10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended May 31, 2019

OR 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                to                .

Commission File Number: 001-33162 

RED HAT, INC.

(Exact name of registrant as specified in its charter) 

Delaware	06-1364380
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

100 East Davie Street, Raleigh, North Carolina 27601

(Address of principal executive offices, including zip code)

(919) 754-3700

(Registrant’s telephone number, including area code) 

Securities registered pursuant to Section 12(b) of the Act:
Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common stock, $0.0001 par value	RHT	New York Stock Exchange

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	x	Accelerated filer	¨
Non-accelerated filer	¨	Smaller reporting company	¨
		Emerging growth company	¨

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:

As of June 27, 2019, there were 178,093,007 shares of common stock outstanding.

RED HAT, INC.

		Page
CAUTIONARY NOTE ON FORWARD-LOOKING STATEMENTS		3
	PART I FINANCIAL INFORMATION
ITEM 1:	FINANCIAL STATEMENTS
	Consolidated Balance Sheets at May 31, 2019 (unaudited) and February 28, 2019 (derived from audited financial statements)	4
	Consolidated Statements of Operations for the three months ended May 31, 2019 (unaudited) and 2018 (unaudited)	5
	Consolidated Statements of Comprehensive Income for the three months ended May 31, 2019 (unaudited) and 2018 (unaudited)	6
	Consolidated Statements of Cash Flows for the three months ended May 31, 2019 (unaudited) and 2018 (unaudited)	7
	Notes to Consolidated Financial Statements (unaudited)	8
	NOTE 1—Company and Merger Agreement
	NOTE 2—Summary of Significant Accounting Policies
	NOTE 3—Accounts Receivable
	NOTE 4—Leases
	NOTE 5—Identifiable Intangible Assets
	NOTE 6—Deferred Selling Costs
	NOTE 7—Derivative Instruments
	NOTE 8—Income Taxes
	NOTE 9—Convertible Notes
	NOTE 10—Commitments and Contingencies
	NOTE 11—Legal Proceedings
	NOTE 12—Stockholders’ Equity
	NOTE 13—Deferred Revenue and Performance Obligations
	NOTE 14—Earnings Per Share
	NOTE 15—Share-based Awards
	NOTE 16—Assets and Liabilities Measured at Fair Value on a Recurring Basis
	NOTE 17—Segment Reporting
	NOTE 18—Business Combinations
ITEM 2:	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	31
ITEM 3:	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	45
ITEM 4:	CONTROLS AND PROCEDURES	47
	PART II OTHER INFORMATION
ITEM 1:	LEGAL PROCEEDINGS	48
ITEM 1A:	RISK FACTORS	48
ITEM 2:	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	70
ITEM 6:	EXHIBITS	71
SIGNATURES		72

2

CAUTIONARY NOTE ON FORWARD-LOOKING STATEMENTS

Certain statements contained in this report and the documents incorporated by reference in this report, including in Management’s Discussion and Analysis of Financial Condition and Results of Operations, constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements provide current expectations of future events based on certain assumptions, and any statement that is not strictly a historical statement could be deemed to be a forward-looking statement (for example, statements regarding current or future financial performance; management’s plans and objectives for future operations; product plans and performance; management’s expectations regarding market risk and market penetration; management’s assessment of market factors; strategies, objectives and plans of Red Hat, Inc. together with its subsidiaries (“Red Hat”) and its partners; and the consummation of the proposed acquisition of Red Hat by International Business Machines Corporation). Words such as “anticipate,” “believe,” “estimate,” “expect,” “intend,” “outlook,” “plan,” “project,” “will,” and similar expressions, may also identify such forward-looking statements. Red Hat may also make forward-looking statements in other filings made with the Securities and Exchange Commission (“SEC”), press releases, materials delivered to stockholders and oral statements made by management. Investors are cautioned that these forward-looking statements are inherently uncertain, are not guarantees of Red Hat’s future performance and are subject to a number of risks and uncertainties that could cause Red Hat’s actual results to differ materially from those found in the forward-looking statements and from historical trends. These risks and uncertainties include the risks and cautionary statements detailed in Part II, Item 1A, “Risk Factors” and elsewhere in this report as well as in Red Hat’s other filings with the SEC, copies of which may be accessed through the SEC’s web site at www.sec.gov. Readers are urged to carefully review these risks and cautionary statements. Moreover, Red Hat operates in a rapidly changing and highly competitive environment. It is impossible to predict all risks and uncertainties or assess the impact of any new risk or uncertainty on our business or any forward-looking statement. The forward-looking statements included in this report represent our views as of the date of this report. We specifically disclaim any obligation to update these forward-looking statements in the future. These forward-looking statements should not be relied upon as representing our views as of any date subsequent to the date of this report.

3

PART I

ITEM 1. FINANCIAL STATEMENTS

RED HAT, INC.

CONSOLIDATED BALANCE SHEETS

(in thousands—except share and per share amounts)

	May 31, 2019 (Unaudited)			February 28, 2019
ASSETS
Current assets:
Cash, cash equivalents and restricted cash	$	2,295,396		$	1,883,096
Investments in debt securities, short-term	177,625			293,361
Accounts receivable, net of allowances for doubtful accounts of $4,452 and $4,561, respectively	529,115			980,188
Prepaid expenses	250,571			282,507
Other current assets	36,743			24,504
Total current assets	3,289,450			3,463,656
Property and equipment, net of accumulated depreciation and amortization of $331,642 and $316,432, respectively	200,015			198,969
Operating right-of-use assets, net (1)	224,371			—
Goodwill	1,273,494			1,276,853
Identifiable intangibles, net	198,914			206,083
Investments in debt securities, long-term	188,172			248,512
Deferred tax assets, net	119,128			112,568
Other assets, net	80,395			81,648
Total assets	$	5,573,939		$	5,588,289
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable and accrued expenses	$	458,456		$	491,259
Deferred revenue, short-term	2,016,488			2,161,206
Other current obligations	256			282
Convertible notes	188,553			69,827
Total current liabilities	2,663,753			2,722,574
Deferred revenue, long-term	781,043			821,218
Convertible notes	—			231,540
Operating lease liabilities (1)	188,133			—
Other long-term obligations	183,074			199,025
Commitments and contingencies (NOTES 10 and 11)
Stockholders’ equity:
Preferred stock, $0.0001 per share par value, 5,000,000 shares authorized, none outstanding	—			—
Common stock, $0.0001 per share par value, 300,000,000 shares authorized, 246,289,980 and 244,402,737 shares issued, and 178,083,153 and 176,800,502 shares outstanding, respectively	25			24
Additional paid-in capital	2,853,105			2,791,895
Retained earnings	2,195,189			2,054,069
Treasury stock, at cost, 68,206,827 and 67,602,235 shares, respectively	(3,242,725		)	(3,189,434		)
Accumulated other comprehensive loss	(47,658		)	(42,622		)
Total stockholders’ equity	1,757,936			1,613,932
Total liabilities and stockholders’ equity	$	5,573,939		$	5,588,289

  

_______

⁽¹⁾ Effective March 1, 2019, the Company adopted Accounting Standard Update 2016-02, Leases (Topic 842) (“ASC 842”). See NOTE 2—Summary of Significant Accounting Policies and NOTE 4—Leases for detailed information on adoption of ASC 842.

The accompanying notes are an integral part of these consolidated financial statements.

4

RED HAT, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands—except per share amounts)

(Unaudited) 

	Three Months Ended
	May 31, 2019			May 31, 2018
Revenue:
Subscriptions	$	814,952		$	711,521
Training and services	119,159			102,009
Total revenue	934,111			813,530
Cost of revenue:
Subscriptions	61,899			52,173
Training and services	82,384			70,526
Total cost of revenue	144,283			122,699
Gross profit	789,828			690,831
Operating expense:
Sales and marketing	394,201			348,815
Research and development	182,961			166,506
General and administrative	80,548			63,354
Total operating expense	657,710			578,675
Income from operations	132,118			112,156
Interest income	9,254			7,834
Interest expense	1,959			6,319
Other expense, net	766			2,194
Income before provision for income taxes	138,647			111,477
Benefit for income taxes	(2,473		)	(1,713		)
Net income	$	141,120		$	113,190
Net income per share:
Basic	$	0.80		$	0.64
Diluted	$	0.76		$	0.59
Weighted average shares outstanding:
Basic	177,400			177,302
Diluted	186,635			190,739

The accompanying notes are an integral part of these consolidated financial statements.

5

RED HAT, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in thousands)

(Unaudited) 

	Three Months Ended
	May 31, 2019			May 31, 2018
Net income	$	141,120		$	113,190
Other comprehensive income (loss):
Change in foreign currency translation adjustment, net of tax benefit of $465 and $0, respectively	(6,256		)	(10,831		)
Available-for-sale securities:
Unrealized gain on available-for-sale securities during the period	2,023			38
Reclassification for gain realized on available-for-sale securities, reported in Other expense, net	(239		)	(128		)
Tax (expense) benefit	(564		)	16
Net change in available-for-sale securities (net of tax)	1,220			(74		)
Total other comprehensive loss	(5,036		)	(10,905		)
Comprehensive income	$	136,084		$	102,285

The accompanying notes are an integral part of these consolidated financial statements.

6

RED HAT, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(Unaudited)

 

	Three Months Ended
	May 31, 2019			May 31, 2018
Cash flows from operating activities:
Net income	$	141,120		$	113,190
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	36,754			27,054
Amortization of debt discount and transaction costs	1,885			5,838
Repayments of convertible notes attributable to debt discount	(13,981		)	—
Share-based compensation expense	50,168			46,005
Net amortization of bond premium on debt securities available for sale	271			743
Other	(872		)	(2,298		)
Changes in operating assets and liabilities:
Accounts receivable	445,186			299,439
Other receivables	(12,278		)	(35,160		)
Prepaid expenses	28,844			25,382
Accounts payable and accrued expenses	(58,271		)	(28,642		)
Deferred revenue	(158,729		)	(104,592		)
Other	(143		)	(800		)
Net cash provided by operating activities	459,954			346,159
Cash flows from investing activities:
Purchase of investment in debt securities available for sale	—			(108,336		)
Proceeds from maturities of investment in debt securities available for sale	110,431			87,004
Proceeds from sales of investment in debt securities available for sale	64,899			525
Proceeds from sales of strategic equity investments	—			1,300
Purchase of developed software and other intangible assets	(4,134		)	(2,866		)
Payments for property and equipment	(23,513		)	(12,963		)
Other	(124		)	(986		)
Net cash provided by (used in) investing activities	147,559			(36,322		)
Cash flows from financing activities:
Proceeds from exercise of common stock options	369			875
Proceeds from employee stock purchase program	7,501			15,262
Payments related to net settlement of share-based compensation awards	(81,274		)	(77,094		)
Purchase of treasury stock	—			(150,019		)
Proceeds (payments) on other borrowings, net	26			(299		)
Repayments of convertible notes attributable to principal	(102,163		)	(25,953		)
Net cash used in financing activities	(175,541		)	(237,228		)
Effect of foreign currency exchange rates on cash, cash equivalents and restricted cash	(19,672		)	(28,261		)
Net increase in cash, cash equivalents and restricted cash	412,300			44,348
Cash, cash equivalents and restricted cash at beginning of the period	1,883,096			1,724,132
Cash, cash equivalents and restricted cash at end of the period	$	2,295,396		$	1,768,480
Restricted cash included in cash, cash equivalents and restricted cash	$	—		$	1,137

The accompanying notes are an integral part of these consolidated financial statements.

7

RED HAT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 1—Company and Merger Agreement

Red Hat, Inc., incorporated in Delaware, together with its subsidiaries (“Red Hat” or the “Company”) is a leading global provider of open source software solutions, using a community-powered approach to develop and offer reliable and high-performing operating system, virtualization, management, middleware, cloud and storage technologies.

Open source software is an alternative to proprietary software and represents a different model for the development and licensing of commercial software code than that typically used for proprietary software. Because open source software code, generally, is freely shared, there are customarily no licensing fees for the use of open source software. Therefore, the Company does not recognize revenue from the licensing of the code itself. The Company provides value to its customers through the development, aggregation, integration, testing, certification, delivery, maintenance, enhancement and support of its Red Hat technologies, and by providing a level of performance, scalability, flexibility, reliability and security for the technologies the Company packages and distributes. Moreover, because communities of developers not employed by the Company assist with the creation of the Company’s open source offerings, opportunities for further innovation of the Company’s offerings are supplemented by these communities.

The Company derives its revenue and generates cash from customers primarily from two sources: (i) subscription revenue and (ii) training and services revenue. These arrangements typically involve subscriptions to Red Hat technologies. The arrangements with the Company’s customers that produce this revenue and cash are explained in further detail in NOTE 2—Summary of Significant Accounting Policies.

Merger Agreement

On October 28, 2018, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with International Business Machines Corporation, a New York corporation (“IBM”), and Socrates Acquisition Corp., a Delaware corporation and a wholly owned subsidiary of IBM (“Sub”), pursuant to which, among other things, Sub will merge with and into the Company, with the Company surviving as a wholly owned subsidiary of IBM (the “Merger”). The Board of Directors of the Company and the Board of Directors of IBM each approved the Merger and the Merger Agreement.

At the effective time of the Merger (the “Effective Time”), subject to the terms and conditions of the Merger Agreement, each share of common stock, par value $0.0001 per share, of the Company issued and outstanding immediately prior to the Effective Time (other than (i) cancelled shares, (ii) dissenting shares, and (iii) subsidiary converted shares) shall be converted into the right to receive $190.00 in cash without interest. On December 12, 2018, the Company filed its definitive proxy statement on Schedule 14A (the “Proxy Statement”) with the Securities and Exchange Commission (“SEC”) for a special meeting of its stockholders to be held on January 16, 2019 in connection with the Merger. The Merger Agreement was adopted and approved by the Company’s stockholders at the January 16, 2019 special meeting of stockholders. The Company continues to expect the transaction to close in the second half of 2019, subject to certain conditions, including receipt of regulatory approvals. Until the closing, the Company will continue to operate as an independent company. The Company has incurred Merger-related costs of $9.9 million, which are included in General and administrative expenses in the Company’s Consolidated Statement of Operations for the three months ended May 31, 2019.

Consummation of the Merger is subject to certain customary conditions, including, without limitation, (i) the receipt of approvals, or the expiration or termination of the applicable waiting periods, under certain antitrust laws (including the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the “HSR Act”) and clearance under Council Regulation 139/2004 of the European Union); and (ii) the absence of any temporary restraining order, preliminary or permanent injunction or other judgment or law issued by certain courts of competent jurisdiction or other governmental entity, in each case prohibiting consummation of the Merger, and no action or proceeding by a governmental entity before any court or certain other governmental entities of competent jurisdiction seeking to enjoin, restrain or otherwise prohibit consummation of the Merger. As of the filing of this Form 10-Q, the U.S. Department of Justice has concluded its review of IBM’s proposed acquisition of the Company without remedies or conditions and the Company has received a notice of early termination of the waiting period under the HSR Act. As of the filing of this Form 10-Q, the European Commission has unconditionally approved the proposed acquisition of the Company by IBM under the European Union Merger Regulation. Each party’s obligation to consummate the Merger is subject to certain other customary conditions.

8

The Merger Agreement contains certain customary termination rights for the Company and IBM. Subject to certain limitations, the Merger Agreement may be terminated by either IBM or the Company if (i) the Merger is not consummated on or before October 28, 2019, which is subject to extension for two consecutive three-month periods by either party if all conditions are satisfied other than receipt of regulatory approvals and absence of legal restraints and (ii) an order having the effect of making the Merger illegal or otherwise prohibiting consummation of the Merger becomes final and non-appealable.

NOTE 2—Summary of Significant Accounting Policies

Basis of presentation

The unaudited interim consolidated financial statements as of and for the three months ended May 31, 2019 have been prepared by the Company pursuant to the rules and regulations of the SEC for interim financial reporting. These consolidated statements are unaudited and, in the opinion of management, include all adjustments (consisting of normal recurring adjustments and accruals) necessary for a fair statement of the consolidated balance sheets, consolidated operating results, consolidated other comprehensive income and consolidated cash flows for the periods presented in accordance with accounting principles generally accepted in the U.S. (“U.S. GAAP”). Operating results for the three months ended May 31, 2019 are not necessarily indicative of the results that may be expected for the fiscal year ending February 29, 2020. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with U.S. GAAP have been omitted in accordance with the SEC’s rules and regulations for interim reporting. These unaudited financial statements should be read in conjunction with the Company’s Consolidated Financial Statements, including notes thereto, included in the Company’s Annual Report on Form 10-K for the fiscal year ended February 28, 2019. Other than the accounting pronouncement adopted during the three months ended May 31, 2019 related to accounting for leases as described below, there have been no changes to the Company’s significant accounting policies from those described in NOTE 2—Summary of Significant Accounting Policies to the Consolidated Financial Statements contained in the Company’s Annual Report on Form 10-K for the fiscal year ended February 28, 2019.

The Company adopted Accounting Standards Update 2016-02, Leases, now commonly referred to as Accounting Standards Codification Topic 842 (“ASC 842”), effective March 1, 2019, using the modified retrospective method, which does not require adjustments to comparative periods nor require modified disclosures in those comparative periods.

Certain amounts for the three months ended May 31, 2018 have been reclassified to conform to the current period presentation.

The Company’s fiscal year ends on the last day of February, and the Company identifies fiscal years by the calendar years in which they end. For example, the fiscal year ending February 29, 2020 is referred to as “fiscal 2020.”

Consolidation policy

The accompanying Consolidated Financial Statements include the accounts of the Company and all of its wholly owned subsidiaries. All significant inter-company accounts and transactions are eliminated in consolidation. There are no significant foreign exchange restrictions on the Company’s foreign subsidiaries.

Use of estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the balance sheet dates and the reported amounts of revenue and expenses during the reporting periods. Actual results could differ from such estimates. Estimates are used for, but not limited to, revenue recognition, goodwill and other long-lived assets, share-based compensation, income taxes and loss contingencies.

Revenue recognition

The Company derives its revenues from subscription contracts and training and service contracts. Revenue is recognized when performance obligations, as stipulated in the contracts, are transferred to a customer for an amount that reflects the consideration the Company expects to receive in exchange for those subscription contracts and training and service contracts.

9

RED HAT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

The Company applies the following five steps to recognize revenue:

1)    Identify the contract with a customer. The Company determines that it has a contract with a customer when the contract is approved, the party’s rights regarding the products and services to be transferred can be identified, the payment terms for the products and services are identified, the customer’s ability and intent to pay can be determined, and the contract has commercial substance. Judgment is used to assess the customer’s ability and intent to pay, which is based upon factors including the customer’s historical payment experience or credit and financial information pertaining to the customer.

2)    Identify the performance obligations in the contract. The Company’s performance obligations are identified based on the products and services that will be transferred to the customer that are both capable of being distinct and are distinct in the context of the contract and consist of (i) subscription offerings, including non-proprietary open-source software code delivered to the customer, software support subscriptions delivered to the customer, software support subscriptions embedded in partner products and learning subscriptions and (ii) training and services, including professional services sold at a fixed fee, professional services sold on a time-and-material-basis, training courses or units, and consulting units. In limited cases, the option to purchase additional subscription offerings or training and services may be offered at a price representing a material right. In such cases, the option to purchase is considered a distinct performance obligation.

3)     Determine the transaction price. The Company determines transaction price based on the consideration expected to be received in exchange for transferring certain performance obligations to the customer. In determining the transaction price, variable consideration, if any, would be considered if, in management’s judgment, it is probable that a significant future reversal of cumulative revenue under the contract will not occur.

The Company’s contracts do not contain significant financing components. Specifically, the Company does not typically extend customer payment terms beyond a standard 30- to 60-day term and as a result the Company has elected the one-year-or-less safe harbor expedient and does not impute any interest.

The Company has elected to exclude all taxes from the transaction price (e.g., sales, use, value-added, etc.). Revenue is recognized net of such taxes.

4)     Allocate the transaction price to performance obligations in the contract. When a contract contains a single performance obligation, the entire transaction price is allocated to that one performance obligation. Contracts that contain multiple performance obligations require an allocation of the transaction price to each performance obligation based on a relative standalone selling price (“SSP”). The Company typically determines SSP based on the observable price when the Company sells the subscriptions or training and services separately, taking into consideration the geographical region of the customer, type of offering and sales channel. In instances where SSP is not directly observable, the Company determines SSP either from the renewal rate paid for the performance obligation to the extent it is the same rate as stipulated in the initial customer contract or by using the expected-cost-plus-margin approach.

5)     Recognize revenue when or as the performance obligation is satisfied. Revenue is recognized at the time the related performance obligation is satisfied by transferring the promised subscription offerings and training and services to a customer. For each performance obligation, a determination is made as to whether the control is transferred over time or at a point in time. For performance obligations satisfied over time, a method to measure progress toward complete satisfaction is selected, based upon the most faithful depiction of performance. The selected method for each performance obligation type is applied consistently to similar contracts.

Subscription revenue

Subscription revenue is comprised of direct and indirect sales of subscriptions relating to Red Hat technologies. Accounts receivable and deferred revenue are recorded at the time a customer enters into a binding and non-cancellable subscription agreement for the purchase of a subscription, subscription services are made available to the customer and the customer is billed. The deferred revenue amount is recognized as revenue ratably over the subscription period. Red Hat technologies are generally offered with base subscription periods of either one year or three years; the majority of the Company’s subscriptions have terms of one year. Under these subscription agreements, renewal rates are generally specified for renewal terms of one year or three years. Subscriptions generally entitle the end user to the technology itself and post-contract customer support, generally consisting of varying levels of support services as well as access to security updates, fixes, functionality enhancements, upgrades to the technologies, each on an if and when available basis, and compatibility with an ecosystem of certified hardware and software, during the term of the subscription. The Company sells its offerings through two principal channels: (1) direct, which includes sales by the Company’s sales force as well as web store sales, and (2) indirect, which includes certified cloud and service providers (“CCSPs”), distributors, original equipment manufacturers (“OEMs”), systems integrators and value added resellers.

10

RED HAT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

The Company recognizes revenue from the sale of Red Hat technologies ratably over the period of the subscription beginning on the commencement date of the subscription agreement. The Company has determined that the delivery of software code underlying the subscription is a distinct performance obligation as it is both capable of being distinct and is distinct within the context of a customer contract. The Company uses a non-proprietary open source development and licensing model to provide its software technologies to customers and therefore the amount of transaction price allocated to the underlying software code is negligible. The Company derives a portion of its revenue from CCSPs that provide public clouds with, and allow users to consume, computing resources as a service. The Company earns revenue based on subscription units consumed by the CCSP or its end users. The Company uses its historical cloud-usage data to estimate the amount of revenue earned and recognized each month and adjusts to actual amounts earned upon receipt of usage reports from the CCSPs in the following month. The differences between actual amounts earned and estimates made have generally been insignificant.

Training and services revenue

Training and services revenue is comprised of revenue for consulting, engineering and customer training courses or units and education services. Consulting services consist of time-based units or fixed-fee arrangements. For time-based arrangements, revenue is recognized over time as these services are performed and for fixed-fee arrangements, revenue is recognized based on the proportion of services performed. Engineering services represent revenue earned under fixed-fee arrangements with the Company’s OEM partners and other customers to provide for significant modification and customization of Red Hat technologies. The Company recognizes revenue for these fixed-fee engineering services based on a proportional performance basis using actual costs incurred to date over the estimated total projected costs, which includes a representative profit margin. A representative profit margin is determined based on analysis of a population of similar contracts by region. Revenue for customer training and education services is recognized on the dates the services are performed.

See NOTE 17—Segment Reporting for further information, including revenue by geographic area and significant product and service offerings.

Contract Balances

Timing of revenue recognition may differ from the timing of invoicing to customers. The Company records a receivable when revenue is recognized prior to invoicing, or deferred revenue when revenue is recognized subsequent to invoicing. For multi-year arrangements, the Company will generally invoice customers upfront or annually at the beginning of each annual coverage period. See below for the accounting policy related to receivables and see NOTE 13—Deferred Revenue and Performance Obligations for further information on deferred revenue balances.

Accounts receivable and allowance for doubtful accounts

Trade accounts receivable are recorded at the invoiced amount and do not bear interest. The allowance for doubtful accounts is the Company’s estimate of the amount of probable credit losses in the Company’s existing accounts receivable. The Company determines the allowance based on historical write-off experience and other qualitative factors. The Company reviews its allowance for doubtful accounts monthly. Past due balances over 90 days and over a specified amount are reviewed individually for collectability. All other balances are reviewed on a pooled basis by type of receivable. Account balances are charged off against the allowance when the Company determines it is probable the receivable will not be recovered. The Company does not have off-balance sheet credit exposure related to its customers. Unbilled receivables related to subscription and training and services contracts are included in accounts receivable. See NOTE 3—Accounts Receivable for further information on accounts receivable balances.

11

RED HAT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

Deferred selling costs

Deferred commissions are the incremental costs that are directly associated with non-cancellable subscription contracts with customers and consist of sales commissions and certain related fringe benefits earned by the Company’s sales force. The commissions are deferred and amortized on a straight-line basis over a period that approximates the subscription period. In determining the period that approximates the subscription period, the Company utilizes a portfolio approach that allows for the analysis of customer contracts with similar characteristics. The Company has determined that the effects on the financial statements of the portfolio approach would not differ materially from an individual customer contract analysis approach. The commission payments are paid in full subsequent to the month in which the customer’s service commences. The deferred commission amounts are recoverable through the future revenue streams under the non-cancellable customer contracts. In addition, the Company has the ability and intent under the commission plans with its sales force to recover commissions previously paid to its sales force in the event that customers breach the terms of their subscription agreements and do not fully pay for their subscription agreements. See NOTE 6—Deferred Selling Costs for further information on deferred commissions and the related amortization of deferred commissions.

Leases

The Company determines if an arrangement is a lease at inception. As part of that determination, the Company considers whether there is an implicitly or explicitly identified asset in an arrangement and whether the Company, as the lessee, has the right to control that asset.

Operating leases are included in operating right-of-use (“ROU”) assets, accounts payable and accrued expenses, and operating lease liabilities in the Company’s Consolidated Balance Sheets. Finance leases are included in property and equipment, other current obligations, and other long-term obligations in the Company’s Consolidated Balance Sheets.

ROU assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Variable lease payments, other than those based on a rate or index, are not included in the recognition of ROU assets and lease liabilities but instead are recognized in the Consolidated Statement of Operations in the period in which the obligation for those payments is incurred. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As most of the Company’s leases do not provide an implicit borrowing rate, the Company’s incremental borrowing rate at commencement date is used to determine the present value of lease payments. The lease terms may include options to extend or to purchase when it is reasonably certain that the Company will exercise those options. For termination options, the Company will adjust the lease term unless it is reasonably certain that the option will not be taken. Lease expense for lease payments is recognized on a straight-line basis over the lease term.

The Company has lease arrangements with both lease and non-lease components, which are generally accounted for as a single lease component. Additionally, for certain equipment leases, the Company applies a portfolio approach to effectively account for the operating lease ROU assets and liabilities.

Recent accounting pronouncements

Accounting pronouncements adopted

In August 2018, the FASB issued Accounting Standards Update 2018-15, Intangibles—Goodwill and Other—Internal-Use Software: Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract (a consensus of the FASB Emerging Issues Task Force) (“ASU 2018-15”). The FASB issued ASU 2018-15 to align the requirements for capitalizing implementation costs in a cloud computing arrangement service contract with the requirements for capitalizing implementation costs incurred for an internal-use software license. The Company early adopted this standard effective March 1, 2019. The adoption of this standard did not significantly impact the Company’s Consolidated Financial Statements.

12

RED HAT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

In February 2016, the FASB issued Accounting Standards Update 2016-02, Leases (Topic 842) (“ASU 2016-02”). The FASB issued ASU 2016-02 to increase transparency and comparability among organizations with respect to accounting for leases by requiring the recognition of ROU assets and lease liabilities on the balance sheet. For income statement purposes, the FASB retained a dual model, requiring leases to be classified as either operating or finance. Along with ASU 2016-02, the Company also adopted Accounting Standards Update 2018-10, Codification Improvements to Topic 842 Leases (“ASU 2018-10”), Accounting Standards Update 2018-11, Targeted Improvements to Topic 842 Leases (“ASU 2018-11”), Accounting Standards Update 2018-20, Leases (Topic 842) Narrow-Scope Improvements for Lessors (“ASU 2018-20”) and Accounting Standards Updated 2019-01, Leases (Topic 842): Codification Improvements (“ASU 2019-01”), now commonly referred to as Accounting Standards Codification Topic 842 (“ASC 842”). The Company adopted ASC 842 as of March 1, 2019.

The Company adopted ASC 842 using the transition method, which does not require adjustments to comparative periods nor require modified disclosures in those comparative periods. The Company elected the transition package of practical expedients permitted within the new standard, which among other things, allows the carryforward of the historical lease classification. Further, upon adoption of the new guidance, the Company elected the practical expedients to combine lease and non-lease components for all asset classes and to not recognize ROU assets and lease liabilities for short-term leases for all asset classes.

ASC 842 had a material impact on the Company’s Consolidated Balance Sheets, but did not have an impact on the Consolidated Statements of Operations. The most significant impact was the recognition of ROU assets and lease liabilities for operating leases. At adoption, the Company recognized operating ROU assets of $237.4 million and operating lease liabilities of $244.5 million. Finance leases are not significant to the Company’s financials. The transition adjustment recognized in retained earnings as of March 1, 2019, was not material.

See NOTE 4—Leases for further information on the Company’s lease arrangements.

NOTE 3—Accounts Receivable

Accounts receivable are presented net of an allowance for doubtful accounts. Activity in the Company’s allowance for doubtful accounts is presented in the following table (in thousands):

As of	Balance at beginning of period		Charged to (recovery of) expense		Adjustments (1)		Balance at end of period
February 28, 2019	$	2,167	3,247		(853	)	$	4,561
May 31, 2019	$	4,561	(195	)	86		$	4,452

_______________ 

⁽¹⁾  Represents foreign currency translation adjustments and amounts written-off as uncollectible accounts receivable.

Included in accounts receivable, net of allowance for doubtful accounts, are unbilled receivables of $43.3 million and $40.2 million as of May 31, 2019 and February 28, 2019, respectively.

As of May 31, 2019, no individual customer accounted for 10% or more of the Company’s total accounts receivable. As of February 28, 2019, the Company had one customer whose accounts receivable balance individually represented 10%of total accounts receivable.

13

RED HAT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

NOTE 4—Leases

The Company has operating and finance leases for office locations, research and development facilities, data centers and certain equipment.

Supplemental balance sheet information related to leases was as follows (in thousands, except for lease term and discount rate):

	Balance Sheet Classification	May 31, 2019		February 28, 2019
Assets:
Operating	Operating right-of-use assets, net	$	224,371	$	—
Finance	Property and equipment, net of accumulated depreciation and amortization	579		281
Total leased assets		$	224,950	$	281
Liabilities:
Current:
Operating	Accounts payable and accrued expenses	$	46,633	$	—
Finance	Other current obligations	256		282
Long-term:
Operating	Operating lease liabilities	188,133		—
Finance	Other long-term obligations	336		6
Total lease liabilities		$	235,358	$	288

Prior to the adoption of ASC 842 on March 1, 2019, ROU assets and lease liabilities for operating leases were not recognized in the Consolidated Balance Sheets. The Company elected the practical expedient to not provide a comparable presentation in the Consolidated Balance Sheets for periods prior to adoption.

Supplemental information related to leases was as follows:

	May 31, 2019
Weighted average remaining lease term:
Operating leases	7.33 years
Finance leases	3.45 years

	May 31, 2019
Weighted average discount rate:
Operating leases	3.7	%
Finance leases	3.3	%

14

RED HAT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

The components of lease expense were as follows (in thousands):

		Three Months Ended
	Statement of Operations Classification	May 31, 2019		May 31, 2018
Operating lease expense	Cost of revenue, Operating expense	$	14,666	see note (1)
Variable lease expense	Cost of revenue, Operating expense	1,176		see note (1)
Finance lease expense:
Amortization of leased assets	Cost of revenue, Operating expense	146		276
Interest on lease liabilities	Interest expense	6		7
Total lease expense (2)		$	15,994	$	283

____________________ 

⁽¹⁾  Rent expense under operating leases was $13.4 million for the three months ended May 31, 2018.

⁽²⁾  Sublease income is recognized as a reduction to operating expense in the Consolidated Statement of Operations and is not material.

Supplemental cash flow information related to leases was as follows (in thousands):

	Three Months Ended May 31, 2019
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash outflows from operating leases	$	14,043
Operating cash outflows from finance leases	$	6
Financing cash outflows from finance leases	$	112
Right-of-use assets obtained in exchange for lease obligations:
Operating leases	$	762
Finance leases	$	133

Maturities of lease liabilities were as follows (in thousands):

Fiscal Year	Operating leases			Finance leases
2020 (excluding the three months ended May 31, 2019)	$	40,737		$	258
2021	47,858			101
2022	42,467			101
2023	33,438			101
2024	26,339			82
Thereafter	79,125			—
Total lease payments	269,964			643
Less imputed interest	(35,198		)	(51		)
Total	$	234,766		$	592

15

RED HAT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

The following table, which was included in the Company’s Annual Report on Form 10-K for the fiscal year ended February 28, 2019, depicts gross minimum lease payments under non-cancellable operating and capital leases (in thousands):

Fiscal Year	Operating Leases		Capital Leases
2020	$	60,722	$	282
2021	51,060		6
2022	41,173		—
2023	32,016		—
2024	27,479		—
Thereafter	79,530		—
Total minimum lease payments	$	291,980	$	288

The difference between the Company’s total lease commitments as reported at February 28, 2019 compared to the March 1, 2019 ROU asset balance in the Consolidated Balance Sheets is primarily due to the required use of a discount factor (imputed interest) under the new lease guidance and certain amounts that are not included in the ROU asset under the new lease guidance.

NOTE 5—Identifiable Intangible Assets

Identifiable intangible assets consist primarily of trademarks, copyrights and patents, purchased technologies, customer and reseller relationships and covenants not to compete, all of which are amortized over the estimated useful life, generally on a straight-line basis, with the exception of customer and reseller relationships, which are generally amortized over the greater of straight-line over the estimated useful life or the related asset’s pattern of economic benefit. Useful lives range from two years to 10 years. As of May 31, 2019 and February 28, 2019, trademarks with an indefinite estimated useful life totaled $11.2 million and $11.4 million, respectively.

The following is a summary of identifiable intangible assets (in thousands):

	May 31, 2019							February 28, 2019
	Gross Amount		Accumulated Amortization			Net Amount		Gross Amount		Accumulated Amortization			Net Amount
Trademarks, copyrights and patents	$	180,240	$	(86,132	)	$	94,108	$	176,704	$	(82,967	)	$	93,737
Purchased technologies	218,561		(118,705		)	99,856		219,196		(113,617		)	105,579
Customer and reseller relationships	105,562		(102,047		)	3,515		105,737		(100,947		)	4,790
Covenants not to compete	15,661		(14,800		)	861		15,787		(14,728		)	1,059
Other intangible assets	8,833		(8,259		)	574		8,833		(7,915		)	918
Total identifiable intangible assets	$	528,857	$	(329,943	)	$	198,914	$	526,257	$	(320,174	)	$	206,083

Amortization expense associated with identifiable intangible assets recognized in the Company’s Consolidated Financial Statements is summarized as follows (in thousands):

	Three Months Ended
	May 31, 2019		May 31, 2018
Cost of revenue	$	6,660	$	6,485
Sales and marketing	1,194		1,362
Research and development	34		34
General and administrative	2,517		2,373
Total amortization expense	$	10,405	$	10,254

16

RED HAT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

NOTE 6—Deferred Selling Costs

Deferred selling costs include commissions paid to the Company’s sales associates that are the incremental costs incurred to obtain contracts with customers. The commissions are deferred and amortized over a period to approximate the period of the subscription term. For further discussion on deferred commissions, see NOTE 2—Summary of Significant Accounting Policies.

Current and non-current deferred commissions are included in Prepaid expenses and Other assets, respectively, in the Company’s Consolidated Balance Sheets and are as follows (in thousands):

	May 31, 2019		February 28, 2019
Deferred commissions, current	$	183,462	$	201,971
Deferred commissions, non-current	45,860		47,849
Total deferred commissions	$	229,322	$	249,820

Amortization of deferred commissions is included in Sales and marketing expense in the Company’s Consolidated Statements of Operations. Amortization expense related to deferred commissions totaled $64.3 million and $56.2 million for the three months ended May 31, 2019 and May 31, 2018, respectively. There was no impairment loss in relation to the costs capitalized for the periods presented.

NOTE 7—Derivative Instruments

The Company transacts business in various foreign countries and is, therefore, subject to risk of foreign currency exchange rate fluctuations. From time to time, the Company enters into forward contracts to economically hedge transactional exposure associated with commitments arising from trade accounts receivable, trade accounts payable and fixed purchase obligations denominated in a currency other than the functional currency of the respective operating entity. All derivative instruments are recognized in the Consolidated Balance Sheets at their respective fair values. The Company has elected not to prepare and maintain the documentation required to qualify for hedge accounting treatment and, therefore, changes in fair value are recognized in the Consolidated Statements of Operations. See NOTE 16—Assets and Liabilities Measured at Fair Value on a Recurring Basis for information regarding the fair value hierarchy of derivative instruments.

The effects of derivative instruments on the Company’s Consolidated Financial Statements are as follows (in thousands):

	May 31, 2019						Classification of  Gain (Loss) Recognized in Income on Derivatives	Three Months Ended May 31, 2019
	Balance Sheet  Classification	Fair Value			Notional Value
Assets—foreign currency forward contracts not designated as hedges	Other current assets	$	233		$	18,185	Other expense, net	$	645
Liabilities—foreign currency forward contracts not designated as hedges	Accounts payable and accrued expenses	(173		)	42,821		Other expense, net	(651		)
Total		$	60		$	61,006		$	(6	)

	May 31, 2018						Classification of  Gain (Loss) Recognized in Income on Derivatives	Three Months Ended May 31, 2018
	Balance Sheet  Classification	Fair Value			Notional Value
Assets—foreign currency forward contracts not designated as hedges	Other current assets	$	111		$	21,554	Other expense, net	$	289
Liabilities—foreign currency forward contracts not designated as hedges	Accounts payable and accrued expenses	(790		)	28,112		Other expense, net	(1,136		)
Total		$	(679	)	$	49,666		$	(847	)

17

RED HAT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

NOTE 8—Income Taxes

The effective tax rate for the three months ended May 31, 2019 of (1.8)% differed from the U.S. federal statutory rate of 21% primarily due to excess tax benefits from share-based compensation, research tax credits and other discrete net tax benefits primarily related to an intra-entity transfer of assets. Tax expense for the three months ended May 31, 2019 included net discrete tax benefits of $28.8 million.

For the three months ended May 31, 2018, the Company’s then-effective tax rate of (1.5)% differed from the U.S. federal statutory rate of 21% primarily due to excess tax benefits from share-based compensation and research tax credits. Tax expense for the three months ended May 31, 2018, included net discrete tax benefits of $26.8 million primarily related to net excess tax benefits from share-based compensation.

The Company files a consolidated U.S. federal income tax return, as well as separate and combined income tax returns in numerous state and international jurisdictions. The Company is currently subject to examination by various taxing jurisdictions. The Company regularly assesses the potential outcomes of both ongoing and future examinations for the current and prior years, and believes that its provision for income taxes is adequate. The Company believes that some of these audits and negotiations may conclude during the next 12 months.

As of May 31, 2019, it is reasonably possible that total unrecognized tax benefits, including interest, may be reduced by approximately $68.2 million within the next 12 months primarily as a result of audit settlements in various tax jurisdictions, most of which would affect the Company’s effective tax rate.

NOTE 9—Convertible Notes

Convertible note offering

On October 7, 2014, the Company completed its offering of $805.0 million aggregate principal amount of the convertible notes. The convertible notes were sold in a private placement under a purchase agreement, dated as of October 1, 2014, entered into by and among the Company and the initial purchasers, for resale to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended. For additional information, see NOTE 12—Convertible Notes to the Consolidated Financial Statements contained in the Company’s Annual Report on Form 10-K for the fiscal year ended February 28, 2019.

Indenture

On October 7, 2014, the Company entered into an indenture (the “Indenture”) with respect to the convertible notes with U.S. Bank National Association, as trustee (the “Trustee”). Under the Indenture, the convertible notes are senior unsecured obligations of the Company and bear interest at a rate of 0.25% per year, payable semiannually in arrears on April 1 and October 1 of each year, beginning on April 1, 2015. The convertible notes will mature on October 1, 2019, unless previously purchased or converted.

The convertible notes are convertible into shares of the Company’s common stock at an initial conversion rate of 13.6219 shares per $1,000 principal amount of the convertible notes (which is equivalent to an initial conversion price of approximately $73.41 per share), subject to adjustment upon the occurrence of certain events. Upon conversion of the convertible notes, holders will receive cash or shares of the Company’s common stock or a combination thereof, at the Company’s election.

Effective April 1, 2019, holders may convert their convertible notes at any time until the close of business on the second scheduled trading day immediately preceding the maturity date of the convertible notes. Upon conversion of the convertible notes on or after April 1, 2019, holders will receive on October 1, 2019 cash equal to the principal amount of the notes converted and shares of the Company’s common stock for the excess conversion value; provided that if the Merger is completed prior to October 1, 2019, then converting holders will receive cash for each $1,000 principal amount of convertible notes being converted equal to the conversion rate then in effect multiplied by the same per share cash consideration a common stockholder would receive in the Merger, subject to certain adjustments.

18

RED HAT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

During the first quarter of the fiscal year ending February 29, 2020, the Company settled notices of conversion with respect to $116.2 million aggregate principal amount of the convertible notes and elected to settle such conversions by paying cash for the principal amount and issuing 943,513 shares of common stock for the excess conversion value. The Company recognized a loss on settled conversions of $0.2 million for the three months ended May 31, 2019. Total settled conversions as of May 31, 2019 amounted to $614.6 million aggregate principal amount of the convertible notes. The Company settled conversions of $3.0 million in principal amount of the convertible notes in the second quarter of the fiscal year ending February 29, 2020 by paying cash for the principal amount and issuing shares of common stock for the excess conversion value.

Based on the closing price of the Company’s common stock of $184.30 on the last trading day of the first quarter of the fiscal year ending February 29, 2020, the if-converted value of the convertible notes as of May 31, 2019 exceeded their principal amount by approximately $287.6 million.

The Company classified the net carrying amount of the convertible notes as a current liability as it is expected to be cash-settled on or prior to October 1, 2019. The equity component of the convertible notes continues to be classified as additional paid-in capital as of May 31, 2019 because the Company had the option to settle the principal amount in shares.

The conversion rate is subject to customary anti-dilution adjustments. If certain corporate events described in the Indenture occur prior to the maturity date, the conversion rate will be increased for a holder who elects to convert its convertible notes in connection with such corporate events in certain circumstances.

The convertible notes are not redeemable prior to maturity, and no sinking fund is provided for the notes. If the Company undergoes a “fundamental change,” as defined in the Indenture, subject to certain conditions, holders may require the Company to purchase for cash all or any portion of their convertible notes. The fundamental change purchase price will be 100% of the principal amount of the convertible notes to be purchased plus any accrued and unpaid interest up to but excluding the fundamental change purchase date. If the Merger with IBM is consummated, it will constitute a “fundamental change” under the Indenture.

The Indenture contains customary terms and covenants, including that upon certain events of default occurring and continuing, either the Trustee or the holders of at least 25% in principal amount of the outstanding convertible notes may declare 100% of the principal of, and accrued and unpaid interest, if any, on, all the convertible notes to be due and payable.

In accounting for the issuance of the convertible notes, the Company separated the convertible notes into liability and equity components. The Company allocated the total transaction costs incurred to the liability and equity components based on their relative fair values. Issuance costs attributable to the liability component are being amortized to interest expense over the term of the convertible notes. The excess of the face value of the convertible notes as a whole over the carrying amount of the liability component (the “debt discount”) is being amortized to interest expense over the term of the convertible notes. In addition, the debt discount is impacted by the derecognition of the original debt discount on early settlements of convertible notes. The convertible notes consisted of the following (in thousands):

	May 31, 2019			February 28, 2019
Liability component:
Principal	$	190,396		$	306,552
Less: debt issuance costs	(211		)	(595		)
Less: debt discount	(1,632		)	(4,590		)
Net carrying amount	$	188,553		$	301,367
Equity component (1)	$	22,916		$	36,897
__________
(1)   Recognized in the Consolidated Balance Sheets in Additional paid-in capital.

19

RED HAT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

The following table includes total interest expense recognized related to the convertible notes (in thousands):

	Three Months Ended
	May 31, 2019		May 31, 2018
Coupon rate 0.25% per year, payable semiannually	$	69	$	471
Amortization of convertible note issuance costs — liability component	384		831
Accretion of debt discount	1,501		5,007
Total interest expense related to convertible notes	$	1,954	$	6,309

The fair value of the convertible notes, which was determined based on inputs that are observable in the market (Level 2), and the carrying value of convertible notes (the carrying value excludes the equity component of the convertible notes classified in equity) is as follows (in thousands):

	May 31, 2019
	Fair Value		Carrying Value
Convertible notes	$	188,798	$	188,553

Convertible note hedge and warrant transactions

On October 1, 2014, the Company entered into convertible note hedge transactions and warrant transactions with certain of the initial purchasers of the convertible notes or their respective affiliates. In connection with the conversions of the convertible notes that settled in the first quarter of the fiscal year ending February 29, 2020, the Company exercised a portion of the options that are part of the convertible note hedge transactions for 954,731 shares of the Company’s common stock.

The convertible note hedge transactions are expected to offset, to the extent the Company’s common stock per share price does not exceed the $101.65 strike price of the warrants, which is subject to adjustments upon the occurrence of certain events, the potential dilution with respect to shares of the Company’s common stock upon any conversion of the convertible notes and/or offset any cash payments the Company is required to make in excess of the principal amount of the converted notes, as the case may be. To partially offset the $148.0 million cost of the convertible note hedge transactions, the Company issued warrants and received proceeds of $79.8 million. The number of shares of the Company’s common stock underlying the warrants total 10,965,630, the number of shares originally underlying the convertible notes and the convertible note hedge transactions. The combination of the convertible note hedge transactions and the warrant transactions effectively increases the initial conversion price of the convertible notes from $73.41 per share to $101.65 per share. As a result, the warrant transactions will have a dilutive effect with respect to the Company’s common stock to the extent that the market price per share of the Company’s common stock, as measured under the terms of the warrant transactions, exceeds the $101.65 strike price of the warrants. For the three months ended May 31, 2019 and May 31, 2018, the warrants were included in the computation of diluted shares outstanding because the warrants’ exercise price was less than the average market price of the Company’s common stock during the related period. However, subject to certain conditions, the Company may elect to settle all of the warrants in cash.

NOTE 10—Commitments and Contingencies

Product indemnification

The Company is a party to a variety of agreements pursuant to which it may be obligated to indemnify the other party from losses arising in connection with the Company’s services or products, or from losses arising in connection with certain events defined within a particular contract, which may include litigation or claims relating to intellectual property infringement, certain losses arising from damage to property or injury to persons or other matters. In each of these circumstances, payment by the Company is conditioned on the other party making a claim pursuant to the procedures specified in the particular contract, which procedures typically allow the Company to challenge the other party’s claims. Further, the Company’s obligations under these agreements may in certain cases be limited in terms of time and/or amount, and in some instances, the Company may have recourse against third parties for certain payments made by the Company.

20

RED HAT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

It is not possible to predict the maximum potential amount of future payments under these or similar agreements due to the conditional nature of the Company’s obligations and the facts and circumstances involved in each particular agreement. The Company does not record a liability for claims related to indemnification unless the Company concludes that the likelihood of a material claim is probable and estimable. Payments pursuant to these indemnification claims during the three months ended May 31, 2019 and May 31, 2018 were, in the aggregate, immaterial.

NOTE 11—Legal Proceedings

The Company experiences routine litigation in the normal course of its business, including patent litigation. The Company presently believes that the outcome of this routine litigation will not have a material adverse effect on its financial position, results of operations or cash flows.

NOTE 12—Stockholders’ Equity

The following table summarizes the changes in the Company’s stockholders’ equity during the three months ended May 31, 2019 (in thousands): 

	Common Stock			Additional Paid-In Capital			Retained Earnings		Treasury Stock			Accumulated Other Comprehensive Loss			Total Stockholders’ Equity
	Shares	Amount
Balance at February 28, 2019	244,403	$	24	$	2,791,895		$	2,054,069	$	(3,189,434	)	$	(42,622	)	$	1,613,932
Net income	—	—		—			141,120		—			—			141,120
Other comprehensive loss, net of tax	—	—		—			—		—			(5,036		)	(5,036		)
Vest and exercise of share-based awards	944	1		368			—		—			—			369
Common stock repurchase	—	—		—			—		—			—			—
Share-based compensation expense	—	—		50,168			—		—			—			50,168
Minimum tax withholdings paid by the Company on behalf of employees related to net settlement of employee share-based awards	—	—		(81,274		)	—		—			—			(81,274		)
Re-issuance of treasury stock under employee stock purchase plan		—		23,323			—		16,614			—			39,937
Convertible note conversions	943	—		(1,296		)	—		—			—			(1,296		)
Exercises of convertible note hedges	—	—		69,380			—		(69,364		)	—			16
Other adjustments				541			—		(541		)	—			—
Balance at May 31, 2019	246,290	$	25	$	2,853,105		$	2,195,189	$	(3,242,725	)	$	(47,658	)	$	1,757,936

21

RED HAT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

The following table summarizes the changes in the Company’s stockholders’ equity during the three months ended May 31, 2018 (in thousands):

	Common Stock			Additional Paid-In Capital			Retained Earnings		Treasury Stock			Accumulated Other Comprehensive Loss			Total Stockholders’ Equity
	Shares	Amount
Balance at February 28, 2018	238,689	$	24	$	2,416,080		$	1,619,688	$	(2,525,072	)	$	(32,596	)	$	1,478,124
Net income	—	—		—			113,190		—			—			113,190
Other comprehensive loss, net of tax	—	—		—			—		—			(10,905		)	(10,905		)
Vest and exercise of share-based awards	905	—		875			—		—			—			875
Common stock repurchase	—	—		(17,175		)	—		(132,844		)	—			(150,019		)
Share-based compensation expense	—	—		46,005			—		—			—			46,005
Minimum tax withholdings paid by the Company on behalf of employees related to net settlement of employee share-based awards	—	—		(77,094		)	—		—			—			(77,094		)
Re-issuance of treasury stock under employee stock purchase plan		—		18,471			—		13,740			—			32,211
Convertible note conversions	185	—		(835		)	—		—			—			(835		)
Exercises of convertible note hedges		—		13,598			—		(13,598		)	—			—
Cumulative-effect adjustment from adoption of ASU 2016-01		—		—			392		—			—			392
Balance at May 31, 2018	239,779	$	24	$	2,399,925		$	1,733,270	$	(2,657,774	)	$	(43,501	)	$	1,431,944

Share repurchase programs

On June 21, 2018, the Company announced that its board of directors authorized the repurchase of up to $1.0 billion of Red Hat’s common stock from time to time on the open market or in privately negotiated transactions. The new program commenced on July 1, 2018, and will expire on the earlier of (i) June 30, 2020 or (ii) a determination by the board of directors, Chief Executive Officer or Chief Financial Officer to discontinue the program. The new program replaced the previous $1.0 billion repurchase program, which expired on June 30, 2018.

During the three months ended May 31, 2019, the Company did not repurchase any shares of its common stock under this repurchase plan program.

From its commencement on July 1, 2018 through May 31, 2019, the Company repurchased 1,838,241 shares of its common stock at an aggregate cost of $262.8 million under this repurchase program.

As of May 31, 2019, the amount available under this program for the repurchase of the Company’s common stock was $737.2 million, which remains unchanged from February 28, 2019. Pursuant to the Merger Agreement, the Company does not anticipate additional repurchases of the Company’s common stock prior to the consummation of the Merger with IBM.

22

RED HAT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

Accumulated other comprehensive loss

Accumulated other comprehensive loss was comprised of the following (in thousands):

	May 31, 2019			February 28, 2019
Accumulated loss from foreign currency translation adjustment, net of tax	$	(47,756	)	$	(41,500	)
Accumulated unrealized gain (loss), net of tax, on available-for-sale securities	98			(1,122		)
Accumulated other comprehensive loss	$	(47,658	)	$	(42,622	)

NOTE 13—Deferred Revenue and Performance Obligations

Activity in the Company’s deferred revenue accounts is presented in the following table (in thousands):

	February 28, 2019		Revenue recognized from opening balance			Deferred revenue, net (1)			May 31, 2019
Deferred revenue, short-term	$	2,161,206	$	(705,210	)	$	560,492		$	2,016,488
Deferred revenue, long-term	821,218		—			(40,175		)	781,043
Total deferred revenue	$	2,982,424	$	(705,210	)	$	520,317		$	2,797,531

____________________ 

⁽¹⁾  Includes revenue recognized from current period customer contracts and the impact from foreign currency exchange rate fluctuations.

As of May 31, 2019, the value of customer contracts allocated to performance obligations not yet satisfied, including $2.80 billion of total deferred revenue, was approximately $3.75 billion, of which approximately 60% is expected to be recognized as revenue within the next 12 months and the remainder thereafter.

In addition to the approximately $3.75 billion of customer contract value allocated to performance obligations not yet satisfied, as of May 31, 2019, the Company has offered customers options to purchase additional services at an agreed-upon price per hour that total approximately $163.9 million.

The summation of the customer contract value allocated to performance obligations not yet satisfied and the options to purchase additional services equals approximately $3.91 billion, which the Company considers as its total backlog.

NOTE 14—Earnings Per Share

The Company computes basic net income per common share by dividing net income available to common stockholders by the weighted average number of common shares outstanding. Diluted net income per common share is computed by dividing net income available to common stockholders by the weighted average number of common shares and dilutive potential common share equivalents then outstanding. Potential common share equivalents consist of shares issuable upon the exercise of stock options, vesting of share-based awards, settlement of convertible notes, or exercise of warrants.

The following table reconciles the numerators and denominators of the earnings per share (“EPS”) calculation (in thousands, except per share amounts):

	Three Months Ended
	May 31, 2019		May 31, 2018
Net income available to common stockholders	$	141,120	$	113,190
Weighted average common shares outstanding	177,400		177,302
Incremental shares attributable to assumed vesting or exercise of outstanding equity award shares	2,803		3,833
Dilutive effect of convertible notes	1,554		5,686
Dilutive effect of warrants	4,878		3,918
Diluted shares	186,635		190,739
Diluted net income per share	$	0.76	$	0.59

23

RED HAT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

With respect to the Company’s convertible notes, the Company will settle the principal amount of the convertible notes in cash upon conversion. As a result, upon conversion of the convertible notes, only the amounts payable in excess of the principal amounts of the convertible notes are considered in diluted EPS under the treasury stock method. See NOTE 9—Convertible Notes for detailed information on the convertible notes.

Warrants to purchase 10,965,630 shares of the Company’s common stock at $101.65 per share were outstanding during the three months ended May 31, 2019 and May 31, 2018. For the three months ended May 31, 2019 and May 31, 2018, the warrants were included in the computation of diluted EPS because the warrants’ exercise price was less than the average market price of the Company’s common stock during the related period.

The following share awards are not included in the computation of diluted EPS because the aggregate value of proceeds considered received upon either exercise or vesting was greater than the average market price of the Company’s common stock during the related periods and the effect of including such share awards in the computation would be anti-dilutive (in thousands): 

	Three Months Ended
	May 31, 2019	May 31, 2018
Number of shares considered anti-dilutive for calculating diluted EPS	43	—

NOTE 15—Share-based Awards

The Company measures share-based compensation cost at the grant date, based on the estimated fair value of the award and recognizes the cost over the employee requisite service period, typically on a straight-line basis. The Company estimates the fair value of stock options using the Black-Scholes-Merton valuation model. The fair value of nonvested share awards, nonvested share units and performance share units are measured at their underlying closing share price on the day of grant.

The following summarizes share-based compensation expense recognized in the Company’s Consolidated Financial Statements (in thousands):

	Three Months Ended
	May 31, 2019		May 31, 2018
Cost of revenue	$	4,945	$	5,128
Sales and marketing	21,904		19,520
Research and development	16,002		14,782
General and administrative	7,317		6,575
Total share-based compensation expense (1)	$	50,168	$	46,005

__________ 

⁽¹⁾ Total share-based compensation expense included $1.7 million and $4.0 million, respectively, of expense related to the Company’s employee stock purchase plan (“ESPP”) for the three months ended May 31, 2019 and May 31, 2018.

Share-based compensation expense qualifying for capitalization was insignificant for each of the three months ended May 31, 2019 and May 31, 2018. Accordingly, no share-based compensation expense was capitalized during these periods.

24

RED HAT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

The following table summarizes the Company’s share-based awards granted, by type:

	Three Months Ended
	May 31, 2019				May 31, 2018
	Shares and Share Units Underlying Awards		Weighted Average Per Share Award Fair Value		Shares and Share Units Underlying Awards		Weighted Average Per Share Award Fair Value
Service-based shares and share units	885,436	(1)(2)	$	183.37	669,450	(1)	$	160.53
Performance share units—target	—		$	—	173,014		$	163.56
Performance share awards	—		$	—	64,219	(2)	$	163.56
Total share-based awards	885,436		$	183.37	906,683		$	161.32

_________ 

⁽¹⁾  Service-based shares and share units granted during the three months ended May 31, 2019 include 639,439 share units that vest over a three-year period with one-third vesting on the first anniversary of the grant date and one-twelfth vesting quarterly over the remaining two years and 56,487 share units that vest over a three-year period with one-third vesting annually over the three-year period. Service-based share units granted during the three months ended May 31, 2018 vest over a four-year period with one-quarter vesting annually over the four- year period.

⁽²⁾  Service-based shares and share units granted during the three months ended May 31, 2019 include 189,510 restricted stock awards that vest over a three-year period with one-third vesting annually over the three-year period. Restricted stock awards granted during the three months ended May 31, 2018 were subject to the achievement of a specified dollar amount of revenue for fiscal 2019 (the “RSA Performance Goal”). Since the Company achieved the RSA Performance Goal, 25% of the restricted stock vests on or about July 16, 2019, and the remainder vests ratably on a quarterly basis over the course of the subsequent three-year period, provided that the grantee’s business relationship with the Company has not ceased.

NOTE 16—Assets and Liabilities Measured at Fair Value on a Recurring Basis

Fair value is defined as the exchange price that would be received for the purchase of an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for such asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value should maximize the use of observable inputs and minimize the use of unobservable inputs. To measure fair value, the Company uses the following fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable:

Level 1—Quoted prices in active markets for identical assets or liabilities.

Level 2—Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3—Unobservable inputs that are supported by little or no market activity and are significant to the fair value of the assets or liabilities.

The Company’s investments are comprised primarily of debt securities that are classified as available for sale and recorded at their fair values. Liquid investments with effective maturities of three months or less at the date of purchase are classified as cash equivalents. Investments with remaining effective maturities of twelve months or less from the balance sheet date are classified as short-term investments. Investments with remaining effective maturities of more than twelve months from the balance sheet date are classified as long-term investments. The Company’s Level 1 financial instruments are valued using quoted prices in active markets for identical instruments. The Company’s Level 2 financial instruments, including derivative instruments, are valued using quoted prices for identical instruments in less active markets or using other observable market inputs for comparable instruments.

25

RED HAT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

Unrealized gains and temporary losses on investments classified as available for sale are included within accumulated other comprehensive income, net of any related tax effect. Realized gains and losses are recorded using the specific identification method and upon realization, such amounts are reclassified from accumulated other comprehensive income to Other expense, net. Realized gains and losses and other than temporary impairments, if any, are reflected in the Company’s Consolidated Statements of Operations as Other expense, net. The Company does not recognize changes in the fair value of its investments in income unless a decline in value is considered other than temporary. The vast majority of the Company’s investments are priced by pricing vendors. These pricing vendors use the most recent observable market information in pricing these securities or, if specific prices are not available for these securities, use other observable inputs. In the event observable inputs are not available, the Company assesses other factors to determine the security’s fair value, including broker quotes or model valuations. Independent price verifications of all holdings are performed by pricing vendors that are then reviewed by the Company. In the event a price fails a pre-established tolerance check, it is researched so that the Company can assess the cause of the variance to determine what the Company believes is the appropriate fair value.

The Company minimizes its credit risk associated with investments by investing primarily in investment-grade, liquid securities. The Company’s policy is designed to limit exposures to any one issuer depending on credit quality. Periodic evaluations of the relative credit standing of those issuers are considered in the Company’s investment strategy.

The following table summarizes the composition and fair value hierarchy of the Company’s financial assets and liabilities at May 31, 2019 (in thousands):

	May 31, 2019			Level 1		Level 2			Level 3
Assets:
Money markets (1)	$	901,570		$	901,570	$	—		$	—
Available-for-sale securities (1):
Commercial paper	255,780			—		255,780			—
U.S. agency securities	203,135			—		203,135			—
Corporate securities	162,662			—		162,662			—
Foreign currency derivatives (2)	233			—		233			—
Liabilities:
Foreign currency derivatives (3)	(173		)	—		(173		)	—
Total	$	1,523,207		$	901,570	$	621,637		$	—

__________ 

⁽¹⁾  Included in Cash, cash equivalents and restricted cash, Investments in debt securities, short-term or Investments in debt securities, long-term in the Company’s Consolidated Balance Sheet at May 31, 2019, in addition to $1.14 billion of cash.

⁽²⁾  Included in Other current assets in the Company’s Consolidated Balance Sheet at May 31, 2019.

⁽³⁾  Included in Accounts payable and accrued expenses in the Company’s Consolidated Balance Sheet at May 31, 2019.

26

RED HAT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

The following table summarizes the composition and fair value hierarchy of the Company’s financial assets and liabilities at February 28, 2019 (in thousands):

	February 28, 2019			Level 1		Level 2			Level 3
Assets:
Money markets (1)	$	398,056		$	398,056	$	—		$	—
Interest-bearing deposits (1)	56,883			—		56,883			—
Available-for-sale securities (1):
Commercial paper	541,753			—		541,753			—
U.S. agency securities	222,298			—		222,298			—
Corporate securities	262,692			—		262,692			—
Foreign currency derivatives (2)	24			—		24			—
Liabilities:
Foreign currency derivatives (3)	(245		)	—		(245		)	—
Total	$	1,481,461		$	398,056	$	1,083,405		$	—

__________ 

⁽¹⁾  Included in Cash, cash equivalents and restricted cash, Investments in debt securities, short-term or Investments in debt securities, long-term in the Company’s Consolidated Balance Sheet at February 28, 2019, in addition to $943.3 million of cash.

⁽²⁾  Included in Other current assets in the Company’s Consolidated Balance Sheet at February 28, 2019.

⁽³⁾  Included in Accounts payable and accrued expenses in the Company’s Consolidated Balance Sheet at February 28, 2019.

The following table represents the Company’s investments measured at fair value as of May 31, 2019 (in thousands):

										Balance Sheet Classification
	Amortized Cost		Gross Unrealized					Aggregate Fair Value		Cash Equivalent Marketable Securities		Investments in debt securities, short-term		Investments in debt securities, long-term
			Gains		Losses (1)
Money markets	$	901,570	$	—	$	—		$	901,570	$	901,570	$	—	$	—
Commercial paper	255,780		—		—			255,780		255,780		—		—
U.S. agency securities	203,746		13		(624		)	203,135		—		68,682		134,453
Corporate securities	162,629		284		(251		)	162,662		—		108,943		53,719
Total	$	1,523,725	$	297	$	(875	)	$	1,523,147	$	1,157,350	$	177,625	$	188,172

__________ 

⁽¹⁾  As of May 31, 2019, there were $0.9 million of accumulated unrealized losses related to investments that have been in a continuous unrealized loss position for 12 months or longer. The aggregate related fair value of investments with unrealized losses was $268.0 million.

The following table summarizes the stated maturities of the Company’s investment in available-for-sale securities (in thousands):

	As of May 31, 2019		Less than 1 Year		1-5 Years		More than 5 Years
Maturity of available-for-sale debt securities	$	365,797	$	177,625	$	188,172	$	—

27

RED HAT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

The following table represents the Company’s investments measured at fair value as of February 28, 2019 (in thousands):

										Balance Sheet Classification
	Amortized Cost		Gross Unrealized					Aggregate Fair Value		Cash Equivalent Marketable Securities		Investments in debt securities, short-term		Investments in debt securities, long-term
			Gains		Losses (1)
Money markets	$	398,056	$	—	$	—		$	398,056	$	398,056	$	—	$	—
Interest-bearing deposits	56,883		—		—			56,883		—		56,883		—
Commercial paper	541,753		—		—			541,753		541,753		—		—
U.S. agency securities	224,293		—		(1,995		)	222,298		—		75,037		147,261
Corporate securities	263,059		299		(666		)	262,692		—		161,441		101,251
Total	$	1,484,044	$	299	$	(2,661	)	$	1,481,682	$	939,809	$	293,361	$	248,512

__________ 

⁽¹⁾  As of February 28, 2019, there were $2.6 million of accumulated unrealized losses related to investments that have been in a continuous unrealized loss position for 12 months or longer. The aggregate related fair value of investments with unrealized losses was $387.8 million.

NOTE 17—Segment Reporting

The Company is organized primarily on the basis of three geographic business units: the Americas (U.S., Canada and Latin America), Europe, Middle East and Africa (“EMEA”) and Asia Pacific. These business units are aggregated into one reportable segment due to the similarity in nature of products and services provided, financial performance economic characteristics (e.g. revenue growth and gross margin), methods of production and distribution and customer classes (e.g., cloud service providers, distributors, reseller and enterprise).

The following summarizes revenue from unaffiliated customers; income (loss) from operations; total cash, cash equivalents and available-for-sale investment securities and total assets by geographic segment (in thousands):

	Americas		EMEA		Asia Pacific		Corporate (1)			Consolidated
	Three Months Ended May 31, 2019
Revenue from unaffiliated customers	$	582,290	$	216,951	$	134,870	$	—		$	934,111
Income (loss) from operations	$	83,555	$	54,909	$	43,822	$	(50,168	)	$	132,118
Total cash, cash equivalents, restricted cash and available-for-sale investment securities	$	1,429,795	$	730,228	$	501,170	$	—		$	2,661,193
Total assets	$	3,567,096	$	1,258,782	$	748,061	$	—		$	5,573,939
	Three Months Ended May 31, 2018
Revenue from unaffiliated customers	$	500,306	$	195,148	$	118,076	$	—		$	813,530
Income (loss) from operations	$	71,864	$	48,860	$	37,437	$	(46,005	)	$	112,156
Total cash, cash equivalents, restricted cash and available-for-sale investment securities	$	1,524,311	$	576,171	$	426,647	$	—		$	2,527,129
Total assets	$	3,559,900	$	1,015,187	$	616,474	$	—		$	5,191,561

 _______________ 

⁽¹⁾  Amounts represent share-based compensation expense that was not allocated to geographic segments.

28

RED HAT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

Supplemental information about geographic areas

The Company approximates its geographic sources of revenue based on the country of origin of its non-cancellable subscription and service agreements initiated during the year (commonly referred to as bookings). The following table lists revenue from unaffiliated customers in the U.S., the Company’s country of domicile, and revenue from foreign countries (in thousands):

	Three Months Ended
	May 31, 2019		May 31, 2018
U.S., the Company’s country of domicile	$	511,716	$	442,421
Foreign	422,395		371,109
Total revenue from unaffiliated customers	$	934,111	$	813,530

Total tangible long-lived assets located in the U.S., the Company’s country of domicile, and similar tangible long-lived assets held outside the U.S. are summarized in the following table (in thousands):

	May 31, 2019		February 28, 2019
U.S., the Company’s country of domicile	$	131,071	$	129,387
Foreign	68,944		69,582
Total tangible long-lived assets	$	200,015	$	198,969

Supplemental information about major customers

For each of the three months ended May 31, 2019 and May 31, 2018, the U.S. government and its agencies represented in the aggregate approximately 11% and 10% of the Company’s total revenue, respectively.

Supplemental information about products and services

The following table provides further detail, by type, of the Company’s subscription and services revenues. Subscription revenue for infrastructure-related offerings includes subscription revenue generated from Red Hat Enterprise Linux and related technologies such as Red Hat Satellite and Red Hat Virtualization. Subscription revenue generated from the Company’s Application Development-related and other emerging technology offerings includes Red Hat Middleware, Red Hat OpenShift, Red Hat Cloud Infrastructure, Red Hat OpenStack Platform, Red Hat Ansible Automation, Red Hat CloudForms and Red Hat Storage technologies (in thousands):

	Three Months Ended
	May 31, 2019		May 31, 2018
Subscription revenue:
Infrastructure-related offerings	$	580,306	$	522,402
Application Development-related and other emerging technology offerings	234,646		189,119
Total subscription revenue	814,952		711,521
Training and services revenue:
Consulting services	93,423		79,147
Training	25,736		22,862
Total training and services revenue	119,159		102,009
Total revenue	$	934,111	$	813,530

29

RED HAT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

NOTE 18—Business Combinations

Acquisition of Y.G. Noobaa Ltd.

On November 27, 2018, the Company completed the acquisition of all of the shares of Y.G. Noobaa Ltd. (“Noobaa”). The addition of Noobaa, an early stage company developing software for managing data storage services, complements and enhances the Company’s portfolio of hybrid cloud technologies, including Red Hat OpenShift Container Platform, Red Hat OpenShift Container Storage and Red Hat Ceph Storage.

The consideration paid was $11.8 million in cash. Based on management’s provisional assessment of the acquisition-date fair value of the assets acquired and liabilities assumed, the total consideration transferred of $11.8 million was allocated to the Company’s assets and liabilities on a preliminary basis as follows: $3.5 million to goodwill, $9.3 million to identifiable intangible assets and $1.0 million to working capital as a net current liability.

Pro forma consolidated financial information

Pro forma consolidated financial information for the three months ended May 31, 2019 has not been provided because the acquisition of Noobaa would not have had a significant impact on consolidated operating results if the acquisition had closed on March 1, 2018.

Goodwill and other business combinations

The following is a summary of goodwill (in thousands):

Balance at February 28, 2019	$	1,276,853
Impact of foreign currency fluctuations	(3,359		)
Balance at May 31, 2019	$	1,273,494

The excess of purchase price paid for Noobaa and other acquisitions over the fair value of the net assets acquired was recognized as goodwill. Goodwill comprises the majority of the purchase price paid for each of the acquired businesses because these businesses were focused on emerging technologies such as development and operations automation, cloud-enabling technologies and software-defined storage technologies, which consequently—at the time of acquisition—generated relatively little revenue. However, these acquired businesses, with their assembled, highly-specialized workforces and community of contributors, are expected to both expand the Company’s existing technology portfolio and advance the Company’s market position overall in open source solutions.

30

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

OVERVIEW

We are a leading global provider of open source software solutions, using a community-powered approach to develop and offer reliable and high-performing operating system, virtualization, management, middleware, cloud and storage technologies.

On October 28, 2018, we entered into an Agreement and Plan of Merger (the “Merger Agreement”) with International Business Machines Corporation, a New York corporation (“IBM”), and Socrates Acquisition Corp., a Delaware corporation and a wholly owned subsidiary of IBM (“Sub”), pursuant to which IBM has agreed to acquire us (the “Merger”) for $190.00 per share for each share of our common stock issued and outstanding immediately prior to the effective time of the Merger (“Effective Time”). Our Board of Directors and the Board of Directors of IBM each approved the Merger, and our stockholders approved the adoption of the Merger Agreement at a special meeting of stockholders on January 16, 2019. The Company continues to expect the transaction to close in the second half of 2019, subject to certain conditions, including receipt of regulatory approvals. We have incurred merger-related costs of $9.9 million, which are included in General and administrative expenses in our Consolidated Statement of Operations for the three months ended May 31, 2019. See NOTE 1—Company and Merger Agreement to our Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q.

Open source software is an alternative to proprietary software and represents a different model for the development and licensing of commercial software code than that typically used for proprietary software. Because open source software code, generally, is freely shared, there are customarily no licensing fees for the use of open source software. Therefore, we do not recognize revenue from the licensing of the code itself. We provide value to our customers through the development, aggregation, integration, testing, certification, delivery, maintenance, enhancement and support of our Red Hat technologies, and by providing a level of performance, scalability, flexibility, reliability and security for the technologies we package and distribute. Moreover, because communities of developers not employed by us assist with the creation of our open source offerings, opportunities for further innovation of our offerings are supplemented by these communities.

We market our offerings primarily to customers in the form of annual or multi-year subscriptions, and we recognize revenue over the period of the subscription agreements with our customers. Our technologies are also offered by certified cloud and service providers (“CCSPs”) as a service available on demand, and this revenue is recognized by us upon delivery.

We derive our revenue and generate cash from customers primarily from two sources: (i) subscription revenue and (ii) training and services revenue. These arrangements typically involve subscriptions to Red Hat technologies. Our revenue is affected by, among other factors, corporate, government and consumer spending levels. In evaluating the performance of our business, we consider a number of factors, including total revenue, deferred revenue, operating income, operating margin and cash flows from operations. The arrangements with our customers that produce this revenue and cash are explained in further detail in NOTE 2—Summary of Significant Accounting Policies to our Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q.

We believe our success is influenced by: (i) our ability to utilize the innovation derived from software developed by an open source community and make it consumable for enterprise customers, (ii) the extent to which we can expand the breadth and depth of our offerings, (iii) strategic business combinations and acquisitions of technical talent and technologies, (iv) our ability to enhance the value of our offerings through frequent and continuing innovation while maintaining platforms designed to be stable and secure over multi-year periods, (v) the extent to which adoption of our emerging technology offerings and software development processes such as CI/CD (continuous integration and continuous deployment) and DevOps increases, (vi) our involvement and leadership in key open source communities and projects, which enable us to develop, enhance and maintain our offerings, (vii) our corporate culture, which we believe fosters innovation, creativity and collaboration, (viii) our ability to generate increasing revenue directly and through partners and other strategic relationships, including CCSPs, distributors, embedded technology partners, independent hardware vendors, independent software vendors, original equipment manufacturers (“OEMs”), systems integrators and value added resellers, (ix) our ability to generate new and recurring revenue for our offerings, (x) the widespread and increasing deployment of open source technologies globally, (xi) our software, hardware, application and cloud service certification programs, which are intended to create an ecosystem of technologies that are compatible with our offerings and supported by us, (xii) our ability to provide customers with consulting and training services that generate additional subscription revenue, and (xiii) our ability to provide greater subscription value, enhance the experience of our customers and promote customer loyalty by focusing on ways in which we can help our customers succeed.

31

In fiscal 2020, we expect to focus on, among other things: (i) driving the widespread adoption of our offerings, (ii) investing in the development of open source technologies and promoting the use of our technologies by software developers globally, (iii) pursuing strategic acquisitions and alliances, and (iv) promoting a range of services to help our customers derive additional value.

Non-GAAP disclosures

In accordance with accounting principles generally accepted in the U.S. (“U.S. GAAP”), the income statements of our non-U.S. operations are translated into U.S. dollars using the average exchange rates for each month in an applicable period. To the extent the U.S. dollar weakens against foreign currencies, the translation of transactions denominated in foreign currencies results in increased revenue, as stated in U.S. dollars, for our non-U.S. operations. Similarly, revenue, as stated in U.S. dollars, for our non-U.S. operations decreases if the U.S. dollar strengthens against foreign currencies. In this Part I, Item 2, we disclose non-GAAP amounts and growth rates that exclude the impact of foreign currency exchange rate fluctuations for the three months ended May 31, 2019 in an effort to provide a comparable framework for assessing how our business performed when compared to the three months ended May 31, 2018. To compute the non-GAAP impact of foreign currency exchange rate fluctuations, we translate amounts from our non-U.S. operations for the three months ended May 31, 2019 using the average foreign currency exchange rate for the three months ended May 31, 2018.

Revenue

The growth rates of subscription revenue by offering type, training and services revenue and total revenue, as reported and excluding the impact of foreign currency exchange rate fluctuations, for the three months ended May 31, 2019 versus the three months ended May 31, 2018 are as follows (in thousands):

	Three Months Ended
	May 31, 2019		May 31, 2018		Year-Over-Year Growth Rate
Infrastructure-related subscription revenue, as reported	$	580,306	$	522,402	11.1%
Adjustment for foreign currency exchange rates	15,207		—
Infrastructure-related subscription revenue, excluding foreign currency impact	595,513		522,402		14.0%
Application Development-related and other emerging technology subscription revenue, as reported	234,646		189,119		24.1%
Adjustment for foreign currency exchange rates	8,903		—
Application Development-related and other emerging technology subscription revenue, excluding foreign currency impact	243,549		189,119		28.8%
Total subscription revenue, as reported	814,952		711,521		14.5%
Adjustment for foreign currency exchange rates	24,110		—
Total subscription revenue, excluding foreign currency impact	839,062		711,521		17.9%
Total training and services revenue, as reported	119,159		102,009		16.8%
Adjustment for foreign currency exchange rates	5,240		—
Total training and services revenue, excluding foreign currency impact	124,399		102,009		21.9%
Total revenue, as reported	934,111		813,530		14.8%
Adjustment for foreign currency exchange rates	29,350		—
Total revenue, excluding foreign currency impact	$	963,461	$	813,530	18.4%

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Subscription revenue

Our enterprise technologies are delivered primarily under subscription agreements. These agreements typically have a one- or three-year subscription period. A subscription generally entitles a customer to, among other things, a specified level of support, as well as security updates, fixes, functionality enhancements, upgrades to the technologies, each if and when available, and compatibility with an ecosystem of certified hardware and software. Subscription revenue increased sequentially for the first quarter of fiscal 2020 and for each quarter of fiscal 2019 and fiscal 2018 and was driven primarily by the increased use of our offerings by customers and our expansion of sales channels and geographic footprint during these periods.

Subscription revenue increased 14.5%, or $103.4 million, for the three months ended May 31, 2019 as compared to the three months ended May 31, 2018. Excluding the impact of foreign currency exchange rate fluctuations, subscription revenue increased by 17.9% for the three months ended May 31, 2019. The increase in subscription revenue is driven primarily by additional subscriptions related to our Red Hat Enterprise Linux, Red Hat Middleware and certain emerging technology offerings: Ansible, OpenShift and OpenStack. The increase is, in part, a result of the continued migration of enterprises in industries such as financial services, government and telecommunications to our open source solutions from proprietary technologies. We believe revenue growth for subscriptions related to our Red Hat Enterprise Linux offerings has moderated primarily due to certain deals renewing in prior years with terms that extend beyond fiscal 2020. Additionally, we believe revenue growth in our Middleware portfolio has moderated as customers shift their workloads from traditional Java deployments to containerized environments with middleware-as-a-service on OpenShift. We believe this transition will impact the revenue growth of the Middleware portfolio throughout the remainder of fiscal 2020.

Training and services revenue

Training and services revenue increased 16.8%, or $17.2 million, for the three months ended May 31, 2019 as compared to the three months ended May 31, 2018. Excluding the impact of foreign currency exchange rate fluctuations, training and services revenue increased by 21.9%. The increase is driven primarily by customer interest in new products and increased demand for consulting projects supporting Ansible and OpenShift solutions.

Deferred revenue and billings proxy

Year-to-date deferred revenue

Our deferred revenue, current and long-term, balance at May 31, 2019 was $2.80 billion. Total deferred revenue at May 31, 2019 decreased 6.2%, or $184.9 million, as compared to the balance of $2.98 billion at February 28, 2019. Excluding the impact of foreign currency exchange rate fluctuations, total deferred revenue decreased by 5.3%, or $158.7 million, from February 28, 2019 to May 31, 2019, which is the change in deferred revenue reported in our Consolidated Statements of Cash Flows. The decrease in deferred revenue is primarily attributable to our typically lower seasonal first quarter billings.

Below is a summary of our deferred revenue, as reported and excluding the impact of foreign currency exchange rate fluctuations for May 31, 2019 and February 28, 2019 (in thousands):

	May 31, 2019		February 28, 2019		Year-to-Date Growth Rate
Current deferred revenue, as reported	$	2,016,488	$	2,161,206	(6.7)%
Adjustment for foreign currency exchange rates	17,628		—
Current deferred revenue, excluding foreign currency impact	$	2,034,116	$	2,161,206	(5.9)%
Long-term deferred revenue, as reported	$	781,043	$	821,218	(4.9)%
Adjustment for foreign currency exchange rates	8,536		—
Long-term deferred revenue, excluding foreign currency impact	$	789,579	$	821,218	(3.9)%
Total deferred revenue, as reported	$	2,797,531	$	2,982,424	(6.2)%
Adjustment for foreign currency exchange rates	26,164		—
Total deferred revenue, excluding foreign currency impact	$	2,823,695	$	2,982,424	(5.3)%

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Year-over-year deferred revenue

Total deferred revenue increased by 14.4%, or $353.0 million, to $2.80 billion at May 31, 2019 from $2.44 billion at May 31, 2018. Excluding the impact of foreign currency exchange rate fluctuations, total deferred revenue increased by 16.8%, or $409.6 million, from May 31, 2018 to May 31, 2019. This increase in deferred revenue of $409.6 million is the summation of the changes in deferred revenue reported in our Consolidated Statements of Cash Flows for each quarter of the four-fiscal-quarter period ended May 31, 2019, which includes an insignificant amount of deferred revenue acquired from business combinations.

Below is a summary of our deferred revenue, as reported and excluding the impact of foreign currency exchange rate fluctuations for May 31, 2019 and May 31, 2018 (in thousands):

	May 31, 2019		May 31, 2018		Year-Over-Year Growth Rate
Current deferred revenue, as reported	$	2,016,488	$	1,721,300	17.1%
Adjustment for foreign currency exchange rates	37,314		—
Current deferred revenue, excluding foreign currency impact	$	2,053,802	$	1,721,300	19.3%
Long-term deferred revenue, as reported	$	781,043	$	723,207	8.0%
Adjustment for foreign currency exchange rates	19,307		—
Long-term deferred revenue, excluding foreign currency impact	$	800,350	$	723,207	10.7%
Total deferred revenue, as reported	$	2,797,531	$	2,444,507	14.4%
Adjustment for foreign currency exchange rates	56,621		—
Total deferred revenue, excluding foreign currency impact	$	2,854,152	$	2,444,507	16.8%

Billings proxy

We approximate our quarterly billings by adding revenue recognized in our Consolidated Statements of Operations to the change in total deferred revenue reported in our Consolidated Statements of Cash Flows. We use the change in deferred revenue as reported in our Consolidated Statements of Cash Flows because the amount has been adjusted for the impact of changes in foreign currency exchange rates used to translate deferred revenue balances from our foreign subsidiaries’ functional currencies into U.S. dollars.

Below is a summary of our billings proxy (in thousands):

	Three Months Ended
	May 31, 2019			May 31, 2018			Year-Over-Year Growth Rate
Revenue, as reported	$	934,111		$	813,530		14.8%
Change in deferred revenue, as reported on Statements of Cash Flows	(158,729		)	(104,592		)
Billings proxy	775,382			708,938			9.4%
Adjustment to revenue for foreign currency exchange rates	29,350			—
Billings proxy, excluding foreign currency impact	$	804,732		$	708,938		13.5%

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We provide a calculation for a four-fiscal-quarter rolling average billings proxy, which is intended to neutralize quarterly fluctuations, as discussed below, to the growth rate of our billings proxy. Below is a summary of our four-fiscal-quarter period rolling average billings proxy (approximated as described above by adding revenue for the period with the change in deferred revenue as reported in our Consolidated Statements of Cash Flows for the same period) for the four-fiscal-quarter periods ended May 31, 2019 and May 31, 2018 (in thousands):

	Four-Fiscal-Quarter Period Ended
	May 31, 2019		May 31, 2018		Year-Over-Year Growth Rate
Four-fiscal-quarter period rolling average billings proxy	$	973,074	$	857,626	13.5%
Adjustment to revenue for foreign currency exchange rates	18,167		—
Four-fiscal-quarter period rolling average billings proxy, excluding foreign currency impact	$	991,241	$	857,626	15.6%

Our deferred revenue and billings proxy can be subject to quarterly fluctuations due to a number of factors. For example, our deferred revenue and billings can be adversely impacted when larger deals anticipated to close in a particular quarter close in a subsequent quarter or customers renew their agreements with us prior to the expiration of such agreements. Additionally, when customers enter into multi-year agreements and choose to be billed annually rather than up-front, billings for the quarter in which those agreements close would be lower than otherwise expected.

For information regarding total backlog, see NOTE 13—Deferred Revenue and Performance Obligations to our Consolidated Financial Statements.

Revenue by geography 

For the three months ended May 31, 2019, approximately $422.4 million, or 45.2%, of our revenue was generated outside the U.S. compared to approximately $371.1 million, or 45.6%, for the three months ended May 31, 2018. Excluding the impact of foreign currency exchange rate fluctuations, our revenue generated outside the U.S. would have been 46.9%, or $451.7 million, of our total revenue for the three months ended May 31, 2019. Our international operations are expected to grow as our international sales force and channels become more mature and as we enter new locations outside the U.S. or expand our presence in existing international locations. As of May 31, 2019, we had offices in more than 105 locations throughout the world.

We operate our business in three geographic regions: the Americas (U.S., Canada and Latin America); EMEA (Europe, Middle East and Africa); and Asia Pacific (principally Australia, China, India, Japan, Singapore and South Korea). Revenue, as reported and excluding the impact of foreign currency exchange rate fluctuations, and related year-over-year (“YoY”) revenue growth rates generated by the Americas, EMEA and Asia Pacific were as follows (in thousands):

	Americas			EMEA			Asia Pacific			Consolidated
Three Months Ended	Revenue		YoY Growth %	Revenue		YoY Growth %	Revenue		YoY Growth %	Revenue		YoY Growth %
May 31, 2019, as reported	$	582,290	16.4%	$	216,951	11.2%	$	134,870	14.2%	$	934,111	14.8%
Adjustment for foreign currency exchange rates	5,786			17,523			6,041			29,350
May 31, 2019, excluding foreign currency impact	$	588,076	17.5%	$	234,474	20.2%	$	140,911	19.3%	$	963,461	18.4%
May 31, 2018, as reported	$	500,306	14.1%	$	195,148	35.8%	$	118,076	24.6%	$	813,530	20.2%

As we expand further within each region, we anticipate revenue growth rates in local currencies to become more similar among our geographic regions due to the similarity of products and services offered and the similarity in customer types or classes.

Gross profit margin

Gross profit margin decreased to 84.6% for the three months ended May 31, 2019 from 84.9% for the three months ended May 31, 2018. This decrease was primarily driven by additional cost of subscription revenue related to higher employee compensation expenses and investments in facility and technology infrastructure enhancements.

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Gross profit margin by geography 

Gross profit margins by our geographic regions were as follows:

	Americas	EMEA	Asia Pacific	Consolidated (1)
Three Months Ended May 31, 2019	85.1%	86.5%	82.9%	84.6%
Three Months Ended May 31, 2018	85.3%	87.9%	83.0%	84.9%

__________

⁽¹⁾  Consolidated gross profit includes corporate (non-allocated) share-based compensation expense for the three months ended May 31, 2019 and May 31, 2018 of $4.9 million and $5.1 million, respectively. Share-based compensation expense was not allocated to geographic segments. For additional information, see NOTE 15—Share-based Awards to our Consolidated Financial Statements.

Regional year-over-year variations in gross profit margins are primarily due to slight product mix shifts between subscriptions and services.

As we continue to expand our sales and support services within our geographic regions, we expect gross profit margins across geographic regions to further converge over the long run due to the similarity of products and services offered, similarity in production and distribution methods and the similarity in customer types or classes. These geographic profit margins exclude the impact of share-based compensation expense, which was not allocated to our geographic regions.

Income from operations 

Operating income was 14.1% and 13.8% of total revenue for the three months ended May 31, 2019 and May 31, 2018, respectively. Operating expenses as a percent of total revenue decreased to 70.4% for the three months ended May 31, 2019 from 71.1% for the three months ended May 31, 2018 due primarily to increased sales productivity as well as efficiencies in our marketing and research and development support areas of the business.

Income from operations by geography

Operating income as a percentage of revenue generated by our geographic regions was as follows:

	Americas	EMEA	Asia Pacific	Consolidated (1)
Three Months Ended May 31, 2019	14.3%	25.3%	32.5%	14.1%
Three Months Ended May 31, 2018	14.4%	25.0%	31.7%	13.8%

 

__________

⁽¹⁾  Consolidated operating income includes corporate (non-allocated) share-based compensation expense for the three months ended May 31, 2019 and May 31, 2018 of $50.2 million and $46.0 million, respectively. Share-based compensation expense was not allocated to geographic segments. For additional information, see NOTE 15—Share-based Awards to our Consolidated Financial Statements.

Cash, cash equivalents, restricted cash, investments in debt securities and cash flow from operations 

Cash, cash equivalents, restricted cash and short-term and long-term available-for-sale investments in debt securities balances at May 31, 2019 totaled $2.66 billion. Cash generated from operating activities for the three months ended May 31, 2019 totaled $460.0 million, which represents an increase of 32.9% in operating cash flow as compared to the three months ended May 31, 2018. This increase is primarily due to collections on billings.

Our significant cash and investment balances give us a measure of flexibility to take advantage of opportunities such as acquisitions and increasing investment in our international operations.

Foreign currency exchange rates’ impact on results of operations

Approximately 45.2% of our revenue for the three months ended May 31, 2019 came from sales outside the U.S. We are exposed to significant risks of foreign currency fluctuation primarily from receivables denominated in foreign currency and are subject to transaction gains and losses, which are recorded as a component of net income. The income statements of our non-U.S. operations are translated into U.S. dollars at the average exchange rates for each applicable month in a period. To the extent the U.S. dollar weakens against foreign currencies, the translation of these foreign-currency-denominated transactions results in increased revenue and operating expenses from operations for our non-U.S. operations. Similarly, our revenue and operating expenses will decrease for our non-U.S. operations if the U.S. dollar strengthens against foreign currencies.

36

Using the average foreign currency exchange rates for the three months ended May 31, 2018, our revenue from non-U.S. operations for the three months ended May 31, 2019 would have been higher than we reported by approximately $29.4 million and operating expenses from non-U.S. operations for the three months ended May 31, 2019 would have been higher than we reported by approximately $23.9 million, which would have resulted in income from operations being higher by $5.5 million.

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CRITICAL ACCOUNTING ESTIMATES

We prepare our consolidated financial statements in accordance with U.S. GAAP. Our significant accounting policies are disclosed in NOTE 2—Summary of Significant Accounting Policies to our Consolidated Financial Statements contained in our Annual Report on Form 10-K for the fiscal year ended February 28, 2019 and describe our methods for applying U.S. GAAP in areas such as revenue recognition, deferred selling costs, fair value measurements, and foreign currency translation among other areas deemed significant. Other than the accounting pronouncement adopted during the first quarter of fiscal 2020 related to accounting for leases as described in NOTE 2—Summary of Significant Accounting Policies to our Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q, there have been no changes to our significant accounting policies.

In applying certain significant accounting policies, we have to make estimates and assumptions that affect our reported amounts of assets, liabilities, revenue and expenses, as well as related disclosure of contingent assets and liabilities. In some cases, changes in the accounting estimates are reasonably likely to occur from period to period. Accordingly, actual results could differ materially from our estimates. To the extent that there are material differences between these estimates and actual results, our financial condition, results of operations or cash flows could be adversely affected. We base our estimates on past experience and other assumptions that we believe are reasonable under the circumstances, and we evaluate these estimates on an ongoing basis. We refer to accounting estimates of this type as critical accounting estimates, which were applied in the following areas:

• Revenue recognition;

• Goodwill and other long-lived assets;

• Share-based compensation;

• Income taxes; and

• Loss contingencies.

There have been no changes to “Critical Accounting Estimates” contained in Part II, Item 7 of our Annual Report on Form 10-K for the fiscal year ended February 28, 2019.

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RESULTS OF OPERATIONS

Three months ended May 31, 2019 and May 31, 2018

The following table is a summary of our results of operations (in thousands):

	Three Months Ended (Unaudited)
	May 31, 2019			May 31, 2018			$ Change			% Change
Revenue:
Subscriptions	$	814,952		$	711,521		$	103,431		14.5	%
Training and services	119,159			102,009			17,150			16.8
Total revenue	934,111			813,530			120,581			14.8
Cost of revenue:
Subscriptions	61,899			52,173			9,726			18.6
As a % of subscription revenue	7.6		%	7.3		%
Training and services	82,384			70,526			11,858			16.8
As a % of training and services revenue	69.1		%	69.1		%
Total cost of revenue	144,283			122,699			21,584			17.6
As a % of total revenue	15.4		%	15.1		%
Gross profit	789,828			690,831			98,997			14.3
Operating expense:
Sales and marketing	394,201			348,815			45,386			13.0
Research and development	182,961			166,506			16,455			9.9
General and administrative	80,548			63,354			17,194			27.1
Total operating expense	657,710			578,675			79,035			13.7
Income from operations	132,118			112,156			19,962			17.8
Interest income	9,254			7,834			1,420			18.1
Interest expense	1,959			6,319			(4,360		)	(69.0	)
Other expense, net	766			2,194			(1,428		)	(65.1	)
Income before provision for income taxes	138,647			111,477			27,170			24.4
Benefit for income taxes	(2,473		)	(1,713		)	(760		)	44.4
Net income	$	141,120		$	113,190		$	27,930		24.7	%
Gross profit margin—subscriptions	92.4		%	92.7		%
Gross profit margin—training and services	30.9		%	30.9		%
Gross profit margin	84.6		%	84.9		%
As a % of total revenue:
Subscription revenue	87.2		%	87.5		%
Training and services revenue	12.8		%	12.5		%
Sales and marketing expense	42.2		%	42.9		%
Research and development expense	19.6		%	20.5		%
General and administrative expense	8.6		%	7.8		%
Total operating expenses	70.4		%	71.1		%
Income from operations	14.1		%	13.8		%
Income before provision for income taxes	14.8		%	13.7		%
Net income	15.1		%	13.9		%
Effective income tax rate (1)	(1.8		)%	(1.5		)%

__________

⁽¹⁾  See NOTE 8—Income Taxes to our Consolidated Financial Statements for further discussion.

39

Revenue

Subscription revenue

Subscription revenue, which is primarily comprised of direct and indirect sales of Red Hat offerings, increased by 14.5%, or $103.4 million, to $815.0 million for the three months ended May 31, 2019 from $711.5 million for the three months ended May 31, 2018.

Revenue derived from the sale of subscriptions supporting our Infrastructure-related offerings increased by 11.1%, or $57.9 million, to $580.3 million for the three months ended May 31, 2019 from $522.4 million for the three months ended May 31, 2018. The increase in subscription revenue is primarily due to increases in volumes sold, including additional subscriptions attributable to geographic expansion, and the continued migration of customers to our open source Linux platform from proprietary operating systems.

Revenue derived from the sale of subscriptions supporting our Application Development-related and other emerging technology offerings increased by 24.1%, or $45.5 million, to $234.6 million for the three months ended May 31, 2019 from $189.1 million for the three months ended May 31, 2018. The increase is primarily driven by additional subscriptions for certain emerging technology offerings: Ansible, OpenShift and OpenStack. We expect the growth rate of revenue derived from our Application Development-related and other emerging technology offerings to continue to exceed the growth rate of revenue derived from our Infrastructure-related offerings as our emerging technology offerings continue to gain broader market acceptance in the enterprise IT environment.

Training and services revenue

Training revenue includes fees paid by our customers for delivery of educational materials and instruction. Services revenue includes fees received from customers for consulting units regarding our offerings, deployment of Red Hat technologies and for delivery of added functionality to Red Hat technologies for our major customers and OEM partners. Total training and services revenue increased by 16.8%, or $17.2 million, to $119.2 million for the three months ended May 31, 2019 from $102.0 million for the three months ended May 31, 2018. Training revenue increased by 12.6%, or $2.9 million as a result of increased revenue generated from our Red Hat Learning Subscription (“RHLS”) offerings and increased consumption of training courses or units related to our emerging technology offerings. Services revenue increased by 18.0%, or $14.3 million, as a result of an increase in consulting engagements driven by increased demand for our open source cloud enabling solutions such as Ansible and OpenShift. We expect services revenue to continue growing as we continue to expand our reach by enabling our channel partners to provide consulting services on our behalf. Combined training and services revenue as a percentage of total revenue was 12.8% and 12.5% for the three months ended May 31, 2019 and May 31, 2018, respectively.

Cost of revenue

Cost of subscription revenue

The cost of subscription revenue primarily consists of expenses we incur to support, distribute and package Red Hat offerings. These costs include labor-related costs to provide technical support, security updates and fixes, as well as costs for fulfillment. Cost of subscription revenue increased by 18.6%, or $9.7 million, to $61.9 million for the three months ended May 31, 2019 from $52.2 million for the three months ended May 31, 2018. The overall increase is primarily due to employee compensation expense, which increased $7.8 million due to the expansion of our technical staff in order to meet the demands of our growing subscriber base for support, security updates and fixes, especially with respect to the increase in demand for our emerging technology offerings. The remaining expense increase is primarily related to $1.2 million higher expense associated with facility and technology infrastructure enhancements. As the number of open source technology subscriptions continues to increase, we expect associated support costs will continue to increase, although we anticipate this will occur at an overall slower rate than that of subscription revenue growth due to economies of scale. Gross profit margin on subscriptions decreased to 92.4% for the three months ended May 31, 2019 from 92.7% for the three months ended May 31, 2018.

40

Cost of training and services revenue

Cost of training and services revenue is mainly comprised of personnel and third-party consulting costs for the design, development and delivery of custom engineering, training courses and professional services provided to various types of customers. Cost of training and services revenue increased by 16.8%, or $11.9 million, to $82.4 million for the three months ended May 31, 2019 from $70.5 million for the three months ended May 31, 2018. The increase in cost to deliver training and services includes $8.3 million increased employee compensation expense, $1.7 million increased outside contractor fees and $1.3 million of additional travel-related expenses. The increase in employee compensation expense, outside contractor fees and travel-related expenses is due to the expansion of our professional consulting teams needed to meet the growing demand for services related to our emerging technology offerings. Total costs to deliver training and services as a percentage of training and services revenue remained constant at 69.1% for the three months ended May 31, 2019 and May 31, 2018.

Gross profit margin

Gross profit margin decreased to 84.6% for the three months ended May 31, 2019 from 84.9% for the three months ended May 31, 2018. This decrease was primarily driven by additional cost of subscription revenue related to higher employee compensation expenses and investments in facility and technology infrastructure enhancements.

Operating expenses

Sales and marketing

Sales and marketing expense consists primarily of salaries and other related costs for sales and marketing personnel, sales commissions, travel, public relations and marketing materials and trade shows. Sales and marketing expense increased by 13.0%, or $45.4 million, to $394.2 million for the three months ended May 31, 2019 from $348.8 million for the three months ended May 31, 2018. This increase was primarily due to a $29.6 million increase in selling costs, which includes $21.0 million of employee compensation expenses, $3.5 million of investments in sales enablement, $1.7 million of higher travel-related expenses and $1.6 million of event-related costs. The remaining increase relates to marketing costs, which grew 18.2%, or $15.8 million, for the three months ended May 31, 2019 as compared to the three months ended May 31, 2018 and includes incremental employee compensation expense and marketing program costs of $7.9 million and $6.7 million, respectively. Sales and marketing expense decreased as a percentage of revenue to 42.2% for the three months ended May 31, 2019 from 42.9% for the three months ended May 31, 2018 primarily as a result of additional sales productivity.

Research and development

Research and development expense consists primarily of personnel and related costs for development of software technologies and systems management offerings. Research and development expense increased by 9.9%, or $16.5 million, to $183.0 million for the three months ended May 31, 2019 from $166.5 million for the three months ended May 31, 2018. The increase in research and development costs primarily resulted from the expansion of our engineering group through both direct hires and business acquisitions as we continue investing in Application Development-related and other emerging technologies. Employee compensation expense increased by $14.7 million, offset by a decrease in outside contractor fees of $0.8 million. The remaining increase in research and development costs relates primarily to process and technology infrastructure enhancements, which increased by $2.2 million. Research and development expense was 19.6% of total revenue for the three months ended May 31, 2019 compared to 20.5% for the three months ended May 31, 2018.

General and administrative

General and administrative expense consists primarily of personnel and related costs for general corporate functions, including information systems, finance, accounting, legal, human resources and facilities expense. General and administrative expense increased by 27.1%, or $17.2 million, to $80.5 million for the three months ended May 31, 2019 from $63.4 million for the three months ended May 31, 2018. The increase in general and administrative expense is primarily due to merger-related costs of $9.9 million related to the pending Merger with IBM, increased employee compensation expenses of $5.6 million and $4.9 million higher expense associated with facility and technology infrastructure enhancements, partially offset by a decrease in outside contractor fees of $3.5 million. General and administrative expense as a percentage of revenue was 8.6% and 7.8% for the three months ended May 31, 2019 and May 31, 2018, respectively. We expect general and administrative costs, before the impact from merger-related costs, to continue to decrease relative to revenue as we leverage benefits from investments made during the current fiscal year to expand and enhance our corporate processes and technology infrastructure.

41

Interest income

Interest income increased by 18.1%, or $1.4 million, for the three months ended May 31, 2019 as compared to the three months ended May 31, 2018. The increase in interest income for the three months ended May 31, 2019 is attributable to higher yields earned on cash and investment balances.

Interest expense

Interest expense decreased by $4.4 million for the three months ended May 31, 2019 as compared to the three months ended May 31, 2018. Interest expense is primarily attributable to the interest on our 0.25% Convertible Senior Notes due 2019 (the “convertible notes”). The decrease in interest expense is due to early conversions of the convertible notes. See NOTE 9—Convertible Notes to our Consolidated Financial Statements for further discussion.

Other expense, net

Other expense, net is primarily attributable to net losses recognized from the settlement of foreign currency transactions during the three months ended May 31, 2019 and May 31, 2018.

Income taxes

The effective tax rate for the three months ended May 31, 2019 of (1.8)% differed from the U.S. federal statutory rate of 21.0% primarily due to excess tax benefits from share-based compensation, research tax credits and other discrete net tax benefits primarily related to an intra-entity transfer of assets. The effective tax rate for the three months ended May 31, 2018 of (1.5)% differed from the U.S. federal statutory rate of 21.0% primarily due to excess tax benefits from share-based compensation and research tax credits. Included in tax expense for the three months ended May 31, 2019, are net discrete tax benefits of $28.8 million primarily related to net excess tax benefits from share-based compensation and other discrete net tax benefits primarily related to an intra-entity transfer of assets. Included in tax expense for the three months ended May 31, 2018, are net discrete tax benefits of $26.8 million primarily related to net excess tax benefits from share-based compensation. For further discussion regarding our income taxes, see NOTE 8—Income Taxes to our Consolidated Financial Statements.

LIQUIDITY AND CAPITAL RESOURCES

We derive our liquidity and operating capital primarily from cash flows from operations. Historically, we also received cash from the sale of equity securities, including private sales of preferred stock and the sale of common stock in our initial and follow-on public offerings, and the issuance of convertible notes, including our issuance of convertible notes described in detail in NOTE 9—Convertible Notes to our Consolidated Financial Statements. At May 31, 2019, we had total cash and investments of $2.66 billion, which was comprised of $2.30 billion in cash and cash equivalents, $177.6 million of short-term investments and $188.2 million of long-term fixed-income investments. This compares to total cash and investments of $2.42 billion at February 28, 2019.

On October 28, 2018, we entered into the Merger Agreement with IBM and Sub. We have agreed to various customary covenants and agreements, including, among others, agreements to conduct our business in the ordinary course during the period between the execution of the Merger Agreement and the Effective Time. In addition, without the consent of IBM, we may not take, authorize, agree or commit to do certain actions outside of the ordinary course of business, including acquiring businesses or incurring capital expenditures above specified thresholds, issuing additional debt facilities, and repurchasing outstanding shares of our common stock. We do not believe these restrictions will prevent us from meeting convertible note obligations, ongoing costs of operations, working capital needs, or capital expenditure requirements for the next 12 months.

The Merger Agreement contains certain termination rights for IBM and us. Upon termination of the Merger Agreement under specified circumstances, we may be required to pay IBM a termination fee of $975.0 million.

Convertible note conversions

Effective April 1, 2019, holders may convert their convertible notes at any time until the close of business on the second scheduled trading day immediately preceding the maturity date of the convertible notes. Upon conversion of the convertible notes on or after April 1, 2019, holders will receive on October 1, 2019 cash equal to the principal amount of the notes converted and shares of the Company’s common stock for the excess conversion value; provided that if the Merger is completed prior to October 1, 2019, then converting holders will receive cash for each $1,000 principal amount of convertible notes being converted equal to the conversion rate then in effect multiplied by the same per share cash consideration a common stockholder would receive in the Merger, subject to certain adjustments.

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Total settled conversions through May 31, 2019 amounted to $614.6 million aggregate principal amount of the convertible notes. We settled conversions of $3.0 million in principal amount of the convertible notes in the second quarter of fiscal 2020 by paying cash for the principal amount and issuing shares of common stock for the excess conversion value.

Cash flows for the three months ended May 31, 2019

Cash flows—overview

At May 31, 2019, cash and cash equivalents totaled $2.30 billion, an increase of $412.3 million as compared to February 28, 2019. The increase in cash and cash equivalents for the three months ended May 31, 2019 is primarily the result of cash provided by operations, which generated $460.0 million, and net sales and maturities of available-for-sale debt securities of $175.3 million offset by repayments of convertible notes of $102.2 million, payments made in return for shares of our common stock received from employees to satisfy employees’ minimum tax withholding obligations related to share awards vesting of $81.3 million and investments in property and equipment of $23.5 million. Net cash generated by operating activities and net cash used for investing activities and financing activities is further described below.

Cash flows from operations

Cash provided by operations of $460.0 million during the three months ended May 31, 2019 includes net income of $141.1 million, adjustments to exclude the impact of non-cash income and expenses, which totaled a $74.2 million net source of cash, and changes in operating assets and liabilities, which totaled a $244.6 million net source of cash. Non-cash income and expenses include the portion of repayments of convertible notes that are attributable to debt discount, which totaled $14.0 million. Cash provided by changes in operating assets and liabilities for the three months ended May 31, 2019 was primarily the result of collections on our billings partially offset by a decrease in deferred revenue. The decrease in deferred revenue is primarily attributable to our lower seasonal first quarter billings.

Cash flows from investing

Cash provided by investing activities of $147.6 million for the three months ended May 31, 2019 includes net sales and maturities of available-for-sale debt securities of $175.3 million offset by investments in property and equipment of $23.5 million, which primarily relate to information technology infrastructure and leasehold improvements and investments in other intangible assets, primarily patents, which totaled $4.1 million.

Cash flows from financing

Cash used in financing activities of $175.5 million for the three months ended May 31, 2019 includes repayments of convertible notes of $102.2 million and $81.3 million of payments made in return for shares of our common stock received from employees to satisfy employees’ minimum tax withholding obligations related to employee share awards vesting during the three months ended May 31, 2019. Partially offsetting these uses of cash were proceeds of $7.5 million from our employee stock purchase plan.

Investments in debt securities

Our investments in debt securities are comprised primarily of available-for-sale fixed-income investments recorded at their fair values, of which $177.6 million are classified as short-term and $188.2 million are classified as long-term in the Consolidated Balance Sheet at May 31, 2019. The vast majority of our investments were priced with the assistance of pricing vendors. These pricing vendors use the most recent observable market information in pricing these securities or, if specific prices are not available for these securities, use other observable inputs. In the event observable inputs are not available, we assess other factors to determine the securities’ fair values, including broker quotes or model valuations. Independent price verifications of all of our holdings are performed by the pricing vendors, which we review. In the event a price fails a pre-established tolerance check, it is researched so that we can assess the cause of the variance to determine what we believe is the appropriate fair value.

We presently do not intend to liquidate our short- and long-term investments in debt securities prior to their scheduled maturity dates. However, in the event that we liquidate these investments prior to their scheduled maturities and there are adverse changes in market interest rates or the overall economic environment, we could be required to recognize a realized loss on those investments when we liquidate these investments. At May 31, 2019 and February 28, 2019, net accumulated unrealized net losses on our available-for-sale debt securities totaled $0.6 million and $2.4 million, respectively.

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Capital requirements

Our capital requirements during fiscal 2020 will depend on numerous factors, including the amount of resources we devote to:

• funding the continued development of our technology offerings;

• improving and extending our services and the technologies used to market and deliver these services to our customers and support our business;

• pursuing strategic acquisitions and alliances;

• investing in or acquiring businesses, products and technologies; and

• investing in enhancements to the systems we use to run our business and the expansion of our office facilities.

We have utilized, and will continue from time to time to utilize, cash and investments to fund, among other potential uses, purchases of our common stock, purchases of fixed assets, purchases of intangible assets (primarily patents), and mergers and acquisitions. Given our historically strong operating cash flow and the $2.66 billion of cash and investments held at May 31, 2019, we believe our cash balances totaling $2.30 billion, together with our ability to generate additional cash from operations, should be sufficient to satisfy our cash requirements for the next twelve months and for the foreseeable future. However, we may take advantage of favorable capital market conditions that may arise from time to time to raise additional capital.

We believe that our ability to generate additional cash from operations will continue; however, there can be no assurances that we will be able to generate cash from operations at a level equal to the current rate or that such cash flows will be adequate to fund other investments or acquisitions that we may choose to make or that cash may be located in or generated in the appropriate geographic region where we can effectively use such cash. We may choose to accelerate the expansion of our business from our current plans, which may require us to raise additional funds through the sale of equity or debt securities or through other financing means. There can be no assurances that any such financing would occur in amounts or on terms favorable to us, if at all.

As of May 31, 2019, $1.36 billion of our total cash and investments were held outside the U.S. Our intent has been to reinvest the earnings of foreign subsidiaries indefinitely outside the U.S. to fund both organic growth and acquisitions. The Tax Act includes a provision to move the U.S. to a territorial tax system by imposing a transition tax on historic foreign earnings whether or not such earnings are repatriated to the U.S. In light of the new territorial tax system, we no longer consider earnings from certain foreign subsidiaries to be indefinitely reinvested. As of February 28, 2019, cumulative undistributed foreign earnings totaled $397.5 million, of which $86.6 million is considered indefinitely reinvested. For further discussion, see NOTE 11—Income Taxes to our Consolidated Financial Statements contained in our Annual Report on Form 10-K for the year ended February 28, 2019.

Off-balance sheet arrangements

As of May 31, 2019 and February 28, 2019, we have no off-balance sheet financing arrangements and do not utilize any “structured debt,” “special purpose” or similar unconsolidated entities for liquidity or financing purposes.

RECENT ACCOUNTING PRONOUNCEMENTS

For discussion of accounting pronouncements recently adopted and accounting pronouncements being evaluated, and the impact of such pronouncements on our consolidated financial statements, see NOTE 2—Summary of Significant Accounting Policies to our Consolidated Financial Statements.

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to the impact of interest rate changes, foreign currency exchange rate fluctuations and changes in the market value of our investments.

Interest-rate risk

Our exposure to market-rate risk for changes in interest rates relates primarily to our investment portfolio. The primary objective of our investment activities is to preserve principal and liquidity while at the same time maximizing yields without significantly increasing risk. To achieve this objective, we maintain our portfolio of short- and long-term investments in a variety of available-for-sale fixed- and floating-rate debt securities, including both government and corporate obligations and money market funds. Investments in both fixed-rate and floating-rate interest-earning instruments carry a degree of interest-rate risk. Fixed-rate securities may have their fair value adversely impacted due to a rise in prevailing interest rates, while floating-rate securities may produce less income than expected if interest rates fall. Due in part to these factors, our future investment income related to these securities may fall short of expectations due to changes in interest rates, or we may suffer losses in principal if forced to sell securities that have declined in market value due to changes in interest rates or perceived credit risk related to the securities’ issuers. A hypothetical one-half percentage point change in interest rates, assuming a parallel shift of all interest rates, would result in an approximate $0.3 million change in annual interest income derived from investments in our portfolio as of May 31, 2019. For further discussion related to our investments as of May 31, 2019 and February 28, 2019, see NOTE 16—Assets and Liabilities Measured at Fair Value on a Recurring Basis to our Consolidated Financial Statements.

Investment risk

The fair value of our available-for-sale investment portfolio is subject to interest-rate risk. Based on a sensitivity analysis performed on this investment portfolio, a hypothetical one percentage point increase in prevailing interest rates would result in an approximate $2.0 million decrease in the fair value of our available-for-sale investment securities as of May 31, 2019. For further discussion related to our investments as of May 31, 2019 and February 28, 2019, see NOTE 16—Assets and Liabilities Measured at Fair Value on a Recurring Basis to our Consolidated Financial Statements.

Credit risk

Investments in debt securities

The fair values of our investment portfolio and cash balances are exposed to counterparty credit risk. Accordingly, while we periodically review our portfolio in an effort to mitigate counterparty risk, the principal values of our cash balances, money market accounts and investments in available-for-sale securities could suffer a loss of value.

Accounts receivable

As of May 31, 2019, no individual customer accounted for 10% or more of the Company’s total accounts receivable. As of February 28, 2019, we had one customer whose accounts receivable balance accounted for 10% of our total accounts receivable.

Foreign currency risk

Approximately 45.2% of our revenue for the three months ended May 31, 2019 was produced by sales outside the U.S. We are exposed to significant risks of foreign currency fluctuation primarily from receivables denominated in foreign currency and are subject to transaction gains and losses, which are recorded as a component of net income. The income statements of our non-U.S. operations are translated into U.S. dollars at the average exchange rates for each applicable month in a period. To the extent the U.S. dollar weakens against foreign currencies, the translation of these foreign currency statements results in increased revenue and operating expenses for our non-U.S. operations. Similarly, our revenue and operating expenses for our non-U.S. operations decrease if the U.S. dollar strengthens against foreign currencies.

Using the average foreign currency exchange rates from the first quarter of our prior fiscal year ended February 28, 2019, our revenue and operating expenses from non-U.S. operations for the three months ended May 31, 2019 would have been higher than we reported by approximately $29.4 million and $23.9 million, respectively, which would have resulted in income from operations being higher by $5.5 million.

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Convertible notes

In October 2014, we issued $805.0 million of 0.25% convertible notes due October 2019. The convertible notes have a fixed annual interest rate of 0.25%, and, therefore, we do not have economic interest-rate exposure on the convertible notes. However, the fair value of the convertible notes is exposed to interest-rate risk. Generally, the fair value of the convertible notes will increase as interest rates fall and decrease as interest rates rise. For further discussion regarding the fair value of the convertible notes, see NOTE 9—Convertible Notes to our Consolidated Financial Statements.

In connection with the sale of the convertible notes, we entered into convertible note hedge transactions and warrant transactions. The convertible note hedge transactions are expected to offset, to the extent that the market price per share of our common stock does not exceed the $101.65 strike price of the warrants, which is subject to adjustments upon the occurrence of certain events, the potential dilution with respect to shares of our common stock upon any conversion of the convertible notes and/or offset any cash payments that we are required to make in excess of the principal amount of the converted notes, as the case may be. The warrant transactions will have a dilutive effect with respect to our common stock to the extent that the market price per share of our common stock, as measured under the terms of the warrant transactions, exceeds the applicable strike price of the warrants. However, subject to certain conditions, we may elect to settle all of the warrants in cash. The initial strike price of the warrants is $101.65 per share. The number of shares of our common stock underlying the warrants is 10,965,630 shares, subject to anti-dilution adjustments. The convertible note hedge and warrants are both considered indexed to our common stock and classified as equity; therefore, the convertible note hedge and warrants are not accounted for as derivative instruments.

Derivative instruments

We transact business in various foreign countries and are, therefore, subject to risk of foreign currency exchange rate fluctuations. From time to time we enter into forward contracts to economically hedge transactional exposure associated with commitments arising from trade accounts receivable, trade accounts payable and fixed-purchase obligations denominated in a currency other than the functional currency of the respective operating entity. All derivative instruments are recorded in the Consolidated Balance Sheets at their respective fair values. We generally elect not to prepare and maintain the documentation required to qualify our forward contracts for hedge accounting treatment and, therefore, changes in fair value are recorded in our Consolidated Statements of Operations. For further discussion related to our management of foreign currency risk, see NOTE 7—Derivative Instruments to our Consolidated Financial Statements.

The aggregate notional amount of outstanding forward contracts at May 31, 2019 was $61.0 million. The fair value of these outstanding contracts at May 31, 2019 was a gross $0.2 million asset and a gross $0.2 million liability, and is recorded in Other current assets and Accounts payable and accrued expenses, respectively, on our Consolidated Balance Sheets. The forward contracts generally expire within three months of the period ended May 31, 2019. The forward contracts will settle in Euros, Hong Kong dollars, Japanese yen, and Singapore dollars.

The aggregate notional amount of outstanding forward contracts at February 28, 2019 was $75.6 million. The fair value of these outstanding contracts at February 28, 2019 was a gross asset less than $0.1 million and a gross $0.2 million liability, and is recorded in Other current assets and Accounts payable and accrued expenses, respectively, on our Consolidated Balance Sheets.

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ITEM 4. CONTROLS AND PROCEDURES

Role of Controls and Procedures

Our management, including our chief executive officer and chief financial officer, does not expect that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act) or our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act) will prevent all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of the controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error and mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part on certain assumptions about the likelihood of future events. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected. Also projections of any evaluation of effectiveness of controls and procedures to future periods are subject to the risk that the controls and procedures may become inadequate because of changes in conditions, or that the degree of compliance with the controls and procedures may have deteriorated.

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our chief executive officer and chief financial officer, evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based on this evaluation, our chief executive officer and chief financial officer concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were effective at a reasonable assurance level.

Changes in Internal Control Over Financial Reporting

No changes in our internal control over financial reporting occurred during the fiscal quarter covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II

ITEM 1. LEGAL PROCEEDINGS

The Company experiences routine litigation in the normal course of its business, including patent litigation. The Company presently believes that the outcome of this routine litigation will not have a material adverse effect on its financial position, results of operations or cash flows.

ITEM 1A. RISK FACTORS

Set forth below are certain risks and cautionary statements, which supplement other disclosures in this report. Please carefully consider the following risks and cautionary statements. If any event related to the following risk factors occurs, our business, financial condition, operating results and cash flows could be materially adversely affected.

RISKS RELATED TO THE MERGER

The announcement and pendency of our agreement to be acquired by International Business Machines Corporation may have an adverse effect on our business, financial condition, operating results and cash flows.

On October 28, 2018, we entered into an Agreement and Plan of Merger (the “Merger Agreement”) with International Business Machines Corporation, a New York corporation (“IBM”), and Socrates Acquisition Corp., a Delaware corporation and a wholly owned subsidiary of IBM (“Sub”), pursuant to which, among other things, Sub will merge with and into us, with Red Hat surviving as a wholly owned subsidiary of IBM (the “Merger”). Upon the terms and subject to the conditions set forth in the Merger Agreement, at the effective time of the Merger (the “Effective Time”), each share of our common stock issued and outstanding immediately prior to the Effective Time will be cancelled and automatically converted into the right to receive $190.00 in cash, without interest and subject to any applicable withholding taxes. 

Uncertainty about the effect of the proposed Merger on our employees, partners, customers and other third parties may disrupt our sales and marketing or other key business activities and may have a material adverse effect on our business, financial condition, operating results and cash flows. Current and prospective employees may experience uncertainty about their roles following the Merger and this may have an effect on our corporate culture. There can be no assurance we will be able to attract and retain key talent, including senior leaders, to the same extent that we have previously been able to attract and retain employees. Any loss or distraction of such employees could have a material adverse effect on our business, financial condition and operating results. In addition, we have diverted, and will continue to divert, significant management and other internal resources towards the completion of the Merger and planning for integration, which could materially adversely affect our business, financial condition, operating results and cash flows. Parties with which we have business relationships may experience uncertainty as to the future of such relationships and may delay or defer certain business decisions, seek alternative relationships with third parties or seek to alter their present business relationships with us. Parties with whom we otherwise may have sought to establish business relationships may seek alternative relationships with third parties.

The Merger Agreement generally requires us to operate our business in the ordinary course pending consummation of the proposed Merger and restricts us, without IBM’s consent, from taking certain specified actions until the Merger is completed. These restrictions may affect our ability to execute our business strategies, to respond effectively to competitive pressures and industry developments, and to attain our financial and other goals and may otherwise harm our business, financial condition, operating results and cash flows.

The failure to complete the Merger with IBM in a timely manner or at all could negatively impact the market price of our common stock as well as adversely affect our business, financial condition, operating results and cash flows.

Completion of the Merger with IBM is subject to several conditions beyond our control that may prevent, delay or otherwise adversely affect its completion in a material way, including the expiration or termination of applicable waiting periods under antitrust and competition laws and similar competition approvals or consents that must be obtained from regulatory entities. The Merger cannot be completed until the conditions to closing are satisfied or (if permissible under applicable law) waived. We cannot guarantee that the closing conditions set forth in the Merger Agreement will be satisfied or, even if satisfied, that no event of termination will take place. In the event that the Merger is not completed for any reason, the holders of our common stock will not receive any payment for their shares of common stock in connection with the proposed Merger. Instead, we will remain an independent public company and the holders of our common stock will continue to own their shares of common stock.

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If the Merger or a similar transaction is not completed, the share price of our common stock may drop to the extent that the current market price of our common stock reflects an assumption that a transaction will be completed. In addition, under circumstances specified in the Merger Agreement, we may be required to pay a termination fee of $975.0 million in the event the Merger is not consummated. Further, a failure to complete the Merger may result in negative publicity, negative impressions of us in the financial markets and investment community and negative responses from customers, partners and other third parties. Any disruption to our business resulting from the announcement and pendency of the Merger and from intensifying competition from our competitors, including any adverse changes in our relationships with our employees, partners, customers and other third parties, could continue or accelerate in the event of a failure to complete the Merger. There can be no assurance that our business, financial condition, operating results and cash flows will not be adversely affected, as compared to our condition prior to the announcement of the Merger, if the Merger is not consummated.

Regulatory approvals may not be received, may take longer than expected or may impose conditions that are not presently anticipated or that cannot be met.

Before the Merger may be completed, various approvals, authorizations and declarations of non-objection must be obtained from certain regulatory and governmental authorities. Subject to the terms and conditions of the Merger Agreement, each party has agreed to use their reasonable best efforts to take all actions and to do, or cause to be done, all things reasonably necessary, proper or advisable under applicable laws to consummate the Merger and the other transactions contemplated by the Merger Agreement as soon as practicable and no later than the termination date of the Merger Agreement, including obtaining any requisite approvals, subject to certain specified limitations under the Merger Agreement.

These regulatory and governmental entities may impose conditions on the granting of such approvals and if such regulatory and governmental entities seek to impose such conditions, lengthy negotiations may ensue among such regulatory or governmental entities, IBM and us. Such conditions and the process of obtaining regulatory approvals could have the effect of delaying completion of the Merger and such conditions may not be satisfied for an extended period of time.

We cannot assure you that these regulatory clearances and approvals will be obtained in a timely manner or obtained at all, or that the granting of these regulatory clearances and approvals will not involve the imposition of regulatory remedies on the completion of the Merger, including requiring changes to the terms of the Merger Agreement. These conditions or changes could result in the conditions to the closing of the Merger not being satisfied. Our stockholders approved the adoption of the Merger Agreement at a special meeting of stockholders on January 16, 2019 prior to receipt of all of the required regulatory approvals. We and IBM may subsequently agree to regulatory remedies without further seeking stockholder approval, except as required by applicable law, even if such regulatory remedies could have an adverse effect on us, IBM or the combined company.

The Merger Agreement contains provisions that could discourage or deter a potential competing acquirer that might be willing to pay more to effect an alternative transaction with us.

Under the Merger Agreement, we are generally not permitted to solicit or discuss takeover proposals with third parties, subject to certain exceptions. Further, subject to limited exceptions, the Merger Agreement contains restrictions on our ability to pursue other alternatives to the Merger and, in specified circumstances, could require us to pay IBM a termination fee of $975.0 million. Such restrictions may discourage or deter a third party that may be willing to pay more than IBM for our common stock from considering or proposing an alternative transaction with us. Notwithstanding the foregoing, in no event will the termination fee be paid to IBM more than once. In addition, the adoption of the Merger Agreement by our stockholders eliminated our right to terminate the Merger Agreement in response to a superior proposal. Additional information regarding these restrictions is provided in the definitive proxy statement on Schedule 14A (the “Proxy Statement”) that we filed with the Securities and Exchange Commission (“SEC”) on December 12, 2018.

We have been and may be subject to litigation challenging the Merger, which may require significant management time and attention and significant legal expenses and may result in unfavorable outcomes, which could delay or prevent the Merger from being completed or have a material adverse effect on our business, financial condition, results of operations and cash flows.

Three putative class action complaints were filed on behalf of Company stockholders in the United States District Court for the District of Delaware against Red Hat and its Board of Directors (the “Actions”). The complaints alleged that the Proxy Statement filed in connection with the Merger Agreement omitted material information in violation of Sections 14(a) and 20(a) of the Securities Exchange Act, rendering the Proxy Statement false and misleading. Among other remedies, the complaints sought to enjoin the special meeting of our stockholders and the closing of the Merger, as well as damages, costs and attorneys’ fees.

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On January 4, 2019, the parties reached an agreement whereby the Actions were dismissed as moot in exchange for supplemental disclosures filed by the Company. Those supplemental disclosures were filed by the Company as definitive additional proxy soliciting material on Schedule 14A with the SEC on January 4, 2019. The Actions were dismissed on January 8, 2019 and January 9, 2019. Plaintiffs in the Actions have reserved the right to seek an award of attorneys’ fees for causing the filing of the supplemental disclosures.

In addition, while the Actions have been dismissed, it is possible that additional lawsuits related to the Merger may be filed in the future against the Company, in which case we could be materially and adversely affected by such additional litigation.

The completion of the transaction contemplated by the Merger Agreement may trigger change in control or other similar provisions in certain agreements to which we are a party.

If we are unable to negotiate waivers of change in control or other similar provisions in certain agreements to which we are a party, the counterparties may exercise their rights and remedies under the agreements, potentially terminating the agreements or seeking monetary damages. Even if we are able to negotiate waivers, the counterparties may require a fee for such waivers or seek to renegotiate the agreements on terms less favorable to us.

We will incur substantial transaction fees and costs in connection with the Merger.

We have and expect to continue to incur significant costs, expenses and fees for professional services and other transaction costs in connection with the Merger. A material portion of these expenses are payable by us whether or not the Merger is completed. Further, while we have assumed that a certain amount of transaction expenses will be incurred, factors beyond our control could affect the total amount or the timing of these expenses. Many of the expenses that will be incurred, by their nature, are difficult to estimate accurately. These expenses may exceed the costs historically borne by us. These costs could adversely affect our business, financial condition, operating results and cash flows.

RISKS RELATED TO BUSINESS UNCERTAINTY

We face intense competition.

The enterprise software industry is rapidly evolving and intensely competitive, and is subject to changing technologies, shifting customer needs, and frequent introductions of new products and services by both new and established information technology (“IT”) companies. We compete based on our ability to provide our customers with enterprise software and related service offerings that best meet their needs at a compelling price. We expect that competition will continue to be intense, and there is a risk that our competitors’ products may provide better performance or include additional features when compared to our offerings. Competitive pressures could also affect the prices we may charge or the demand for our offerings, resulting in reduced profit margins and loss of market share.

Our current and potential competitors range from large and well-established companies to emerging start-ups. Some of our competitors have significantly greater financial resources and name recognition, larger development and sales staffs and more extensive marketing and distribution capabilities. Certain competitors also bundle hardware and software offerings, making it more difficult for us to penetrate their customer bases, while other competitors may be able to innovate and provide products and services faster than we can. As the enterprise software industry evolves, the competitive pressure for us to innovate encompasses a wider range of products and services, including new offerings that require different expertise than our current offerings. Moreover, if we are unable to effectively communicate the value of our subscription model, we may not compete effectively in attracting new, and maintaining existing, customers.

Given the rapid evolving nature of the enterprise software industry, the competitive landscape and the nature of the competition are constantly changing. Consolidation and divestitures in the technology industry are trends that we expect to continue as companies attempt to strengthen or maintain market positions as the technology industry evolves. Industry consolidation may affect competition by creating larger and potentially stronger competitors in the markets in which we compete or competitors that position themselves as key or single-source vendors providing end-to-end technology solutions for the data center. Moreover, other companies may currently be planning to, or are under pressure by stockholders to, divest businesses. These divestitures may result in additional competitors that may have an advantage by focusing on a single product or service. We also compete in certain areas with our partners and potential partners, some of which may from time to time form new strategic alliances designed to position one or more of them as a key or single-source vendor, and this may adversely impact our relationship with an individual partner or a number of partners.

Our efforts to compete effectively may not be sufficient, which may adversely affect our business, financial condition, operating results and cash flows.

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Our continued success depends on our ability to adapt to a rapidly changing industry. Investment in new offerings, business strategies and initiatives could disrupt our ongoing business and may present risks not originally contemplated.

We operate in highly competitive markets that are characterized by rapid technological change, such as the transition of many of our enterprise customers to cloud computing environments and frequent new product and service announcements. Our continued success will depend on our ability to adapt to rapidly changing technologies and user preferences, to adapt our offerings to evolving industry standards, to predict user preferences and industry changes in order to continue to provide value to our customers and to improve the performance and reliability of our offerings. Our failure to adapt to such changes could harm our business, and our efforts to adapt to such changes could require substantial expenditures on our part to modify our offerings or infrastructure. Delays in developing, completing or delivering new or enhanced offerings and technologies could result in delayed or reduced revenue for those offerings and could also adversely affect customer acceptance of those offerings and technologies. The success of new and enhanced offering introductions depends on several factors, including our ability to invest significant resources in research and development in order to enhance our existing offerings and introduce new offerings in a timely manner, successfully promote the offerings, manage the risks associated with the offerings, make sufficient resources available to support the offerings and address any quality or other defects in the early stages of introduction. Even if we are able to enhance our existing offerings or introduce new offerings that are well perceived by the market, if our marketing or sales efforts do not generate interest in or sales for these offerings, they may be unsuccessful.

Moreover, we believe that our continued success depends on our investing in new business strategies or initiatives that complement our strategic direction and technology road map. Such endeavors may involve significant risks and uncertainties, including distraction of management’s attention away from other business operations, and insufficient revenue generation to offset liabilities and expenses undertaken with such strategies and initiatives. Because these endeavors may be inherently risky, no assurance can be given that such endeavors will not adversely affect our business, financial condition, operating results and cash flows.

If we fail to continue to establish and maintain strategic relationships with industry-leading companies, we may not be able to attract and retain a larger customer base.

Our success depends in part on our ability to continue to establish and maintain strategic relationships with industry-leading cloud service providers, hardware original equipment manufacturers (“OEMs”), independent software vendors (“ISVs”) and system integrators (“SIs”) to help us attract and retain a larger customer base. Many of these strategic partners have engineered and certified that their technologies run on or with our offerings and, in some cases, have built their products and solutions using our offerings. We may not be able to maintain these relationships or replace them on attractive terms in the future. Some of our strategic partners offer competing products and services. As a result of these factors, many of the companies with which we have strategic alliances may choose to pursue alternative technologies and develop alternative products and services in addition to or in lieu of our offerings, either on their own or in collaboration with others, including our competitors. Moreover, we cannot guarantee that the companies with which we have strategic relationships will market our offerings effectively or continue to devote the resources necessary to provide us with effective sales, marketing and technical support. As our agreements with strategic partners terminate or expire, we may be unable to renew or replace these agreements on comparable terms, or at all.

We rely, to a significant degree, on indirect sales channels for the distribution of our offerings, and disruption within these channels could adversely affect our business, financial condition, operating results and cash flows.

We use a variety of different indirect distribution methods for our offerings, including channel partners, such as certified cloud and service providers, distributors, embedded technology partners, OEMs, ISVs, SIs and value added resellers. A number of these partners in turn distribute via their own networks of channel partners with whom we have no direct relationship. These relationships allow us to offer our technologies to a much larger customer base than we would otherwise be able through our direct sales and marketing efforts.

We rely, to a significant degree, on each of our channel partners to select, screen and maintain relationships with its distribution network and to distribute our offerings in a manner that is consistent with applicable law and regulatory requirements and our quality standards. If our channel partners or a partner in its distribution network violate applicable law or regulatory requirements or misrepresent the functionality of our offerings, our reputation could be damaged and we could be subject to potential liability. Furthermore, our channel partners may offer their own products and services or the products and services of other companies that compete with our offerings or may not distribute and market our offerings effectively. Moreover, our existing channel partner relationships do not, and any future channel partner relationships may not, provide for any exclusivity regarding marketing or distribution. In addition, if a channel partner is acquired by a competitor, its business units are reorganized or divested or its financial condition were to weaken, our revenue derived from that partner may be adversely impacted.

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Recruiting and retaining qualified channel partners and training them in the use of our enterprise technologies requires significant time and resources. If we fail to devote sufficient resources to support and expand our network of channel partners, our business may be adversely affected. In addition, because we rely on channel partners for the indirect distribution of our enterprise technologies, we may have little or no contact with the ultimate end-users of our technologies, thereby making it more difficult for us to establish brand awareness, ensure proper delivery and installation of our software, support ongoing customer requirements, estimate end-user demand, respond to evolving customer needs and obtain subscription renewals from end-users.

A portion of our sales to government entities have been made indirectly through our channel partners. Government entities may have statutory, contractual, or other legal rights to terminate contracts with our channel partners for convenience or due to a default, and any such termination may adversely impact our future operating results. Government entities routinely investigate and audit government contractors’ administrative processes, and any unfavorable audit could result in a government entity refusing to continue buying our offerings, a reduction of revenue or fines or civil or criminal liability if the audit uncovers improper or illegal activities.

If our indirect distribution channel is disrupted, we may be required to devote more resources to distribute our offerings directly and support our customers, which may not be as effective and could lead to higher costs, reduced revenue and growth that is slower than expected.

If we fail to effectively manage our growth, our business, financial condition, operating results and cash flows could be adversely affected.

We have expanded our operations significantly in recent years. For example, our total revenue increased from $2.92 billion for the fiscal year ended February 28, 2018 to $3.36 billion for the fiscal year ended February 28, 2019 (“fiscal 2019”). Moreover, the total number of our employees increased from approximately 11,870 as of February 28, 2018 to approximately 13,360 as of February 28, 2019. In addition, we continue to explore ways to extend our offerings and geographic reach. Our growth has placed and will likely continue to place a strain on our management systems, information systems, resources and internal controls. Our ability to successfully provide our offerings and implement our business plan requires adequate information systems and resources, internal controls and oversight from our senior management. As we expand in international markets, these challenges increase as a result of the need to support a growing business in an environment of multiple languages, cultures, customs, legal systems, dispute resolution systems, regulatory systems and commercial practices. As we grow, (i) we may not be able to adequately screen and hire or adequately train, supervise, manage or develop sufficient personnel, and (ii) we may not be able to develop or effectively manage our controls, oversight functions or information systems. If we are unable to effectively manage our growth, our business, financial condition, operating results and cash flows could be adversely affected.

We have entered into and may continue to enter into or seek to enter into business combinations and acquisitions, which may be difficult to complete and integrate, disrupt our business, divert management’s attention, adversely affect our business, financial condition, operating results and cash flows or dilute stockholder value.

As part of our business strategy, we have in the past entered into business combinations and acquisitions, and we may continue to do so in the future subject to the restrictions under the Merger Agreement. Under the terms of the Merger Agreement, without the consent of IBM, we may not acquire businesses outside of the ordinary course of business above specified thresholds or that could reasonably be expected to increase the risk of not obtaining, or the risk of materially impeding or delaying the obtaining of, any regulatory approvals with respect to the Merger. These types of transactions can increase the expense of running our business and present significant challenges and risks, including:

• integrating the acquired business’ accounting, financial reporting, management, information and information security, human resource and other administrative systems to permit effective management and reporting, and the lack of control if such integration is delayed or not implemented;

• incorporating and further developing acquired products or technology into our offerings and maintaining quality standards consistent with our brands;

• effectively evaluating talent at an acquired business or identifying cultural challenges associated with integrating employees from the acquired business into our organization;

• losing key employees of the acquired business;

• achieving the expected benefits of the transaction, which may include generating greater market acceptance of our offerings and technologies, increasing our revenue or integrating the assets acquired into one or more of our current offerings;

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• increasing or adding operating expenses related to the acquired business or technology;

• identifying acquisition targets that complement our strategic direction and technology road map;

• gathering full information regarding a business or technology prior to a transaction, including the identification and assessment of liabilities, claims or other circumstances that could result in litigation or regulatory exposure, unfavorable accounting treatment, unexpected tax implications and other adverse effects on our business;

• maintaining or establishing acceptable standards, controls, procedures and policies;

• disrupting our ongoing business and distracting management;

• impairing relationships with our employees, partners or customers as a result of any integration of new management and other personnel, products or technology or as a result of the changes in the competitive landscape affected by the transaction;

• maintaining good relationships with customers or business partners of the acquired business;

• incurring expenses related to the transaction;

• assuming claims and liabilities from the acquired business or technology, or that are otherwise related to the transaction;

• entering into new markets in which we have little or no experience or in which competitors may have stronger market positions;

• impairing of intangible assets and goodwill acquired in transactions; and

• for foreign transactions, managing additional risks related to the integration of operations across different cultures and languages, and the economic, political, compliance and regulatory risks associated with specific countries.

There can be no assurance that we will manage these challenges and risks successfully. Moreover, if we are not successful in completing transactions that we have pursued or may pursue, our business may be adversely affected, and we may incur substantial expenses and divert significant management time and resources. In addition, in pursuing and completing such transactions, we could use substantial portions of our available cash as all or a portion of the purchase price for these transactions or as retention incentives to employees of the acquired business, or we may incur substantial debt. We could also issue additional securities as all or a portion of the purchase price for these transactions or as retention incentives to employees of the acquired business, which could cause our stockholders to suffer significant dilution. Any transaction may not generate additional revenue or profit for us, or may take longer to do so than expected, which may adversely affect our business, financial condition, operating results and cash flows.

Our offerings and third-party products upon which our offerings depend may contain errors or defects that may be costly to correct or work around, delay market acceptance of our enterprise technologies and expose us to claims and litigation.

Despite our testing procedures, errors have been and may continue to be found in our offerings after deployment. This risk is amplified by the fact that much of the code in our offerings is developed by independent parties over whom we exercise no supervision or control. If errors are discovered, we may have to make significant expenditures of capital and devote significant technical resources to analyze, correct, eliminate or work around them, and we may not be able to successfully do so in a timely manner or at all.

In addition, errors or defects (including deviations from published specifications) in our technologies or the design architecture or implementation of third-party products upon which our offerings depend could have a material adverse effect on our business, financial condition, operating results and cash flows. For example, in January 2018, computer security researchers publicly disclosed the discovery of hardware-based security vulnerabilities known as Meltdown and Spectre. The Meltdown and Spectre vulnerabilities affect many modern microprocessors and could allow an unauthorized individual to gain access to privileged memory that would otherwise be inaccessible. While we have issued updates for our offerings designed to address the Meltdown and Spectre vulnerabilities, such updates could slow the performance of affected machines. Meltdown and Spectre and similar vulnerabilities, errors or defects in our technologies or the third-party products on which our offerings depend could cause system failures, security breaches, loss of data, performance issues or other adverse effects for our customers who may assert warranty and other claims for substantial damages against us.

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Although our agreements with our customers often contain provisions that seek to limit our exposure to potential product liability claims, it is possible that these provisions may not be effective or enforceable under the laws of some jurisdictions. While we seek to insure against these types of claims, our insurance policies may not adequately limit our exposure to such claims. These claims, even if unsuccessful, could be costly and time-consuming to defend and could adversely affect our business, financial condition, operating results and cash flows. Any errors or defects in our offerings or third-party products upon which our offerings depend could result in a loss of, or delay in, market acceptance of our offerings, loss of existing or potential customers and delayed or lost revenue, damage to our reputation, declining market acceptance of emerging technologies, such as cloud computing, negatively affect demand for our technologies or delay their release, or otherwise adversely affect our business, financial condition, operating results and cash flows.

Security breaches and data loss may expose us to liability, harm our reputation and adversely affect our business.

Our business involves the production and distribution of enterprise software technologies, as well as hosting applications. As part of our business, we receive, store and process our data, as well as our employees’, customers’ and partners’ data. We also work with third-party service providers and vendors that offer technologies, systems and services that we use in our business operations and in connection with the receipt, storage and processing of such data. While we take security measures relating to our offerings and business operations seriously and devote significant resources to implement and maintain security measures, those measures (or those of our third-party service providers and vendors) may not prevent security breaches or data loss or unauthorized disclosure that could harm our business, our employees or the businesses of our customers and partners. Inadequate technology or security measures, the failure to follow proper security protocols or other factors may result in data loss or unauthorized disclosure or a compromise or breach of our systems and the data we receive, store and process (or systems and the data received, stored and processed by our third-party service providers and vendors). Security measures may be breached or data may be lost or disclosed by third parties (such as through social engineering techniques to induce disclosure of passwords or other sensitive information, other actions to gain access to our data or our customers’ or partners’ data, or the use of ineffective security measures or failure to follow proper security protocols), human error (such as the use of weak passwords or unencrypted devices), malfeasance or vulnerabilities (including vulnerabilities in third-party products upon which our offerings depend as well as vulnerabilities of our third-party service providers and vendors) or bugs found in software code. A party who is able to circumvent security measures or exploit inadequacies in security measures, could, among other things, misappropriate proprietary information (including information about our employees, customers and partners, our customers’ information, financial data and data that others could use to compete against us), cause the loss, misuse or disclosure of some or all of this information, cause interruptions or denial of service in our or our customers’ operations, cause delays in development efforts or expose customers (and their customers) to computer viruses or other disruptions or vulnerabilities. A compromise to these systems could remain undetected for an extended period of time, exacerbating the impact of that compromise. While we have not experienced a cybersecurity incident that has had a material adverse effect on our business, reputation, financial condition, operating results or cash flows, we have experienced the unauthorized exposure of limited data by a third-party service provider.

Risks arising from or related to security breaches or data loss are likely to increase as we continue to grow our cloud and services offerings and as we receive, store and process more data. Actual or perceived vulnerabilities may lead to regulatory investigations and sanctions, claims against us by current or former employees, customers, partners or other third parties, or costs, such as those related to providing breach notifications and fraud monitoring. While our customer agreements typically contain provisions that seek to limit our liability, there is no assurance these provisions will be enforceable and effective under applicable law. In addition, the cost and operational consequences of remediating any incidents, implementing further data protection measures or upgrading our cybersecurity systems could be significant. Moreover, because the techniques used to obtain unauthorized access, disable or degrade service or sabotage systems change frequently, often grow more complex over time and often are not recognized until launched against a target, we may be unable to anticipate these techniques or to implement adequate and timely preventative measures, which could exacerbate the effects of a breach. We can make no assurance that we will be able to detect, prevent, timely and adequately address, or mitigate the negative effects of cyberattacks or other security breaches. Any loss of data or compromise of our systems or the data we receive, store or process (or systems and the data received, stored and processed by our third-party service providers and vendors) could result in a loss of confidence in the security of our offerings, damage our reputation, cause the loss of current or potential customers or partners, lead to legal liability and adversely affect our business, financial condition, operating results and cash flows.

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The duration and extent of economic downturns, regional financial instability, and economic and market conditions in general could adversely affect our business, financial condition, operating results and cash flows.

Economic weakness and uncertainty, tightened credit markets and constrained IT spending from time to time contribute to slowdowns in the technology industry, as well as in the industries of our customers and the geographic regions in which we operate, which may result in reduced demand and increased price competition for our offerings. Our operating results in one or more geographic regions or customer industries may also be affected by uncertain or changing economic conditions within that region or industry. Uncertainty about future economic conditions may, among other things, negatively impact our current and prospective customers and result in delays or reductions in technology purchases or lengthen our sales cycle. Adverse economic conditions also may negatively impact our ability to obtain payment for outstanding debts owed to us by our customers or other parties with whom we do business. In addition, such conditions may impact our investment portfolio, and we could determine that some of our investments have experienced an other-than-temporary decline in fair value, requiring an impairment charge that could adversely impact our financial condition and operating results. Also, such conditions may make it more difficult to forecast operating results. If global economic conditions, or economic conditions in the U.S., Europe, Asia or in other key geographic regions or customer industries, were to deteriorate, current and prospective customers may delay or reduce their IT spending, which could adversely affect our business, financial condition, operating results and cash flows.

We depend on our key employees, and our inability to attract and retain such employees could adversely affect our business or diminish our brands.

Competition in our industry for qualified employees, especially sales and technical employees, is intense and our competitors may directly target our employees. Our inability to attract and retain key employees could hinder our influence in open source projects and seriously impede our success. We have from time to time in the past experienced, and we may experience in the future, difficulty in hiring and retaining highly skilled employees with appropriate qualifications. Potential changes to U.S. immigration policies may inhibit our ability to hire and retain qualified employees to the extent these policies restrain the mobility of technical and professional talent. Also, to the extent we hire personnel from competitors, we may be subject to allegations that they have been improperly solicited, that they have divulged proprietary or other confidential information, or that their former employers own their inventions or other work product. Moreover, the loss of these key employees, particularly to a competitor, some of which may be in a position to offer greater compensation, and any resulting loss of customers could reduce our market share and diminish our brands.

A number of our key employees have become, or will become, vested in a significant amount of their equity compensation awards. Employees may be more likely to leave us after a significant portion of their equity compensation awards fully vest, especially if the shares underlying the equity awards have significantly appreciated in value. Additionally, as we grow, there may be less equity compensation to award per employee. If we do not succeed in attracting and retaining key personnel, our business, financial performance, operating results and cash flows may be adversely affected.

We may not be able to continue to attract and retain capable management.

Our future success depends on the continued services and effectiveness of a number of key management personnel. The loss of these individuals, particularly to a competitor, some of which may be in a position to offer greater compensation, could adversely affect our business or stock price.

Our ability to retain key management personnel or hire capable new management personnel as we grow may be challenged to the extent that other companies are able to offer more attractive opportunities to the individuals we seek to hire or retain. In addition, historically we have used share-based compensation as a key component of our compensation packages. If the price of our common stock falls, the value of our share-based awards to recipients is reduced. Such events, or if we are unable to secure stockholder approval for increases in the number of shares eligible for share-based compensation grants, could adversely affect our ability to successfully attract and retain key management personnel. Effective succession planning is also important to our long-term success. Failure to ensure effective transfer of knowledge and smooth transitions involving key management personnel could hinder our strategic planning and execution.

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Because of the characteristics of open source software, there are few technology barriers to entry into the open source market by new competitors and it may be relatively easy for competitors, some of which may have greater resources than we have, to enter our markets and compete with us.

One of the characteristics of open source software is that anyone may modify and redistribute the existing open source software and use it to compete with us. Such competition can develop without the degree of overhead and lead time required by traditional proprietary software companies. It is possible for competitors with greater resources than ours to develop their own open source solutions or acquire a smaller business that has developed open source offerings that compete with our offerings, potentially reducing the demand for, and putting price pressure on, our offerings. In addition, some competitors make their open source software available for free download and use on an ad hoc basis or may position their open source software as a loss leader. We cannot guarantee that we will be able to compete successfully against current and future competitors or that competitive pressure and/or the availability of open source software will not result in price reductions, reduced operating margins and loss of market share. Additionally, any failure by us to provide high-quality technical support, or the perception that we do not provide high-quality technical support, could harm our reputation and negatively impact our ability to sell subscriptions for our open source offerings to existing and prospective customers. If we are unable to differentiate our open source offerings from those of our competitors or compete effectively with other open source offerings, our business, financial condition, operation results and cash flows could be adversely affected.

Our corporate culture has contributed to our success, and if we cannot maintain this culture as we grow, we could lose the innovation, creativity and collaboration fostered by our culture, and our business may be adversely affected.

We believe that a critical contributor to our success has been our corporate culture, which we believe fosters innovation, creativity and collaboration. As our organization grows, our employees (including remote workers) and our resources become more globally dispersed and our organizational management structures become more complex, we may find it increasingly difficult to maintain these beneficial aspects of our corporate culture. If we are unable to maintain our corporate culture, we may find it difficult to attract and retain motivated employees, continue to perform at current levels or execute on our business strategy. As a result, our business, financial condition, operating results and cash flows could be adversely affected.

Our emerging technology offerings are based on developing technologies and business models, and the potential market for these offerings remains uncertain.

Our emerging technology offerings, which include our cloud and storage offerings, are based on developing technologies and business models, the success of which will depend on the technological and operational benefits and cost savings associated with the adoption of these technologies. These technologies are rapidly evolving, and their development is a complex and uncertain process requiring high levels of innovation and investment as well as the accurate anticipation of technology trends, market demand and customer needs. We expect competition to remain intense and, as with many emerging IT sectors, these technologies may be subject to a “first mover” effect pursuant to which certain product offerings rapidly capture a significant portion of market share and developer attention. Moreover, we may make errors in reacting to relevant business trends and predicting which technologies will be successful or otherwise develop into industry standards.

Adoption of emerging technologies may occur more slowly or less pervasively than we expect and the revenue growth associated with these offerings may be slower than currently expected. Moreover, even if emerging technologies are adopted widely by enterprises, our offerings in these areas may not attract a sufficient number of users or generate attractive financial results. We incur expenses associated with these offerings in advance of our ability to generate associated revenue. Demand for our emerging technology offerings may unfavorably impact demand for our other offerings, including software subscriptions and related professional services. For example, revenue growth in our Middleware portfolio has moderated as customers shift their workloads from traditional Java deployments to containerized environments with middleware-as-a-service on OpenShift. If the market for our emerging technologies offerings fails to develop adequately, it could have an adverse effect on our business, financial condition, operating results and cash flows.

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We may experience a decline in the demand for our offerings.

Demand for our offerings depends substantially on the general demand for enterprise software, which fluctuates based on numerous factors, including the spending levels and growth of our current and prospective customers, and general economic conditions. In addition, our customers generally undertake a significant evaluation process that may result in a lengthy sales cycle. We spend substantial time, effort, and money on our sales efforts, including developing and implementing appropriate go-to-market strategies and training our sales force and channel partners in order to effectively market new offerings, without any assurance that our efforts will produce any sales. The ability of our sales team to execute effectively has also adversely impacted financial performance in certain geographic regions from time to time. The purchase of our offerings may be discretionary and can involve significant expenditures. If our current and prospective customers cut costs, then they may significantly reduce their enterprise software expenditures.

An increased focus on developing and providing emerging technology offerings may place a greater emphasis on marketing more holistic solutions, rather than individual offerings. Consequently, we may need to adapt our marketing and pricing strategies for our offerings, our customers’ purchasing decisions may become more complex and require a more significant evaluation process and additional levels of approval and the duration of sales cycles for our offerings may increase.

If demand for our offerings declines, our business, financial condition, operating results and cash flows could be adversely affected.

If our customers do not renew their subscription agreements with us, if they renew on less favorable terms, or if they renew their subscription agreements prior to the expiration of such agreements, our business, financial results, operating results and cash flows may be adversely affected.

Our customers may not renew their subscriptions after the expiration of their subscription agreements and in fact some customers elect not to do so. In addition, our customers may choose a lower-priced edition of our offerings, fewer subscriptions or to renew their subscription agreements prior to the expiration of such agreements. Our historical data with respect to rates of customer subscription renewals is not predictive of future customer renewal rates. Our customers’ renewal rates may decline or fluctuate as a result of a number of factors, including their level of satisfaction with our offerings, their ability to implement our hybrid cloud technologies and their ability to continue their operations and spending levels. If we experience a decline in the renewal rates or a change in renewal timing for our customers or they opt for lower-priced editions of our offerings or fewer subscriptions, our business, financial condition, operating results and cash flows may be adversely affected.

Our business model may encounter customer resistance.

We provide Red Hat enterprise technologies primarily under annual or multi-year subscriptions. A subscription generally entitles a customer to, among other things, a specified level of support, as well as security updates, fixes, functionality enhancements, upgrades to the technologies, each, if and when available, and compatibility with an ecosystem of certified hardware and software. While we believe this practice complies with the requirements of the GNU General Public License, and while we have reviewed this practice with the Free Software Foundation, the organization that maintains and provides interpretations of the GNU General Public License, customers may fail to honor the terms of our subscription agreements.

As technologies and the markets for our enterprise offerings change, our annual or multi-year subscription-based business model may no longer meet the needs of our customers. For example, a business model based on annual or multi-year subscriptions may no longer be competitive in an environment where disruptive technologies (such as cloud computing) enable customers to consume competitive offerings available from companies such as Amazon Web Services, Inc., Google Inc. and Microsoft Corporation on an hourly basis or for free. We also develop and offer these disruptive technologies with consumption-based pricing, which may have an effect on the demand for our subscription-based offerings.

If we are unable to adapt our business model to changes in the marketplace, our business, financial condition, operating results and cash flows could be adversely affected.

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If third-party enterprise hardware and software providers do not continue to make their products and services compatible with our offerings, our software may cease to be competitive and our business, financial condition, operating results and cash flows may be adversely affected.

The competitive position of our offerings is dependent on their compatibility with products and services of third-party enterprise hardware and software companies. To the extent that a hardware or software vendor might have or develop products and services that compete with ours, the vendor may have an incentive to seek to limit the performance, functionality or compatibility of our offerings when used with one or more of the vendor’s offerings. In addition, these vendors may fail to support or issue statements of compatibility or certification of our offerings when used with their offerings. We intend to encourage the development of additional applications that operate on both current and new versions of our offerings by, among other means, attracting third-party developers to our offerings, providing open source tools to create these applications and maintaining our existing developer relationships through marketing and technical support. We intend to encourage the compatibility of our software with various third-party hardware and software offerings by maintaining and expanding our relationships, both business and technical, with relevant independent hardware and software vendors. If we are not successful in achieving these goals, however, our offerings may not be competitive and our business, financial condition, operating results and cash flows may be adversely affected.

If open source software programmers, most of whom we do not employ, do not continue to develop and enhance open source technologies, we may be unable to develop new technologies, adequately enhance our existing technologies or meet customer requirements for innovation, quality and price.

We rely to a significant degree on a number of largely informal communities of independent open source software programmers to develop and enhance our enterprise technologies. For example, Linus Torvalds, a prominent open source software developer, and a relatively small group of software engineers, many of whom are not employed by us, are primarily responsible for the development and evolution of the Linux kernel, which is the heart of the Red Hat Enterprise Linux operating system. If these groups of programmers fail to adequately further develop and enhance open source technologies, we would have to rely on other parties to develop and enhance our offerings or we would need to develop and enhance our offerings with our own resources. We cannot predict whether further developments and enhancements to these technologies would be available from reliable alternative sources. In either event, our development expenses could be increased and our technology release and upgrade schedules could be delayed. Moreover, if third-party software programmers fail to adequately further develop and enhance open source technologies, the development and adoption of these technologies could be stifled and our offerings could become less competitive. Delays in developing, completing or delivering new or enhanced offerings could result in delayed or reduced revenue for those offerings and could also adversely affect customer acceptance of those offerings.

Our continued success depends on our ability to maintain and enhance strong brands.

We believe that the brand identities that we have developed have contributed significantly to the success of our business. We also believe that maintaining and enhancing our brands is important to expanding our customer and partner base and attracting talented employees. In order to maintain and enhance our brands, we may be required to make further investments that may not be successful. Maintaining our brands will depend in part on our ability to remain a leader in open source technology and our ability to continue to provide high-quality offerings. If we fail to promote and maintain our brands, or if we incur excessive costs in doing so, our business, financial condition, operating results and cash flows may be adversely affected.

We are vulnerable to technology infrastructure failures, which could harm our reputation and adversely affect our business.

We rely on our technology infrastructure, and the technology infrastructure of third parties, for many functions, including selling our offerings, supporting our partners, fulfilling orders and billing, and collecting and making payments. This technology infrastructure may be vulnerable to damage or interruption from natural disasters, power loss, telecommunication failures, terrorist attacks, computer intrusions, vulnerabilities and viruses, software errors, computer denial-of-service attacks and other events. A significant number of the systems making up this infrastructure are not redundant, and our disaster recovery planning may not be sufficient for every eventuality. This technology infrastructure may fail or be vulnerable to damage or interruption because of actions by third parties or employee error or malfeasance. We may not carry business interruption insurance sufficient to protect us from all losses that may result from interruptions in our services as a result of technology infrastructure failures or to cover all contingencies. Any interruption in the availability of our websites and on-line interactions with customers or partners may cause a reduction in customer or partner satisfaction levels, which in turn could cause additional claims, reduced revenue or loss of customers or partners. Despite any precautions we may take, such problems could result in, among other consequences, a loss of data, loss of confidence in the stability and reliability of our offerings, damage to our reputation, and legal liability, all of which may adversely affect our business, financial condition, operating results and cash flows.

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A decline in or reprioritization of funding in the U.S. or foreign government budgets or delays in the budget process could adversely affect our business, financial condition, operating results and cash flows.

We derive, and expect to continue to derive, a portion of our revenue from U.S. and foreign governments. Government deficit reduction and austerity measures can place pressure on U.S. and foreign government spending. Government contracts could be subject to future funding that may affect the extension or termination of programs and generally are subject to the right of the government to terminate for convenience or non-appropriation. The termination of, or delayed or reduced funding for, government-sponsored programs and contracts from which we derive revenue could adversely affect our business, financial condition, operating results and cash flows.

We may be unable to predict the future course of open source technology development, which could reduce the market appeal of our offerings, damage our reputation and adversely affect our business, financial condition, operating results and cash flows.

We do not exercise control over many aspects of the development of open source technology. Different groups of open source software programmers compete with one another to develop new technology. Typically, the technology developed by one group will become more widely used than that developed by others. As a result, a new technology we acquire or adopt and incorporate into our offerings could become less widely used or accepted than a competing technology, which could reduce the market appeal of our offerings and harm our reputation, diminish our brands and adversely affect our business, financial condition, operating results and cash flows.

We include software licensed from other parties in our offerings, the loss of which could increase our costs and delay availability of our offerings.

We utilize various types of software licensed from unaffiliated third parties in our offerings. Aspects of our business could be disrupted if any of the software we license from others or functional equivalents of this software were no longer available to us, no longer offered to us on commercially reasonable terms or changed in ways or included defects that make the third-party software unsuitable for our use. In these cases, we would be required to either redesign our technologies to function with software available from other parties, develop these components ourselves or eliminate the functionality, which could result in increased costs, the need to mitigate customer issues, delays in delivery of our offerings and the release of new offerings and limit the features available in our current or future offerings.

RISKS RELATED TO LEGAL UNCERTAINTY

If our technologies are found or alleged to infringe third-party intellectual property rights, we may be required to take costly and time-consuming actions to meet our commitments to customers.

We regularly commit to our subscription customers that if portions of our offerings are found to infringe third-party intellectual property rights we will, at our expense and option: (i) obtain the right for the customer to continue to use the technology consistent with their subscription agreement with us; (ii) modify the technology so that its use is non-infringing; or (iii) replace the infringing component with a non-infringing component, and defend them against specified infringement claims. Although we cannot predict whether we will need to satisfy these commitments and we often have limitations on these commitments, satisfying these commitments could be costly, be time-consuming, divert the attention of technical and management personnel, and adversely affect our business, financial condition, operating results and cash flows. In addition, our insurance policies would likely not adequately cover our exposure to this type of claim. Finally, because we have agreed to defend our subscription customers against specified infringement claims arising from the use of our offerings, we could become involved in litigation brought against such customers if our services and technology are allegedly implicated.

We are vulnerable to claims that our technologies infringe third-party intellectual property rights, and an unfavorable legal decision affecting our intellectual property could adversely affect our business.

We are vulnerable to claims that our technologies infringe third-party intellectual property rights, including patents, copyrights, trademarks and trade secrets, because our technologies are comprised of software components, many of which are developed by numerous independent parties. We are also unlikely to be able to assess adequately the relevance of patents to our technologies, and may be unable to take appropriate responsive action in a timely or economic manner because, among other reasons, the scope of software patent protection is often not well defined or readily determinable, patent applications in the U.S. are not publicly disclosed at the time of filing, and the number of software patents that are issued each year is significant and growing. Our exposure to risks associated with the use of intellectual property may increase as a result of acquisitions. In addition, third parties may make infringement and similar or related claims after we have acquired technology that had not been asserted prior to our acquisition of such technology.

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In the past, our technologies have been subject to intellectual property infringement claims. Some of these claims have been brought by entities that do not design, manufacture, or distribute products or services or that acquire intellectual property such as patents for the sole purpose of monetizing their acquired intellectual property through asserting claims of infringement. As these entities do not have operating businesses of their own and therefore have limited risk of counterclaims for damages or injunctive relief, it may be difficult to deter them from bringing intellectual property infringement claims. We expect to face the possibility of more intellectual property infringement claims as our prominence increases, business activities expand, market share and revenue grow, the number of products and competitors in our industry grows and the functionality of products in different portions of the industry overlap. We may not be able to accurately assess the risk related to these suits, and we may be unable to accurately assess our level of exposure.

Defending patent and other intellectual property claims, even claims without significant merit, can be time-consuming and costly and can divert the attention of technical and management personnel. We may receive unfavorable preliminary or interim rulings in the course of litigation, and there can be no assurances that favorable final outcomes will be obtained in all cases. We may decide to settle certain lawsuits and disputes on terms that are disadvantageous to us. Similarly, if any litigation to which we are a party is resolved adversely, we may be subject to an unfavorable judgment that may not be reversed upon appeal. The terms of such a settlement or judgment may require us to cease offering certain of our technologies or pay substantial amounts to the other party. In addition, we may have to seek a license to continue offering technologies found to be in violation of a third party’s rights, which may not be available on reasonable terms, or at all, and may significantly increase our operating costs and expenses and which could have a material adverse effect on our business, financial condition and operating results. As a result, we may also be required to develop alternative non-infringing technology or practices or discontinue the practices. The development of alternative non-infringing technology or practices could require significant effort and expense or may not be feasible.

An unfavorable legal decision regarding the intellectual property in and to our technology and other offerings could adversely affect our business, financial condition, operating results and cash flows. See Part II, Item 1, “Legal Proceedings” for additional information.

Our activities, or the activities of our partners, may violate anti-corruption laws and regulations that apply to us.

In many foreign countries, particularly in certain developing economies, there may be business practices that are prohibited by regulations that may apply to us, such as the U.S. Foreign Corrupt Practices Act and similar laws. Although we have policies and procedures designed to help promote compliance with these laws, our employees, contractors, partners and agents, as well as those companies to which we outsource certain of our business operations or which we acquire, may take actions in violation of our policies and procedures. Any violation of these laws and regulations could result in fines, criminal sanctions against us, our officers, or our employees, prohibitions on the conduct of our business, and damage to our reputation.

Governmental regulations affecting the import or export of software could adversely impact our business.

Due to the global nature of our business, we are subject to import and export restrictions and regulations, including the Export Administration Regulations administered by the U.S. Commerce Department’s Bureau of Industry and Security (“BIS”) and the trade and economic sanctions regulations administered by the U.S. Treasury Department’s Office of Foreign Assets Control (“OFAC”). The U.S., through the BIS and OFAC, places restrictions on the sale or export of certain products and services to certain countries and persons (“denied parties”). Violators of these export control and sanctions laws may be subject to significant penalties, which may include significant monetary fines, criminal proceedings against them and their officers and employees, a denial of export privileges, and suspension or debarment from selling products or services to the federal government. Any such penalties could have an adverse effect on our business, financial condition, operating results and cash flows. In addition, the political and media scrutiny surrounding any governmental investigation of us could cause us significant expense and reputational harm and distract senior executives from managing our normal day-to-day operations.

Our products could also be shipped to denied parties by third parties, including our channel partners. Even though we take precautions to ensure that our channel partners comply with all relevant import and export regulations, any failure by our channel partners to comply with such regulations could have negative consequences for us, including reputational harm, government investigations and penalties.

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We could be prevented from selling or developing our software if the GNU General Public License and similar licenses under which our technologies are developed and licensed are not enforceable or are modified so as to become incompatible with other open source licenses.

A number of our offerings, including Red Hat Enterprise Linux, have been developed and licensed under the GNU General Public License and similar open source licenses. These licenses state that any program licensed under them may be liberally copied, modified and distributed. It is possible that a court would hold these licenses to be unenforceable or that someone could assert a claim for proprietary rights in a program developed and distributed under them. Additionally, if any of the open source components of our offerings may not be liberally copied, modified or distributed, then our ability to distribute or develop all or a portion of our offerings could be adversely impacted. In addition, licensors of open source software employed in our offerings may, from time to time, modify the terms of their license agreements in such a manner that those license terms may become incompatible with other open source licenses in our offerings or our end user license agreement, and thus could, among other consequences, prevent us from distributing the software code subject to the modified license.

Our efforts to protect our trademarks may not be adequate to prevent third parties from misappropriating our intellectual property rights in our trademarks.

Our collection of trademarks is valuable and important to our business. The protective steps we have taken in the past may have been, and may in the future continue to be, inadequate to protect and deter misappropriation of our trademark rights. Policing unauthorized use of our trademark rights is difficult, expensive and time-consuming and our efforts may be inadequate. We may be unable to detect the unauthorized use of, or take appropriate steps to enforce, our trademark rights in a timely manner. We have registered some of our trademarks in countries in North America, South America, Europe, Asia, Africa and Australia and have other trademark applications pending in various countries around the world. Effective trademark protection may not be available in every country in which we offer or intend to distribute our offerings. We may be unable to prevent third parties from acquiring domain names that are similar to, infringe upon, or diminish the value of our trademarks and other proprietary rights. Failure to adequately protect our trademark rights could damage or even destroy one or more of our brands and impair our ability to compete effectively. Furthermore, defending or enforcing our trademark rights could result in the expenditure of significant financial and managerial resources. The loss of any material trademark could have a material adverse effect on our business, financial condition or operating results.

Efforts to assert intellectual property ownership rights in our technologies could impact our standing in the open source community, which could limit our technology innovation capabilities and adversely affect our business.

When we undertake actions to protect and maintain ownership and control over our intellectual property, including patents, copyrights and trademark rights, our standing in the open source community could be adversely affected as the community supports the ability to write and share code freely. This in turn could limit our ability to continue to rely on this community, upon which we are dependent, as a resource to help develop and improve our technologies and further our research and development efforts, which could adversely affect our business.

Our “Patent Promise” on software patents limits our ability to enforce our patent rights in certain circumstances.

As part of our commitment to the open source community, we provide our Patent Promise on software patents. Under our Patent Promise, we agree, subject to certain limitations, to not enforce our patent rights against users of open source software covered by any open source license listed by the Open Source Initiative as meeting its definition of “Open Source” or listed by the Free Software Foundation as meeting its definition of “Free Software.” While we may be able to claim protection of our intellectual property under other rights, such as trade secrets or contractual rights, our Patent Promise effectively limits our ability to assert our patent rights against these third parties (even if we were to conclude that their use infringes our patents with competing offerings), unless any such third party asserts its patent rights against us. This limitation on our ability to assert our patent rights against others could harm our business and ability to compete.

We are, and may become, involved in disputes and lawsuits that could adversely affect our business.

Lawsuits or legal proceedings may be commenced against us. These disputes and proceedings may involve significant expense and divert the attention of management and other employees. If we do not prevail in these matters, we could be required to pay substantial damages or settlement costs, which could adversely affect our business, financial condition, operating results and cash flows. See Part II, Item 1, “Legal Proceedings” for additional information.

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If we fail to comply with laws and regulations regarding data privacy and protection, our business could be adversely affected.

Our business is subject to a variety of federal, state and international laws and regulations that apply to the collection, use, retention, protection, disclosure, transfer and processing of personal data. These data privacy- and protection-related laws and regulations are evolving, with new or modified laws and regulations proposed and implemented frequently and existing laws and regulations subject to new or different interpretations. For example, the European Union’s General Data Protection Regulation took effect in May 2018 establishing new requirements applicable to the handling and processing of personal data and providing for greater penalties for noncompliance.

Any failure by us to comply with data privacy- and protection-related laws and regulations could result in enforcement actions, significant penalties or other legal actions against us or our customers or suppliers. An actual or alleged failure to comply, which could result in negative publicity, reduce demand for our offerings, increase the cost of compliance, require changes in business practices that result in reduced revenue, restrict our ability to provide our offerings in certain locations, result in our customers’ inability to use our offerings and prohibit data transfers or result in other claims, liabilities or sanctions, including fines, could have an adverse effect on our business, financial condition, operating results and cash flows.

If we fail to comply with our customer contracts or government contracting regulations, our business could be adversely affected.

Our contracts with our customers may include specialized performance requirements. In particular, our contracts with federal, state, provincial and local governmental customers are subject to various government certification requirements, procurement regulations, contract provisions and other requirements relating to their formation, administration and performance. Any failure by us or our channel partners to comply with the specific provisions in our customer contracts or any violation of government contracting regulations by us or our channel partners could result in the imposition of various civil and criminal penalties, which may include termination of contracts, forfeiture of profits, suspension of payments and, in the case of our government contracts, fines and suspension from future government contracting. In addition, we may be subject to qui tam litigation, the process by which a private individual sues or prosecutes on behalf of the government relating to government contracts and shares in the proceeds of any successful litigation or settlement, which could include claims for up to treble damages. Further, any negative publicity related to our customer contracts or any proceedings surrounding them, regardless of its accuracy, may damage our business and affect our ability to compete for new contracts. If our customer contracts are terminated, if we are suspended from government work, if we are unable to meet government certification requirements, or if our ability to compete for new contracts is adversely affected, we could suffer an adverse effect on our business, financial condition, operating results and cash flows.

We may be subject to legal liability associated with providing online services or content.

We provide offerings, such as Red Hat OpenShift, that enable users to exchange information, advertise products and services, conduct business, and engage in various online activities. The law relating to the liability of providers of these online offerings for activities of their users is relatively unsettled and still developing both in the U.S. and internationally and may be significantly different from jurisdiction to jurisdiction. Claims could be brought against us based on the nature and content of information that we publish or to which we provide links or that may be posted online or generated by us or by third parties, including our customers. In addition, we could be subject to domestic or international actions alleging that certain content we have generated or third-party content that we have made available within our services violates applicable law.

Open source development and licensing practices may limit the value of our software copyright assets.

Our offerings, including Red Hat Enterprise Linux and Red Hat Middleware, are built primarily from software components licensed under various open source licenses. While some components are developed by our employees, we obtain many components from software developed and released by contributors to independent open source software development projects. Open source licenses grant licensees broad permissions to use, copy, modify and redistribute the software. Certain open source licenses, such as the GNU General Public License, impose significant limits on a distributor’s ability to license derivative works under more restrictive terms and generally require the distributor to disclose the source code of such works. The inclusion of software components governed by such licenses in our offerings limits our ability to use traditional proprietary software licensing models for those offerings. As a result, while we have substantial copyright interests in our software technologies, open source development and licensing practices may have the effect of limiting the value of our software copyright assets.

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RISKS RELATED TO FINANCIAL UNCERTAINTY

Our quarterly and annual operating results may not be a reliable indicator of our future financial performance.

Due to the unpredictability of the IT spending environment, among other reasons, our revenue and operating results have fluctuated and may continue to fluctuate. We base our current and projected future expense levels, in part, on our estimates of future revenue. Our expenses are, to a large extent, fixed in the short term. Accordingly, we may not be able to adjust our spending quickly enough to protect our projected operating results for a quarter if our revenue in that quarter falls short of our expectations.

Our fourth fiscal quarter has historically been our strongest quarter for sales. This pattern has become more pronounced as the number of customers with renewal dates occurring in the last half of our fiscal year has continued to increase. Additionally, a significant portion of our quarterly sales typically occur during the last weeks of the quarter and our operating results may be adversely impacted if we do not have sufficient time to bill and collect from our customers in the same quarter or fiscal year. Some of our customers may wait until the end of the quarter to negotiate their contracts in the hope of obtaining more favorable terms, which can also impede our ability to execute these contracts within the same quarter. Moreover, as an increasing number of customers enter into larger, multi-year transactions with us, such transactions tend to have longer sales cycles and can involve customers choosing to pay annually, which may impact our quarterly financial results. If, among other considerations, our future financial performance falls below the expectations of securities analysts or investors or we are unable to increase or maintain profitability, the market price of our common stock may decline.

We may not be able to meet the financial and operational challenges that we will encounter as our international operations, which represented approximately 45.3% of our total revenue for fiscal 2019, continue to expand.

Our international operations accounted for approximately 45.3% of total revenue for fiscal 2019. As we expand our international operations, we may have difficulty managing and administering a globally dispersed business and we may need to expend additional funds to, among other activities, reorganize our sales force and technical support services team, outsource or supplement general and administrative functions, staff key management positions, obtain additional information technology infrastructure and successfully localize offerings for a significant number of international markets, which may adversely affect our operating results. Additional challenges associated with the conduct of our business globally that may adversely affect our operating results include:

• fluctuations in exchange rates;

• pricing environments;

• longer payment cycles and less financial stability of customers;

• economic, political, compliance and regulatory risks associated with specific countries;

• laws and policies of the U.S. and other jurisdictions affecting trade, foreign investment, loans, immigration and taxes, including any adverse effects that may result from the United Kingdom’s vote to exit the European Union;

• difficulty selecting and monitoring channel partners;

• differing technology standards and customer requirements;

• lower levels of availability or use of the Internet, through which our software is often delivered;

• difficulty protecting our intellectual property rights globally due to, among other reasons, the uncertainty of laws and enforcement in certain countries relating to the protection of intellectual property rights;

• difficulty in staffing, developing and managing foreign operations as a result of distance and language, legal, cultural and other differences;

• different employee/employer relationships and the existence of works councils and labor unions;

• difficulty maintaining quality standards consistent with our brands;

• export and import laws and regulations that could prevent us from delivering our offerings into and from certain countries;

• public health risks and natural disasters, particularly in areas in which we have significant operations;

• limitations on the repatriation and investment of funds and foreign currency exchange restrictions; and

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• changes in import/export duties, quotas or other trade barriers that could affect the competitive pricing of our offerings and reduce our market share in some countries.

Any failure by us to effectively manage the challenges associated with the international expansion of our operations could adversely affect our business, financial condition, operating results and cash flows.

A substantial portion of our revenue is derived from our Red Hat Enterprise Linux platform.

During fiscal 2019, a substantial portion of our subscription revenue was derived from our Red Hat Enterprise Linux offerings. Although we are continuing to develop other offerings, we expect that revenue from Red Hat Enterprise Linux will constitute a majority of our revenue for the foreseeable future. Declines and variability in demand for Red Hat Enterprise Linux could occur as a result of:

• competitive products and pricing;

• failure to release new or enhanced versions of Red Hat Enterprise Linux on a timely basis, or at all;

• maturity of the market for Red Hat Enterprise Linux;

• technological change that we are unable to address with Red Hat Enterprise Linux; or

• future economic conditions.

Additionally, as more customers and potential customers virtualize their data centers and move computing projects to cloud environments, demand for operating systems such as Red Hat Enterprise Linux may decline. Moreover, as data centers become more virtualized and move to cloud environments, we may experience a decline in growth if we are unsuccessful in adapting our business model and offerings accordingly. Due to the concentration of our revenue from Red Hat Enterprise Linux, our business, financial condition, operating results and cash flows could be adversely affected by a decline in demand for Red Hat Enterprise Linux.

We are subject to risks of currency fluctuations and related hedging operations.

A portion of our business is conducted in currencies other than the U.S. dollar. Changes in exchange rates among other currencies and the U.S. dollar may affect our revenue, operating expenses and operating margins, which are reported in U.S. dollars. We cannot predict the impact of future exchange rate fluctuations. For example, the income statements of our non-U.S. operations are translated into U.S. dollars at the average exchange rates for each applicable month in a period. To the extent the U.S. dollar weakens against foreign currencies, the translation of these foreign currency statements results in increased revenue and operating expenses for our non-U.S. operations. Similarly, our revenue and operating expenses for our non-U.S. operations decreases if the U.S. dollar strengthens against foreign currencies.

As we expand international operations, our exposure to exchange rate fluctuations may increase. We may use financial instruments, primarily forward purchase contracts, to economically hedge currency commitments arising from trade accounts receivable, trade accounts payable and fixed purchase obligations. If these hedging activities are not successful or we change or reduce these hedging activities in the future, we may experience significant unexpected expenses from fluctuations in exchange rates. For information regarding our hedging activity, see Part I, Item 3, “Quantitative and Qualitative Disclosures About Market Risk.”

If our growth rate slows, our stock price could be adversely affected.

As the markets for our offerings mature and the scale of our business increases, our rate of revenue, deferred revenue and operating cash flow growth may be lower than the growth rates we experienced in earlier periods. In addition, to the extent that the adoption of our offerings occurs more slowly or is less pervasive than we expect or have experienced in the past, our growth rates may slow or decline, which could adversely affect our stock price. Historical period-to-period comparisons of our revenue, deferred revenue and operating cash flow may not be meaningful and are not guarantees of our future performance.

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We may be subject to greater tax liabilities.

We are subject to income tax and other taxes in the U.S. and in numerous foreign jurisdictions. Our domestic and foreign tax liabilities are dependent on the jurisdictions in which profits are determined to be earned and taxed. Additionally, the amount of taxes paid is subject to our interpretation of applicable tax laws in the jurisdictions in which we operate. Changes in tax laws, or in judicial or administrative interpretations of tax laws, could have an adverse effect on our business, financial condition, operating results and cash flows. Significant judgment, knowledge and experience are required in determining our worldwide provision for income taxes. Our future effective tax rate is impacted by a number of factors including our interpretation of the Tax Cuts and Jobs Act (the “Tax Act”) enacted into law on December 22, 2017 and the regulations, some of which are pending, and other interpretive guidance relative to the Tax Act, changes in the valuation of our deferred tax assets and liabilities, increases in expenses not deductible for tax, including impairment of goodwill in connection with acquisitions, and changes in available tax credits. We anticipate that the U.S. Department of the Treasury, the Internal Revenue Service and other standard-setting bodies will continue to issue regulations and interpretive guidance on how the provisions of the Tax Act will be applied or otherwise administered, and additional regulations or interpretive guidance may be issued in the future that is different from our current interpretation and could be made retroactive.

In the ordinary course of our business, there are many transactions and calculations where the ultimate tax determination is uncertain. We are regularly and increasingly subject to audits by tax authorities. Although we believe our tax estimates are reasonable, the final determination of tax audits and any potential litigation related to such audits could be materially different from our historical income tax provisions and accruals. Economic and political pressures to increase tax revenue in various jurisdictions may make resolving tax disputes more difficult. The results of an audit or litigation could adversely affect our financial statements in the period or periods for which that determination is made.

We earn a significant amount of our operating income from outside the U.S., and any repatriation of funds currently held in foreign jurisdictions that are not permanently reinvested may result in increased state taxes and/or additional foreign withholding taxes. In addition, the Tax Act significantly impacts how U.S. multinational corporations are taxed on foreign earnings. Numerous countries are evaluating their existing tax laws due in part, to recommendations made by the Organization for Economic Co-operation and Development’s (“OECD’s”) Base Erosion and Profit Shifting (“BEPS”) project and in response to the changes in U.S. tax laws. Although we cannot predict whether or in what form any legislation based on such proposals may be adopted by the countries in which we do business, future tax reform based on such proposals may increase the amount of taxes we pay and adversely affect our operating results and cash flows. Moreover, the European Commission and some foreign jurisdictions have introduced proposals to impose a separate tax on specified digital service activity. It is unclear how or if such proposals, if enacted, would impact us.

Because we recognize revenue from subscriptions over the term of the subscription, downturns or upturns in sales may not be immediately reflected in our operating results.

We generally recognize subscription revenue from customers ratably over the term of their subscription agreements, which are generally 12 to 36 months. As a result, much of the revenue we report in each quarter is deferred revenue from subscription agreements entered into during previous quarters. Consequently, a decline in subscriptions in any one quarter will not necessarily be fully reflected in the revenue in that quarter and will negatively affect our revenue in future quarters. In addition, we may be unable to adjust our cost structure to reflect this reduced revenue. Accordingly, the effect of significant downturns in sales and market acceptance of our service, and potential changes in our rate of renewals, including those due to customers renewing their subscription agreements prior to the expiration of such agreements or customers renewing with a multi-year agreement instead of an annual agreement, may not be fully reflected in our operating results until future periods. Our subscription model also makes it difficult for us to rapidly increase our revenue through additional sales in any period, as revenue from new customers must be recognized over the applicable subscription term. 

If our goodwill or amortizable intangible assets become impaired, we may be required to record a significant charge to earnings.

Under generally accepted accounting principles, we review our amortizable intangible assets for impairment when events or changes in circumstances indicate the carrying value may not be recoverable. Goodwill is required to be tested for impairment at least annually. Factors that may be considered a change in circumstances indicating that the carrying value of our goodwill or amortizable intangible assets may not be recoverable include a decline in stock price and market capitalization, reduced future cash flow estimates and slower growth rates in our industry. We may be required to record a significant charge to earnings in our financial statements during the period in which any impairment of our goodwill or amortizable intangible assets is determined, which could adversely affect our operating results.

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We may be exposed to potential risks if we do not have an effective system of disclosure controls or internal controls.

We must comply, on an on-going basis, with the requirements of the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”), including those provisions that establish the requirements for both management and auditors of public companies with respect to reporting on internal control over financial reporting. We cannot be certain that measures we have taken, and will take, will be sufficient or timely completed to meet these requirements on an on-going basis, or that we will be able to implement and maintain adequate disclosure controls and controls over our financial processes and reporting in the future, particularly in light of our rapid growth, international expansion, changes in our offerings and changes in accounting principles and guidance, which are expected to result in on-going changes to our control systems and areas of potential risk.

If we fail to maintain an effective system of disclosure controls or internal control over financial reporting, including satisfaction of the requirements of the Sarbanes-Oxley Act, we may not be able to accurately or timely report on our financial results or adequately identify and reduce fraud. As a result, the financial condition of our business could be adversely affected, current and potential future stockholders could lose confidence in us and/or our reported financial results, which may cause a negative effect on our trading price, and we could be exposed to litigation or regulatory proceedings, which may be costly or divert management attention.

Changes in accounting principles and guidance, or their interpretation, could result in unfavorable accounting charges or effects, including changes to previously filed financial statements, which could cause our stock to decline.

We prepare our consolidated financial statements in accordance with accounting principles generally accepted in the U.S. These principles are subject to interpretation by the SEC and various bodies formed to create and interpret appropriate accounting principles and guidance. A change in these principles or guidance, or in their interpretations, may have a significant effect on our reported results, as well as our processes and related controls, and may retroactively affect previously reported results.

Our investment portfolio is subject to credit and liquidity risks and fluctuations in the market value of our investments and interest rates. These risks may result in an impairment of, or the loss of all or a portion of, the value of our investments, an inability to sell our investments or a decline in interest income.

We maintain an investment portfolio of various holdings, types and maturities. Our portfolio generally consists of certificates of deposit, commercial paper, corporate securities, European sovereign and agency securities with a rating of AA or higher, money market funds, and U.S. government and agency securities. Although we follow an established investment policy and seek to minimize the risks associated with our investments by investing primarily in investment grade, highly liquid securities and by limiting the amounts invested with any one institution, type of security or issuer, we cannot give assurances that the assets in our investment portfolio will not lose value or become impaired, or that our interest income will not decline.

A significant part of our short-term and long-term investment portfolio consists of U.S. government and agency securities. If global credit and equity markets experience prolonged periods of decline, or if there is a default or downgrade of U.S. government or agency debt, our investment portfolio may be adversely impacted and we could determine that some of our investments have experienced an other-than-temporary decline in fair value, requiring impairment charges that could adversely affect our financial condition and operating results.

Future fluctuations and uncertainty in economic and market conditions could adversely affect the market value of our investments, and we could record additional impairment charges and lose some or all of the principal value of investments in our portfolio. A total loss of an investment or a significant decline in the value of our investment portfolio could adversely affect our financial condition and operating results. For information regarding the sensitivity of and risks associated with the market value of portfolio investments and interest rates, see Part I, Item 3, “Quantitative and Qualitative Disclosures About Market Risk.”

Our investments in private companies are subject to risk of loss of investment capital. Some of these investments may have been made to further our strategic objectives and support our key business initiatives. Our investments in private companies are inherently risky because the markets for the technologies they have under development are typically in the early stages and may never materialize. We could lose the value of our entire investment in these companies.

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Epidemics, geo-political events, Internet and power outages or natural disasters could adversely affect our business, financial condition, operating results and cash flows.

The occurrence of one or more epidemics, geo-political events (such as civil unrest or terrorist attacks), Internet and power outages, telecommunications failures, fire or natural disasters (including those due to the effects of climate change such as increased storm severity, drought, wildfires, and potential flooding due to rising sea levels and storm surges) in a country in which we operate or in which technology industry suppliers or our customers are located, could adversely affect our business, financial condition, operating results and cash flows. Such events could result in physical damage to, or the complete loss of, one or more of our facilities, the lack of an adequate work force in a market, the inability of our customers to access our offerings, the inability of our associates to reach or have transportation to our facilities or our customers’ facilities directly affected by such events, the evacuation of the populace from areas in which our facilities are located, changes in the purchasing patterns of our customers, the temporary or long-term disruption in the supply of computer hardware and related components, the disruption or delay in the manufacture and transport of goods globally, the disruption of utility services to our facilities or to suppliers, partners or customers, or disruption in our communications with our customers.

RISKS RELATED TO THE CONVERTIBLE NOTES

The convertible notes mature on October 1, 2019, and the use of our cash to repay the convertible notes, satisfy our conversion obligations under the convertible notes, or repurchase the convertible notes following a fundamental change will reduce our liquidity and capital resources.

In October 2014, we issued $805.0 million of 0.25% Convertible Senior Notes due 2019 (the “convertible notes”). As of May 31, 2019, there was $190.4 million aggregate principal amount of convertible notes outstanding. The convertible notes will mature on October 1, 2019, unless previously purchased or converted. On October 1, 2019, the outstanding aggregate principal amount of the convertible notes and all accrued and unpaid interest on such notes will become due and payable. Holders that elect to convert their convertible notes prior to maturity will receive a cash payment on October 1, 2019 in the amount of $1,000 for each $1,000 in principal amount of convertible notes converted, which may also adversely affect our liquidity, plus shares of our common stock in an amount equal to the excess conversion value above $1,000, if any. In addition, if the Merger is completed prior to maturity of the convertible notes, then converting holders will receive cash for each $1,000 principal amount of convertible notes being converted equal to the conversion rate then in effect multiplied by the same per share cash consideration a common stockholder would receive in the Merger, subject to certain adjustments, and we would be required to make an offer to repurchase the convertible notes for cash in an amount equal to 100% of their principal amount plus accrued and unpaid interest to but excluding the date of repurchase. Any of these cash payments could adversely affect our liquidity and capital resources.

The accounting method for convertible debt securities that may be settled in cash, such as the convertible notes, could have a material effect on our reported financial results.

Accounting Standards Codification Subtopic 470-20, Debt with Conversion and Other Options (“ASC 470-20”), requires an entity to separately account for the liability and equity components of convertible debt instruments (such as the convertible notes) that may be settled entirely or partially in cash upon conversion in a manner that reflects the issuer’s non-convertible debt interest rate. Accordingly, the equity component of the convertible notes is required to be included in the additional paid-in capital section of stockholders’ equity on our consolidated balance sheet, and the value of the equity component is treated as original issue discount for purposes of accounting for the debt component of the convertible notes. As a result, we are required to recognize a greater amount of non-cash interest expense in our consolidated income statements in the current and future periods presented as a result of the amortization of the discounted carrying value of the convertible notes to their principal amount over the term of the convertible notes. We will report lower net income (or greater net losses) in our consolidated financial results because ASC 470-20 requires interest to include both the current period’s amortization of the original issue discount and the instrument’s non-convertible interest rate. This could adversely affect our reported or future consolidated financial results, the trading price of our common stock and the trading price of the convertible notes.

In addition, under certain circumstances, in calculating earnings per share, convertible debt instruments (such as the convertible notes) that may be settled entirely or partly in cash are currently accounted for utilizing the treasury stock method, the effect of which is that the shares of common stock issuable upon conversion of the convertible notes, if any, are not included in the calculation of diluted earnings per share except to the extent that the conversion value of the convertible notes exceeds their principal amount. Under the treasury stock method, diluted earnings per share is calculated as if the number of shares of common stock that would be necessary to settle such excess, if we elected to settle such excess in shares, were issued. We cannot be sure that the accounting standards in the future will continue to permit the use of the treasury stock method. If we are unable to use the treasury stock method in accounting for the shares issuable upon conversion of the convertible notes, if any, then our diluted consolidated earnings per share would be adversely affected.

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The convertible note hedge and warrant transactions may affect the value of our common stock.

In connection with the sale of the convertible notes, we entered into convertible note hedge transactions with institutions that we refer to as the option counterparties. We also entered into warrant transactions with the option counterparties pursuant to which we sold warrants for the purchase of our common stock. The convertible note hedge transactions are expected to offset the potential dilution to our common stock upon any conversion of the convertible notes and/or offset any cash payments we are required to make in excess of the principal amount upon conversion of any convertible notes. The warrant transactions could separately have a dilutive effect to the extent that the market price per share of our common stock exceeds the strike price of the relevant warrants, unless, subject to certain conditions, we elect to settle the warrants in cash.

The option counterparties or their respective affiliates may modify their hedge positions by entering into or unwinding various derivatives with respect to our common stock and/or purchasing or selling our common stock or other securities of ours in secondary market transactions prior to the maturity of the convertible notes (and are likely to do so during any observation period related to a conversion of the convertible notes or following any repurchase of convertible notes by us in connection with any fundamental change repurchase date or otherwise). This activity could suppress or inflate the market price of our common stock.

We do not make any representation or prediction as to the direction or magnitude of any potential effect that the transactions described above may have on the price of the convertible notes or our common stock. In addition, we do not make any representation that the option counterparties or their respective affiliates will engage in these transactions or that these transactions, once commenced, will not be discontinued without notice.

We are subject to counterparty risk with respect to the convertible note hedge transactions.

The option counterparties are financial institutions or affiliates of financial institutions, and we will be subject to the risk that these option counterparties may default under the convertible note hedge transactions. Our exposure to the credit risk of the option counterparties will not be secured by any collateral. If one or more of the option counterparties to one or more of our convertible note hedge transactions becomes subject to insolvency proceedings, we will become an unsecured creditor in those proceedings with a claim equal to our exposure at the time under those transactions. Our exposure will depend on many factors but, generally, the increase in our exposure will be correlated to the increase in the market price of our common stock and in the volatility of the market price of our common stock. In addition, upon a default by one of the option counterparties, we may suffer dilution with respect to our common stock as well as adverse financial consequences. We can provide no assurances as to the financial stability or viability of any of the option counterparties.

RISKS RELATED TO OWNERSHIP OF OUR COMMON STOCK

Our stock price has been volatile historically and may continue to be volatile.

The trading price of our common stock has been and may continue to be subject to wide fluctuations. Our stock price may fluctuate in response to a number of events and factors, such as quarterly variations in operating results, announcements of technological innovations or new offerings by us or our competitors, announcements relating to strategic decisions such as the Merger, announcements related to key personnel, customer purchase delays, service disruptions, changes in financial estimates and recommendations by securities analysts, the operating and stock price performance of other companies that investors may deem comparable to us, news reports relating to trends in our markets, the commencement or termination of any share repurchase program, general economic conditions and other risks listed herein.

The sale of our common stock by significant stockholders may cause the price of our common stock to decrease.

Several of our stockholders own significant portions of our common stock. If these stockholders were to sell all or a portion of their holdings of our common stock, then the market price of our common stock could be negatively impacted. The effect of such sales, or of significant portions of our stock being offered or made available for sale, could result in strong downward pressure on our stock price. Investors should be aware that they could experience significant short-term volatility in our stock if such stockholders decide to sell all or a portion of their holdings of our common stock at once or within a short period of time.

We may issue additional shares of our common stock in certain limited circumstances and thereby adversely affect the market price of our common stock.

Pursuant to the terms of the Merger Agreement, from October 28, 2018 until the Effective Time, we generally may not issue, deliver, sell, pledge or otherwise encumber any shares of our common stock, other voting equity interests or certain equity equivalents, or securities convertible into, or exchangeable or exercisable for, or any options, warrants, calls or rights to

68

acquire, any such stock interest or equity equivalent other than the issuance of shares upon the exercise of options, settlement of other equity awards, exercise of the rights under the employee stock purchase plan, and in relation to notices of conversion regarding the convertible notes and pursuant to warrant transactions.

A substantial number of shares of our common stock are reserved for issuance under our equity compensation plans, including for issuance upon the exercise of stock options and the vesting of performance share units, restricted stock, restricted stock units and deferred stock units. A substantial number of shares of our common stock are also reserved in relation to the convertible notes and the warrant transactions and for our employee stock purchase plan. We may not be able to predict the size of future issuances or the effect, if any, that they may have on the market price for our common stock. The issuance of substantial amounts of common stock, or the perception that such issuances may occur, could adversely affect the market price of our common stock.

We do not currently expect to pay dividends on our common stock.

We have never declared or paid any cash dividends on our common stock. We currently anticipate that we will retain future earnings for the development, operation and expansion of our business and do not anticipate declaring or paying any cash dividends for the foreseeable future. Under the terms of the Merger Agreement, from October 28, 2018 until the Effective Time, we may not declare, set aside or pay any dividends on, or make any other distributions in respect of, any of our capital stock or other equity or voting interests without IBM’s prior written consent. In addition, our ability to pay cash dividends on our common stock may be prohibited or limited by the terms of any future debt financing arrangement.

Conversion of the convertible notes may dilute the ownership interest of existing stockholders, including holders who had previously converted their convertible notes, or may otherwise depress the price of our common stock.

The conversion of the convertible notes into shares of our common stock will dilute the ownership interests of existing stockholders. Any sales in the public market of the common stock issuable upon conversion of the convertible notes could adversely affect prevailing market prices of our common stock. In addition, the existence of the convertible notes may encourage short selling by market participants due to this dilution or may facilitate trading strategies involving the convertible notes and our common stock.

Provisions of our certificate of incorporation, by-laws, Delaware law and the convertible notes may have anti-takeover effects that could prevent a change in control even if the change in control would be beneficial to our stockholders.

Provisions of our certificate of incorporation, by-laws and Delaware law could make it more difficult for a third party to acquire us, even if doing so would be beneficial to our stockholders. These provisions include:

• our Board of Directors has the right to elect directors to fill a vacancy created by the expansion of the Board of Directors or the resignation, death or removal of a director, which prevents stockholders from being able to fill vacancies on our Board of Directors;

• stockholders must provide advance notice to nominate individuals for election to the Board of Directors or to propose matters that can be acted upon at a stockholders’ meeting; such provisions may discourage or deter a potential acquirer from conducting a solicitation of proxies to elect the acquirer’s own slate of directors or otherwise attempting to obtain control of our company; and

• our Board of Directors may issue, without stockholder approval, shares of undesignated preferred stock; the ability to issue undesignated preferred stock makes it possible for our Board of Directors to issue preferred stock with voting or other rights or preferences that could impede the success of any attempt to acquire us.

Further, as a Delaware corporation, we are also subject to certain Delaware law anti-takeover provisions. Under Delaware law, a corporation may not engage in a business combination with any holder of 15% or more of its capital stock unless the holder has held the stock for three years or, among other things, the Board of Directors has approved the transaction. Our Board of Directors could rely on Delaware law to prevent or delay an acquisition of us. Additionally, certain provisions of the convertible notes could make it more difficult or more expensive for a third party to acquire us or could also have the effect of delaying or reducing the likelihood of a change in control of us even if such acquisition or change of control may be favorable to our stockholders.

69

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Unregistered Sales of Equity Securities

During the three months ended May 31, 2019, the Company issued 943,513 shares of its unregistered common stock upon settlement of conversions of an aggregate of $116.2 million in principal amount of the convertible notes. These shares of the Company’s common stock were issued in reliance on the exemption from registration provided by Section 3(a)(9) of the Securities Act of 1933, as amended.

Issuer Purchases of Equity Securities

The table below sets forth information regarding the Company’s purchases of its common stock during its first fiscal quarter ended May 31, 2019:

Issuer Purchases of Equity Securities

Period	Total Number of Shares Purchased (1)(2)	Weighted Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (3)	Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs
March 1, 2019—March 31, 2019	200,717	$	73.41	—	$	737.2	million
April 1, 2019—April 30, 2019	683,305	$	144.36	—	$	737.2	million
May 1, 2019—May 31, 2019	515,231	$	73.41	—	$	737.2	million
Total	1,399,253			—

__________ 

⁽¹⁾  During the three months ended May 31, 2019, the Company withheld an aggregate of 444,522 shares of its common stock (with a weighted average share price of $182.48) from employees to satisfy minimum tax withholding obligations relating to the vesting of restricted share awards. These shares were not withheld pursuant to the programs described in Note (3) below.

⁽²⁾  In connection with the convertible note conversions settled during the three months ended May 31, 2019, the Company exercised a portion of the options that are part of the convertible note hedge transactions and acquired 954,731 shares of its common stock. The counterparties to the convertible note hedge transactions may be deemed to be an “affiliate purchaser” and may have purchased the shares of the Company’s common stock deliverable to the Company upon the exercise of the options.

⁽³⁾  On June 21, 2018, the Company announced that its Board authorized the repurchase of up to $1.0 billion of Red Hat’s common stock from time to time on the open market or in privately negotiated transactions. The program, which replaced a previous repurchase program, commenced on July 1, 2018, and will expire on the earlier of (i) June 30, 2020 or (ii) a determination by the Board, Chief Executive Officer or Chief Financial Officer to discontinue the program. Pursuant to the Merger Agreement, we do not anticipate additional repurchases of the Company’s common stock prior to the consummation of the Merger with IBM.

70

ITEM 6. EXHIBITS

			Incorporated by Reference
Exhibit No.	Exhibit Description	Provided Herewith	Form	File No.	Exhibit	Filing Date
10.1*	Executive Base Salaries, Target Award Amounts under Red Hat, Inc.’s Executive Variable Compensation Plan for the Fiscal Year Ending February 29, 2020, RSA Award Amounts and Amounts for Executive Cash Retention Awards		8-K	001-33162	99.1	5-21-19
10.2*	Form of Restricted Stock Award Agreement adopted May 15, 2019		8-K	001-33162	99.2	5-21-19
10.3*	Form of Cash Retention Award Agreement adopted May 15, 2019		8-K	001-33162	99.3	5-21-19
10.4*	Form of Red Hat Cash Retention Agreement	X
31.1	Certification of the registrant’s Chief Executive Officer pursuant to Rule 13a-14(a)/Rule 15d-14(a) under the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002	X
31.2	Certification of the registrant’s Chief Financial Officer pursuant to Rule 13a-14(a)/Rule 15d-14(a) under the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002	X
32.1	Certification of the registrant’s principal executive officer and principal financial officer pursuant to 18 U.S.C. Section 1350	X
101.INS	XBRL Instance Document	X
101.SCH	XBRL Taxonomy Extension Schema	X
101.CAL	XBRL Taxonomy Extension Calculation Linkbase	X
101.DEF	XBRL Taxonomy Extension Definition Linkbase	X
101.LAB	XBRL Taxonomy Extension Label Linkbase	X
101.PRE	XBRL Taxonomy Extension Presentation Linkbase	X

* Indicates a management contract or compensatory plan, contract or arrangement.

71

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

		RED HAT, INC.
Date:	June 28, 2019	By:	/S/ JAMES M. WHITEHURST
			James M. Whitehurst President and Chief Executive Officer (Duly Authorized Officer on Behalf of the Registrant)
		RED HAT, INC.
Date:	June 28, 2019	By:	/S/ ERIC R. SHANDER
			Eric R. Shander Executive Vice President and Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer)

72

EX-10.4

Exhibit 10.4

MONTH DATE YEAR

NAME

Dear [NAME],

We appreciate your hard work and contributions to Red Hat’s success, and look forward to continuing to build an organization that’s the default choice for next-generation IT, delivering an open hybrid cloud, powered by an open organization. As an important part of this journey, we are offering you the opportunity to earn an exceptional special retention bonus in the amount of $[AMOUNT] (the “Retention Payment”) in accordance with the terms and conditions described below.

This letter (this “Letter Agreement”) sets forth Red Hat's agreement with you regarding the Retention Payment. Throughout the remainder of this document you and Red Hat, Inc. (“Red Hat”) may be collectively referred to as the “Parties.” Certain other definitions are set forth at the end of this Letter Agreement.

1. Retention Payment

[OPTION 1 - 75% at closing, 25% at 6-months anniversary of the closing:

(a) As an incentive to remain employed by Red Hat or an Affiliate, you are entitled to receive the Retention Payment, which shall vest in two (2) installments. The first installment of seventy-five percent (75%) of the total Retention Payment shall vest on the Closing Date and the second installment of the remaining twenty-five percent (25%) of the total Retention Payment shall begin to vest on the Closing Date and shall vest on the six-month anniversary of the Closing Date (each installment individually, a “Retention Payment Installment”). Red Hat will pay you the applicable Retention Payment Installment on the first administratively feasible payroll date following each applicable vesting date. Subject to 1(b) below, in order to receive a Retention Payment Installment, you must remain continuously employed by Red Hat or an Affiliate through the applicable vesting date.

OPTION 2 - 50% at 6 month anniversary of the closing; 50% at one-year anniversary of the closing:

(a) As an incentive to remain employed by Red Hat or an Affiliate, you are entitled to receive the Retention Payment, which shall begin to vest on the Closing Date and shall vest in two (2) installments. The first installment of fifty percent (50%) of the total Retention Payment shall vest on the six-month anniversary of the Closing Date and the second installment of the remaining fifty percent (50%) of the total Retention Payment shall vest on the one-year anniversary of the Closing Date (each installment individually, a “Retention Payment Installment”). Red Hat will pay you the applicable Retention Payment Installment on the first administratively feasible payroll date following each applicable vesting date. Subject to 1(b) below, in order to receive a Retention Payment Installment, you must remain continuously employed by Red Hat or an Affiliate through the applicable vesting date.]

(b) Involuntary Termination Without Cause. If, after the Closing Date and prior to payment in full of the Retention Payment, your employment with Red Hat or an Affiliate is involuntarily terminated by Red Hat or an Affiliate without Cause (as defined below), Red Hat will pay you the unpaid portion of the Retention Payment on the first administratively feasible payroll date following the date of employment termination.

(c) Cause. For purposes of this agreement only, “Cause” means conduct involving one or more of the following:

(i)    your conviction of, or plea of guilty or nolo contendere to, a felony;

(ii)    your willful misconduct resulting in material harm to Red Hat;

(iii)    fraud, embezzlement, theft or dishonesty by you against Red Hat or any Affiliate resulting in material harm to Red Hat;

(iv)     your repeated and continuing failure to follow the proper and lawful directions of Red Hat or the officer to whom you report after a written demand is delivered to you that specifically identifies the manner in which Red Hat or the officer to whom you report believes that you have failed to follow such instructions;

(v)     your current alcohol or prescription drug abuse affecting work performance, or current illegal use of drugs regardless of the effect on work performance;

(vi)     a material violation of Red Hat’s Code of Conduct by you that causes harm to Red Hat; or

(vii)     your material breach of any term of this Letter Agreement or any other confidentiality and/or non-competition agreements.

2. Withholding; Other Tax Matters. The Retention Payment(s) payable hereunder are subject to income tax and other required tax withholding. Amounts payable under this Letter Agreement are intended to be treated as a separate “payment” for purposes of Section 409A of the Internal Revenue Code and the guidance issued thereunder (“Section 409A”). Red Hat makes no representation that such payment(s) will be exempt from or comply with Section 409A and makes no undertaking to preclude Section 409A from applying to any such payment(s). Amounts payable hereunder are intended to be exempt from Section 409A but to the extent subject thereto are intended to comply with Section 409A and accordingly, to the maximum extent permitted, shall be interpreted and administered to be in compliance therewith. To the extent required in order to avoid accelerated taxation and/or tax penalties under Section 409A, amounts that would otherwise be payable during the six-month period immediately following your separation from service shall instead be paid on the first business day after the date that is six months following such separation from service (or upon your death, if earlier).    

3. Confidentiality. Unless required by law, you agree to keep the existence and terms of this Letter Agreement, including the amount of the Retention Payment(s), the timing of the Retention Payment(s), and the vesting date(s) confidential. You further agree that you will not disclose the existence or terms of this Letter Agreement to any third party other than your spouse, significant other, or tax planning professional and only then with the instruction that the excepted individual meet the confidentiality and disclosure requirements described in this Paragraph. Nothing in this Letter Agreement or elsewhere prohibits you from communicating with government agencies about possible violations of federal, state, or local laws or otherwise providing information to government agencies, filing a complaint with government agencies, or participating in government agency investigations or proceedings. You are not required to notify Red Hat or an Affiliate of any such communications; provided, however, that nothing herein authorizes you to disclose information you obtained through a communication that was subject to the attorney-client privilege.

4. No Right to Employment or Other Status; Non-Alienation. Nothing in this Letter Agreement shall be construed as giving you the right to continued employment or any other relationship with Red Hat or an Affiliate. The Retention Payment(s) will not be funded, set aside, or otherwise segregated prior to payment and shall only be earned by you upon a good faith determination by Red Hat or an Affiliate that all eligibility requirements have been successfully met. The obligation to pay the Retention Payment shall at all times be an unfunded and unsecured obligation of Red Hat.

5. Entire Agreement; Amendment. This Letter Agreement constitutes the entire agreement between the Parties regarding any retention payment associated with your ongoing employment with Red Hat or an Affiliate, and supersedes all proposals, written or oral, and all other communications between the Parties relating to the Retention Payment(s). Nothing in this Letter Agreement alters the at-will nature of your employment.

6. Governing Law. This agreement shall be governed by and construed in accordance with the laws of the State of North Carolina (without reference to the conflicts of laws provisions thereof).

7. Definitions.

(a) “Affiliate” means any person or entity that directly, or through one or more intermediaries, controls, or is controlled by, or is under common control with, Red Hat.

(b) “Closing Date” refers to the date of the closing of the merger transaction agreed to by and among Red Hat, International Business Machines Corporation and Socrates Acquisition Corp. pursuant to the Agreement and Plan of Merger dated October 28, 2018 (the “Merger Transaction”). All payments hereunder are subject to the occurrence of the Closing Date.

8. Miscellaneous.

(a) The Retention Payment is in addition to and not in lieu of any salary, bonus, benefits, or severance to which you may otherwise be entitled. You may not assign your rights under this Letter Agreement. This Agreement may be executed in two or more counterparts, and by the different parties in separate counterparts, each of which

when executed shall be deemed to be an original but all of which taken together shall constitute one and the same agreement.

(b) Retention payments to be paid in currencies other than U.S. dollars will be converted using the applicable foreign exchange rate on the Closing Date as determined by Red Hat.

(c) Nothing in this Letter Agreement limits, or is intended to limit, any right to concerted activity you have under the National Labor Relations Act.

9. Headings. The headings of the sections of this agreement are for convenience of reference only and in no way define, limit or affect the scope or substance of any section of this agreement.

EMPLOYEE	Red Hat, Inc.
Signature: ______________________	By:____________________________
Date:______________________	Date:__________________________

EX-31.1

EXHIBIT 31.1

CERTIFICATION OF JAMES M. WHITEHUST, PRESIDENT AND CHIEF EXECUTIVE OFFICER,

PURSUANT TO RULE 13a-14(a)/Rule 15d-14(a) UNDER THE

SECURITIES EXCHANGE ACT OF 1934, AS AMENDED

I, James M. Whitehurst, certify that:

1. I have reviewed this Quarterly Report on Form 10-Q of Red Hat, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

June 28, 2019

By:	/S/ JAMES M. WHITEHURST
	James M. Whitehurst President and Chief Executive Officer (Principal Executive Officer)

EX-31.2

EXHIBIT 31.2

CERTIFICATION OF ERIC R. SHANDER, EXECUTIVE VICE PRESIDENT AND CHIEF FINANCIAL OFFICER, PURSUANT TO RULE 13a-14(a)/Rule 15d-14(a) UNDER

THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED

I, Eric R. Shander, certify that:

1. I have reviewed this Quarterly Report on Form 10-Q of Red Hat, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

June 28, 2019

By:	/S/ ERIC R. SHANDER
	Eric R. Shander Executive Vice President and Chief Financial Officer (Principal Financial Officer)

EX-32.1

EXHIBIT 32.1

CERTIFICATIONS OF JAMES M. WHITEHURST, PRESIDENT AND CHIEF EXECUTIVE OFFICER,

AND ERIC R. SHANDER, EXECUTIVE VICE PRESIDENT AND

CHIEF FINANCIAL OFFICER, PURSUANT TO 18U.S.C. SECTION 1350, AS

ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

Each of the undersigned hereby certify, for the purposes of section 1350 of chapter 63 of title 18 of the United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, in his capacity as an officer of Red Hat, Inc. (“Red Hat”), that, to his knowledge, the Quarterly Report on Form 10-Q for the three months ended May 31, 2019 (the “Report”), as filed with the Securities and Exchange Commission, fully complies with the requirements of Section 13(a) of the Securities and Exchange Act of 1934 and that the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of Red Hat.

June 28, 2019

By:	/S/ JAMES M. WHITEHURST
	James M. Whitehurst President and Chief Executive Officer (Principal Executive Officer)

June 28, 2019

By:	/S/ ERIC R. SHANDER
	Eric R. Shander Executive Vice President and Chief Financial Officer (Principal Financial Officer)

XML

Document and Entity Information - shares	3 Months Ended
	May 31, 2019	Jun. 27, 2019
Document And Entity Information [Abstract]
Entity Registrant Name	RED HAT INC
Entity Central Index Key	0001087423
Current Fiscal Year End Date	--02-29
Entity Filer Category	Large Accelerated Filer
Document Type	10-Q
Document Period End Date	May 31, 2019
Document Fiscal Year Focus	2020
Document Fiscal Period Focus	Q1
Amendment Flag	false
Entity Shell Company	false
Entity Small Business	false
Entity Emerging Growth Company	false
Entity Current Reporting Status	Yes
Entity Common Stock, Shares Outstanding		178,093,007

XML

Consolidated Balance Sheets - USD ($) $ in Thousands		May 31, 2019	Feb. 28, 2019
Current assets:
Cash, cash equivalents and restricted cash		$ 2,295,396	$ 1,883,096
Investments in debt securities, short-term		177,625	293,361
Accounts receivable, net of allowances for doubtful accounts of $4,452 and $4,561, respectively		529,115	980,188
Prepaid expenses		250,571	282,507
Other current assets		36,743	24,504
Total current assets		3,289,450	3,463,656
Property and equipment, net of accumulated depreciation and amortization of $331,642 and $316,432, respectively		200,015	198,969
Operating right-of-use assets, net	[1]	224,371	0
Goodwill		1,273,494	1,276,853
Identifiable intangibles, net		198,914	206,083
Investments in debt securities, long-term		188,172	248,512
Deferred tax assets, net		119,128	112,568
Other assets, net		80,395	81,648
Total assets		5,573,939	5,588,289
Current liabilities:
Accounts payable and accrued expenses		458,456	491,259
Deferred revenue, short-term		2,016,488	2,161,206
Other current obligations		256	282
Convertible notes		188,553	69,827
Total current liabilities		2,663,753	2,722,574
Deferred revenue, long-term		781,043	821,218
Convertible notes		0	231,540
Operating lease liabilities	[1]	188,133	0
Other long-term obligations		183,074	199,025
Commitments and contingencies (NOTES 10 and 11)
Stockholders’ equity:
Preferred stock, $0.0001 per share par value, 5,000,000 shares authorized, none outstanding		0	0
Common stock, $0.0001 per share par value, 300,000,000 shares authorized, 246,289,980 and 244,402,737 shares issued, and 178,083,153 and 176,800,502 shares outstanding, respectively		25	24
Additional paid-in capital		2,853,105	2,791,895
Retained earnings		2,195,189	2,054,069
Treasury stock, at cost, 68,206,827 and 67,602,235 shares, respectively		(3,242,725)	(3,189,434)
Accumulated other comprehensive loss		(47,658)	(42,622)
Total stockholders’ equity		1,757,936	1,613,932
Total liabilities and stockholders’ equity		$ 5,573,939	$ 5,588,289

[1] Effective March 1, 2019, the Company adopted Accounting Standard Update 2016-02, Leases (Topic 842) (“ASC 842”). See NOTE 2—Summary of Significant Accounting Policies and NOTE 4—Leases for detailed information on adoption of ASC 842.

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Consolidated Balance Sheets (Parenthetical) - USD ($) $ in Thousands	May 31, 2019	Feb. 28, 2019
Statement of Financial Position [Abstract]
Accounts receivable, allowances for doubtful accounts	$ 4,452	$ 4,561
Property and equipment, accumulated depreciation and amortization	$ 331,642	$ 316,432
Preferred stock, per share par value (in dollars per share)	$ 0.0001	$ 0.0001
Preferred stock, shares authorized (in shares)	5,000,000	5,000,000
Preferred stock, outstanding (in shares)	0	0
Common stock, per share par value (in dollars per share)	$ 0.0001	$ 0.0001
Common stock, shares authorized (in shares)	300,000,000	300,000,000
Common stock, shares issued (in shares)	246,289,980	244,402,737
Common stock, shares outstanding (in shares)	178,083,153	176,800,502
Treasury stock, shares (in shares)	68,206,827	67,602,235

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Consolidated Statements of Operations - USD ($) shares in Thousands, $ in Thousands	3 Months Ended
	May 31, 2019	May 31, 2018
Revenue:
Total revenue	$ 934,111	$ 813,530
Cost of revenue:
Total cost of revenue	144,283	122,699
Gross profit	789,828	690,831
Operating expense:
Sales and marketing	394,201	348,815
Research and development	182,961	166,506
General and administrative	80,548	63,354
Total operating expense	657,710	578,675
Income from operations	132,118	112,156
Interest income	9,254	7,834
Interest expense	1,959	6,319
Other expense, net	766	2,194
Income before provision for income taxes	138,647	111,477
Benefit for income taxes	(2,473)	(1,713)
Net income	$ 141,120	$ 113,190
Net income per share:
Basic (in dollars per share)	$ 0.80	$ 0.64
Diluted (in dollars per share)	$ 0.76	$ 0.59
Weighted average shares outstanding:
Basic (in shares)	177,400	177,302
Diluted (in shares)	186,635	190,739
Subscriptions
Revenue:
Total revenue	$ 814,952	$ 711,521
Cost of revenue:
Total cost of revenue	61,899	52,173
Training and services
Revenue:
Total revenue	119,159	102,009
Cost of revenue:
Total cost of revenue	$ 82,384	$ 70,526

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Consolidated Statements of Comprehensive Income - USD ($) $ in Thousands	3 Months Ended
	May 31, 2019	May 31, 2018
Statement of Comprehensive Income [Abstract]
Net income	$ 141,120	$ 113,190
Other comprehensive income (loss):
Change in foreign currency translation adjustment, net of tax benefit of $465 and $0, respectively	(6,256)	(10,831)
Available-for-sale securities:
Unrealized gain on available-for-sale securities during the period	2,023	38
Reclassification for gain realized on available-for-sale securities, reported in Other expense, net	(239)	(128)
Tax (expense) benefit	(564)	16
Net change in available-for-sale securities (net of tax)	1,220	(74)
Total other comprehensive loss	(5,036)	(10,905)
Comprehensive income	$ 136,084	$ 102,285

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Consolidation Statements of Comprehensive Income (Parenthetical) - USD ($) $ in Thousands	3 Months Ended
	May 31, 2019	May 31, 2018
Statement of Comprehensive Income [Abstract]
Foreign currency translation adjustment, tax benefit	$ 465	$ 0

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Consolidated Statements of Cash Flows - USD ($) $ in Thousands		3 Months Ended
		May 31, 2019	May 31, 2018
Cash flows from operating activities:
Net income		$ 141,120	$ 113,190
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		36,754	27,054
Amortization of debt discount and transaction costs		1,885	5,838
Repayments of convertible notes attributable to debt discount		(13,981)	0
Share-based compensation expense	[1]	50,168	46,005
Net amortization of bond premium on debt securities available for sale		271	743
Other		(872)	(2,298)
Changes in operating assets and liabilities:
Accounts receivable		445,186	299,439
Other receivables		(12,278)	(35,160)
Prepaid expenses		28,844	25,382
Accounts payable and accrued expenses		(58,271)	(28,642)
Deferred revenue		(158,729)	(104,592)
Other		(143)	(800)
Net cash provided by operating activities		459,954	346,159
Cash flows from investing activities:
Purchase of investment in debt securities available for sale		0	(108,336)
Proceeds from maturities of investment in debt securities available for sale		110,431	87,004
Proceeds from sales of investment in debt securities available for sale		64,899	525
Proceeds from sales of strategic equity investments		0	1,300
Purchase of developed software and other intangible assets		(4,134)	(2,866)
Payments for property and equipment		(23,513)	(12,963)
Other		(124)	(986)
Net cash provided by (used in) investing activities		147,559	(36,322)
Cash flows from financing activities:
Proceeds from exercise of common stock options		369	875
Proceeds from employee stock purchase program		7,501	15,262
Payments related to net settlement of share-based compensation awards		(81,274)	(77,094)
Purchase of treasury stock		0	(150,019)
Proceeds (payments) on other borrowings, net		26
Proceeds (payments) on other borrowings, net			(299)
Repayments of convertible notes attributable to principal		(102,163)	(25,953)
Net cash used in financing activities		(175,541)	(237,228)
Effect of foreign currency exchange rates on cash, cash equivalents and restricted cash		(19,672)	(28,261)
Net increase in cash, cash equivalents and restricted cash		412,300	44,348
Cash, cash equivalents and restricted cash at beginning of the period		1,883,096	1,724,132
Cash, cash equivalents and restricted cash at end of the period		2,295,396	1,768,480
Restricted cash included in cash, cash equivalents and restricted cash		$ 0	$ 1,137

[1] Total share-based compensation expense included $1.7 million and $4.0 million, respectively, of expense related to the Company’s employee stock purchase plan (“ESPP”) for the three months ended May 31, 2019 and May 31, 2018.

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Company

3 Months Ended

May 31, 2019

Accounting Policies [Abstract]

Company

Company and Merger Agreement

Red Hat, Inc., incorporated in Delaware, together with its subsidiaries (“Red Hat” or the “Company”) is a leading global provider of open source software solutions, using a community-powered approach to develop and offer reliable and high-performing operating system, virtualization, management, middleware, cloud and storage technologies.

Open source software is an alternative to proprietary software and represents a different model for the development and licensing of commercial software code than that typically used for proprietary software. Because open source software code, generally, is freely shared, there are customarily no licensing fees for the use of open source software. Therefore, the Company does not recognize revenue from the licensing of the code itself. The Company provides value to its customers through the development, aggregation, integration, testing, certification, delivery, maintenance, enhancement and support of its Red Hat technologies, and by providing a level of performance, scalability, flexibility, reliability and security for the technologies the Company packages and distributes. Moreover, because communities of developers not employed by the Company assist with the creation of the Company’s open source offerings, opportunities for further innovation of the Company’s offerings are supplemented by these communities.

The Company derives its revenue and generates cash from customers primarily from two sources: (i) subscription revenue and (ii) training and services revenue. These arrangements typically involve subscriptions to Red Hat technologies. The arrangements with the Company’s customers that produce this revenue and cash are explained in further detail in NOTE 2—Summary of Significant Accounting Policies.

Merger Agreement

On October 28, 2018, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with International Business Machines Corporation, a New York corporation (“IBM”), and Socrates Acquisition Corp., a Delaware corporation and a wholly owned subsidiary of IBM (“Sub”), pursuant to which, among other things, Sub will merge with and into the Company, with the Company surviving as a wholly owned subsidiary of IBM (the “Merger”). The Board of Directors of the Company and the Board of Directors of IBM each approved the Merger and the Merger Agreement.

At the effective time of the Merger (the “Effective Time”), subject to the terms and conditions of the Merger Agreement, each share of common stock, par value $0.0001 per share, of the Company issued and outstanding immediately prior to the Effective Time (other than (i) cancelled shares, (ii) dissenting shares, and (iii) subsidiary converted shares) shall be converted into the right to receive $190.00 in cash without interest. On December 12, 2018, the Company filed its definitive proxy statement on Schedule 14A (the “Proxy Statement”) with the Securities and Exchange Commission (“SEC”) for a special meeting of its stockholders to be held on January 16, 2019 in connection with the Merger. The Merger Agreement was adopted and approved by the Company’s stockholders at the January 16, 2019 special meeting of stockholders. The Company continues to expect the transaction to close in the second half of 2019, subject to certain conditions, including receipt of regulatory approvals. Until the closing, the Company will continue to operate as an independent company. The Company has incurred Merger-related costs of $9.9 million, which are included in General and administrative expenses in the Company’s Consolidated Statement of Operations for the three months ended May 31, 2019.

Consummation of the Merger is subject to certain customary conditions, including, without limitation, (i) the receipt of approvals, or the expiration or termination of the applicable waiting periods, under certain antitrust laws (including the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the “HSR Act”) and clearance under Council Regulation 139/2004 of the European Union); and (ii) the absence of any temporary restraining order, preliminary or permanent injunction or other judgment or law issued by certain courts of competent jurisdiction or other governmental entity, in each case prohibiting consummation of the Merger, and no action or proceeding by a governmental entity before any court or certain other governmental entities of competent jurisdiction seeking to enjoin, restrain or otherwise prohibit consummation of the Merger. As of the filing of this Form 10-Q, the U.S. Department of Justice has concluded its review of IBM’s proposed acquisition of the Company without remedies or conditions and the Company has received a notice of early termination of the waiting period under the HSR Act. As of the filing of this Form 10-Q, the European Commission has unconditionally approved the proposed acquisition of the Company by IBM under the European Union Merger Regulation. Each party’s obligation to consummate the Merger is subject to certain other customary conditions.

The Merger Agreement contains certain customary termination rights for the Company and IBM. Subject to certain limitations, the Merger Agreement may be terminated by either IBM or the Company if (i) the Merger is not consummated on or before October 28, 2019, which is subject to extension for two consecutive three-month periods by either party if all conditions are satisfied other than receipt of regulatory approvals and absence of legal restraints and (ii) an order having the effect of making the Merger illegal or otherwise prohibiting consummation of the Merger becomes final and non-appealable.

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Summary of Significant Accounting Policies

3 Months Ended

May 31, 2019

Accounting Policies [Abstract]

Summary of Significant Accounting Policies

Summary of Significant Accounting Policies

Basis of presentation

The unaudited interim consolidated financial statements as of and for the three months ended May 31, 2019 have been prepared by the Company pursuant to the rules and regulations of the SEC for interim financial reporting. These consolidated statements are unaudited and, in the opinion of management, include all adjustments (consisting of normal recurring adjustments and accruals) necessary for a fair statement of the consolidated balance sheets, consolidated operating results, consolidated other comprehensive income and consolidated cash flows for the periods presented in accordance with accounting principles generally accepted in the U.S. (“U.S. GAAP”). Operating results for the three months ended May 31, 2019 are not necessarily indicative of the results that may be expected for the fiscal year ending February 29, 2020. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with U.S. GAAP have been omitted in accordance with the SEC’s rules and regulations for interim reporting. These unaudited financial statements should be read in conjunction with the Company’s Consolidated Financial Statements, including notes thereto, included in the Company’s Annual Report on Form 10-K for the fiscal year ended February 28, 2019. Other than the accounting pronouncement adopted during the three months ended May 31, 2019 related to accounting for leases as described below, there have been no changes to the Company’s significant accounting policies from those described in NOTE 2—Summary of Significant Accounting Policies to the Consolidated Financial Statements contained in the Company’s Annual Report on Form 10-K for the fiscal year ended February 28, 2019.

The Company adopted Accounting Standards Update 2016-02, Leases, now commonly referred to as Accounting Standards Codification Topic 842 (“ASC 842”), effective March 1, 2019, using the modified retrospective method, which does not require adjustments to comparative periods nor require modified disclosures in those comparative periods.

Certain amounts for the three months ended May 31, 2018 have been reclassified to conform to the current period presentation.

The Company’s fiscal year ends on the last day of February, and the Company identifies fiscal years by the calendar years in which they end. For example, the fiscal year ending February 29, 2020 is referred to as “fiscal 2020.”

Consolidation policy

The accompanying Consolidated Financial Statements include the accounts of the Company and all of its wholly owned subsidiaries. All significant inter-company accounts and transactions are eliminated in consolidation. There are no significant foreign exchange restrictions on the Company’s foreign subsidiaries.

Use of estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the balance sheet dates and the reported amounts of revenue and expenses during the reporting periods. Actual results could differ from such estimates. Estimates are used for, but not limited to, revenue recognition, goodwill and other long-lived assets, share-based compensation, income taxes and loss contingencies.

Revenue recognition

The Company derives its revenues from subscription contracts and training and service contracts. Revenue is recognized when performance obligations, as stipulated in the contracts, are transferred to a customer for an amount that reflects the consideration the Company expects to receive in exchange for those subscription contracts and training and service contracts.

The Company applies the following five steps to recognize revenue:

1)    Identify the contract with a customer. The Company determines that it has a contract with a customer when the contract is approved, the party’s rights regarding the products and services to be transferred can be identified, the payment terms for the products and services are identified, the customer’s ability and intent to pay can be determined, and the contract has commercial substance. Judgment is used to assess the customer’s ability and intent to pay, which is based upon factors including the customer’s historical payment experience or credit and financial information pertaining to the customer.

2)    Identify the performance obligations in the contract. The Company’s performance obligations are identified based on the products and services that will be transferred to the customer that are both capable of being distinct and are distinct in the context of the contract and consist of (i) subscription offerings, including non-proprietary open-source software code delivered to the customer, software support subscriptions delivered to the customer, software support subscriptions embedded in partner products and learning subscriptions and (ii) training and services, including professional services sold at a fixed fee, professional services sold on a time-and-material-basis, training courses or units, and consulting units. In limited cases, the option to purchase additional subscription offerings or training and services may be offered at a price representing a material right. In such cases, the option to purchase is considered a distinct performance obligation.

3)     Determine the transaction price. The Company determines transaction price based on the consideration expected to be received in exchange for transferring certain performance obligations to the customer. In determining the transaction price, variable consideration, if any, would be considered if, in management’s judgment, it is probable that a significant future reversal of cumulative revenue under the contract will not occur.

The Company’s contracts do not contain significant financing components. Specifically, the Company does not typically extend customer payment terms beyond a standard 30- to 60-day term and as a result the Company has elected the one-year-or-less safe harbor expedient and does not impute any interest.

The Company has elected to exclude all taxes from the transaction price (e.g., sales, use, value-added, etc.). Revenue is recognized net of such taxes.

4)     Allocate the transaction price to performance obligations in the contract. When a contract contains a single performance obligation, the entire transaction price is allocated to that one performance obligation. Contracts that contain multiple performance obligations require an allocation of the transaction price to each performance obligation based on a relative standalone selling price (“SSP”). The Company typically determines SSP based on the observable price when the Company sells the subscriptions or training and services separately, taking into consideration the geographical region of the customer, type of offering and sales channel. In instances where SSP is not directly observable, the Company determines SSP either from the renewal rate paid for the performance obligation to the extent it is the same rate as stipulated in the initial customer contract or by using the expected-cost-plus-margin approach.

5)     Recognize revenue when or as the performance obligation is satisfied. Revenue is recognized at the time the related performance obligation is satisfied by transferring the promised subscription offerings and training and services to a customer. For each performance obligation, a determination is made as to whether the control is transferred over time or at a point in time. For performance obligations satisfied over time, a method to measure progress toward complete satisfaction is selected, based upon the most faithful depiction of performance. The selected method for each performance obligation type is applied consistently to similar contracts.

Subscription revenue

Subscription revenue is comprised of direct and indirect sales of subscriptions relating to Red Hat technologies. Accounts receivable and deferred revenue are recorded at the time a customer enters into a binding and non-cancellable subscription agreement for the purchase of a subscription, subscription services are made available to the customer and the customer is billed. The deferred revenue amount is recognized as revenue ratably over the subscription period. Red Hat technologies are generally offered with base subscription periods of either one year or three years; the majority of the Company’s subscriptions have terms of one year. Under these subscription agreements, renewal rates are generally specified for renewal terms of one year or three years. Subscriptions generally entitle the end user to the technology itself and post-contract customer support, generally consisting of varying levels of support services as well as access to security updates, fixes, functionality enhancements, upgrades to the technologies, each on an if and when available basis, and compatibility with an ecosystem of certified hardware and software, during the term of the subscription. The Company sells its offerings through two principal channels: (1) direct, which includes sales by the Company’s sales force as well as web store sales, and (2) indirect, which includes certified cloud and service providers (“CCSPs”), distributors, original equipment manufacturers (“OEMs”), systems integrators and value added resellers.

The Company recognizes revenue from the sale of Red Hat technologies ratably over the period of the subscription beginning on the commencement date of the subscription agreement. The Company has determined that the delivery of software code underlying the subscription is a distinct performance obligation as it is both capable of being distinct and is distinct within the context of a customer contract. The Company uses a non-proprietary open source development and licensing model to provide its software technologies to customers and therefore the amount of transaction price allocated to the underlying software code is negligible. The Company derives a portion of its revenue from CCSPs that provide public clouds with, and allow users to consume, computing resources as a service. The Company earns revenue based on subscription units consumed by the CCSP or its end users. The Company uses its historical cloud-usage data to estimate the amount of revenue earned and recognized each month and adjusts to actual amounts earned upon receipt of usage reports from the CCSPs in the following month. The differences between actual amounts earned and estimates made have generally been insignificant.

Training and services revenue

Training and services revenue is comprised of revenue for consulting, engineering and customer training courses or units and education services. Consulting services consist of time-based units or fixed-fee arrangements. For time-based arrangements, revenue is recognized over time as these services are performed and for fixed-fee arrangements, revenue is recognized based on the proportion of services performed. Engineering services represent revenue earned under fixed-fee arrangements with the Company’s OEM partners and other customers to provide for significant modification and customization of Red Hat technologies. The Company recognizes revenue for these fixed-fee engineering services based on a proportional performance basis using actual costs incurred to date over the estimated total projected costs, which includes a representative profit margin. A representative profit margin is determined based on analysis of a population of similar contracts by region. Revenue for customer training and education services is recognized on the dates the services are performed.

See NOTE 17—Segment Reporting for further information, including revenue by geographic area and significant product and service offerings.

Contract Balances

Timing of revenue recognition may differ from the timing of invoicing to customers. The Company records a receivable when revenue is recognized prior to invoicing, or deferred revenue when revenue is recognized subsequent to invoicing. For multi-year arrangements, the Company will generally invoice customers upfront or annually at the beginning of each annual coverage period. See below for the accounting policy related to receivables and see NOTE 13—Deferred Revenue and Performance Obligations for further information on deferred revenue balances.

Accounts receivable and allowance for doubtful accounts

Trade accounts receivable are recorded at the invoiced amount and do not bear interest. The allowance for doubtful accounts is the Company’s estimate of the amount of probable credit losses in the Company’s existing accounts receivable. The Company determines the allowance based on historical write-off experience and other qualitative factors. The Company reviews its allowance for doubtful accounts monthly. Past due balances over 90 days and over a specified amount are reviewed individually for collectability. All other balances are reviewed on a pooled basis by type of receivable. Account balances are charged off against the allowance when the Company determines it is probable the receivable will not be recovered. The Company does not have off-balance sheet credit exposure related to its customers. Unbilled receivables related to subscription and training and services contracts are included in accounts receivable. See NOTE 3—Accounts Receivable for further information on accounts receivable balances.

Deferred selling costs

Deferred commissions are the incremental costs that are directly associated with non-cancellable subscription contracts with customers and consist of sales commissions and certain related fringe benefits earned by the Company’s sales force. The commissions are deferred and amortized on a straight-line basis over a period that approximates the subscription period. In determining the period that approximates the subscription period, the Company utilizes a portfolio approach that allows for the analysis of customer contracts with similar characteristics. The Company has determined that the effects on the financial statements of the portfolio approach would not differ materially from an individual customer contract analysis approach. The commission payments are paid in full subsequent to the month in which the customer’s service commences. The deferred commission amounts are recoverable through the future revenue streams under the non-cancellable customer contracts. In addition, the Company has the ability and intent under the commission plans with its sales force to recover commissions previously paid to its sales force in the event that customers breach the terms of their subscription agreements and do not fully pay for their subscription agreements. See NOTE 6—Deferred Selling Costs for further information on deferred commissions and the related amortization of deferred commissions.

Leases

The Company determines if an arrangement is a lease at inception. As part of that determination, the Company considers whether there is an implicitly or explicitly identified asset in an arrangement and whether the Company, as the lessee, has the right to control that asset.

Operating leases are included in operating right-of-use (“ROU”) assets, accounts payable and accrued expenses, and operating lease liabilities in the Company’s Consolidated Balance Sheets. Finance leases are included in property and equipment, other current obligations, and other long-term obligations in the Company’s Consolidated Balance Sheets.

ROU assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Variable lease payments, other than those based on a rate or index, are not included in the recognition of ROU assets and lease liabilities but instead are recognized in the Consolidated Statement of Operations in the period in which the obligation for those payments is incurred. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As most of the Company’s leases do not provide an implicit borrowing rate, the Company’s incremental borrowing rate at commencement date is used to determine the present value of lease payments. The lease terms may include options to extend or to purchase when it is reasonably certain that the Company will exercise those options. For termination options, the Company will adjust the lease term unless it is reasonably certain that the option will not be taken. Lease expense for lease payments is recognized on a straight-line basis over the lease term.

The Company has lease arrangements with both lease and non-lease components, which are generally accounted for as a single lease component. Additionally, for certain equipment leases, the Company applies a portfolio approach to effectively account for the operating lease ROU assets and liabilities.

Recent accounting pronouncements

Accounting pronouncements adopted

In August 2018, the FASB issued Accounting Standards Update 2018-15, Intangibles—Goodwill and Other—Internal-Use Software: Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract (a consensus of the FASB Emerging Issues Task Force) (“ASU 2018-15”). The FASB issued ASU 2018-15 to align the requirements for capitalizing implementation costs in a cloud computing arrangement service contract with the requirements for capitalizing implementation costs incurred for an internal-use software license. The Company early adopted this standard effective March 1, 2019. The adoption of this standard did not significantly impact the Company’s Consolidated Financial Statements.

In February 2016, the FASB issued Accounting Standards Update 2016-02, Leases (Topic 842) (“ASU 2016-02”). The FASB issued ASU 2016-02 to increase transparency and comparability among organizations with respect to accounting for leases by requiring the recognition of ROU assets and lease liabilities on the balance sheet. For income statement purposes, the FASB retained a dual model, requiring leases to be classified as either operating or finance. Along with ASU 2016-02, the Company also adopted Accounting Standards Update 2018-10, Codification Improvements to Topic 842 Leases (“ASU 2018-10”), Accounting Standards Update 2018-11, Targeted Improvements to Topic 842 Leases (“ASU 2018-11”), Accounting Standards Update 2018-20, Leases (Topic 842) Narrow-Scope Improvements for Lessors (“ASU 2018-20”) and Accounting Standards Updated 2019-01, Leases (Topic 842): Codification Improvements (“ASU 2019-01”), now commonly referred to as Accounting Standards Codification Topic 842 (“ASC 842”). The Company adopted ASC 842 as of March 1, 2019.

The Company adopted ASC 842 using the transition method, which does not require adjustments to comparative periods nor require modified disclosures in those comparative periods. The Company elected the transition package of practical expedients permitted within the new standard, which among other things, allows the carryforward of the historical lease classification. Further, upon adoption of the new guidance, the Company elected the practical expedients to combine lease and non-lease components for all asset classes and to not recognize ROU assets and lease liabilities for short-term leases for all asset classes.

ASC 842 had a material impact on the Company’s Consolidated Balance Sheets, but did not have an impact on the Consolidated Statements of Operations. The most significant impact was the recognition of ROU assets and lease liabilities for operating leases. At adoption, the Company recognized operating ROU assets of $237.4 million and operating lease liabilities of $244.5 million. Finance leases are not significant to the Company’s financials. The transition adjustment recognized in retained earnings as of March 1, 2019, was not material.

See NOTE 4—Leases for further information on the Company’s lease arrangements.

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Accounts Receivable

3 Months Ended

May 31, 2019

Receivables [Abstract]

Accounts Receivable

Accounts Receivable

Accounts receivable are presented net of an allowance for doubtful accounts. Activity in the Company’s allowance for doubtful accounts is presented in the following table (in thousands):

As of	Balance at beginning of period		Charged to (recovery of) expense		Adjustments (1)		Balance at end of period
February 28, 2019	$	2,167	3,247		(853	)	$	4,561
May 31, 2019	$	4,561	(195	)	86		$	4,452

_______________ 

⁽¹⁾  Represents foreign currency translation adjustments and amounts written-off as uncollectible accounts receivable.

Included in accounts receivable, net of allowance for doubtful accounts, are unbilled receivables of $43.3 million and $40.2 million as of May 31, 2019 and February 28, 2019, respectively.

As of May 31, 2019, no individual customer accounted for 10% or more of the Company’s total accounts receivable. As of February 28, 2019, the Company had one customer whose accounts receivable balance individually represented 10%of total accounts receivable.

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Leases

3 Months Ended

May 31, 2019

Leases [Abstract]

Leases

Leases

The Company has operating and finance leases for office locations, research and development facilities, data centers and certain equipment.

Supplemental balance sheet information related to leases was as follows (in thousands, except for lease term and discount rate):

	Balance Sheet Classification	May 31, 2019		February 28, 2019
Assets:
Operating	Operating right-of-use assets, net	$	224,371	$	—
Finance	Property and equipment, net of accumulated depreciation and amortization	579		281
Total leased assets		$	224,950	$	281
Liabilities:
Current:
Operating	Accounts payable and accrued expenses	$	46,633	$	—
Finance	Other current obligations	256		282
Long-term:
Operating	Operating lease liabilities	188,133		—
Finance	Other long-term obligations	336		6
Total lease liabilities		$	235,358	$	288

Prior to the adoption of ASC 842 on March 1, 2019, ROU assets and lease liabilities for operating leases were not recognized in the Consolidated Balance Sheets. The Company elected the practical expedient to not provide a comparable presentation in the Consolidated Balance Sheets for periods prior to adoption.

Supplemental information related to leases was as follows:

	May 31, 2019
Weighted average remaining lease term:
Operating leases	7.33 years
Finance leases	3.45 years

	May 31, 2019
Weighted average discount rate:
Operating leases	3.7	%
Finance leases	3.3	%

The components of lease expense were as follows (in thousands):

		Three Months Ended
	Statement of Operations Classification	May 31, 2019		May 31, 2018
Operating lease expense	Cost of revenue, Operating expense	$	14,666	see note (1)
Variable lease expense	Cost of revenue, Operating expense	1,176		see note (1)
Finance lease expense:
Amortization of leased assets	Cost of revenue, Operating expense	146		276
Interest on lease liabilities	Interest expense	6		7
Total lease expense (2)		$	15,994	$	283

____________________ 

⁽¹⁾  Rent expense under operating leases was $13.4 million for the three months ended May 31, 2018.

⁽²⁾  Sublease income is recognized as a reduction to operating expense in the Consolidated Statement of Operations and is not material.

Supplemental cash flow information related to leases was as follows (in thousands):

	Three Months Ended May 31, 2019
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash outflows from operating leases	$	14,043
Operating cash outflows from finance leases	$	6
Financing cash outflows from finance leases	$	112
Right-of-use assets obtained in exchange for lease obligations:
Operating leases	$	762
Finance leases	$	133

Maturities of lease liabilities were as follows (in thousands):

Fiscal Year	Operating leases			Finance leases
2020 (excluding the three months ended May 31, 2019)	$	40,737		$	258
2021	47,858			101
2022	42,467			101
2023	33,438			101
2024	26,339			82
Thereafter	79,125			—
Total lease payments	269,964			643
Less imputed interest	(35,198		)	(51		)
Total	$	234,766		$	592

The following table, which was included in the Company’s Annual Report on Form 10-K for the fiscal year ended February 28, 2019, depicts gross minimum lease payments under non-cancellable operating and capital leases (in thousands):

Fiscal Year	Operating Leases		Capital Leases
2020	$	60,722	$	282
2021	51,060		6
2022	41,173		—
2023	32,016		—
2024	27,479		—
Thereafter	79,530		—
Total minimum lease payments	$	291,980	$	288

The difference between the Company’s total lease commitments as reported at February 28, 2019 compared to the March 1, 2019 ROU asset balance in the Consolidated Balance Sheets is primarily due to the required use of a discount factor (imputed interest) under the new lease guidance and certain amounts that are not included in the ROU asset under the new lease guidance.

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Identifiable Intangible Assets

3 Months Ended

May 31, 2019

Goodwill and Intangible Assets Disclosure [Abstract]

Identifiable Intangible Assets

Identifiable Intangible Assets

Identifiable intangible assets consist primarily of trademarks, copyrights and patents, purchased technologies, customer and reseller relationships and covenants not to compete, all of which are amortized over the estimated useful life, generally on a straight-line basis, with the exception of customer and reseller relationships, which are generally amortized over the greater of straight-line over the estimated useful life or the related asset’s pattern of economic benefit. Useful lives range from two years to 10 years. As of May 31, 2019 and February 28, 2019, trademarks with an indefinite estimated useful life totaled $11.2 million and $11.4 million, respectively.

The following is a summary of identifiable intangible assets (in thousands):

	May 31, 2019							February 28, 2019
	Gross Amount		Accumulated Amortization			Net Amount		Gross Amount		Accumulated Amortization			Net Amount
Trademarks, copyrights and patents	$	180,240	$	(86,132	)	$	94,108	$	176,704	$	(82,967	)	$	93,737
Purchased technologies	218,561		(118,705		)	99,856		219,196		(113,617		)	105,579
Customer and reseller relationships	105,562		(102,047		)	3,515		105,737		(100,947		)	4,790
Covenants not to compete	15,661		(14,800		)	861		15,787		(14,728		)	1,059
Other intangible assets	8,833		(8,259		)	574		8,833		(7,915		)	918
Total identifiable intangible assets	$	528,857	$	(329,943	)	$	198,914	$	526,257	$	(320,174	)	$	206,083

Amortization expense associated with identifiable intangible assets recognized in the Company’s Consolidated Financial Statements is summarized as follows (in thousands):

	Three Months Ended
	May 31, 2019		May 31, 2018
Cost of revenue	$	6,660	$	6,485
Sales and marketing	1,194		1,362
Research and development	34		34
General and administrative	2,517		2,373
Total amortization expense	$	10,405	$	10,254

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Deferred Selling Costs

3 Months Ended

May 31, 2019

Revenue from Contract with Customer [Abstract]

Deferred Selling Costs

Deferred Selling Costs

Deferred selling costs include commissions paid to the Company’s sales associates that are the incremental costs incurred to obtain contracts with customers. The commissions are deferred and amortized over a period to approximate the period of the subscription term. For further discussion on deferred commissions, see NOTE 2—Summary of Significant Accounting Policies.

Current and non-current deferred commissions are included in Prepaid expenses and Other assets, respectively, in the Company’s Consolidated Balance Sheets and are as follows (in thousands):

	May 31, 2019		February 28, 2019
Deferred commissions, current	$	183,462	$	201,971
Deferred commissions, non-current	45,860		47,849
Total deferred commissions	$	229,322	$	249,820

Amortization of deferred commissions is included in Sales and marketing expense in the Company’s Consolidated Statements of Operations. Amortization expense related to deferred commissions totaled $64.3 million and $56.2 million for the three months ended May 31, 2019 and May 31, 2018, respectively. There was no impairment loss in relation to the costs capitalized for the periods presented.

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Derivative Instruments

3 Months Ended

May 31, 2019

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Derivative Instruments

Derivative Instruments

The Company transacts business in various foreign countries and is, therefore, subject to risk of foreign currency exchange rate fluctuations. From time to time, the Company enters into forward contracts to economically hedge transactional exposure associated with commitments arising from trade accounts receivable, trade accounts payable and fixed purchase obligations denominated in a currency other than the functional currency of the respective operating entity. All derivative instruments are recognized in the Consolidated Balance Sheets at their respective fair values. The Company has elected not to prepare and maintain the documentation required to qualify for hedge accounting treatment and, therefore, changes in fair value are recognized in the Consolidated Statements of Operations. See NOTE 16—Assets and Liabilities Measured at Fair Value on a Recurring Basis for information regarding the fair value hierarchy of derivative instruments.

The effects of derivative instruments on the Company’s Consolidated Financial Statements are as follows (in thousands):

	May 31, 2019						Classification of  Gain (Loss) Recognized in Income on Derivatives	Three Months Ended May 31, 2019
	Balance Sheet  Classification	Fair Value			Notional Value
Assets—foreign currency forward contracts not designated as hedges	Other current assets	$	233		$	18,185	Other expense, net	$	645
Liabilities—foreign currency forward contracts not designated as hedges	Accounts payable and accrued expenses	(173		)	42,821		Other expense, net	(651		)
Total		$	60		$	61,006		$	(6	)

	May 31, 2018						Classification of  Gain (Loss) Recognized in Income on Derivatives	Three Months Ended May 31, 2018
	Balance Sheet  Classification	Fair Value			Notional Value
Assets—foreign currency forward contracts not designated as hedges	Other current assets	$	111		$	21,554	Other expense, net	$	289
Liabilities—foreign currency forward contracts not designated as hedges	Accounts payable and accrued expenses	(790		)	28,112		Other expense, net	(1,136		)
Total		$	(679	)	$	49,666		$	(847	)

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Income Taxes

3 Months Ended

May 31, 2019

Income Tax Disclosure [Abstract]

Income Taxes

Income Taxes

The effective tax rate for the three months ended May 31, 2019 of (1.8)% differed from the U.S. federal statutory rate of 21% primarily due to excess tax benefits from share-based compensation, research tax credits and other discrete net tax benefits primarily related to an intra-entity transfer of assets. Tax expense for the three months ended May 31, 2019 included net discrete tax benefits of $28.8 million.

For the three months ended May 31, 2018, the Company’s then-effective tax rate of (1.5)% differed from the U.S. federal statutory rate of 21% primarily due to excess tax benefits from share-based compensation and research tax credits. Tax expense for the three months ended May 31, 2018, included net discrete tax benefits of $26.8 million primarily related to net excess tax benefits from share-based compensation.

The Company files a consolidated U.S. federal income tax return, as well as separate and combined income tax returns in numerous state and international jurisdictions. The Company is currently subject to examination by various taxing jurisdictions. The Company regularly assesses the potential outcomes of both ongoing and future examinations for the current and prior years, and believes that its provision for income taxes is adequate. The Company believes that some of these audits and negotiations may conclude during the next 12 months.

As of May 31, 2019, it is reasonably possible that total unrecognized tax benefits, including interest, may be reduced by approximately $68.2 million within the next 12 months primarily as a result of audit settlements in various tax jurisdictions, most of which would affect the Company’s effective tax rate.

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Convertible Notes

3 Months Ended

May 31, 2019

Debt Disclosure [Abstract]

Convertible Notes

Convertible Notes

Convertible note offering

On October 7, 2014, the Company completed its offering of $805.0 million aggregate principal amount of the convertible notes. The convertible notes were sold in a private placement under a purchase agreement, dated as of October 1, 2014, entered into by and among the Company and the initial purchasers, for resale to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended. For additional information, see NOTE 12—Convertible Notes to the Consolidated Financial Statements contained in the Company’s Annual Report on Form 10-K for the fiscal year ended February 28, 2019.

Indenture

On October 7, 2014, the Company entered into an indenture (the “Indenture”) with respect to the convertible notes with U.S. Bank National Association, as trustee (the “Trustee”). Under the Indenture, the convertible notes are senior unsecured obligations of the Company and bear interest at a rate of 0.25% per year, payable semiannually in arrears on April 1 and October 1 of each year, beginning on April 1, 2015. The convertible notes will mature on October 1, 2019, unless previously purchased or converted.

The convertible notes are convertible into shares of the Company’s common stock at an initial conversion rate of 13.6219 shares per $1,000 principal amount of the convertible notes (which is equivalent to an initial conversion price of approximately $73.41 per share), subject to adjustment upon the occurrence of certain events. Upon conversion of the convertible notes, holders will receive cash or shares of the Company’s common stock or a combination thereof, at the Company’s election.

Effective April 1, 2019, holders may convert their convertible notes at any time until the close of business on the second scheduled trading day immediately preceding the maturity date of the convertible notes. Upon conversion of the convertible notes on or after April 1, 2019, holders will receive on October 1, 2019 cash equal to the principal amount of the notes converted and shares of the Company’s common stock for the excess conversion value; provided that if the Merger is completed prior to October 1, 2019, then converting holders will receive cash for each $1,000 principal amount of convertible notes being converted equal to the conversion rate then in effect multiplied by the same per share cash consideration a common stockholder would receive in the Merger, subject to certain adjustments.

During the first quarter of the fiscal year ending February 29, 2020, the Company settled notices of conversion with respect to $116.2 million aggregate principal amount of the convertible notes and elected to settle such conversions by paying cash for the principal amount and issuing 943,513 shares of common stock for the excess conversion value. The Company recognized a loss on settled conversions of $0.2 million for the three months ended May 31, 2019. Total settled conversions as of May 31, 2019 amounted to $614.6 million aggregate principal amount of the convertible notes. The Company settled conversions of $3.0 million in principal amount of the convertible notes in the second quarter of the fiscal year ending February 29, 2020 by paying cash for the principal amount and issuing shares of common stock for the excess conversion value.

Based on the closing price of the Company’s common stock of $184.30 on the last trading day of the first quarter of the fiscal year ending February 29, 2020, the if-converted value of the convertible notes as of May 31, 2019 exceeded their principal amount by approximately $287.6 million.

The Company classified the net carrying amount of the convertible notes as a current liability as it is expected to be cash-settled on or prior to October 1, 2019. The equity component of the convertible notes continues to be classified as additional paid-in capital as of May 31, 2019 because the Company had the option to settle the principal amount in shares.

The conversion rate is subject to customary anti-dilution adjustments. If certain corporate events described in the Indenture occur prior to the maturity date, the conversion rate will be increased for a holder who elects to convert its convertible notes in connection with such corporate events in certain circumstances.

The convertible notes are not redeemable prior to maturity, and no sinking fund is provided for the notes. If the Company undergoes a “fundamental change,” as defined in the Indenture, subject to certain conditions, holders may require the Company to purchase for cash all or any portion of their convertible notes. The fundamental change purchase price will be 100% of the principal amount of the convertible notes to be purchased plus any accrued and unpaid interest up to but excluding the fundamental change purchase date. If the Merger with IBM is consummated, it will constitute a “fundamental change” under the Indenture.

The Indenture contains customary terms and covenants, including that upon certain events of default occurring and continuing, either the Trustee or the holders of at least 25% in principal amount of the outstanding convertible notes may declare 100% of the principal of, and accrued and unpaid interest, if any, on, all the convertible notes to be due and payable.

In accounting for the issuance of the convertible notes, the Company separated the convertible notes into liability and equity components. The Company allocated the total transaction costs incurred to the liability and equity components based on their relative fair values. Issuance costs attributable to the liability component are being amortized to interest expense over the term of the convertible notes. The excess of the face value of the convertible notes as a whole over the carrying amount of the liability component (the “debt discount”) is being amortized to interest expense over the term of the convertible notes. In addition, the debt discount is impacted by the derecognition of the original debt discount on early settlements of convertible notes. The convertible notes consisted of the following (in thousands):

	May 31, 2019			February 28, 2019
Liability component:
Principal	$	190,396		$	306,552
Less: debt issuance costs	(211		)	(595		)
Less: debt discount	(1,632		)	(4,590		)
Net carrying amount	$	188,553		$	301,367
Equity component (1)	$	22,916		$	36,897
__________
(1)   Recognized in the Consolidated Balance Sheets in Additional paid-in capital.

The following table includes total interest expense recognized related to the convertible notes (in thousands):

	Three Months Ended
	May 31, 2019		May 31, 2018
Coupon rate 0.25% per year, payable semiannually	$	69	$	471
Amortization of convertible note issuance costs — liability component	384		831
Accretion of debt discount	1,501		5,007
Total interest expense related to convertible notes	$	1,954	$	6,309

The fair value of the convertible notes, which was determined based on inputs that are observable in the market (Level 2), and the carrying value of convertible notes (the carrying value excludes the equity component of the convertible notes classified in equity) is as follows (in thousands):

	May 31, 2019
	Fair Value		Carrying Value
Convertible notes	$	188,798	$	188,553

Convertible note hedge and warrant transactions

On October 1, 2014, the Company entered into convertible note hedge transactions and warrant transactions with certain of the initial purchasers of the convertible notes or their respective affiliates. In connection with the conversions of the convertible notes that settled in the first quarter of the fiscal year ending February 29, 2020, the Company exercised a portion of the options that are part of the convertible note hedge transactions for 954,731 shares of the Company’s common stock.

The convertible note hedge transactions are expected to offset, to the extent the Company’s common stock per share price does not exceed the $101.65 strike price of the warrants, which is subject to adjustments upon the occurrence of certain events, the potential dilution with respect to shares of the Company’s common stock upon any conversion of the convertible notes and/or offset any cash payments the Company is required to make in excess of the principal amount of the converted notes, as the case may be. To partially offset the $148.0 million cost of the convertible note hedge transactions, the Company issued warrants and received proceeds of $79.8 million. The number of shares of the Company’s common stock underlying the warrants total 10,965,630, the number of shares originally underlying the convertible notes and the convertible note hedge transactions. The combination of the convertible note hedge transactions and the warrant transactions effectively increases the initial conversion price of the convertible notes from $73.41 per share to $101.65 per share. As a result, the warrant transactions will have a dilutive effect with respect to the Company’s common stock to the extent that the market price per share of the Company’s common stock, as measured under the terms of the warrant transactions, exceeds the $101.65 strike price of the warrants. For the three months ended May 31, 2019 and May 31, 2018, the warrants were included in the computation of diluted shares outstanding because the warrants’ exercise price was less than the average market price of the Company’s common stock during the related period. However, subject to certain conditions, the Company may elect to settle all of the warrants in cash.

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Commitments and Contingencies

3 Months Ended

May 31, 2019

Commitments and Contingencies Disclosure [Abstract]

Commitments and Contingencies

Commitments and Contingencies

Product indemnification

The Company is a party to a variety of agreements pursuant to which it may be obligated to indemnify the other party from losses arising in connection with the Company’s services or products, or from losses arising in connection with certain events defined within a particular contract, which may include litigation or claims relating to intellectual property infringement, certain losses arising from damage to property or injury to persons or other matters. In each of these circumstances, payment by the Company is conditioned on the other party making a claim pursuant to the procedures specified in the particular contract, which procedures typically allow the Company to challenge the other party’s claims. Further, the Company’s obligations under these agreements may in certain cases be limited in terms of time and/or amount, and in some instances, the Company may have recourse against third parties for certain payments made by the Company.

It is not possible to predict the maximum potential amount of future payments under these or similar agreements due to the conditional nature of the Company’s obligations and the facts and circumstances involved in each particular agreement. The Company does not record a liability for claims related to indemnification unless the Company concludes that the likelihood of a material claim is probable and estimable. Payments pursuant to these indemnification claims during the three months ended May 31, 2019 and May 31, 2018 were, in the aggregate, immaterial.

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Legal Proceedings	3 Months Ended
	May 31, 2019
Commitments and Contingencies Disclosure [Abstract]
Legal Proceedings	Legal ProceedingsThe Company experiences routine litigation in the normal course of its business, including patent litigation. The Company presently believes that the outcome of this routine litigation will not have a material adverse effect on its financial position, results of operations or cash flows.

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Stockholders' Equity

3 Months Ended

May 31, 2019

Equity [Abstract]

Stockholders' Equity

Stockholders’ Equity

The following table summarizes the changes in the Company’s stockholders’ equity during the three months ended May 31, 2019 (in thousands): 

	Common Stock			Additional Paid-In Capital			Retained Earnings		Treasury Stock			Accumulated Other Comprehensive Loss			Total Stockholders’ Equity
	Shares	Amount
Balance at February 28, 2019	244,403	$	24	$	2,791,895		$	2,054,069	$	(3,189,434	)	$	(42,622	)	$	1,613,932
Net income	—	—		—			141,120		—			—			141,120
Other comprehensive loss, net of tax	—	—		—			—		—			(5,036		)	(5,036		)
Vest and exercise of share-based awards	944	1		368			—		—			—			369
Common stock repurchase	—	—		—			—		—			—			—
Share-based compensation expense	—	—		50,168			—		—			—			50,168
Minimum tax withholdings paid by the Company on behalf of employees related to net settlement of employee share-based awards	—	—		(81,274		)	—		—			—			(81,274		)
Re-issuance of treasury stock under employee stock purchase plan		—		23,323			—		16,614			—			39,937
Convertible note conversions	943	—		(1,296		)	—		—			—			(1,296		)
Exercises of convertible note hedges	—	—		69,380			—		(69,364		)	—			16
Other adjustments				541			—		(541		)	—			—
Balance at May 31, 2019	246,290	$	25	$	2,853,105		$	2,195,189	$	(3,242,725	)	$	(47,658	)	$	1,757,936

The following table summarizes the changes in the Company’s stockholders’ equity during the three months ended May 31, 2018 (in thousands):

	Common Stock			Additional Paid-In Capital			Retained Earnings		Treasury Stock			Accumulated Other Comprehensive Loss			Total Stockholders’ Equity
	Shares	Amount
Balance at February 28, 2018	238,689	$	24	$	2,416,080		$	1,619,688	$	(2,525,072	)	$	(32,596	)	$	1,478,124
Net income	—	—		—			113,190		—			—			113,190
Other comprehensive loss, net of tax	—	—		—			—		—			(10,905		)	(10,905		)
Vest and exercise of share-based awards	905	—		875			—		—			—			875
Common stock repurchase	—	—		(17,175		)	—		(132,844		)	—			(150,019		)
Share-based compensation expense	—	—		46,005			—		—			—			46,005
Minimum tax withholdings paid by the Company on behalf of employees related to net settlement of employee share-based awards	—	—		(77,094		)	—		—			—			(77,094		)
Re-issuance of treasury stock under employee stock purchase plan		—		18,471			—		13,740			—			32,211
Convertible note conversions	185	—		(835		)	—		—			—			(835		)
Exercises of convertible note hedges		—		13,598			—		(13,598		)	—			—
Cumulative-effect adjustment from adoption of ASU 2016-01		—		—			392		—			—			392
Balance at May 31, 2018	239,779	$	24	$	2,399,925		$	1,733,270	$	(2,657,774	)	$	(43,501	)	$	1,431,944

Share repurchase programs

On June 21, 2018, the Company announced that its board of directors authorized the repurchase of up to $1.0 billion of Red Hat’s common stock from time to time on the open market or in privately negotiated transactions. The new program commenced on July 1, 2018, and will expire on the earlier of (i) June 30, 2020 or (ii) a determination by the board of directors, Chief Executive Officer or Chief Financial Officer to discontinue the program. The new program replaced the previous $1.0 billion repurchase program, which expired on June 30, 2018.

During the three months ended May 31, 2019, the Company did not repurchase any shares of its common stock under this repurchase plan program.

From its commencement on July 1, 2018 through May 31, 2019, the Company repurchased 1,838,241 shares of its common stock at an aggregate cost of $262.8 million under this repurchase program.

As of May 31, 2019, the amount available under this program for the repurchase of the Company’s common stock was $737.2 million, which remains unchanged from February 28, 2019. Pursuant to the Merger Agreement, the Company does not anticipate additional repurchases of the Company’s common stock prior to the consummation of the Merger with IBM.

Accumulated other comprehensive loss

Accumulated other comprehensive loss was comprised of the following (in thousands):

	May 31, 2019			February 28, 2019
Accumulated loss from foreign currency translation adjustment, net of tax	$	(47,756	)	$	(41,500	)
Accumulated unrealized gain (loss), net of tax, on available-for-sale securities	98			(1,122		)
Accumulated other comprehensive loss	$	(47,658	)	$	(42,622	)

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Deferred Revenue and Performance Obligations

3 Months Ended

May 31, 2019

Revenue from Contract with Customer [Abstract]

Deferred Revenue and Performance Obligations

Deferred Revenue and Performance Obligations

Activity in the Company’s deferred revenue accounts is presented in the following table (in thousands):

	February 28, 2019		Revenue recognized from opening balance			Deferred revenue, net (1)			May 31, 2019
Deferred revenue, short-term	$	2,161,206	$	(705,210	)	$	560,492		$	2,016,488
Deferred revenue, long-term	821,218		—			(40,175		)	781,043
Total deferred revenue	$	2,982,424	$	(705,210	)	$	520,317		$	2,797,531

____________________ 

⁽¹⁾  Includes revenue recognized from current period customer contracts and the impact from foreign currency exchange rate fluctuations.

As of May 31, 2019, the value of customer contracts allocated to performance obligations not yet satisfied, including $2.80 billion of total deferred revenue, was approximately $3.75 billion, of which approximately 60% is expected to be recognized as revenue within the next 12 months and the remainder thereafter.

In addition to the approximately $3.75 billion of customer contract value allocated to performance obligations not yet satisfied, as of May 31, 2019, the Company has offered customers options to purchase additional services at an agreed-upon price per hour that total approximately $163.9 million.

The summation of the customer contract value allocated to performance obligations not yet satisfied and the options to purchase additional services equals approximately $3.91 billion, which the Company considers as its total backlog.

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Earnings Per Share

3 Months Ended

May 31, 2019

Earnings Per Share [Abstract]

Earnings Per Share

Earnings Per Share

The Company computes basic net income per common share by dividing net income available to common stockholders by the weighted average number of common shares outstanding. Diluted net income per common share is computed by dividing net income available to common stockholders by the weighted average number of common shares and dilutive potential common share equivalents then outstanding. Potential common share equivalents consist of shares issuable upon the exercise of stock options, vesting of share-based awards, settlement of convertible notes, or exercise of warrants.

The following table reconciles the numerators and denominators of the earnings per share (“EPS”) calculation (in thousands, except per share amounts):

	Three Months Ended
	May 31, 2019		May 31, 2018
Net income available to common stockholders	$	141,120	$	113,190
Weighted average common shares outstanding	177,400		177,302
Incremental shares attributable to assumed vesting or exercise of outstanding equity award shares	2,803		3,833
Dilutive effect of convertible notes	1,554		5,686
Dilutive effect of warrants	4,878		3,918
Diluted shares	186,635		190,739
Diluted net income per share	$	0.76	$	0.59

With respect to the Company’s convertible notes, the Company will settle the principal amount of the convertible notes in cash upon conversion. As a result, upon conversion of the convertible notes, only the amounts payable in excess of the principal amounts of the convertible notes are considered in diluted EPS under the treasury stock method. See NOTE 9—Convertible Notes for detailed information on the convertible notes.

Warrants to purchase 10,965,630 shares of the Company’s common stock at $101.65 per share were outstanding during the three months ended May 31, 2019 and May 31, 2018. For the three months ended May 31, 2019 and May 31, 2018, the warrants were included in the computation of diluted EPS because the warrants’ exercise price was less than the average market price of the Company’s common stock during the related period.

The following share awards are not included in the computation of diluted EPS because the aggregate value of proceeds considered received upon either exercise or vesting was greater than the average market price of the Company’s common stock during the related periods and the effect of including such share awards in the computation would be anti-dilutive (in thousands): 

	Three Months Ended
	May 31, 2019	May 31, 2018
Number of shares considered anti-dilutive for calculating diluted EPS	43	—

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Share-based Awards

3 Months Ended

May 31, 2019

Disclosure of Compensation Related Costs, Share-based Payments [Abstract]

Share-based Awards

Share-based Awards

The Company measures share-based compensation cost at the grant date, based on the estimated fair value of the award and recognizes the cost over the employee requisite service period, typically on a straight-line basis. The Company estimates the fair value of stock options using the Black-Scholes-Merton valuation model. The fair value of nonvested share awards, nonvested share units and performance share units are measured at their underlying closing share price on the day of grant.

The following summarizes share-based compensation expense recognized in the Company’s Consolidated Financial Statements (in thousands):

	Three Months Ended
	May 31, 2019		May 31, 2018
Cost of revenue	$	4,945	$	5,128
Sales and marketing	21,904		19,520
Research and development	16,002		14,782
General and administrative	7,317		6,575
Total share-based compensation expense (1)	$	50,168	$	46,005

__________ 

⁽¹⁾ Total share-based compensation expense included $1.7 million and $4.0 million, respectively, of expense related to the Company’s employee stock purchase plan (“ESPP”) for the three months ended May 31, 2019 and May 31, 2018.

Share-based compensation expense qualifying for capitalization was insignificant for each of the three months ended May 31, 2019 and May 31, 2018. Accordingly, no share-based compensation expense was capitalized during these periods.

The following table summarizes the Company’s share-based awards granted, by type:

	Three Months Ended
	May 31, 2019				May 31, 2018
	Shares and Share Units Underlying Awards		Weighted Average Per Share Award Fair Value		Shares and Share Units Underlying Awards		Weighted Average Per Share Award Fair Value
Service-based shares and share units	885,436	(1)(2)	$	183.37	669,450	(1)	$	160.53
Performance share units—target	—		$	—	173,014		$	163.56
Performance share awards	—		$	—	64,219	(2)	$	163.56
Total share-based awards	885,436		$	183.37	906,683		$	161.32

_________ 

⁽¹⁾  Service-based shares and share units granted during the three months ended May 31, 2019 include 639,439 share units that vest over a three-year period with one-third vesting on the first anniversary of the grant date and one-twelfth vesting quarterly over the remaining two years and 56,487 share units that vest over a three-year period with one-third vesting annually over the three-year period. Service-based share units granted during the three months ended May 31, 2018 vest over a four-year period with one-quarter vesting annually over the four- year period.

⁽²⁾ 

Service-based shares and share units granted during the three months ended May 31, 2019 include 189,510 restricted stock awards that vest over a three-year period with one-third vesting annually over the three-year period. Restricted stock awards granted during the three months ended May 31, 2018 were subject to the achievement of a specified dollar amount of revenue for fiscal 2019 (the “RSA Performance Goal”). Since the Company achieved the RSA Performance Goal, 25% of the restricted stock vests on or about July 16, 2019, and the remainder vests ratably on a quarterly basis over the course of the subsequent three-year period, provided that the grantee’s business relationship with the Company has not ceased.

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Assets and Liabilities Measured at Fair Value on a Recurring Basis

3 Months Ended

May 31, 2019

Fair Value Disclosures [Abstract]

Assets and Liabilities Measured at Fair Value on a Recurring Basis

Assets and Liabilities Measured at Fair Value on a Recurring Basis

Fair value is defined as the exchange price that would be received for the purchase of an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for such asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value should maximize the use of observable inputs and minimize the use of unobservable inputs. To measure fair value, the Company uses the following fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable:

Level 1—Quoted prices in active markets for identical assets or liabilities.

Level 2—Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3—Unobservable inputs that are supported by little or no market activity and are significant to the fair value of the assets or liabilities.

The Company’s investments are comprised primarily of debt securities that are classified as available for sale and recorded at their fair values. Liquid investments with effective maturities of three months or less at the date of purchase are classified as cash equivalents. Investments with remaining effective maturities of twelve months or less from the balance sheet date are classified as short-term investments. Investments with remaining effective maturities of more than twelve months from the balance sheet date are classified as long-term investments. The Company’s Level 1 financial instruments are valued using quoted prices in active markets for identical instruments. The Company’s Level 2 financial instruments, including derivative instruments, are valued using quoted prices for identical instruments in less active markets or using other observable market inputs for comparable instruments.

Unrealized gains and temporary losses on investments classified as available for sale are included within accumulated other comprehensive income, net of any related tax effect. Realized gains and losses are recorded using the specific identification method and upon realization, such amounts are reclassified from accumulated other comprehensive income to Other expense, net. Realized gains and losses and other than temporary impairments, if any, are reflected in the Company’s Consolidated Statements of Operations as Other expense, net. The Company does not recognize changes in the fair value of its investments in income unless a decline in value is considered other than temporary. The vast majority of the Company’s investments are priced by pricing vendors. These pricing vendors use the most recent observable market information in pricing these securities or, if specific prices are not available for these securities, use other observable inputs. In the event observable inputs are not available, the Company assesses other factors to determine the security’s fair value, including broker quotes or model valuations. Independent price verifications of all holdings are performed by pricing vendors that are then reviewed by the Company. In the event a price fails a pre-established tolerance check, it is researched so that the Company can assess the cause of the variance to determine what the Company believes is the appropriate fair value.

The Company minimizes its credit risk associated with investments by investing primarily in investment-grade, liquid securities. The Company’s policy is designed to limit exposures to any one issuer depending on credit quality. Periodic evaluations of the relative credit standing of those issuers are considered in the Company’s investment strategy.

The following table summarizes the composition and fair value hierarchy of the Company’s financial assets and liabilities at May 31, 2019 (in thousands):

	May 31, 2019			Level 1		Level 2			Level 3
Assets:
Money markets (1)	$	901,570		$	901,570	$	—		$	—
Available-for-sale securities (1):
Commercial paper	255,780			—		255,780			—
U.S. agency securities	203,135			—		203,135			—
Corporate securities	162,662			—		162,662			—
Foreign currency derivatives (2)	233			—		233			—
Liabilities:
Foreign currency derivatives (3)	(173		)	—		(173		)	—
Total	$	1,523,207		$	901,570	$	621,637		$	—

__________ 

⁽¹⁾  Included in Cash, cash equivalents and restricted cash, Investments in debt securities, short-term or Investments in debt securities, long-term in the Company’s Consolidated Balance Sheet at May 31, 2019, in addition to $1.14 billion of cash.

⁽²⁾  Included in Other current assets in the Company’s Consolidated Balance Sheet at May 31, 2019.

⁽³⁾  Included in Accounts payable and accrued expenses in the Company’s Consolidated Balance Sheet at May 31, 2019.

The following table summarizes the composition and fair value hierarchy of the Company’s financial assets and liabilities at February 28, 2019 (in thousands):

	February 28, 2019			Level 1		Level 2			Level 3
Assets:
Money markets (1)	$	398,056		$	398,056	$	—		$	—
Interest-bearing deposits (1)	56,883			—		56,883			—
Available-for-sale securities (1):
Commercial paper	541,753			—		541,753			—
U.S. agency securities	222,298			—		222,298			—
Corporate securities	262,692			—		262,692			—
Foreign currency derivatives (2)	24			—		24			—
Liabilities:
Foreign currency derivatives (3)	(245		)	—		(245		)	—
Total	$	1,481,461		$	398,056	$	1,083,405		$	—

__________ 

⁽¹⁾  Included in Cash, cash equivalents and restricted cash, Investments in debt securities, short-term or Investments in debt securities, long-term in the Company’s Consolidated Balance Sheet at February 28, 2019, in addition to $943.3 million of cash.

⁽²⁾  Included in Other current assets in the Company’s Consolidated Balance Sheet at February 28, 2019.

⁽³⁾  Included in Accounts payable and accrued expenses in the Company’s Consolidated Balance Sheet at February 28, 2019.

The following table represents the Company’s investments measured at fair value as of May 31, 2019 (in thousands):

										Balance Sheet Classification
	Amortized Cost		Gross Unrealized					Aggregate Fair Value		Cash Equivalent Marketable Securities		Investments in debt securities, short-term		Investments in debt securities, long-term
			Gains		Losses (1)
Money markets	$	901,570	$	—	$	—		$	901,570	$	901,570	$	—	$	—
Commercial paper	255,780		—		—			255,780		255,780		—		—
U.S. agency securities	203,746		13		(624		)	203,135		—		68,682		134,453
Corporate securities	162,629		284		(251		)	162,662		—		108,943		53,719
Total	$	1,523,725	$	297	$	(875	)	$	1,523,147	$	1,157,350	$	177,625	$	188,172

__________ 

⁽¹⁾  As of May 31, 2019, there were $0.9 million of accumulated unrealized losses related to investments that have been in a continuous unrealized loss position for 12 months or longer. The aggregate related fair value of investments with unrealized losses was $268.0 million.

The following table summarizes the stated maturities of the Company’s investment in available-for-sale securities (in thousands):

	As of May 31, 2019		Less than 1 Year		1-5 Years		More than 5 Years
Maturity of available-for-sale debt securities	$	365,797	$	177,625	$	188,172	$	—

The following table represents the Company’s investments measured at fair value as of February 28, 2019 (in thousands):

										Balance Sheet Classification
	Amortized Cost		Gross Unrealized					Aggregate Fair Value		Cash Equivalent Marketable Securities		Investments in debt securities, short-term		Investments in debt securities, long-term
			Gains		Losses (1)
Money markets	$	398,056	$	—	$	—		$	398,056	$	398,056	$	—	$	—
Interest-bearing deposits	56,883		—		—			56,883		—		56,883		—
Commercial paper	541,753		—		—			541,753		541,753		—		—
U.S. agency securities	224,293		—		(1,995		)	222,298		—		75,037		147,261
Corporate securities	263,059		299		(666		)	262,692		—		161,441		101,251
Total	$	1,484,044	$	299	$	(2,661	)	$	1,481,682	$	939,809	$	293,361	$	248,512

__________ 

⁽¹⁾ 

As of February 28, 2019, there were $2.6 million of accumulated unrealized losses related to investments that have been in a continuous unrealized loss position for 12 months or longer. The aggregate related fair value of investments with unrealized losses was $387.8 million.

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Segment Reporting

3 Months Ended

May 31, 2019

Segment Reporting [Abstract]

Segment Reporting

Segment Reporting

The Company is organized primarily on the basis of three geographic business units: the Americas (U.S., Canada and Latin America), Europe, Middle East and Africa (“EMEA”) and Asia Pacific. These business units are aggregated into one reportable segment due to the similarity in nature of products and services provided, financial performance economic characteristics (e.g. revenue growth and gross margin), methods of production and distribution and customer classes (e.g., cloud service providers, distributors, reseller and enterprise).

The following summarizes revenue from unaffiliated customers; income (loss) from operations; total cash, cash equivalents and available-for-sale investment securities and total assets by geographic segment (in thousands):

	Americas		EMEA		Asia Pacific		Corporate (1)			Consolidated
	Three Months Ended May 31, 2019
Revenue from unaffiliated customers	$	582,290	$	216,951	$	134,870	$	—		$	934,111
Income (loss) from operations	$	83,555	$	54,909	$	43,822	$	(50,168	)	$	132,118
Total cash, cash equivalents, restricted cash and available-for-sale investment securities	$	1,429,795	$	730,228	$	501,170	$	—		$	2,661,193
Total assets	$	3,567,096	$	1,258,782	$	748,061	$	—		$	5,573,939
	Three Months Ended May 31, 2018
Revenue from unaffiliated customers	$	500,306	$	195,148	$	118,076	$	—		$	813,530
Income (loss) from operations	$	71,864	$	48,860	$	37,437	$	(46,005	)	$	112,156
Total cash, cash equivalents, restricted cash and available-for-sale investment securities	$	1,524,311	$	576,171	$	426,647	$	—		$	2,527,129
Total assets	$	3,559,900	$	1,015,187	$	616,474	$	—		$	5,191,561

 _______________ 

⁽¹⁾  Amounts represent share-based compensation expense that was not allocated to geographic segments.

Supplemental information about geographic areas

The Company approximates its geographic sources of revenue based on the country of origin of its non-cancellable subscription and service agreements initiated during the year (commonly referred to as bookings). The following table lists revenue from unaffiliated customers in the U.S., the Company’s country of domicile, and revenue from foreign countries (in thousands):

	Three Months Ended
	May 31, 2019		May 31, 2018
U.S., the Company’s country of domicile	$	511,716	$	442,421
Foreign	422,395		371,109
Total revenue from unaffiliated customers	$	934,111	$	813,530

Total tangible long-lived assets located in the U.S., the Company’s country of domicile, and similar tangible long-lived assets held outside the U.S. are summarized in the following table (in thousands):

	May 31, 2019		February 28, 2019
U.S., the Company’s country of domicile	$	131,071	$	129,387
Foreign	68,944		69,582
Total tangible long-lived assets	$	200,015	$	198,969

Supplemental information about major customers

For each of the three months ended May 31, 2019 and May 31, 2018, the U.S. government and its agencies represented in the aggregate approximately 11% and 10% of the Company’s total revenue, respectively.

Supplemental information about products and services

The following table provides further detail, by type, of the Company’s subscription and services revenues. Subscription revenue for infrastructure-related offerings includes subscription revenue generated from Red Hat Enterprise Linux and related technologies such as Red Hat Satellite and Red Hat Virtualization. Subscription revenue generated from the Company’s Application Development-related and other emerging technology offerings includes Red Hat Middleware, Red Hat OpenShift, Red Hat Cloud Infrastructure, Red Hat OpenStack Platform, Red Hat Ansible Automation, Red Hat CloudForms and Red Hat Storage technologies (in thousands):

	Three Months Ended
	May 31, 2019		May 31, 2018
Subscription revenue:
Infrastructure-related offerings	$	580,306	$	522,402
Application Development-related and other emerging technology offerings	234,646		189,119
Total subscription revenue	814,952		711,521
Training and services revenue:
Consulting services	93,423		79,147
Training	25,736		22,862
Total training and services revenue	119,159		102,009
Total revenue	$	934,111	$	813,530

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Business Combinations

3 Months Ended

May 31, 2019

Business Combinations [Abstract]

Business Combinations

Business Combinations

Acquisition of Y.G. Noobaa Ltd.

On November 27, 2018, the Company completed the acquisition of all of the shares of Y.G. Noobaa Ltd. (“Noobaa”). The addition of Noobaa, an early stage company developing software for managing data storage services, complements and enhances the Company’s portfolio of hybrid cloud technologies, including Red Hat OpenShift Container Platform, Red Hat OpenShift Container Storage and Red Hat Ceph Storage.

The consideration paid was $11.8 million in cash. Based on management’s provisional assessment of the acquisition-date fair value of the assets acquired and liabilities assumed, the total consideration transferred of $11.8 million was allocated to the Company’s assets and liabilities on a preliminary basis as follows: $3.5 million to goodwill, $9.3 million to identifiable intangible assets and $1.0 million to working capital as a net current liability.

Pro forma consolidated financial information

Pro forma consolidated financial information for the three months ended May 31, 2019 has not been provided because the acquisition of Noobaa would not have had a significant impact on consolidated operating results if the acquisition had closed on March 1, 2018.

Goodwill and other business combinations

The following is a summary of goodwill (in thousands):

Balance at February 28, 2019	$	1,276,853
Impact of foreign currency fluctuations	(3,359		)
Balance at May 31, 2019	$	1,273,494

The excess of purchase price paid for Noobaa and other acquisitions over the fair value of the net assets acquired was recognized as goodwill. Goodwill comprises the majority of the purchase price paid for each of the acquired businesses because these businesses were focused on emerging technologies such as development and operations automation, cloud-enabling technologies and software-defined storage technologies, which consequently—at the time of acquisition—generated relatively little revenue. However, these acquired businesses, with their assembled, highly-specialized workforces and community of contributors, are expected to both expand the Company’s existing technology portfolio and advance the Company’s market position overall in open source solutions.

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Summary of Significant Accounting Policies (Policies)

3 Months Ended

May 31, 2019

Accounting Policies [Abstract]

Basis of presentation

Basis of presentation

The unaudited interim consolidated financial statements as of and for the three months ended May 31, 2019 have been prepared by the Company pursuant to the rules and regulations of the SEC for interim financial reporting. These consolidated statements are unaudited and, in the opinion of management, include all adjustments (consisting of normal recurring adjustments and accruals) necessary for a fair statement of the consolidated balance sheets, consolidated operating results, consolidated other comprehensive income and consolidated cash flows for the periods presented in accordance with accounting principles generally accepted in the U.S. (“U.S. GAAP”). Operating results for the three months ended May 31, 2019 are not necessarily indicative of the results that may be expected for the fiscal year ending February 29, 2020. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with U.S. GAAP have been omitted in accordance with the SEC’s rules and regulations for interim reporting. These unaudited financial statements should be read in conjunction with the Company’s Consolidated Financial Statements, including notes thereto, included in the Company’s Annual Report on Form 10-K for the fiscal year ended February 28, 2019. Other than the accounting pronouncement adopted during the three months ended May 31, 2019 related to accounting for leases as described below, there have been no changes to the Company’s significant accounting policies from those described in NOTE 2—Summary of Significant Accounting Policies to the Consolidated Financial Statements contained in the Company’s Annual Report on Form 10-K for the fiscal year ended February 28, 2019.

The Company adopted Accounting Standards Update 2016-02, Leases, now commonly referred to as Accounting Standards Codification Topic 842 (“ASC 842”), effective March 1, 2019, using the modified retrospective method, which does not require adjustments to comparative periods nor require modified disclosures in those comparative periods.

Certain amounts for the three months ended May 31, 2018 have been reclassified to conform to the current period presentation.

The Company’s fiscal year ends on the last day of February, and the Company identifies fiscal years by the calendar years in which they end. For example, the fiscal year ending February 29, 2020 is referred to as “fiscal 2020.”

Consolidation policy

Consolidation policy

The accompanying Consolidated Financial Statements include the accounts of the Company and all of its wholly owned subsidiaries. All significant inter-company accounts and transactions are eliminated in consolidation. There are no significant foreign exchange restrictions on the Company’s foreign subsidiaries.

Use of estimates

Use of estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the balance sheet dates and the reported amounts of revenue and expenses during the reporting periods. Actual results could differ from such estimates. Estimates are used for, but not limited to, revenue recognition, goodwill and other long-lived assets, share-based compensation, income taxes and loss contingencies.

Revenue recognition

Revenue recognition

The Company derives its revenues from subscription contracts and training and service contracts. Revenue is recognized when performance obligations, as stipulated in the contracts, are transferred to a customer for an amount that reflects the consideration the Company expects to receive in exchange for those subscription contracts and training and service contracts.

The Company applies the following five steps to recognize revenue:

1)    Identify the contract with a customer. The Company determines that it has a contract with a customer when the contract is approved, the party’s rights regarding the products and services to be transferred can be identified, the payment terms for the products and services are identified, the customer’s ability and intent to pay can be determined, and the contract has commercial substance. Judgment is used to assess the customer’s ability and intent to pay, which is based upon factors including the customer’s historical payment experience or credit and financial information pertaining to the customer.

2)    Identify the performance obligations in the contract. The Company’s performance obligations are identified based on the products and services that will be transferred to the customer that are both capable of being distinct and are distinct in the context of the contract and consist of (i) subscription offerings, including non-proprietary open-source software code delivered to the customer, software support subscriptions delivered to the customer, software support subscriptions embedded in partner products and learning subscriptions and (ii) training and services, including professional services sold at a fixed fee, professional services sold on a time-and-material-basis, training courses or units, and consulting units. In limited cases, the option to purchase additional subscription offerings or training and services may be offered at a price representing a material right. In such cases, the option to purchase is considered a distinct performance obligation.

3)     Determine the transaction price. The Company determines transaction price based on the consideration expected to be received in exchange for transferring certain performance obligations to the customer. In determining the transaction price, variable consideration, if any, would be considered if, in management’s judgment, it is probable that a significant future reversal of cumulative revenue under the contract will not occur.

The Company’s contracts do not contain significant financing components. Specifically, the Company does not typically extend customer payment terms beyond a standard 30- to 60-day term and as a result the Company has elected the one-year-or-less safe harbor expedient and does not impute any interest.

The Company has elected to exclude all taxes from the transaction price (e.g., sales, use, value-added, etc.). Revenue is recognized net of such taxes.

4)     Allocate the transaction price to performance obligations in the contract. When a contract contains a single performance obligation, the entire transaction price is allocated to that one performance obligation. Contracts that contain multiple performance obligations require an allocation of the transaction price to each performance obligation based on a relative standalone selling price (“SSP”). The Company typically determines SSP based on the observable price when the Company sells the subscriptions or training and services separately, taking into consideration the geographical region of the customer, type of offering and sales channel. In instances where SSP is not directly observable, the Company determines SSP either from the renewal rate paid for the performance obligation to the extent it is the same rate as stipulated in the initial customer contract or by using the expected-cost-plus-margin approach.

5)     Recognize revenue when or as the performance obligation is satisfied. Revenue is recognized at the time the related performance obligation is satisfied by transferring the promised subscription offerings and training and services to a customer. For each performance obligation, a determination is made as to whether the control is transferred over time or at a point in time. For performance obligations satisfied over time, a method to measure progress toward complete satisfaction is selected, based upon the most faithful depiction of performance. The selected method for each performance obligation type is applied consistently to similar contracts.

Subscription revenue

Subscription revenue is comprised of direct and indirect sales of subscriptions relating to Red Hat technologies. Accounts receivable and deferred revenue are recorded at the time a customer enters into a binding and non-cancellable subscription agreement for the purchase of a subscription, subscription services are made available to the customer and the customer is billed. The deferred revenue amount is recognized as revenue ratably over the subscription period. Red Hat technologies are generally offered with base subscription periods of either one year or three years; the majority of the Company’s subscriptions have terms of one year. Under these subscription agreements, renewal rates are generally specified for renewal terms of one year or three years. Subscriptions generally entitle the end user to the technology itself and post-contract customer support, generally consisting of varying levels of support services as well as access to security updates, fixes, functionality enhancements, upgrades to the technologies, each on an if and when available basis, and compatibility with an ecosystem of certified hardware and software, during the term of the subscription. The Company sells its offerings through two principal channels: (1) direct, which includes sales by the Company’s sales force as well as web store sales, and (2) indirect, which includes certified cloud and service providers (“CCSPs”), distributors, original equipment manufacturers (“OEMs”), systems integrators and value added resellers.

The Company recognizes revenue from the sale of Red Hat technologies ratably over the period of the subscription beginning on the commencement date of the subscription agreement. The Company has determined that the delivery of software code underlying the subscription is a distinct performance obligation as it is both capable of being distinct and is distinct within the context of a customer contract. The Company uses a non-proprietary open source development and licensing model to provide its software technologies to customers and therefore the amount of transaction price allocated to the underlying software code is negligible. The Company derives a portion of its revenue from CCSPs that provide public clouds with, and allow users to consume, computing resources as a service. The Company earns revenue based on subscription units consumed by the CCSP or its end users. The Company uses its historical cloud-usage data to estimate the amount of revenue earned and recognized each month and adjusts to actual amounts earned upon receipt of usage reports from the CCSPs in the following month. The differences between actual amounts earned and estimates made have generally been insignificant.

Training and services revenue

Training and services revenue is comprised of revenue for consulting, engineering and customer training courses or units and education services. Consulting services consist of time-based units or fixed-fee arrangements. For time-based arrangements, revenue is recognized over time as these services are performed and for fixed-fee arrangements, revenue is recognized based on the proportion of services performed. Engineering services represent revenue earned under fixed-fee arrangements with the Company’s OEM partners and other customers to provide for significant modification and customization of Red Hat technologies. The Company recognizes revenue for these fixed-fee engineering services based on a proportional performance basis using actual costs incurred to date over the estimated total projected costs, which includes a representative profit margin. A representative profit margin is determined based on analysis of a population of similar contracts by region. Revenue for customer training and education services is recognized on the dates the services are performed.

See NOTE 17—Segment Reporting for further information, including revenue by geographic area and significant product and service offerings.

Contract Balances

Timing of revenue recognition may differ from the timing of invoicing to customers. The Company records a receivable when revenue is recognized prior to invoicing, or deferred revenue when revenue is recognized subsequent to invoicing. For multi-year arrangements, the Company will generally invoice customers upfront or annually at the beginning of each annual coverage period.

Accounts receivable and allowance for doubtful accounts

Accounts receivable and allowance for doubtful accounts

Trade accounts receivable are recorded at the invoiced amount and do not bear interest. The allowance for doubtful accounts is the Company’s estimate of the amount of probable credit losses in the Company’s existing accounts receivable. The Company determines the allowance based on historical write-off experience and other qualitative factors. The Company reviews its allowance for doubtful accounts monthly. Past due balances over 90 days and over a specified amount are reviewed individually for collectability. All other balances are reviewed on a pooled basis by type of receivable. Account balances are charged off against the allowance when the Company determines it is probable the receivable will not be recovered. The Company does not have off-balance sheet credit exposure related to its customers. Unbilled receivables related to subscription and training and services contracts are included in accounts receivable.

Deferred selling costs

Deferred selling costs

Deferred commissions are the incremental costs that are directly associated with non-cancellable subscription contracts with customers and consist of sales commissions and certain related fringe benefits earned by the Company’s sales force. The commissions are deferred and amortized on a straight-line basis over a period that approximates the subscription period. In determining the period that approximates the subscription period, the Company utilizes a portfolio approach that allows for the analysis of customer contracts with similar characteristics. The Company has determined that the effects on the financial statements of the portfolio approach would not differ materially from an individual customer contract analysis approach. The commission payments are paid in full subsequent to the month in which the customer’s service commences. The deferred commission amounts are recoverable through the future revenue streams under the non-cancellable customer contracts. In addition, the Company has the ability and intent under the commission plans with its sales force to recover commissions previously paid to its sales force in the event that customers breach the terms of their subscription agreements and do not fully pay for their subscription agreements.

Leases

Leases

The Company determines if an arrangement is a lease at inception. As part of that determination, the Company considers whether there is an implicitly or explicitly identified asset in an arrangement and whether the Company, as the lessee, has the right to control that asset.

Operating leases are included in operating right-of-use (“ROU”) assets, accounts payable and accrued expenses, and operating lease liabilities in the Company’s Consolidated Balance Sheets. Finance leases are included in property and equipment, other current obligations, and other long-term obligations in the Company’s Consolidated Balance Sheets.

ROU assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Variable lease payments, other than those based on a rate or index, are not included in the recognition of ROU assets and lease liabilities but instead are recognized in the Consolidated Statement of Operations in the period in which the obligation for those payments is incurred. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As most of the Company’s leases do not provide an implicit borrowing rate, the Company’s incremental borrowing rate at commencement date is used to determine the present value of lease payments. The lease terms may include options to extend or to purchase when it is reasonably certain that the Company will exercise those options. For termination options, the Company will adjust the lease term unless it is reasonably certain that the option will not be taken. Lease expense for lease payments is recognized on a straight-line basis over the lease term.

The Company has lease arrangements with both lease and non-lease components, which are generally accounted for as a single lease component. Additionally, for certain equipment leases, the Company applies a portfolio approach to effectively account for the operating lease ROU assets and liabilities.

Recent accounting pronouncements

Recent accounting pronouncements

Accounting pronouncements adopted

In August 2018, the FASB issued Accounting Standards Update 2018-15, Intangibles—Goodwill and Other—Internal-Use Software: Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract (a consensus of the FASB Emerging Issues Task Force) (“ASU 2018-15”). The FASB issued ASU 2018-15 to align the requirements for capitalizing implementation costs in a cloud computing arrangement service contract with the requirements for capitalizing implementation costs incurred for an internal-use software license. The Company early adopted this standard effective March 1, 2019. The adoption of this standard did not significantly impact the Company’s Consolidated Financial Statements.

In February 2016, the FASB issued Accounting Standards Update 2016-02, Leases (Topic 842) (“ASU 2016-02”). The FASB issued ASU 2016-02 to increase transparency and comparability among organizations with respect to accounting for leases by requiring the recognition of ROU assets and lease liabilities on the balance sheet. For income statement purposes, the FASB retained a dual model, requiring leases to be classified as either operating or finance. Along with ASU 2016-02, the Company also adopted Accounting Standards Update 2018-10, Codification Improvements to Topic 842 Leases (“ASU 2018-10”), Accounting Standards Update 2018-11, Targeted Improvements to Topic 842 Leases (“ASU 2018-11”), Accounting Standards Update 2018-20, Leases (Topic 842) Narrow-Scope Improvements for Lessors (“ASU 2018-20”) and Accounting Standards Updated 2019-01, Leases (Topic 842): Codification Improvements (“ASU 2019-01”), now commonly referred to as Accounting Standards Codification Topic 842 (“ASC 842”). The Company adopted ASC 842 as of March 1, 2019.

The Company adopted ASC 842 using the transition method, which does not require adjustments to comparative periods nor require modified disclosures in those comparative periods. The Company elected the transition package of practical expedients permitted within the new standard, which among other things, allows the carryforward of the historical lease classification. Further, upon adoption of the new guidance, the Company elected the practical expedients to combine lease and non-lease components for all asset classes and to not recognize ROU assets and lease liabilities for short-term leases for all asset classes.

ASC 842 had a material impact on the Company’s Consolidated Balance Sheets, but did not have an impact on the Consolidated Statements of Operations. The most significant impact was the recognition of ROU assets and lease liabilities for operating leases. At adoption, the Company recognized operating ROU assets of $237.4 million and operating lease liabilities of $244.5 million. Finance leases are not significant to the Company’s financials. The transition adjustment recognized in retained earnings as of March 1, 2019, was not material.

See NOTE 4—Leases for further information on the Company’s lease arrangements.

Identifiable Intangible Assets

Identifiable intangible assets consist primarily of trademarks, copyrights and patents, purchased technologies, customer and reseller relationships and covenants not to compete, all of which are amortized over the estimated useful life, generally on a straight-line basis, with the exception of customer and reseller relationships, which are generally amortized over the greater of straight-line over the estimated useful life or the related asset’s pattern of economic benefit. Useful lives range from two years to 10 years.

Derivative Instruments

The Company transacts business in various foreign countries and is, therefore, subject to risk of foreign currency exchange rate fluctuations. From time to time, the Company enters into forward contracts to economically hedge transactional exposure associated with commitments arising from trade accounts receivable, trade accounts payable and fixed purchase obligations denominated in a currency other than the functional currency of the respective operating entity. All derivative instruments are recognized in the Consolidated Balance Sheets at their respective fair values. The Company has elected not to prepare and maintain the documentation required to qualify for hedge accounting treatment and, therefore, changes in fair value are recognized in the Consolidated Statements of Operations.

Share Based Awards

The Company measures share-based compensation cost at the grant date, based on the estimated fair value of the award and recognizes the cost over the employee requisite service period, typically on a straight-line basis. The Company estimates the fair value of stock options using the Black-Scholes-Merton valuation model. The fair value of nonvested share awards, nonvested share units and performance share units are measured at their underlying closing share price on the day of grant.

Assets and Liabilities Measured at Fair Value on a Recurring Basis

Fair value is defined as the exchange price that would be received for the purchase of an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for such asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value should maximize the use of observable inputs and minimize the use of unobservable inputs. To measure fair value, the Company uses the following fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable:

Level 1—Quoted prices in active markets for identical assets or liabilities.

Level 2—Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3—Unobservable inputs that are supported by little or no market activity and are significant to the fair value of the assets or liabilities.

The Company’s investments are comprised primarily of debt securities that are classified as available for sale and recorded at their fair values. Liquid investments with effective maturities of three months or less at the date of purchase are classified as cash equivalents. Investments with remaining effective maturities of twelve months or less from the balance sheet date are classified as short-term investments. Investments with remaining effective maturities of more than twelve months from the balance sheet date are classified as long-term investments. The Company’s Level 1 financial instruments are valued using quoted prices in active markets for identical instruments. The Company’s Level 2 financial instruments, including derivative instruments, are valued using quoted prices for identical instruments in less active markets or using other observable market inputs for comparable instruments.

Unrealized gains and temporary losses on investments classified as available for sale are included within accumulated other comprehensive income, net of any related tax effect. Realized gains and losses are recorded using the specific identification method and upon realization, such amounts are reclassified from accumulated other comprehensive income to Other expense, net. Realized gains and losses and other than temporary impairments, if any, are reflected in the Company’s Consolidated Statements of Operations as Other expense, net. The Company does not recognize changes in the fair value of its investments in income unless a decline in value is considered other than temporary. The vast majority of the Company’s investments are priced by pricing vendors. These pricing vendors use the most recent observable market information in pricing these securities or, if specific prices are not available for these securities, use other observable inputs. In the event observable inputs are not available, the Company assesses other factors to determine the security’s fair value, including broker quotes or model valuations. Independent price verifications of all holdings are performed by pricing vendors that are then reviewed by the Company. In the event a price fails a pre-established tolerance check, it is researched so that the Company can assess the cause of the variance to determine what the Company believes is the appropriate fair value.

The Company minimizes its credit risk associated with investments by investing primarily in investment-grade, liquid securities. The Company’s policy is designed to limit exposures to any one issuer depending on credit quality. Periodic evaluations of the relative credit standing of those issuers are considered in the Company’s investment strategy.

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Accounts Receivable (Tables)

3 Months Ended

May 31, 2019

Receivables [Abstract]

Schedule of Credit Losses for Financing Receivables, Current

Accounts receivable are presented net of an allowance for doubtful accounts. Activity in the Company’s allowance for doubtful accounts is presented in the following table (in thousands):

As of	Balance at beginning of period		Charged to (recovery of) expense		Adjustments (1)		Balance at end of period
February 28, 2019	$	2,167	3,247		(853	)	$	4,561
May 31, 2019	$	4,561	(195	)	86		$	4,452

_______________ 

⁽¹⁾ 

Represents foreign currency translation adjustments and amounts written-off as uncollectible accounts receivable.

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Leases (Tables)

3 Months Ended

May 31, 2019

Leases [Abstract]

Schedule of Right-of-Use Assets and Lease Liabilities

Supplemental balance sheet information related to leases was as follows (in thousands, except for lease term and discount rate):

	Balance Sheet Classification	May 31, 2019		February 28, 2019
Assets:
Operating	Operating right-of-use assets, net	$	224,371	$	—
Finance	Property and equipment, net of accumulated depreciation and amortization	579		281
Total leased assets		$	224,950	$	281
Liabilities:
Current:
Operating	Accounts payable and accrued expenses	$	46,633	$	—
Finance	Other current obligations	256		282
Long-term:
Operating	Operating lease liabilities	188,133		—
Finance	Other long-term obligations	336		6
Total lease liabilities		$	235,358	$	288

Schedule of Lease Term and Discount Rate

Supplemental information related to leases was as follows:

	May 31, 2019
Weighted average remaining lease term:
Operating leases	7.33 years
Finance leases	3.45 years

	May 31, 2019
Weighted average discount rate:
Operating leases	3.7	%
Finance leases	3.3	%

Schedule of components of lease expense

The components of lease expense were as follows (in thousands):

		Three Months Ended
	Statement of Operations Classification	May 31, 2019		May 31, 2018
Operating lease expense	Cost of revenue, Operating expense	$	14,666	see note (1)
Variable lease expense	Cost of revenue, Operating expense	1,176		see note (1)
Finance lease expense:
Amortization of leased assets	Cost of revenue, Operating expense	146		276
Interest on lease liabilities	Interest expense	6		7
Total lease expense (2)		$	15,994	$	283

____________________ 

⁽¹⁾  Rent expense under operating leases was $13.4 million for the three months ended May 31, 2018.

⁽²⁾ 

Sublease income is recognized as a reduction to operating expense in the Consolidated Statement of Operations and is not material.

Schedule of supplemental cash flow information related to leases

Supplemental cash flow information related to leases was as follows (in thousands):

	Three Months Ended May 31, 2019
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash outflows from operating leases	$	14,043
Operating cash outflows from finance leases	$	6
Financing cash outflows from finance leases	$	112
Right-of-use assets obtained in exchange for lease obligations:
Operating leases	$	762
Finance leases	$	133

Schedule of maturities of lease liabilities

Maturities of lease liabilities were as follows (in thousands):

Fiscal Year	Operating leases			Finance leases
2020 (excluding the three months ended May 31, 2019)	$	40,737		$	258
2021	47,858			101
2022	42,467			101
2023	33,438			101
2024	26,339			82
Thereafter	79,125			—
Total lease payments	269,964			643
Less imputed interest	(35,198		)	(51		)
Total	$	234,766		$	592

Schedule of future minimum payments for operating and capital lease

The following table, which was included in the Company’s Annual Report on Form 10-K for the fiscal year ended February 28, 2019, depicts gross minimum lease payments under non-cancellable operating and capital leases (in thousands):

Fiscal Year	Operating Leases		Capital Leases
2020	$	60,722	$	282
2021	51,060		6
2022	41,173		—
2023	32,016		—
2024	27,479		—
Thereafter	79,530		—
Total minimum lease payments	$	291,980	$	288

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Identifiable Intangible Assets (Tables)

3 Months Ended

May 31, 2019

Goodwill and Intangible Assets Disclosure [Abstract]

Schedule of Finite-Lived Intangible Assets

The following is a summary of identifiable intangible assets (in thousands):

	May 31, 2019							February 28, 2019
	Gross Amount		Accumulated Amortization			Net Amount		Gross Amount		Accumulated Amortization			Net Amount
Trademarks, copyrights and patents	$	180,240	$	(86,132	)	$	94,108	$	176,704	$	(82,967	)	$	93,737
Purchased technologies	218,561		(118,705		)	99,856		219,196		(113,617		)	105,579
Customer and reseller relationships	105,562		(102,047		)	3,515		105,737		(100,947		)	4,790
Covenants not to compete	15,661		(14,800		)	861		15,787		(14,728		)	1,059
Other intangible assets	8,833		(8,259		)	574		8,833		(7,915		)	918
Total identifiable intangible assets	$	528,857	$	(329,943	)	$	198,914	$	526,257	$	(320,174	)	$	206,083

Schedule of Amortization Expense Associated with Identifiable Intangible Assets

Amortization expense associated with identifiable intangible assets recognized in the Company’s Consolidated Financial Statements is summarized as follows (in thousands):

	Three Months Ended
	May 31, 2019		May 31, 2018
Cost of revenue	$	6,660	$	6,485
Sales and marketing	1,194		1,362
Research and development	34		34
General and administrative	2,517		2,373
Total amortization expense	$	10,405	$	10,254

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Deferred Selling Costs (Tables)

3 Months Ended

May 31, 2019

Revenue from Contract with Customer [Abstract]

Schedule of Deferred Sales Commissions

Current and non-current deferred commissions are included in Prepaid expenses and Other assets, respectively, in the Company’s Consolidated Balance Sheets and are as follows (in thousands):

	May 31, 2019		February 28, 2019
Deferred commissions, current	$	183,462	$	201,971
Deferred commissions, non-current	45,860		47,849
Total deferred commissions	$	229,322	$	249,820

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Derivative Instruments (Tables)

3 Months Ended

May 31, 2019

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Summary of Effects of Derivative Instruments

The effects of derivative instruments on the Company’s Consolidated Financial Statements are as follows (in thousands):

	May 31, 2019						Classification of  Gain (Loss) Recognized in Income on Derivatives	Three Months Ended May 31, 2019
	Balance Sheet  Classification	Fair Value			Notional Value
Assets—foreign currency forward contracts not designated as hedges	Other current assets	$	233		$	18,185	Other expense, net	$	645
Liabilities—foreign currency forward contracts not designated as hedges	Accounts payable and accrued expenses	(173		)	42,821		Other expense, net	(651		)
Total		$	60		$	61,006		$	(6	)

	May 31, 2018						Classification of  Gain (Loss) Recognized in Income on Derivatives	Three Months Ended May 31, 2018
	Balance Sheet  Classification	Fair Value			Notional Value
Assets—foreign currency forward contracts not designated as hedges	Other current assets	$	111		$	21,554	Other expense, net	$	289
Liabilities—foreign currency forward contracts not designated as hedges	Accounts payable and accrued expenses	(790		)	28,112		Other expense, net	(1,136		)
Total		$	(679	)	$	49,666		$	(847	)

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Convertible Notes (Tables)

3 Months Ended

May 31, 2019

Debt Disclosure [Abstract]

Components of Convertible Notes

The convertible notes consisted of the following (in thousands):

	May 31, 2019			February 28, 2019
Liability component:
Principal	$	190,396		$	306,552
Less: debt issuance costs	(211		)	(595		)
Less: debt discount	(1,632		)	(4,590		)
Net carrying amount	$	188,553		$	301,367
Equity component (1)	$	22,916		$	36,897
__________
(1)   Recognized in the Consolidated Balance Sheets in Additional paid-in capital.

Schedule of Total Interest Expense Recognized Related to Convertible Notes

The following table includes total interest expense recognized related to the convertible notes (in thousands):

	Three Months Ended
	May 31, 2019		May 31, 2018
Coupon rate 0.25% per year, payable semiannually	$	69	$	471
Amortization of convertible note issuance costs — liability component	384		831
Accretion of debt discount	1,501		5,007
Total interest expense related to convertible notes	$	1,954	$	6,309

Summary of Fair Value of Convertible Notes and Carrying Value of Convertible Notes

The fair value of the convertible notes, which was determined based on inputs that are observable in the market (Level 2), and the carrying value of convertible notes (the carrying value excludes the equity component of the convertible notes classified in equity) is as follows (in thousands):

	May 31, 2019
	Fair Value		Carrying Value
Convertible notes	$	188,798	$	188,553

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Stockholders' Equity (Tables)

3 Months Ended

May 31, 2019

Equity [Abstract]

Summary of Changes in Stockholders' Equity

The following table summarizes the changes in the Company’s stockholders’ equity during the three months ended May 31, 2019 (in thousands): 

	Common Stock			Additional Paid-In Capital			Retained Earnings		Treasury Stock			Accumulated Other Comprehensive Loss			Total Stockholders’ Equity
	Shares	Amount
Balance at February 28, 2019	244,403	$	24	$	2,791,895		$	2,054,069	$	(3,189,434	)	$	(42,622	)	$	1,613,932
Net income	—	—		—			141,120		—			—			141,120
Other comprehensive loss, net of tax	—	—		—			—		—			(5,036		)	(5,036		)
Vest and exercise of share-based awards	944	1		368			—		—			—			369
Common stock repurchase	—	—		—			—		—			—			—
Share-based compensation expense	—	—		50,168			—		—			—			50,168
Minimum tax withholdings paid by the Company on behalf of employees related to net settlement of employee share-based awards	—	—		(81,274		)	—		—			—			(81,274		)
Re-issuance of treasury stock under employee stock purchase plan		—		23,323			—		16,614			—			39,937
Convertible note conversions	943	—		(1,296		)	—		—			—			(1,296		)
Exercises of convertible note hedges	—	—		69,380			—		(69,364		)	—			16
Other adjustments				541			—		(541		)	—			—
Balance at May 31, 2019	246,290	$	25	$	2,853,105		$	2,195,189	$	(3,242,725	)	$	(47,658	)	$	1,757,936

The following table summarizes the changes in the Company’s stockholders’ equity during the three months ended May 31, 2018 (in thousands):

	Common Stock			Additional Paid-In Capital			Retained Earnings		Treasury Stock			Accumulated Other Comprehensive Loss			Total Stockholders’ Equity
	Shares	Amount
Balance at February 28, 2018	238,689	$	24	$	2,416,080		$	1,619,688	$	(2,525,072	)	$	(32,596	)	$	1,478,124
Net income	—	—		—			113,190		—			—			113,190
Other comprehensive loss, net of tax	—	—		—			—		—			(10,905		)	(10,905		)
Vest and exercise of share-based awards	905	—		875			—		—			—			875
Common stock repurchase	—	—		(17,175		)	—		(132,844		)	—			(150,019		)
Share-based compensation expense	—	—		46,005			—		—			—			46,005
Minimum tax withholdings paid by the Company on behalf of employees related to net settlement of employee share-based awards	—	—		(77,094		)	—		—			—			(77,094		)
Re-issuance of treasury stock under employee stock purchase plan		—		18,471			—		13,740			—			32,211
Convertible note conversions	185	—		(835		)	—		—			—			(835		)
Exercises of convertible note hedges		—		13,598			—		(13,598		)	—			—
Cumulative-effect adjustment from adoption of ASU 2016-01		—		—			392		—			—			392
Balance at May 31, 2018	239,779	$	24	$	2,399,925		$	1,733,270	$	(2,657,774	)	$	(43,501	)	$	1,431,944

Summary of Accumulated Other Comprehensive Loss

Accumulated other comprehensive loss was comprised of the following (in thousands):

	May 31, 2019			February 28, 2019
Accumulated loss from foreign currency translation adjustment, net of tax	$	(47,756	)	$	(41,500	)
Accumulated unrealized gain (loss), net of tax, on available-for-sale securities	98			(1,122		)
Accumulated other comprehensive loss	$	(47,658	)	$	(42,622	)

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Deferred Revenue and Performance Obligations (Tables)

3 Months Ended

May 31, 2019

Revenue from Contract with Customer [Abstract]

Contract with Customer, Asset and Liability

Activity in the Company’s deferred revenue accounts is presented in the following table (in thousands):

	February 28, 2019		Revenue recognized from opening balance			Deferred revenue, net (1)			May 31, 2019
Deferred revenue, short-term	$	2,161,206	$	(705,210	)	$	560,492		$	2,016,488
Deferred revenue, long-term	821,218		—			(40,175		)	781,043
Total deferred revenue	$	2,982,424	$	(705,210	)	$	520,317		$	2,797,531

____________________ 

⁽¹⁾ 

Includes revenue recognized from current period customer contracts and the impact from foreign currency exchange rate fluctuations.

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Earnings Per Share (Tables)

3 Months Ended

May 31, 2019

Earnings Per Share [Abstract]

Reconciliation of Numerators and Denominators of Earnings Per Share Calculation

The following table reconciles the numerators and denominators of the earnings per share (“EPS”) calculation (in thousands, except per share amounts):

	Three Months Ended
	May 31, 2019		May 31, 2018
Net income available to common stockholders	$	141,120	$	113,190
Weighted average common shares outstanding	177,400		177,302
Incremental shares attributable to assumed vesting or exercise of outstanding equity award shares	2,803		3,833
Dilutive effect of convertible notes	1,554		5,686
Dilutive effect of warrants	4,878		3,918
Diluted shares	186,635		190,739
Diluted net income per share	$	0.76	$	0.59

Shares Considered Anti-Dilutive for Calculating Diluted EPS

The following share awards are not included in the computation of diluted EPS because the aggregate value of proceeds considered received upon either exercise or vesting was greater than the average market price of the Company’s common stock during the related periods and the effect of including such share awards in the computation would be anti-dilutive (in thousands): 

	Three Months Ended
	May 31, 2019	May 31, 2018
Number of shares considered anti-dilutive for calculating diluted EPS	43	—

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Share-based Awards (Tables)

3 Months Ended

May 31, 2019

Disclosure of Compensation Related Costs, Share-based Payments [Abstract]

Share-Based Compensation Expense

The following summarizes share-based compensation expense recognized in the Company’s Consolidated Financial Statements (in thousands):

	Three Months Ended
	May 31, 2019		May 31, 2018
Cost of revenue	$	4,945	$	5,128
Sales and marketing	21,904		19,520
Research and development	16,002		14,782
General and administrative	7,317		6,575
Total share-based compensation expense (1)	$	50,168	$	46,005

__________ 

⁽¹⁾

Total share-based compensation expense included $1.7 million and $4.0 million, respectively, of expense related to the Company’s employee stock purchase plan (“ESPP”) for the three months ended May 31, 2019 and May 31, 2018.

Summary of Share-Based Awards Granted During Period

The following table summarizes the Company’s share-based awards granted, by type:

	Three Months Ended
	May 31, 2019				May 31, 2018
	Shares and Share Units Underlying Awards		Weighted Average Per Share Award Fair Value		Shares and Share Units Underlying Awards		Weighted Average Per Share Award Fair Value
Service-based shares and share units	885,436	(1)(2)	$	183.37	669,450	(1)	$	160.53
Performance share units—target	—		$	—	173,014		$	163.56
Performance share awards	—		$	—	64,219	(2)	$	163.56
Total share-based awards	885,436		$	183.37	906,683		$	161.32

_________ 

⁽¹⁾  Service-based shares and share units granted during the three months ended May 31, 2019 include 639,439 share units that vest over a three-year period with one-third vesting on the first anniversary of the grant date and one-twelfth vesting quarterly over the remaining two years and 56,487 share units that vest over a three-year period with one-third vesting annually over the three-year period. Service-based share units granted during the three months ended May 31, 2018 vest over a four-year period with one-quarter vesting annually over the four- year period.

⁽²⁾ 

Service-based shares and share units granted during the three months ended May 31, 2019 include 189,510 restricted stock awards that vest over a three-year period with one-third vesting annually over the three-year period. Restricted stock awards granted during the three months ended May 31, 2018 were subject to the achievement of a specified dollar amount of revenue for fiscal 2019 (the “RSA Performance Goal”). Since the Company achieved the RSA Performance Goal, 25% of the restricted stock vests on or about July 16, 2019, and the remainder vests ratably on a quarterly basis over the course of the subsequent three-year period, provided that the grantee’s business relationship with the Company has not ceased.

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Assets and Liabilities Measured at Fair Value on a Recurring Basis (Tables)

3 Months Ended

May 31, 2019

Fair Value Disclosures [Abstract]

Fair Value of Assets and Liabilities Measured at Fair Value on a Recurring Basis

The following table summarizes the composition and fair value hierarchy of the Company’s financial assets and liabilities at May 31, 2019 (in thousands):

	May 31, 2019			Level 1		Level 2			Level 3
Assets:
Money markets (1)	$	901,570		$	901,570	$	—		$	—
Available-for-sale securities (1):
Commercial paper	255,780			—		255,780			—
U.S. agency securities	203,135			—		203,135			—
Corporate securities	162,662			—		162,662			—
Foreign currency derivatives (2)	233			—		233			—
Liabilities:
Foreign currency derivatives (3)	(173		)	—		(173		)	—
Total	$	1,523,207		$	901,570	$	621,637		$	—

__________ 

⁽¹⁾  Included in Cash, cash equivalents and restricted cash, Investments in debt securities, short-term or Investments in debt securities, long-term in the Company’s Consolidated Balance Sheet at May 31, 2019, in addition to $1.14 billion of cash.

⁽²⁾  Included in Other current assets in the Company’s Consolidated Balance Sheet at May 31, 2019.

⁽³⁾  Included in Accounts payable and accrued expenses in the Company’s Consolidated Balance Sheet at May 31, 2019.

The following table summarizes the composition and fair value hierarchy of the Company’s financial assets and liabilities at February 28, 2019 (in thousands):

	February 28, 2019			Level 1		Level 2			Level 3
Assets:
Money markets (1)	$	398,056		$	398,056	$	—		$	—
Interest-bearing deposits (1)	56,883			—		56,883			—
Available-for-sale securities (1):
Commercial paper	541,753			—		541,753			—
U.S. agency securities	222,298			—		222,298			—
Corporate securities	262,692			—		262,692			—
Foreign currency derivatives (2)	24			—		24			—
Liabilities:
Foreign currency derivatives (3)	(245		)	—		(245		)	—
Total	$	1,481,461		$	398,056	$	1,083,405		$	—

__________ 

⁽¹⁾  Included in Cash, cash equivalents and restricted cash, Investments in debt securities, short-term or Investments in debt securities, long-term in the Company’s Consolidated Balance Sheet at February 28, 2019, in addition to $943.3 million of cash.

⁽²⁾  Included in Other current assets in the Company’s Consolidated Balance Sheet at February 28, 2019.

⁽³⁾ 

Included in Accounts payable and accrued expenses in the Company’s Consolidated Balance Sheet at February 28, 2019.

Investments Measured at Fair Value

The following table represents the Company’s investments measured at fair value as of May 31, 2019 (in thousands):

										Balance Sheet Classification
	Amortized Cost		Gross Unrealized					Aggregate Fair Value		Cash Equivalent Marketable Securities		Investments in debt securities, short-term		Investments in debt securities, long-term
			Gains		Losses (1)
Money markets	$	901,570	$	—	$	—		$	901,570	$	901,570	$	—	$	—
Commercial paper	255,780		—		—			255,780		255,780		—		—
U.S. agency securities	203,746		13		(624		)	203,135		—		68,682		134,453
Corporate securities	162,629		284		(251		)	162,662		—		108,943		53,719
Total	$	1,523,725	$	297	$	(875	)	$	1,523,147	$	1,157,350	$	177,625	$	188,172

__________ 

⁽¹⁾ 

As of May 31, 2019, there were $0.9 million of accumulated unrealized losses related to investments that have been in a continuous unrealized loss position for 12 months or longer. The aggregate related fair value of investments with unrealized losses was $268.0 million.

The following table represents the Company’s investments measured at fair value as of February 28, 2019 (in thousands):

										Balance Sheet Classification
	Amortized Cost		Gross Unrealized					Aggregate Fair Value		Cash Equivalent Marketable Securities		Investments in debt securities, short-term		Investments in debt securities, long-term
			Gains		Losses (1)
Money markets	$	398,056	$	—	$	—		$	398,056	$	398,056	$	—	$	—
Interest-bearing deposits	56,883		—		—			56,883		—		56,883		—
Commercial paper	541,753		—		—			541,753		541,753		—		—
U.S. agency securities	224,293		—		(1,995		)	222,298		—		75,037		147,261
Corporate securities	263,059		299		(666		)	262,692		—		161,441		101,251
Total	$	1,484,044	$	299	$	(2,661	)	$	1,481,682	$	939,809	$	293,361	$	248,512

__________ 

⁽¹⁾ 

As of February 28, 2019, there were $2.6 million of accumulated unrealized losses related to investments that have been in a continuous unrealized loss position for 12 months or longer. The aggregate related fair value of investments with unrealized losses was $387.8 million.

Summary of Stated Maturities of Investment in Debt Securities

The following table summarizes the stated maturities of the Company’s investment in available-for-sale securities (in thousands):

	As of May 31, 2019		Less than 1 Year		1-5 Years		More than 5 Years
Maturity of available-for-sale debt securities	$	365,797	$	177,625	$	188,172	$	—

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Segment Reporting (Tables)

3 Months Ended

May 31, 2019

Segment Reporting [Abstract]

Summary of Revenue, Income (Loss) from Operations, Total Assets and Total Cash, Cash Equivalents and Available-for-Sale Investment Securities by Geographic Segment

The following summarizes revenue from unaffiliated customers; income (loss) from operations; total cash, cash equivalents and available-for-sale investment securities and total assets by geographic segment (in thousands):

	Americas		EMEA		Asia Pacific		Corporate (1)			Consolidated
	Three Months Ended May 31, 2019
Revenue from unaffiliated customers	$	582,290	$	216,951	$	134,870	$	—		$	934,111
Income (loss) from operations	$	83,555	$	54,909	$	43,822	$	(50,168	)	$	132,118
Total cash, cash equivalents, restricted cash and available-for-sale investment securities	$	1,429,795	$	730,228	$	501,170	$	—		$	2,661,193
Total assets	$	3,567,096	$	1,258,782	$	748,061	$	—		$	5,573,939
	Three Months Ended May 31, 2018
Revenue from unaffiliated customers	$	500,306	$	195,148	$	118,076	$	—		$	813,530
Income (loss) from operations	$	71,864	$	48,860	$	37,437	$	(46,005	)	$	112,156
Total cash, cash equivalents, restricted cash and available-for-sale investment securities	$	1,524,311	$	576,171	$	426,647	$	—		$	2,527,129
Total assets	$	3,559,900	$	1,015,187	$	616,474	$	—		$	5,191,561

 _______________ 

⁽¹⁾ 

Amounts represent share-based compensation expense that was not allocated to geographic segments.

Summary of Revenue from Unaffiliated Customers

The Company approximates its geographic sources of revenue based on the country of origin of its non-cancellable subscription and service agreements initiated during the year (commonly referred to as bookings). The following table lists revenue from unaffiliated customers in the U.S., the Company’s country of domicile, and revenue from foreign countries (in thousands):

	Three Months Ended
	May 31, 2019		May 31, 2018
U.S., the Company’s country of domicile	$	511,716	$	442,421
Foreign	422,395		371,109
Total revenue from unaffiliated customers	$	934,111	$	813,530

Summary of Tangible Long-Lived Assets

Total tangible long-lived assets located in the U.S., the Company’s country of domicile, and similar tangible long-lived assets held outside the U.S. are summarized in the following table (in thousands):

	May 31, 2019		February 28, 2019
U.S., the Company’s country of domicile	$	131,071	$	129,387
Foreign	68,944		69,582
Total tangible long-lived assets	$	200,015	$	198,969

Summary of Subscription Revenue and Services by Technology Classes

The following table provides further detail, by type, of the Company’s subscription and services revenues. Subscription revenue for infrastructure-related offerings includes subscription revenue generated from Red Hat Enterprise Linux and related technologies such as Red Hat Satellite and Red Hat Virtualization. Subscription revenue generated from the Company’s Application Development-related and other emerging technology offerings includes Red Hat Middleware, Red Hat OpenShift, Red Hat Cloud Infrastructure, Red Hat OpenStack Platform, Red Hat Ansible Automation, Red Hat CloudForms and Red Hat Storage technologies (in thousands):

	Three Months Ended
	May 31, 2019		May 31, 2018
Subscription revenue:
Infrastructure-related offerings	$	580,306	$	522,402
Application Development-related and other emerging technology offerings	234,646		189,119
Total subscription revenue	814,952		711,521
Training and services revenue:
Consulting services	93,423		79,147
Training	25,736		22,862
Total training and services revenue	119,159		102,009
Total revenue	$	934,111	$	813,530

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Business Combinations (Tables)

3 Months Ended

May 31, 2019

Business Combinations [Abstract]

Summary of Changes in Goodwill

The following is a summary of goodwill (in thousands):

Balance at February 28, 2019	$	1,276,853
Impact of foreign currency fluctuations	(3,359		)
Balance at May 31, 2019	$	1,273,494

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Company Merger Agreement (Details) - USD ($) $ / shares in Units, $ in Millions	3 Months Ended
	May 31, 2019	Feb. 28, 2019	Oct. 28, 2018
Business Acquisition [Line Items]
Common Stock, par value (in dollars per share)	$ 0.0001	$ 0.0001	$ 0.0001
Merger with IBM
Business Acquisition [Line Items]
Business Acquisition, Share Price (in dollars per share)			$ 190.00
Business Combination, Acquisition Related Costs	$ 9.9

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Summary of Significant Accounting Policies - Narrative (Detail) - USD ($) $ in Thousands	3 Months Ended
	May 31, 2019		Mar. 01, 2019	Feb. 28, 2019	[1]
Accounting Policies [Abstract]
Operating Lease, Right-of-Use Asset	$ 224,371	[1]	$ 237,400	$ 0
Operating Lease, Liability	$ 234,766		$ 244,500
Minimum
Disaggregation of Revenue [Line Items]
Contract payment terms	30 days
Maximum
Disaggregation of Revenue [Line Items]
Contract payment terms	60 days
Base Subscription [Member]
Disaggregation of Revenue [Line Items]
Revenue Recognition Customer Contract Period Minimum	1 year
Revenue Recognition Customer Contract Period Maximum	3 years
Renewal [Member]
Disaggregation of Revenue [Line Items]
Revenue Recognition Customer Contract Period Minimum	1 year
Revenue Recognition Customer Contract Period Maximum	3 years

[1] Effective March 1, 2019, the Company adopted Accounting Standard Update 2016-02, Leases (Topic 842) (“ASC 842”). See NOTE 2—Summary of Significant Accounting Policies and NOTE 4—Leases for detailed information on adoption of ASC 842.

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Accounts Receivable (Detail) - USD ($) $ in Thousands		3 Months Ended	12 Months Ended
		May 31, 2019	Feb. 28, 2019
Allowance for Doubtful Accounts Receivable [Roll Forward]
Balance at beginning of period		$ 4,561	$ 2,167
Charged to expense			3,247
Recovery of expenses		(195)
Adjustments	[1]	86	(853)
Balance at end of period		4,452	4,561
Unbilled contracts receivable		$ 43,300	$ 40,200
One Customer [Member] | Accounts Receivable [Member] | Customer Concentration Risk
Schedule of Customer Receivables [Line Items]
Concentration risk, percentage			10.00%

[1] Represents foreign currency translation adjustments and amounts written-off as uncollectible accounts receivable.

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Leases - Schedule of ROU Assets and Lease Liabilities (Details) - USD ($) $ in Thousands		May 31, 2019		Mar. 01, 2019	Feb. 28, 2019
Leases [Abstract]
Operating right-of-use assets, net		$ 224,371	[1]	$ 237,400	$ 0	[1]
Finance right-of-use assets, net		579			281
Total leased assets		224,950			281
Lease liabilities, current
Operating lease liabilities, current		46,633			0
Finance lease liabilities, current		256			282
Lease liabilities, non current
Operating lease liabilities, noncurrent	[1]	188,133			0
Finance lease liabilities, noncurrent		336			6
Total lease liabilities		$ 235,358			$ 288

[1] Effective March 1, 2019, the Company adopted Accounting Standard Update 2016-02, Leases (Topic 842) (“ASC 842”). See NOTE 2—Summary of Significant Accounting Policies and NOTE 4—Leases for detailed information on adoption of ASC 842.

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Leases - Schedule of Lease Term and Discount Rate (Details)	May 31, 2019
Leases [Abstract]
Weighted average remaining lease term - operating leases	7 years 3 months 29 days
Weighted average remaining lease term - finance leases	3 years 5 months 12 days
Weighted average discount rate, operating leases	3.70%
Weighted average discount rate, finance leases	3.30%

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Leases - Schedule of Component of Lease expense (Details) - USD ($) $ in Thousands		3 Months Ended
		May 31, 2019	May 31, 2018
Leases [Abstract]
Operating lease expense		$ 14,666
Variable lease expense		1,176
Operating leases rent expense			$ 13,400
Finance lease expense
Amortization of leased assets		146	276
Interest on lease liabilities		6	7
Total lease expense	[1]	$ 15,994	$ 283

[1] Sublease income is recognized as a reduction to operating expense in the Consolidated Statement of Operations and is not material.

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Leases - Schedule of Supplemental Cash Flow Information Related To Leases (Details) $ in Thousands	3 Months Ended
	May 31, 2019 USD ($)
Leases [Abstract]
Operating cash outflows from operating leases	$ 14,043
Operating cash outflows from finance leases	6
Financing cash outflows from finance leases	112
ROU Assets obtained in exchange of operating lease liability	762
ROU asset obtained in exchange for finance lease liability	$ 133

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Leases - Schedule of Maturities of Lease Liabilities (Details) - USD ($) $ in Thousands	May 31, 2019	Mar. 01, 2019
Operating Lease Liabilities, Payments Due [Abstract]
2020 (excluding the three months ended May 31, 2019)	$ 40,737
2021	47,858
2022	42,467
2023	33,438
2024	26,339
Thereafter	79,125
Total lease payments	269,964
Less: imputed interest	(35,198)
Total	234,766	$ 244,500
Finance Lease Liabilities, Payments, Due [Abstract]
2020 (excluding the three months ended May 31, 2019)	258
2021	101
2022	101
2023	101
2024	82
Thereafter	0
Total lease payments	643
Less: imputed interest	(51)
Total	$ 592

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Leases - Schedule of Future Minimum Payments for Operating and Capital Leases (Details) $ in Thousands	Feb. 28, 2019 USD ($)
Operating leases, future minimum payment due
2020	$ 60,722
2021	51,060
2022	41,173
2023	32,016
2024	27,479
Thereafter	79,530
Total minimum lease payments	291,980
Capital Leases, future minimum payments due
2020	282
2021	6
2022	0
2023	0
2024	0
Thereafter	0
Total minimum payment due	$ 288

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Identifiable Intangible Assets - Additional Information (Detail) - USD ($) $ in Millions	3 Months Ended
	May 31, 2019	Feb. 28, 2019
Acquired Finite-Lived Intangible Assets [Line Items]
Carrying amount for trademarks with an indefinite estimated useful life	$ 11.2	$ 11.4
Minimum
Acquired Finite-Lived Intangible Assets [Line Items]
Total identified intangible assets, useful life (in years)	2 years
Maximum
Acquired Finite-Lived Intangible Assets [Line Items]
Total identified intangible assets, useful life (in years)	10 years

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Identifiable Intangible Assets - Schedule of Identifiable Intangible Assets (Detail) - USD ($) $ in Thousands	May 31, 2019	Feb. 28, 2019
Finite-Lived Intangible Assets [Line Items]
Gross Amount	$ 528,857	$ 526,257
Accumulated Amortization	(329,943)	(320,174)
Net Amount	198,914	206,083
Trademarks, copyrights and patents
Finite-Lived Intangible Assets [Line Items]
Gross Amount	180,240	176,704
Accumulated Amortization	(86,132)	(82,967)
Net Amount	94,108	93,737
Purchased technologies
Finite-Lived Intangible Assets [Line Items]
Gross Amount	218,561	219,196
Accumulated Amortization	(118,705)	(113,617)
Net Amount	99,856	105,579
Customer and reseller relationships
Finite-Lived Intangible Assets [Line Items]
Gross Amount	105,562	105,737
Accumulated Amortization	(102,047)	(100,947)
Net Amount	3,515	4,790
Covenants not to compete
Finite-Lived Intangible Assets [Line Items]
Gross Amount	15,661	15,787
Accumulated Amortization	(14,800)	(14,728)
Net Amount	861	1,059
Other intangible assets
Finite-Lived Intangible Assets [Line Items]
Gross Amount	8,833	8,833
Accumulated Amortization	(8,259)	(7,915)
Net Amount	$ 574	$ 918

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Identifiable Intangible Assets - Schedule of Amortization Expense Associated with Identifiable Intangible Assets (Detail) - USD ($) $ in Thousands	3 Months Ended
	May 31, 2019	May 31, 2018
Finite-Lived Intangible Assets [Line Items]
Total amortization expense	$ 10,405	$ 10,254
Cost of revenue
Finite-Lived Intangible Assets [Line Items]
Total amortization expense	6,660	6,485
Sales and marketing
Finite-Lived Intangible Assets [Line Items]
Total amortization expense	1,194	1,362
Research and development
Finite-Lived Intangible Assets [Line Items]
Total amortization expense	34	34
General and administrative
Finite-Lived Intangible Assets [Line Items]
Total amortization expense	$ 2,517	$ 2,373

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Deferred Selling Costs (Detail) - USD ($)	3 Months Ended
	May 31, 2019	May 31, 2018	Feb. 28, 2019
Revenue from Contract with Customer [Abstract]
Deferred commissions, current	$ 183,462,000		$ 201,971,000
Deferred commissions, non-current	45,860,000		47,849,000
Total deferred commissions	229,322,000		$ 249,820,000
Amortization expense	64,300,000	$ 56,200,000
Impairment loss	$ 0	$ 0

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Derivative Instruments (Detail) - USD ($) $ in Thousands	3 Months Ended
	May 31, 2019	May 31, 2018
Derivative [Line Items]
Total, Fair Value	$ 60	$ (679)
Notional value of foreign currency forward contracts not designated as hedges	61,006	49,666
Amount of unrealized gain (loss) recognized in income on derivatives	(6)	(847)
Other current assets
Derivative [Line Items]
Assets—foreign currency forward contracts not designated as hedges	233	111
Notional value of foreign currency forward contracts not designated as hedges, assets	18,185	21,554
Accounts payable and accrued expenses
Derivative [Line Items]
Liabilities—foreign currency forward contracts not designated as hedges	(173)	(790)
Notional value of foreign currency forward contracts not designated as hedges, liabilities	42,821	28,112
Derivative Liabilities | Other expense, net
Derivative [Line Items]
Amount of unrealized gain (loss) recognized in income on derivatives	(651)	(1,136)
Derivative Assets | Other expense, net
Derivative [Line Items]
Amount of unrealized gain (loss) recognized in income on derivatives	$ 645	$ 289

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Income Taxes (Detail) - USD ($) $ in Millions	3 Months Ended
	May 31, 2019	May 31, 2018
Income Taxes [Line Items]
Effective tax rate	(1.80%)	(1.50%)
Federal statutory rate	21.00%	21.00%
Net discrete tax benefits	$ 28.8	$ 26.8
Decrease in unrecognized tax benefits	$ 68.2
Significant change in unrecognized tax benefits, nature of event	as a result of audit settlements in various tax jurisdictions

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Convertible Notes - Additional Information (Detail) $ / shares in Units, $ in Thousands			3 Months Ended
	Oct. 07, 2014 USD ($) $ / shares	Oct. 01, 2014 USD ($) $ / shares shares	Aug. 31, 2019 USD ($)	May 31, 2019 USD ($) $ / shares shares	Feb. 28, 2019 USD ($)	May 31, 2018 $ / shares
Debt Instrument [Line Items]
Closing price of common stock (in dollars per share) | $ / shares				$ 184.30
If-converted value in excess of principal				$ 287,600
Convertible notes, current				$ 188,553	$ 69,827
Strike price of warrants (in dollars per share) | $ / shares		$ 101.65		$ 101.65		$ 101.65
Purchase of convertible note hedges		$ 148,000
Proceeds from issuance of warrants		$ 79,800
Number of shares of common stock underlying the warrants | shares		10,965,630
Fundamental Change
Debt Instrument [Line Items]
Repurchase of note principal amount	100.00%
Default
Debt Instrument [Line Items]
Repurchase of note principal amount	100.00%
Ownership percentage of outstanding principal amount	25.00%
0.25% Convertible Senior Notes due 2019
Debt Instrument [Line Items]
Debt instrument, face amount	$ 805,000
Debt instrument, interest rate				0.25%		0.25%
Converted instrument, amount				$ 116,200
Converted instrument, shares issued (in shares) | shares				943,513
Loss on settled conversions				$ 200
Debt Conversion, Converted Instrument, Total Amount				$ 614,600
Options exercised under convertible note hedge transaction (in shares) | shares				954,731
0.25% Convertible Senior Notes due 2019 | Unsecured Debt
Debt Instrument [Line Items]
Debt instrument, offering date	Oct. 01, 2014
Debt instrument, interest rate	0.25%
Frequency of interest payment	semiannually in arrears on April 1 and October 1 of each year, beginning on April 1, 2015.
Debt instrument, maturity date	Oct. 01, 2019
Common stock conversion rate	0.0136219
Debt instrument, convertible, conversion price (in dollars per share) | $ / shares	$ 73.41	$ 73.41
Subsequent Event | 0.25% Convertible Senior Notes due 2019
Debt Instrument [Line Items]
Converted instrument, amount			$ 3,000

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Convertible Notes - Components of Convertible Notes (Detail) - USD ($) $ in Thousands		May 31, 2019	Feb. 28, 2019
Liability Component [Abstract]
Net carrying amount		$ 0	$ 231,540
Unsecured Debt | 0.25% Convertible Senior Notes due 2019
Liability Component [Abstract]
Principal		190,396	306,552
Less: debt issuance costs		(211)	(595)
Less: debt discount		(1,632)	(4,590)
Net carrying amount		188,553	301,367
Equity component	[1]	$ 22,916	$ 36,897

[1] Recognized in the Consolidated Balance Sheets in Additional paid-in capital.

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Convertible Notes - Interest Expense Related to Convertible Notes (Detail) - 0.25% Convertible Senior Notes due 2019 - USD ($) $ in Thousands	3 Months Ended
	May 31, 2019	May 31, 2018
Debt Instrument [Line Items]
Coupon rate 0.25% per year, payable semiannually	$ 69	$ 471
Amortization of convertible note issuance costs — liability component	384	831
Accretion of debt discount	1,501	5,007
Total interest expense related to convertible notes	$ 1,954	$ 6,309
Coupon rate per year	0.25%	0.25%

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Convertible Notes - Fair Value of Notes Based on Inputs Observable in Market (Level 2) and Carrying Value of Debt Instruments (Detail) - USD ($) $ in Thousands	May 31, 2019	Feb. 28, 2019
Debt Instrument [Line Items]
Carrying value, convertible notes	$ 0	$ 231,540
Level 2
Debt Instrument [Line Items]
Fair value, convertible notes	188,798
Unsecured Debt | 0.25% Convertible Senior Notes due 2019
Debt Instrument [Line Items]
Carrying value, convertible notes	$ 188,553	$ 301,367

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Stockholders' Equity - Summary of Changes in Stockholders' Equity (Detail) - USD ($) shares in Thousands, $ in Thousands	3 Months Ended
	May 31, 2019	May 31, 2018	Feb. 28, 2019	Feb. 28, 2018
Changes in Stockholders' Equity
Beginning Balance	$ 1,613,932	$ 1,478,124
Net income	141,120	113,190
Other comprehensive income (loss), net of tax	(5,036)	(10,905)
Vest and exercise of share-based awards	369	875
Common stock repurchase	0	(150,019)
Share-based compensation expense	50,168	46,005
Minimum tax withholdings paid by the Company on behalf of employees related to net settlement of employee share-based awards	(81,274)	(77,094)
Re-issuance of treasury stock under employee stock purchase plan	39,937	32,211
Convertible note conversions	(1,296)	(835)
Exercise of convertible note hedges	16	0
Other adjustments	0
Cumulative Effect of New Accounting Principle in Period of Adoption		392
Ending Balance	1,757,936	1,431,944
Common Stock
Changes in Stockholders' Equity
Beginning Balance	$ 24	$ 24
Vest and exercise of share-based awards (shares)	944	905
Vest and exercise of share-based awards	$ 1
Convertible note conversions (shares)	943	185
Shares, Issued	246,290	239,779	244,403	238,689
Ending Balance	$ 25	$ 24
Additional Paid-In Capital
Changes in Stockholders' Equity
Beginning Balance	2,791,895	2,416,080
Vest and exercise of share-based awards	368	875
Common stock repurchase	0	(17,175)
Share-based compensation expense	50,168	46,005
Minimum tax withholdings paid by the Company on behalf of employees related to net settlement of employee share-based awards	(81,274)	(77,094)
Re-issuance of treasury stock under employee stock purchase plan	23,323	18,471
Convertible note conversions	(1,296)	(835)
Exercises of convertible note hedges	69,380	13,598
Other adjustments	(541)
Ending Balance	2,853,105	2,399,925
Retained Earnings
Changes in Stockholders' Equity
Beginning Balance	2,054,069	1,619,688
Net income	141,120	113,190
Cumulative Effect of New Accounting Principle in Period of Adoption		392
Ending Balance	2,195,189	1,733,270
Treasury Stock
Changes in Stockholders' Equity
Beginning Balance	(3,189,434)	(2,525,072)
Common stock repurchase	0	(132,844)
Re-issuance of treasury stock under employee stock purchase plan	16,614	13,740
Convertible note conversions	0
Exercises of convertible note hedges	(69,364)	(13,598)
Other adjustments	(541)
Ending Balance	(3,242,725)	(2,657,774)
Accumulated Other Comprehensive Loss
Changes in Stockholders' Equity
Beginning Balance	(42,622)	(32,596)
Other comprehensive income (loss), net of tax	(5,036)	(10,905)
Ending Balance	$ (47,658)	$ (43,501)

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Stockholders' Equity - Additional Information (Detail) - USD ($)			3 Months Ended		11 Months Ended
	Jun. 21, 2018	Jun. 22, 2016	May 31, 2019	May 31, 2018	May 31, 2019
Shareholders Equity [Line Items]
Aggregate cost of common stock repurchased			$ 0	$ 150,019,000
June 2016 Share Repurchase Program
Shareholders Equity [Line Items]
Common stock amount authorized for stock repurchase program		$ 1,000,000,000.0
Stock repurchase program termination date		Jun. 30, 2018
June 2018 Share Repurchase Program
Shareholders Equity [Line Items]
Common stock amount authorized for stock repurchase program	$ 1,000,000,000.0
Stock repurchase program termination date	Jun. 30, 2020
Common stock, purchased during the period (in shares)					1,838,241
Aggregate cost of common stock repurchased					$ 262,800,000
Stock available for repurchase			$ 737,200,000		$ 737,200,000

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Stockholders' Equity - Summary of Accumulated Other Comprehensive Loss (Detail) - USD ($) $ in Thousands	May 31, 2019	Feb. 28, 2019
Equity [Abstract]
Accumulated loss from foreign currency translation adjustment, net of tax	$ (47,756)	$ (41,500)
Accumulated unrealized gain (loss), net of tax, on available-for-sale securities	98	(1,122)
Accumulated other comprehensive loss	$ (47,658)	$ (42,622)

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Deferred Revenue and Performance Obligations - Summary of Deferred Revenue Activity (Detail) $ in Thousands	3 Months Ended
	May 31, 2019 USD ($)
Change in Contract with Customer, Liability [Roll Forward]
Deferred revenue, short-term, beginning balance	$ 2,161,206
Deferred revenue, long-term, beginning balance	821,218
Total deferred revenue, beginning balance	2,982,424
Revenue recognized from opening balance, current	(705,210)
Revenue recognized from opening balance, noncurrent	0
Revenue recognized from opening balance	(705,210)
Deferred revenue net, short-term	560,492	[1]
Deferred revenue net, long-term	(40,175)	[1]
Deferred revenue net	520,317	[1]
Deferred revenue, short-term, ending balance	2,016,488
Deferred revenue, long-term, ending balance	781,043
Total deferred revenue, ending balance	$ 2,797,531

[1] Includes revenue recognized from current period customer contracts and the impact from foreign currency exchange rate fluctuations.

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Deferred Revenue and Performance Obligations - Narrative (Detail) - USD ($) $ in Thousands	May 31, 2019	Feb. 28, 2019
Revenue from Contract with Customer [Abstract]
Total deferred revenue	$ 2,797,531	$ 2,982,424
Remaining performance obligation	3,750,000
Amount of potential remaining performance obligation	163,900
Backlog	$ 3,910,000

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Deferred Revenue and Performance Obligations - Remaining Performance Obligation (Detail) - Revenue, Remaining Performance Obligation, Expected Timing of Satisfaction, Start Date [Axis]: 2019-06-01	May 31, 2019
Revenue, Remaining Performance Obligation, Expected Timing of Satisfaction [Line Items]
Remaining performance obligation, percentage	60.00%
Revenue, Remaining Performance Obligation, Expected Timing of Satisfaction, Period	12 months

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Earnings Per Share - Reconciliation of Numerators and Denominators of Earnings Per Share Calculation (Detail) - USD ($) $ / shares in Units, shares in Thousands, $ in Thousands	3 Months Ended
	May 31, 2019	May 31, 2018
Earnings Per Share [Abstract]
Net income available to common stockholders	$ 141,120	$ 113,190
Weighted average common shares outstanding (in shares)	177,400	177,302
Incremental shares attributable to assumed vesting or exercise of outstanding equity award shares (in shares)	2,803	3,833
Dilutive effect of convertible notes (in shares)	1,554	5,686
Dilutive effect of warrants (in shares)	4,878	3,918
Diluted shares (in shares)	186,635	190,739
Diluted net income per share (in dollars per share)	$ 0.76	$ 0.59

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Earnings Per Share - Additional Information (Detail) - $ / shares	May 31, 2019	May 31, 2018	Oct. 01, 2014
Earnings Per Share [Abstract]
Warrants outstanding (in shares)	10,965,630	10,965,630
Exercise price per share (in dollars per share)	$ 101.65	$ 101.65	$ 101.65

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Earnings Per Share - Shares Considered Anti-Dilutive for Calculating Diluted EPS (Detail) - shares shares in Thousands	3 Months Ended
	May 31, 2019	May 31, 2018
Stock Options
Antidilutive Securities Excluded from Computation of Earnings Per Share [Line Items]
Number of shares considered anti-dilutive for calculating diluted EPS (in shares)	43	0

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Share-based Awards - Additional Information (Detail) - USD ($)	3 Months Ended
	May 31, 2019	May 31, 2018
Disclosure of Compensation Related Costs, Share-based Payments [Abstract]
Fair value assumptions, method used	Black-Scholes-Merton
Share-based compensation expense capitalized	$ 0	$ 0

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Share-based Awards - Share-Based Compensation Expense (Detail) - USD ($) $ in Thousands		3 Months Ended
		May 31, 2019	May 31, 2018
Share-based Compensation Arrangement by Share-based Payment Award, Compensation Cost [Line Items]
Total share-based compensation expense	[1]	$ 50,168	$ 46,005
Cost of revenue
Share-based Compensation Arrangement by Share-based Payment Award, Compensation Cost [Line Items]
Total share-based compensation expense		4,945	5,128
Sales and marketing
Share-based Compensation Arrangement by Share-based Payment Award, Compensation Cost [Line Items]
Total share-based compensation expense		21,904	19,520
Research and development
Share-based Compensation Arrangement by Share-based Payment Award, Compensation Cost [Line Items]
Total share-based compensation expense		16,002	14,782
General and administrative
Share-based Compensation Arrangement by Share-based Payment Award, Compensation Cost [Line Items]
Total share-based compensation expense		7,317	6,575
Employee Stock Purchase Plan
Share-based Compensation Arrangement by Share-based Payment Award, Compensation Cost [Line Items]
Total share-based compensation expense		$ 1,700	$ 4,000

[1] Total share-based compensation expense included $1.7 million and $4.0 million, respectively, of expense related to the Company’s employee stock purchase plan (“ESPP”) for the three months ended May 31, 2019 and May 31, 2018.

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Share-based Awards - Summary of Share-Based Awards Granted During Period (Detail) - $ / shares		3 Months Ended
		May 31, 2019		May 31, 2018
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Shares and Shares Underlying Awards (in shares)		885,436		906,683
Weighted Average Per Share Award Fair Value (in dollars per share)		$ 183.37		$ 161.32
Service-based shares and share units
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Shares and Shares Underlying Awards (in shares)	[2]	885,436	[1]	669,450
Weighted Average Per Share Award Fair Value (in dollars per share)		$ 183.37		$ 160.53
Vesting right description				Service-based share units granted during the three months ended May 31, 2018 vest over a four-year period with one-quarter vesting annually over the four- year period.
Vesting percentage				25.00%
Vesting period				4 years
Performance share units—target
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Shares and Shares Underlying Awards (in shares)		0		173,014
Weighted Average Per Share Award Fair Value (in dollars per share)		$ 0		$ 163.56
Performance share awards
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Shares and Shares Underlying Awards (in shares)		0		64,219	[1]
Weighted Average Per Share Award Fair Value (in dollars per share)		$ 0		$ 163.56
Vesting percentage				25.00%
Vesting period				3 years
Share-based Compensation Award, Tranche One | Service-based shares and share units
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Shares and Shares Underlying Awards (in shares)		639,439
Vesting right description		vest over a three-year period with one-third vesting on the first anniversary of the grant date and one-twelfth vesting quarterly over the remaining two years
Percentage vested after one year of the grant date		33.00%
Vesting period		3 years
Share-based Compensation Award, Tranche Two | Service-based shares and share units
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Shares and Shares Underlying Awards (in shares)		56,487
Vesting right description		vest over a three-year period with one-third vesting annually over the three-year period.
Vesting percentage		33.00%
Vesting period		3 years
Share-based Compensation Award, Tranche Three | Performance share awards
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Shares and Shares Underlying Awards (in shares)		189,510
Vesting percentage		33.00%
Vesting period		3 years

[1] Service-based shares and share units granted during the three months ended May 31, 2019 include 189,510 restricted stock awards that vest over a three-year period with one-third vesting annually over the three-year period. Restricted stock awards granted during the three months ended May 31, 2018 were subject to the achievement of a specified dollar amount of revenue for fiscal 2019 (the “RSA Performance Goal”). Since the Company achieved the RSA Performance Goal, 25% of the restricted stock vests on or about July 16, 2019, and the remainder vests ratably on a quarterly basis over the course of the subsequent three-year period, provided that the grantee’s business relationship with the Company has not ceased.

[2] Service-based shares and share units granted during the three months ended May 31, 2019 include 639,439 share units that vest over a three-year period with one-third vesting on the first anniversary of the grant date and one-twelfth vesting quarterly over the remaining two years and 56,487 share units that vest over a three-year period with one-third vesting annually over the three-year period. Service-based share units granted during the three months ended May 31, 2018 vest over a four-year period with one-quarter vesting annually over the four- year period.

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Assets and Liabilities Measured at Fair Value on a Recurring Basis - Summary of Financial Assets and Liabilities Measured at Fair Value (Detail) - USD ($) $ in Thousands		May 31, 2019		Feb. 28, 2019
Assets:
Money markets		$ 901,570	[1]	$ 398,056	[2]
Interest-bearing deposits	[2]			56,883
Available-for-sale securities, debt securities		365,797
Foreign currency derivatives		233	[3]	24	[4]
Liabilities:
Foreign currency derivatives		(173)	[5]	(245)	[6]
Total		1,523,207		1,481,461
Cash		1,140,000		943,300
Level 1
Assets:
Money markets		901,570	[1]	398,056	[2]
Interest-bearing deposits	[2]			0
Foreign currency derivatives		0	[3]	0	[4]
Liabilities:
Foreign currency derivatives		0	[5]	0	[6]
Total		901,570		398,056
Level 2
Assets:
Money markets		0	[1]	0	[2]
Interest-bearing deposits	[2]			56,883
Foreign currency derivatives	[4]			24
Liabilities:
Foreign currency derivatives	[6]			(245)
Total		621,637		1,083,405
Level 3
Assets:
Money markets		0	[1]	0	[2]
Interest-bearing deposits	[2]			0
Foreign currency derivatives		0	[3]	0	[4]
Liabilities:
Foreign currency derivatives		0	[5]	0	[6]
Total		0		0
Commercial paper
Assets:
Available-for-sale securities, debt securities		255,780	[1]	541,753	[2]
Commercial paper | Level 1
Assets:
Available-for-sale securities, debt securities		0	[1]	0	[2]
Commercial paper | Level 2
Assets:
Available-for-sale securities, debt securities		255,780	[1]	541,753	[2]
Commercial paper | Level 3
Assets:
Available-for-sale securities, debt securities		0	[1]	0	[2]
U.S. agency securities
Assets:
Available-for-sale securities, debt securities		203,135	[1]	222,298	[2]
U.S. agency securities | Level 1
Assets:
Available-for-sale securities, debt securities		0	[1]	0	[2]
U.S. agency securities | Level 2
Assets:
Available-for-sale securities, debt securities		203,135	[1]	222,298	[2]
U.S. agency securities | Level 3
Assets:
Available-for-sale securities, debt securities		0	[1]	0	[2]
Corporate securities
Assets:
Available-for-sale securities, debt securities		162,662	[1]	262,692	[2]
Corporate securities | Level 1
Assets:
Available-for-sale securities, debt securities		0	[1]	0	[2]
Corporate securities | Level 2
Assets:
Available-for-sale securities, debt securities		162,662	[1]	262,692	[2]
Corporate securities | Level 3
Assets:
Available-for-sale securities, debt securities		$ 0	[1]	$ 0	[2]

[1] Included in Cash, cash equivalents and restricted cash, Investments in debt securities, short-term or Investments in debt securities, long-term in the Company’s Consolidated Balance Sheet at May 31, 2019, in addition to $1.14 billion of cash.

[2] Included in Cash, cash equivalents and restricted cash, Investments in debt securities, short-term or Investments in debt securities, long-term in the Company’s Consolidated Balance Sheet at February 28, 2019, in addition to $943.3 million of cash.

[3] Included in Other current assets in the Company’s Consolidated Balance Sheet at May 31, 2019.

[4] Included in Other current assets in the Company’s Consolidated Balance Sheet at February 28, 2019.

[5] Included in Accounts payable and accrued expenses in the Company’s Consolidated Balance Sheet at May 31, 2019.

[6] Included in Accounts payable and accrued expenses in the Company’s Consolidated Balance Sheet at February 28, 2019.

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Assets and Liabilities Measured at Fair Value on a Recurring Basis - Investments Measured at Fair Value (Detail) - USD ($) $ in Thousands		May 31, 2019		Feb. 28, 2019
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Gross Unrealized Gains		$ 297		$ 299
Gross Unrealized Losses		(875)	[1]	(2,661)	[2]
Available-for-sale securities, debt securities		365,797
Cash, cash equivalents and available-for-sale securities amortized cost		1,523,725		1,484,044
Cash, cash equivalents and available-for-sale securities		1,523,147		1,481,682
Accumulated unrealized losses related to investments in unrealized loss position 12 months or longer		900		2,600
Fair value of investments with unrealized losses		268,000		387,800
Cash Equivalent Marketable Securities
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Cash equivalent marketable securities		1,157,350		939,809
Investments in debt securities, short-term
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Available-for-sale securities, debt securities		177,625		293,361
Investments in debt securities, long-term
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Available-for-sale securities, debt securities		188,172		248,512
Money markets
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Cash, cash equivalents and restricted cash		901,570		398,056
Cash and cash equivalents, fair value disclosure		901,570		398,056
Money markets | Cash Equivalent Marketable Securities
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Cash, cash equivalents and restricted cash		901,570		398,056
Commercial paper
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Cash, cash equivalents and restricted cash		255,780		541,753
Cash and cash equivalents, fair value disclosure		255,780		541,753
Commercial paper | Cash Equivalent Marketable Securities
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Cash, cash equivalents and restricted cash		255,780		541,753
Commercial paper | Investments in debt securities, short-term
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Cash, cash equivalents and restricted cash		0
Commercial paper | Investments in debt securities, long-term
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Cash, cash equivalents and restricted cash				0
Corporate securities
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Available-for-sale debt securities, amortized cost		162,629		263,059
Gross Unrealized Gains		284		299
Gross Unrealized Losses		(251)	[1]	(666)	[2]
Available-for-sale securities, debt securities		162,662		262,692
Corporate securities | Cash Equivalent Marketable Securities
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Available-for-sale securities, debt securities				0
Corporate securities | Investments in debt securities, short-term
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Available-for-sale securities, debt securities		108,943		161,441
Corporate securities | Investments in debt securities, long-term
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Available-for-sale securities, debt securities		53,719		101,251
Interest-bearing deposits
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Available-for-sale debt securities, amortized cost				56,883
Gross Unrealized Gains				0
Gross Unrealized Losses	[2]			0
Available-for-sale securities, debt securities				56,883
Interest-bearing deposits | Investments in debt securities, short-term
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Available-for-sale securities, debt securities				56,883
Interest-bearing deposits | Investments in debt securities, long-term
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Available-for-sale securities, debt securities				0
U.S. agency securities
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Available-for-sale debt securities, amortized cost		203,746		224,293
Gross Unrealized Gains		13		0
Gross Unrealized Losses		(624)	[1]	(1,995)	[2]
Available-for-sale securities, debt securities		203,135		222,298
U.S. agency securities | Investments in debt securities, short-term
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Available-for-sale securities, debt securities		68,682		75,037
U.S. agency securities | Investments in debt securities, long-term
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Available-for-sale securities, debt securities		$ 134,453		$ 147,261

[1] As of May 31, 2019, there were $0.9 million of accumulated unrealized losses related to investments that have been in a continuous unrealized loss position for 12 months or longer. The aggregate related fair value of investments with unrealized losses was $268.0 million.

[2] As of February 28, 2019, there were $2.6 million of accumulated unrealized losses related to investments that have been in a continuous unrealized loss position for 12 months or longer. The aggregate related fair value of investments with unrealized losses was $387.8 million.

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Assets and Liabilities Measured at Fair Value on a Recurring Basis - Summary of Stated Maturities of Investment in Debt Securities (Detail) $ in Thousands	May 31, 2019 USD ($)
Fair Value Disclosures [Abstract]
May 31, 2019	$ 365,797
Less than 1 Year	177,625
1-5 Years	188,172
More than 5 Years	$ 0

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Segment Reporting - Additional Information (Detail) - segment	3 Months Ended
	May 31, 2019	May 31, 2018
Segment Reporting Information [Line Items]
Number of operating segments	3
Number of reportable segments	1
U.S. Government and Agencies | Subscription Revenues | Customer Concentration Risk
Segment Reporting Information [Line Items]
Concentration risk, percentage	11.00%	10.00%

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Segment Reporting - Summary of Revenue, Income (Loss) from Operations, Total Assets and Total Cash, Cash Equivalents and Available-for-Sale Investment Securities by Geographic Segments (Detail) - USD ($) $ in Thousands		3 Months Ended
		May 31, 2019	May 31, 2018	Feb. 28, 2019
Segment Reporting Information [Line Items]
Total revenue from unaffiliated customers		$ 934,111	$ 813,530
Income (loss) from operations		132,118	112,156
Total cash, cash equivalents, restricted cash and available-for-sale investment securities		2,661,193	2,527,129
Total assets		5,573,939	5,191,561	$ 5,588,289
Corporate
Segment Reporting Information [Line Items]
Total revenue from unaffiliated customers	[1]	0	0
Income (loss) from operations	[1]	(50,168)	(46,005)
Total cash, cash equivalents, restricted cash and available-for-sale investment securities	[1]	0	0
Total assets	[1]	0	0
Americas | Operating Segment
Segment Reporting Information [Line Items]
Total revenue from unaffiliated customers		582,290	500,306
Income (loss) from operations		83,555	71,864
Total cash, cash equivalents, restricted cash and available-for-sale investment securities		1,429,795	1,524,311
Total assets		3,567,096	3,559,900
EMEA | Operating Segment
Segment Reporting Information [Line Items]
Total revenue from unaffiliated customers		216,951	195,148
Income (loss) from operations		54,909	48,860
Total cash, cash equivalents, restricted cash and available-for-sale investment securities		730,228	576,171
Total assets		1,258,782	1,015,187
Asia Pacific | Operating Segment
Segment Reporting Information [Line Items]
Total revenue from unaffiliated customers		134,870	118,076
Income (loss) from operations		43,822	37,437
Total cash, cash equivalents, restricted cash and available-for-sale investment securities		501,170	426,647
Total assets		$ 748,061	$ 616,474

[1] Amounts represent share-based compensation expense that was not allocated to geographic segments.

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Segment Reporting - Summary of Revenue from Unaffiliated Customers (Detail) - USD ($) $ in Thousands	3 Months Ended
	May 31, 2019	May 31, 2018
Segment Reporting Information [Line Items]
Total revenue from unaffiliated customers	$ 934,111	$ 813,530
U.S., the Company’s country of domicile
Segment Reporting Information [Line Items]
Total revenue from unaffiliated customers	511,716	442,421
Foreign
Segment Reporting Information [Line Items]
Total revenue from unaffiliated customers	$ 422,395	$ 371,109

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Segment Reporting - Summary of Tangible Long-Lived Assets (Detail) - USD ($) $ in Thousands	May 31, 2019	Feb. 28, 2019
Segment Reporting, Asset Reconciling Item [Line Items]
Total tangible long-lived assets	$ 200,015	$ 198,969
U.S., the Company’s country of domicile
Segment Reporting, Asset Reconciling Item [Line Items]
Total tangible long-lived assets	131,071	129,387
Foreign
Segment Reporting, Asset Reconciling Item [Line Items]
Total tangible long-lived assets	$ 68,944	$ 69,582

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Segment Reporting - Summary of Subscription and Services Revenue by Technology Product (Detail) - USD ($) $ in Thousands	3 Months Ended
	May 31, 2019	May 31, 2018
Revenue from External Customer [Line Items]
Total revenue	$ 934,111	$ 813,530
Subscriptions
Revenue from External Customer [Line Items]
Total revenue	814,952	711,521
Infrastructure-related offerings
Revenue from External Customer [Line Items]
Total revenue	580,306	522,402
Application Development-related and other emerging technology offerings
Revenue from External Customer [Line Items]
Total revenue	234,646	189,119
Training and services
Revenue from External Customer [Line Items]
Total revenue	119,159	102,009
Consulting services
Revenue from External Customer [Line Items]
Total revenue	93,423	79,147
Training
Revenue from External Customer [Line Items]
Total revenue	$ 25,736	$ 22,862

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Business Combinations - Additional Information (Detail) - NoobaLtd. $ in Millions	Nov. 27, 2018 USD ($)
Business Acquisition [Line Items]
Cash paid	$ 11.8
Goodwill acquired	3.5
Identifiable intangible assets acquired	9.3
Net working capital	$ (1.0)

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Business Combinations - Summary of Changes in Goodwill (Detail) $ in Thousands	3 Months Ended
	May 31, 2019 USD ($)
Goodwill [Roll Forward]
Goodwill, beginning balance	$ 1,276,853
Impact of foreign currency fluctuations	(3,359)
Goodwill, ending balance	$ 1,273,494