Red Hat's CEO Discusses Q2 2012 Results - Earnings Call Transcript

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Red Hat (RHT)

Q2 2012 Earnings Call

September 21, 2011 5:00 pm ET

Executives

James M. Whitehurst - Chief Executive Officer, President and Director

Charles E. Peters - Chief Financial Officer and Executive Vice President

Tom McCallum - Investor Relations

Analysts

Gregg Moskowitz - Cowen and Company, LLC, Research Division

Reid Menge - UBS Investment Bank, Research Division

Nabil Elsheshai - Pacific Crest Securities, Inc., Research Division

Keith Weiss - Morgan Stanley, Research Division

Mark R. Murphy - Piper Jaffray Companies, Research Division

Tim Klasell - Stifel, Nicolaus & Co., Inc., Research Division

Steven M. Ashley - Robert W. Baird & Co. Incorporated, Research Division

Kash G. Rangan - BofA Merrill Lynch, Research Division

Edward Maguire - Credit Agricole Securities (USA) Inc., Research Division

Heather Bellini - Goldman Sachs Group Inc., Research Division

John S. DiFucci - JP Morgan Chase & Co, Research Division

Brad Reback - Oppenheimer & Co. Inc., Research Division

Michael Turits - Raymond James & Associates, Inc., Research Division

S. Kirk Materne - Evercore Partners Inc., Research Division

Walter H. Pritchard - Citigroup Inc, Research Division

Presentation

Operator

Good afternoon. My name is David and I will be your conference operator today. At this time, I would like to welcome everyone to Red Hat's Q2 Earnings Call Fiscal 2012. [Operator Instructions] I would now like to turn the call over to Mr. Tom McCallum, Vice President of Investor Relations. Sir, you may begin your conference.

Tom McCallum

Hi, everyone, and welcome to Red Hat's Earnings Call for the second quarter of fiscal 2012. Speakers for today's call will be Jim Whitehurst, President and CEO; and Charlie Peters, Executive Vice President, CFO. Our 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'll be able to find a historic reconciliation schedule of GAAP to non-GAAP financial metric 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 harbors provision 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 annual report on Form 10-Q filed with the SEC as well as the safe harbor statement in today's press release. In addition, any forward-looking statements represent our estimates or views only as of today, September 21, 2011, and these estimates and 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 day subsequent to today.

With that, I'd 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. Red Hat Associates around the globe executed extremely well and delivered outstanding results. While the macroeconomic environment remained volatile, we continue to experience broad demand for our open source solutions in every major geography during the second quarter. We drove significant upselling within our top deals and we added a number of large wins from customers who migrated away from proprietary products and other Linux distributions. Customers are increasingly turning to Red Hat as they look to modernize their data center infrastructure and fundamentally change the way they deliver IT services.

Let me review some of the highlights for our second quarter, which combined with strong demand heading into the second half of this year, provides us with confidence to again raise our full year growth outlook, as Charlie will explain later.

First, sales execution was once again strong in Q2 and we delivered accelerating year-over-year organic revenue growth for the fourth consecutive quarter. Our 27% revenue growth to the first half of this year had significantly outpaced last year's 20% first half growth, given our investments in sales and marketing and R&D are clearly paying off.

Second, even with this focused investment for growth, we continue to deliver leverage, which enabled our operating income to significantly outpace revenue. Our operating income is up 41% in Q2 and up 35% in the first half of this year.

Third, we continue to drive strong cash flow growth with operating cash flow up 20% for the quarter and 34% for the first half of the year. I'm also pleased to report that all of our top 25 deals that were up for renewal in the second quarter, not only renewed, but they did sell at a total value of over 150% of the original value. This was our strongest upsell percentage since we started tracking this metric, which is usually in the 120% to 130% range. Customers across a variety of segments and geographies contributed to this record.

The value and innovation that customers receive from a Red Hat subscription is a key demand driver for us in both good times and in challenging ones. For instance, this quarter, one of our largest renewals and upsell came from a technology firm that has been a staunch proponent of UNIX for several decades. Given the value, performance and capabilities of RHEL, they have now -- have a substantial deployment in their internal infrastructure.

From a demand perspective, it is clear from our results that there's a fundamental shift happening in the way IT is being delivered. Recently, the former U.S. CIO, Vivek Kundra, wrote an article that demonstrates this need for change. His article spells out the issues government agencies face when purchasing, deploying and maintaining inefficient software and hardware. To combat these issues, government agencies are now shifting away from the older model of customized, deeply integrated IT purchases, which often came with heavy maintenance fees and the need for specialized IT staff and expensive customization. Rather, they choose a new model that relies on modularity, reuse, flexibility and the interoperability of systems that they control and are not locked into.

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