Red Hat Reports First Quarter Results for Fiscal Year 2019

Red Hat, Inc., the world's leading provider of open source solutions, today announced financial results for the first quarter of fiscal year 2019 ended May 31, 2018.

“The move to hybrid cloud architecture continues to be a strategic priority for our customers. We again delivered strong revenue growth in Q1 as customers continued to adopt our cloud enabling technologies for their applications,” stated Jim Whitehurst, President and Chief Executive Officer of Red Hat. “For instance, we are driving strong growth in both subscription and services revenues for our OpenShift technologies as more customers modernize their applications in Linux containers for their hybrid cloud and digital transformation in transition, which requires that the standard be applied to all periods presented. The adoption of ASC 606 did not materially impact our total revenues as previously reported for fiscal years 2018 and 2017 and it had no impact on net cash provided by or used in operating, investing or financing activities. The primary impact of adopting ASC 606 relates to the deferral of incremental commission and other costs of obtaining contracts with customers. Previously, we deferred only direct and incremental commission costs to obtain a contract and amortized those costs over the contract term as the revenue was recognized and, under the new standard, we now also defer related fringe benefit costs. The results in this Press Release apply these changes to the current period and adjust prior periods, which are detailed in the Supplemental Information section of the Press Release.

Revenue: Total revenue for the quarter was $814 million, up 20% in USD year-over-year, or 17% measured in constant currency. Constant currency references in this release are detailed in the tables below. Subscription revenue for the quarter was $712 million, up 19% in USD year-over-year, or 16% measured in constant currency. Subscription revenue in the quarter was 87% of total revenue.

Subscription Revenue Breakout: Subscription revenue from Infrastructure-related offerings for the quarter was $522 million, an increase of 14% in USD year-over-year, or 11% measured in constant currency. Subscription revenue from Application Development-related and other emerging technology offerings for the quarter was $189 million, an increase of 37% in USD year-over-year, or 32% measured in constant currency.

Operating Income: GAAP operating income for the quarter was $112 million, up 25% 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 $168 million, up 19% year-over-year. For the first quarter, GAAP operating margin was 13.8% and non GAAP operating margin was 20.7%. Non-GAAP references in this release are detailed in the tables below.

Net Income: GAAP net income for the quarter was $113 million, or $0.59 diluted earnings per share (“EPS”), compared with GAAP net income of $75 million, or $0.41 diluted EPS, 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 $133 million, or $0.72 diluted EPS, as compared to $104 million, or $0.58 diluted EPS, in the year-ago quarter. Non-GAAP diluted weighted average shares outstanding excludes dilution that is expected to be offset by our convertible note hedge transactions.

Cash: Operating cash flow was $346 million for the first quarter, an increase of 34% on a year-over-year basis. Total cash, cash equivalents and investments as of May 31, 2018 was $2.5 billion after repurchasing approximately $150 million, or 949,000 shares, of common stock in the first quarter. The remaining balance in the current repurchase authorization as of May 31, 2018 was approximately $249 million.

Deferred revenue: At the end of the first quarter, the company’s total deferred revenue balance was $2.4 billion, an increase of 19% year-over-year. The positive impact to total deferred revenue from changes in foreign exchange rates was $16 million year-over-year. On a constant currency basis, total deferred revenue would have been up 18% 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 $3.375 billion to $3.410 billion in USD.
• GAAP operating margin is expected to be approximately 16.4% and non-GAAP operating margin
is expected to be approximately 23.9%.
• Diluted GAAP EPS is expected to be approximately $2.36 to $2.40, assuming 191 million diluted
shares outstanding. Diluted non-GAAP EPS is expected to be approximately $3.44 to $3.48,
assuming 185 million diluted shares outstanding. Both GAAP and non-GAAP EPS assume a $4
million per quarter forecast for other income and an estimated annual effective tax rate of
approximately 22.5% before discrete tax items.
• Operating cash flow is expected to be approximately $1.035 billion to $1.045 billion.
For the second quarter:
• Revenue is expected to be approximately $822 to $830 million in USD.
• GAAP operating margin is expected to be approximately 15.1% and non-GAAP operating margin
is expected to be approximately 23.0%.
• Diluted GAAP EPS is expected to be approximately $0.50, assuming 191 million diluted shares
outstanding. Diluted non-GAAP EPS is expected to be approximately $0.81, assuming 185 million
diluted shares outstanding. Both GAAP and non-GAAP EPS assume a $4 million forecast for other
income and an estimated annual effective tax rate of 22.5% 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 $215 million and amortization of intangible assets of approximately $39 million. Full year 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 22.5% before discrete tax items. Additionally, full year diluted non-GAAP EPS excludes approximately $46 million of discrete tax benefits related to share-based compensation that are included in full year diluted GAAP EPS. Full year diluted non-GAAP EPS excludes approximately 6 million diluted shares related to the convertible notes, which are 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 $55 million and amortization of intangible assets of approximately $10 million. Second quarter 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 22.5% before discrete tax items. 

Additionally, second quarter diluted non-GAAP EPS excludes approximately $7 million of
discrete tax benefits related to share-based compensation that are included in second quarter diluted GAAP EPS. Second quarter diluted non-GAAP EPS excludes approximately 6 million diluted shares related to the convertible notes, which are 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 htt p:/ /i nvestors.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.