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Red Hat (NYSE:RHT)

Q1 2014 Earnings Call

June 19, 2013 5:00 pm ET

Executives

Tom McCallum

James M. Whitehurst - Chief Executive Officer, President and Director

Charles E. Peters - Chief Financial Officer and Executive Vice President

Analysts

Raimo Lenschow - Barclays Capital, Research Division

Kash G. Rangan - BofA Merrill Lynch, Research Division

Joel P. Fishbein - Lazard Capital Markets LLC, Research Division

Heather Bellini - Goldman Sachs Group Inc., Research Division

Mark R. Murphy - Piper Jaffray Companies, Research Division

Ross MacMillan - Jefferies & Company, Inc., Research Division

Steven M. Ashley - Robert W. Baird & Co. Incorporated, Research Division

Keith Weiss - Morgan Stanley, Research Division

Edward Maguire - Credit Agricole Securities (NYSE:USA) Inc., Research Division

Stewart Materne - Evercore Partners Inc., Research Division

Abhey Lamba - Mizuho Securities USA Inc., Research Division

Jason Maynard - Wells Fargo Securities, LLC, Research Division

Tim Klasell - Northland Capital Markets, Research Division

Scott Zeller - Needham & Company, LLC, Research Division

Bhavan Suri - William Blair & Company L.L.C., Research Division

Michael Turits - Raymond James & Associates, Inc., Research Division

Matthew Hedberg - RBC Capital Markets, LLC, Research Division

Walter H. Pritchard - Citigroup Inc, Research Division

Gregg Moskowitz - Cowen and Company, LLC, Research Division

Operator

Good afternoon. My name is Dustin, and I will be your conference operator today. At this time, I would like to welcome everyone to Red Hat's Q1 '14 Earnings Conference Call. [Operator Instructions] I'll now hand the call over to our host, Mr. Tom McCallum. Sir, you may begin.

Tom McCallum

Thank you, Dustin. Hello, everyone. Welcome to Red Hat's earnings call for the first quarter of fiscal 2014. Speakers for today's call will be Jim Whitehurst, President and CEO; and Charlie Peters, Executive Vice President and CFO.

Our earnings press release was issued after the market closed today and may be downloaded from redhat.com on the Investor Relations page. Also on this page, you'll be able to find a historic reconciliation schedule of GAAP to non-GAAP financial metrics, as well as the schedule on currency rates.

Various remarks that we may make about the company's future expectations, plans, prospects, including the statements containing the words believe, anticipate, plan, project, estimate, expect, intend or will, constitute forward-looking statements for the purposes of the Safe Harbor provision under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those indicated by these forward-looking statements as a result of various important factors, including those discussed in the company's most recent quarterly report on Form 10-K filed with the SEC, as well as the Safe Harbor statement in today's press release.

In addition, any forward-looking statements represent our estimates or views only as of today, June 19, 2013, and these estimates or views may change. While the company may elect to update forward-looking statements at some point in the future, we specifically disclaim any obligation to do so even if our estimates or views do change, and therefore, you should not rely on these forward-looking statements as representing our estimates or views as of any subsequent date besides today.

With that, I'd like to turn this over to Jim.

James M. Whitehurst

Thank you, Tom, and let me add my welcome to all of you joining us on today's call. We are pleased with the double-digit growth that we delivered across each of our key financial metrics and our execution on our growth initiatives focused on the open hybrid cloud.

In a few minutes, Charlie will provide details on our solid start to FY '14 and reaffirm our growth outlook for the year despite foreign exchange volatility and a challenging macroeconomic environment. Before he does, let me describe some of the trends that I heard last week from customers and partners at our premier user and partner event, the Red Hat Summit. Then let me highlight our exciting announcements to address these trends in customer priorities.

Clearly from my conversations with partners and customers at the Summit, the IT industry is changing dramatically and Red Hat is changing, too. We are leveraging our open innovation development model and subscription business model to help define the next generation of the data center. Unlike the past proprietary model of development, today's rapid innovation is being driven by communities of developers from across geographies and companies, who are delivering open source technology like never before.

On the consumption side, enterprise IT departments are stressed to reduce costs, while also helping their businesses consume this rapidly changing innovation that is the foundation for cloud computing. Here's where Red Hat helps. Our goal in this new world is to bridge this innovation gap for our customers. And the key focus for us will be to drive application consistency across the open hybrid cloud.

Last week, we announced several new technologies and partnerships to move the enterprise along this journey. Here are a few of the highlights. First, as many of you know, we have been involved with the OpenStack community for some time. In fact, with the Grizzly release, we have become the leading contributor to the OpenStack project. With this release and feedback from our early adopter program with the OpenStack technologies, we believe that it's time to bring to market an enterprise-ready commercial version of OpenStack with an enhanced and optimized Red Hat Enterprise Linux, to deliver a scalable and secure foundation for private or public clouds.

The Red Hat Enterprise Linux OpenStack platform will provide a fully integrated certified platform to build private and public clouds. Based on RHEL, this offering carries with it thousands of hardware, ISV and OEM certifications, and with over 13,000 applications and 4,000 hardware systems currently certified, allowing OpenStack to be more easily consumable by enterprises and cloud providers.

Second, we announced Red Hat Cloud Infrastructure, a policy-based cloud management solution that provides management for both virtualization, such as RHEV or VMware deployments, in cloud architectures such as OpenStack. Both Red Hat Cloud Infrastructure and Red Hat OpenStack are slated to be released in July, and we're pleased with the early interest in these innovative offerings.

Third, we shared our progress on Red Hat OpenStack Cloud Infrastructure Partner Network, which has over 100 global technology leaders as members, further demonstrating the ecosystem's need for a certified version of OpenStack. This program includes key alliance partners such as Cisco, Intel and IBM.

Fourth, we announced the availability of our OpenShift online Platform-as-a-Service public cloud offering. Since its debut and developer preview, more than 1 million applications have been created on OpenShift by the developer community. Responding to customer demand for a supported enterprise-class public PaaS offering, the new commercial offering will enable OpenShift online users and developers to access, among other sources of value, Red Hat's award-winning global support team. In addition, we have also built a new training and consulting program to further assist customers who deploy and optimize their data centers around these new technologies.

We continue to stay keenly focused on enhancing the value our customers receive through a Red Hat subscription. One way we've done this is through our consistent enhancements to the Red Hat Customer Portal. The portal, which is only available to paid subscribers, is designed to empower customers with tools that provide greater capabilities to troubleshoot and collaborate.

We're pleased to announce that, last week, for the third year in a row, the Red Hat Customer Portal has been recognized as one of the Top 10 Best Web Support Sites in 2013 by the Association of Support Professionals. We continue to be ranked alongside successful companies such as Cisco and Intel.

Continuing to drive additional value leads to strong renewals. Following on last year's perfect record in our quarterly top 25 deals that were up for renewal, I'm pleased to report that all of our top 25 deals not only renewed in Q1, but they did so at a total value of over 120% of the original value. This further validates the high level of value that customers are receiving through their Red Hat subscriptions.

On a final note, with the public cloud provider partners, we announced that Acxiom, NewLease and Verizon Terremark have joined the Red Hat Certified Cloud Provider program, continuing global momentum for Red Hat's open hybrid cloud solutions. The Red Hat Certified Cloud Provider program is for tested, proven solutions that extend the functionality of Red Hat's open hybrid cloud solutions. We have more than doubled our certified public cloud providers in the last year to 30 public clouds, with more to come.

In summary, we're pleased with our position in the world of open innovation and the resulting technologies we have brought to market, including Linux, middleware, storage and virtualization technologies. Looking ahead to the open hybrid cloud, we are optimistic on the growth opportunities in these markets and look forward to discussing these in more detail with you next week at our Analyst Day in New York.

With that, let me turn the call over to Charlie.

Charles E. Peters

Thanks, Jim. Q1 was a good start to the new fiscal year and included strong growth in a number of our key metrics. As Jim mentioned earlier, currency volatility continued to impact results. For example, year-over-year, the yen spot rate weakened 22% against the dollar, and the yen average rate has weakened 17%. Most currencies in which we do business weakened against the dollar on a year-over-year basis, on a quarter-over-quarter basis, and compare to the rates I used for guidance. So as I have over the past several quarters, I am going to report results in U.S. dollars, and where it's appropriate, I'll also report the constant currency result.

In Q1, we had year-over-year constant currency subscription revenue growth of 18% and growth of 16% in U.S. dollars. We had year-over-year constant currency total revenue growth of 17% and growth of 15% in U.S. dollars. Year-over-year, short-term deferred revenue growth of 17% and long-term deferred revenue growth of 12%, both in U.S. dollars, and record operating cash flow of $142 million, which grew 14% in U.S. dollars.

We continue to drive cross-selling and increased deal size in our top 30 deal metrics. The top 30 deals set a Q1 record for deals over $1 million. In the quarter, we had 28 deals of $1 million or greater, 2 deals were in excess of $5 million, and cross-selling was strong with a record 60% of the deals including a middleware component, and 5 of them being standalone middleware deals.

Within the top 30 deals, the telecoms/hosting/cloud provider vertical and financial services were the top core verticals. We achieved a record percentage this quarter coming from the telecom/hosting/cloud provider vertical, including deals with 2 more large public cloud providers.

Now let's turn to our financial performance. This quarter, 54% of bookings came from the Americas, 25% from EMEA and 21% from Asia Pacific versus a 55%, 25%, 20% split in Q1 last year. We expected -- as expected and consistent with last quarter, the Americas region continued to be impacted by the uncertainty in the federal government spending. EMEA continues to execute well against the challenging European economic backdrop. And Japan, which is the largest country in our APAC region, experienced a typical strong Q1 despite the significant negative impact of the weakened yen.

The Q1 sales mix was 68% from the channel and 32% from our direct sales force versus a 64%, 36% split in Q1 last year, reflecting our continued emphasis on the channel and the greater geographic mix from regions more heavily devoted to channel business.

Our billings proxy, which we calculate by adding revenue plus the change in deferred revenue on the cash flow statement, experienced its normal Q1 seasonality. The billings proxy was $346 million for the quarter, up 12% year-over-year. If one also factors in the year-over-year foreign exchange impact on revenue in this calculation, the foreign exchange adjusted billings proxy was $352 million and grew by 14% on a constant currency basis for the first quarter.

Now let's shift to the income statement. First quarter revenue was $363 million, an increase in constant currency of 17%. In U.S. dollars, the increase was 15% year-over-year and 4% sequentially. The main driver of our total revenue growth was subscription revenue of $316 million. Subscription revenue was up 18% in constant currency and 16% in U.S. dollars year-over-year.

The training and services component of revenue was $47 million, up approximately 13% year-over-year on a constant currency basis and in U.S. dollars. Service's revenue grew 5% sequentially. Service revenue growth rates were modestly better than guidance due to higher demand for middleware consulting than originally projected.

Now I'll discuss the rest of our results on a non-GAAP basis, excluding stock compensation and amortization expense, starting with gross margin. Subscription gross margin was 93.9%, consistent with Q4. Training and services gross margin was 34.3%, up 30 basis points from Q4. Overall, gross margin was above 86%, consistent with Q4 and Q1 last year.

Moving on to our non-GAAP operating expenses. We continue to focus spending on growth opportunities, with an emphasis on expanded R&D. Q1 non-GAAP operating expense came in at $226 million, up 5% sequentially and 19% year-over-year. R&D grew 27%, reflecting additions from last year's acquisitions and from ramped-up hiring of engineers for cloud management, Red Hat OpenStack and OpenShift technologies, among others. G&A increased only 7%, benefiting from systems investments made last year.

We continue to enjoy a natural foreign exchange hedge, primarily as a result of having multiple offshore engineering and support centers that somewhat mitigates the impact of foreign exchange on our operating income. It's not a perfect hedge, but it definitely cushions the impact of currency swings on our profitability. It does not cushion the impact on revenues reported in U.S. dollars.

Using currency rates from Q1 last year, this Q1 would have shown revenues, $6 million higher; expenses, $3 million higher; and operating income, $3 million higher. Using currency rates from the fourth quarter, this Q1 would have shown revenue, $4 million higher; expenses, $2 million higher; and operating income, $2 million higher. Compared to the rates I used for setting guidance, revenue would have been $1 million higher and operating income $700,000 higher.

Q1 non-GAAP operating income was $87 million, producing an operating margin of 23.9% and better than our guidance. This margin is higher than originally forecasted, due in part to the revenue beat. In addition, overall net hiring was approximately 150 associates, in line with our expectations.

Net interest income was modestly lower for -- than Q1 last year at approximately $1 million. Our estimated annual effective tax rate was 30% for both GAAP and non-GAAP results. Non-GAAP diluted earnings per share came to $0.32, which is $0.01 above the high end of our guidance range. GAAP diluted earnings per share came to $0.21 compared to $0.19 last year.

Q1 last year included a $3 million or $0.01 a share facility exit charge in connection with the disposition of 1 of our 2 old HQ buildings in Raleigh, North Carolina. This month, we've completed our transition to a larger building in downtown Raleigh. We expect to dispose of the other old HQ building and record any related charges within the next 6 months.

Now let's turn to the balance sheet and cash flow statement. We ended the quarter with cash and investments of $1.2 billion. In Q1, we used $179 million to repurchase approximately 3.6 million shares of Red Hat common stock, completing the remaining balance of our stock repurchase authorization at the time. Subsequently, on April 15, we announced a new $300 million stock repurchase program authorization.

Quarterly operating cash flow of $142 million was up 14% from Q1 last year, due in part to healthy opening receivables balance and strong collections. FX adjusted DSOs continued to be within our target range at 61 days. And as a reminder, since day sales outstanding is traditionally a measure of receivables compared to billings, our DSO is calculated using our billings proxy.

Total deferred revenue at quarter end was $1.06 billion, an increase of $147 million or 16% from the same quarter a year ago. In U.S. dollars, current deferred revenue grew 17% and long-term deferred revenue grew 12% from 1 year ago.

Sequentially, deferred revenue decreased approximately $29 million from last quarter. To help you isolate the foreign exchange impact, let me break down the components of deferred revenue for you. Short-term deferred revenue, which ended Q4 at $830 million, had a real decrease in Q1 of $19 million and decreased an additional $10 million as a result of changes in foreign exchange spot rates, ending Q1 at $801 million.

Long-term deferred revenue, which ended Q4 at $259 million, had a real increase in Q1 of approximately $2 million, but was offset by a $2 million reduction caused by changes in foreign currency spot rates, ending Q1 unchanged at $259 million. The total decrease in deferred revenue without the impact of currency changes was $17 million and can be found on our statement of cash flows.

Now I'd like to turn to guidance, factoring in the current global macroeconomic environment and weakening of most currencies against the dollar. I don't forecast foreign exchange rates, but for the purposes of this guidance, I have assumed that average foreign exchange rates for Q2 as -- are as they were recently, so I'm using euro at $1.33 and yen at JPY 96 to the dollar. We do business in many other currencies, but those are the 2 principal ones.

From a full year perspective, we are pleased today to reaffirm our full year revenue, profitability and cash flow guidance ranges, despite the negative FX headwind year-to-date. For Q2 specifically, I offer the following outlook: Q2 revenue is estimated to be approximately $370 million to $373 million; operating margin is estimated to be in the 23.9% area; interest and other income should be around $1 million; and non-GAAP EPS is estimated to be $0.32 to $0.33 a share, assuming the same 30% estimated annual effective tax rate.

Consistent with my past practice, I do not forecast quarterly cash flow. However, I suggest that while estimating cash flow, you use beginning accounts receivable balances as a clue for a starting point.

In summary, we continue to perform well despite the macroeconomic and currency headwinds that are affecting everyone. We are also seeing encouraging signs that our federal business will improve in the current quarter, and we believe that we are continuing to gain market share.

Finally, we're excited about the new technologies that we've launched around the open hybrid cloud. I look forward to seeing as many of you as possible next week at Analyst Day in New York City. And operator, I would now like to turn it back over to you for the first question.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of Raimo Lenschow with Barclays.

Raimo Lenschow - Barclays Capital, Research Division

Quick question, you mentioned the cloud service providers as one of the strong guys for this quarter. And [indiscernible] with investors about how those guys were playing out in terms of will they long-term take the support from you guys? What are you seeing in your discussions with them especially after the event last week?

Charles E. Peters

We've got a good business with the public cloud providers. We provide infrastructure to many of the public cloud providers, and we also sell instances of Red Hat in the public cloud that are consumed by their customers. Hence, we get a recurring revenue stream. We believe that the technologies that we are offering are the technologies that are needed for the public cloud, and we think it's a good business for us. And just to recap, as I said and as you've mentioned, Raimo, the public cloud providers, 2 of them were in the top 30 deals this quarter, and that vertical was one of the top 2 verticals for the quarter, the second one being the financial services.

Operator

The next question comes from the line of Kash Rangan with Merrill Lynch.

Kash G. Rangan - BofA Merrill Lynch, Research Division

I'm just curious, given that we've had some weakness in the software group over the last couple of months, wondering if you could talk about the linearity of how things started [ph] in your -- the months of March, April and May. Did you see business get better progressively in the month of May as we came out of the sequester? And also, Charlie, I think you might have alluded that you talked about an off-balance sheet backlog metric that grew -- the off-balance sheet billings grew significantly faster than your reported billings last quarter. Wondering if that's still the shape of things to come, and should we expect the reported billings growth rate to improve as the year progresses?

Charles E. Peters

Thanks, Kash. So on the first question about linearity, linearity this quarter was more of sort of a 20-20-60 kind of linearity. And as we've described in the past, for us, generally, we're in a range -- a really good linear quarter would be 25-25-50 and less linear is 20-20-60. So we're more -- last several quarters have been more sort of 20-20-60. The second part of your question about the off-balance sheet backlog, as you recall, an off-balance sheet backlog is a statistic that we disclosed at our year end, and we had a nice increase in off-balance sheet backlog at the end of last year. And probably the relevant piece to your question, Kash, is the portion which is billable within 12 months. And that portion that was billable within 12 months at the end of February, with over $180 million, is an increase of -- a substantial increase from the prior year. So that should help us probably when we get to our fourth quarter. And the only other thing I guess I would add is we saw the normal seasonality of our Q1 compared to prior Q1s.

Operator

Our next question comes from the line of Joel Fishbein with Lazard.

Joel P. Fishbein - Lazard Capital Markets LLC, Research Division

Just a question around sales necessary to sell some of the new products. Do you think that the current sales organization is equipped to go into the cloud infrastructure space and commercial OpenStack? Or will you need to make some modifications to it in order to go -- penetrate the ecosystem deeper?

James M. Whitehurst

We've been making modifications, really, over the last year, right? Really, technically several years ago, we started with JBoss using overlays and other vehicles to build out our capabilities to sell beyond the core infrastructure. So we will continue to do that. We're actually making a significant investment in a project we call Project Lighthouse, which is bringing in more skilled kind of architecture-type level people to help with that. We're also continuing to work hard building out channel relationships. This is kind of a symbiotic relationship. As we're becoming more strategic to customers around this whole set of cloud infrastructure, we also become more strategic to our channel partners who are also very interested in providing those services. So it's a nice symbiotic relationship. As we go deeper with them, we're able to leverage their expertise as well.

Operator

Our next question comes from the line of Heather Bellini with Goldman Sachs.

Heather Bellini - Goldman Sachs Group Inc., Research Division

I just had 2. In particular, I wanted to ask a little bit more about the federal business, which you said was weak in the May quarter but you're expecting improvement next quarter. Can you walk us through what the confidence level is? And obviously, we all know it's the end of the government buying cycle at the end of September, but what gives you the confidence that you're going to see things change given what's going on with sequestration? And then I guess, the other question is, and there's been a lot of talk about OpenStack and just some of the questions that we've heard already tonight, but when we think about that OpenStack being integrated with RHEL, with your offering now going GA, how should we be realistically thinking about when we start to see that, again not impact revenue, but in terms of a contribution to deferred?

Charles E. Peters

I'll take the first one on the fed business, and then Jim can jump in on the second one, on OpenStack. So on the fed business, what I said is that we've continued to see impact in Q1 from fed budget-related issues, I guess, in my view, sequestration or otherwise. And we do have, I'd say, high confidence that in the current quarter, the second quarter for us, we're going to see a nice increase on our federal business. And I would say also just to remind everybody about this, we have a recurring revenue business, so 86%, 87% of our business is subscriptions, it's renewable. It means the pattern that develops year after year is we typically have a low Q1, a little bit better Q2, a somewhat better Q3 and a very strong Q4. And we see that same kind of pattern developing again this year. So -- and Jim if you could comment on just the OpenStack.

James M. Whitehurst

Sure. The other -- only other thing I would say on federal as well is obviously, we have a pipeline and we can see the pipeline and the customers and what we expect to close. So that's not a top down macroeconomic call on the federal government. It's more of a bottom up, looking at what's in the pipeline and what we expect to be able to close. Regarding OpenStack, we're very excited about the momentum we have around OpenStack, the interest, the early customers who we're working with on it. But I also want to temper expectations. My guess is we will do a lot of POCs in the next year on OpenStack, but people don't start writing even 6-figure checks for software. They may for some services, but for software, until they get a little closer to production, that's probably still a year or 18 months away. So I wouldn't expect to see a material impact to the top line for a year directly. Now indirectly, it does help. It makes us more strategic with our customers. It gets us in many more conversations, and that helps drive middleware conversations. It helps our relative share versus Windows, when -- as more new workloads are likely to go on Linux. So it does have an impact for us, but I wouldn't expect to see material OpenStack revenues or even billings or bookings in the next 12 months.

Operator

Our next question comes from the line of Mark Murphy with Piper Jaffray.

Mark R. Murphy - Piper Jaffray Companies, Research Division

When your RHEL customers are shifting to a hybrid cloud environment, whether they're using Amazon Web Services or another public cloud environment, and they're doing that in conjunction with their on-premise private clouds, what does that typically mean for their consumption of RHEL in aggregate? In other words, based on what you've seen so far, how strong is the preference to maintain architectural symmetry by trying to run RHEL both on-premise and in an Amazon or another structure?

James M. Whitehurst

We absolutely see it. I mean, as soon as you make compute cycles easier to consume, people consume more. And so people running a hybrid environment also running in a cloud, they're likely to consume more. And for customers who want to have any kind of consistency in their architecture, they want to run the same operating system. And so we have our whole bring-your-own operating system kind of deals that we've done with our larger customers, so we don't care whether they run them on-premise or in the public cloud. And without a doubt, that drives more use.

Operator

Our next question comes from the line of Ross MacMillan with Jefferies.

Ross MacMillan - Jefferies & Company, Inc., Research Division

It's Ross MacMillan. Charlie, maybe just a quick one just to start off. So as we think about the FX adjusted billings proxy of 14% growth in the quarter, I know you don't guide for that, but that was a few points lower than the currency-adjusted subscription or total revenue growth rate. Is there anything we should take away from that for the rest of the year in terms of the relationship between that billings proxy and revenue growth? And is it possible we would see the billings proxy at a lower rate of growth this year?

Charles E. Peters

Ross, I don't think there's any longer-term message you should take away from that. It's kind of typical for Q1. The revenue growth rate is based upon what's coming from deferred revenue, largely, in the quarter from a subscription basis, plus some of the business we've done in current quarter, and then it's also impacted by what's happening on the services side of things. And there definitely are quarters in which billings will be growing at a faster pace than revenue, and then are quarters when revenue grows at a faster pace than billings. So I don't think I'd take anything away other than it was a normal Q1.

Ross MacMillan - Jefferies & Company, Inc., Research Division

Okay. And then maybe just a quick follow-up for Jim. I think there was the announcement around you allowing RHEL to be used in the free tier with AWS. I was just curious as to the strategy there. Is it really a seeding strategy? Is this an effort to get RHEL more widely used ahead of mission-critical workloads being run in public cloud? I'd love to just get your high-level thoughts around that.

James M. Whitehurst

Yes. I think mentally, how we look at that is no different than we look that evals that we give away for temporary use, for customers who are evaluating RHEL. So it's really basically the Amazon Cloud equivalent of evals. I don't think we really overthought it a ton more than that. Yes, I will say production workflows, we think, as those move to the cloud, we'll basically have a very high share of production workloads and a traditional data center will have a high share of those same production workloads as they move to cloud. I don't think people have experiment with it that much to know that. People can see the Certified Cloud Provider program, the engineering we've done around how updates get pushed, et cetera, et cetera. The value proposition for existing customers is very, very clear, whether it's on-premise or in the cloud. For new customers, it's a good way for people to kind of try it out in the same way we give evals to potential new customers normally.

Operator

Our next question comes from the line of Steve Ashley with Robert W. Baird.

Steven M. Ashley - Robert W. Baird & Co. Incorporated, Research Division

About the middleware business and how we should think about that in terms of WebLogic and WebSphere replacement activity? Have you seen -- is that part of the mix? Is that an increasing part of the business versus doing something brand new? We'd just love to get some color around that.

Charles E. Peters

Well, first of all, thanks for the question, Steve. As I mentioned, in the top 30 deals this quarter, 60% of them had a middleware component. It's the largest number we've ever had, and 5 of them were a standalone middleware deal. So you can see the activity is still high, it's still growing rapidly and we are in it. We are taking share in this business. I'm actually going to show some examples at Analyst Day next week, so I'm going to wait until next week to get to the more detailed part of the questions. I've got some examples I'll share -- 6 case studies I want to share with everybody.

James M. Whitehurst

The only other color I would add quickly to that is, I'd say for the last couple of years, the primary share shift has been around the application server. But as our BRMS and our SLA [ph] suites have matured, we're seeing more migrations from WebSphere and WebLogic's equivalent integration products as well, which is great to see.

Operator

Our next question comes from the line of Keith Weiss with Morgan Stanley.

Keith Weiss - Morgan Stanley, Research Division

I was wondering if we can get an update on the initial traction in some of the new acquisitions that you guys made on ManageIQ, and maybe some of the products that came out of the Fuse acquisition and that AMQ part [ph] you guys announced last quarter.

Charles E. Peters

Sure. We did 3 acquisitions last year, ManageIQ, a company called Polymita and then FuseSource. And Polymita and Fuse basically both related to the middleware product line and have been integrated with the product line. There has been, I'd say, continued interest in Fuse. We think that's going to be a good addition to the middleware portfolio. What I didn't say about the top 30 deals is that one of the top 30 deals was actually a large component, that was CloudForms, and ManageIQ is being integrated with CloudForms. So ManageIQ, we think, is going to be a very important part of some of these new technologies that Jim discussed. But beyond that, I don't have specific numbers that I intend to break down on them, either now or in the future.

Operator

Next question comes from the line of Ed Maguire with CLSA.

Edward Maguire - Credit Agricole Securities (USA) Inc., Research Division

I was wondering if you could just provide an update over the last 90 days on how the storage business is progressing, and I'm noticing that you're tying that into OpenStack, and what your expectations are for that business this year.

James M. Whitehurst

Well, I'm not sure I'd say we're tying it in. I think we see that as an incremental opportunity as well. The storage business continues to mature. We have -- we're seeing well over 180 POCs there now. One of our big deals had -- of our top 30 deals had a significant storage component. And one of the deals -- or one of the implementations that we highlighted at Summit was Intuit, who had basically all their TurboTax documents for millions of filers, all of those documents were in Red Hat storage and it was a phenomenal use case. I've personally met with the Intuit team at Summit, and they were just glowing at how easily it's scaled up. And obviously, April 14 is the big night for it. And it scaled perfectly, they're really excited to continue to expand their use. So there are a number of use cases like that, but that was a great one that we highlighted at Summit.

Operator

Our next question comes from the line of Kirk Materne with Evercore Partners.

Stewart Materne - Evercore Partners Inc., Research Division

Charlie, I just want to follow up a little bit on your commentary around sort of the macro environment. It's interesting, it seems like you guys had a really good quarter in terms of large deals again, yet you guys referred to the macro environment a couple of times. And I guess, I'm just wondering, is the macro environment really pressuring more sort of the transactional side of your business? The numbers sort of -- it sounds like you're pretty pleased with how they came in. So I'm just wondering is the macro environment constricting your growth right now or just because it seems like the big deals are going well, so I'm just trying to get a sense on if that's having more of an impact on the transactional side? I got your comments around the fed business, but I was just wondering more in general, is that really where you're seeing pressure if there is any?

Charles E. Peters

Yes, I would say this, that we always want to do better, and there's no doubt that the European economy is still suffering. Our European guys worked hard. We think they did a good job, but if the economy there was more robust, I think they could have done better. In the U.S., there's no doubt that the federal space, in particular, for everybody, has been kind of tied up in a knot for at least 6 months, and we could have done better had not -- that not been the case. So I make the comment because I do believe it's real and it's obviously not Red Hat-specific. We're seeing the same thing everybody else is seeing. Currency rates clearly were a factor, and even in the last 2 to 3 weeks, currency rates have gyrated rather significantly. In this case, the dollar weakening against some of these currencies. So I mentioned it because I think it's important background information for everybody.

Operator

Our next question comes from the line of Abhey Lamba with Mizuho Securities.

Abhey Lamba - Mizuho Securities USA Inc., Research Division

Charlie, just wanted to revisit the question on large deals. You had 8 straight quarters of very strong, large deals. Can you talk about what are the drivers behind an uptick in large deals over the last couple of years? And based on the pipeline and your customer conversations, should this trend continue in the near term?

Charles E. Peters

It's a good question. I think the reason for the large deals is we have a very loyal customer base. As Jim said, last year, every single one of the top 100 deals that were supposed to renew, did renew, and they did -- the top 25 renewed again this year. If I go back 3 or 4 years, there's only 1 or 2 out of that entire time frame that didn't. And so these customers are continuing to stay with us, they're growing their infrastructure, they're adding on new products and services, and they simply just keep getting bigger and bigger. We have very few customers where there's not opportunity for more growth for us. And that's why they keep getting bigger. I actually have some more statistics on this as well and intend to share next week at the Analyst Day.

Operator

Our next question comes from the line of Jason Maynard with Wells Fargo.

Jason Maynard - Wells Fargo Securities, LLC, Research Division

Jim, I have a question for you just around the core Linux business, and I'd love to get your take on where do you think we're at in UNIX or Linux migration? How would you characterize the health, if you will, of sort of that bread-and-butter business? And how much, if at all, is that business, do you think, impacted by some of the challenges and [indiscernible] in the financial services and some of the other sectors of the economy?

James M. Whitehurst

Again, I think when we look out at opportunities, we do a bottom-up build. And so we look at our customers, we look at their Linux footprints relative to their UNIX footprints and how much room we have to go. And based on that metric, third inning maybe. I would say even our most penetrated customers, some of the big financial services institutions are maybe halfway done, 60% done with UNIX to Linux. Mainstream customers are nowhere near halfway done. So I'm guessing a little bit on the third inning. What's interesting is what's left, too, because it's more likely to be at mainstream customers or it's kind of bigger systems. The ASPs of what's left are significantly higher than the ASPs of what we've already done because, one, I think mainstream versus early adopter customers, mainstream customers are more likely to buy higher service levels because they want kind of more support and more immediate support. And then obviously, just the bigger boxes, it's just a higher price point. So in terms of units, I'd say again, third, maybe early fourth inning. In terms of dollars, it would be significantly earlier than that. Just one other comment, too. That is certainly a go-to-market motion, but when I really look at the volume growth, where, at least we see, just kind of talking to customers, we win a very high percentage of new workloads. I mean, big data workloads are almost exclusively on Linux, and then it's only a matter of is it Red Hat or is it free? Most web workloads, the same way. So when we actually look at drivers of growth with our customers, certainly UNIX to Linux is one, but I would say a very high percentage of all new workloads end up on our platforms, certainly, relative to anyone else's.

Operator

Our next question comes from the line of Tim Klasell with Northland Securities.

Tim Klasell - Northland Capital Markets, Research Division

I have a question about OpenStack, and I realize it's very early days still. But when we look at your other markets of middleware operating systems and what have you, you are displacing some traditional proprietary software. With OpenStack, you're sort of leading the charge into a new market. Can you give us some idea of how big you think that total addressable market is and maybe where you think you'll play particularly strong? Is it in the storage and the networking side or will it continue to be in virtualization and operating system? So can you give us an idea of what we -- how we should think about that opportunity going forward?

James M. Whitehurst

Yes, it's such early days. It would really be hard to tell. And I have to say, some of our very early adopter customers we're working with on this, where OpenStack ends and OpenShift begins also really munges together, because these customers are often consuming both, because they're actually looking at it as a platform on which to build and run their applications. And so right now, we talked about Infrastructure-as-a-Service, we talked about Platform-as-a-Service and our products are obviously around OpenStack and OpenShift, but exactly how those lines play out over time, I'm not sure. And combined, so let me talk about it combined, the platform on which people will write and run their application portfolios in this next generation of architecture is massive. But exactly where those lines draw out, it's going to be a little hard to say. And that's why I think it's important for Red Hat that we're investing across OpenShift, OpenStack and around storage, because we're just -- we'll have to see where those kind of lines ultimately fall out.

Operator

Our next question comes from the line of Scott Zeller with Needham & Company.

Scott Zeller - Needham & Company, LLC, Research Division

Regarding the performance in Europe, you said you're pleased with the execution. Can you give us a sense of the types of deals you're seeing on the continent and U.K. versus perhaps North America? Are the projects in North America different in size and scope? Just a comparison will be interesting and color about why you believe Europe is holding up well for you.

Charles E. Peters

No, I don't think that there's any significant differences in terms of the types of deals we do or even the types of customers we serve. We're usually large there in the financial vertical. I know we're in the telco vertical. Government, over different points in time, the government vertical, both federal, local level in Europe have been customers, is very much the same use case and the same sort of the customer base. So no real significant differences.

James M. Whitehurst

Yes. And the only thing I would add, just a little bit of color. I think both in Scandinavia and in Southern Europe, there is a general, I would say, cultural affinity for open source in a way that you don't necessarily see as much in the U.K. and Central Europe or, frankly, in North America. I think in the U.K., in Central Europe and in the U.S., people buy our technologies because they're better technologies and a better value proposition. I do think that in both the Nordics and in Southern Europe, we actually get benefits just from the fact that we're open source. Just a quick factoid, of our top 30 deals where we provided metrics, 8 of those were in EMEA.

Operator

Our next question comes from the line of Bhavan Suri with William Blair.

Bhavan Suri - William Blair & Company L.L.C., Research Division

Just Jim or Charlie, if you could provide an update on the competitive environment in the Linux space. I know you've been hearing sort of the workloads on Amazon being used by Ubuntu or being built on Ubuntu or Sands. Just I think an update on that environment and sort of where you're seeing those guys gain adoption versus sort of the systems where RHEL plays.

James M. Whitehurst

Well, you mean specifically in clouds or in general?

Bhavan Suri - William Blair & Company L.L.C., Research Division

In general.

James M. Whitehurst

In general, we -- it may be too strong to say this, but I have never heard of an instance where we have competed against Ubuntu or Riltwell [ph] at all. Certainly SUSE, has in our -- at least with our set of customers, continued to lose prominence. So we rarely see them showing up in deals. We see Oracle every now and then at our kind of large Oracle database installations, so kind of come in with a kind of a price-based proposition to those customers. So if anything, I would say on the Linux side, we are seeing less competition maybe than we've seen in the past. And when you get onto cloud, again I don't think it's any different really than cloud. Obviously, the initial use cases of cloud is in kind of dev test, developers playing around, doing things. And just like we see within our customers, they haven't bought unlimited. You'll see Ubuntu or CentOS or Fedora or others in there. But typically when those things go to production, they move to RHEL. So I don't think there's anything particularly different about the cloud deployment model and why it should play out any differently.

Operator

Our next question comes from the line of Michael Turits with Raymond James.

Michael Turits - Raymond James & Associates, Inc., Research Division

Questions. One sort of back on bookings billings, I know you don't give off-balance sheet inter-year, but sometimes you do comment on whether bookings or billings grew faster. How did bookings grow relative to billings? And the second question is around RHEL 7 and pricing. In other areas of software there have been attempts at different types of ways to change pricing to get more leverage out of the customer. Any thoughts on whether those have been proper and good strategies and where you might go with RHEL 7?

Charles E. Peters

Okay. So on the first part, I'm not going to comment on the bookings issue. We don't talk about bookings, just billings. End of year, as you've said, we do comment about off-balance sheet backlog. We offer some additional statistics about the annual bookings, so I'm going to stick with that. In terms of RHEL 7, let me just talk about RHEL generally that -- and this applies to RHEL 6, RHEL 5, RHEL 4, going back to the beginning, that if you're a RHEL subscriber, that when a new version of RHEL comes out, it's your choice as to when to move to next version. So today, we still -- even though we're at RHEL 6, we still have customers using RHEL 5 and RHEL 4. And the pricing that applies to RHEL is going to apply to all those versions. So the timing of a new RHEL release, it doesn't have really much implication in terms of revenue. But in questions about pricing, we're always looking at different ways to package our products, not just RHEL but all the rest of our products, how to price it in a way that's attractive to our customers and also attractive to our shareholders. So when RHEL 7 is launched, if there are pricing changes, we'll discuss it at that time.

Operator

Our next question comes from the line of Matthew Hedberg with RBC Capital Markets.

Matthew Hedberg - RBC Capital Markets, LLC, Research Division

You guys have made a lot of interesting strategic acquisitions over the past couple of years. I guess I'm wondering, when you look at all the hype around whether it's Hadoop or analytics or data integration, when you look at your portfolio, do you feel like you need to acquire some of that technology or do you feel like you can handle it through partnerships?

James M. Whitehurst

Well, our perfect way to get involved in things is what we've done with OpenStack, where we become a participant, and we, over time, work our way to be a leading participant. So that's, I guess, a more organic way to enter categories. We do see ourselves as a player around big data. Our storage solution, we think, is really, for customers, the best way to optimize, be able to use a single data store, both operationally and then for running map-reduced queries. We have great partnerships with Cloudera, with Hortonworks and Intel in the area. For us, we want to make sure we meet our customers. They're great partnership and it drives a lot of RHEL across all 3 of those. So we're pleased where we are now. And obviously, we always look at the market and where we think our customers want us to drive more value. But right now, we're quite comfortable continuing to drive our storage strategy to really be the preferred storage underneath Hadoop.

Operator

Our next question comes from the line of Walter Pritchard with Citigroup.

Walter H. Pritchard - Citigroup Inc, Research Division

I was wondering just a follow-up on the OpenStack question. I'm wondering, just talking at high level, how you expect to monetize it? And then specifically around the July release, do you expect to change pricing relative to the RHEL with the new OpenShift that have the OpenStack built?

Charles E. Peters

At a high level, it's going to be a subscription model just like all the rest of our products. So obviously, we will be offering a subscription for certain levels of support and technology. The details of that, again, will be announced at the time of the GA of the product.

James M. Whitehurst

I'd also suggest that we continue that discussion next week with Paul at Analyst Day. Obviously, one of the real benefits we can bring to OpenStack is our -- the RHEL OpenStack platform includes unlimited guests, so we can make it very easy for our customers and very compelling economically for a customer to be consuming RHEL in an OpenStack environment. And that's something that no one else can do. So Paul can talk a lot more about exactly what we're doing there and how we'll be able to drive value for customers going forward.

Operator

Our last question comes from the line of Gregg Moskowitz with Cowen.

Gregg Moskowitz - Cowen and Company, LLC, Research Division

Charlie, was there any changes in average contract duration this quarter? And then also, I didn't hear a whole lot around RHEV. Just wondering if you could provide a little more color around RHEV as a component of large deals and more broadly as well?

Charles E. Peters

Okay, good question. The average contract duration this quarter was 20 months, so it's just a tad shorter than it's been last the couple of quarters. The proportion of bookings beyond 12 months was 22%, and that within 12 months is 78%. Your question about RHEV, RHEV was represented in 4 of the top 30 deals, so that continues to make some good progress as well.

James M. Whitehurst

And one of those was actually a 7-figure RHEV component.

Charles E. Peters

Yes.

Tom McCallum

Great. Well, thank you, everyone, and we look forward to speaking to you next week. I hope everyone can make it. Thanks.

Operator

Ladies and gentlemen, this does conclude today's conference call. We...

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