Red Hat 8-K Red Hat Reports Third Quarter Results

Exhibit 99.1

Red Hat Reports Third Quarter Results

• Revenue of $165.3 million, up 22% year over year and within guidance on a comparable currency basis
• GAAP EPS of 12 cents, Non-GAAP EPS of 24 cents exceeds guidance
• Operating Cash-flow of $59.1 million

RALEIGH, N.C.--(BUSINESS WIRE)--December 22, 2008--Red Hat, Inc. (NYSE: RHT), the world's leading provider of open source solutions, today announced financial results for its fiscal year 2009 third quarter ended November 30, 2008.

Total revenue for the quarter was $165.3 million, an increase of 22% from the year ago quarter and 1% from the prior quarter. Subscription revenue for the quarter was $135.5 million, up 17% year-over-year and flat sequentially.

Foreign exchange rate changes during the quarter, as compared to the second quarter, reduced quarterly revenues and expenses by $6.9 million and $4.8 million, respectively, resulting in a negative impact on operating income of $2.1 million. For the quarter, GAAP operating income was $21.0 million, or a 12.7% operating margin. After adjusting for stock compensation and amortization expenses, non-GAAP operating income was $38.4 million, or a 23.2% operating margin, up 120 basis points from the prior quarter despite the strengthening US dollar and the Qumranet acquisition.

Net income for the quarter was $24.3 million, or $0.12 per diluted share, compared with $20.3 million, or $0.10 per diluted share, in the year ago quarter. Non-GAAP adjusted net income for the quarter was $48.4 million, or $0.24 per diluted share, after adjusting for stock compensation, amortization and tax expense as detailed in the tables below. This compares to non-GAAP adjusted net income of $42.8 million, or $0.20 per diluted share in the year ago quarter.

Operating cash flow totaled $59.1 million, compared to $59.6 million from the year ago quarter and $54.3 million from the prior quarter. At quarter end, the company’s total deferred revenue balance was $505.1 million, an increase of 20% on a year-over-year basis and 2% sequentially. Total cash, cash equivalents and investments as of November 30, 2008 were $1.1 billion after retiring $285 million of convertible debentures and repurchasing 2 million shares of common stock.

Subsequent to these repurchases, the Company’s Board of Directors authorized a new common stock repurchase program with a capacity of up to $250 million.

“Our solid financial results this quarter reflect our strong market position as the low cost, high value provider of infrastructure solutions,” stated Jim Whitehurst, President and Chief Executive Officer of Red Hat. “Purchasing decisions for IT have changed dramatically for CIOs. In this budget-constrained environment, IT professionals are adopting open source and more specifically Red Hat to save money and enhance their competitiveness.”

"This was a strong quarter where we delivered better-than-expected operating income, net income and cash flow,” stated Charlie Peters, Executive Vice President and Chief Financial Officer of Red Hat. “While significant devaluations in most foreign currencies depressed our reported revenue, a combination of focused cost management and natural currency hedging enabled the company to deliver better-than-expected operating margin.

We also took advantage of unusual market conditions and repurchased some of our convertible bonds and common stock. This action reduced the diluted shares outstanding by approximately 11 million, or 6%, and produced a gain of $4.1 million, both improving earnings per share. Our balance sheet remains very strong.”

Other highlights include the following:

• Red Hat announced an agreement with Fujitsu to provide new Linux support services that are designed to provide quicker response times and extended support periods for mission-critical systems through the Red Hat Advanced Mission Critical Program. The Program combines the mainframe expertise of Fujitsu with the enterprise Linux expertise of Red Hat.
• Red Hat Chairman Matthew Szulik was named Ernst & Young's Overall National Winner for Entrepreneur of the Year 2008 Award.
• Red Hat continued to develop its capabilities and offerings in virtualization. Early in the quarter, Red Hat acquired Qumranet Inc. which accelerates the time to market to deliver an expanded virtualization solutions portfolio.

Additional information on Red Hat's reported results, including a reconciliation of the non-GAAP adjusted results, are included in the financial tables below. A live webcast of Red Hat's results will begin at 5:00 pm ET today and 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 will have ended.

About Red Hat, Inc.

Red Hat, the world's leading open source solutions provider, is headquartered in Raleigh, NC with over 65 offices spanning the globe. CIOs ranked Red Hat first for value in Enterprise Software for four consecutive years in the CIO Insight Magazine Vendor Value survey. Red Hat provides high-quality, affordable technology with its operating system platform, Red Hat Enterprise Linux, together with applications, management and Services Oriented Architecture (SOA) solutions, including JBoss Enterprise Middleware. Red Hat also offers support, training and consulting services to its customers worldwide. Learn more: 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 integration of acquisitions; the ability of the Company to effectively compete; 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; ineffective management of, and control over, the Company's growth and international operations; adverse results in litigation; 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 conditions, and governmental and public policy changes. 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 the press release.

LINUX is a trademark of Linus Torvalds. RED HAT and JBOSS are registered trademarks of Red Hat, Inc. and its subsidiaries in the US and other countries.

Tables follow:

RED HAT, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) (In thousands - except per share amounts)
				Three Months Ended						Nine Months Ended
				November 30, 2008			November 30, 2007			November 30, 2008			November 30, 2007
Revenue:
		Subscriptions		$	135,451		$	115,732		$	401,854		$	327,949
		Training and services			29,881			19,649			84,497			53,575
			Total subscription, training and services revenue		165,332			135,381			486,351			381,524
Cost of revenue:
		Subscriptions			8,771			8,099			27,448			24,192
		Training and services			17,765			12,827			53,025			35,062
			Total cost of subscription, training and services revenue		26,536			20,926			80,473			59,254
	Total gross profit				138,796			114,455			405,878			322,270
Operating expense:
	Sales and marketing				58,514			47,653			177,350			139,955
	Research and development				34,544			25,930			95,184			71,101
	General and administrative				24,768			21,419			71,060			59,013
		Total operating expense			117,826			95,002			343,594			270,069
Income from operations					20,970			19,453			62,284			52,201
Other income, net					13,795			14,440			38,593			42,048
Interest expense					(1,249	)		(1,581	)		(4,365	)		(4,641	)
Income before provision for income taxes					33,516			32,312			96,512			89,608
Provision for income taxes					9,211			12,029			33,779			34,947
Net income				$	24,305		$	20,283		$	62,733		$	54,661
Net income-diluted				$	25,147		$	21,177		$	65,392		$	57,342
Net income per share:
	Basic			$	0.13		$	0.10		$	0.33		$	0.28
	Diluted			$	0.12		$	0.10		$	0.30		$	0.26
Weighted average shares outstanding:
	Basic				190,665			194,038			190,978			194,741
	Diluted				208,408			221,547			215,605			222,740
Diluted net income per share computation:
GAAP Net income, basic				$	24,305		$	20,283		$	62,733		$	54,661
Interest expense on convertible debentures, net of related GAAP tax effects					387			435			1,273			1,304
Amortization of debt issuance costs, net of related GAAP tax effects					455			459			1,386			1,377
GAAP Net income, diluted				$	25,147		$	21,177		$	65,392		$	57,342

RED HAT, INC. CONSOLIDATED BALANCE SHEETS (In thousands)
ASSETS
				November 30,			February 29,
				2008			2008
				(Unaudited)
Current assets:
	Cash and cash equivalents			$	519,837		$	677,720
	Investments in debt and equity securities				238,794			312,442
	Accounts receivable, net				113,162			127,002
	Prepaid expenses and other current assets				78,142			75,192
			Total current assets		949,935			1,192,356
	Property and equipment, net				68,249			68,557
	Goodwill				437,713			340,314
	Identifiable intangibles, net				126,260			93,823
	Investments in debt securities				317,821			341,781
	Other assets, net				64,501			43,151
			Total assets	$	1,964,479		$	2,079,982
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
	Accounts payable			$	10,779		$	17,341
	Accrued expenses				58,345			43,260
	Deferred revenue				352,701			339,088
	Convertible debentures				285,500			570,000
	Other current obligations				898			59
		Total current liabilities			708,223			969,748
	Deferred lease credits				4,630			4,977
	Long term deferred revenue				152,416			133,805
	Other long term obligations				19,329			20,261
	Convertible debentures				-			-
Stockholders' equity:
	Common stock				21			21
	Additional paid-in capital				1,267,432			1,170,328
	Retained earnings (accumulated deficit)				34,531			(28,202	)
	Treasury stock, at cost				(232,311	)		(192,946	)
	Accumulated other comprehensive income (loss)				10,208			1,990
			Total stockholders' equity		1,079,881			951,191
			Total liabilities and stockholders' equity	$	1,964,479		$	2,079,982

RED HAT, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (In thousands)
			Three Months Ended						Nine Months Ended
			November 30, 2008			November 30, 2007			November 30, 2008			November 30, 2007
Cash flows from operating activities:
Net income			$	24,305		$	20,283		$	62,733		$	54,661
Adjustments to reconcile net income to net cash provided by operating activities:
		Depreciation and amortization		10,561			8,443			29,486			23,897
		Deferred income taxes		7,031			10,343			27,260			28,557
		Excess tax benefits from share-based payment arrangements		(14,790	)		(17,087	)		(39,246	)		(44,206	)
		Share-based compensation expense		12,251			9,455			33,682			26,422
		Gain on sale of strategic equity investments		-			-			(4,996	)		-
		Gain on repurchase of convertible debentures		(4,129	)		-			(4,129	)		-
		Amortization of debt issuance costs		627			752			2,131			2,257
		Other		314			477			177			1,021
Changes in operating assets and liabilities net of effects of acquisitions:
		Accounts receivable		(7,650	)		(16,986	)		13,687			(16,741	)
		Prepaid expenses and other current assets		(7,400	)		(1,674	)		(14,308	)		(1,673	)
		Accounts payable		1,836			148			(6,138	)		(1,959	)
		Accrued expenses		8,774			9,660			18,576			7,278
		Deferred revenue		27,503			35,759			58,217			69,181
		Other assets		(85	)		65			(355	)		(132	)
		Net cash provided by operating activities		59,148			59,638			176,777			148,563
Cash flows from investing activities:
	Purchase of investment securities			-			(354,569	)		(331,705	)		(863,159	)
	Proceeds from sales and maturities of investment securities			77,498			344,345			427,314			753,303
	Acquisitions of businesses, net of cash acquired			(101,338	)		-			(148,140	)		(11,784	)
	Proceeds from sale of strategic equity investments			-			-			5,568			-
	Purchase of property and equipment			(4,212	)		(10,971	)		(18,164	)		(25,752	)
	Purchase of developed software and other intangible assets			(779	)		(422	)		(3,121	)		(4,775	)
		Net cash used in investing activities		(28,831	)		(21,617	)		(68,248	)		(152,167	)
Cash flows from financing activities:
	Excess tax benefits from share-based payment arrangements			14,790			17,087			39,246			44,206
	Net proceeds (payments) related to employee exercise or vest of share-based awards			(772	)		5,390			16,017			13,920
	Repurchase of convertible debentures			(280,058	)		-			(280,058	)		-
	Purchase of treasury stock			(29,999	)		(482	)		(39,365	)		(618	)
	Structured stock repurchase			-			-			1,989			-
	Proceeds from other borrowings			-			-			-			2,898
	Payments on other borrowings			(48	)		-			(72	)		(757	)
		Net cash (used in) provided by financing activities		(296,087	)		21,995			(262,243	)		59,649
Effect of foreign currency exchange rates on cash and cash equivalents				(1,850	)		2,324			(4,169	)		3,675
Net increase (decrease) in cash and cash equivalents				(267,620	)		62,340			(157,883	)		59,720
Cash and cash equivalents at beginning of the period				787,457			524,619			677,720			527,239
Cash and cash equivalents at end of period			$	519,837		$	586,959		$	519,837		$	586,959

RED HAT, INC. NON CASH SHARE-BASED COMPENSATION AND RECONCILIATION OF 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				Nine Months Ended
		November 30, 2008		November 30, 2007		November 30, 2008		November 30, 2007
	Cost of revenue	$	723	$	583	$	2,047	$	1,736
	Sales and marketing		3,352		2,637		9,554		7,587
	Research and development		3,715		2,208		9,769		6,452
	General and administration		4,461		4,027		12,311		10,647
	Total share-based compensation expense	$	12,251	$	9,455	$	33,681	$	26,422
Amortization of intangible assets expense included in Consolidated Statements of Operations:
		Three Months Ended				Nine Months Ended
		November 30, 2008		November 30, 2007		November 30, 2008		November 30, 2007
	Cost of revenue	$	989	$	1,127	$	2,534	$	3,203
	Sales and marketing		2,301		1,755		6,861		5,295
	Research and development		1,049		0		1,049		0
	General and administration		797		449		2,254		1,347
	Total amortization of intangible assets expense	$	5,136	$	3,331	$	12,698	$	9,845
		Three Months Ended				Nine Months Ended
		November 30, 2008		November 30, 2007		November 30, 2008		November 30, 2007
GAAP net income		$	24,305	$	20,283	$	62,733	$	54,661
GAAP provision for income taxes			9,211		12,029		33,779		34,947
GAAP income before provision for income taxes		$	33,516	$	32,312	$	96,512	$	89,608
Add: Non-cash share-based compensation expense per FAS 123R			12,251		9,455		33,681		26,422
Add: Amortization of intangible assets			5,136		3,331		12,698		9,845
Non-GAAP adjusted income before provision for income taxes		$	50,903	$	45,098	$	142,891	$	125,875
Non-GAAP cash provision for income taxes		$	2,545	$	2,255	$	7,145	$	6,294
Non-GAAP adjusted net income		$	48,358	$	42,843	$	135,746	$	119,581
Non-GAAP adjusted net income-diluted		$	49,461	$	44,235	$	139,632	$	123,756
Non-GAAP adjusted net income per share:
	Basic	$	0.25	$	0.22	$	0.71	$	0.61
	Diluted	$	0.24	$	0.20	$	0.65	$	0.56
Non-GAAP diluted net income per share computation:
Non-GAAP adjusted net income		$	48,358	$	42,843	$	135,746	$	119,581
Interest expense on convertible debentures, net of related 5% cash tax effects			507		677		1,861		2,031
Amortization of debt issuance costs, net of related 5% cash tax effects			596		715		2,025		2,144
Non-GAAP adjusted net income-diluted		$	49,461	$	44,235	$	139,632	$	123,756

RED HAT, INC. RECONCILIATION OF GAAP RESULTS TO NON-GAAP ADJUSTED RESULTS (Unaudited) (In thousands - except per share amounts)
Reconciliation of GAAP results to non-GAAP adjusted results
	Three Months Ended						Nine Months Ended
	November 30, 2008			November 30, 2007			November 30, 2008			November 30, 2007
GAAP Gross profit	$	138,796		$	114,455		$	405,878		$	322,270
Add: Non-cash share-based compensation expense per FAS 123R		723			583			2,047			1,736
Add: Amortization of intangible assets		989			1,127			2,534			3,203
Non-GAAP gross profit	$	140,508		$	116,165		$	410,459		$	327,209
Non-GAAP gross margin		85	%		86	%		84	%		86	%
	Three Months Ended						Nine Months Ended
	November 30, 2008			November 30, 2007			November 30, 2008			November 30, 2007
GAAP operating expenses	$	117,826		$	95,002		$	343,594		$	270,069
Deduct: Non-cash share-based compensation expense per FAS 123R		(11,528	)		(8,872	)		(31,634	)		(24,686	)
Deduct: Amortization of intangible assets		(4,147	)		(2,204	)		(10,164	)		(6,642	)
Non-GAAP adjusted operating expenses	$	102,151		$	83,926		$	301,796		$	238,741
	Three Months Ended						Nine Months Ended
	November 30, 2008			November 30, 2007			November 30, 2008			November 30, 2007
GAAP operating income	$	20,970		$	19,453		$	62,284		$	52,201
Add: Non-cash share-based compensation expense per FAS 123R		12,251			9,455			33,681			26,422
Add: Amortization of intangible assets		5,136			3,331			12,698			9,845
Non-GAAP adjusted operating income	$	38,357		$	32,239		$	108,663		$	88,468
Non-GAAP adjusted operating margin		23.2	%		23.8	%		22.3	%		23.2	%

CONTACT:
Red Hat
Kara Schiltz, Corporate Communications
919-301-3002
kschiltz@redhat.com
or
Tom McCallum, Investor Relations
919-754-4630
investors@redhat.com