Analyst Conference Summary

conference date: March 27, 2014 @ 2:00 PM Pacific Time
for quarter ending: February 28, 2014 (Q4, fourth quarter fiscal 2014)

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

Overview: Red Hat continues on a good revenue growth path.

Basic data (GAAP) :

Revenue was $400.4 million, up 1% sequentially from $396.5 million, and up 15% from $347.9 million in the year-earlier quarter.

Net income was $45.1 million, down 13% sequentially from $52.0 million, and up 5% from $43.0 million year-earlier.

EPS (diluted earnings per share) were $0.24, down 11% sequentially from $0.27, and up 9% from $0.22 year-earlier.

Guidance:

For full fiscal 2015 with Euro up 2% and Yen down 2%, revenue expected between $1.73 and $1.755 billion, up 14% y/y. Will ramp investment in new technology ahead of new revenue. Non-GAAP operating margin 23.5%. Other income $8 million. Effective tax rate 29%. At 192 million diluted shares, non-GAAP EPS $1.54 to $1.56 . $135 million non-cash stock based comp. $58 to $600 million cash flow. Cap ex $50 million.

Q1 revenue $412 to $415 million. 21.0% non-GAAP operating margin. Non-GAAP EPS $0.32 to $0.33. Reflects seasonal expenses.

Conference Highlights:

The fourth quarter was notable for Red Hat making a record number (over 70) of deals over $1 million. Demand growth was across the product spectrum, including emerging technologies.

Subscription revenue was $351.5 million. Training and services revenue was $48.9 million.

Emerging technologies like OpenStack and OpenShip that address immediate needs began selling earlier than expected due to Red Hat's cross-selling capabilities. Closed first million dollar OpenStack deal. Expanding OpenStack to carrier-based market.

All top 30 deals were greater than $1 million. Two deals were over $10 million. 65% of top 30 deals included a middleware component. Most deals included some technology in addition to Red Hat Enterprise Linux (RHEL). Growth was strong across verticals. Renewals were made for 99 of the top 100 deals, with some possibility of still renewing the hold out.

RHEL 7 beta process is moving smoothly. Relationships with largest public cloud providers, including Amazon, were strengthened. Added ATT.

Non-GAAP numbers: Operating income $97 million. Net income $75 million, down sequentially from $81 million, but up from $70 million year-earlier. EPS was $0.39, down 7% sequentially from $0.42 and up 8% from $0.36 year-earlier.

Cash and equivalents balance ended at $1.49 billion. Deferred revenue was $1.29 billion. $240 million remains authorized for stock repurchases. Operating cash flow was $185 million.

The billing proxy was $565 million for the quarter, up 17% y/y. Backlog for the fiscal year was $1.56 billion, up 14% y/y.

Cost of revenue was $60.5 million, leaving gross profit of $339.9 million. Total operating expenses were $280.6 million, consisting of: sales and marketing $157.3 million; research and development $82.6 million; general and administrative $40.6 million. Leaving income from operations of $59.3 million. Interest income $2.0 million. Other income $0.3 million. Income tax provision $16.6 million.

GAAP operating margin was 14.8%. Operating margin (non-GAAP) was 24.3%, .

During the fiscal year channel sales grew faster than direct sales. By geography 61% of revenue was from the Americas, 26% from EMEA, and 13% Asia-Pacific.

Over 180 new employees were hired in the quarter.

Q&A:

OpenStack interest? Most obvious is Telco's, but also banking, telecommunications, banking, and media. We will have some reasonable bookings this year, but almost no revenue given the subscription model.

OpenStack training and consulting? We have thousands of individuals certified; they will go back to their employers and drive product use. There are also large numbers of consultants. There is more interest in OpenStack than in any other open source product since Linux.

Our public cloud contribution is up 40% y/y. New business looks sustainable and growing every month, with 55% of so of customers new to Red Hat.

RHEL 7 incremental profit levers? We will address that in depth at the Red Hat Summit.

Foreign exchange rates in guidance? Latin American currencies, India and Australia have all depreciated significantly, but we are just figuring in the Yen and Euro.

OEMs partnering with Red Hat for OpenStack? Dell is fully in; also Alcatel-Lucent. Working towards progress with other OEMs.

Middleware? Middleware had a great year. We will break it down on analyst day. It grew faster than the Linux business.

Acceleration of growth during year? It was driven by the very large deals.

Unix to Linux conversion is winding down a bit, but has a ways to go. But Windows to Linux conversion is speeding up. We also have embedded Linux gearing up.

This is a time we need to add engineers and sales people to go after the new opportunities including OpenStack. We intend to go to the OpenStack summit in May, which is a new expense for us. Margins will start improving in the second quarter.

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