Item 2.02. Results of Operations and Financial Condition
On September 21, 2016, Red Hat, Inc. announced its financial results for
the fiscal second quarter ended August 31, 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 six months ended August 31, 2016 and August 31,
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:
-
the impact of non-cash share-based compensation expense under FASB ASC
Section 718 Compensation-Stock Compensation ("ASC 718") and the
related excess tax benefits recognized in the provision for income
taxes as a result of our early adoption of Accounting Standards Update
No. 2016-09,
Compensation—Stock Compensation (Topic 718):
Improvements to Employee Share-Based Payment Accounting
;
-
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;
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 and
total revenue measured on a constant currency basis for the three months
and six months ended August 31, 2016 in an effort to provide a
comparable framework for assessing how our business performed when
compared to the three months and six months ended August 31, 2015 in
light of the effect of exchange rate differences. Approximately 42.7%
and 42.4% of our revenue for the three months and six months ended
August 31, 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 six months
ended August 31, 2015, our subscription revenue for the three months and
six months ended August 31, 2016 would have been lower than we reported
by $4.5 million and $6.5 million, respectively, and our total revenue
for the three months and six months ended August 31, 2016 would have
been lower than we reported by $3.5 million and $4.9 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 $45.4 million and $86.6 million and the GAAP related excess
tax benefits of $1.0 million and $8.9 million for the three months and
six months ended August 31, 2016, respectively, and $40.5 million and
$77.1 million for the three months and six months ended August 31, 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 $7.6
million and $15.0 million for the three months and six months ended
August 31, 2016, respectively, and $6.1 million and $12.0 million for
the three months and six months ended August 31, 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 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
$4.8 million and $9.5 million for the three months and six months ended
August 31, 2016, respectively, and $4.6 million and $9.2 million for the
three months and six months ended August 31, 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
each of the three months and six months ended August 31, 2016 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 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.