Red Hat, Inc. (NYSE: RHT) today announced financial results for the second quarter of fiscal year 2017 ended August 31, 2016.

„Red Hat’s second quarter revenue results were highlighted by 18% in year-over-year growth for our Infrastructure offerings combined with 33% in year-over-year growth for our Application development and other emerging technologies,“ said Jim Whitehurst, President and Chief Executive Officer of Red Hat. „Digital transformation and hybrid cloud computing are changing how applications are built, deployed, and managed. As organizations adopt agile application development technologies such as Linux containers, they are able to rely on Red Hat as their strategic partner to modernize their infrastructure and application development platforms.”

„In the second quarter, we continued to benefit from solid demand and strong overall execution,” stated Frank Calderoni, Executive Vice President, Operations and Chief Financial Officer of Red Hat.  „We continued to close a record number of deals over $1 million in our second quarter, which are up more than 60% year over year.  This further demonstrates our customers’ commitment to Red Hat and the broad demand for our expanding technology portfolio as enterprises embrace digital transformation and the hybrid cloud.“

Revenue: Total revenue for the quarter was $600 million, up 19% in U.S. dollars year-over-year, or 18% measured in constant currency.  Constant currency references in this release are detailed in the tables below.  Subscription revenue for the quarter was $531 million, up 20% in U.S. dollars year-over-year, or 19% measured in constant currency.
Subscription revenue in the quarter was 89% of total revenue.

Subscription Revenue Breakout: Subscription revenue from Infrastructure-related offerings for the quarter was $427 million, an increase of 18% in U.S. dollars year-over-year and 17% measured in constant currency.  Subscription revenue from Application development-related and other emerging technologies offerings for the quarter was $104 million, an increase of 33% in U.S. dollars year-over-year and 32% measured in constant currency.

Operating Income: GAAP operating income for the quarter was $82 million, up 7% 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 operating income for the second quarter was $137 million, up 11% year-over-year.  Non-GAAP references in this release are detailed in the tables below.  For the second quarter, GAAP operating margin was 13.7% and non-GAAP operating margin was 22.8%.

Net Income: GAAP net income for the quarter was $59 million, or $0.32 per diluted share, compared with $51 million, or $0.28 per diluted share, 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 net income for the quarter was $101 million, or $0.55 per diluted share, as compared to $88 million, or $0.47 per diluted share, in the year-ago quarter.  Non-GAAP diluted weighted average shares outstanding excludes any dilution resulting from the convertible notes because any potential dilution is expected to be offset by our convertible note hedge transactions.

Cash: Operating cash flow was $97 million for the second quarter, a decrease of 21% on a year-over-year basis.  Total cash, cash equivalents and investments as of August 31, 2016 was $2.0 billion after repurchasing approximately $127 million, or approximately 1.8 million shares, of common stock in the second quarter.  The remaining balance in the current repurchase authorization as of August 31, 2016 was approximately $901 million.

Deferred revenue: At the end of the second quarter, the company’s total deferred revenue balance was $1.68 billion, an increase of 19% year-over-year.  The full year positive impact to total deferred revenue from changes in foreign exchange rates was $22 million year-over-year.  On a constant currency basis, total deferred revenue would have been up 17% year-over-year.

Outlook: Red Hat’s outlook assumes current business conditions and current foreign currency exchange rates.

For the full year:

• Revenue guidance is expected to be $2.415 billion to $2.435 billion in U.S. dollars.
• GAAP operating margin is expected to be approximately 13.8% and non-GAAP operating margin is expected to be approximately 23.0%.
• Fully-diluted GAAP earnings per share (EPS) is expected to be approximately $1.35 to $1.37 per share.  Fully-diluted non-GAAP EPS is expected to be approximately $2.23 to $2.25 per share. Both GAAP and non-GAAP EPS assume a $1 million to $2 million per quarter forecast for other income. Both GAAP and non-GAAP EPS also assume an estimated annual effective tax rate of 27% before discrete tax items and 184 million fully-diluted shares outstanding.
• Operating cash flow guidance range is expected to be approximately $800 million to $820 million.

For the third quarter:

• Revenue guidance is $613 million to $623 million.
• GAAP operating margin is expected to be approximately 13.4% and non-GAAP operating margin is expected to be approximately 23.3%.
• Fully-diluted GAAP EPS is expected to be approximately $0.34 per share.  Fully-diluted non-GAAP EPS is expected to be approximately $0.58 per share.  Both GAAP and non-GAAP EPS assume a $1 million to $2 million forecast for other income.  Both GAAP and non-GAAP EPS also assume an estimated annual effective tax rate of 27% before discrete tax items and 184 million fully-diluted shares outstanding.

GAAP to non-GAAP reconciliation:

Full year non-GAAP operating margin guidance is derived by subtracting the estimated full year impact of non-cash share-based compensation expense of approximately $190 million, amortization of intangible assets of approximately $32 million, and transaction costs related to business combinations of $2 million.  Estimated full year impacts of share-based compensation expense, amortization of intangible assets, and transaction costs related to business combinations have increased from the prior quarter primarily due to business combinations. Full year fully-diluted non-GAAP EPS guidance is derived by subtracting the expenses listed in the previous sentence and the full year impact of non-cash interest expense related to the debt discount of approximately $19 million and an estimated annual effective tax rate of 27% before discrete tax items. Additionally, full year fully-diluted non-GAAP EPS excludes approximately $15 million of discrete tax benefits related to share-based compensation that are included in full year fully-diluted GAAP EPS.

Third quarter non-GAAP operating margin guidance is derived by subtracting the estimated impact of non-cash share-based compensation expense of approximately $53 million and amortization of intangible assets of approximately $8 million. Third quarter fully-diluted non-GAAP EPS guidance is derived by subtracting the expenses listed in the previous sentence and non-cash interest expense related to the debt discount of approximately $5 million and an estimated annual effective tax rate of 27% before discrete tax items. Additionally, third quarter fully-diluted non-GAAP EPS excludes approximately $5 million of discrete tax benefits related to share-based compensation that are included in third quarter fully-diluted GAAP EPS.