8-K

UNITED STATESSECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 8-K

CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934

Date of report (Date of earliest event reported): September 19, 2018

Red Hat, Inc.
(Exact Name of Registrant as Specified in Its Charter)

Delaware
(State or Other Jurisdiction of Incorporation)

001-33162	06-1364380
(Commission File Number)	(I.R.S. Employer Identification No.)

100 East Davie Street, Raleigh, North Carolina	27601
(Address of Principal Executive Offices)	(Zip Code)

(919) 754-3700(Registrant’s Telephone Number, Including Area Code)

Not Applicable(Former Name or Former Address, if Changed Since Last Report)

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):

⃞ Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

⃞ Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

⃞ Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

⃞ Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).

Emerging growth company  ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐

Item 2.02. Results of Operations and Financial Condition

On September 19, 2018, Red Hat, Inc. announced its financial results for the fiscal second quarter ended August 31, 2018. The full text of the press release issued in connection with the announcement is furnished as Exhibit 99.1 to this Current Report on Form 8-K.

In the press release, we disclosed non-GAAP financial information for the three and six months ended August 31, 2018 and August 31, 2017. These non-GAAP disclosures include non-GAAP revenue growth rates measured on a constant currency basis, non-GAAP cash flow provided by operations and a reconciliation of GAAP net income to non-GAAP adjusted net income based on:

• the impact of non-cash share-based compensation expense under FASB ASC Section 718 Compensation-Stock Compensation ("ASC 718") and the related discrete tax benefit or expense;
• the impact of expense associated with the amortization of intangible assets primarily related to business combinations;
• the impact of non-cash interest expense related to the debt discount described below; and
• the impact of transaction costs related to business combinations.

These non-GAAP disclosures should not be used as a substitute for our GAAP results, but rather read in conjunction with our GAAP results. The non-GAAP financial measures we disclosed and the methods we used to calculate non-GAAP results are not in accordance with GAAP and may be materially different from the non-GAAP measures and methods used by other companies.

We disclosed non-GAAP revenue growth rates for subscription revenue, training and services revenue and total revenue measured on a constant currency basis for the three and six months ended August 31, 2018 in an effort to provide a comparable framework for assessing how our business performed when compared to the three and six months ended August 31, 2017 in light of the effect of exchange rate differences. Approximately 45.1% and 45.3% of our revenue for the three and six months ended August 31, 2018, respectively, was produced by sales outside the United States. The income statements of our non-U.S. operations are translated into U.S. dollars using the average exchange rates for each month in an applicable period. To the extent the U.S. dollar weakens against foreign currencies, the translation of transactions denominated in foreign currencies results in increased revenue, as stated in U.S. dollars, for our non-U.S. operations. Similarly, revenue, as stated in U.S. dollars, for our non-U.S. operations decreases if the U.S. dollar strengthens against foreign currencies. Using the average foreign currency exchange rates for the three and six months ended August 31, 2017, our subscription revenue for the three and six months ended August 31, 2018 would have been higher than we reported by $2.6 million and lower than we reported by $17.7 million, respectively, our training and services revenue for the three and six months ended August 31, 2018 would have been higher than we reported by $1.6 million and lower than we reported by less than $1.0 million, respectively, and our total revenue for the three and six months ended August 31, 2018 would have been higher than we reported by $4.2 million and lower than we reported by $18.4 million, respectively.

We also disclosed non-GAAP deferred revenue growth rates measured on a constant currency basis for the twelve months ended August 31, 2018 and revenue growth rates by geographic segment measured on a constant currency basis for the three and six months ended August 31, 2018 in an effort to provide a comparable framework for assessing how our business performed when compared to the twelve months ended August 31, 2017 and the three and six months ended August 31, 2017, respectively, in light of the effect of exchange rate differences.

We excluded GAAP share-based compensation expense and the related discrete tax benefit or expense for the purpose of calculating non-GAAP adjusted net income and non-GAAP adjusted net income per share because share-based compensation expense is a non-cash expense which may vary significantly from period to period as a result of changes not directly or immediately related to the particular period’s operational performance. For example, the amount recognized for share-based awards is directly related to the underlying share price of our common stock as of the date of grant, which, in the short-term, may not be directly related to our operational performance. Consequently, management believes that by excluding share-based compensation expense we provide an alternative and useful measure of operating performance. Management also believes that non-GAAP measures of profitability that exclude share-based compensation expense are used by a number of financial analysts in the software industry to compare current performance to prior periods and to forecast future performance. Our reconciliation of GAAP net income to non-GAAP adjusted net income includes GAAP non-cash, share-based compensation expense of $52.7 million and $98.7 million for the three and six months ended August 31, 2018, respectively, and $46.9 million and $90.7 million for the three and six months ended August 31, 2017, respectively, versus the non-GAAP exclusion of such expense.

Amortization expense related to intangible assets results primarily from business combinations. These costs are fixed in connection with an acquisition, are then amortized over a number of years after the acquisition and generally cannot be changed or influenced by management after the acquisition. Accordingly, management generally does not consider such costs for the purpose of evaluating the performance of the business or its managers or when making decisions to allocate resources. Management also believes that non-GAAP measures of profitability that exclude amortization expense related to intangible assets are used by a number of financial analysts in the software industry to compare current performance to prior periods and to forecast future performance. Our reconciliation of GAAP net income to non-GAAP adjusted net income includes GAAP non-cash amortization expense of $9.7 million and $19.6 million for the three and six months ended August 31, 2018, respectively, and $8.2 million and $15.3 million for the three and six months ended August 31, 2017, respectively, versus the non-GAAP exclusion of such expense.

We also excluded GAAP non-cash interest expense relating to our 0.25% convertible senior notes issued in October 2014 for the purpose of calculating non-GAAP adjusted net income and non-GAAP adjusted net income per share. Under GAAP, certain convertible debt instruments that may be settled in cash on conversion are required to be accounted for as separate liability (debt) and equity (conversion option) components in a manner that reflects the issuer’s non-convertible debt borrowing rate. This results in the debt component being treated as though it was issued at a discount, with the debt discount being accreted as additional non-cash interest expense over the term of the notes using the effective interest method. As a result, management believes that excluding this non-cash interest expense from the accretion of the debt discount in calculating our non-GAAP measures is useful because this incremental interest expense does not represent a cash outflow and is not indicative of our ongoing operational performance. Our reconciliation of GAAP net income to non-GAAP adjusted net income includes GAAP non-cash interest expense related to the debt discount of $3.9 million and $8.9 million for the three and six months ended August 31, 2018, respectively, and $4.9 million and $9.8 million for the three and six months ended August 31, 2017, respectively, versus the non-GAAP exclusion of such expense. Additionally, for the purpose of calculating non-GAAP adjusted net income per share, non-GAAP diluted weighted average shares outstanding excludes 3.7 million shares and 3.8 million shares for the three and six months ended August 31, 2018, respectively, and 2.7 million shares and 2.2 million shares for the three and six months ended August 31, 2017, respectively, from our calculation of GAAP diluted weighted average shares outstanding.  We exclude these shares that are issuable upon conversions of our convertible notes because we expect that the dilution from such shares will be offset by the convertible note hedge transactions entered into in October 2014 in connection with the issuance of the convertible notes.

We also excluded GAAP expense relating to costs we incurred in connection with business combinations. These costs include acquisition-related charges such as transaction expenses. As we do not acquire or dispose of businesses on a predictable cycle, the terms of each acquisition are unique and can vary significantly from other acquisitions and significant expense can be incurred in connection with an acquisition that we would not have otherwise incurred in the periods presented as part of our continuing operations, management believes that by excluding such expense we provide an alternative and useful measure of operating performance. Management also believes that non-GAAP measures of profitability that exclude acquisition-related charges are used by a number of financial analysts in the software industry to compare current performance to prior periods and to forecast future performance. Our reconciliation of GAAP net income to non-GAAP adjusted net income includes GAAP acquisition-related expense of less than $1.0 million for both the three and six months ended August 31, 2018, and GAAP acquisition-related expenses of $1.2 million and $1.4 million for the three and six months ended August 31, 2017, respectively, versus the non-GAAP exclusion of such expense.

We recently adopted ASU 2016-15: Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments, which now requires us to classify the portion of repayments of the convertible notes that is attributable to the debt discount as a cash outflow from operating activities rather than a cash outflow from financing activities.  As a result, we have disclosed non-GAAP net cash provided by operating activities for the three and six months ended August 31, 2018, which removes the impact of this classification as a cash outflow from operating activities, in an effort to provide a comparable framework for assessing how our business performed when compared to the three and six months ended August 31, 2017.  Our reconciliation of GAAP net cash provided by operating activities to non-GAAP net cash provided by operating activities includes the portion of repayments of convertible notes attributable to debt discount of $32.6 million for both the three and six months ended August 31, 2018 versus the non-GAAP exclusion of such repayments.

On August 21, 2018, the Internal Revenue Service issued Notice 2018-68 providing guidance regarding amendments to Section 162(m) of the Internal Revenue Code contained in the Tax Cuts and Jobs Act that limit tax deductions for compensation granted to certain executives. As a result of this guidance, our GAAP provision for income taxes for the three and six months ended August 31, 2018 includes the impact of this tax deduction limitation.  In an effort to provide a comparable framework for assessing how our business performed when compared to the three and six months ended August 31, 2017, the calculation of our non-GAAP provision for income taxes for the three and six months ended August 31, 2018 excludes $5.0 million of tax expense for share-based compensation that is no longer deductible.

Additionally, for the three months ended August 31, 2018, we recorded a tax charge of approximately $18 million, resulting primarily from the re-measurement of deferred tax assets associated with the non-deductibility of certain share-based compensation under Notice 2018-68 and the reversal of certain share-based compensation benefits recognized during the three months ended May 31, 2018.  Our non-GAAP provision for income tax excludes this impact related to Notice 2018-68.

Management believes that these adjusted non-GAAP results, when read in conjunction with the GAAP results, offer a useful view of our business performance in that they provide a more consistent means of comparing performance to prior periods in light of the effect of exchange rate differences, potential variations in the amount of expense for share-based awards recognized from period to period due to changes in the price of our common stock and the related tax benefit or expense, the irregularity with which management acquires intangible assets, the non-cash interest expense related to the debt discount, the exclusion of any share dilution that is expected to be offset by the convertible note hedge transactions, transaction costs we incurred in connection with business combinations, our reclassification of a portion of repayments of the convertible notes that is attributable to the debt discount as a cash outflow from operating activities rather than a cash outflow from financing activities, and changes in the deductibility of share-based compensation granted to certain executives. Management also uses non-GAAP measures as a component of its regular internal reporting to evaluate performance of the business and compare it to prior performance, to make operating decisions, including internal budgeting and the calculation of incentive compensation, and to forecast future performance. Our disclosure of non-GAAP financial measures allows investors to evaluate the Company's performance using information used by management.

The information furnished pursuant to Item 2.02 of this Form 8-K, including Exhibit 99.1 referenced herein, shall not be deemed "filed" for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the "Exchange Act") or otherwise subject to the liabilities of that section, nor shall it be deemed incorporated by reference in any filing under the Securities Act of 1933, as amended, or the Exchange Act, except as expressly set forth by specific reference in such a filing.

Item 9.01. Financial Statements and Exhibits

(d)  Exhibits

Exhibit No.	Description
99.1	Press Release dated September 19, 2018

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

Date:	September 19, 2018	RED HAT, INC.
		By:	/s/ ERIC R. SHANDER
		Name:	Eric R. Shander
		Title:	Executive Vice President and Chief Financial Officer

EX-99.1

Exhibit 99.1

Red Hat Reports Second Quarter Results for Fiscal Year 2019

• Second quarter total revenue of $823 million, up 14% year-over-year, or 14% in constant currency
• Second quarter Application Development-related and other emerging technology subscription revenue of $196 million, up 31% year-over-year, or 31% in constant currency
• Quarter-end deferred revenue balance of $2.4 billion, up 17% year-over-year, or 19% in constant currency

RALEIGH, N.C.--(BUSINESS WIRE)--September 19, 2018--Red Hat, Inc. (NYSE: RHT), the world's leading provider of open source solutions, today announced financial results for the second quarter of fiscal year 2019 ended August 31, 2018.

“Customers continue to prioritize their digital transformation initiatives, and they are adopting Red Hat’s hybrid cloud enabling technologies to modernize their applications and drive greater efficiency and effectiveness in their business,” stated Jim Whitehurst, President and Chief Executive Officer of Red Hat. “The expansion of our technology portfolio has increased our strategic importance with customers, which is evidenced by the number of deals over five million dollars in the second quarter more than doubling year-over-year.”

“Our second quarter results were consistent with our guidance and we drove 20% growth in total backlog to $3.3 billion,” said Eric Shander, Executive Vice President and Chief Financial Officer for Red Hat. “We are re-affirming our full year growth in constant currency at 16%-17% year-over-year; however, we are adjusting our full year total revenue guidance in dollars by approximately $15 million, solely to account for the change in FX rates.”

Revenue: Total revenue for the quarter was $823 million, up 14% in USD year-over-year, or 14% measured in constant currency. Constant currency references in this release are detailed in the tables below. Subscription revenue for the quarter was $723 million, up 13% in USD year-over-year, or 14% measured in constant currency. Subscription revenue in the quarter was 88% of total revenue.

Subscription Revenue Breakout: Subscription revenue from Infrastructure-related offerings for the quarter was $527 million, an increase of 8% in USD year-over-year, or 8% measured in constant currency. Subscription revenue from Application Development-related and other emerging technology offerings for the quarter was $196 million, an increase of 31% in USD year-over-year, or 31% measured in constant currency.

Operating Income: GAAP operating income for the quarter was $135 million. 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 $197 million, up 3% year-over-year. For the second quarter, GAAP operating margin was 16.4% and non-GAAP operating margin was 23.9%. Non-GAAP references in this release are detailed in the tables below.

Provision for Income Taxes: GAAP provision for income taxes for the second quarter included a tax charge of approximately $18 million due to newly issued IRS guidance related to the Tax Cuts and Jobs Act (“IRS Guidance”), resulting primarily from the re-measurement of deferred tax assets associated with the non-deductibility of certain share-based compensation and the reversal of certain share-based compensation benefits recognized during the first quarter of fiscal year 2019. Non-GAAP provision for income tax excludes this impact related to the IRS Guidance.

Net Income: GAAP net income for the quarter was $87 million, or $0.46 diluted earnings per share (“EPS”), compared with GAAP net income of $97 million, or $0.53 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 $157 million, or $0.85 diluted EPS, as compared to $138 million, or $0.77 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 $133 million for the second quarter, down 7% on a year-over-year basis. Operating cash flow includes the impact of our recent adoption of ASU 2016-15: Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments, which requires the portion of repayments of convertible notes during the second quarter that is attributable to debt discount to be classified as operating cash flow. Non-GAAP cash flow provided by operations, which excludes this impact, was $165 million, an increase of 16% on a year-over-year basis compared to GAAP operating cash flow. Total cash, cash equivalents and investments as of August 31, 2018 was $2.2 billion after repurchasing approximately $250 million, or approximately 1.7 million shares, of common stock in the second quarter. The remaining balance in the current repurchase authorization as of August 31, 2018 was approximately $750 million.

Deferred revenue: At the end of the second quarter, the Company’s total deferred revenue balance was $2.4 billion, an increase of 17% year-over-year. The negative impact to total deferred revenue from changes in foreign exchange rates was $40 million year-over-year. On a constant currency basis, total deferred revenue would have been up 19% 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 $3.360 billion to $3.395 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 $2.29 to $2.33, assuming 186 million diluted shares outstanding. Diluted non-GAAP EPS is expected to be approximately $3.45 to $3.49, assuming 184 million diluted shares outstanding. Both GAAP and non-GAAP EPS assume a $4 million per quarter forecast for other income. The GAAP estimated tax rate assumes a rate of 23.4% before discrete tax items and the non-GAAP estimated tax rate assumes a rate of approximately 22.5% before discrete tax items.
• Non-GAAP operating cash flow is expected to be approximately $1.035 billion to $1.045 billion.

For the third quarter:

• Revenue is expected to be approximately $848 to $856 million in USD.
• GAAP operating margin is expected to be approximately 16.1% and non-GAAP operating margin is expected to be approximately 24.0%.
• Diluted GAAP EPS is expected to be approximately $0.56, assuming 186 million diluted shares outstanding. Diluted non-GAAP EPS is expected to be approximately $0.87, assuming 184 million diluted shares outstanding. Both GAAP and non-GAAP EPS assume a $4 million forecast for other income. The GAAP estimated tax rate assumes a rate of 23.4% before discrete tax items and the non-GAAP estimated tax rate assumes a rate of approximately 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 tax expense at an estimated annual non-GAAP effective tax rate of approximately 22.5% before discrete tax items. Additionally, full year diluted non-GAAP EPS excludes approximately $12.8 million of discrete tax benefits related to share-based compensation and certain non-deductible share-based compensation under IRS Guidance that are included in full year diluted GAAP EPS. Full year GAAP EPS does not take into account any future discrete tax benefit or expense because such amounts are unknown. Full year diluted non-GAAP EPS excludes approximately 2 million diluted shares related to the convertible notes, which are expected to be offset by our convertible note hedge transactions.

The full year outlook for non-GAAP cash flow provided by operations excludes the portion of repayments of convertible notes that are attributable to debt discount. The Company is not able to predict the timing and amount of any future convertible note settlements initiated by a holder prior to maturity so forecasting GAAP operating cash flow is not possible to calculate without unreasonable effort.

Third quarter non-GAAP operating margin guidance is derived by subtracting the estimated impact of non-cash share-based compensation expense of approximately $57 million and amortization of intangible assets of approximately $10 million. Third 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 tax expense at an estimated annual non-GAAP effective tax rate of 22.5% before discrete tax items. Third quarter GAAP EPS does not take into account any future discrete tax benefit or expense because such amounts are unknown. Third quarter diluted non-GAAP EPS excludes approximately 2 million diluted shares related to the convertible notes, which are expected to be offset by our convertible note hedge transactions.

The estimated annual non-GAAP effective tax rate of 22.5% for both the full year and third quarter outlook excludes the impact of certain non-deductible share-based compensation under IRS Guidance.

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.

About Red Hat, Inc.

Red Hat is the world's leading provider of open source software solutions, using a community-powered approach to provide reliable and high-performing cloud, Linux, middleware, storage and virtualization technologies. Red Hat also offers award-winning support, training, and consulting services. As a connective hub in a global network of enterprises, partners, and open source communities, Red Hat helps create relevant, innovative technologies that liberate resources for growth and prepare customers for the future of IT. Learn more at http://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 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 Quarterly Report on Form 10-Q (copies of which may be accessed through the Securities and Exchange Commission's website, (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.

Red Hat and the Shadowman logo are trademarks or registered trademarks of Red Hat, Inc. or its subsidiaries in the U.S. and other countries. Linux® is the registered trademark of Linus Torvalds in the U.S. and other countries.

RED HAT, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) (In thousands - except per share amounts)
	Three Months Ended						Six Months Ended
	August 31,			August 31,			August 31,			August 31,
	2018			2017 (1)			2018			2017 (1)
Revenue:
Subscriptions	$	722,699		$	637,562		$	1,434,220		$	1,234,070
Training and services	100,048			85,793			202,057			166,081
Total revenue	822,747			723,355			1,636,277			1,400,151
Cost of revenue:
Subscriptions	51,931			46,324			104,104			89,957
Training and services	66,999			60,393			137,525			117,456
Total cost of revenue	118,930			106,717			241,629			207,413
Gross profit	703,817			616,638			1,394,648			1,192,738
Operating expense:
Sales and marketing	334,380			278,317			683,195			572,640
Research and development	166,308			141,809			332,814			278,972
General and administrative	68,573			61,722			131,927			116,592
Total operating expense	569,261			481,848			1,147,936			968,204
Income from operations	134,556			134,790			246,712			224,534
Interest income	7,855			4,612			15,689			8,605
Interest expense	4,808			6,081			11,127			12,166
Other expense, net	(2,457		)	(1,260		)	(4,651		)	(1,846		)
Income before provision for income taxes	135,146			132,061			246,623			219,127
Provision for income taxes	48,292			34,973			46,579			46,725
Net income	$	86,854		$	97,088		$	200,044		$	172,402
Net income per share:
Basic	$	0.49		$	0.55		$	1.13		$	0.97
Diluted	$	0.46		$	0.53		$	1.06		$	0.94
Weighted average shares outstanding:
Basic	176,746			177,257			177,024			177,250
Diluted	186,936			183,021			188,061			182,460

⁽¹⁾ As adjusted to reflect the impact of the retrospective application of ASC 606.

RED HAT, INC. CONSOLIDATED BALANCE SHEETS (Unaudited) (In thousands)
	August 31,			February 28,
	2018			2018 (1)
ASSETS
Current assets:
Cash, cash equivalents and restricted cash	$	1,503,515		$	1,724,132
Investments in debt and equity securities, short-term	264,945			318,358
Accounts receivable, net	516,008			806,744
Prepaid expenses	247,197			267,197
Other current assets	46,088			25,666
Total current assets	2,577,753			3,142,097
Property and equipment, net	195,230			206,105
Goodwill	1,278,478			1,288,830
Identifiable intangibles, net	213,260			224,953
Investments in debt securities, long-term	389,402			430,442
Deferred tax assets, net	83,761			92,606
Other assets, net	68,984			89,460
Total assets	$	4,806,868		$	5,474,493
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable and accrued expenses	$	405,970		$	427,139
Deferred revenue, short-term	1,683,503			1,853,719
Other current obligations	544			843
Convertible notes	4,435			23,806
Total current liabilities	2,094,452			2,305,507
Deferred revenue, long-term	709,746			741,453
Convertible notes	512,095			744,194
Other long-term obligations	200,771			205,215
Stockholders’ equity:
Common stock	24			24
Additional paid-in capital	2,576,560			2,416,080
Retained earnings	1,820,124			1,619,688
Treasury stock, at cost	(3,055,268		)	(2,525,072		)
Accumulated other comprehensive loss	(51,636		)	(32,596		)
Total stockholders’ equity	1,289,804			1,478,124
Total liabilities and stockholders’ equity	$	4,806,868		$	5,474,493

⁽¹⁾ Derived from audited financial statements except for line items adjusted by the retrospective application of ASC 606.

RED HAT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
	Three Months Ended						Six Months Ended
	August 31, 2018			August 31, 2017 (1)			August 31, 2018			August 31, 2017 (1)
Cash flows from operating activities:
Net income	$	86,854		$	97,088		$	200,044		$	172,402
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	26,666			24,136			53,720			45,953
Amortization of debt discount and transaction costs	4,570			5,570			10,408			11,110
Repayments of convertible notes attributable to debt discount	(32,563		)	—			(32,563		)	—
Deferred income taxes	(293		)	(359		)	(3,688		)	7,558
Share-based compensation expense	52,686			46,947			98,691			90,665
Net amortization of bond premium on debt securities available for sale	543			2,439			1,286			4,875
Other	2,553			571			3,650			1,532
Changes in operating assets and liabilities, net of effects of acquisitions:
Accounts receivable	(22,049		)	17,036			277,390			225,797
Other receivables	14,915			(949		)	(20,245		)	(20,346		)
Prepaid expenses	6,280			(11,793		)	31,662			231
Accounts payable and accrued expenses	26,937			2,010			(1,705		)	(53,316		)
Deferred revenue	(33,786		)	(40,575		)	(138,378		)	(86,292		)
Other	(521		)	775			(1,321		)	599
Net cash provided by operating activities	132,792			142,896			478,951			400,768
Cash flows from investing activities:
Purchase of investment in debt securities available for sale	(9,725		)	(109,669		)	(118,061		)	(259,193		)
Proceeds from maturities of investment in debt securities available for sale	106,050			105,303			193,054			217,344
Proceeds from sales of investment in debt securities available for sale	7,966			—			8,491			14,324
Proceeds from sales of strategic equity investments	—			—			1,300			—
Acquisition of businesses, net of cash acquired	—			(83,965		)	—			(83,965		)
Purchase of developed software and other intangible assets	(3,258		)	(7,671		)	(6,124		)	(9,445		)
Purchase of property and equipment	(13,653		)	(25,781		)	(26,616		)	(51,681		)
Other	—			(189		)	(986		)	(189		)
Net cash provided by (used in) investing activities	87,380			(121,972		)	51,058			(172,805		)
Cash flows from financing activities:
Proceeds from exercise of common stock options	189			862			1,064			3,830
Proceeds from employee stock purchase program	13,685			10,952			28,947			22,713
Payments related to net settlement of share-based compensation awards	(17,638		)	(7,413		)	(94,732		)	(48,423		)
Purchase of treasury stock	(250,035		)	(75,015		)	(400,054		)	(137,002		)
Payments on other borrowings	(250		)	(418		)	(549		)	(861		)
Repayments of convertible notes attributable to principal	(211,990		)	—			(237,943		)	—
Net cash used in financing activities	(466,039		)	(71,032		)	(703,267		)	(159,743		)
Effect of foreign currency exchange rates on cash, cash equivalents and restricted cash	(19,098		)	29,959			(47,359		)	51,280
Net (decrease) increase in cash, cash equivalents and restricted cash	(264,965		)	(20,149		)	(220,617		)	119,500
Cash, cash equivalents and restricted cash at beginning of the period	1,768,480			1,230,457			1,724,132			1,090,808
Cash, cash equivalents and restricted cash at end of the period	$	1,503,515		$	1,210,308		$	1,503,515		$	1,210,308

⁽¹⁾ As adjusted to reflect the impact of the retrospective application of ASC 606.

RED HAT, INC.
RECONCILIATION OF CERTAIN GAAP RESULTS TO NON-GAAP ADJUSTED RESULTS
(Unaudited)
(In thousands)
	Three Months Ended						Six Months Ended
	August 31,			August 31,			August 31,			August 31,
	2018			2017 (1)			2018			2017 (1)
Reconciliation items included in Consolidated Statements of Operations:
Non-cash share-based compensation expense:
Cost of revenue	$	4,747		$	4,261		$	9,875		$	8,209
Sales and marketing	22,824			20,817			42,344			41,430
Research and development	16,306			14,220			31,088			27,666
General and administrative	8,809			7,649			15,384			13,360
Total share-based compensation expense	$	52,686		$	46,947		$	98,691		$	90,665
Amortization of intangible assets expense:
Cost of revenue	$	5,875		$	4,326		$	12,016		$	8,162
Sales and marketing	1,400			1,583			2,762			3,042
Research and development	35			35			69			69
General and administrative	2,380			2,227			4,753			4,053
Total amortization of intangible assets expense	$	9,690		$	8,171		$	19,600		$	15,326
Total non-cash interest expense related to the debt discount	$	3,869		$	4,890		$	8,876		$	9,757
Transaction costs related to business combinations	$	107		$	1,220		$	118		$	1,362
Reconciliation of GAAP results to non-GAAP adjusted results:
GAAP net income	$	86,854		$	97,088		$	200,044		$	172,402
GAAP provision for income taxes	48,292			34,973			46,579			46,725
GAAP income before provision for income taxes	$	135,146		$	132,061		$	246,623		$	219,127
Add: Non-cash share-based compensation expense	52,686			46,947			98,691			90,665
Add: Amortization of intangible assets expense	9,690			8,171			19,600			15,326
Add: Non-cash interest expense related to the debt discount	3,869			4,890			8,876			9,757
Add: Transaction costs related to business combinations	107			1,220			118			1,362
Non-GAAP adjusted income before provision for income taxes	$	201,498		$	193,289		$	373,908		$	336,237
Non-GAAP provision for income taxes (2)	44,915			54,848			84,216			93,550
Non-GAAP adjusted net income (basic and diluted)	$	156,583		$	138,441		$	289,692		$	242,687
Non-GAAP adjusted diluted weighted average shares outstanding:
GAAP diluted weighted average shares outstanding	186,936			183,021			188,061			182,460
Dilution offset from convertible note hedge transactions	(3,699		)	(2,706		)	(3,801		)	(2,189		)
Non-GAAP diluted weighted average shares outstanding	183,237			180,315			184,260			180,271
Non-GAAP adjusted net income per share:
Basic	$	0.89		$	0.78		$	1.64		$	1.37
Diluted	$	0.85		$	0.77		$	1.57		$	1.35
(1) As adjusted to reflect the impact of the retrospective application of ASC 606.
RED HAT, INC.
RECONCILIATION OF CERTAIN GAAP RESULTS TO NON-GAAP ADJUSTED RESULTS
(Unaudited)
(In thousands)
	Three Months Ended						Six Months Ended
	August 31,			August 31,			August 31,			August 31,
	2018			2017 (1)			2018			2017 (1)
(2) Non-GAAP provision for income taxes:
Non-GAAP adjusted income before provision for income taxes	$	201,498		$	193,289		$	373,908		$	336,237
GAAP estimated annual effective tax rate	24.1		%	27.6		%	23.4		%	27.3		%
Provision for income taxes on non-GAAP adjusted income before adjustments	$	48,702		$	53,483		$	87,494		$	91,793
Certain non-deductible share-based compensation	(4,973		)	—			(4,973		)	—
Discrete tax expense, excluding discrete benefits related to share-based compensation	1,186			1,365			1,695			1,757
Provision for income taxes on non-GAAP adjusted income, excluding impact from certain non-deductible share-based compensation and discrete tax benefits related to share-based compensation	$	44,915		$	54,848		$	84,216		$	93,550
GAAP gross profit	$	703,817		$	616,638		$	1,394,648		$	1,192,738
Add: Non-cash share-based compensation expense	4,747			4,261			9,875			8,209
Add: Amortization of intangible assets expense	5,875			4,326			12,016			8,162
Non-GAAP gross profit	$	714,439		$	625,225		$	1,416,539		$	1,209,109
Non-GAAP gross margin	86.8		%	86.4		%	86.6		%	86.4		%
GAAP operating expenses	$	569,261		$	481,848		$	1,147,936		$	968,204
Deduct: Non-cash share-based compensation expense	(47,939		)	(42,686		)	(88,816		)	(82,456		)
Deduct: Amortization of intangible assets expense	(3,815		)	(3,845		)	(7,584		)	(7,164		)
Deduct: Transaction costs related to business combinations	(107		)	(1,220		)	(118		)	(1,362		)
Non-GAAP adjusted operating expenses	$	517,400		$	434,097		$	1,051,418		$	877,222
GAAP operating income	$	134,556		$	134,790		$	246,712		$	224,534
Add: Non-cash share-based compensation expense	52,686			46,947			98,691			90,665
Add: Amortization of intangible assets expense	9,690			8,171			19,600			15,326
Add: Transaction costs related to business combinations	107			1,220			118			1,362
Non-GAAP adjusted operating income	$	197,039		$	191,128		$	365,121		$	331,887
Non-GAAP adjusted operating margin	23.9		%	26.4		%	22.3		%	23.7		%
GAAP net cash provided by operating activities	$	132,792		$	142,896		$	478,951		$	400,768
Repayments of convertible notes attributable to debt discount	32,563			—			32,563			—
Non-GAAP net cash provided by operating activities	$	165,355		$	142,896		$	511,514		$	400,768
(1) As adjusted to reflect the impact of the retrospective application of ASC 606.

RED HAT, INC.
RECONCILIATION OF CERTAIN GAAP RESULTS TO NON-GAAP ADJUSTED RESULTS
(Unaudited)
(In thousands)
	Three Months Ended
	August 31,			August 31,		Year-Over-Year
	2018			2017		Growth Rate
Subscription and services revenue:
GAAP subscription revenue by offering type:
Infrastructure-related offerings	$	526,701		$	487,447	8.1	%
Adjustment for currency impact	1,431			—
Non-GAAP Infrastructure-related subscription revenue on a constant currency basis	$	528,132		$	487,447	8.3	%
Application Development-related and other emerging technology offerings	$	195,998		$	150,115	30.6	%
Adjustment for currency impact	1,136			—
Non-GAAP Application Development-related and other emerging technology subscription revenue on a constant currency basis	$	197,134		$	150,115	31.3	%
GAAP subscription revenue	$	722,699		$	637,562	13.4	%
Adjustment for currency impact	2,567			—
Non-GAAP subscription revenue on a constant currency basis	$	725,266		$	637,562	13.8	%
GAAP training and services revenue	$	100,048		$	85,793	16.6	%
Adjustment for currency impact	1,615			—
Non-GAAP training and services revenue on a constant currency basis	$	101,663		$	85,793	18.5	%
GAAP total revenue	$	822,747		$	723,355	13.7	%
Adjustment for currency impact	4,182			—
Non-GAAP total revenue on a constant currency basis	$	826,929		$	723,355	14.3	%
	Six Months Ended
	August 31,			August 31,		Year-Over-Year
	2018			2017		Growth Rate
GAAP subscription revenue by offering type:
Infrastructure-related offerings	$	1,049,103		$	945,408	11.0	%
Adjustment for currency impact	(12,569		)	—
Non-GAAP Infrastructure-related subscription revenue on a constant currency basis	$	1,036,534		$	945,408	9.6	%
Application Development-related and other emerging technology offerings	$	385,117		$	288,662	33.4	%
Adjustment for currency impact	(5,082		)	—
Non-GAAP Application Development-related and other emerging technology subscription revenue on a constant currency basis	$	380,035		$	288,662	31.7	%
GAAP subscription revenue	$	1,434,220		$	1,234,070	16.2	%
Adjustment for currency impact	(17,651		)	—
Non-GAAP subscription revenue on a constant currency basis	$	1,416,569		$	1,234,070	14.8	%
GAAP training and services revenue	$	202,057		$	166,081	21.7	%
Adjustment for currency impact	(757		)	—
Non-GAAP training and services revenue on a constant currency basis	$	201,300		$	166,081	21.2	%
GAAP total revenue	$	1,636,277		$	1,400,151	16.9	%
Adjustment for currency impact	(18,408		)	—
Non-GAAP total revenue on a constant currency basis	$	1,617,869		$	1,400,151	15.5	%

RED HAT, INC.
SUPPLEMENTAL INFORMATION
(Unaudited)
(In thousands)
Change in deferred revenue balances:
	Deferred Revenue
	Current			Long-Term			Total
Balance at August 31, 2017	$	1,471,434		$	581,077		$	2,052,511
Constant currency change in deferred revenue	236,962			143,967			380,929
Impact from foreign currency translation	(24,893		)	(15,298		)	(40,191		)
Balance at August 31, 2018	$	1,683,503		$	709,746		$	2,393,249
Year-over-year growth rate	14.4		%	22.1		%	16.6		%
Year-over-year growth rate on a constant currency basis	16.1		%	24.8		%	18.6		%

Revenue growth by geographical segment:
	Americas			EMEA			APAC			Consolidated
Total revenue for the three months ended August 31, 2018	$	514,323		$	189,303		$	119,121		$	822,747
Adjustment for currency impact	4,468			(1,776		)	1,490			4,182
Total revenue on a constant currency basis for the three months ended August 31, 2018	$	518,791		$	187,527		$	120,611		$	826,929
Total revenue for the three months ended August 31, 2017	$	463,359		$	159,722		$	100,274		$	723,355
Year-over-year growth rate	11.0		%	18.5		%	18.8		%	13.7		%
Year-over-year growth rate on a constant currency basis	12.0		%	17.4		%	20.3		%	14.3		%
Total revenue for the six months ended August 31, 2018	$	1,014,629		$	384,451		$	237,197		$	1,636,277
Adjustment for currency impact	6,477			(22,880		)	(2,005		)	(18,408		)
Total revenue on a constant currency basis for the six months ended August 31, 2018	$	1,021,106		$	361,571		$	235,192		$	1,617,869
Total revenue for the six months ended August 31, 2017	$	901,739		$	303,392		$	195,020		$	1,400,151
Year-over-year growth rate	12.5		%	26.7		%	21.6		%	16.9		%
Year-over-year growth rate on a constant currency basis	13.2		%	19.2		%	20.6		%	15.5		%

RED HAT, INC.

SUPPLEMENTAL INFORMATION

(Unaudited)

(In thousands - except per share amounts)

The primary impact of adopting ASC 606 related to the deferral of incremental commission and other costs of obtaining contracts with customers. Certain unaudited financial statement information as adjusted to reflect the Company’s adoption of ASC 606 is set forth below. The adjustments resulting from ASC 606 are reflected in presentations of both GAAP and non-GAAP financial information.

Consolidated balance sheets:
	February 28, 2018
	As Reported (1)		Adjustments			As Adjusted
Prepaid expenses	$	260,092	$	7,105		$	267,197
Deferred tax assets, net	$	93,300	$	(694	)	$	92,606
Other assets, net	$	87,924	$	1,536		$	89,460
Accounts payable and accrued expenses	$	427,086	$	53		$	427,139
Retained earnings	$	1,611,794	$	7,894		$	1,619,688
(1) Derived from audited financial statements.

Consolidated statements of operations:
	Three Months Ended May 31, 2017
	As Reported		Adjustments			As Adjusted
Operating expense:
Sales and marketing	$	296,459	$	(2,136	)	$	294,323
Net income	$	73,190	$	2,124		$	75,314
Net income per share:
Basic	$	0.41	$	0.01		$	0.42
Diluted	$	0.40	$	0.01		$	0.41

	Three Months Ended August 31, 2017
	As Reported		Adjustments			As Adjusted
Operating expense:
Sales and marketing	$	278,548	$	(231	)	$	278,317
Net income	$	96,859	$	229		$	97,088
Net income per share:
Basic	$	0.55	$	—		$	0.55
Diluted	$	0.53	$	—		$	0.53

	Three Months Ended November 30, 2017
	As Reported		Adjustments			As Adjusted
Operating expense:
Sales and marketing	$	308,388	$	(305	)	$	308,083
Net income	$	101,306	$	303		$	101,609
Net income per share:
Basic	$	0.57	$	—		$	0.57
Diluted	$	0.54	$	0.01		$	0.55

RED HAT, INC.
SUPPLEMENTAL INFORMATION
(Unaudited)
(In thousands - except per share amounts)
	Three Months Ended February 28, 2018
	As Reported			Adjustments			As Adjusted
Operating expense:
Sales and marketing	$	315,181		$	(618	)	$	314,563
Net loss	$	(12,552	)	$	392		$	(12,160	)
Net loss per share:
Basic	$	(0.07	)	$	—		$	(0.07	)
Diluted	$	(0.07	)	$	—		$	(0.07	)

	Twelve Months Ended February 28, 2018
	As Reported (1)		Adjustments			As Adjusted
Operating expense:
Sales and marketing	$	1,198,576	$	(3,290	)	$	1,195,286
Net income	$	258,803	$	3,048		$	261,851
Net income per share:
Basic	$	1.46	$	0.02		$	1.48
Diluted	$	1.40	$	0.02		$	1.42
(1) Derived from audited financial statements.

CONTACT:
Red Hat, Inc.
Media Contact:
Stephanie Wonderlick, 571-421-8169
swonderl@redhat.com
or
Investor Relations:
Tom McCallum, 919-754-4630
tmccallum@redhat.com