Digital transformation and hybrid cloud computing are changing how applications are built, deployed, and managed. As organizations adopt agile application development technologies such as Linux containers, they are able to rely on Red Hat as their strategic partner to modernize their infrastructure and application development platforms.
Second quarter total revenue of $600 million, up 19% year-over-year
Second quarter total subscription revenue of $531 million, up 20% year-over-year
Second quarter GAAP EPS of $0.32 and non-GAAP EPS of $0.55, up14% and 17% year-over-year, respectively
Total deferred revenue balance of $1.68 billion, up 19% year-over-year
Red Hat, Inc. (NYSE: RHT), the world's leading provider of open source solutions, today announced financial results for the second quarter of fiscal year 2017 ended August 31, 2016.
“Red Hat's second quarter revenue results were highlighted by 18% in year-over-year growth for our Infrastructure offerings combined with 33% in year-over-year growth for our Application development and other emerging technologies," said Jim Whitehurst, President and Chief Executive Officer of Red Hat. "Digital transformation and hybrid cloud computing are changing how applications are built, deployed, and managed. As organizations adopt agile application development technologies such as Linux containers, they are able to rely on Red Hat as their strategic partner to modernize their infrastructure and application development platforms.”
“In the second quarter, we continued to benefit from solid demand and strong overall execution,” stated Frank Calderoni, Executive Vice President, Operations and Chief Financial Officer of Red Hat. “We continued to close a record number of deals over $1 million in our second quarter, which are up more than 60% year over year. This further demonstrates our customers’ commitment to Red Hat and the broad demand for our expanding technology portfolio as enterprises embrace digital transformation and the hybrid cloud."
Revenue: Total revenue for the quarter was $600 million, up 19% in U.S. dollars year-over-year, or 18% measured in constant currency. Constant currency references in this release are detailed in the tables below. Subscription revenue for the quarter was $531 million, up 20% in U.S. dollars year-over-year, or 19% measured in constant currency. Subscription revenue in the quarter was 89% of total revenue.
Subscription Revenue Breakout: Subscription revenue from Infrastructure-related offerings for the quarter was $427 million, an increase of 18% in U.S. dollars year-over-year and 17% measured in constant currency. Subscription revenue from Application development-related and other emerging technologies offerings for the quarter was $104 million, an increase of 33% in U.S. dollars year-over-year and 32% measured in constant currency.
Operating Income: GAAP operating income for the quarter was $82 million, up 7% 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 second quarter was $137 million, up 11% year-over-year. Non-GAAP references in this release are detailed in the tables below. For the second quarter, GAAP operating margin was 13.7% and non-GAAP operating margin was 22.8%.
Net Income: GAAP net income for the quarter was $59 million, or $0.32 per diluted share, compared with $51 million, or $0.28 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 $101 million, or $0.55 per diluted share, as compared to $88 million, or $0.47 per diluted share, in the year-ago quarter. Non-GAAP diluted weighted average shares outstanding excludes any dilution resulting from the convertible notes because any potential dilution is expected to be offset by our convertible note hedge transactions.
Cash: Operating cash flow was $97 million for the second quarter, a decrease of 21% on a year-over-year basis. Total cash, cash equivalents and investments as of August 31, 2016 was $2.0 billion after repurchasing approximately $127 million, or approximately 1.8 million shares, of common stock in the second quarter. The remaining balance in the current repurchase authorization as of August 31, 2016 was approximately $901 million.
Deferred revenue: At the end of the second quarter, the company’s total deferred revenue balance was $1.68 billion, an increase of 19% year-over-year. The full year positive impact to total deferred revenue from changes in foreign exchange rates was $22 million year-over-year. On a constant currency basis, total deferred revenue would have been up 17% year-over-year.
Outlook: Red Hat’s outlook assumes current business conditions and current foreign currency exchange rates.
. For the full year:
Revenue guidance is expected to be $2.415 billion to $2.435 billion in U.S. dollars.
GAAP operating margin is expected to be approximately 13.8% and non-GAAP operating margin is expected to be approximately 23.0%.
Fully-diluted GAAP earnings per share (EPS) is expected to be approximately $1.35 to $1.37 per share. Fully-diluted non-GAAP EPS is expected to be approximately $2.23 to $2.25 per share. Both GAAP and non-GAAP EPS assume a $1 million to $2 million per quarter forecast for other income. Both GAAP and non-GAAP EPS also assume an estimated annual effective tax rate of 27% before discrete tax items and 184 million fully-diluted shares outstanding.
Operating cash flow guidance range is expected to be approximately $800 million to $820 million.
For the third quarter:
Revenue guidance is $613 million to $623 million.
GAAP operating margin is expected to be approximately 13.4% and non-GAAP operating margin is expected to be approximately 23.3%.
Fully-diluted GAAP EPS is expected to be approximately $0.34 per share. Fully-diluted non-GAAP EPS is expected to be approximately $0.58 per share. Both GAAP and non-GAAP EPS assume a $1 million to $2 million forecast for other income. Both GAAP and non-GAAP EPS also assume an estimated annual effective tax rate of 27% before discrete tax items and 184 million fully-diluted shares outstanding.
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 $190 million, amortization of intangible assets of approximately $32 million, and transaction costs related to business combinations of $2 million. Estimated full year impacts of share-based compensation expense, amortization of intangible assets, and transaction costs related to business combinations have increased from the prior quarter primarily due to business combinations. 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 $19 million and an estimated annual effective tax rate of 27% before discrete tax items. Additionally, full year fully-diluted non-GAAP EPS excludes approximately $15 million of discrete tax benefits related to share-based compensation that are included in full year fully-diluted GAAP EPS.
Third quarter non-GAAP operating margin guidance is derived by subtracting the estimated impact of non-cash share-based compensation expense of approximately $53 million and amortization of intangible assets of approximately $8 million. Third 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 27% before discrete tax items. Additionally, third quarter fully-diluted non-GAAP EPS excludes approximately $5 million of discrete tax benefits related to share-based compensation that are included in third quarter fully-diluted GAAP EPS.
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.
- About Red Hat
Red Hat is the world's leading provider of open source software solutions, using a community-powered approach to provide reliable and high-performing cloud, Linux, middleware, storage and virtualization technologies. Red Hat also offers award-winning support, training, and consulting services. As the connective hub in a global network of enterprises, partners, and open source communities, Red Hat helps create relevant, innovative technologies that liberate resources for growth and prepare customers for the future of IT. Learn more at http://www.redhat.com.
- Forward-Looking Statements
Certain statements contained in this press release may constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements provide current expectations of future events based on certain assumptions and include any statement that does not directly relate to any historical or current fact. Actual results may differ materially from those indicated by such forward-looking statements as a result of various important factors, including: risks related to the ability of the Company to compete effectively; the ability to deliver and stimulate demand for new products and technological innovations on a timely basis; delays or reductions in information technology spending; the integration of acquisitions and the ability to market successfully acquired technologies and products; fluctuations in exchange rates; the effects of industry consolidation; uncertainty and adverse results in litigation and related settlements; the inability to adequately protect Company intellectual property and the potential for infringement or breach of license claims of or relating to third party intellectual property; risks related to data and information security vulnerabilities; the ability to meet financial and operations changes encountered in our international operations; ineffective management of, and control over, the Company's growth and international operations; and changes in and a dependence on key personnel, as well as other factors contained in our most recent Quarterly Report on Form 10-Q (copies of which may be accessed through the Securities and Exchange Commission's website at http://www.sec.gov), including those found therein under the captions "Risk Factors" and "Management's Discussion and Analysis of Financial Condition and Results of Operations". In addition to these factors, actual future performance, outcomes, and results may differ materially because of more general factors including (without limitation) general industry and market conditions and growth rates, economic and political conditions, governmental and public policy changes and the impact of natural disasters such as earthquakes and floods. The forward-looking statements included in this press release represent the Company's views as of the date of this press release and these views could change. However, while the Company may elect to update these forward-looking statements at some point in the future, the Company specifically disclaims any obligation to do so. These forward-looking statements should not be relied upon as representing the Company's views as of any date subsequent to the date of this press release.
