Editor’s note: Raleigh-based Red Hat beat revenue expectations for the second quarter in financial results reported Wednesday, fueled by OpenStack adoption and an application-centric strategy, says Technology Business Research Analyst Andrew Smith. Red Hat also announced a $1 billion stock buyback plan and the acquisition of 3scale, a provider of application programming interface management technology. Here’s an in-depth analysis of where Red Hat stands – and where it’s headed. (Plus: Read about Red Hat CEO’s shoutout for Durham-based Ansible.)
HAMPTON, N.H. – Red Hat is competing in increasingly cloud-centric markets, causing the vendor to adjust its product and partner strategy to focus on the delivery of infrastructure and platform as-a-service. Red Hat’s open strategy allows it to partner with technology and channel partners and develop private, hybrid, and public cloud solutions and avoid head-on competition with public cloud heavyweights like AWS, Google, and Microsoft Azure.
Red Hat will continue to execute this strategy, growing its emerging solutions and taking advantage of steady adoption rates for OpenStack solutions within the enterprise. During the vendor’s earnings call, CFO Frank Calderoni noted that 80% of the vendor’s top 30 deals included one or more of the vendor’s emerging technology solutions, backing up the vendor’s claim that customers are deploying OpenStack solutions for a growing number of production-grade applications.
Red Hat (NYSE: RHT) grew revenue 18% year-to-year to $568 million in 2Q16, which was above the high-end of the vendor’s revenue guidance given last quarter. Red Hat continues to post double-digit growth rates due to the successful expansion of its RHEL, OpenStack and OpenShift solutions.
OpenStack and OpenShift are included within Red Hat’s Application Development-related and emerging technologies line, which grew 39% year-to-year in 1Q16, outpacing corporate growth. The vendor’s more traditional, Infrastructure-related offerings including Red Hat Enterprise Linux, grew 14% year-to-year.
Building a business based on OpenStack and OpenShift solutions requires Red Hat to consistently improve its partner capabilities
Red Hat has over 5,000 sales channel partners, and earned 78% of revenue in 2Q16 through the channel. Over the past year, Red Hat has consistently focused on growing its channel capabilities and partner programs in order to accelerate Linux and OpenStack-related services delivery. To enable partners to sell a higher mix of cloud services, Red Hat has been working closely to evolve the skills and solutions it can enable partners to deliver. For example, Red Hat launched its Certified Cloud and Service Provider program (CCSP) at the end of 2015, which allows SIs and MSPs to host and resell Red Hat offerings on-demand within multi-tenant, dedicated, and managed environments.
In addition to new programs and certifications, Red Hat has also altered its product strategy to help partners add more value during cloud services engagements. Red Hat’s is positioning its technology to provide a foundation which partners can build on by adding management and orchestration services for the underlying operating systems, storage, and virtualization or cloud platforms.
This strategy is a win-win for Red Hat, allowing the vendor to focus on developing close-to-the-application capabilities and cloud connectivity via solutions like CloudForms and Satellite, while partners use their expertise to help Red Hat customers overcome the challenges of managing and orchestrating the underlying infrastructure, ultimately addressing some of the skills gaps associated with open source and OpenStack adoption.
The release of Red Hat Cloud Suite for Applications bolsters the vendor’s PaaS and application-centric approach to the cloud market
In April Red Hat announced its Red Hat Cloud Suite for Applications, which combines OpenShift, RHEL OpenStack Platform, CloudForms, and other Red Hat technologies into a single offering designed to provide integrated IaaS and PaaS capabilities. Services can be run locally or in the cloud, and connected to the necessary virtualization, private cloud, public cloud, and storage platforms which also exist in its customers’ environment. The key benefit of this suite is its ability to give Red Hat control of application development, management, and hosting capabilities via CloudForms and OpenShift.
Growing the number of production-grade applications deployed on Red Hat PaaS is a key strategy for the vendor, and a major reason why Red Hat takes such an open approach with its infrastructure and middleware solutions, as well as other cloud services providers. The developer is the high-value customer that Red Hat and many other infrastructure providers seek to attract to win cloud revenue. But Red Hat’s focus on PaaS and the developer puts it into increasingly close competition with larger competitors like AWS, Microsoft, and IBM. Red Hat will differentiate from larger competitors by offering lower-cost solutions.
Unlike some competitors, Red Hat can rely on generating revenue with subscription-based services for application testing, integration, and platform extension, while giving developers free access to the underlying infrastructure and development toolkits. Facilitating this strategy, Red Hat began providing RHEL subscriptions to developers for free in April, opening access to Red Hat development components, web servers, and even the vendor’s container development kit.
(C) TBR