The following is excerpted from the question-and-answer section of the transcript.
(Questions from industry analysts are provided in full, but answers are omitted - download the transcript to see the full question-and-answer session)
Question: Adam Holt - Morgan Stanley - Analyst: Hi, thanks for taking my question. My first question is could you talk -- you talked a little bit about the success with the largest customers that came up for renewal. Can you talk a little bit about the customers outside of the top 25 or 30, what renewal rates were like, and maybe a little bit for the total billings, what the mix between new billings and renewals was like in the quarter.
Answer By: Jim Whitehurst - Red Hat, Inc. - President, CEO
Question: Adam Holt - Morgan Stanley - Analyst: If I could just ask a quick follow-up, you also have another initiative to get folks to move from free to pay on a number of different levels. Could you update us on your progress there as well?
Answer By: Jim Whitehurst - Red Hat, Inc. - President, CEO
Question: Adam Holt - Morgan Stanley - Analyst: Great. Thank you.
Question: Sarah Friar - Goldman Sachs - Analyst: Great, thanks very much. Charlie, could you talk a little bit about the differences saw between large enterprise spending versus the more SMB type spending. Was there any shifting around in the corner. I guess what I'm asking is SMEs I feel have been more heavily hurt by this downturn so are you starting to see them recover at all?
Answer By: Charlie Peters - Red Hat, Inc. - EVP, CFO
Question: Sarah Friar - Goldman Sachs - Analyst: Got it. If I could give you two quick follow-ups, just the financials vertical, I'm kind of not asking the same question but I'm not asking you to say it's recovering, but clearly that was a vertical very hurt where you have a lot of -- it's a big vertical for you, so do you see at least financials beginning to sound a little bit more optimistic? And then just a net on the numbers, the difference between the change in deferred revenue on the cash flow statement, versus what we can see on the balance sheet, is that all just a currency difference?
Answer By: Charlie Peters - Red Hat, Inc. - EVP, CFO
Question: Sarah Friar - Goldman Sachs - Analyst: Sure.
Answer By: Charlie Peters - Red Hat, Inc. - EVP, CFO
Question: Sarah Friar - Goldman Sachs - Analyst: Thank you.
Answer By: Tom McCallum - Red Hat, Inc. - VP IR
Question: Kash Rangan - BAS-ML - Analyst: Hi, thanks very much. One question for Charlie and one for -- I'll just state the question for Charlie first and then I'll go to you, Jim. First, Charlie, looking at the cash flow guidance for the year I think your assumptions may have not incorporated the change in the billings patterns that you're seeing in this quarter, so obviously you look at the cash flow statement, the delta in deferred revenue is lower than what it has been in the last few quarters. So are you able to still hang onto the cash flow forecast in light of some of the changes in the margin that you're seeing where the average contract length is going down by five months and also the one year billing component is a greater percentage of your mix. So is it time for us to fine tune our cash flows for this year? And the question for Jim is if youhaveanycommentaryatallonOracle'sproposedacquisitionofSun.Thelasttimeyouwerenotabletocomment becausetheIBMproposalhadnotgonethrough,butI'mwonderingwithmoreclarityonthatdeal,Iwaswondering if you could give us your take on how you see Red Hat positioned in light of that big change that's happening in the industry. That's it. Thanks.
Answer By: Charlie Peters - Red Hat, Inc. - EVP, CFO
Answer By: Jim Whitehurst - Red Hat, Inc. - President, CEO
Answer By: Tom McCallum - Red Hat, Inc. - VP IR
Answer By: Charlie Peters - Red Hat, Inc. - EVP, CFO
Answer By: Jim Whitehurst - Red Hat, Inc. - President, CEO
Question: Tim Klasell - Thomas Weisel Partners - Analyst: Yes, good afternoon, everybody. Sort of wanted to talk a little about what's changing with the larger deals. Are customers taking just one year contracts or are they just taking the three year contracts and just paying on an annual basis?
Answer By: Charlie Peters - Red Hat, Inc. - EVP, CFO
Question: Tim Klasell - Thomas Weisel Partners - Analyst: And then maybe you could give us a little color, then, directionally maybe just on the off-balance sheet component then. I know you don't like to give details mid year but maybe in light of what happened this quarter, you could give us some directional color.
Answer By: Charlie Peters - Red Hat, Inc. - EVP, CFO
Question: Tim Klasell - Thomas Weisel Partners - Analyst: Okay.
Answer By: Tom McCallum - Red Hat, Inc. - VP IR
Question: Katherine Egbert - Jefferies & Co - Analyst: Hi, not to beat a dead horse, Charlie, but just quickly, are the multi-year deals renewing for multi-years, or are they renewing at either one year at a time or are they renewing such that they're paying one year at a time although they're committed to multi-year?
Answer By: Charlie Peters - Red Hat, Inc. - EVP, CFO
Answer By: Jim Whitehurst - Red Hat, Inc. - President, CEO
Question: Katherine Egbert - Jefferies & Co - Analyst: Okay. Got it. Thanks, Jim. A quick follow-up. Your subscriptions are back over to 85% of total revenue. Can you flush out a little bit more why services is weaker in this economy. Thanks.
Answer By: Jim Whitehurst - Red Hat, Inc. - President, CEO
Answer By: Tom McCallum - Red Hat, Inc. - VP IR
Question: Steve Ashley - Robert W Baird - Analyst: Hi, thanks for taking my question. Do you -- just getting back to Kash Rangan's question regarding the Sun Oracle deal. Do you have any idea what percentage of the business you do in any given period would be related to Oracle and Oracle software at this point?
Answer By: Charlie Peters - Red Hat, Inc. - EVP, CFO
Question: Steve Ashley - Robert W Baird - Analyst: Okay. And then secondly, in your prepared remarks, Jim, you talked about the cloud and cloud computing as being an important focus point, public and private clouds. Is that impacting demand today and manifesting as bookings here today?
Answer By: Jim Whitehurst - Red Hat, Inc. - President, CEO
Answer By: Tom McCallum - Red Hat, Inc. - VP IR
Question: Aaron Schwartz - Ladenburg Thalmann - Analyst: Good afternoon. You spent a lot of time talking about the opportunity with the free to pay conversions. Have you changed anything operationally to either incent your sales force or partners to more aggressively pursue those opportunities?
Answer By: Charlie Peters - Red Hat, Inc. - EVP, CFO
Answer By: Jim Whitehurst - Red Hat, Inc. - President, CEO
Question: Aaron Schwartz - Ladenburg Thalmann - Analyst: Okay. That's helpful. And just one quick follow-up. Jim, you talked a little bit about strategic partners and I was wondering if you could provide some color on sort of as you move more into the VDI opportunity, what should we expect there? Are you going to pursue more strategic partnerships to attack that opportunity?
Answer By: Jim Whitehurst - Red Hat, Inc. - President, CEO
Answer By: Tom McCallum - Red Hat, Inc. - VP IR
Question: Michael Curtis - Raymond James - Analyst: Hi. Two questions. First of all, your constant currency billings rate was up 8%, I calculated organic about 9% last quarter. Does it feel like that's pretty much bottomed here?
Answer By: Charlie Peters - Red Hat, Inc. - EVP, CFO
Question: Michael Curtis - Raymond James - Analyst: And then, so just a follow-up question here but on slightly out of the subject on JBoss. You made comments in the past that JBoss was growing somewhere around twice the rate of the rail business. Is that still a pretty good rule of thumb? Are those trends still in place?
Answer By: Charlie Peters - Red Hat, Inc. - EVP, CFO
Answer By: Tom McCallum - Red Hat, Inc. - VP IR
Question: Brent Williams - The Benchmark Company - Analyst: Hi, guys. Wanted to go back to the Oracle bid for Sun that's out there. Do you think that the odds are that they are going to change the Java community process or anything to favor their own products more? As you know, Sun never did a particularly good job taking any of the four application servers they were trying to bash together and reallymonetizingitbutOracle'sgotamuchbiggerrevenuestreamthereandanincentivetoreallybendtheprocess. Doyouthinkthattheymightbeabletodothatanddoyouthinkthatthatendsupbeinganopportunityaspartners throw up their hands and say "I need to get to open source because I don't need that kind of concern"? Or do you think that it might be an issue that they'll just stop talking to non-Oracle providers?
Answer By: Jim Whitehurst - Red Hat, Inc. - President, CEO
Question: Brent Williams - The Benchmark Company - Analyst: And relatedly, they're also going to get Solaris if they compete this deal, including Open Solaris. Have you had any uptick of customer activity, people saying "I wonder what this does to the future of that operating system?" and are you looking at putting in place any programs to help, particularly the Open Solaris crowd, what there is of it, to move away and not look back?
Answer By: Jim Whitehurst - Red Hat, Inc. - President, CEO
Answer By: Tom McCallum - Red Hat, Inc. - VP IR
Question: Brent Williams - The Benchmark Company - Analyst: Hi, thanks for taking my question. Wonder if you can give some geographic color, customer sentiment, that sort of thing?
Answer By: Charlie Peters - Red Hat, Inc. - EVP, CFO
Answer By: Tom McCallum - Red Hat, Inc. - VP IR
Question: Todd Raker - Deutsche Bank - Analyst: Thanks, guys. I just want to follow up on JBoss growth. Clearly, you guys are starting to hit some tougher comps here, and if we look out from a longer term perspective, how should we be thinking about the growth profile of JBoss versus the core business with a two to three year time horizon. Do you expect the growth profile to be materially higher than the core business, or should we start to think about it coming in line with the core business?
Answer By: Jim Whitehurst - Red Hat, Inc. - President, CEO
Question: Todd Raker - Deutsche Bank - Analyst: Okay. Thanks, guys.
Answer By: Tom McCallum - Red Hat, Inc. - VP IR
Question: David Bayer - Cantor Fitzgerald - Analyst: Hi, gentlemen. Congratulations on a fine quarter in a tough environment. I will not continue to pursue my original question which had to do with Sun and Oracle also but I would ask you to clarify a little bit, on the shorter contract lengths, does that imply anything about the overall pipelines? Or is it just more people being more conservative with what budgets they do have?
Answer By: Charlie Peters - Red Hat, Inc. - EVP, CFO
Question: David Bayer - Cantor Fitzgerald - Analyst: Okay. Thank you.
Question: Trip Chowdhry - Global Equity Research - Analyst: Thank you and again, congratulations on a good quarter in a tough environment. Two quick questions. First is regarding the success of open source companies, and here I am talking about Sugar CRM, which had a lot of momentum, lot of noise, and today it's struggling quite a bit. I was trying to understand what is the reason that you as a Company is doing very well and probably you're the only open source software Company which is bucking the trend. Any key data points you can suggest like when we look at open source companies, what should we be looking at in terms of financial end markets success and then I have a follow-up question.
Answer By: Jim Whitehurst - Red Hat, Inc. - President, CEO
Answer By: Charlie Peters - Red Hat, Inc. - EVP, CFO
Answer By: Jim Whitehurst - Red Hat, Inc. - President, CEO
Question: Trip Chowdhry - Global Equity Research - Analyst: The follow-up question I have is regarding cloud computing and the two I would say camps that are evolving as we speak. One is a scale-up model where we have virtualization as a key driver for providing cloud services, and the other is what I would call is a scale-out model, also application clouds on which companies like Google and Microsoft are playing a role. It seems like Red Hat is gravitating towards the first camp, and I was a little concerned that probably you may be missing an opportunity in application clouds, where at least I know two projects, open source projects which are having a lot of traction. One is [Rizzle], which is a spinoff from MySQL and the other one is [Clip Disc] and of course Hadoop. So I was wondering how do you see the space and how do you make sure you don't get blind-sided if one takes over the other camp while you're hedging your bets? Thanks again.
Answer By: Jim Whitehurst - Red Hat, Inc. - President, CEO
Answer By: Tom McCallum - Red Hat, Inc. - VP IR
Question: Robert Breza - RBC Capital Markets - Analyst: Hi, Charlie. Just a quick follow-up. As you look at the billings, and the trends there towards more one year deals, did that differ by geography and can you also comment, you talked about the trend changing here in Q2, can you also maybe give us some color if there is any color to be given around the geography split amongst those trends? Thanks.
Answer By: Charlie Peters - Red Hat, Inc. - EVP, CFO
Answer By: Tom McCallum - Red Hat, Inc. - VP IR
Question: Kevin Buttigieg - FTN - Analyst: Just I wanted to understand the reduction in the average term length. Is it influenced at all by when a customer decides to pay over time on their contract rather than up front or is it purely influenced by the contract length that they choose?
Answer By: Charlie Peters - Red Hat, Inc. - EVP, CFO
Question: Kevin Buttigieg - FTN - Analyst: Two separate factors then. And then any quick comments that you could make as far as the advanced platform trends, particularly in light of some of the pricing actions by some of the competitors in recent months?
Answer By: Charlie Peters - Red Hat, Inc. - EVP, CFO
Answer By: Tom McCallum - Red Hat, Inc. - VP IR
Question: Brad Whitt - Broadpoint AmTech - Analyst: Thanks for taking my questions. Just looking at the channel contributions this quarter. 61% in light of our expectations. How would you characterize that? Did you see a little weakness from your internal sales organization? If you could give some more color on that.
Answer By: Jim Whitehurst - Red Hat, Inc. - President, CEO
Question: Brad Whitt - Broadpoint AmTech - Analyst: Okay. That makes sense. And also, wonder if you could share with us some of the things that you're doing to try to enhance renewals from the channel, anything specific that you can share there?
Answer By: Jim Whitehurst - Red Hat, Inc. - President, CEO
Question: Brad Whitt - Broadpoint AmTech - Analyst: Next question please, operator.
Question: Brent Thill - Citigroup - Analyst: Charlie, you got out of the gate pretty strong on the margins. You're already ahead of your target for the year. It looks like you're going to dial back a little bit on the margin in Q2. Can you give us a sense of, are there additional expenses that are coming back in that are going to tone the margin expansion down from what we saw in Q1? How are you thinking about that metric?
Answer By: Charlie Peters - Red Hat, Inc. - EVP, CFO
Answer By: Tom McCallum - Red Hat, Inc. - VP IR
Question: Aaron Schwartz - Ladenburg Thalmann - Analyst: Yes, hi, this is Brian Schwartz for Mark Murphy. Jim and Charlie, you're making it clear here on the call that you're not calling stabilization in the economy yet but with the conversations you're having with CIOs, are you getting any sense that their budgets are loosening up for the second half of this calendar year or possibly looking at it from a metrics standpoint, can you compare the growth in your pipeline or the number of RFPs received this past quarter to the previous quarter? Thanks.
Answer By: Jim Whitehurst - Red Hat, Inc. - President, CEO
Answer By: Charlie Peters - Red Hat, Inc. - EVP, CFO
Answer By: Tom McCallum - Red Hat, Inc. - VP IR
Question: Nabil Elsheshai - Pacific Crest Securities - Analyst: Hi,guys.Ifyoulookatthevirtualizationreleasecominguplaterthisyear,doyoulookatthataskindofanincremental revenue opportunity, either through driving greater AP sales or incremental revenue opportunity, or is it too early in the virtualization story to make that call?
Answer By: Jim Whitehurst - Red Hat, Inc. - President, CEO
Question: Nabil Elsheshai - Pacific Crest Securities - Analyst: Okay. And then just to follow-up real quick on the competitive front, specifically with Oracle, now that they have potentially two operating systems. To the degree that you do compete with them on Unbreakable Linux, do you see customers concerned about the future of that product line?
Answer By: Jim Whitehurst - Red Hat, Inc. - President, CEO
Answer By: Tom McCallum - Red Hat, Inc. - VP IR
Answer By: Jim Whitehurst - Red Hat, Inc. - President, CEO
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