Analyst Conference Summary

conference date: March 27, 2013 @ 2:00 PM Pacific Time
for quarter ending: February 28, 2013 (Q4, fourth quarter fiscal 2013)

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

Overview: Strong quarter, with strong fiscal 2014 guidance.

Basic data (GAAP) :

Revenue was $347.9 million, up 1% sequentially from $343.6 million, and up 17% from $297.0 year-earlier.

Net income was $43.0 million, up 24% sequentially from $34.8 million and up 19% from $36.0 million year-earlier.

EPS (diluted earnings per share) were $0.22, up 22% sequentially from $0.18 and also up 22% from $0.18 year-earlier.

Guidance:

Assuming unchanged Euro and 15% weaker Yen, Fiscal 2014 revenue $1.51 to $1.54 billion, which would be 16% annual growth. Non-GAAP operating margin near 24%. $6 million interest income. 30% effective tax rate. Non-GAAP EPS $1.31 to $1.35. Cash flow $500 to $520 million. Capital expenditures roughly $75 million.

Q1 revenue $358 to $361 million. Non-Gaap operating margin near 23.5%. Assuming 30% tax rate, non-GAAP EPS $0.30 to $0.31.

Conference Highlights:

Customers increased their commitments to Red Hat's open source solutions for their datacenters. In Q4 the number of deals closed for over $5 million and over $10 million set records. Exceed $1 billion in annual subscriptions for the first time. Annual revenue for fiscal 2013 was a record.

Non-GAAP numbers: operating income $84 million, net income $70 million or $0.36 per share, up sequentially from $57 million and also up from $57 million in the year-earlier quarter. Non-GAAP excludes $26.0 million in share based compensation expense, $7 million in amortization, but increases income tax provision by $8 million.

The backlog, both billed and unbilled, is strong. Bookings and billings hit records in the quarter.

Unix to Linux (RHEL, Red Hat Enterprise Linux) migrations were strong, Linux grew faster than Windows Server, and middleware (JBoss) sales were strong.

40% of revenue now comes from outside the U.S., and all global regions showed growth.

Subscriptions represented $302.8 million of revenue, up 19% y/y, with training and services representing $45.1 million, up 8% y/y.

Top 30 deals were all greater than $1 million. 6 deals over $5 million, 3 over $10 million. 60% of deals included a middleware component, with 4 deals being all middleware. 5 had RHEV (virtualization) components. Technology, media, and financial services verticals had the highest representation in top 30 deals. The largest single deal was in the healthcare vertical. Red Hat now serves over 90% of the Fortune 500. Renewed 25 out of 25 largest deals up for renewal in quarter.

Enabling open hybrid cloud including virtualization. Acquired ManagedIQ to help with this. JBoss AMG and Views were introduced. Red Hat Storage Apache Hadoop plug-in introduced. Now second largest contributor to OpenStack and in a partnership with Intel for Big Data.

Cash and equivalents plus investments in securities balance was $1.3 billion. There was no debt. Current deferred revenue was $830 million, and long term deferred revenue was $259 million. Operating cash flow was $137 million, up 7% from year-earlier. Stock buy backs $36 million, with $179 million authorization remaining.

Cost of revenue was $53.6 million, leaving gross profit of $294.3 million. Total operating expenses were $244.0 million, consisting of: sales and marketing $136.3 million; research and development $71.2 million; general and administrative $36.5 million. Leaving income from operations of $50.2 million. Interest income $1.9 million. Income tax provision $9.1 million.

Operating expenses were up due to acquisitions and hiring of 240 new employees.

Record bookings and billings give good visibility to future revenue.

Q&A:

Payments, any effects of federal sequestration? In a 3 year billing, billed 1 year at a time, the first year goes into deferred revenue and the later 2 years into unbilled backlog. The record unbilled backlog this quarter is directly from the increase in large deals. There was nothing unusual about the vertical mix for payment terms.

Guidance is based on currency assumptions, but these are not currency forecasts.

We do not offer discounts to customers to get cash up front. We have plenty of cash. Large deals typically want to pay for subscriptions over time.

We have done well the last few years with customers moving application servers from WebSphere WebLogic to JBoss. Lately we see a lot of growth in higher-value products like BRMS, rules management, and the SOA platform. A number of large, well-known companies are standardizing on JBoss.

Federal impact in quarter? We had two areas where macro was a factor in soft revenues, federal and Japan. We don't think we lost any federal contracts, but they may have come in slower. We have a recurring revenue model, we are seeing federal contracts renew, it is possible new opportunities could be delayed because of sequestration.

Deal signing environment over time? It was a 20/20/60 kind of quarter, in range of what is normal.

Guidance assumptions for economy? We do a bottom up, country by country, estimate. So we are not assuming an improved economy in general.

Healthcare largest deal in quarter? Largest deal of year. RHEL, RHN, JBoss, combination of legacy migration from proprietary platform and now the new platform going forward for functionality.

Cash flow guidance is to grow slower than net income because of a higher tax rate and lower operating margin.

OpenStack, what will differentiate Red Hat? We build enterprise versions of open software which can be certified. We are working closely with a whole series of partners on OpenStack, are more will be announced in the next few months.

Bookings tend to be seasonal, with Q1 slowest and accelerating to Q4, but revenues tend to ramp each quarter.

We are still in the early days of coverting UNIX to Linux in mainstream verticals, including healthcare. We see no slowing in the momentum, and the good news is the customers are big.

We like to talk about our RHEV feature set, but a lot of business is being driven by the low cost compared to VMware.

The small accounts are very important to us. Many of them grow into major accounts over time.

Red Hat Storage expectations? We are now seeing 6-figure deals. The plan is still light in revenue for storage for fiscal 2014, but should improve over time. We have a large pharmaceutical company that already chose Red Hat Storage this quarter.

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