Red Hat, Inc. (RHT)
Q1 2011 Earnings Call Transcript
June 22, 2010 5:00 p.m. ET

Executives

Tom McCallum – Vice President, Investor Relations
James M. Whitehurst – President and Chief Executive Officer
Charles E. Peters Jr. – Executive Vice President and Chief Financial Officer

Analysts

Kevin Rune – Morgan Stanley
Mark Murphy – Piper Jaffray
Tim Klasell – Thomas Weisel Partners
Heather Bellini – ISI Group
Trip Chowdhry – Global Equities
Katherine Egbert – Jefferies and Company
Todd Raker – Deutsche Bank
John DiFucci – J.P. Morgan
Michael Turits – Raymond James
Nabil Elsheshai – Pacific Crest Securities
Tatyana Yamaida – Robert W. Baird
Brent Williams – Benchmark Company
Brent Thill – UBS
Richard Williams – Cross Research
Brad Whitt – Gleacher & Company
Bhavan Suri – William Blair
Matthew Hedberg – RBC Capital
Stephanie Withers – Goldman Sachs
Brad Reback – Oppenheimer & Company

Presentation

Operator

Good afternoon, ladies and gentlemen. My name is Gerald and I will be your conference Operator. At this time, I would like to welcome everyone to Red Hat''s Q1 2011 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remark, there will be a question-and-answer session. If you would like to ask your question during this time, simply press star then the number one on your telephone keypad. If you would like to withdraw your question, press the pound key. Thank you. I would now like to introduce Mr. Tom McCallum, Vice President of Investor Relations. Sir, you may begin.

Tom McCallum

Thank you. Hello everyone. Welcome to Red Hat''s earnings call for Q1 fiscal 2011. Speakers for today''s call will be Jim Whitehurst, President and CEO and Charlie Peters, Executive Vice President and CFO. Our earnings press release was issued after the market closed today and may be downloaded from RedHat.com on the Investor Relations page. Also, on this page you will be able to find a historic reconciliation schedule of GAAP to non-GAAP financial metrics as well as a schedule on currency rates.

Various remarks that we may make about the company''s future expectations, plans and prospects, including the statements containing the words believe, anticipate, plan, project, estimate, expect, intend or will constitute forward-looking statements for the purposes of the Safe Harbor provisions under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those indicated by these forward-looking statements as a result of various important factors, including those discussed in the company''s most recent quarterly report on Form 10-Q filed with the SEC.

In addition, any forward-looking statements represent our estimates or views only as of today, June 22, 2010 and these estimates or views may change. While the company may elect to update forward-looking statements at some point in the future, we specifically disclaim any obligation to do so, even if our estimates or views do change. And therefore, you should not rely on these forward-looking statements as representing our estimates or views at any date subsequent to today.

As a final note, we will be holding an analyst meeting on Wednesday, June 23 here in Boston at our Summit JBoss World Event. The webcast of the presentations will also be available on our Investor Relations page. With that, I would like to turn the call over to Jim.

James M. Whitehurst

Thank you, Tom. And let me add my welcome to all of you joining us on today''s call. I am pleased to announce another quarter of strong execution by our Red Hat Associates, which has led to financial results that are above our expectations. The demand for our subscriptions remain strong and demand for our services has rebounded.

Here are a few highlights. First, sales execution was strong for Q1. We experienced solid demand in all major geographies and across all our products suites. This demand was further highlighted by winning the largest deal in our history in the past quarter, an eight-figure deal with a mainstream customer which was primarily middleware. Second, we saw consistent traction with our free to paid initiative, with one of the largest deals in the quarter being a free to paid win.

Yesterday, we also announced a major win with the NYSE Euronext. After evaluating the free dot org version of JBoss in their test and development environments versus proprietary solutions, the NYSE Euronext looked to Red Hat to provide enterprise class support for production workloads on Enterprise JBoss. As they migrated production workloads to paid JBoss subscriptions, they continue to reap major benefits, including cost savings of up to 50% to 60% from the simplicity and flexibility of the architecture. As with RHEL, the NYSE has now standardized on JBoss.

A third driver, this quarter is the fact that our cloud and virtualization offerings continued to make early traction with cloud providers. In addition to the RHEL and RHEV public cloud wins announced earlier this quarter with NTT and IBM, we closed a multimillion dollar deal with a global cloud provider, who is recognized as a top leader in cloud services. Internationally, we also announced wins with a hosting and cloud service provider in the Netherlands and a RHEV virtualization win with a mobile provider in Southeast Asia.

Finally, from the renewals perspective, I am pleased to report that all of our top 25 deals that were up for renewal in the quarter renewed and not only renewed, but they did so with a total value at over 120% of the original value. This further validates the level of value customers are receiving through their Red Hat subscriptions. In addition to strong topline growth, we grew non-GAAP operating income by 28% in the first quarter. At the same time, we continued to invest in new growth opportunities like virtualization, cloud and middleware.

Let me preview some of the exciting events and announcements that will take place over the next few days at the Red Hat Summit and JBoss World, our premier open source user and partner event, which begins today in Boston. Attendance is over 2,200 people, with registration still coming in and attendees are coming from around the globe. We will be showcasing Red Hat''s leadership with innovators, customers and partners, including IBM, Cisco and Accenture.