Analyst Conference Summary

conference date: December 20, 2012 @ 2:00 PM Pacific Time
for quarter ending: November 31, 2012 (Q3, third quarter fiscal 2013)

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

Overview: Continuing solid revenue growth, but GAAP net income down.

Basic data (GAAP) :

Revenue was $343.6 million, up 6.5% sequentially from $322.6 million and up 18.5% from $290.0 million in the year-earlier quarter.

Net income was $34.8 million, down 1% sequentially from $35.0 million and down 9% from $38.2 million year-earlier.

EPS (diluted earnings per share) were $0.18, flat sequentially from $0.18 but down 5% from $0.19 year-earlier.

Guidance:

Assuming $1.31 Euro: fiscal Q4 revenue $347 to $350 million; Non-GAAP operating margin 24%. Non-GAAP EPS $0.29 to $0.30.

Conference Highlights:

Believes revenue increase was due to strong execution and solutions that "deliver a compelling ROI to our customers." Red Hat is addressing enterprise customer needs with industry-leading open source technologies that extend Linux to cloud infrastructure.

Acquisition-related costs were the main reason profits lagged revenue. Currency volatility was also a factor. Believes this lag is temporary and will result in profit growth "in years to come." Believes G&A costs will begin to decline as a percentage of revenue in 2013.

Announced will be acquiring ManageIQ, which specializes in cloud management.

Non-GAAP numbers: net income $56.9 million , up 4% sequentially from $54.9 million, and up 2% from $55.7 million year-earlier. 86% gross margin. Operating income $82.5 million, operating margin 24.0%. EPS $0.29.

Subscription revenue was $294.2 million, training and service revenue $49.4 million.

All top 25 deals in the quarter renewed, and at over 120% revenue rate and exceeded $1 million each. Financial services wins and public cloud providers led new deals. Channel bookings exceeded goals.

Middleware acquisitions are being integrated for BPM and business rules management. Red Hat Storage represents a significant new addressable market. Now have over 125 customers for storage. Newest version of Red Hat Enterprise Virtualization (RHEV) was launched and is not integrated with Storage. Open Stack Cloud Platform initiative making progress.

Cash, equivalents and investments balance was $1.35 billion. Operating cash flow was $100.2 million, down sequentially from $103.9 million but up from $96.6 million year-earlier. Deferred revenue balance was $987.8 million. Repurchased $52 million of common stock.

Cost of revenue was $53.1 million, leaving gross profit of $290.5 million. Operating expenses were $240.6 million, consisting of: sales and marketing $133.8 million; research and development $68.7 million; general and administrative $38.1 million. Leaving income from operations for $49.9 million. Interest and other income was was $1.2 million. Income taxes $16.4 million.

Will hire 900 to 1000 new employees this fiscal year.

Q&A:

Financial services, cause of strength? The Linux operating system is still the largest item sold, but JBoss and training added, and we had wins in Europe as well as the U.S. The benefit for customers is cost savings.

JBoss? JBoss continued to grow faster than the core business, but growing faster in businesses smaller than the top 30. 20% of top 30 deals included JBoss.

Storage? Interest in storage is strong, but still in initial phase. The storage market is larger than the operating system market. Some storage wins were greenfield opportunities. But purchase cycles for storage are longer than for other components.

Levers driving the business? Unix to Linux migration still the main factor. Windows to Linux and free to pay also. Also upgrades from 4 and 5 to RHEL 6, with the modest price increase.

ManageIQ? We see a sizable opportunity there as people move to hybrid cloud models. "It is a fantastic group of people we are bringing onboard." They have a few customers, mainly in financial sector, but their revenue is not significant to us and it was burning about $2 million per quarter.

We do not break down revenue or bookings by product line.

Government vertical? It did fine in the quarter, it is still growing nicely. We are a lousy indicator because we do well when budgets are tight. The pipeline in the public sector looks solid. December is looking fine, and overall, not just government.

Private cloud is in very early days. People say they have it because they have virtualized a data center.

Public cloud economics? We get revenue a couple of ways, with economics very similar to the rest of the customer base. There is a whole stream from customers using Red Hat in public clouds, which brings in a quarterly revenue stream.

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