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Red Hat Reports Second Quarter Fiscal Year 2008 Results

Red Hat, Inc. (NYSE: RHT), the world's leading provider of open source solutions, today announced financial results for its second fiscal quarter ended August 31, 2007. Red Hat's current fiscal year will end February 29, 2008.

Total revenue for the quarter was $127.3 million, an increase of 28% from the year ago quarter and 7% from the prior quarter. Subscription revenue was $109.2 million, up 29% year-over-year and 6% sequentially.

Net income for the quarter was $18.2 million, or $0.09 per diluted share, compared with $16.2 million, or $0.08 per diluted share, for the prior quarter and $11.0 million, or $0.05 per diluted share, in the year ago quarter. Non-GAAP adjusted net income for the quarter was $36.9 million, or $0.17 per diluted share, after adjusting for stock compensation and tax expense as detailed in the tables below. This compares to non-GAAP adjusted net income of $33.7 million, or $0.16 per diluted share, in the prior quarter and $24.5 million, or $0.12 per diluted share, in the year ago period.

Non-GAAP operating cash flow, as detailed in the tables below, totaled $63.7 million for the quarter, up 43% from the year ago quarter and 22% sequentially. Total cash, cash equivalents and investments as of August 31, 2007 were $1.3 billion. At quarter end, Red Hat's total deferred revenue balance was $377.0 million, an increase of 33% year-over-year and 4% sequentially.

Other highlights of the quarter included the following:

- Red Hat continued to build its industry leading ecosystem by surpassing the milestone of more than 3,000 applications certified on Red Hat Enterprise Linux.

- Following three consecutive years of Red Hat being ranked first in value for enterprise software in the CIO Insight survey, Red Hat Japan was ranked the number one technology vendor in Japan that customers intend to conduct business with in the future according to the Nikkei Market Access survey.

- Red Hat released the beta version of the Red Hat Developer Studio, an integrated Eclipse-based set of open source development tools and runtime environment.

- Red Hat released JBoss Enterprise Application Platform 4.2, an enterprise-ready platform on which to migrate legacy applications to an open source architecture.

"We are pleased to report another solid quarter of strong revenues. I am particularly pleased with the steady improvement in operating margin and operating cash flow. These performance improvements come at a time when we are continuing to invest heavily in our processes and systems as we scale globally, stated Charlie Peters, Executive Vice President and Chief Financial Officer of Red Hat. We continue to see robust demand for our open source solutions and are encouraged by our market position.

In addition, Red Hat today announced that its Board of Directors had authorized the continuation of the Company's stock and debenture repurchase program. Under the program, the Company is authorized to repurchase in aggregate up to $250 million of the Company's common stock and in aggregate up to $75 million of the Company's 0.5% Convertible Senior Debentures due 2024.

Repurchases of common stock and debentures may be effected, from time to time, either on the open market or in privately negotiated transactions, as applicable. The timing and the amount of any repurchases of common stock and debentures will be determined by the Companys management based on an evaluation of market conditions and other factors. Repurchased common stock will be available for use in connection with the Companys equity compensation plans and for other corporate purposes. Repurchased debentures will be retired and canceled. The repurchase program will be funded using the Companys working capital and may be suspended or discontinued at any time. Red Hat had approximately 193.9 million shares of common stock outstanding as of September 21, 2007.

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 50 offices spanning the globe. CIOs have ranked Red Hat first for value in Enterprise Software for three consecutive years in the CIO Insight Magazine Vendor Value study. Red Hat provides high-quality, low-cost technology with its operating system platform, Red Hat Enterprise Linux, together with applications, management and Services Oriented Architecture (SOA) solutions, including the JBoss Enterprise Middleware Suite. Red Hat also offers support, training and consulting services to its customers worldwide. Learn more: 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 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, 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 EndedSix Months Ended

Aug. 31,

Aug. 31,

Aug. 31,

Aug. 31,

2007200620072006
Revenue:
Subscriptions $ 109,172 $ 84,947 $ 212,217 $ 156,439
Training and services 18,098 14,726 33,926 27,237
Total subscription, training and services revenue 127,270 99,673 246,143 183,676
Cost of revenue:
Subscriptions 8,492 7,386 16,093 13,382
Training and services 11,572 9,034 22,235 16,484
Total cost of subscription, training and services revenue 20,064 16,420 38,328 29,866
Total gross profit 107,206 83,253 207,815 153,810
Operating expense:
Sales and marketing 46,093 37,807 92,302 68,308
Research and development 23,384 18,068 45,171 31,883
General and administrative 19,933 17,926 37,594 31,555
Total operating expense 89,410 73,801 175,067 131,746
Income from operations 17,796 9,452 32,748 22,064
Other income, net 14,030 9,573 27,608 20,275
Interest expense (1,565 ) (1,490 ) (3,060 ) (2,974 )
Income before provision (benefit) for income taxes 30,261 17,535 57,296 39,365
Provision (benefit) for income taxes 12,104 6,488 22,918 14,565
Net income $ 18,157 $ 11,047 $ 34,378 $ 24,800
Net income-diluted $ 19,050 $ 12,000 $ 36,165 $ 26,705
Net income per share:
Basic $ 0.09 $ 0.06 $ 0.18 $ 0.13
Diluted $ 0.09 $ 0.05 $ 0.16 $ 0.12
Weighted average shares outstanding:
Basic 193,634 190,292 193,358 186,936
Diluted 221,688 219,940 221,559 217,348
Diluted net income per share computation:
GAAP Net income, basic $ 18,157 $ 11,047 $ 34,378 $ 24,800
Interest expense on convertible debentures, net of related GAAP tax effects 435 464 869 927
Amortization of debt issuance costs, net of related GAAP tax effects 458 489 918 978
GAAP Net income, diluted $ 19,050 $ 12,000 $ 36,165 $ 26,705
Note: certain prior year amounts have been reclassified to conform with current year presentation.
RED HAT, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands)
ASSETS

Aug. 31,

Feb. 28,

20072007
(unaudited)
Current assets:
Cash and cash equivalents $ 524,619 $ 527,239
Investments in debt securities 353,764 350,827
Accounts receivable, net 89,125 87,973
Prepaid expenses and other current assets 57,862 41,026
Total current assets 1,025,370 1,007,065
Property and equipment, net 51,363 45,258
Goodwill 339,357 328,837
Identifiable intangibles, net 97,477 94,314
Investments in debt securities 375,263 278,028
Other assets, net 32,945 32,352
Total assets $ 1,921,775 $ 1,785,854
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 10,085 $ 12,062
Accrued expenses 37,622 38,472
Deferred revenue 278,361 249,615
Other current obligations 24 214
Total current liabilities 326,092 300,363
Deferred lease credits 5,042 5,235
Long term deferred revenue 98,673 89,020
Other long term obligations 23,430 -
Convertible debentures 570,000 570,000
Stockholders' equity:
Common stock 20 20
Additional paid-in capital 1,096,394 1,040,892
Accumulated deficit (70,491 ) (92,092 )
Treasury stock, at cost (125,924 ) (125,789 )
Accumulated other comprehensive loss (1,461 ) (1,795 )
Total stockholders' equity 898,538 821,236
Total liabilities and stockholders' equity $ 1,921,775 $ 1,785,854
Note: certain prior year amounts have been reclassified to conform with current year presentation.
RED HAT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
Three Months EndedSix Months Ended

Aug. 31,

Aug. 31,

Aug. 31,

Aug. 31,

2007200620072006
Cash flows from operating activities:
Net income $ 18,157 $ 11,047 $ 34,378 $ 24,800
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 8,219 6,754 15,453 11,098
Deferred income taxes 9,884 4,092 18,214 9,502
Share-based compensation expense 8,581 8,300 16,967 15,926
Excess tax benefits from share-based payment arrangements (14,509 ) (740 ) (27,119 ) (2,875 )
Provision for doubtful accounts (195 ) 201 387 702
Amortization of debt issuance costs 752 752 1,505 1,504
Other 156 (12 ) 156 (289 )
Changes in operating assets and liabilities net of effects of acquisitions:
Accounts receivable and earnings in excess of billings 4,162 3,311 245 (181 )
Prepaid expenses and other current assets 736 (1,115 ) - (2,415 )
Accounts payable 2,116 399 (2,107 ) 509
Accrued expenses (617 ) (1,707 ) (2,382 ) (157 )
Deferred revenue 11,858 12,623 33,421 38,079
Other assets (99 ) (21 ) (193 ) 53
Net cash provided by operating activities 49,201 43,884 88,925 96,256
Cash flows from investing activities:
Purchase of investment securities (167,415 ) (112 ) (508,590 ) (7,444 )
Proceeds from sales and maturities of investment securities 193,478 78,021 408,958 356,052
Acquisitions of businesses, net of cash acquired - (147,651 ) (11,784 ) (149,562 )
Purchase of property and equipment (8,375 ) (5,107 ) (14,782 ) (8,985 )
Purchase of developed software and other intangibles assets (865 ) - (4,352 ) -
Net cash provided by (used in) investing activities 16,823 (74,849 ) (130,550 ) 190,061
Cash flows from financing activities:
Excess tax benefits from share-based payment arrangements 14,509 740 27,119 2,875
Net proceeds from issuance of common stock under Employee Stock Purchase Plan - - - 306
Proceeds from exercise of common stock options 5,455 4,354 8,530 11,684
Purchase of treasury stock (136 ) (1,359 ) (136 ) (1,532 )
Proceeds from other borrowings - - 2,898 -
Payments on other borrowings (90 ) (31 ) (757 ) (31 )
Net cash provided by financing activities 19,738 3,704 37,654 13,302
Effect of foreign currency exchange rates on cash and cash equivalents 1,473 (1,475 ) 1,351 1,015
Net increase (decrease) in cash and cash equivalents 87,235 (28,736 ) (2,620 ) 300,634
Cash and cash equivalents at beginning of the period 437,384 596,917 527,239 267,547
Cash and cash equivalents at end of period $ 524,619 $ 568,181 $ 524,619 $ 568,181
Note: certain prior year amounts have been reclassified to conform with current year presentation.
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

Six Months

Ended

Aug. 31,

Aug. 31,

Aug. 31,

Aug. 31,

2007200620072006
Cost of revenue $ 570 $ 539 $ 1,152 $ 1,049
Sales and marketing 2,437 2,455 4,951 4,572
Research and development 2,118 1,771 4,243 3,268
General and administration 3,456 3,535 6,621 7,037
Total stock based compensation expense $ 8,581 $ 8,300 $ 16,967 $ 15,926
Reconciliation of GAAP results to non-GAAP adjusted results

Three Months

Ended

Six Months

Ended

Aug. 31,

Aug. 31,

Aug. 31,

Aug. 31,

2007200620072006
GAAP net income $ 18,157 $ 11,047 $ 34,378 $ 24,800
GAAP provision for income taxes 12,104 6,488 22,918 14,565
GAAP income before provision for income taxes $ 30,261 $ 17,535 $ 57,296 $ 39,365
Add: Share-based compensation per FAS 123R 8,581 8,300 16,967 15,926
Non-GAAP adjusted income before provision for income taxes $ 38,842 $ 25,835 $ 74,263 $ 55,291
Non-GAAP cash provision for income taxes $ 1,942 $ 1,292 $ 3,713 $ 2,765
Non-GAAP adjusted net income $ 36,900 $ 24,543 $ 70,550 $ 52,526
Non-GAAP adjusted net income-diluted $ 38,292 $ 25,935 $ 73,334 $ 55,310
Non-GAAP adjusted net income per share:
Basic $ 0.19 $ 0.13 $ 0.36 $ 0.28
Diluted $ 0.17 $ 0.12 $ 0.33 $ 0.25
Non-GAAP diluted net income per share computation:
Non-GAAP adjusted net income $ 36,900 $ 24,543 $ 70,550 $ 52,526
Interest expense on convertible debentures, net of related 5% cash tax effects 677 677 1,354 1,354
Amortization of debt issuance costs, net of related 5% cash tax effects 715 715 1,430 1,430
Non-GAAP adjusted net income-diluted $ 38,292 $ 25,935 $ 73,334 $ 55,310
Reconciliation of GAAP cash flows from operating activities to non-GAAP adjusted cash flows from operating activities

Three Months

Ended

Six Months

Ended

Aug. 31,

Aug. 31,

Aug. 31,

Aug. 31,

2007200620072006
GAAP net cash provided by operating activities $ 49,201 $ 43,884 $ 88,925 $ 96,256
Add: Excess tax benefits from share-based payment arrangements 14,509 740 27,119 2,875
Non-GAAP net cash provided by operating activities $ 63,710 $ 44,624 $ 116,044 $ 99,131
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 EndedSix Months Ended

Aug. 31,

Aug. 31,

Aug. 31,

Aug. 31,

2007200620072006
GAAP Gross profit $ 107,206 $ 83,253 $ 207,815 $ 153,810
Add: Non-cash share-based compensation per FAS 123R 570 539 1,152 1,049
Non-GAAP gross profit $ 107,776 $ 83,792 $ 208,967 $ 154,859
Non-GAAP gross margin 85 % 84 % 85 % 84 %
Three Months EndedSix Months Ended

Aug. 31,

Aug. 31,

Aug. 31,

Aug. 31,

2007200620072006
GAAP operating expenses $ 89,410 $ 73,801 $ 175,067 $ 131,746
Deduct: Non-cash share-based compensation per FAS 123R (8,011 ) (7,761 ) (15,815 ) (14,877 )
Non-GAAP adjusted operating expenses $ 81,399 $ 66,040 $ 159,252 $ 116,869
Three Months EndedSix Months Ended

Aug. 31,

Aug. 31,

Aug. 31,

Aug. 31,

2007200620072006
GAAP operating income $ 17,796 $ 9,452 $ 32,748 $ 22,064
Add: Non-cash share-based compensation per FAS 123R 8,581 8,300 16,967 15,926
Non-GAAP adjusted operating income $ 26,377 $ 17,752 $ 49,715 $ 37,990
Non-GAAP adjusted operating margin 20.7 % 17.8 % 20.2 % 20.7 %

Contacts:

Red Hat, Inc.
Kerrin Catallozzi, 919-754-4268
Corporate Communications
kcatallo@redhat.com
or
Linda Brewton, 919-754-4476
Investor Relations
lbrewton@redhat.com

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