Red Hat Reports Fourth Quarter and Fiscal Year 2016 Results

RALEIGH, N.C. — March 22, 2016 — Red Hat, Inc. (NYSE: RHT), the world’s leading provider of open source solutions, today announced financial results for its fiscal fourth quarter and fiscal year ended February 29, 2016.

Customers are demanding technologies that modernize the development, deployment and life-cycle management of applications across hybrid cloud environments. Many are relying on Red Hat to provide both the infrastructure and the application development platforms to run their enterprise applications consistently and reliably across physical, virtual, private cloud and public cloud environments.

JIM WHITEHURST,

PRESIDENT AND CEO

“The fourth quarter was a strong close to the year as our results exceeded our guidance. We maintained a high level of execution throughout the fiscal year which contributed to greater than 20% constant currency revenue growth in each quarter. This performance also drove a record backlog of $2.13 billion in U.S. dollars, up 15% year-over-year, and provides us meaningful visibility into future revenue,” stated Frank Calderoni, Executive Vice President, Operations and Chief Financial Officer of Red Hat. “Our business momentum also drove record annual cash flow of $716 million, up 15% and representing the 5th straight year of operating cash flow margin of approximately 35%.”Enterprises increasingly adopting hybrid cloud infrastructures and open source technologies drove our strong results. The fourth quarter marked our 56thconsecutive quarter of revenue growth, contributing to Red Hat’s first fiscal year crossing $2 billion in total revenue,” stated Jim Whitehurst, President and Chief Executive Officer of Red Hat. “Customers are demanding technologies that modernize the development, deployment and life-cycle management of applications across hybrid cloud environments. Many are relying on Red Hat to provide both the infrastructure and the application development platforms to run their enterprise applications consistently and reliably across physical, virtual, private cloud and public cloud environments.”

Revenue: Total revenue for the quarter was $544 million, up 17% in U.S. dollars year-over-year, or 21% measured in constant currency. Constant currency references in this release are detailed in the tables below. Subscription revenue for the quarter was $480 million, up 18% in U.S. dollars year-over-year, or 22% measured in constant currency. Subscription revenue in the quarter was 88% of total revenue.

Full fiscal year 2016 total revenue was $2.05 billion, up 15% in U.S. dollars year-over-year, or 21% measured in constant currency. Subscription revenue for the full fiscal year was $1.80 billion, up 16% in U.S. dollars year-over-year, or 22% measured in constant currency. Subscription revenue in the full fiscal year was 88% of total revenue.

Subscription Revenue Breakout: Subscription revenue from Infrastructure-related offerings for the quarter was $391 million, an increase of 15% in U.S. dollars year-over-year and 18% measured in constant currency. Subscription revenue from Application Development-related and other emerging technologies offerings for the quarter was $89 million, an increase of 38% in U.S. dollars year-over-year and 43% measured in constant currency.

Full fiscal year subscription revenue from Infrastructure-related offerings was $1.48 billion, an increase of 12% in U.S. dollars year-over-year and 18% measured in constant currency. Full fiscal year subscription revenue from Application Development-related and other emerging technologies offerings was $323 million, an increase of 37% in U.S. dollars year-over-year and 46% measured in constant currency.

Operating Income: GAAP operating income for the quarter was $72 million, up 6% 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 fourth quarter was $124 million, up 13% year-over-year. Non-GAAP references in this release are detailed in the tables below. For the fourth quarter, GAAP operating margin was 13.2% and non-GAAP operating margin was 22.9%.

Full fiscal year GAAP operating income was $288 million, up 15% 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 full fiscal year was $484 million, up 16% year-over-year. Full fiscal year GAAP operating margin was 14.0% and non-GAAP operating margin was 23.6%.

Net Income: GAAP net income for the quarter was $53 million, or $0.29 per diluted share, compared with $48 million, or $0.26 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 convertible debt discount, non-GAAP net income for the quarter was $97 million, or $0.52 per diluted share, as compared to $81 million, or $0.43 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. Fourth quarter GAAP EPS included an approximately $0.02 benefit while non-GAAP EPS included an approximately $0.04 benefit associated with a discrete tax item recorded in the quarter.

Full fiscal year GAAP net income was $199 million, or $1.07 per diluted share, compared with $180 million, or $0.95 per diluted share, in the prior fiscal year. 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 convertible debt discount, non-GAAP net income for the full fiscal year was $355 million, or $1.91 per diluted share, as compared to $303 million, or $1.60 per diluted share, in the prior fiscal year.

Cash: Operating cash flow was $247 million for the fourth quarter, an increase of 14% on a year-over-year basis. Operating cash flow for the full fiscal year was $716, an increase of 15% compared to the prior fiscal year.

Total cash, cash equivalents and investments as of February 29, 2016 was $2.0 billion after repurchasing approximately $114 million, or approximately 1.6 million shares, of common stock in the fourth quarter. After repurchasing approximately $263 million, or approximately 3.5 million shares, of common stock for the full fiscal year, the remaining balance in the current repurchase authorization as of February 29, 2016 was approximately $237 million.

Deferred revenue and backlog: Total backlog for fiscal year 2016 was in excess of $2.13 billion, up 15% year-over-year. We define total backlog as the value of non-cancellable subscription and service agreements, including total deferred revenue, which is billed, plus the value of non-cancellable subscription and service agreements to be billed in the future not reflected in our financial statements. At the end of the fiscal year, the company’s total deferred revenue balance was $1.72 billion, an increase of 16% year-over-year. The full year negative impact to total deferred revenue from changes in foreign exchange rates was $21 million year-over-year. On a constant currency basis, total deferred revenue would have been up 18% year-over-year. The portion of total backlog to be billed in the future not reflected in our financial statements was in excess of $410 million as of February 29, 2016, compared with the ending balance in excess of $380 million reported for fiscal year 2015. The portion of total backlog to be billed during fiscal year 2017 was in excess of $275 million as of February 29, 2016, compared with in excess of $230 million for the fiscal year ending February 28, 2015.

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

Revenue guidance is expected to be $2.380 billion to $2.420 billion in U.S. dollars.

Full year GAAP operating margin is expected to be approximately 14.4% and non-GAAP operating margin is expected to be approximately 23.2%.

Full year fully-diluted GAAP earnings per share (EPS) is expected to be approximately $1.30 to $1.34 per share. Full year fully-diluted non-GAAP EPS is expected to be approximately $2.22 to $2.26 per share. Both GAAP and non-GAAP EPS assume a $1 million to $2 million per quarter forecast for other income, a 27% annual effective tax rate and 184 million fully-diluted shares outstanding.

Operating cash flow guidance range is expected to be approximately $800 million to $820 million.

For the first quarter:

Revenue guidance is $558 million to $566 million.

GAAP operating margin is expected to be approximately 13.2% and non-GAAP operating margin is expected to be approximately 22.0%.

Fully-diluted GAAP EPS is expected to be approximately $0.28 per share. Fully-diluted non-GAAP EPS is expected to be approximately $0.50.

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 $180 million and amortization of intangible assets of approximately $29 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 convertible debt discount of approximately $19 million.

First quarter non-GAAP operating margin guidance is derived by subtracting the estimated impact of non-cash share-based compensation expense of approximately $41 million and amortization of intangible assets of approximately $8 million. First 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 convertible debt discount of approximately $5 million.

These statements are forward-looking and actual results may differ materially. Refer to the Forward-Looking Statements below for information on certain factors that could cause our actual results to differ materially.