Red Hat F4Q08 (Qtr End 2/29/08) Earnings Call Transcript

Red Hat, Inc. (RHT)

F4Q08 Earnings Call

March 27, 2008 5:00 pm ET

Executives

Tom McCallum - Investor Relations

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

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

Analysts

Kash Rangan - Merrill Lynch

Kirk Materne - Banc of America Securities

Brent Williams - The Benchmark Company

Tim Klasell - Thomas Weisel Partners

Aaron Schwartz - J.P. Morgan

Katherine Egbert - Jefferies and Company

Vikram Churamani - Lehman Brothers

Tom Curlin - RBC Capital Markets

Brendan Barnicle - Pacific Crest Securities

Steven M. Ashley - Robert W. Baird & Co.

Kevin Buttigieg - Stanford Group

Presentation

Operator

Good afternoon. My name is Lemont and I will be your conference operator today. At this time, I would like to welcome everyone to the Red Hat quarter four earnings conference call. (Operator Instructions) Mr. McCallum, you may begin your conference.

Tom McCallum

Hello and welcome to Red Hat's fiscal fourth quarter and fiscal 2008 earnings call. 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 www.redhat.com on the investor relations page. In addition, and forward-looking statements represent our estimates and views only as of today, March 27, 2008, 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 date subsequent to today.

Various remarks that we make about the company’s future expectations, plans, and prospects, including statements containing the words believe, anticipate, plan, project, estimate, expect, intend, and 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, various important factors, including those discussed in the company’s most recent quarterly report on Form 10-K with the SEC.

And with that, I’ll now turn the call over to Jim.

James M. Whitehurst

Thank you, Tom and let me add my welcome to all of you for joining us on today’s call. This marks my first earnings call at Red Hat and it’s nice to join on a high note. Red Hat continues to generate a remarkable combination of revenue growth, profitability, and cash flow. For FY2008, we grew revenues by 31% and operating income by 26%, all while generating operating cash flow margin of 50%.

For the year, we achieved two important milestones. First, we broke through the $500 million annual revenue mark and second, we achieved a $200 million -- over $200 million in quarterly bookings for the first time in the fourth quarter of this year.

In addition, during the year we grew our deferred revenue by 40%, expanded Red Hat offices in 10 countries, and launched major new releases in each of our major product categories.

The important investments we made this fiscal year to strengthen both our direct and channel sales efforts are paying off. This can be seen in our strong growth in bookings, billings, and revenues. Moreover, the strength of demand we are seeing for our solutions cuts across industries, geographies, and products.

I am particularly pleased with the improvements we see in our middleware business. Our middleware business delivered its best quarterly and annual bookings performance ever. In North America, a third of our top 25 deals contained middleware products. We are now more frequently selling our platform and middleware product as a solution for large enterprises.

In the fourth quarter, we also closed three exclusive middleware deals in excess of $1 million. The middleware business exceeded the target we set by growing two times faster than the platform business in the quarter.

We also announced our full SOA suite to a record audience at JBoss World in February. It is the industry’s first comprehensive open source integration software platform. Our SOA platform includes an enterprise service bus, business process management, and rules for enabling the integration of applications, processes, services, and people using a service oriented architecture. The SOA platform represents a significant expansion of the JBoss middleware product portfolio away from application servers into the rapidly growing area of integration software.

According to IDC, the integration software market will grow 27% annually to over $10 billion by 2011. Red Hat's middleware strategy is to offer a comprehensive portfolio of open source middleware products and services that address an enterprise’s application development, deployment, integration, and management needs.

And finally, two weeks ago we announced the acquisition of Amentra, a leading provider of systems integration and consulting services around middleware, service-oriented architecture, and open source solutions. Their deep experience and success with JBoss middleware and SOA provides us with a great opportunity to drive further adoption of JBoss.

As pleased as we are with the growth in our business, what is most gratifying and meaningful to the long-term prospects for our business is the fact that our customer satisfaction remains high, as does their perception of the value we provide. This is clearly evident in the very high renewal rates of our top accounts, which Charlie will further detail later in the call.

In summary, the 2008 fiscal results and accomplishments are further proof of our strong brand and robust business model, all driven by 2,200 Red Hat associates who are keenly focused on delivering value and industry-leading service to our customers.

Before laying out our FY09 priorities, I would like to share some of my observations from the past quarter. Having joined in January, I’ve had the opportunity to see Red Hat from the inside while at the same time having an outsider’s perspective. During this time, I’ve met with employees, customers, partners, and open source community thought leaders around the globe.

What’s most reassuring is to see the strong momentum for open source solutions globally. I am particularly pleased to see so much interest outside of the United States. Many governments clearly see a public policy rationale for using open source beyond the direct performance and value that it delivers. Governments worldwide are rallying around open source software and open standards, whether that be in support of the open document format to help free electronic documents from monopolistic control, or whether it be simply specifying the consideration of open source software in public procurements.

Open source software is pervasive in universities around the world and is the clear choice of younger IT managers. Since we are the global open source leader, this bodes well for our future.

We also continue to see the opportunity to significantly expand our presence within our existing base, but I also observe many large customers -- in fact, some entire industries that are just now beginning open source adoption in a meaningful way.

We are winning multi-million dollar deals with new customers who are only now realizing the tremendous value that Red Hat can bring to their organization. It’s no longer a question of why use open source in my data center but a question of when for many of these mainstream customers. Moving beyond the early adopters opens substantial new revenue opportunities for us going forward.

Finally, our customers are continuing to look for ways to reduce costs in their IT infrastructure. As one executive recently told me, TCO today means take costs out. Indicators suggest that the broader economic environment may be more challenging this year and we believe that Red Hat will be particularly well-positioned to capitalize on this dynamic.

Open source in general, and our products in particular, represent proven ways for enterprises to reduce their operating costs. Last year we were recognized for the fourth straight year by CIOs as the number one enterprise software vendor for delivering customer value and satisfaction in the Ziff-Davis CIO Insight Survey. This type of recognition only happens when a company consistently delivers real value and makes customer service its top priority.

These themes reinforce our view that there continues to be a very large and under-penetrated global opportunity, both to attract new mainstream customers who have not yet adopted open source solutions and to deepen our existing customer relationships.

As we look to fiscal 2009 and beyond, our priorities are designed to capture these opportunities. Our goal is to drive high revenue growth for the next several years.

The top priorities for 2009 are simple. First, to focus our customers on our fast-growing data center infrastructure solution. These are the operating systems, middleware and management solutions that we deliver to enhance key areas of IT infrastructure.

Second is to continue to invest in our own infrastructure to allow us to become continually more efficient as we scale to be a multi-billion dollar business. As Charlie will discuss in a moment this work is progressing but we must continue to invest in people, processes, and technology to ensure that we are able to scale our rapidly growing business.

And finally, we will continue to build out our partner ecosystem, including channel partners, major ISVs, and tier one systems integrators. We achieved great success driving over 40% growth in our channel bookings in FY08, but realize there is additional opportunity. In FY09, we intend to increase the number of partners and advance business partners substantially and we expect to provide between 2,500 and 3,000 partner training days.

We believe there is a tremendous opportunity for Red Hat over the next decade. We are still in the early stages and we believe our strong market position, focused execution, and proven value proposition will enable Red Hat to deliver strong revenue growth in the years ahead.

In summary, we are pleased with our fiscal 2008 results and that we surpassed $500 million in revenue. We are now squarely focused on achieving our next goal -- to become the first billion dollar revenue open source vendor.

With that, let me turn the call over to Charlie who will review our Q408 operational achievements and financial results and provide our outlook for fiscal 2009.

Charles E. Peters Jr.

Thank you, Jim. We are pleased to finish our fiscal year 2008 with strong performance across every major component of our business -- all geographies, major industry verticals, and products. This in turn drove strong financial results, which were highlighted by revenue at the high end of our guidance, record bookings, record billings, robust growth in deferred revenue, and strong cash flow.

This performance reflects continued strong global demand for Red Hat's products and services as we implied during our Q3 earnings call. Our fourth quarter and full fiscal year results demonstrate our ability to generate solid returns from the additional investments we have made in the areas of sales and marketing, including ongoing process and systems improvements that further automate these functions.

This is an important validation of our business model, since we believe that we are still in the early phase of open source adoption. We believe that we are well-positioned to continue delivering strong revenue growth by focusing on execution around our operating system platform, middleware and management solutions.

The high cash flow margins and operating margins which we have produced are very rare for a software company of our size and growth rate. Our results are even more differentiated when one considers that we have a subscription revenue model.

Let me quickly recap our performance relative to our key operational initiatives, and then I’ll walk you through our financial results and guidance for fiscal year 2009.

In Q4, we continued progress towards transforming our business to support growth to the $1 billion plus level of revenue in the next several years. Our primary operational objectives involve driving global consistency in processes and procedures, building additional order capacity, and improving our internal systems while continuing to provide great value and support to our customers.

During the year, we continued to reduce cycle times for processing orders by reducing error rates through effective triage processes, through overall process improvements, and through the use of flexible teams. Based upon these improvements, we are now able to process up to 80% more orders in the same time period compared to prior quarters.

We also developed teams and created processes to reduce the time spent by sales with administrative tasks. This freed up more time for real selling. We invested in these sales improvements throughout fiscal year ’08 and have plans to continue investments for all geographies in fiscal year ’09 based upon these successes.

We also continue to improve our sales tools globally. We kicked off a new initiative to develop reporting and processes to drive our renewal business in Asia-Pacific, to complement successfully implemented processes in other geographies which have contributed to improvements in renewals.

Finally, we have begun enhancements to our process for handling sales leads, which will automatically pass leads to our business partners. This is in beta now but we’ve already seen encouraging early success indicators.

We clearly will have more to talk about as the year progresses and we get further into our lead to renew process and systems transformational work. I’ll continue to brief investors quarterly on this large and important effort.

Now let’s talk about our financial performance. As I mentioned earlier, Q4 was a solid finish to a year of strong results for Red Hat. Fourth quarter revenue was $141.5 million, an increase of nearly 5% from last quarter and 27% from the same quarter in fiscal year 2007, and that was at the top end of our guidance.

In addition to broad-based sales execution across all our solutions and geographies, I also want to note an [unprecedented] acceleration in JBoss business in the second half of the year and in Q4 in particular. As Jim mentioned, in one-third of our top 25 deals in the U.S., JBoss was an important component and three deals of $1 million or more were exclusively JBoss.

Subscription revenue continued to grow rapidly, resulting in $121.9 million in subscription revenue, or 5% growth sequentially. Year over year, subscriptions were up 27% and constituted 86% of total revenue.

The training and services component of revenue was $19.6 million, up 29% from last year and in line with Q3’s strong performance, despite the reduced number of available training days during the holiday season.

While revenue was strong, bookings and billings were even stronger. Here are some of the statistics that I provide every quarter. Breaking down our Q4 bookings mix, the channel generate 54% of our bookings and 46 came from direct sales. That compares to a 51%-49% split in Q3. This shift in percentage reflects our progress on our key initiatives to build out our channels and more specifically, we saw increased strength from middleware in the channel, as well as our federal channel business.

In terms of geography, we saw strength on a global basis. Fifty-seven percent of our bookings came from the Americas, 28% from EMEA, and 15% from Asia-Pacific, which is roughly the same split as we saw last quarter.

Renewals also continued to be strong. We renewed 24 of the top 25 deals up for renewal in the quarter and the total value of these contracts was more than 120% higher than the original value -- excuse me, it was 120% of the original value. So for the full year, that’s 99 out of 100 of the top deals that should have renewed did renew.

Now, as in the past, I’m going to add a few additional year-end statistics on bookings that will help demonstrate the breadth and depth of the strength of our business, including some statistics which I have never disclosed before. But to be clear, as in the past, I will not be updating these statistics on a quarterly basis.

First of all, we had another year of record bookings, which after the normal Q4 to Q1 decline, grew sequentially every quarter after and the rate of sequential growth for each quarter was higher than the previous quarter.

We achieved another bookings milestone in Q4 by booking in excess of $200 million in the quarter. In addition, our off balance sheet backlog -- that is the portion of customer contracts or bookings to be billed in the future -- grew every quarter this year to a balance that now exceeds $125 million at the end the year.

This combination of a recurring revenue business model, large deferred revenue balances, and a strong off balance sheet backlog give us good visibility into future performance. In short, strong demand and execution has resulted in an outstanding bookings performance for the quarter and the year.

These bookings produce billings of $186 million in Q4 compared to $172 million in Q3, or 8% sequential growth and 35% growth compared to Q4 of last year. Please note that for these purposes, billings are calculated by adding revenue to the change in deferred revenue shown on the cash flow statement, which excludes the impact of foreign exchange rates on deferred revenue.

As I said before, billings can vary from quarter to quarter and investors may want to consider evaluating this metric on a rolling three or four quarter average.

Now let’s shift back to the income statement. On a non-GAAP basis, excluding stock compensation expense, overall gross margin was 85% for Q4, slightly higher than last quarter and last year. Subscription gross margin was approximately 93% and in line with last quarter and last year, while training and services gross margin improved approximately 400 basis points from the prior quarter in Q4 last year.

Q4 non-GAAP operating expense came in at $92.5 million, up $6.4 million from last quarter. This increase in operating expense was attributable principally to spending in sales and marketing that drove additional bookings growth in Q4 and for the future, coupled with an increase in systems related spending that will enable Red Hat to scale its operations in the years ahead.

Q4 non-GAAP operating income was $28.2 million, producing an operating margin of 20%, compared to non-GAAP operating income of $28.9 million and operating margin of 21% last quarter, and non-GAAP operating income and operating margin of $24.6 million and 22% in the year-ago quarter.

Moving on, other income net, which is attributable primarily to investment income, was $16.7 million, including a one-time gain from the sale of an investment of $4.7 million. Our non-GAAP tax rate, which reflects actual cash taxes that we expect to pay, is still approximately 5%, resulting in non-GAAP net income of $42.7 million, up nearly 8% from last quarter and up 29% from the year-ago quarter. Our non-GAAP diluted earnings per share came to $0.20 a share, which was $0.01 better than our guidance for the quarter.

To briefly recap highlights from the income statement for the full fiscal year, revenue grew to $523 million, an increase of 31%; subscription revenue grew to $450 million, an increase of 32%; non-GAAP operating income grew to $107 million, up 26%; and non-GAAP EPS for the full year was $0.72, up 29%.

Now let’s turn to the balance sheet and the cash flow statement. We ended the year with over $1.3 billion in cash and investments, after purchasing $66 million of our common stock under our existing $250 million stock repurchase program. That was a total of 3.7 million shares.

Although I do not normally provide details on our investment portfolio, which is 100% debt securities, it is important to note that we hold no auction rate securities, no asset-backed securities, and no mortgage backed securities, each of which we exited over the past six months.

DSO was 60 days versus 55 days at the end of Q3, simply due to heavy billings in February. We continue to be within our target range and we are pleased with the consistency of this metric. As a reminder, since days sales outstanding is traditionally a measure of receivables versus billing, our DSO calculation includes revenue plus the change in deferred revenue.

Total deferred revenue at quarter end was $473 million, an increase of $50 million, or 12% over the prior quarter and an increase of 40% over the prior year-end. The increase was $37 million in current deferred revenue and $13 million in long-term deferred revenue.

Deferred revenue includes an increase from the Q3 balance of approximately $6 million related to changes in exchange rates, so as I mentioned before, to see the change in deferred revenue excluding the foreign exchange impact, please refer to the statement of cash flows and note the increase of $44 million which resulted from billings.

Finally on the balance sheet, I would note that the convertible bonds have been classified as a current liability, reflecting the January 15, 2009 put date five years after the original issuance.

Moving to the statement of cash flows, the non-GAAP cash flow from operations excluding the reclassification of excess tax benefits from share-based compensation arrangements was $72 million for the quarter and $264 million for the full year, or 50% of revenue. That being said, Q4 is the first quarter where one has comparability of quarterly GAAP cash flows from operations on a year-over-year basis. Our GAAP cash flow from operations was $55 million versus $46 million in Q4 of last year.

Now I’d like to turn to guidance. For the income statement, I will continue this year to provide the same non-GAAP adjustments as in the past. We adjust only two items, which are stock compensation expense and cash taxes. However, for your long range planning, I plan to transition to GAAP disclosures for fiscal year 2010 because we will have year-to-year comparability for stock compensation accounting and we will, within a year or two, have close comparability of tax rates as our remaining NOLs of approximately $225 million are utilized.

This means that you should be thinking all GAAP measures for fiscal year 2010 and beyond with respect to creating your models and publishing your estimates. As I stated last quarter, beginning now I will only be using GAAP cash flow from operations statistics going forward.

As Jim’s discussed earlier, we believe there are significant growth opportunities for Red Hat and in order to capitalize on these opportunities and our existing strong market position, we believe it is important to continue to invest in the business.

With this as background, we are forecasting total revenue for 2008 to be in the range of $665 million to $680 million, representing an annual growth rate upwards to 30%. This includes contribution from our recent acquisition of Amentra, which recorded approximately $25 million of revenue for calendar year 2007.

We expect our non-GAAP operating income for the year to grow at approximately the same rate as revenue, reflecting our near-term priority of investing in the business to drive strong top line growth and build on the successes that we are seeing across all of our product lines.

From a long-term perspective, there is no change in our belief that the business could ultimately support much higher operating margins.

While I do not normally provide guidance on other income, I believe it is appropriate now due to recent changes in interest rates and our expectation that rates will fall further. You obviously need to build your own models and make your own estimates, but for purposes of guidance I am estimating net interest income, interest expense of approximately $9 million per quarter, and likely declining over the year. I am assuming higher cash balances but falling interest rates. To ballpark it for the full year, you might look at least 150 basis points lower yield on average than in the year we just finished.

Assuming the same 5% cash tax rate and approximately 220 million diluted shares, one would estimate diluted non-GAAP EPS in the range of $0.78 to $0.82 per share for the full year fiscal 2009.

On a GAAP basis, we estimate stock compensation expense of approximately $11 million per quarter in fiscal 2009 and we estimate our GAAP tax rate to be 40%.

From a cash flow perspective, we anticipate GAAP operating cash flow for the full year of between $240 million and $250 million, or up to a 25% increase compared to GAAP operating cash flow of $203 million in fiscal year ’09 -- excuse me, in fiscal year ’08.

It is also important not to lose sight of the value of approximately $75 million to $80 million of additional cash which we expect will be produced this year by tax savings resulting from the usage of NOLs, which is not included in GAAP operating cash flows.

Finally, looking at Q1, we offer the following guidance: revenue is estimated to be between $152 million to $154 million, including approximately $5 million from the partial quarter ownership of Amentra; operating margin is estimated to be approximately 19%, principally due to higher IT and systems transformation expenses. This higher level of transformation OpEx will continue two more quarters, after which OpEx growth will subside and much of the work will be CapEx.

Other income net is estimated around $9.4 million, and non-GAAP EPS is estimated to be approximately $0.18.

In summary, we are pleased with our strong fiscal year ’08 performance. Looking forward, we firmly believe that we have the opportunity to continue the rapid growth of our business. We are expecting revenue growth of upwards of 30% this year, with a combination of cash flow margins and operating margins that will continue to be very strong for a software company of our size, growth rate, and subscription revenue model.

Operator, I would now like to turn it back over to you for questions and again, a reminder; we would like to limit the callers to one question and one follow-up, please.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question is from the line of Kash Rangan with Merrill Lynch.

Kash Rangan - Merrill Lynch

Thank you very much. I just have a couple of questions. First, I’m just wondering if you have any color commentary at all on REL 5.0 and the up-tick on that front; any commentary you have on the mix shift that is potentially helping ASPs; any commentary on ASPs in particular; and also second and final on JBoss -- I know you qualitatively talked about the trajectory of the business but I’m wondering if you can share more metrics on how many customers you landed in the quarter, how many subscriptions you landed in the quarter, and how is pricing for JBoss? That’s about it. Thanks again.

James M. Whitehurst

On the first question on REL 5 up-take, as we’ve said before, the beauty of the subscription model is customers can move from one version to another when they are prepared and we do expect that people will continue to move gradually over time. Having said that, I think it’s evident in the statistics of the top 25 deals that were up for renewal, they renewed at a 120% of the value last year. but part of the reason for that is some of these folks are already beginning the process of renewing and some of them are moving from the lower price REL 4 version to a higher price REL 5 advanced platform.

And secondly on JBoss, I don’t have any further color in terms of numbers of customers. We continue to add new customers. That’s a very good thing. We still think the opportunity is very large and I would just remind people that at JBoss World, we announced that there are over 20 million free downloads of JBoss out there today. The number of customers we have for JBoss is still quite low relative to that metric and there’s an awful lot of opportunity to convince existing JBoss users to move to paid support.

Kash Rangan - Merrill Lynch

And I don’t know if this is for Jim or Charlie, but final follow-up question on JBoss -- any changes at all to the distribution model, be it direct sales or channel? And if there are any changes, can you share with us any metrics that indicate any productivity improvement on the JBoss side that can help us get more confidence in the forward-looking aspect of it? That’s it. Thanks.

James M. Whitehurst

Well, I don’t have anymore numbers that we want to disclose but a couple of comments; I think the movement in the commercial model from being a set of projects that we then tried to commercialize with service to now a model similar to the REL Fedora model, where we have an enterprise edition and a community edition, has been quite successful.

Just anecdotally, if you looked at the numbers of production, data center people at JBoss World versus developers, the mix was much different this year than in the past. And that’s -- I do believe -- you know, we have 20 million downloads. A lot of those have been in development and in test. And with the enterprise edition, we are seeing more and more interest and momentum in moving into the data center and that’s frankly when people are willing to pay for it.

So we are very, very pleased and a lot of the momentum I do believe is driven by having that battle-hardened production ready enterprise edition out there.

Tom McCallum

Next question, please.

Operator

Your next question is from the line of Kirk Materne with Banc of America.

Kirk Materne - Banc of America Securities

Thanks very much. Charlie, you talked qualitatively about getting some process permits in the execution of deals. Can you just give us an idea of what you’ve seen in terms of improvement in indirect renewal rates? I know you guys have always had really strong direct renewal rates. I was just wondering if the improvement maybe on the indirect sides contribute at all to the pick-up in billings you’ve seen over the past couple of quarters, or is that just simply a higher volume of deals?

Charles E. Peters Jr.

Well, maybe two or three things; one is clearly there is a higher volume of deals. As I mentioned on the Q3 call, the pipeline was then strong and continues to be strong. And bookings, billings, and revenue numbers we put up would indicate that strength. But specifically on renewals, we have talked about a number of process improvements in terms of gathering data about end customers actually in some cases trying to link information systems from a couple of our sources to get the data and actually using a third party to help with some of the renewal activity.

We did see some I would say fairly substantial improvement on smaller accounts where renewals wouldn’t happen. We saw a fairly substantial renewal rate when calls were made to those folks.

Lastly, one of the things I mentioned in the systems and process improvement was a beta activity around feeding leads directly to some of our channel partners. We literally have so many leads that our inside sales folks in some cases simply can’t get to the leads and we historically had an aging problem with our leads and when that happens, leads become cold.

With a beta test of a little bit more than a handful of partners feeding them leads, we have seen a fairly good success with these leads turning to actual bookings in a very short period of time. So we are looking forward to finishing up this systems work and trying to roll this out more broadly to our partners over the next three to six months.

Kirk Materne - Banc of America Securities

And just one follow-up, if I could; clearly billings and bookings in the last couple quarters of the year were very strong. Do you see any seasonality in that business, just for purposes of modeling or thinking about it? Do you expect it to be quite so seasonal? Are you starting to see because you are seeing bigger deals that it’s going to be a little bit more back-end loaded in terms of how the billings and bookings come in over a given fiscal year? I’m just wondering if you’ve seen any trends in that or how we should think about that going forward. Thanks.

Charles E. Peters Jr.

I think the good news is our business isn’t really terribly seasonal. I did make one comment that I would repeat, that we typically do see a surge in Q4 and then usually it’s a little bit lighter in Q1. If you went back a couple of years and looked at our billings metrics Q4 to Q1, you’ll see that sort of a pattern.

And I’ve also said before that because it’s a recurring revenue model if in one year you have an increase in billings in a particular quarter, it’s likely to be a repeating pattern because those people should be renewing a year later and then a year after that, et cetera.

Apart from that, frankly we don’t see much seasonality with the exception of the training business, and also as I commented in my prepared remarks, this year business was strong even through the holiday period.

Kirk Materne - Banc of America Securities

Thank you.

Operator

Your next question is from the line of Brent Williams with The Benchmark Company.

Brent Williams - The Benchmark Company

One question for you on the larger JBoss deals and indeed on the larger Linux deals -- have you been making any changes in terms of the assumptions of the deal close rate or sales cycle time to reflect any potentials for customers to take longer to mull things over?

And the other question was, have you seen any changes to inbound leads from fallout from customers thinking about what might happen as Oracle acquires BEA systems?

Charles E. Peters Jr.

The first part about the sales cycle, you know, really from inception we’ve recognized the fact that the sales cycle on JBoss and middleware is a longer sales cycle typically and we’ve taken some steps to help speed that up, including some overlay, people and specialists who know about middleware who can help the more general sales force. I don’t think there’s been any real change in that sales cycle. It’s a very consultative sale but I think we’re making some good progress on it.

The second part of your question about changes in the competitive environment as a result of M&A activity, I think that any time there is M&A activity and a company is being acquired, it creates uncertainty with that company and that sometimes uncertainty creates opportunity.

James M. Whitehurst

I will say we saw a substantial spike in our downloads of JBoss the day the Oracle BEA deal was announced.

Brent Williams - The Benchmark Company

Great. Thanks.

Operator

Your next question comes from the line of Tim Klasell with Thomas Weisel Partners.

Tim Klasell - Thomas Weisel Partners

Good afternoon, everybody. A quick question on Amentra; you mentioned that’s about a $25 million run-rate right now. Do you expect that to be growing as fast as the core business? And what sort of margin profile should we be thinking about that acquisition?

James M. Whitehurst

I’ll let Charlie get back with the specific numbers, but I do want to stress with Amentra, while we are very, very pleased with that as a business, this does not represent a change to our core strategy. Amentra, the strategic logic for Amentra is around driving additional JBoss sales. So with that said, I’ll hand it over to Charlie with the numbers.

Charles E. Peters Jr.

I provided a couple of data points on Amentra. One is that in last calendar year, they did $25 million in revenue and I also indicated in the partial ownership period in this quarter, that you probably should be modeling around $5 million. Beyond that, I’m not going to provide any more details, financial details on Amentra.

But to help you for modeling purposes, one of the things that you might think about is that the relative split of our revenue has typically been in the last couple of years around 85% subscriptions and 15% services. And I think that I would be thinking that our services as a result of this acquisition probably will be somewhere in the range of 16% to 17% of our total revenue.

So however you build your model, I would be thinking total services, including Amentra, somewhere in 16% to 17% of total for the year.

Tim Klasell - Thomas Weisel Partners

Okay, good, and then a follow-on question on your investments in the first half of the year on your operating -- could you give us an idea of what sort of systems or processes you plan on building out there and what areas you really want to focus in on?

Charles E. Peters Jr.

I think probably the way to describe it is everything on the sales side from the lead process, lead quote, invoicing, all the way through the renewal process, mostly on the sales side of the business, connecting many existing systems. It’s work we began about six to nine months ago. It has ramped up so that as I mentioned, over the next two quarters, there will be some fairly significant OpEx and then that will subside, and the actual, you know, the work of designing and actual coding of systems will begin after that. And then it becomes CapEx.

So there’s a little bit of a build-up of expense that was in Q4, Q1, and Q2, and then it should start going down. But it’s a broad range of systems across most of the customer-facing side of our business.

James M. Whitehurst

Just conceptually at the highest level, there are three kinds of systems on the customer side. There’s obviously a sales system, which identifies customers through selling. There is a system where we actually account for revenue from those customers, and then there is a system that entitles that, so customers actually get access to the bits which they’ve bought subscriptions to.

There’s making those things better and then making them talk better together and sharing common data, et cetera, et cetera. It’s a lot of the pipes and sewers around that, making it more efficient.

Tim Klasell - Thomas Weisel Partners

Very good. Thank you.

Operator

Your next question comes from the line of Aaron Schwartz with J.P. Morgan.

Aaron Schwartz - J.P. Morgan

Just wondering, since you’ve come in and taken a look at the sales organization if there’s anything that you would think about potentially changing there in terms of maybe more of a specialist model, or if you were more likely to be consistent in terms of the coverage of the products there?

James M. Whitehurst

Well, I think the biggest thing that I’ve emphasized and you’ve heard Charlie emphasize is continuing to build out our channel business. We have an excellent direct sales and I do feel very comfortable with the model in the direct sales side. That said, in order to scale this business as we go to smaller customers and less sophisticated customers beyond the early adopters, we’ll need to work more and more with partners to make sure we do that. And so we’ve discussed, I think both Charlie and I, we’ve talked a little more about the importance of channel and growing our channel partners. So from a go-to-market model, that’s our top priority.

Aaron Schwartz - J.P. Morgan

Okay, and then a quick question on the repurchase program; I believe that has an expiration date of October ’08. Should we expect that you would look to get further into that program, or actually complete it for modeling purposes, or will you just be more subject to market conditions?

Charles E. Peters Jr.

I think that the -- well, first of all me just confirm what you said; the total value was a $250 million authorization and it does in fact have an end date at the end of October. I would remind everyone that the board, however, has previously extended dates for repurchase programs and also has changed and enlarged repurchase programs historically going back three years.

In terms of what we’ll actually do and when we’ll do it, I think we’ll just have to -- you guys have to kind of monitor how we perform each quarter once the quarter’s over. We’ll basically tell you if we’re in the market or not.

Aaron Schwartz - J.P. Morgan

Okay and lastly, can you comment on the currency impact to expenses?

Charles E. Peters Jr.

Yeah, this past quarter currencies obviously, they’ve changed a lot but they changed mostly right towards the end of the quarter and compared to Q3, the currency impact, principally the Euro, had an impact of increasing both expenses and revenues by almost $1 million. The net impact on the bottom line was not much. We actually have a pretty nice natural balance of the business with expenses and revenue that at least from the P&L impact, we don’t see much.

Aaron Schwartz - J.P. Morgan

Okay. Thanks for taking my questions.

Tom McCallum

Just a reminder to everyone, can you limit yourself to one question and one follow-on? We don’t have as much time. We have a pretty good queue of folks trying to get through. Thank you.

Operator

Your next question is from the line of Katherine Egbert with Jefferies.

Katherine Egbert - Jefferies and Company

I have a follow-up question on Amentra; you say you bought it to drive additional JBoss sales -- so this is a company which will help you get JBoss out in the market or is it there to basically do installs after the fact?

Charles E. Peters Jr.

Just a comment -- they are a company that has about 140 very talented consultants that do an awful lot of middleware SOA work today. They are in some key accounts, some of our existing key accounts. As I said before, JBoss and middleware is a very consultative sale. There is a natural synergy between what they do and what our customers need on the JBoss side. Within the first week or two, there were a number of accounts, either existing Red Hat accounts or existing Amentra accounts where we saw opportunity for helping the customer do some additional things.

Katherine Egbert - Jefferies and Company

But is it mainly pre or post the time they buy the product?

Charles E. Peters Jr.

Well, what they do today is consulting and implementation work, architectural design work, trying to help customers move to an SOA type strategy.

James M. Whitehurst

It’s tough to answer because the answer is yes, it’s pre and it’s post. They do a fair amount of work consulting on how to implement SOA in moderate architectures, and that obviously often includes middleware and then they help make sure that gets executed.

So we’re not trying to dodge it -- it’s just it’s a little bit of both.

Tom McCallum

Next question, please.

Operator

Your next question is from the line of Vikram Churamani with Lehman Brothers.

Vikram Churamani - Lehman Brothers

This is a good question -- backing into your guidance for fiscal ’09 and if you assume about let’s say $25 million to $30 million in Amentra, you are looking at about a 23% or 24% growth rate organically. Can you give us your thoughts on what you expect -- and assuming billings and revenue grow in line, what do you expect your Linux growth to look like in fiscal ’09 and also your middleware growth to look like relative to that? And I have a follow-up after that.

Charles E. Peters Jr.

It’s still our view that the middleware business will, the bookings part of the business will grow at about twice the growth rate of the base business. In a subscription model, that means the revenue is going to lag somewhat behind that. But we see strong demand and good growth across all parts of the business.

You know, relative to revenue forecasts, one of the things I would sort of point everybody to in terms of getting comfortable with the guidance we’ve given and creating your own models is look at the balance of current deferred revenue at February 29th of ’08 and look at that as a percentage of the guidance we gave. You might want to go back a year or two and do the same thing and draw your own conclusions, but I think it helps one see that there is pretty good visibility about performance.

Vikram Churamani - Lehman Brothers

Okay, and then the $125 million in off balance sheet backlog, could you tell us what the number was last year in terms of year-over-year growth? And then also lastly, what is your assumption on pricing given the current macro environment going in the next 12 months? Thanks.

Charles E. Peters Jr.

I’m not going to go back and talk about a number that I hadn’t previously disclosed but I think it is helpful for people to understand that there is a very sizable number of booked business already that is going to be billed in the future in excess of $125 million, but I’m not going to go back and give you a comparable. This number is substantially than it was a year ago, however.

Relative to pricing, I think our assumption is that we deliver a lot of value. We have been very consistent in our pricing now, going on to almost four years. We are competitive in all situations. We talked before about I believe some price uplift. It’s available when customers move from REL 4 to REL 5 advanced platform. We are seeing some of that. We see very good pricing on the JBoss product line.

Overall, my assumption on pricing is about the same as it was last year.

James M. Whitehurst

Recognize a big chunk of our business is helping customers save money by moving from proprietary to open software, so that overall trend in general is a positive one for us.

Tom McCallum

Next question, please.

Operator

Your next question is from the line of Tom Curlin with RBC.

Tom Curlin - RBC Capital Markets

Good afternoon. Your CapEx line is roughly doubling year over year, if I have this right. Can you just walk through what’s happening with that in terms of I guess typical CapEx versus capitalized software? And do you think you are reaching a higher normalized rate? Does that trajectory continue? How do you see that trending going forward?

Charles E. Peters Jr.

That’s a good question. I think CapEx comprises basically two things -- some fairly significant office expansion, including offices in several new countries. Jim mentioned expansions in 10 countries and in at least a couple of those countries, there were multiple offices that were expanded in those countries. So part of that CapEx and actually probably the majority of that CapEx relates to new offices and office expansion to accommodate the growth. The balance is going to be capitalized software and other systems, including hardware, to support the infrastructure here.

I do think as a percentage of revenue, the CapEx this year is a little bit over 7% of revenue and as we -- I do think you are probably going to have one more year, the year we’re now in, where CapEx may still be in the $35 million to $40 million range, principally as we get into some of the capitalization of software and also further office expansions and probably at least another 10 countries this year.

So probably ’08 and ’09, CapEx up a little bit. My guess is it falls back in ‘010.

Tom Curlin - RBC Capital Markets

When you look at -- so is that mix shifting more towards the capitalized software items in the current -- or I guess the upcoming fiscal year?

Charles E. Peters Jr.

It will be in fiscal year ’09, yes.

Tom Curlin - RBC Capital Markets

And can you give us some flavor on what you are doing with that?

Charles E. Peters Jr.

That was the comments we’ve made before in terms of some of the major infrastructure improvements, in terms of systems to run the business, to build out data centers, to build the networking in the offices, et cetera, et cetera. I mean, it’s quite a long list.

We now have offices in 59 -- excuse me, 59 offices in 28 countries I believe is the current count and have fairly significant expansion plans for some of those in the coming year.

Tom McCallum

Next question, please.

Operator

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

Brendan Barnicle - Pacific Crest Securities

I’m interested in whether you’ve seen any change in the linearity of the sales during the quarter or any sort of deal slippage at the end of the quarter related to the macro environment.

Charles E. Peters Jr.

Not really. As we’ve said before, our linearity, like many software companies, our linearity would be something on a monthly basis like 25%-25%-50% -- sometimes it’s 20%-20%-60%, but it very seldom changes from that range. We did not see anything different or unusual in Q4. We did not see any deal slippage in Q4. As we have indicated, we’ve closed over $200 million in bookings. That’s a new landmark for us and a very solid quarter. We did in excess of $185 million or $186 million in billing.

Brendan Barnicle - Pacific Crest Securities

Great, and just as a follow-up, in the past you’ve given us some metrics on virtualization, sort of customer usage, I think. Maybe there was a press release on that in the fall. Do you have any other metrics you can give us around how virtualization adoption is going?

James M. Whitehurst

I don’t have any numbers. Again, virtualization, it comes for free in REL 5 so we don’t have a sales line around virtualization. Anecdotally, I’ve been out talking to quite a few customers and they are very, very pleased with the -- we are very, very pleased with the traction we are getting with those customers. The performance and the technology itself is quite good and customers are really realizing that now.

Tom McCallum

Next question, please.

Operator

Your next question is from the line of Steve Ashley with Robert W. Baird.

Steven M. Ashley - Robert W. Baird & Co.

Jim, you’ve mentioned in the press release and in your introductory comments about being out, meeting with customers. Was there any messages that you came away with with things they would just like to see you change or improve in the future?

James M. Whitehurst

For starters, coming from the airline business, it’s great to talk to customers without having them wanting to take your head off. And you know, certainly relative to airlines but frankly relative to other software companies, across the board I hear positive things about service, which is phenomenal. So clearly there is not the tactical -- the primary thing we hear from our major customers is they value and want even more of a technical relationship.

Because of the nature of what we do, especially on the operating systems side, you know, very, very high performance technology, our customers are actually interested in and want to talk to the maintainers of various components of the Linux distribution. I had a long robust conversation around power management.

So we are the only real company because of our -- just our size and scope and the number of maintainers around the various components of Linux that we have that can have those conversations. So they keep asking for more and more and we need to see how we can continue to bring our engineers to do that.

They are also again very interested in our large certified ecosystem of ISVs out there, and so continue to hammer on us to expand that. So that’s a great asset that we have and it’s clearly seen by our customers as well.

Tom McCallum

Operator, we have time for one more question, please.

Operator

Your next question is from the line of Kevin Buttigieg with Stanford Group.

Kevin Buttigieg - Stanford Group

Charlie, just wondering about your comments in fiscal year ’10 as far as the tax rate is concerned. Is there going to be an impact to the operating cash flow statement from that? And then secondarily, what are your plans for the convertible?

Charles E. Peters Jr.

Good question. So first of all, we have operating loss carry-forwards today of something in excess of about $225 million. My estimate at this point in time is that sometime in the next year or two, we will utilize all of the rest of the NOLs, and so from an operating cash flow statement, certainly on a GAAP operating cash flow, I don’t see any significant change. The piece that would change is this piece that goes down into the financing section. When it’s fully utilized, we wouldn’t have that any longer.

Sorry, the second part of the question again?

Kevin Buttigieg - Stanford Group

On the upcoming convertible maturation.

Charles E. Peters Jr.

The upcoming convertible, for your modeling purposes, you could assume that we pay it off in cash in January 15th of ’09 but I’ll -- we will certainly be looking at different scenarios as the year progresses. We certainly have plenty of cash today to pay it off. I’ve projected a significant increase in cash based upon the operations this coming year, which would help improve that situation. But we will also be looking at refinancing opportunities as the year progresses and depending upon where the stock price is, that existing convert may simply stay in place. So there’s at least three scenarios I can think of, but if you are building a model, probably the simplest is simply assume it gets paid in cash on January 15th of ’09.

Kevin Buttigieg - Stanford Group

Okay. Thank you.

Charles E. Peters Jr.

I just want to summarize some of the key takeaways here. We think it was an outstanding year with some key benchmarks that were passed. We passed the $0.5 billion mark in revenue. We passed for the first time ever a bookings mark of in excess of $200 million in Q4. For the year, our revenue exceeded 30% growth and for our guidance for fiscal year ’09, we are also guiding up to about 30% revenue growth.

The deferred revenue at the end of the fiscal year was 40% higher than the prior year, and so what’s very important about that is the visibility it gives all of us, including investors and analysts, about performance in fiscal year ’09. Having a subscription revenue model is a predictable revenue stream and it should help everyone to build their models.

Lastly, from a cash flow perspective, we had very good cash flow, very strong cash flow in fiscal year ’08 and we are projecting GAAP cash flow growth of up to 25% in fiscal year ’09.

So with that, thank you all very much and we look forward to seeing you and talking to some of you as the quarter progresses.

Operator

This concludes today’s conference call. You may now disconnect.

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