Red Hat F4Q07 (Qtr End 2/28/07) Earnings Call Transcript

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Red Hat, Inc. (NYSE:RHT)

F4Q07 Earnings Call

March 29, 2007 5:00 pm ET

Executives

Katrinka McCallum - Vice President, Investor Relations

Matthew J. Szulik - Chairman of the Board, President, Chief Executive Officer

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

Analysts

Kash Rangan - Merrill Lynch

Heather Bellini - UBS

Terry Tillman - SunTrust Robinson Humphrey

Brent Thill - Citigroup

Mark Murphy - Global Equities Research

Trip Chowdhry - Global Equities Research

John McPeake - Prudential Equity Group

Jason Maynard - Credit Suisse

Brendan Barnicle - Pacific Crest Securities

Sarah Friar - Goldman Sachs

Tim Klasell - Thomas Weisel Partners

Todd Raker - Deutsche Bank

James N. Gilman - Cross Research

Katherine Egbert - Jefferies and Company

Kirk Materne - Banc of America Securities

Adam Holt - JP Morgan

Presentation

Operator

Good afternoon, everyone. My name is Jacob and I will be your conference facilitator today. At this time, I would now like to welcome everyone to today’s Red Hat fourth quarter 2007 conference call. (Operator Instructions)

I would now like to turn the conference over to Katrinka McCallum, Vice President of Investor Relations. Ms. McCallum, you may begin your conference.

Katrinka McCallum

Thanks, Jacob, and welcome to Red Hat's fourth quarter fiscal year 2007 earnings call. Speakers for today’s call will be Matthew Szulik, Chairman, President and Chief Executive Officer; and Charlie Peters, Executive Vice President and Chief Financial Officer.

Our earnings press release was issued after the market closed today and may be downloaded from redhat.com or requested by calling Linda Brewton, Manager of Investor Relations, at 919-754-4476.

Various remarks that we may make about the company’s future expectations, plans and prospects, including statements containing the words believe, anticipate, plan, project, estimate, expect, intend, or will, constitute forward-looking statements for the purposes of the Safe Harbor provisions 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-Q filed with the SEC.

In addition, any forward-looking statements represent our estimates or views only as of today and should not be relied on as representing our estimates or views as of any subsequent date. While we 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 change and therefore, you should not rely on these forward-looking statements as representing our estimates or views as of any date subsequent to today.

Now I would like to turn the call over to Matthew.

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Matthew J. Szulik

Thank you, Katrinka, and it is great to have you on board as our new Vice President of Investor Relations. Katrinka joins us as formerly Chief Operating Officer of Micromuse, is a proud graduate of Wellesley College, has an MBA from Duke University. We are very happy to have you on board.

I would also like to take this opportunity to thank Dion Cornett for the outstanding job he did in his role as Vice President of Investor Relations, and to congratulate him on his new role of VP Inside Sales within Red Hat. I know that he will bring the same passion and energy to our global sales function as he had demonstrated in the past in leading our investor relations activities.

This Q4 earnings call is an especially meaningful call for Red Hat, for this week marks the five-year anniversary since the original launch of Red Hat Enterprise Linux, an enterprise Linux platform so transformative that it accelerated the adoption of open source into the enterprise. It validated the enterprise market for Linux and open source software. As well, it validated open source software development as the model for contemporary software development and ultimately validated the market for subscription-based software as a service economics.

In five years, Red Hat and the open source community have delivered four major operating system releases that run on six different computing architectures, with the open source industry’s broadest support of hardware and software relationships.

Red Hat Enterprise Linux 5 further extends our technology leadership position, expands our market opportunity, and I believe is the most significant release in the history of the company. If you fly on a plane, it is likely that the application supporting the navigation system is powered by Red Hat Enterprise Linux. The plane is likely to be receiving its weather information from servers powered by Red Hat Enterprise Linux. The reservation system that you booked your air travel on are likely powered by Red Hat Enterprise Linux. If you wanted a book to read on your flight, it is likely that the secure servers from which you made your online purchase are powered by Red Hat Enterprise Linux, and if you chose not to read a book or watch an in-flight movie, there is a strong likelihood that the animation for that movie which you are watching was powered by Red Hat Enterprise Linux. And when you are done watching the movie and want to purchase a gift duty-free online, it is likely that this purchase, this transaction is transacted through Red Hat Enterprise Linux.

In Red Hat's fourth quarter, the company continued its success of new customer acquisition, solid operational execution, and continued progress in servicing the world’s most demanding customers.

Highlights include: year over year total revenue growth of 44%; non-GAAP cash flow from operations at 54% of revenue for the year; non-GAAP operating margins of 21% for the year; in Q4, Red Hat once again signed more than 10,000 net new customers and over the fiscal year, we renewed 98 out of our top 100 customers.

Red Hat enters fiscal 2008 as an organization with close to 2,000 associates in 55 offices globally, delivering around the clock, seven-by-24 world-class service and support to enterprise and government customers.

There is no doubt that there is an open source transformation happening and Red Hat is both benefiting from and enabling one of the largest shifts in technology spending that is expected to continue for years to come. I firmly believe that our focus on customer success and continued investment in technology and service infrastructure, channels of distribution will continue to position Red Hat strongly to sustain and expand our leadership position to take advantage of this tremendous opportunity as markets shift from analog to digital.

In the fiscal year 2008, Red Hat has three core initiatives to capture this demand: deepening our enterprise relationships through improved product and service offerings, expanding global channels of distribution, and continuing technology leadership and service innovation.

Let me describe our first initiative, deepening our enterprise relationships through improved product and service offerings. Enterprise and government customers have been working with Red Hat to advance our platform, middleware and systems management capabilities for over five years. Our customers are spending less time debating the merits of one Linux kernel versus another. Instead, their discussions with me and other executives have shifted to strategic mission-critical components of their IT infrastructure, and discussions focus on computing and data models, the federation of data services and enterprise class solutions.

Customers are seeking to enable technology in business process improvements with the global open source community.

Today, Red Hat Network is managing the world’s most complex Linux and JBoss server environments. A highlight in fiscal 2007 was the adoption of Red Hat Network as the content distribution and management tool within the enterprise for delivering updates, managing patches, and managing and provisioning Linux and JBoss servers. Customers have communicated positive feedback on the support that they receive in multiple thousand server environments.

Now let me describe how we will reach our customers with our second initiative in expanding global channels of distribution. Throughout fiscal 2007, we expanded our geographic presence and we will continue to grow our reach outside the U.S. With market demand increasing around the world and open source becoming mainstream, we will leverage our brand leadership to expand channels of distribution further than our existing channel relationships.

Earlier this month, we introduced Red Hat Exchange, a platform to accelerate the global availability of open source technology and services. While Red Hat Exchange is clearly in its early stages, our aim is to create a contemporary value-added model of distribution and to create and service software to new and emerging markets. This is an expansion of our online communities without the historical large investment in personnel and manual processes.

As a trusted vendor, we bring a simplified delivery, consistent contract terms, and a single point of contact to the customer. We are uniquely positioned to create this open-sourced exchange with our brand, our resources, broad partner support and reputation for delivering the highest quality of solution. We will continue to update you on Red Hat Exchange at the Red Hat Summit in May.

The open source model is transforming the way Red Hat support can scale and how quickly resolution is reached. Our Red Hat resolution center helps customers and partners to solve complex multi-vendor problems by offering a single point of contact to Red Hat developers, partners, and the global open source community. For customers, this is a key differentiator from the other support offerings that they have historically received. For our channel partners, this is a compelling reason to invest in a Red Hat relationship, as this service model shows that Red Hat wants their customers and their partners to succeed.

Now, I would like to walk you through our third initiative, continuing technology leadership and service innovation. As we enter fiscal 2008, we have a rich product pipeline. Our open source architecture combining new Red Hat Enterprise Linux 5 platform with our service-oriented architecture platform from JBoss continues to expand our opportunities.

Red Hat and JBoss technologies increasingly touch major components of IT applications through run-time implementations in routers and switches, video servers, security appliances, and voice-over-IP servers. The continued success of JBoss with developers has created discussion with IT leaders developing service-centric applications, with open source technologies like hibernate and JBoss Rules, and business process engines.

Just this month, we entered into a technical partnership with a development team in Belarus to advance the availability of open source Java development tools to deliver scaleable Web 2.0 applications. Data center automation, automation of databases and compute clusters, policy-based security models, and expansion of open source SOA solutions are themes which investors will hear more from Red Hat in fiscal 2008.

Before our summit in May, Red Hat will communicate advancements and plans that we are making in the JBoss and middleware space in the late April timeframe.

Within the open source model, Red Hat and Linux and JBoss customers are active partners in the development process. They participated in the development of Red Hat Enterprise Linux 5 through Fedora Core 5 and 6. As part of our beta program, we implemented virtualization testing long before Red Hat Enterprise Linux 5 was launched, and when Red Hat Enterprise Linux 5 was made available this month, we knew with certainty what to expect. Customers knew about performance characteristics and tuning, had key ISVs integrations complete.

We are very excited about the quality of product and the reliability and management capability incorporated within REL 5 that was delivered to the customer. In May at the Red Hat Summit, Red Hat will communicate its client and desktop strategy to partners and customers.

Let me reinforce that today’s digital infrastructure supports an unprecedented set of workloads and transactions. The contemporary lower cost computing environments of scale X86 machines enabling a grid-like infrastructure provide the ideal platform for the integration of our Linux and JBoss middleware solutions to deliver web-based shared services. This computing model restores value lost through under a non-performing proprietary system.

The largest Red Hat customers that we saw during the fiscal year are the most demanding customers in the world -- financial services, telecommunications, defense agencies, logistics companies. They require partnerships with companies like Red Hat that understand their mission-critical business needs.

Our value is recognized by our existing base of over 42,000 net new customers that were created during the fiscal ’07 timeframe.

I would like to leave you with this thought; listen to the dilemma facing IT executives attempting to create modern, scaleable systems. Let me quote a recent survey from Information Week.

The Information Week 500 Survey of leading business technology organizations shows that $0.60 of every IT dollar goes to maintaining existing systems, with only $0.40 left over for new projects and technical innovation. IT veterans realize that is moving the needle in the right direction because the rule of thumb used to be that 80% of tech budgets went to ongoing operations. But even so, that 60% figure hangs like an albatross around the necks of forward-thinking CIOs.

Red Hat has taken the tact of working with our customers to create contemporary front-end and rapid development of modern applications. The company has a proven track record of broad and integrated value proposition for enterprise class solutions and unparalleled demand expertise. We are uniquely positioned to solve the economic dilemmas of time to market and speed of execution. We will deliver more automation, more reliability, and superior response.

Let me turn the call over to Charlie.

Charles E. Peters

Thank you, Matthew. Given that today’s webcast represents both a quarterly review and a year-end review, my comments will include an overview of operational highlights for the year, followed by both quarterly and annual financial results. I will then conclude with first quarter and full-year guidance for fiscal year 2008.

Fiscal year 2007 was a year of investment for Red Hat. In order to build a solid foundation to support the growth initiatives that Matthew highlighted earlier, we invested in people, systems and our eco-system to expand our reach and continue to deliver the highest value at the lowest cost to our customers.

We also invested time and resources to contribute to the growth and vibrancy of the open source community. Equally as important, we accomplished these goals while continuing to deliver strong growth, profitability and cash flow to our shareholders.

Let me quickly recap our key areas of investment in fiscal year 2007, starting with our investment in global expansion. We made acquisitions in Argentina, Brazil, India, and the Czech Republic. We also added 21 offices worldwide, including establishing a direct presence in seven additional countries, and we added approximately 600 associates worldwide.

We made significant investments in systems to bolster our online initiatives. Today, more than 150,000 customers visit Red Hat's network site every week to attain new software, upgrades, patches, compare releases and administer their operating environments. Over half of our customers get services through our web support systems, and one-third of our orders are now processed through our web store.

We made significant investments in technology solutions, including the Red Hat application stack, the JBoss enterprise service bus, and REL 5. We continued to invest in customer support by integrating JBoss and Red Hat support offerings and service level agreements, and establishing a support presence in both Argentina and Brazil while aligning our support organization tightly with engineering to further improve our responsiveness.

This attention to customer support clearly is paying off, as demonstrated by the number of new customers that we continue to add and the renewal rates that Matthew mentioned earlier. We are also pleased that for the third year in a row, Red Hat was named by CIOs as the number one enterprise software vendor in delivering value in a survey conducted by CIO Insight.

Finally, we continue to lead and make major investments in the open source community, including the Fedora project, the one laptop per child initiative, and hosting open source software industry days. These efforts to help meet the needs of and contribute to the open source community also led to the genesis of Red Hat Exchange, which Matthew described earlier.

We believe these investments in our business and in the open source community itself will position us to meet the growing demand for open source solutions, which is apparent.

Now let’s talk about our financial performance. Once again, we are pleased to report strong financial results, resulting from a combination of robust demand and solid fundamental execution.

Let me begin by looking at our fourth quarter income statement. Fourth quarter total revenue was $111.1 million, an increase of 5% from last quarter and 41% from the same quarter in fiscal year 2006. Total revenue was slightly below my guidance of $112 million to $113 million, as a result of training revenue coming in later than expected. However, our subscription revenue was in line with our expectations for the quarter.

Driven by continued strength in bookings and renewal rates, subscription revenue was $95.9 million, up 8% sequentially and 44% year over year. Training and services revenue was $15.2 million and it was up 26% from the same quarter last year but down 10% from last quarter. This sequential decline in training was attributable to seasonality resulting from fewer training days available in the quarter.

Our billings proxy, which we define as revenue plus change in deferred revenue, was $138.1 million, up 35% year over year and more than 3% sequentially.

Breaking down our Q4 bookings mix, the channel generated 52% of our bookings and 48% came from direct sales versus a 50-50 split in Q3. In terms of geography, 61% of bookings came from the Americas; 25% from EMEA, and 14% from Asia-Pacific. This compares to a respective 60%, 24%, 16% split last quarter.

The percentage of Q4 bookings value beyond one year was 25%, down from 29% last quarter but up from 21% last year.

Finally, a little final point on Matthew’s renewal rate, all 25 of the top 25 deals expected to renew during this quarter did renew, in a total value in excess of 120% higher than the original value. So that is 98 out of 100 for the full year, as Matthew mentioned.

As I have in the past couple of years at a year-end point, I will share a few additional bookings metrics with you that I do not repeat quarterly. They are, first of all that our single year bookings grew every quarter this year and growth in percentage terms accelerated every quarter this year in fiscal 2007. Second, multi-year bookings as a percentage of the total were particularly strong in Q3 and Q4. Finally, the growth in the off-balance sheet backlog was sequentially larger in dollar terms every quarter this year.

Overall, non-GAAP gross margin was 85%. That is 90 basis points better than last quarter and 70 basis points better than last Q4. Non-GAAP operating expenses, which excludes only FAS-123R stock compensation expense, came in at $70.2 million. That is up 4.1% from last quarter.

Quarterly non-GAAP operating income was $24.1 million, which translates to an operating margin of 22%. This is an increase from non-GAAP operating income of $21.5 million and operating margin of 20% last quarter, and compares to non-GAAP operating income of $19.8 million and a 25% operating margin in Q4 a year ago.

Moving on, other income net, which is attributable primarily to investment income, was $11.9 million. Our non-GAAP tax rate, which reflects actual cash taxes which we expect to pay for the foreseeable future, is still approximately 5%, resulting in non-GAAP net income of $32.7 million, up 11% from last quarter and up 34% from the year-ago quarter.

Our non-GAAP earnings per diluted share were $0.15, an increase of 25% from the year-ago quarter and at the top of the previously guided range.

I will now turn to our income statement performance for the full fiscal year. Subscription revenue of $341.2 million grew 48% versus fiscal year 2006, and total revenue of $400.6 million grew 44%. Non-GAAP operating income was $82.3 million, up 42% from last year. Non-GAAP operating margin for the full year was 21%, approximately the same as last year.

Non-GAAP net income for the full year was $113.6 million, an increase from last year of 46%, and diluted earnings per share was $0.54, up from $0.40 last year.

On a GAAP basis, our fourth quarter operating income, net income and EPS were $16.6 million, $20.5 million and $0.10 per share respectively. For the full year, our GAAP operating income, net income and earnings per share were $52.3 million, $59.9 million, and $0.29 per share respectively.

For the fourth quarter, GAAP net income was positively impacted by our decision to release a $2.9 million valuation allowance against a deferred tax asset related to prior years’ operating losses. After 36 successive months of generating positive taxable income, combined with our confidence in a bright future for Red Hat, we no longer believe that the valuation allowance for this asset is necessary. This benefit is a one-time event and is the primary reason why the Q4 and the annual GAAP tax rates of 24% and 33% respectively differ from the 37% estimated annual effective tax rate used in earlier quarters in fiscal year 2007. This has no effect on the non-GAAP results.

Now let’s turn to the balance sheet and the cash flow statement. We ended the quarter with approximately $1.2 billion in cash and investments, an increase of $59 million from the end of Q3, driven by strong cash flow from operations and cash receipts related to employee stock option exercises.

DSO was 57 days versus 55 days at the end of Q3. As a reminder, as DSOs are traditionally a measure of receivables versus billings, our DSO calculation includes the change in deferred revenue.

Total deferred revenue ended the quarter at $338.6 million, an increase of 9% from the prior quarter and an increase of 52% from the prior year.

Moving to the statement of cash flows, non-GAAP cash flow from operations excluding the reclassification of excess tax benefits from share-based compensation arrangements, was $56.4 million for the quarter and $217.5 million for the year. This compares to last year’s reported cash flow from operations of $50.1 million for the quarter and $186.6 million for the full year.

Now I would like to turn to guidance, which I will continue to provide with the same non-GAAP adjustments for FAS-123R and for taxes as I have in fiscal year 2007.

We are anticipating Q1 revenue to be in the range of $116 million to $117.5 million. It is our intention to continue to invest in people and systems over the course of fiscal year 2008, including approximately 100 new staff people per quarter.

We anticipate roughly $5 million to $6 million of incremental Q1 operating expenses versus Q4, principally due to higher sales and marketing expenses in connection with the REL 5 launch, the Red Hat Summit, and the expansion of direct and channel sales. R&D will also grow as we continue to invest in new technologies.

Because we have a large tax loss carry-forward, still approximately $400 million, we anticipate a cash tax rate of approximately 5% for at least the next five or six years. In Q1, if one assumes a diluted share count of 220 million shares, one would estimate diluted non-GAAP earnings per share of approximately $0.15 a share.

For the full fiscal year of 2008, we anticipate revenue in the range of $510 million to $520 million, and a full-year operating margin of 21% to 22%. Assuming the same 5% cash tax rate and approximately 220 million diluted shares, one would estimate diluted non-GAAP EPS in the range of $0.67 to $0.72 per share.

For those of you still tracking GAAP results, you should estimate stock compensation expense of between $8 million and $9 million per quarter and a GAAP tax rate estimated at 39%.

While cash flow from operations may fluctuate from quarter to quarter, we anticipate steady growth on an annual basis. We note that GAAP operating cash flow will be impacted by the reclassification of excess tax benefits from share-based compensation arrangements and due to the unpredictable nature of the transactions that give rise to such excess tax benefits, we will only provide annual guidance for operating cash flow on a non-GAAP basis, adding back these excess tax benefits.

We expect non-GAAP cash flow from operations to be $250 million to $260 million for the full year, compared to the $217.5 million for the year just ended.

I would now like to turn it back over to Matthew for a few closing comments.

Matthew J. Szulik

Thanks, Charlie. We feel good about the close of Q4, which capped off a very strong fiscal year. A few other highlights that I would like to add: over the course of the fiscal year, Red Hat added nine senior managers across the world in sales, engineering, marketing and administrative positions. We continue to make strong investment in our IT and computing infrastructure, which contributed to the continued positive margin improvement on a global basis. As Charlie has highlighted, we continue to look for ways that we can improve the efficiencies through better automation of our business process.

We are working with our customers globally. We are expanding channels of distribution. We continue to demonstrate our technology leadership and service innovation.

I look forward to seeing you all at the Red Hat Summit in San Diego on May 9th through May 11th, and I especially would like to thank our customers, our business partners, shareholders, members of the open source community and associates for their continued commitment to Red Hat. Your energy, your drive, and your excitement for our mission helps to establish Red Hat as a key global IT provider known for trust, value and consistency of performance. Thank you.

Katrinka McCallum

Thank you. Now, Jacob, for the question-and-answer period today, we will be asking our callers to limit themselves to one question and one brief follow-up. Could you please poll the audience for questions?

Question-and-Answer Session

Operator

(Operator Instructions)

Your first question comes from Kash Rangan from Merrill Lynch.

Kash Rangan - Merrill Lynch

Thank you very much. Just a couple of questions. On the product cycle ahead for REL 5.0, can you talk about -- I know you do not break out ASPs, but you certainly have a broader SKU set going forward. There’s the platform, you’ve got the storage, you’ve got the virtualization, you’ve got JBoss that should be more tightly integrated, how should we think about qualitatively ASPs in the next cycle going forward? I have a follow-up. Thanks.

Charles E. Peters

I think that we have demonstrated a good discipline in our pricing over the last two years. I would expect that the discipline in pricing will continue. Our philosophy has always been to deliver more value to customers at a very fair price and we believe we priced the products, the new products in a way where we would expect a fairly rapid pick-up. Over time, as customers are prepared for REL 5, they will adopt. I think the way we priced it that over time, we may see some improvement in our total average prices.

Kash Rangan - Merrill Lynch

Great, and also, as a corollary to that question, there have been some concerns on the street that the virtualization capability effectively leads to a significant price discount. Could you straighten this out and help us understand how should we think about the impact of virtualization and how this may not be a negative? Or if you do not think that is the case, I would like you hear your arguments on that as well. Thanks.

Matthew J. Szulik

Kash, thank you for bringing that up. I read a lot of reports but I really believe that that logic is misplaced. Let me explain why. Today, virtualization occupies somewhere between 4 to 6 of the current marketplace. When you think back to historical drivers, some of the things that we see is that X86 and multi-core, 64-bit computing models will become a very similar phenomenon that we have seen that have been drivers away from the historical Unix machines, the risk-based machines, over to REL and X86 devices.

Likewise, we expect virtualization to be a driver and a catalyst for the migration away from legacy environments to better TCO and better capability within the REL platform. We have seen this in Asia where customers are re-hosting off of a large historic Hitachi-related mainframe computers.

We also see the benefits of consolidation, which at this stage are relatively negligible to the growth of our product line. We think virtualization is increasing the value of the REL entitlement. We are seeing what we would call stranded applications, or legacy applications that are sitting on white box Linux or the existing Red Hat Linux, pre-REL Linux, which are now going to be expected to get migrated over to modern hardware and hardware and software that can be managed.

Of course, finally, any consolidation effect on REL should increase the level of service capability that Red Hat can provide. So although I have read the reports, I do not have the doom-and-gloom attitude that I have read in some of the analyst reports.

Kash Rangan - Merrill Lynch

Also, if you could comment on competition, the big boys in the space. You didn’t see any impact last quarter. How did it shake out this quarter? That’s it for me. Thanks.

Matthew J. Szulik

Kash, since 1998, competition with the big boys has been a fact of life at Red Hat, whether they were the hardware vendors, whether they were competing against the guys in Redmond, this company has been trained how to compete against larger entrants and monopolies.

So to that end, the company continues to compete on value. We believe that we will continue to compete on our service levels and innovate wherever possible, as you have seen in the REL 5 product line and the evidence so far is validating my assumptions.

Operator

Your next question is from Heather Bellini from UBS.

Heather Bellini - UBS

Yes, this is [Apai] for Heather. Matthew, any comments on what percent of your customers are on ES versus AS? Does virtualization on REL 5 give you an opportunity to move customers to your high-end SKU?

Matthew J. Szulik

Virtualization is -- and I appreciate the enthusiasm for it, but it is, as I have said, it is a multi-step process. It requires people, technology, policies, security models -- not just simply the historical dropping in a virtualization instance and see how quickly you can save a few dollars.

We do see the trade-up opportunity from ES to the advanced platform. We are in discussions with customers that are now looking to scale out into data center environments, so there is an upside we believe over the course of the next 18 to 24 months of those customers migrating, as I have just described.

Heather Bellini - UBS

Any color on the mix of your customer base?

Matthew J. Szulik

I think depending upon the application, we are now selling into such strategic environments that it is rare for us not to find a large enterprise customer not engaging 7 by 24 support in a mission-critical environment.

Heather Bellini - UBS

Just a quick follow-up for Charlie; Charlie, in your cash flows, I see about $90 million from deferred in fiscal year ’07, which is roughly the same as fiscal year ’06, but your bookings accelerated every quarter, as you pointed out. How do we reconcile that? Is there any change in the contract types or is there any change in the payment terms that you are offering? Can you help us reconcile that?

Charles E. Peters

The average length of our contracts is still in the same 18 to 21 month timeframe that we have had for quite some time. There have been no changes in the payment terms and I think as you can see from our DSOs, they continue to be quite attractive. Probably the most important number would be the, in terms of future visibility, is the increase in the deferred revenue by about 52%. So keep in mind that with the substantial growth in revenue, that the bookings and billings have to continue to grow at a faster pace to grow that deferred revenue number, and it has been a very nice increase this year.

Operator

Your next question is from Terry Tillman from SunTrust Robinson Humphrey.

Terry Tillman - SunTrust Robinson Humphrey

Thank you. Matthew, the first question relates to the much-talked about Microsoft/Novell agreement. They are all touting the idea of interoperability. How do you combat those claims and how can you address this hot button of interoperability?

Matthew J. Szulik

I would like to give some credit to Paul Cormier and his team in engineering, and Tim [Getman] in marketing, because we continue to work with Microsoft on interoperability. It probably just does not get the public fanfare that you read online.

We want to continue to drive standards, and vendor-neutral standards through initiatives like ODF, which we think is critically important. I think we continue to work with all vendors, whether they be Microsoft or anyone in the client or server side, to fulfill the goal of interoperability, as evidenced by the REL 5 product for both the server and client, Terry. I think you will hear more about that at the Summit coming up in May.

Terry Tillman - SunTrust Robinson Humphrey

Okay, thanks. Just a follow-up, Charlie, relates to you talked about how bookings increased every quarter and the growth rate also increased, or accelerated. Could you give a little bit more color, maybe at least qualitatively, in the fourth quarter specifically? Were you in line or ahead of expectations on the REL side and in the SOA platform? I am looking for a little bit more color on the two pieces.

Charles E. Peters

I think what is clear is that on the subscription side, both on SOA and REL, we were in good shape and in line with our expectations. You could tell from the revenue side, the training bit was a little bit short, principally due to the fact that we had the seasonality of the holidays and I probably did not anticipate as much as I should have there. But on the subscription side, both were strong.

Operator

Your next question is from Brent Thill from Citigroup.

Brent Thill - Citigroup

Thanks. Good afternoon. Two question; one, just on JBoss, could you give us a high level view of how the integration and the assumptions in the model for ’08 at a very high level? I will circle back.

Charles E. Peters

As I said on the Q3 conference call, the integration was essentially completed at the end of Q3. There was very little in the way of additional integration activity that happened in Q4. The sales force, we have one global sales force now that basically is able to sell all products. The marketing organization and the engineering organization are fully integrated with the total global marketing and engineering organization, so it is essentially complete.

Brent Thill - Citigroup

Okay. Just a follow-up on your guidance for operating cash, 250 to 260, what is the assumption for the excess tax benefit that you are assuming? I think it was $16 million last year. What should we assume for ’08?

Charles E. Peters

That is precisely the reason why I do not try to forecast a GAAP number. That is not a predictable number. As you know, the way that number is derived, it depends on what stock options are exercised, how many and by what individual, so it is a very -- it is a number that I simply cannot predict.

The easiest way to think about it, however, is that on an apples-to-apples basis, the 250 to 260 is comparable to the 217 of the year we just finished, which is comparable to the 186 of the year before that.

I am not going to try to make any predictions as to what that excess tax benefit amount might be.

Operator

Your next question is from Mark Murphy from Global Equities Research.

Mark Murphy - Global Equities Research

Thank you. Can you comment on the Yahoo! customer relationship? Are there any changes there? Do you see an opportunity perhaps to expand the Red Hat footprint at Yahoo! in the future?

Matthew J. Szulik

I spoke with the Yahoo! executives yesterday and they were very quick to respond that they have had and continue to have a very successful relationship with Red Hat, that they have selected Oracle Linux to run on a number of Oracle database servers, but they expect to currently and in the future continue to have a successful and positive relationship with Red Hat.

Mark Murphy - Global Equities Research

Matthew, as a follow-up, to your knowledge, is Red Hat being chosen as a desktop preload option from Dell? Or is there anything you can comment on there?

Matthew J. Szulik

Let me just make one additional comment about the Yahoo! discussion. In my discussions also, they are in discussions of expanding their Red Hat Enterprise Linux footprint with us as well, Mark.

I have no comment on the Dell situation.

Mark Murphy - Global Equities Research

Matthew, can I just try one last one then? An update on the progress with the initiative to sell the value of the JBoss subscription; I am just curious. How widespread is the perception that JBoss typically works so well out of the box that the support is sometimes unnecessary? And then, how successful have you been in converting those customers over to the JBoss subscription?

Matthew J. Szulik

Well, there is no doubt that JBoss has been very successful in getting the product to be performing out of the box, especially within the developer community. As I highlight, Mark, on the previous call, where we see the opportunity now is moving that base of developers and augmenting it with tools that we announced this quarter and also bringing the confidence to a production level support. In the last three quarters, what we have seen now is the support of a number of seven-figure transactions where JBoss technology was an integral component of the sale and the confidence that Red Hat brought to the sale by the ability to deliver seven-by-24 production level support.

As I mentioned, in late April we will have more announcements about our middleware strategy. I think we will find more opportunity for up-sell. The JBoss technology was rich in the areas of big detail and workflow and rules and portal. We are seeing strong demand in markets that JBoss had no distribution historically, which is in Europe and Asia. So I do think the opportunity is there and the investment that we made, Mark, previously in educating the channels of distribution have continued to show productivity over the last two fully integrated quarters.

Operator

Your next question is from Trip Chowdhry with Global Equities Research.

Trip Chowdhry - Global Equities Research

Thank you. Again, good execution in a very noisy environment. Two questions; first, regarding GPL Version 3, Red Hat has been very quiet whereas all the analysts have been very vocal, including your community. I was wondering, what is your current thinking about what is happening? How does it change the Linux environment and what are your latest thoughts about what is Linus Torvalds thinking about it?

Matthew J. Szulik

Trip, the GPL 3, like all versions of the GPL, work very much like a good open source project. You get lots of opinion and lots of enthusiasm, but it continues to iterate. I think the draft that we saw last night was much better than earlier drafts, specifically around the areas of patent and patent infringement, around the Tivo innovation activities that have been described.

I think, although I have not spoken to Linus, things that I have read online said that he is more positive of this most recent draft.

I think we have been quiet because our team here chooses to work through the committees and not hopefully waste your time or others’ time with public statements about one opinion or another. But we think that like a good open source project, it continues to get better with each iteration.

Trip Chowdhry - Global Equities Research

That’s good. The second question I have is regarding the training revenues. I was under the impression since REL 5 was just launched, it was natural for training to slack off a bit and I would anticipate moving into fiscal year ’08, that training revenue should ramp up because of your expanded stack, REL 5 is in the customer’s hand and the product is still a little bit complex. Any thoughts on that?

Charles E. Peters

There is some merit probably in your hypothesis. I think that the fact that this -- sometimes Christmas and New Year’s fall on a Saturday and then the following week. This year, Christmas was on a Monday, New Year’s was on a Monday, we think we may have lost two full weeks. The seasonality was probably more than I anticipated but I think your hypothesis has some merit. It is possible that some people waited a little bit for the REL 5 launch. I guess we will know that better at the end of Q1 or Q2.

Operator

Your next question is from John McPeake from Prudential Group.

John McPeake - Prudential Equity Group

Thank you. Could you give us a sense as to what is implied from JBoss in the guidance, in terms of revenue?

Charles E. Peters

I am not going to separately break out JBoss any longer but I would say this; again, as a one-time thing and some highlight about the bookings, JBoss was our fastest growing product line on a percentage basis in fiscal year ’07 and I would expect it to again in fiscal year ’08 be the fastest growing product line on a percentage basis.

John McPeake - Prudential Equity Group

Along those lines, with respect to acquisitions, you guys are generating a lot of cash. You have a lot of cash. What direction, just sort of overview wise, should I expect you guys to add to the open source stack through acquisitions, if any?

Charles E. Peters

I think our view about acquisitions and investments is really unchanged. We think about it two ways; one is acquisitions that would allow us to further expand geographically as we did in 2007 and also acquisitions that would further complement our technologies and our product.

We have told people before though that you should not necessarily think about us going up the stack as more think about us going across the enterprise, from development through production. With the acquisition of JBoss in the middleware space and back in the developer side of the enterprise, it really sort of grounded out what we have.

We still have gaps in that going across the enterprise, so there are probably still things we would like to be looking at. Think about it more in those terms as opposed to going up the stack.

Operator

Your next question is from Jason Maynard with Credit Suisse.

Jason Maynard - Credit Suisse

Good afternoon. Just a question on the Red Hat Exchange, maybe help me understand what you are thinking about in terms of contribution, either to bookings or revenue next year. Is that in the guidance yet or is this an upside potential if you actually get some success selling some of their products?

Matthew J. Szulik

We expect to have success, Jason, or else we would not have launched it. We are very enthused about its potential but none of its potential has been factored in of any materiality within the guidance that Charlie provided.

Jason Maynard - Credit Suisse

When you look at the opportunity, how should I think about the incremental net sales and marketing hires being allocated to RHX versus some of the core Linux products, or even the JBoss side of the equation?

Matthew J. Szulik

I think that you should consider that the role of RHX being able to augment the growing numbers of software developers, service providers, IH and ISVs that are looking to get access to both our customer base and our development community, and the more creative that we can be about providing low-cost access to those technologies that can be provided then through a single point of contact for both service contracting value and other management capabilities of that relationship, we think that we have not even scratched the surface. This has been confirmed by the number of distributors and resellers that I have spoken to personally in the last six to nine months, both domestic as well as abroad.

There are growing and expanded marketplaces geographically that we have very limited presence in right now, and as you know, historically companies hire 20, 30, 40 sales and marketing people to go out and to beat the bushes. It is our point of view that we can do that through the brand identity that we have and an online experience to augment what had been traditional feet on the street, that we can sell and deliver that capability as a web service online. That is the emphasis right now.

So far, we are very pleased with the take-up that we have seen, both from large IHVs and venture-backed start-up companies.

Jason Maynard - Credit Suisse

Okay, so you are not actually going to have -- there is not going to be Red Hat reps with quotas or anything like that. You are going to spend marketing and promote the idea and then fulfill online?

Matthew J. Szulik

That is true.

Operator

Your next question is from Brendan Barnicle with Pacific Crest Securities.

Brendan Barnicle - Pacific Crest Securities

Thank you. Matthew, I was interested in going back to the REL 5 pricing, particularly with the virtualization features. You guys will be well below the prices of some of the competitive products out there in the market. Are you using this as a way to just grab a lot of market share by being the low-cost provider in there? What was some of the rationale and the thinking behind the pricing decisions?

Matthew J. Szulik

I would like you to keep in mind how long we have been selling REL, for five years, into the global marketplace. Certainly to a large extent, we have achieved some level of penetration into the majority of the Fortune 50 to the Fortune 2000 customers. Standardization has occurred in many of these accounts in their development shops and within their administrators, so it is likely that those customers are on a multi-year agreement with us, or have received some level of discount for volume purchases.

Secondly, we wanted to continue to be the lowest cost, highest value provider as part of the core positioning of the product line because we do think, as I described, that virtualization will be a driver and an enabler. As we start to see mid-tier of the marketplace, the mid-adopters, the late adopters, we want to make sure that we are in a good position to capture that share as you have described.

With the inclusion of JBoss in the middleware technology, with the advancements around storage, with new routes to market through RHX, we felt that was a good time to price the product accordingly and to make sure that we became the standard virtualization platform integrated with the operating system at a time where we expect virtualization to be a key enabler of IT.

Brendan Barnicle - Pacific Crest Securities

So when you think about taking share, do you see REL 5, in particular the virtualization features, as ways to start taking significant share in the Windows market versus the traditional Unix markets you have taken a lot of the share from?

Matthew J. Szulik

I think that there’s a lot of legs left in the historically Unix marketplace. I speak about how penetrated Unix is on a worldwide basis, and we see virtualization as being a driver that will continue to accelerate that shift -- low cost, X86 machines, horizontally scaled out grids, enabling the knowledge worker to get better access to data, et cetera. So we expect that trend to continue.

But most importantly, we wanted to make sure that we created an opportunity to build out the platform, both with the OS layer as well as the middleware layer and other advanced technologies that we will build into 5.1 and then the JBoss middleware stride in technologies.

Brendan Barnicle - Pacific Crest Securities

Just on the renewals, you mentioned the two of the 100 that did not renew, can you tell us what the situations were there? Then, do you have an overall renewal rate amongst the customer base outside of just that top 100 customers? That’s it for me. Thanks a lot.

Charles E. Peters

Just out of history, one of those was in Q2. It was a government customer that had a cancelled program and therefore, the subscription related to that program was cancelled. That same entity is still a customer, just in a different program, so that was the first situation. That was in the second quarter. As Matthew described, on the third quarter, the other one that we lost was a company that became a competitor.

Brendan Barnicle - Pacific Crest Securities

Anything on the overall renewal rates broader than that top 100?

Charles E. Peters

I guess I would say on the overall renewal rate, as I have described in a number of sessions when I have been out with investors, that we have been doing a lot of work on the broader renewal rate on the smaller base to improve things, including improving our ability for people to renew on the web, our ability to capture more data when our business is transacted through channel partners so we have a better view to the end customer.

Some of those projects are still in the works. At least one of them relative to information through channel partners, for at least the United States market, comes around full cycle in about three or four more months and will begin to be able to move on renewals, on hopefully a higher rate of renewals, on some of these through channel partners where we didn’t have the visibility before.

I would say just qualitatively, the renewal rate continues to get better. On the direct business, as you can tell from the numbers, it has always been very high and on the indirect business, we are taking steps to make it get better.

Operator

Your next question is from Sarah Friar with Goldman Sachs.

Sarah Friar - Goldman Sachs

Good afternoon. Firstly, on the use of cash, outside of acquisitions, could you talk a little bit about what you expect to do with either stock repurchase or continuing to repurchase some of that convertible debt you have?

Charles E. Peters

We have authorization to do both stock and bond repurchase that are standing. There is a $250 million standing authorization for stock repurchase and a $75 million standing authorization for bond. We will simply be in the market probably occasionally. As you can tell, we did not transact anything in the fourth quarter. In the third quarter, we did do one structured stock repurchase transaction, which actually resulted in a return of investment at the end of the day.

But we continue to monitor it.

Sarah Friar - Goldman Sachs

Okay, so maybe nothing more accelerated than what we have seen?

Charles E. Peters

It will simply depend upon circumstances.

Sarah Friar - Goldman Sachs

Got it. The second question, just a more broad question for both of you, could you talk a little bit about linearity in the quarter and then comment on the overall macro environment, given that you guys give us a little bit of an early read on overall Q1 for software?

Charles E. Peters

The linearity of our business continues to be -- still a good quarter for us would be something like 25%, 25%, 50% on a monthly basis. A less linear quarter would be more like 20%, 20%, 60%, but it pretty much stays in that kind of a range. We still have a business like most software companies, that has a bit of a hockey stick at the end of the quarter.

I think one thing that makes the subscription model business substantially more predictable is the deferred revenue. If you look at our deferred revenue balance and you take the current portion of deferred revenue and take it as a percentage of the guidance I just gave you for revenue for 2008, hopefully it will give you a fair amount of comfort that we have a pretty predictable business. On a quarterly basis, the ability to predict revenue is even better. That maybe seems a little ironic in that the training business missed a little bit this quarter but typically our track record in terms of predictability is very good.

Sarah Friar - Goldman Sachs

Just as you are out there with customers though, any kind of feedback on how they are feeling about their willingness to spend budget, willingness to do new projects right now?

Matthew J. Szulik

As I highlighted, Sarah, there is a healthy mix right now of customers trying to create and shift dollars from the management of historical legacy systems and how do they migrate and create the availability of dollars and resource in technology to accelerate and move towards web-based systems. That is happening.

Our interactions with our customers have been positive toward that end because of the rapid ROI that they have gotten. Remember, with open source software, it is likely that they have been using Linux, they have been using JBoss, they have an opinion and their goal is migrating into a production environment that would require a service level premise.

I would say that the overall macro spending environment for software has been positive in our worldwide review over the last six months.

Sarah Friar - Goldman Sachs

Just one very final quick one for you; obviously a lot of folks have asked around effectively this question about are you more prone to doing longer term contracts at this point in time, given that you are starting to see your market perhaps get a little bit more competitive. As folks shift to REL 5, are you providing any special incentives for longer term contracts? Do you speak to your sales force to look for longer term contracts? Just philosophically, how do you think about that shift?

Matthew J. Szulik

What we see as a core driver, Sarah, to the move to longer term contracts is the continued financial improvement of the company, the customers’ success that they have had with Linux and open source software, and their confidence in us as a service provider. A key announcement that we made 30 days ago that I would reinforce to you is the incredible amount of effort that Ian Gray, who runs our worldwide support business, has been able to create supporting and becoming a single point of contact in multi-vendor environments, which was perhaps an issue three to four years ago. Customers are gaining increasing confidence of our ability to service them in a heterogeneous environment and most importantly, respond to keep their digital infrastructure up 7 by 24.

To that end, customers, especially the ones that are in mission-critical environments, are expanding and extending their term of their relationship with us. We are not offering any incentives and we are not doing unusual discounting to incent the multi-year agreements.

Operator

Your next question is from Tim Klasell with Thomas Weisel Partners.

Tim Klasell - Thomas Weisel Partners

Thank you very much. Gentlemen, sort of a follow-on to the last question; last quarter, or in Q3, you had a larger proportion of your longer term bookings go to annual payment. Running roughly through the math and some of your comments that you made earlier, it seems like that trend may have continued this quarter. Could you confirm that? If so, what are you factoring into your guidance for next year?

Charles E. Peters

Just to clarify, are you talking about the portion of bookings that are beyond 12 months, or are you talking about the number of long-term deals that we had arranged to bill one year at a time?

Tim Klasell - Thomas Weisel Partners

The second part.

Charles E. Peters

That really depends on the situation. Sometimes both parties prefer to bill all up-front and there are different arrangements that are billed one year at a time. All of the long-term deals that we drew through channel partners are always billed up front by the channel partner and paid to us up front. That is a pretty consistent number. It is more the direct deals with us where there is some variability but there is no real pattern to it.

Tim Klasell - Thomas Weisel Partners

Very good. Sort of a bigger question for you, Matthew, you are talking about the client and desktop strategy you will be announcing in May. In the past, the efforts have been towards task-centric workers in the enterprise. With REL 5 and virtualization, do you have the opportunity to go broader than that? Maybe give us a little bit of color of what we could expect there.

Matthew J. Szulik

I think you should expect us to go broader than that. I think that there are multiple facets about our movement to a greater adoption of REL 5 within the client environment. I think customers are looking and have had a chance to experience our support of Stateless Linux in Stateless environments. I think their continued interest now to separate applications and data. I think the development tools and the announcement that we have made in the last 30 days in total I think is continuing to accrue towards our strategy of coming out with an innovative and robust client strategy.

Operator

Your next question is from Todd Raker with Deutsche Bank.

Todd Raker - Deutsche Bank

Two quick questions for you; you talked about the top 25 accounts and about 120% of deal size if you compare it. Can you give us some insight in terms of what is driving that up-take? Is it longer term deals? Is it more units? Is it upselling new products? If you could break those out.

Charles E. Peters

That is all a single year comparison so it is not like we had a deal that renewed and used to be one year and now they have added three years. These are all one-year comparisons, so it really is -- it is typically some expansion and some additional value-adds, some additional products or services that they are buying when they renew.

Todd Raker - Deutsche Bank

Okay, and then just following up on this -- you cited the multi-year bookings in Q3 and Q4 have picked up but you are still seeing the average length of your contract is still in this 18 to 21 month timeframe. I just want to understand, make sure I understand the distinction here.

Charles E. Peters

The average length of the contract, that number does vary sometimes within the 18 to 21 but it has not come outside of that range in almost three years.

The second part of your question was the percentage of the contracts beyond one year?

Todd Raker - Deutsche Bank

Well, with the pick-up in multi-year bookings, is it fair to say that we are not hitting the upper limit of this 18 to 21 month timeframe and you think that could begin to extend?

Charles E. Peters

I think clearly it would have moved up a little bit in that range but it is not yet -- it does not appear to me yet that we are going to get outside that range.

Operator

Your next question is from James Gilman with Cross Research.

James N. Gilman - Cross Research

Good afternoon. In reference to the 25 renewed accounts, are you sharing any of the accounts now with your competitor, Oracle?

Matthew J. Szulik

No.

James N. Gilman - Cross Research

Okay. In reference to your non-OS products, in the past you stated that at one point in time, when it got to 10% of revenue, you would break that out. Are your non-OS products at 10% of revenue?

Charles E. Peters

They are in excess of 10% of revenue but I do not intend to break them out.

Operator

Your next question is from Katherine Egbert with Jefferies.

Katherine Egbert - Jefferies and Company

Could you tell us if JBoss made the earn-out targets for the year?

Charles E. Peters

JBoss did not make the earn-out target for the year.

Katherine Egbert - Jefferies and Company

Secondly, a question on the pro forma operating margin. You were a little bit shy of the guidance for the quarter with a 200 basis point increase. I would think professional services would have helped you. Could you talk about that? Also, the R&D has been high at 16% plus. Does that come down now that REL 5 is released?

Charles E. Peters

The first question on the operating margin for the quarter, at about 22%, the few basis points difference that it is compared to what I guided to I would say is directly related to the revenue line.

The second question about R&D, I think you should expect because of the -- what I said earlier about investing in additional technologies and continuing to broaden our offerings from the development all the way through production of the enterprise, as a percentage of revenue if you are trying to build a model, I would encourage you to continue to stay in the same percentage of R&D for ’08 as you were for ’07.

Katherine Egbert - Jefferies and Company

And then, just one quick one, what do you think a steady state pro forma operating margin is?

Charles E. Peters

If you are thinking longer term, there is no doubt in my mind and there should be no doubt in any of your minds, that we have the ability to scale and the ability to improve profitability very rapidly. We were at 25% a year ago, but as I have consistently said, we believe we have a high growth opportunity here and the right approach now is to continue to invest and grow and the time for higher profitability can come later.

I do think 21%, 22% is the right range for ’08. I would suspect that we would continue to see some incremental improvement on that but what the slope of that line looks like beyond ’08, I am not prepared at this point to say.

Operator

(Operator Instructions)

The next question comes from Kirk Materne with Banc of America.

Kirk Materne - Banc of America Securities

Thanks very much. I’ll keep it quick. Charlie, on the length of the average deal, how are you viewing that in terms of what is JBoss’ average deal length? Is that pretty much on par with REL? Meaning it seems that it has trended up a little bit year over year. How does JBoss influence that one way or the other versus prior years? I am just trying to get a sense if you are seeing the same kind of three-year up-take on JBoss as you do on REL.

Charles E. Peters

At the time of the acquisition, JBoss did not have many three-year deals and they historically had not done many three-year deals. Since that time, Matthew has mentioned a number of fairly sizable deals that have been a combination of the historical Red Hat and the historical JBoss technology coming together, and several of those deals have been multi-year deals. So the percentage of multi-year deals that they are doing is now increasing, although it is not yet at the same level as the traditional Red Hat stuff.

Kirk Materne - Banc of America Securities

Just a follow-up on JBoss, clearly they did not have as strong an indirect channel as you all did when you bought them. Could you just talk about some of the traction you have made with some of the indirect partners over since you have bought them? Thanks.

Charles E. Peters

I think as we have talked about the acquisition, their mix of business was almost the inverse of ours. In fact, I believe it was about 70% direct business and closer to 30% channel originally. So we have I think 90 to 100 days after the acquisition introduced the Red Hat application stack to produce a product that would be more easily saleable through the channel. We have made continual efforts to educate the channel and are making some good progress there.

I do not have anything quantitatively for you at this point.

Operator

Your next question is from Adam Holt with JP Morgan.

Adam Holt - JP Morgan

Good afternoon. I also had a question on the Red Hat Exchange. Understanding that it is not in guidance explicitly for next year, how should we be thinking about the impact on revenue and how it flows through the revenue line? What metrics then should we look for to measure traction there, other than obviously partner adds?

Matthew J. Szulik

Well, certainly metrics, we would like to see a combination of both new services being added to exchange, ISVs contributing certified products to the exchange, services and income derived through the sales of the exchange, international expansion of the exchange. Those would be some of the ones that I would suggest.

Adam Holt - JP Morgan

What should we look for in revenue? How should we think about the impact to revenue?

Matthew J. Szulik

As I said in my remarks, we are in our early stages of RHX. It would be my suggestion that you should not expect any materiality to come from RHX. Anything that does would be upside.

Adam Holt - JP Morgan

Lastly, I would assume to you do not want to explicitly give guidance for billings growth for next year but we can make some assumptions around the cash flow, but just maybe qualitatively, how would you talk about what we should expect to see from a growth rate perspective for next year?

Charles E. Peters

I am not going to give any additional guidance on billings, other than to say that as you know, billings is not always -- it is not a straight line. Billings, some quarters are up, some quarters are down. The overall growth in the cash flow number that I gave you, however, should give you some indication that our expectations of billings continue to be good.

Katrinka McCallum

Jacob, I think we have time for one more question.

Operator

(Operator Instructions)

We have no further questions.

Katrinka McCallum

Great. I want to thank everybody for joining our call today. We look forward to future discussions.

Operator

Thank you. That does conclude today’s conference call. You may now disconnect.

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