Red Hat Reports Third Quarter Results for Fiscal Year 2019

• Third quarter total revenue of $847 million, up 13% year-over-year, or 15% in constant currency

• Third quarter Infrastructure-related subscription revenue of $534 million, up 8% year-over-year, or 9% in constant currency

• Third quarter Application Development-related and other emerging technology subscription revenue of $207 million, up 28% year-over-year, or 30% in constant currency

• Quarter-end deferred revenue balance of $2.5 billion, up 20% year-over-year, or 23% in constant currency

Red Hat, Inc. (NYSE: RHT), the world's leading provider of open source solutions, today announced financial results for the third quarter of fiscal year 2019 ended November 30, 2018.

“Adoption of Red Hat’s technologies that enable customers to build and deploy applications more securely and consistently across hybrid and multi-cloud environments continued to drive our growth in Q3,” stated Jim Whitehurst, President and Chief Executive Officer of Red Hat. “For instance, our Certified Cloud and Service Providers (CCSP) program reached the $300 million annualized run-rate milestone in Q3 with 25% year-over-year growth of Red Hat Enterprise Linux on-demand in the public clouds. In addition, we continue to experience strong customer growth in Red Hat OpenShift, our enterprise Kubernetes platform, and Red Hat Ansible Automation, both of which added more than 100 customers in Q3.”

“In Q3, we closed 100 deals over $1 million and delivered double digit total revenue growth of 13% year-over-year, or 15% in constant currency and deferred revenue growth of 20% year-over-year, or 23% in constant currency despite continued foreign exchange volatility. Moreover, our total backlog grew 22% year-over-year to approximately $3.5 billion,” said Eric Shander, Executive Vice President and Chief Financial Officer for Red Hat.  “Strong renewals of our largest deals also helped drive these results with all of our top 25 deals renewing at an upsell rate above 120%.”

Revenue: Total revenue for the quarter was $847 million, up 13% year-over-year, or 15% measured in constant currency. Constant currency references in this release are detailed in the tables below. Subscription revenue for the quarter was $741 million, up 13% year-over-year, or 15% 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 $534 million, an increase of 8% year-over-year, or 9% measured in constant currency. Subscription revenue from Application Development-related and other emerging technology offerings for the quarter was $207 million, an increase of 28% year-over-year, or 30% measured in constant currency.

Operating Income: GAAP operating income for the quarter was $109 million, down 8% 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 adjusted operating income for the third quarter was $203 million, up 13% year-over-year. For the third quarter, GAAP operating margin was 12.9% and non-GAAP adjusted operating margin was 24.0%. Non-GAAP references in this release are detailed in the tables below.

Net Income: GAAP net income for the quarter was $94 million, or $0.51 diluted earnings per share (“EPS”), compared with GAAP net income of $102 million, or $0.55 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 adjusted net income for the quarter was $175 million, or $0.96 diluted EPS, as compared to $133 million, or $0.73 diluted EPS, in the year-ago quarter. Non-GAAP adjusted diluted weighted average shares outstanding excludes dilution that is expected to be offset by our convertible note hedge transactions.

Cash: GAAP and non-GAAP operating cash flow was $137 million for the third quarter, down 15% on a year-over-year basis compared to GAAP operating cash flow. Non-GAAP operating cash flow adjusts for the impact of our recent adoption of ASU 2016-15: Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments, which requires the portion of repayments of convertible notes during the third quarter that is attributable to debt discount to be classified as operating cash flow. GAAP and non-GAAP operating cash flow include approximately $23 million of business combinations expenses paid in the quarter. Total cash, cash equivalents and investments as of November 30, 2018 was $2.2 billion after repurchasing approximately $13 million, or approximately 0.1 million shares, of common stock in the third quarter. The remaining balance in the current repurchase authorization as of November 30, 2018 was approximately $737 million.

Deferred revenue: At the end of the third quarter, the Company’s total deferred revenue balance was $2.5 billion, an increase of 20% year-over-year. The negative impact to total deferred revenue from changes in foreign exchange rates was $53 million year-over-year. On a constant currency basis, total deferred revenue would have increased 23% year-over-year.

Due to the pending transaction with International Business Machines Corporation, Red Hat will not be updating its outlook for fiscal 2019 and will not be hosting a conference call for its third quarter 2019 business results.

Additional information on Red Hat's reported results, including a reconciliation of the non-GAAP adjusted results, are included in the financial tables below.

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