ANALYST DAY. May 2, 2017

Transcription

1 ANALYST DAY May 2, 2017

2 SAFE HARBOR MESSAGE Certain statements contained in this presentation may constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 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; 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; risks related to data and information security vulnerabilities; 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 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 presentation represent the Company's views as of the date of this presentation 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 presentation, May 2,

3 AGENDA The opportunity ahead Jim Whitehurst, President and CEO Building the future: containers, hybrid cloud and app dev Paul Cormier, President Products & Technologies Strategic position driving growth Eric Shander, Executive Vice President and CFO 3

4 THE OPPORTUNITY AHEAD Jim Whitehurst President & chief executive officer Red Hat

5 GROWTH OPPORTUNITY Total addressable market estimated at ~$66 billion in 2020 $4B Operating system $13B $8B Virtualization $5B $3B $16B Infrastructure mgmt Middleware Cloud mgmt PaaS $17B Source: Analyst and company estimates. Not to be construed as company guidance. Storage

6 CHANGE IS COMING Is your organization also seeing digital disruption? 87% 44% of respondents anticipate that their industries will be disrupted by digital trends to a great or moderate extent. of respondents say their organizations are adequately preparing for the disruptions to come. Source: MIT Sloan Management Review and Deloitte Consulting LLP and Deloitte Services LP, Aligning the Organization for Its Digital Future, July

7 ACHIEVE FULL POTENTIAL SOLVE BUSINESS PROBLEMS SAVE MONEY

8 SHIFT INVESTMENT TO INNOVATION IT optimization to shift from 79% to 21% over next 24 months 79% 67% 66% Today (2016) 58% 50% 50% 42% 52% 48% In months 33% 34% 21% Optimizing existing IT Improving overall IT management Integrating data and applications Delivering cloud infrastructure and services Implementing software-defined storage Source: Red Hat Global Customer Tech Outlook Conducted Sept. & Oct by TechValidate, n= Developing and deploying modern applications

9 BALANCING INNOVATION AND OPTIMIZATION Here s what CIOs say are their top priorities and challenges 6 Optimizing the IT you have Integrate apps, data, and processes Add and manage cloud infrastructure Build more modern applications GAIN EFFICIENCY IMPROVE PRODUCTIVITY INCREASE AGILITY MOVE

10 POWERED BY PARTICIPATION OUR TECHNOLOGY OUR PROCESS OUR CULTURE

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12 @JWhitehurst

13 @JWhitehurst

14 11 SCALE OUR FOCUS ON PARTNERSHIPS

15 A ROBUST PARTNER ECOSYSTEM CLOUD PARTNERS TECH PARTNERS SI PARTNERS

16 THE TRANSFORMATION IS REAL And our customers can reap the benefits Open architecture with OpenStack and SDN Higher transaction volume and less downtime Adopted agile DevOps culture Improved efficiency with Red Hat OpenShift Container Platform Created cloud computing platform collaboratively More automated and streamlined operations enables new apps to market faster

17 The best way to predict your future is to create it. ABRAHAM LINCOLN

18 The best way to predict your future is to create it TOGETHER. JIM WHITEHURST

19 BUILDING THE FUTURE: CONTAINERS, HYBRID CLOUD, AND APP DEV Paul Cormier President, Products and Technologies Red Hat

20 WHAT HAVE WE BEEN DOING? HINT: THERE S MORE TO OUR MODEL

21 THIS IS OUR MODEL

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23 WHAT DO WE DO NEXT? 3 INITIATIVES FOR FY18

24 RED HAT ENTERPRISE LINUX HYBRID CLOUD INFRASTRUCTURE CONTAINERS

25 RED HAT ENTERPRISE LINUX OPENS DOORS RED HAT ENTERPRISE LINUX A common foundation for Red Hat platforms The first step toward cloud-based infrastructure, platforms, and applications Part of traditional OS, virtualization, private cloud, and public clouds We are the enterprise Linux leader with a 15-year head start building strong, flexible foundations.

26 HYBRID CLOUD INFRASTRUCTURE IS FLEXIBLE HYBRID CLOUD INFRASTRUCTURE Our approach to cloud computing A more secure environment, managed across multiple footprints Presence of multiple vendors can prevent public cloud lock-in We are uniquely positioned to get apps to cloud in a practical way.

27 HYBRID CLOUD INFRASTRUCTURE 84% are using private, public, or hybrid cloud1 Source: Red Hat Global Customer Tech Outlook Conducted Sept. & Oct by TechValidate, n=268.

28 CONTAINERS ARE LINUX CONTAINERS Next-generation application platform for existing and new apps Portable across the hybrid cloud Container companies must be Linux companies We are uniquely positioned to connect the future of infrastructure to the future of applications.

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35 HOW ARE WE WINNING TODAY?

36 50% TCO1, 100% ROI2 Red Hat JBoss Middleware (including Fuse and EAP) helps the airline integrate new companies and services. Bonus: A consistent experience for its customers. 1 Red Hat customer case study. Avianca streamlines application integration. Red Hat customer success story. Avianca improves passengers flying experience. 2

37 10K developers How do you give that many developers what they need? Red Hat OpenShift. With a little help from Red Hat Consulting. Source: Red Hat Summit Paul Cormier keynote presentation. John Hodgson, senior director of enterprise cloud adoption at Optum. May 2, 2017.

38 1.5M+ customers per week A RHEL foundation gave them consistency. Adding Red Hat OpenShift let KeyBank create a container-centric environment and continuous delivery pipeline. Now they can answer customer demand and do more, faster. Source: KeyBank and Red Hat press release. KeyBank Goes Cloud-Native, Builds a DevOps Practice and Chooses Red Hat OpenShift Container Platform. December 2016.

39 SECRETARY OF FINANCE, STATE OF JALISCO, MEXICO 60% infrastructure operational costs, 900% citizens served A combination of Linux, virtualization, and middleware helps this government organization integrate applications and better serve citizens with highly available, high-performance systems and services. Source: Red Hat customer case study. Government of the State of Jalisco modernizes public services with Red Hat.

40 HOW ARE WE GOING TO CHANGE THE WORLD OF COMPUTING?

41 RED HAT ENTERPRISE LINUX RED HAT JBOSS MIDDLEWARE The platform of today. The apps of today.

42 THE INFRASTRUCTURE OF TOMORROW Is designed, developed, and implemented on Linux RED HAT STORAGE RED HAT OPENSTACK PLATFORM RED HAT VIRTUALIZATION Modern, scale-out storage Modern datacenter software Modern, flexible virtualization

43 THE APPLICATIONS OF TOMORROW ANSIBLE BY RED HAT RED HAT OPENSHIFT A de facto open source automation technology Connects our portfolio around containers

44 WE BRING THESE WORLDS TOGETHER.

45 OUR VISION: ANY APPLICATION. ANY ENVIRONMENT. NO LOCK-IN.

46 WHY AM I SO CONFIDENT?

47 WE HAVE BEEN HERE BEFORE IBM SUN HP DIGITAL

48 WE HAVE BEEN HERE BEFORE IBM SUN HP DIGITAL

49 WE HAVE THE PORTFOLIO AND THE MODEL TO DELIVER WHAT CUSTOMERS NEED.

50 THANK YOU

51 ANALYST DAY STRATEGIC POSITION DRIVING GROWTH Eric Shander Executive vice president and chief financial officer

52 SAFE HARBOR MESSAGE Certain statements contained in this presentation may constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 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; 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; risks related to data and information security vulnerabilities; 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 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 presentation represent the Company's views as of the date of this presentation 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 presentation, May 2,

53 AGENDA Financial results Hybrid cloud opportunity Financial strategy 3

54 FINANCIAL RESULTS 4

55 CONTINUED GROWTH ACROSS KEY METRICS ($ millions) $2,412 $2, consecutive quarters of revenue growth $1,789 $784 Crossed over $2B milestone in subscription revenue 32% Low to mid-teens 3 Yr CAGR across key metrics $736* $628* $416 % of Revenue 23.3% $ % $ % Non-GAAP Operating Income 35% Operating Cash Flow FY % FY2016 Revenue FY2017 *FY15 and FY16 Operating Cash Flow adjusted retrospectively for ASU See Appendix for details. Non-GAAP Operating Income excludes non-cash share-based compensation expense, amortization of intangible assets, and transaction costs related to business combinations of $166M, $196M and $224M from GAAP operating income of $250M, $288M and $332M in FY15, FY16 and FY17, respectively. Please refer to Appendix or for a GAAP to Non-GAAP reconciliation. CAGR= compound annual growth rate.

56 STRONG GROWTH ACROSS ALL CATEGORIES (Revenue, $ millions) $2,411 3 YEAR CAGR +12% $2,053 $1, % Multiple growth drivers in each category: Market share gains Hybrid cloud and container adoption Increased cross-selling +13% FY2015 INFRASTRUCTURE-RELATED SUBSCRIPTIONS 6 FY2016 APP DEV-RELATED & EMERGING TECH SUBSCRIPTIONS FY2014 reported revenue used to calculate 3 year CAGRs. FY2017 TRAINING & SERVICES Emerging technologies driving services App dev & emerging 21% of subscription revenue in FY17

57 STRATEGIC IMPORTANCE WITH CUSTOMERS Customers >$1M have more than doubled over the past 5 years 48 5 YR CAGR >2X TOTAL: Source: Company subscription data. TOTAL: 606 $1M-$5M +17% $5M-$10M +21% >$10M +32%

58 RETURNING VALUE TO SHAREHOLDERS year total repurchases FY13 FY14 Shares repurchased 8 DILUTED SHARES O/S SHARES REPURCHASED FY15 FY16* 180 FY17 Diluted weighted average shares outstanding (WASO) *FY16 includes repurchase of 0.7 million shares from an Accelerated Share Repurchase Free cash flow calculated by subtracting Purchases of property & equipment from Operating Cash Flow found on Statement of Cash Flows 26 million shares $1.6 billion Diluted WASO reduced by 7% Goal of ~50% of free cash flow annually for share repurchases 64% of FY17 free cash flow was used for share repurchases

59 REAFFIRMING FY18 & Q1 GUIDANCE 9 Q118 FY2018 REVENUE $643M - $650M $2.72B - $2.76B Y/Y GROWTH 13-15% USD 13-14% USD NON-GAAP OPERATING MARGIN ~20.0% ~23.6% NON-GAAP EPS $0.52 -$0.53 $2.60 -$2.64 OPERATING CASH FLOW N/A $850M - $870M Continued growth and investment with operating leverage Expect to expand Non-GAAP operating margin by 50 bps in FY18 Assumes ~2% FX headwind for full year Outlook assumes currency exchange rates as they were March 27, All guidance metrics given on March 27, 2017 remain unchanged. Please refer to earnings press release issued on March 27, 2017 at for a GAAP to Non-GAAP reconciliation.

60 HYBRID CLOUD STRATEGY IS WORKING 10

61 OUR HYBRID CLOUD PORTFOLIO FY2017 subscription revenue and y/y growth EMERGING/CLOUD-ENABLING >$100M +100% GROWTH ~$300M 20%-25% ESTABLISHED ~$1,700M 10%-15% Cloud management NFV Openshift (PaaS) OpenStack (IaaS) Storage Application development 11 Chart for illustration purposes only. Not to be construed as guidance. Infrastructure

62 GROWTH OPPORTUNITY ACROSS CUSTOMER COHORTS 1% 7% 4% 8% 95% 100 TOP TOP TOP 52% 1,000 10,000 41% 32% 1 Technology 12 2 Technologies 3 Technologies Technologies defined here as Infrastructure-related, Application development-related and Emerging technologies. See Appendix for offerings within each category Source: Company subscription data FY17 60%

63 CUSTOMER ADOPTION OF TOP EMERGING TECHNOLOGIES CUSTOMERS (acquired FY16) FY15 FY16 Source: company customer subscription data FY17 FY15 FY16 FY17 FY16 FY17

64 TOP EMERGING TECHNOLOGY ADOPTION BY VERTICAL 30% 17% 15% 34% 26% 25% 37% 23% 34% Financial services 14 *Verticals distribution based on FY17 annualized subscription data Government Telcom Media/technology Other

65 CLOUD-ENABLING TECHNOLOGIES FUEL GROWTH ATTACH RATE CHANNEL PRICING Customers buying both OpenStack and OpenShift* Customers buying from partners Multiple of RHEL list price 12X-15X 5x INCREASE 22% LIST PRICE BOOKINGS ($) % BUYING BOTH 28% 4X 18% 1X FY15 15 FY16 FY17 *Customers represented in chart are only those buying OpenStack and/or OpenShift FY15 FY16 FY17 RHEL OPENSTACK OPENSHIFT

66 HYBRID CLOUD STRATEGY IS WORKING Customers utilizing RHEL, middleware and/or cloud-enabling technologies either on-premise or in public cloud Growth continues across physical, virtual, public and private cloud environments +25% CAGR ~5% CAGR FY17 total spend for customers buying cloud-enabling technologies FY17 total spend from customers buying on-premise RHEL and middleware only 16 Customers not yet utilizing our cloud-enabling technologies Hybrid cloud customers spend with Red Hat is larger and growing faster than on-premise only customers as they initialize and adopt cloud-enabling technologies Cloud-enabling technologies as defined here includes OpenShift Enterprise, OpenStack, RHCI, Ceph Software, CloudForms, Data Grid, Gluster Software, Data Virtualization, and Ansible. Certain partner transactions excluded where a channel partner did not identify the end customer. This would include some transactions through OEM, CCSP and other partner types. 3 year CAGRs

67 FINANCIAL STRATEGY IN A HYBRID CLOUD WORLD 17

68 FINANCIAL MODEL DYNAMICS $ 18 Enabling next-generation consumption by providing choice and flexibility to customers Solution selling and business linearity potential implications to cash flow growth Balanced approach: manage profitability while investing in emerging technologies and scaling our partners Capitalizing on the significant opportunity

69 ENABLING NEXT-GEN CONSUMPTION Billing terms of one year or less are gradually increasing 100% Overall billings mix stable with faster growth in multi-year deals with annual payments and in-arrears payments 75% As multi-year deals become larger, they may be more likely to bill annually vs upfront 50% 25% OBS grew 58% in FY17, up from 8% growth in FY16 0 FY15 Paid in arrears 19 FY17 FY16 Multi-year deals with annual payments 1 year deals Multi-year upfront payment Off Balance Sheet (OBS), is the value of non-cancellable subscription and service agreements to be billed in the future and not reflected in our financial statements.

70 CASE STUDY: PORTFOLIO ADOPTION CYCLE Infrastructure revenue steady growth along with quicker ramp-up in emerging technologies Customer with 10+ year history $23M DEAL Total deal amounts have nearly doubled every 3 years REVENUE ($M) $6 $12M DEAL $4 $23M deal includes $5M OpenStack $2 $2M Storage $1M Ansible 0 17 Q4 17 Q3 17 Emerging Q2 17 Q1 16 Q4 16 Q3 16 App-Dev Q2 16 Q1 15 Q Q3 15 Q2 15 Q1 14 Q4 14 Q3 14 Q2 14 Q1 Infrastructure

71 CASH FLOW DYNAMICS $850M - $870M $784M Larger deals tend to take longer to close due to complexity $736M FY18 assumes 2% billings shift into Q4 % of Revenue 36% FY Linearity shift Linearity shift Sales expense Sales expense Cash taxes 32% FY %-32% FY2018 GUIDANCE RANGE FY18 operating cash flow guidance provided on March 27, Please refer to earnings press release issued on March 27, 2017 at

72 CASH FLOW LINEARITY SCENARIOS Change in linearity moves OCF margin ADDITIONAL LINEARITY SHIFT STABLE LINEARITY IMPROVING LINEARITY OPERATING CASH FLOW 35% 30% Y1 Y2 Y3 Y1 Y2 Operating Cash Flow 22 Charts are for illustration purposes only. Not representative of Red Hat reported sales or projections Y3 Y1 Y2 Operating Cash Flow Margin Y3

73 SEIZING THE OPPORTUNITY Balanced investments approach RHEL MARGIN MODEL Requires continued investment APP-DEV Scaling with the channel Emerging product significant strategic value add and pricing upside EMERGING TIME 23 Opportunity for margin expansion as technologies scale Chart for illustration purposes only. Not representative of Red Hat profitability.

74 SIGNIFICANT OPPORTUNITY AHEAD OF US Total addressable market estimated at ~$66 billion in 2020 $4B Operating system $13B $8B Virtualization $5B $3B $16B Infrastructure mgmt Middleware Cloud mgmt PaaS $17B 24 Source: Analyst and company estimates. Not to be construed as company guidance. Storage

75 SUMMARY Hybrid cloud is a reality and we re seizing the opportunity Emerging technologies increase our strategic position with customers Committed to balanced approach to profitability and growth Capital strategy to drive additional shareholder return 25

76 THANK YOU

77 APPENDIX 27

78 28 CATEGORY TECHNOLOGIES Infrastructure Directory & Certificate RHEL RHEL w/ Smart Virtualization RHEV Satellite/Smart Management Application Development Acceleration (EAP, Web Service, EPP, JON, Other) Automation (BPM/BRMS) Integration (A-MQ, SOA, Data Virt/Services, Fuse, Messaging) Emerging Ansible CloudForms Mobile OpenShift RHCI RHEL-OpenStack Platform Gluster Ceph

79 29

80 EARLY ADOPTION OF ACCOUNTING STANDARDS UPDATE Effect of ASU on FY16 and FY17 operating cash flows (unaudited) ($millions) 30 FY2015 FY2016 FY2017 Operating cash flows prior to accounting update $623 $716 $767 Excess tax benefits from share-based payment arrangements now classified as an operating source of cash $5 $20 $16 Operating cash flows adjusted for accounting update $628 $736 $784