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Excerpt from Red Hat's earnings conference call; CFO Charlie Peters is speaking:

Now, let's talk about Q2. I will comment on non-GAAP adjusted results because I believe they provide a better comparison of performance with the prior year. Total second quarter revenue of $99.7 million represents an increase of 19% from last quarter and 52% from the same quarter and fiscal year 2006 and includes approximately $7 million in JBoss revenue. It also includes in-quarter revenue of approximately $1 million, which was not originally planned and is not likely to repeat in Q3. Even with this $1 million, we beat the high end of our previous guidance.

Subscription revenue was $84.9 million; it grew 19% sequentially and 56% year-over-year. Training and services revenue came in at $14.7 million, an 18% sequentially increase and 29% year-over-year. This quarter, 54% of our business came from the channel and 46% from direct sales versus a respective 61%, 39% split last quarter. This shift back towards direct sales is primarily the result of including JBoss' relatively higher direct bookings mix. Our expectation is that over time the indirect contribution will grow from these levels as we leverage our existing channel relationships to promote the JBoss offerings. Last week's introduction of the Red Hat application stack and our ability to rapidly introduce a joint Red Hat/JBoss offering to channels is illustrative of this point.

From a geographic perspective, 61% of bookings came from the Americas, 23% from EMEA, and 16% from Asia Pacific. Due to the inclusion of JBoss' results, this mix is more heavily tilted towards Americas than the recent prior quarters, as JBoss bookings have historically been small in EMEA and almost nonexistent in APAC. Of course, the exciting aspect of JBoss' previously-limited ability to serve users globally is the opportunity we have to leverage our existing worldwide sales and support structure to grow the business in the future.

Our billings, which we define as revenue plus change in deferred revenue, was $113 million, up 23% year-over-year and up 3% sequentially after adjusting for currency swings in each quarter. We have, of course, excluded from the change in deferred revenue the additional increase of approximately $16.8 million which came with the acquisition of JBoss. Q2 billings were affected this quarter by three specific Red Hat-related issues which are temporary and which we believe will rebound quickly.

First, sales productivity was impacted by integration activities related to the recently-acquired businesses. For example, we invested selling time of the entire global Red Hat sales force, including sales engineers, to train them on the basics of JBoss offerings. Although this training came at the expense of valuable selling time in Q2, we believe it was necessary and will produce returns in coming quarters.

Secondly, Asia-Pacific billings were impacted due to changes in sales structure in that region. The changes are complete and the outlook for the region remains strong, so we expect substantial Q3 improvement there.

Finally, we did a higher proportion of three-year deals billed one year at a time than last year, resulting in growth in unbilled backlog but not billings.

These items impacted billings during Q2. But the good news is the pipeline is strong and the outlook remains solid.

For the quarter, we achieved an overall gross margin of 84%, up from 82% in the year-ago period and only 50 basis points lower than Q1. That is 25 basis points better than my own expectations, which I communicated to you last quarter. This improvement is primarily attributable to faster and better JBoss integration progress than originally planned.

Operating expenses came in at $66 million, excluding stock compensation expense of $7.8 million. Operating expenses were slightly lower than expected as we continue to manage tightly. Non-GAAP operating income was $16.9 million for the quarter, resulting in non-GAAP operating margin of 16.9%. This is almost 200 basis points better than originally expected due to higher revenues and lower operating expenses than planned. Nevertheless, it should be obvious that by comparing each line of operating expenses as a percentage of revenue to prior quarters that we have room for rapid improvement as revenue continues to grow.

Moving on, other income net, attributable primarily to investment income, was $9.6 million versus $10.7 million last quarter. The smaller contribution is primarily attributable to differences in foreign exchange and lower interest rates on smaller cash balances after funding recent acquisitions.

Our estimated effective GAAP tax rate is 37% for the year, unchanged from our previous estimate. However, to reiterate, regardless of the GAAP tax rate, it's important for investors to understand that due to tax NOLs of approximately $450 million, we continue to estimate cash taxes of 5% for this year and for the foreseeable future. Therefore, 5% is a rate we use for the non-GAAP adjusted results.

Non-GAAP adjusted net income was $23.7 million versus $17.7 million in Q2 of last year. Based on 220 million fully diluted shares in Q2, fully diluted non-GAAP adjusted earnings per share was $0.11 per share versus $0.07 per share last quarter.

For more, see the entire conference call transcript (free). A full list of the most recent conference call transcripts on Seeking Alpha is here.

Source: Red Hat's Results in its Own Words