees.

Q&A:

Adjusted billings growth rate details? Linearity in the quarter was typical 25-25-50. Training revenue was less than expected. We don't manage the billings numbers, we hit our plan on the number we use.

Product mix, JBOSS v. Linux? We had a good middleware showing. 3 stand alone JBOSS deals. No significant revenue from Red Hat storage product yet, because the product is not yet released for general availability.

Asia specifics? Q1 in Asia has been about 20% typically. We had good performance this year, particularly out of Japan, Australia, and New Zealand.

Channel v. direct sales split was typical of a Q1.

Average deal length is still 21 months. Renewals generally include expansions of deployments. Cross selling of products is going well, but mainly increased revenues for renewals is still from unit expansion. UNIX to Linux migration continues. In Europe in particular companies are looking to reduce costs. Client-server to cloud shift makes open source the new default choice, which is a paradigm shift.

Bookings did exceed billings in Q1, but that is likely a Q1 timing factor for customer cycles.

What is driving growth in mainstream verticals? Telco, government, and finance are early adopters, so they went to Linux early. Mainstream started converting later, so are now growing fast. We have specific internal programs to drive sales in the verticals.

120% renewal rate, below 130% usual rate? 120% to 130% has been the norm, with a couple of outliers. Since it is just 25 top customers, it tends to be lumpy.

Q2 thoughts? Deal pipeline looks good. Q1 is seasonally low quarter, then builds during the year.

RHEV 3.0 progress? Virtualization deals are getting good traction, with a good deal pipeline.

Europe color, by region? Southern Europe was one of our strongest regions, extremely strong and well-ahead of plan. "Value sells in difficult economic situations." All three European regions are doing quite well.

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