Red Hat Reports First Quarter Results for Fiscal Year 2018

• First quarter total revenue of $677 million, up 19% year-over-year or 20% in constant currency
• First quarter total subscription revenue of $597 million, up 19% year-over-year or 20% in constant currency
• First quarter Application Development-related and other emerging technology subscription revenue of $139 million, up 41% year-over-year or 42% in constant currency
• Quarter-end deferred revenue balance of $2.05 billion, up 21% year-over-year

Red Hat, Inc. (NYSE: RHT), the world's leading provider of open source solutions, today announced financial results for the first quarter of fiscal year 2018 ended May 31, 2017.

“The first quarter was a strong start to FY18, with double digit growth across a number of our financial metrics, including 19% total revenue growth in U.S. dollars or 20% measured in constant currency and over 40% growth in our Application Development-related and other emerging technology revenue," stated Jim Whitehurst, President and Chief Executive Officer of Red Hat.  "We continued to benefit from our ability to deliver important foundational and cloud enabling technologies, which help our customers to modernize and manage their infrastructure and application development platforms for the hybrid cloud."

"The strength of the first quarter results was driven in part by robust global demand for our technologies and increased commitments from our largest customers," stated Eric Shander, Executive Vice President and Chief Financial Officer of Red Hat.  "The combination of our strong first quarter results, business momentum and solid execution by Red Hat associates has enabled us to increase our full year revenue outlook."

Revenue:Total revenue for the quarter was $677 million, up 19% in USD year-over-year, or 20% measured in constant currency. Constant currency references in this release are detailed in the tables below. Subscription revenue for the quarter was $597 million, up 19% in USD year-over-year, or 20% measured in constant currency. Subscription revenue in the quarter was 88% of total revenue.

Subscription Revenue Breakout:Subscription revenue from Infrastructure-related offerings for the quarter was $458 million, an increase of 14% in USD year-over-year, and 14% as measured in constant currency. Subscription revenue from Application Development-related and other emerging technologies offerings for the quarter was $139 million, an increase of 41% in USD year-over-year, or 42% measured in constant currency.

Operating Income:GAAP operating income for the quarter was $88 million, up 16% year-over-year. After adjusting for non-cash share-based compensation expense, amortization of intangible assets, and transaction costs related to business combinations, non-GAAP operating income for the first quarter was $139 million, up 12% year-over-year. Non-GAAP references in this release are detailed in the tables below. For the first quarter, GAAP operating margin was 12.9% and non-GAAP operating margin was 20.5%.

Net Income:GAAP net income for the quarter was $73 million, or $0.40 per diluted share, compared with $61 million, or $0.33 per diluted share, in the year-ago quarter.

After adjusting for non-cash share-based compensation expense, amortization of intangible assets, transaction costs related to business combinations and non-cash interest expense related to the debt discount, non-GAAP net income for the quarter was $102 million, or $0.56 per diluted share, as compared to $92 million, or $0.50 per diluted share, in the year-ago quarter. Non-GAAP diluted weighted average shares outstanding excludes any dilution resulting from our convertible notes because any potential dilution is expected to be offset by our convertible note hedge transactions.

Cash:Operating cash flow was $258 million for the first quarter, an increase of 11% on a year-over-year basis. Total cash, cash equivalents and investments as of May 31, 2017 was $2.31 billion after repurchasing approximately $62 million, or 714,900 shares, of common stock in the first quarter. The remaining balance in the current repurchase authorization as of May 31, 2017 was approximately $574 million.

Deferred revenue:At the end of the first quarter, the company’s total deferred revenue balance was $2.05 billion, an increase of 21% year-over-year. The full year positive impact to total deferred revenue from changes in foreign exchange rates was $13 million year-over-year. On a constant currency basis, total deferred revenue would have been up 21% year-over-year.

Outlook: Red Hat’s outlook assumes current business conditions and current foreign currency exchange rates.

For the full year:

• Revenue is expected to be approximately $2.785 billion to $2.825 billion in USD.

• GAAP operating margin is expected to be approximately 15.4% and non-GAAP operating margin is expected to be approximately 23.6%.

• Fully diluted GAAP earnings per share (EPS) is expected to be approximately $1.76 to $1.80 per share, assuming 181 million fully diluted shares outstanding. Fully diluted non-GAAP EPS is expected to be approximately $2.66 to $2.70 per share, assuming 180 million fully diluted shares outstanding. Both GAAP and non-GAAP EPS assume approximately $2 million per quarter forecast for other income and an estimated annual effective tax rate of approximately 28% before discrete tax items.

• Operating cash flow is expected to be approximately $850 million to $870 million.

For the second quarter:

• Revenue is expected to be approximately $695 million to $702 million.

• GAAP operating margin is expected to be approximately 15.7% and non-GAAP operating margin is expected to be approximately 24.0%.

• Fully diluted GAAP EPS is expected to be approximately $0.43 per share, assuming 182 million fully diluted shares outstanding. Fully diluted non-GAAP EPS is expected to be approximately $0.67 per share, assuming 181 million fully diluted shares outstanding. Both GAAP and non-GAAP EPS assume a $2 million per quarter forecast for other income and an estimated annual effective tax rate of 28% before discrete tax items.

GAAP to non-GAAP reconciliation:

Full year non-GAAP operating margin guidance is derived by subtracting the estimated full year impact of non-cash share-based compensation expense of approximately $200 million, amortization of intangible assets of approximately $30 million and transaction costs related to business combinations of approximately $0.1 million. Full year fully diluted non-GAAP EPS guidance is derived by subtracting the expenses listed in the previous sentence and the full year impact of non-cash interest expense related to the debt discount of approximately $20 million and an estimated annual effective tax rate of approximately 28% before discrete tax items. Additionally, full year fully diluted non-GAAP EPS excludes approximately $20 million of discrete tax benefits related to share-based compensation that are included in full year fully diluted GAAP EPS. Full year fully diluted non-GAAP EPS excludes approximately 1 million diluted shares resulting from the convertible notes because any potential dilution is expected to be offset by our convertible note hedge transactions.

Second quarter non-GAAP operating margin guidance is derived by subtracting the estimated impact of non-cash share-based compensation expense of approximately $50 million and amortization of intangible assets of approximately $8 million. Second quarter fully diluted non-GAAP EPS guidance is derived by subtracting the expenses listed in the previous sentence and non-cash interest expense related to the debt discount of approximately $5 million and an estimated annual effective tax rate of 28% before discrete tax items. Additionally, second quarter fully diluted non-GAAP EPS excludes approximately $3 million of discrete tax benefits related to share-based compensation that are included in second quarter fully diluted GAAP EPS. Second quarter fully diluted non-GAAP EPS excludes approximately 1 million diluted shares resulting from the convertible notes because any potential dilution is expected to be offset by our convertible note hedge transactions.

Webcast and Website Information

A live webcast of Red Hat's results will begin at 5:00 pm ET today. The webcast, in addition to a copy of our prepared remarks and slides containing financial highlights and supplemental metrics, can be accessed by the general public at Red Hat's investor relations website at http://investors.redhat.com. A replay of the webcast will be available shortly after the live event has ended. Additional information on Red Hat's reported results, including a reconciliation of the non-GAAP adjusted results, are included in the financial tables below.