Red Hat, Inc. (NYSE:RHT) Files An 8-K Results of Operations and Financial Condition

Item 2.02. Results of Operations and Financial Condition

On December 21, 2016, Red Hat, Inc. announced its financial
results for the fiscal third quarter ended November 30, 2016. 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 months and nine months ended November 30, 2016 and
November 30, 2015. These non-GAAP disclosures include non-GAAP
revenue growth rates measured on a constant currency basis and a
reconciliation of GAAP net income to non-GAAP adjusted net income
based on:

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 and total revenue measured on a constant currency basis
for the three months and nine months ended November 30, 2016 in
an effort to provide a comparable framework for assessing how our
business performed when compared to the three months and nine
months ended November 30, 2015 in light of the effect of exchange
rate differences. Approximately 42.8% and 42.5% of our revenue
for the three months and nine months ended November 30, 2016,
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 each of the three months and nine months ended November
30, 2015, our subscription revenue for the three months and nine
months ended November 30, 2016 would have been lower than we
reported by $5.5 million and $11.9 million, respectively, and our
total revenue for the three months and nine months ended November
30, 2016 would have been lower than we reported by $5.0 million
and $9.8 million, respectively.

We excluded GAAP share-based compensation expense and the related
excess tax benefits 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
periods 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 $54.7 million and $141.4 million and the
GAAP related excess tax benefits of $6.2 million and $15.2
million for the three months and nine months ended November 30,
2016, respectively, and $43.4 million and $120.5 million for the
three months and nine months ended November 30, 2015,
respectively, versus the non-GAAP exclusion of such expense or
benefit.

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 $7.7 million and $22.6 million for the three months and nine
months ended November 30, 2016, respectively, and $7.0 million
and $18.9 million for the three months and nine months ended
November 30, 2015, 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 issuers 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 $4.8 million and $14.3 million
for the three months and nine months ended November 30, 2016,
respectively, and $4.7 million and $13.9 million for the three
months and nine months ended November 30, 2015, respectively,
versus the non-GAAP exclusion of such expense.

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 $1.8 million for the nine months ended November 30,
2016 and $3.8 million for each of the three months and nine
months ended November 30, 2015 versus the non-GAAP exclusion of
such expense.

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, the
irregularity with which management acquires intangible assets,
the non-cash interest expense related to the debt discount and
transaction costs we incurred in connection with business
combinations. 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 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 99.1 Press Release dated December 21, 2016

About Red Hat, Inc. (NYSE:RHT)

Red Hat, Inc. (Red Hat) provides open source software solutions, using a community-powered approach to develop and offer operating system, virtualization, management, middleware, cloud, mobile and storage technologies. Red Hat operates through three geographical segments: the Americas, including the United States, Canada and Latin America; EMEA, including Europe, Middle East and Africa, and Asia Pacific. Its products and services include infrastructure-related offerings, application development-related and other technology offerings, and consulting, support and training services. Its infrastructure-related offerings include Red Hat Enterprise Linux, Red Hat Satellite and Red Hat Enterprise Virtualization. Its application development-related and other technology offerings include Red Hat JBoss Middleware, Red Hat cloud offerings, Red Hat Mobile and Red Hat Storage. Its consulting services include upgrade planning, platform migrations, solution integration and application development.

Red Hat, Inc. (NYSE:RHT) Recent Trading Information

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