RALEIGH, N.C.--(BUSINESS WIRE)--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.
About Red Hat, Inc.
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 a 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; changes in and a dependence on key personnel; the ability to meet financial and operational challenges encountered in our international operations; and ineffective management of, and control over, the Company's growth and international operations, as well as other factors contained in our most recent Annual Report on Form 10-K (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.
Red Hat and the Shadowman logo are trademarks or registered trademarks of Red Hat, Inc. or its subsidiaries in the U.S. and other countries. Linux® is the registered trademark of Linus Torvalds in the U.S. and other countries.
| RED HAT, INC. | ||||
| CONSOLIDATED STATEMENTS OF OPERATIONS | ||||
| (Unaudited) | ||||
| (In thousands - except per share amounts) | ||||
| Three Months Ended | ||||
| May 31, | May 31, | |||
| 2017 | 2016 | |||
| Revenue: | ||||
| Subscriptions | $596,508 | $501,665 | ||
| Training and services | 80,288 | 66,234 | ||
| Total subscription and training and services revenue | 676,796 | 567,899 | ||
| Cost of revenue: | ||||
| Subscriptions | 43,633 | 36,545 | ||
| Training and services | 57,063 | 47,503 | ||
| Total cost of subscription and training and services revenue | 100,696 | 84,048 | ||
| Gross profit | 576,100 | 483,851 | ||
| Operating expense: | ||||
| Sales and marketing | 296,459 | 243,248 | ||
| Research and development | 137,163 | 115,016 | ||
| General and administrative | 54,870 | 50,224 | ||
| Total operating expense | 488,492 | 408,488 | ||
| Income from operations | 87,608 | 75,363 | ||
| Interest income | 3,993 | 3,430 | ||
| Interest expense | 6,085 | 5,887 | ||
| Other income (expense), net | (586) | (553) | ||
| Income before provision for income taxes | 84,930 | 72,353 | ||
| Provision for income taxes | 11,740 | 11,169 | ||
| Net income | $73,190 | $61,184 | ||
| Net income per share: | ||||
| Basic | $0.41 | $0.34 | ||
| Diluted | $0.40 | $0.33 | ||
| Weighted average shares outstanding: | ||||
| Basic | 177,243 | 181,168 | ||
| Diluted | 181,810 | 184,187 | ||
| RED HAT, INC. | ||||
| CONSOLIDATED BALANCE SHEETS | ||||
| (Unaudited) | ||||
| (In thousands) | ||||
| ASSETS | ||||
| May 31, | February 28, | |||
| 2017 | 2017 (1) | |||
| Current assets: | ||||
| Cash and cash equivalents | $1,230,457 | $1,090,808 | ||
| Investments in debt securities, short-term | 408,026 | 369,983 | ||
| Accounts receivable, net | 429,908 | 634,821 | ||
| Prepaid expenses | 192,551 | 200,609 | ||
| Other current assets | 40,707 | 19,481 | ||
| Total current assets | 2,301,649 | 2,315,702 | ||
| Property and equipment, net | 195,281 | 189,629 | ||
| Goodwill | 1,047,038 | 1,040,709 | ||
| Identifiable intangibles, net | 133,365 | 137,767 | ||
| Investments in debt securities, long-term | 671,098 | 672,440 | ||
| Deferred tax assets, net | 92,829 | 104,833 | ||
| Other assets, net | 71,176 | 74,105 | ||
| Total assets | $4,512,436 | $4,535,185 | ||
| LIABILITIES AND STOCKHOLDERS' EQUITY | ||||
| Current liabilities: | ||||
| Accounts payable and accrued expenses | $303,668 | $376,957 | ||
| Deferred revenue, short-term | 1,486,409 | 1,512,762 | ||
| Other current obligations | 1,303 | 1,354 | ||
| Total current liabilities | 1,791,380 | 1,891,073 | ||
| Deferred revenue, long-term | 567,755 | 557,194 | ||
| Convertible notes | 751,173 | 745,633 | ||
| Other long term obligations | 96,584 | 93,965 | ||
| Stockholders' equity: | ||||
| Common stock | 24 | 24 | ||
| Additional paid-in capital | 2,295,123 | 2,294,462 | ||
| Retained earnings | 1,426,181 | 1,352,991 | ||
| Treasury stock, at cost | (2,350,044) | (2,311,805) | ||
| Accumulated other comprehensive loss | (65,740) | (88,352) | ||
| Total stockholders' equity | 1,305,544 | 1,247,320 | ||
| Total liabilities and stockholders' equity | $4,512,436 | $4,535,185 | ||
| (1) Derived from audited financial statements | ||||
| RED HAT, INC. | ||||
| CONSOLIDATED STATEMENTS OF CASH FLOWS | ||||
| (Unaudited) | ||||
| (In thousands) | ||||
| Three Months Ended | ||||
| May 31, | May 31, | |||
| 2017 | 2016 | |||
| Cash flows from operating activities: | ||||
| Net income | $73,190 | $61,184 | ||
|
Adjustments to reconcile net income to net cash provided by operating activities: |
||||
| Depreciation and amortization | 21,817 | 20,702 | ||
| Amortization of debt discount and transaction costs | 5,540 | 5,365 | ||
| Share-based compensation expense | 43,718 | 41,275 | ||
| Deferred income taxes | 7,917 | (2,152) | ||
| Net amortization of bond premium on debt securities available for sale | 2,436 | 3,540 | ||
| Other | 961 | (765) | ||
| Changes in operating assets and liabilities net of effects of acquisitions: | ||||
| Accounts receivable | 208,761 | 190,330 | ||
| Prepaid expenses | (7,708) | (9,373) | ||
| Accounts payable and accrued expenses | (55,338) | (30,186) | ||
| Deferred revenue | (45,717) | (46,093) | ||
| Other | 2,295 | (1,530) | ||
| Net cash provided by operating activities | 257,872 | 232,297 | ||
| Cash flows from investing activities: | ||||
| Purchase of investment in debt securities available for sale | (149,524) | (134,601) | ||
| Proceeds from maturities of investment in debt securities available for sale | 112,041 | 99,033 | ||
| Proceeds from sales of investments in debt securities available for sale | 14,324 | 18,149 | ||
| Purchase of developed software and other intangible assets | (1,774) | (2,868) | ||
| Purchase of property and equipment | (25,900) | (17,653) | ||
| Other | - | (111) | ||
| Net cash used in investing activities | (50,833) | (38,051) | ||
| Cash flows from financing activities: | ||||
| Proceeds from exercise of common stock options | 2,968 | 1,380 | ||
| Proceeds from employee stock purchase program | 11,761 | - | ||
| Purchase of treasury stock | (61,987) | (66,478) | ||
| Payments related to net settlement of share-based compensation awards | (41,010) | (31,079) | ||
| Payments on other borrowings | (443) | (445) | ||
| Other | - | 500 | ||
| Net cash used in financing activities | (88,711) | (96,122) | ||
| Effect of foreign currency exchange rates on cash and cash equivalents | 21,321 | 5,663 | ||
| Net increase (decrease) in cash and cash equivalents | 139,649 | 103,787 | ||
| Cash and cash equivalents at beginning of the period | 1,090,808 | 927,778 | ||
| Cash and cash equivalents at end of period | $1,230,457 | $1,031,565 | ||
| RED HAT, INC. | ||||
| RECONCILIATION OF CERTAIN GAAP RESULTS TO NON-GAAP ADJUSTED RESULTS | ||||
| (Unaudited) | ||||
| (In thousands - except per share amounts) | ||||
| Non cash share-based compensation expense included in Consolidated Statements of Operations: | ||||
| Three Months Ended | ||||
| May 31, | May 31, | |||
| 2017 | 2016 | |||
| Cost of revenue | $3,948 | $4,305 | ||
| Sales and marketing | 20,612 | 18,440 | ||
| Research and development | 13,447 | 12,002 | ||
| General and administration | 5,711 | 6,528 | ||
| Total share-based compensation expense | $43,718 | $41,275 | ||
| Amortization of intangible assets expense included in Consolidated Statements of Operations: | ||||
| Three Months Ended | ||||
| May 31, | May 31, | |||
| 2017 | 2016 | |||
| Cost of revenue | $3,836 | $3,623 | ||
| Sales and marketing | 1,459 | 1,916 | ||
| Research and development | 34 | 34 | ||
| General and administration | 1,826 | 1,753 | ||
| Total amortization of intangible assets expense | $7,155 | $7,326 | ||
| Non-cash interest expense related to the debt discount included in Consolidated Statements of Operations: | ||||
| Three Months Ended | ||||
| May 31, | May 31, | |||
| 2017 | 2016 | |||
| Total non-cash interest expense related to the debt discount | $4,867 | $4,732 | ||
| Transaction costs related to business combinations included in Consolidated Statements of Operations: | ||||
| Three Months Ended | ||||
| May 31, | May 31, | |||
| 2017 | 2016 | |||
| Transaction costs related to business combinations | $142 | - | ||
| Three Months Ended | ||||
| May 31, | May 31, | |||
| 2017 | 2016 | |||
| GAAP net income | $73,190 | $61,184 | ||
| GAAP provision for income taxes | 11,740 | 11,169 | ||
| GAAP income before provision for income taxes | $84,930 | $72,353 | ||
| Add: Non-cash share-based compensation expense | 43,718 | 41,275 | ||
| Add: Amortization of intangible assets | 7,155 | 7,326 | ||
| Add: Non-cash interest expense related to the debt discount | 4,867 | 4,732 | ||
| Add: Transaction costs related to business combinations | 142 | - | ||
| Non-GAAP adjusted income before provision for income taxes | $140,812 | $125,686 | ||
| Non-GAAP provision for income taxes (1) | 39,115 | 33,507 | ||
| Non-GAAP adjusted net income (basic and diluted) | $101,697 | $92,179 | ||
| Non-GAAP adjusted diluted weighted average shares outstanding: | ||||
| GAAP diluted weighted average shares outstanding | 181,810 | 184,187 | ||
| Dilution offset from convertible note hedge transactions | (1,593) | - | ||
| Non-GAAP diluted weighted average shares outstanding | 180,217 | 184,187 | ||
| Non-GAAP adjusted net income per share: | ||||
| Basic | $0.57 | $0.51 | ||
| Diluted | $0.56 | $0.50 | ||
| (1) Non-GAAP provision for income taxes: | ||||
| Non-GAAP adjusted income before provision for income taxes | $140,812 | $125,686 | ||
| GAAP estimated annual effective tax rate | 27.5% | 27.0% | ||
| Provision for income taxes on Non-GAAP adjusted net income before discrete tax benefits | $38,723 | $33,935 | ||
| Discrete tax expense (benefit), excluding discrete benefits related to share-based compensation | 392 | (428) | ||
| Provision for income taxes on Non-GAAP adjusted net income excluding discrete benefits related to share-based compensation | $39,115 | $33,507 | ||
| RED HAT, INC. | ||||||
| RECONCILIATION OF CERTAIN GAAP RESULTS TO NON-GAAP ADJUSTED RESULTS | ||||||
| (Unaudited) | ||||||
| (In thousands) | ||||||
| Reconciliation of GAAP results to non-GAAP adjusted results | ||||||
| Three Months Ended | ||||||
| May 31, | May 31, | |||||
| 2017 | 2016 | |||||
| GAAP gross profit | $576,100 | $483,851 | ||||
| Add: Non-cash share-based compensation expense | 3,948 | 4,305 | ||||
| Add: Amortization of intangible assets | 3,836 | 3,623 | ||||
| Non-GAAP gross profit | $583,884 | $491,779 | ||||
| Non-GAAP gross margin | 86.3% | 86.6% | ||||
| Three Months Ended | ||||||
| May 31, | May 31, | |||||
| 2017 | 2016 | |||||
| GAAP operating expenses | $488,492 | $408,488 | ||||
| Deduct: Non-cash share-based compensation expense | (39,770) | (36,970) | ||||
| Deduct: Amortization of intangible assets | (3,319) | (3,703) | ||||
| Deduct: Transaction costs related to business combinations | (142) | - | ||||
| Non-GAAP adjusted operating expenses | $445,261 | $367,815 | ||||
| Three Months Ended | ||||||
| May 31, | May 31, | |||||
| 2017 | 2016 | |||||
| GAAP operating income | $87,608 | $75,363 | ||||
| Add: Non-cash share-based compensation expense | 43,718 | 41,275 | ||||
| Add: Amortization of intangible assets | 7,155 | 7,326 | ||||
| Add: Transaction costs related to business combinations | 142 | - | ||||
| Non-GAAP adjusted operating income | $138,623 | $123,964 | ||||
| Non-GAAP adjusted operating margin | 20.5% | 21.8% | ||||
| Three Months Ended | ||||||
| May 31, | May 31, | Year-Over-Year | ||||
| 2017 | 2016 | Growth Rate | ||||
| GAAP subscription revenue by offering type | ||||||
| Infrastructure-related offerings | $457,961 | $403,182 | 13.6% | |||
| Adjustment for currency impact | 3,336 | - | ||||
| Non-GAAP Infrastructure-related subscription revenue on a constant currency basis | $461,297 | $403,182 | 14.4% | |||
| Application development-related and other emerging technology offerings | $138,547 | $98,483 | 40.7% | |||
| Adjustment for currency impact | 1,087 | - | ||||
| Non-GAAP Application development-related and other emerging technology subscription revenue on a constant currency basis | $139,634 | $98,483 | 41.8% | |||
| GAAP subscription revenue | $596,508 | $501,665 | 18.9% | |||
| Adjustment for currency impact | 4,423 | - | ||||
| Non-GAAP subscription revenue on a constant currency basis | $600,931 | $501,665 | 19.8% | |||
| GAAP training and services revenue | $80,288 | $66,234 | 21.2% | |||
| Adjustment for currency impact | 722 | - | ||||
| Non-GAAP training and services revenue on a constant currency basis | $81,010 | $66,234 | 22.3% | |||
| GAAP total subscription, training and services revenue | $676,796 | $567,899 | 19.2% | |||
| Adjustment for currency impact | 5,145 | - | ||||
| Non-GAAP total subscription, training and services revenue on a constant currency basis | $681,941 | $567,899 | 20.1% | |||
| RED HAT, INC. | ||||||||
| SUPPLEMENTAL INFORMATION | ||||||||
| (Unaudited) | ||||||||
| (In thousands) | ||||||||
| Change in deferred revenue balances | ||||||||
|
Current Deferred |
Long-Term |
Total Deferred |
||||||
| Balance at May 31, 2016 | $1,251,096 | $441,060 | $1,692,156 | |||||
| Constant currency change in deferred revenue (1) | 226,923 | 122,344 | 349,267 | |||||
| Impact from foreign currency translation | 8,390 | 4,351 | 12,741 | |||||
| Balance at May 31, 2017 | $1,486,409 | $567,755 | $2,054,164 | |||||
| Year-over-year growth rate | 18.8% | 28.7% | 21.4% | |||||
| Year-over-year growth rate on a constant currency basis | 18.1% | 27.7% | 20.6% | |||||
| (1) Change in deferred revenue includes approximately $0.4 million acquired as part of a business combination. | ||||||||
| Revenue growth by geographical segment | ||||||||
| Americas | EMEA | APAC | Consolidated | |||||
| Total revenue for the three months ended May 31, 2017 | $438,380 | $143,671 | $94,745 | $676,796 | ||||
| Adjustment for currency impact | (922) | 5,654 | 413 | 5,145 | ||||
| Total revenue on a constant currency basis for the three months ended May 31, 2017 | $437,458 | $149,325 | $95,158 | $681,941 | ||||
| Total revenue for the three months ended May 31, 2016 | $365,723 | $124,299 | $77,877 | $567,899 | ||||
| Year-over-year growth rate | 19.9% | 15.6% | 21.7% | 19.2% | ||||
| Year-over-year growth rate on a constant currency basis | 19.6% | 20.1% | 22.2% | 20.1% | ||||
