Today, Red Hat dominates enterprise Linux. Tomorrow, it wants to rule the cloud. Don’t bet against it.
The stock market is a strange beast. The SEC suspended trading on The Crypto Company, a Bitcoin company that has zoomed up 17,000 percent in the last three months in an ever-rising bubble. Meanwhile, Red Hat, the leading Linux company with its eye on the cloud, had great results, beat estimates on earnings and revenue, and saw its stock price drop by almost 5 percent. Given a choice between real value and fantasy, the market loves fantasy.
I’ll tell you something that’s not fantasy. In the next few years, Red Hat will become the first billion-dollar-a-quarter open-source company, and that’s real money.
Here’s how. First, as Jim Whitehurst, Red Hat CEO, said in the earnings call, “We anticipate exiting the fiscal year with an annualized run-rate of approximately $3 billion for total revenue.”
Precisely, Red Hat is predicting it will make $2.911 billion for its fiscal year. Not bad for a company in a world where people can still say with a straight face they don’t understand how open source can make money. Hello. Wake-up alert. Nobody gets fired for buying Linux, open source software, or Red Hat Enterprise Linux (RHEL) these days.
Whitehurst added in a statement, “We again delivered over 20 percent year-over-year growth in both subscription revenue and total revenue due to strong customer demand for hybrid cloud technologies, including our core technologies, container platforms and solutions that enable and manage multiple cloud and private cloud environments.”
Eric Shander, Red Hat’s CFO, added, “Total revenue for the quarter was $748 million, up 22 percent in USD year over year, or 20 percent measured in constant currency.” Subscription revenue for the quarter was $657 million, up 21 percent in USD year-over-year, or 19 percent measured in constant currency. That, Shander said, was yet another “record quarter”.
During the earnings call Whitehurst said, “These top line results were driven by, first, consistent subscription revenue growth for our Infrastructure-related offerings which include bare metal RHEL, virtualized RHEL, and RHEL on the public cloud.”
One noteworthy point in those results, Whitehurst added, is that a great deal of Red Hat’s growth is coming because of “our growing number of seven-figure and multi seven-figure transactions.” In short, Red Hat Enterprise Linux is becoming increasingly a staple of Enterprise IT.
As strong as Red Hat’s Linux is, Red Hat continues to look to the cloud for its future. Whitehurst said, in response to a question, that Red Hat’s cloud infrastructure revenue is growing by 14 percent year over year.
Thanks to Red Hat’s Certified Cloud Service Provider program, Red Hat is growing its public and hybrid cloud market. For example, the Alibaba Cloud, China’s biggest public cloud, now offers RHEL on a pay-as-you-go basis.
In the last quarter, Red Hat also announced the availability of its OpenShift Container Platform as a service broker that enables cloud native services from Amazon Web Services. Additional Red Hat technologies have been integrated with the company’s OpenShift Platform-as-a-Service (PaaS) cloud.
Red Hat’s Red Hat OpenShift Application Runtimes (RHOAR) is a next-generation set of runtimes for containerized microservices-based application development stands with Red Hat JBoss EAP, as a way of making applications cloud native and DevOps and microservices friendly.
This is proving popular, Whitehurst explained, because Red Hat has two main selling points. One is Kubernetes, the leading cloud orchestration program. “As the second largest contributor to the Kubernetes project, that’s positioned us well to be able to help drive roadmaps and confidently support our customers there,” he said.
“The other,” Whitehurst continued, “is just life cycle in the operating system. I mean, I think a lot of people forget that we have security vulnerabilities. The user space of the operating system is inside the container. People like to kind of abstract and say, ‘Oh, the container is the source code for the application’. But it’s also all of the user space dependencies. Over 90 percent of the security vulnerabilities that are patched in Linux happen in user space. So therefore, if you’re going to deploy an application that you plan to run in a production context, you need to make sure you have a vendor who can — you feel confident can support and patch the operating system components that are inside the container.”
Virtually all of Red Hat’s big customers trust Red Hat to keep Linux safe, whether it’s on a server or in a container. Whitehurst said, “In fact, we had one significant financial services institution that had gone down another path, and their security group ultimately vetoed use of different container technology because they said, well the operating system component is in that. We don’t have a life cycle or feel confident and support around that. And so they then came and since have migrated to OpenShift.”
Another way Red Hat is expanding its cloud services sales, Whitehurst said, is by “cross-selling our broad portfolio of technologies, which led to 30 percent year-over-year growth in deals over $1 million and over 40 percent growth in application development-related and other emerging technology subscription revenue.” For example, Ansible, Red Hat’s DevOps tool, is proving to be a great cross-sell with RHEL.
Still, for all of Red Hat’s good cloud news, RHEL’s subscription revenue in the quarter was still 88 percent of total revenue. Cross-selling is all well and good, but it’s not moving the needle as much as Red Hat would like. For Red Hat to reach its goal of being a cloud power, it must grow its cloud services at a faster rate. Can they do it, or will Red Hat still be tied to its profitable Linux line? Stay tuned.
- Red Hat tops Q3 targets on strong subscription revenue growth
- Red Hat partners with AWS with OpenShift Container Platform 3.7
- Red Hat and Amazon integrate AWS, RHEL, and OpenShift