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Red Hat Reports First Quarter Results for Fiscal Year 2019

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Red Hat Reports First Quarter Results for Fiscal Year 2019
  • First quarter total revenue of $814 million, up 20% year-over-year, or 17% in constant currency
  • First quarter Application Development-related and other emerging technology subscription revenue of $189 million, up 37% year-over-year, or 32% in constant currency
  • First quarter operating cash flow of $346 million, up 34% year-over-year
  • Quarter-end deferred revenue balance of $2.4 billion, up 19% year-over-year

Raleigh, NC  –Red Hat, Inc. (NYSE: RHT), the world’s leading provider of open source solutions, today announced financial results for the first quarter of fiscal year 2019 ended May 31, 2018.

“The move to hybrid cloud architecture continues to be a strategic priority for our customers. We again delivered strong revenue growth in Q1 as customers continued to adopt our cloud enabling technologies for their applications,” stated Jim Whitehurst, President and Chief Executive Officer of Red Hat. “For instance, we are driving strong growth in both subscription and services revenues for our OpenShift technologies as more customers modernize their applications in Linux containers for their hybrid cloud and digital transformation initiatives.”

“The first quarter of FY19 started as expected with double digit year-over-year growth across a number of our financial metrics, including 20% total revenue growth in U.S. dollars or 17% measured in constant currency, 25% growth in GAAP operating income, 19% growth in non-GAAP operating income, and 34% growth in operating cash flow. In addition, we also drove 48% year-over-year growth in the number of deals over one million dollars in the quarter which is evidence of our ability to expand our technology footprint with customers,” stated Eric Shander, Executive Vice President and Chief Financial Officer of Red Hat. “As in March when we gave our annual guidance, we continue to expect strong demand for our hybrid cloud enabling technologies. Given the headwinds that have developed in foreign exchange rates since that time, we are adjusting our full year total revenue guidance by approximately $50 million, solely to account for the change in FX rates.”

On March 1, 2018, we adopted Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers, now commonly referred to as Accounting Standards Codification Topic 606 (“ASC 606”), using the full retrospective method of transition, which requires that the standard be applied to all periods presented. The adoption of ASC 606 did not materially impact our total revenues as previously reported for fiscal years 2018 and 2017 and it had no impact on net cash provided by or used in operating, investing or financing activities. The primary impact of adopting ASC 606 relates to the deferral of incremental commission and other costs of obtaining contracts with customers. Previously, we deferred only direct and incremental commission costs to obtain a contract and amortized those costs over the contract term as the revenue was recognized and, under the new standard, we now also defer related fringe benefit costs. The results in this Press Release apply these changes to the current period and adjust prior periods, which are detailed in the Supplemental Information section of the Press Release.

Revenue: Total revenue for the quarter was $814 million, up 20% in USD year-over-year, or 17% measured in constant currency. Constant currency references in this release are detailed in the tables below. Subscription revenue for the quarter was $712 million, up 19% in USD year-over-year, or 16% 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 $522 million, an increase of 14% in USD year-over-year, or 11% measured in constant currency. Subscription revenue from Application Development-related and other emerging technology offerings for the quarter was $189 million, an increase of 37% in USD year-over-year, or 32% measured in constant currency.

Operating Income: GAAP operating income for the quarter was $112 million, up 25% 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 first quarter was $168 million, up 19% year-over-year. For the first quarter, GAAP operating margin was 13.8% and non-GAAP operating margin was 20.7%. Non-GAAP references in this release are detailed in the tables below.

Net Income: GAAP net income for the quarter was $113 million, or $0.59 diluted earnings per share (“EPS”), compared with GAAP net income of $75 million, or $0.41 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 net income for the quarter was $133 million, or $0.72 diluted EPS, as compared to $104 million, or $0.58 diluted EPS, in the year-ago quarter. Non-GAAP diluted weighted average shares outstanding excludes dilution that is expected to be offset by our convertible note hedge transactions.

Cash: Operating cash flow was $346 million for the first quarter, an increase of 34% on a year-over-year basis. Total cash, cash equivalents and investments as of May 31, 2018 was $2.5 billion after repurchasing approximately $150 million, or 949,000 shares, of common stock in the first quarter. The remaining balance in the current repurchase authorization as of May 31, 2018 was approximately $249 million.

Deferred revenue: At the end of the first quarter, the company’s total deferred revenue balance was $2.4 billion, an increase of 19% year-over-year. The positive impact to total deferred revenue from changes in foreign exchange rates was $16 million year-over-year. On a constant currency basis, total deferred revenue would have been up 18% year-over-year.

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

For the full year:

  • Revenue is expected to be approximately $3.375 billion to $3.410 billion in USD.
  • GAAP operating margin is expected to be approximately 16.4% and non-GAAP operating margin is expected to be approximately 23.9%.
  • Diluted GAAP EPS is expected to be approximately $2.36 to $2.40, assuming 191 million diluted shares outstanding. Diluted non-GAAP EPS is expected to be approximately $3.44 to $3.48, assuming 185 million diluted shares outstanding. Both GAAP and non-GAAP EPS assume a $4 million per quarter forecast for other income and an estimated annual effective tax rate of approximately 22.5% before discrete tax items.
  • Operating cash flow is expected to be approximately $1.035 billion to $1.045 billion.

For the second quarter:

  • Revenue is expected to be approximately $822 to $830 million in USD.
  • GAAP operating margin is expected to be approximately 15.1% and non-GAAP operating margin is expected to be approximately 23.0%.
  • Diluted GAAP EPS is expected to be approximately $0.50, assuming 191 million diluted shares outstanding. Diluted non-GAAP EPS is expected to be approximately $0.81, assuming 185 million diluted shares outstanding. Both GAAP and non-GAAP EPS assume a $4 million forecast for other income and an estimated annual effective tax rate of 22.5% before discrete tax items.

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 $215 million and amortization of intangible assets of approximately $39 million. Full year 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 $20 million and an estimated annual effective tax rate of approximately 22.5% before discrete tax items. Additionally, full year diluted non-GAAP EPS excludes approximately $46 million of discrete tax benefits related to share-based compensation that are included in full year diluted GAAP EPS. Full year diluted non-GAAP EPS excludes approximately 6 million diluted shares related to the convertible notes, which are expected to be offset by our convertible note hedge transactions.

Second quarter non-GAAP operating margin guidance is derived by subtracting the estimated impact of non-cash share-based compensation expense of approximately $55 million and amortization of intangible assets of approximately $10 million. Second quarter 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 22.5% before discrete

tax items. Additionally, second quarter diluted non-GAAP EPS excludes approximately $7 million of discrete tax benefits related to share-based compensation that are included in second quarter diluted GAAP EPS. Second quarter diluted non-GAAP EPS excludes approximately 6 million diluted shares related to the convertible notes, which are expected to be offset by our convertible note hedge transactions.

Webcast and Website Information

A live webcast of Red Hat’s results will begin at 5:00 pm ET today. The webcast, in addition to a copy of our prepared remarks and slides containing financial highlights and supplemental metrics, 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 has ended. Additional information on Red Hat’s reported results, including a reconciliation of the non-GAAP adjusted results, are included in the financial tables below.

 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 ability of the Company to compete effectively; the ability to deliver and stimulate demand for new products and technological innovations on a timely basis; delays or reductions in information technology spending; the integration of acquisitions and the ability to market successfully acquired technologies and products; risks related to errors or defects in our offerings and third-party products upon which our offerings depend; risks related to the security of our offerings and other data security vulnerabilities; fluctuations in exchange rates; the effects of industry consolidation; uncertainty and adverse results in litigation and related settlements; 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; changes in and a dependence on key personnel; the ability to meet financial and operational challenges encountered in our international operations; and ineffective management of, and control over, the Company’s growth and international operations, as well as other factors contained in our most recent Annual Report on Form 10-K (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 to these factors, actual future performance, outcomes, and results may differ materially

because of more general factors including (without limitation) general industry and market conditions and growth rates, economic and political conditions, governmental and public policy changes and the impact of natural disasters such as earthquakes and floods. 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 this press release.

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Sunak gives British economy a boost to see out COVID crisis, tax rises ahead

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Sunak gives British economy a boost to see out COVID crisis, tax rises ahead 1

By David Milliken, William Schomberg and Andy Bruce

LONDON (Reuters) – Finance minister Rishi Sunak gave more aid to Britain’s economy and offered companies a big incentive to start investing again, but also announced a future tax squeeze on people and businesses as he began to focus on the COVID-19 hit to the public finances.

Sunak said in an annual budget speech on Wednesday that the economy will return to its pre-pandemic size in mid-2022, six months earlier than previously forecast, helped by Europe’s fastest coronavirus vaccination programme.

But it will be 3% smaller in five years’ time than it would have been without the health shock and extra support was needed as the country gradually lifts restrictions over the next few months, he said.

Sunak’s early warning that he will demand more money from companies and individual taxpayers in the coming years makes him one of the first policymakers from rich countries to address the state of public finances.

Britain’s first rise in corporation tax since 1974 will see big, profitable companies pay 25% from 2023 compared to 19% now.

But Sunak first offered firms an immediate two-year “super-deduction” tax break in a bid to snap them out of their pandemic deep-freeze and invest to boost short-term growth.

The government’s budget watchdog said the move was more than 10 times more generous than an equivalent incentive in 2009.

Sunak repeated his plan to do “whatever it takes to support the British people and businesses”.

“Second, once we are on the way to recovery, we will need to begin fixing the public finances – and I want to be honest today about our plans to do that,” he told parliament. “And, third, in today’s budget we begin the work of building our future economy.”

Among the support measures were a five-month extension of Britain’s huge jobs rescue plan, wider help for the self-employed and the continuation of an emergency increase in welfare payments.

A business rates exemption for retail, hospitality and leisure businesses will now run until the end of June, by when Prime Minister Boris Johnson hopes to have lifted most COVID-19 restrictions.

An existing tax break for home-buyers was extended by three months until June 30 and then for cheaper homes until the end of September.

Shares in housebuilders gained on the news, with Persimmon one of the top risers in the FTSE 100, up about 5%.

Pub firms JD Wetherspoon and Premier Inn owner Whitbread also rose about 5%, helped by an extended VAT cut for the hospitality sector.

But British government bond prices fell sharply after Sunak said overall borrowing will be much bigger next financial year than thought just a few months ago – 234 billion pounds, or 10.3% of gross domestic product, compared with a previous estimate of 164 billion pounds, or 7.4% of GDP.

The Debt Management Office said it planned to sell 296 billion pounds of gilts in the coming year, well above the 247 billion pounds expected in a Reuters poll.

“The UK’s fiscal stance has become much looser, and more focused on investment, more in line with its U.S. and euro area counterparts,” Morgan Stanley economist Jacob Nell said.

“This shift changes our view of the UK. Near term, we see a stronger and more investment-focused recovery bringing forward the return to pre-COVID-19 levels of output.”

To show he will get a grip on borrowing, Sunak’s future hikes will increase the tax burden to its highest since the 1960s, rising from 34% to 35% of GDP by the mid-2020s.

“The UK is thus to become the first major economy to consider such measures,” Valentin Marinov, head of G10 foreign exchange research at Credit Agricole, said.

Britain has suffered the biggest COVID-19 death toll in Europe and its economy shrank by 10% last year, its worst slump in three centuries.

Many companies are also under strain from Brexit after Britain left the European Union’s single market on Jan. 1, and the government faces the challenge of huge investment to meet its promise to create a net zero carbon economy by 2050.

UK EARLY MOVER ON TAX HIKES

Britain’s Office for Budgetary Responsibility (OBR) said the economy was likely to grow 4% in 2021, slower than the 5.5% it had forecast in November, due largely to the current lockdown which began in January.

But the OBR raised its forecast for growth in 2022 to 7.3% from 6.6%.

Sunak has already racked up Britain’s highest borrowing since World War Two, with the deficit reaching an estimated 17% of GDP in the 2020/21 financial year that ends in April and set to fall to a still historically high 10.3% in 2021/22.

Announcing the corporation tax rise, he said: “Even after this change the UK will still have the lowest corporation tax rate in the G7 – lower than the United States, Canada, Italy, Japan, Germany and France.”

Rain Newton Smith, chief economist at the Confederation of British Industry, said the hike was “a huge jump” and that other G7 countries would be more competitive than Britain when state and federal level tax breaks were taken into account.

Businesses with profits of 50,000 pounds or less would pay a new Small Profits Rate at the current rate of 19%.

Sunak also said he would freeze the amount of money that people can earn tax-free and the threshold for the higher rate of income tax at the 2021/22 level until April 2026.

($1 = 0.7156 pounds)

(Additional reporting by Guy Faulconbridge, William James, Costas Pitas, James Davey, Estelle Shirbon, Elizabeth Piper, Paul Sandle, Alastair Smout and Sarah Young; Writing by William Schomberg; Editing by Catherine Evans)

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UK’s Sunak extends COVID rescue plan but companies to pay more tax from 2023

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UK's Sunak extends COVID rescue plan but companies to pay more tax from 2023 2

By David Milliken and William Schomberg

LONDON (Reuters) – Finance minister Rishi Sunak announced a costly extension of his emergency aid programmes to see Britain’s economy through its current coronavirus lockdown, but announced a tax hike for many businesses as he began to focus on fixing the public finances.

Delivering an annual budget speech on Wednesday, Sunak said the economy will regain its pre-pandemic size in the middle of 2022, six months earlier than previously forecast, helped by Europe’s fastest COVID-19 vaccination programme.

But it will remain 3% smaller in five years’ time than it would have been without the damage wrought by the coronavirus crisis and extra support is needed now as the country remains under coronavirus restrictions, he said.

Among the new support measures was a five-month extension of his huge jobs rescue plan and more help for the self-employed, the continuation of an emergency increase in welfare payments, and an extension of a VAT cut for the hospitality sector.

A tax cut for home-buyers was also extended until the end of June.

“First, we will continue doing whatever it takes to support the British people and businesses through this moment of crisis,” Sunak told parliament.

“Second, once we are on the way to recovery, we will need to begin fixing the public finances – and I want to be honest today about our plans to do that. And, third, in today’s Budget we begin the work of building our future economy.”

Announcing forecasts by the Office for Budgetary Responsibility (OBR), Sunak said the economy was likely to grow by 4% in 2021, slower than a forecast of 5.5% made in November, reflecting the current lockdown which began in January.

Looking further ahead, the OBR forecast gross domestic product would grow 7.3%, 1.7% and 1.6% in 2022, 2023 and 2024 respectively. In November, the OBR had forecast growth in those years of 6.6%, 2.3% and 1.7%.

Sunak promised to do “whatever it takes” to steer the economy through what he hopes will be the final months of pandemic restrictions.

He has already racked up Britain’s highest borrowing since World War Two, which hit an estimated 17% of GDP in the 2020/21 financial year that is about to end and should fall to a still historically high 10.3% in 2021/22.

In a first move to raise taxes, Sunak announced he would raise corporation tax to 25% from 19% from 2023, by which time the economy should be past the pandemic crisis.

“Even after this change the UK will still have the lowest corporation tax rate in the G7 – lower than the United States, Canada, Italy, Japan, Germany and France,” he said.

Businesses with profits of 50,000 pounds or less would pay a new Small Profits Rate, maintained at the current rate of 19%.

Sunak also said he would freeze the amount of money that people can earn tax-free and the threshold for the higher rate of income tax until 2026.

(Writing by William Schomberg; Editing by Catherine Evans)

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Renewable diesel boom highlights challenges in clean-energy transition

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Renewable diesel boom highlights challenges in clean-energy transition 3

By Rod Nickel, Stephanie Kelly and Karl Plume

(Reuters) – For 17 years, trucker Colin Birch has been hitting the highways to collect used cooking oil from restaurants.

He works for Vancouver-based renderer West Coast Reduction Ltd, which processes the grease into a material to make renewable diesel, a clean-burning road fuel. That job has recently gotten much harder. Birch is caught between soaring demand for the fuel – driven by U.S. and Canadian government incentives – and scarce cooking oil supplies, because fewer people are eating out during the coronavirus pandemic.

“I just have to hustle more,” said Birch, who now sometimes travels twice as far across British Columbia to collect half as much grease as he once did.

His search is a microcosm of the challenges facing the renewable diesel industry, a niche corner of global road fuel production that refiners and others are betting on for growth in a lower-carbon world. Their main problem: a shortage of the ingredients needed to accelerate production of the fuel.

Unlike other green fuels such as biodiesel, renewable diesel can power conventional auto engines without being blended with diesel derived from crude oil, making it attractive for refiners aiming to produce low-pollution options. Refiners can produce renewable diesel from animal fats and plant oils, in addition to used cooking oil.

Production capacity is expected to nearly quintuple to about 2.65 billion gallons (63 million barrels) over the next three years, investment bank Goldman Sachs said in an October report.

Rising demand is creating both problems and opportunities across an emerging supply chain for the fuel, one small example of how the larger transition to green fuels is upending the energy economy. A renewable diesel boom could also have a profound impact on the agricultural sector by swelling demand for oilseeds like soybeans and canola that compete with other crops for finite planting area, and by driving up food prices.

Local and federal governments in the United States and Canada have created a mix of regulations, taxes or credits to stimulate more production of cleaner fuels. President Joe Biden has promised to move the United States toward net-zero emissions, and Canada’s Clean Fuel Standard requires lower carbon intensity starting in late 2022. California currently has a low-carbon standard that provides tradable credits to clean fuel producers.

But the feedstock supply squeeze is constraining the industry’s ability to comply with those efforts.

‘SPINNING FAT INTO GOLD’

Demand and prices for feedstocks from soybean oil to grease and animal fat is soaring. Used cooking oil is worth 51 cents per pound, up about half from last year’s price, according to pricing service The Jacobsen.

Tallow, made from cattle or sheep fat, sells for 47 cents per pound in Chicago, up more than 30% from a year ago. That’s boosting the fortunes of renderers such as Texas-based Darling Ingredients Inc and meat packers such as Tyson Foods Inc. Darling shares have about doubled in the last six months.

“They’re spinning fat into gold,” said Lonnie James, owner of South Carolina fats and oil brokerage Gersony-Strauss. “The appetite for it is amazing.”

Clean fuels could be a boon for North American refiners, among the pandemic’s hardest-hit businesses as grounded airlines and lockdowns hammered fuel demand. Refiners Valero Energy Corp, PBF Energy Inc and Marathon Petroleum Corp all lost billions in 2020.

Valero’s renewable diesel segment, however, posted a profit, and the company has announced plans to expand output. Marathon is seeking permits to convert a California refinery to produce renewable fuels, while PBF is considering a renewable diesel project at a Louisiana refinery.

The companies are among at least eight North American refineries that have announced plans to produce renewable fuels, including Phillips 66, which is reconfiguring a California refinery to produce 800 million gallons of green fuels annually.

Once new renewable diesel production capacity comes online, feedstocks are likely to become more scarce, said Todd Becker, chief executive of Green Plains Inc, a biorefining company that helps produce feedstocks.

Goldman Sachs estimates that an additional 1 billion gallons of total capacity could be added if not for issues with feedstock availability, permitting and financing.

“Everybody in North America and around the world are all trying to buy low carbon-intensity feedstocks,” said Barry Glotman, chief executive of West Coast Reduction.

His customers include the world’s biggest renewable diesel maker, Finland’s Neste. A spokesperson for Neste said the company sees more than enough feedstock supply to meet current demand and that development of new feedstocks can ensure supply in the future.

SOYBEAN, CANOLA BOOM

Renewable diesel producers are increasingly counting on soybean and canola oil to run new plants.

The U.S. Agriculture Department (USDA) is forecasting record-high soybean demand from domestic processors and exporters this season, largely because of soaring global demand for livestock and poultry feed.

Crushers who produce oil from the crops are also scouring Western Canada for canola, helping to drive prices in February to a record futures high of C$852.10 per tonne. Soybeans reached $14.45 per bushel in the United States last week, the highest level in more than six years.

Rising food prices are a concern if the predicted demand for crops to generate renewable diesel materializes, said USDA Chief Economist Seth Meyer. U.S. renewable diesel production could generate an extra 500 million pounds of demand for soyoil this year, Juan Luciano, chief executive of agricultural commodities trader Archer Daniels Midland Co, said in January. That would represent a 2% year-over-year increase in total consumption.

Greg Heckman, CEO of agribusiness giant Bunge Ltd, in February called the renewable diesel expansion a long-term “structural shift” in demand for edible oils that will further tighten global supplies this year.

By 2023, U.S. soybean oil demand could outstrip U.S. production by up to 8 billion pounds annually if half the proposed new renewable diesel capacity is constructed, according to BMO Capital Markets.

That same year, Canadian refiners and importers will face their first full year complying with new standards to lower the carbon intensity of fuel, accelerating demand for renewable diesel feedstocks, said Ian Thomson, president of industry group Advanced Biofuels Canada.

Manitoba canola grower Clayton Harder said it is hard to envision a vast expansion of canola plantings because farmers need to rotate crops to keep soils healthy. Farmers may instead have to raise yields by improving agronomic practices and sowing better seed varieties, he said.

British Columbia refiner Parkland Corp is hedging its bets on feedstock supplies. The company is securing canola oil through long-term contracts, but also exploring how to use forestry waste such as branches and foliage, said Senior Vice President Ryan Krogmeier.

The competition to find new and sustainable biofuel feedstocks will be fierce, said Randall Stuewe, chief executive at Darling, the largest renderer and collector of waste oils.

“If there is a feedstock war, so be it,” he said.

(Reporting by Rod Nickel in Winnipeg, Stephanie Kelly in New York and Karl Plume in Chicago; editing by David Gaffen, Simon Webb and Brian Thevenot)

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