Editor’s note: Krista Macomber, an analyst at Technology Business Research, analyzes Red Hat’s latest quarterly financial report, which exceeded Wall Street expectations. She projects more growth ahead.
HAMPTON, N.H. – With a focus on Linux evolution and OpenStack monetization, Red Hat will deliver double-digit revenue growth through 2015.
Red Hat’s (NYSE: RHT) investments in sales headcount and cloud-focused engineers enabled successful execution of corporate cross-selling initiatives and helped revenue grow 16.7% year-to-year to $424 million during 2Q14. Subscription revenues climbed 18% year-to-year to $372 million during the quarter; within this segment, application development and emerging product licenses climbed 45% to $53 million against a backdrop of infrastructure license revenue rising 14% to $319 million. Red Hat’s investments in newer technologies such as virtualization and OpenStack-enabled hybrid cloud management not only facilitate continued customer loyalty and share-of-wallet expansion, but also help Red Hat raise its profile with larger enterprises, facilitating the vendor’s reported penetration of 94% of the Fortune 500.
Due to its historical stance as a pure-play middleware and operating system provider, Red Hat faces a longer road to increased visibility among C-Suite executives, who are increasingly influencing IT purchase decision making, compared to competitors such as VMware.
Additionally, work remains for Red Hat in simplifying messaging to more succinctly map its technologies and competencies to broader industry trends. However, Red Hat’s focus on cross-selling is resulting in larger deals. On its 2Q14 earnings call, Red Hat announced that, for the first time in its second calendar quarter, all of its top 30 deals exceeded $1 million in revenue, with four deals exceeding $5 million and one exceeding $10 million. Gains were supported by Red Hat’s application development and emerging technologies, with 60% of Red Hat’s top 30 deals including sales from these segments.
Following its Linux-led “land and expand” strategy, Red Hat is committed to positioning its flagship Red Hat Enterprise Linux (RHEL) platform as the de facto standard across the hybrid IT environments that enterprises are increasingly adopting. In June RHEL 7 became generally available. RHEL 7 was in beta incubation for a year and a half. It is a marked evolution over previous generations in its ability to accommodate next-generation IT requirements by supporting Linux containers and big data and bare metal through IaaS deployments. As a result, TBR notes significant opportunity for Red Hat to align with high-priority emerging pain points around secure and efficient data and workload management in today’s mobile and cloud-enabled business environment. This creates the potential for Red Hat to elevate its standing from a provider of a commoditized operating system to a more strategic business partner.
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Red Hat’s planned acquisition of France-based OpenStack integrator eNovance for $95 million signifies that the vendor is serious about establishing credibility as a multifaceted provider of the IT fabric required for hybrid cloud and next-generation application creation and management — and that it is maturing in its ability to deliver on this promise. Red Hat and eNovance partnered in 2013 around OpenStack implementation and integration. The planned acquisition signifies Red Hat saw the need to more closely infuse its product development teams with industry-specific integration capabilities (with eNovance offering expertise in the telecommunications sector and network functions virtualization), as Red Hat seeks to expand wallet share in its install base.
Evidenced by recent collaborations with SAP and Dell, as well as investments in enhanced development platforms, Red Hat will not go it alone as it works to establish credibility and increase portfolio monetization in newer areas such as OpenShift and big data. TBR believes the ecosystem is fundamental to Red Hat’s long-term success, as it opens doors to adjacent expertise and innovation and an expanded roster of channel, ISV and cloud service provider partnerships as well as lends additional large enterprise credibility.
- Leading with OpenStack, Red Hat extends software-defined data center and hybrid cloud management functionality to facilitate diversified growth
OpenStack lies at the heart of Red Hat’s efforts to capitalize on the maturation of the software-defined data center and burgeoning complexities in managing data and workloads as customers’ IT environments become increasingly heterogeneous. Building from its entrenchment in the operating system, Red Hat is refining its middleware and compute virtualization capabilities while penetrating the networking and storage layers to expand its presence across the data center. However, as Red Hat broadens its scope, success depends on its ability to simplify its strategy in the eyes of the ecosystem, including customers, partners and developers; his is true as Red Hat works to become the de facto platform provider in the cloud marketplace, which is characterized by complex solutions geared toward providing high-profile business agility and flexibility required by line-of-business decision makers, which focus on improving business outcomes rather than the underlying technology.
To position for improved portfolio monetization in light of lackluster adoption of OpenStack in enterprise production environments, Red Hat is honing R&D investments on facilitating streamlined, optimized virtualized and private cloud environments through OpenStack. Red Had updated its Enterprise Virtualization platform to enable increased scalability of traditional virtualization infrastructure and advanced OpenStack capabilities across compute, storage and networking — with tie-ins to RHEL 7 far from an insignificant aspect of the announcement. Red Hat is establishing interoperability and building go-to-market bridges across its expanding portfolio, including tying in its software-defined storage capabilities, which were rounded out and have strengthened OpenStack tie-ins through the acquisition of InkTank. This is a tall but necessary order for Red Hat to compete against the likes of EMC and VMware and cross-sell its way to increased wallet share.
- Red Hat increases investments in containers to speed development and improve security of applications
In today’s cloud-enabled, mobile and socially connected business environment, applications have an increasingly meaningful impact on organizations’ operational efficiency and engagements with customers. Although traditional methods of virtualization will remain broadly entrenched across enterprises, application containerization is rising in interest and, to a slightly lesser degree, implementation by organizations such as Google as an alternative for increased flexibility in managing distributed applications. As enterprises increasingly trial application containerization, Red Hat is expanding investments in containerization technologies to improve portability, provide simplified and more secure maintenance, and reduce development costs and footprint of applications.
Red Hat has a rich history in Linux containers and virtualizing applications, and enhanced containerization technologies will help improve its value proposition to customers and increase its appeal to developers. In April Red Hat increased integration between its certified container hosts (including RHEL 7 Beta and OpenShift) and services with Docker’s hosted services. Docker’s Linux containerization technologies are proliferating in the marketplace by reducing barriers to enterprise adoption of containers, including facilitating improved ease of use, application packaging and infrastructure integration. Combining containerization with PaaS will be a differentiator for Red Hat, as the vendor will be positioned to exploit the value of both.
Augmenting these capabilities, ecosystem engagement lies at the heart of Red Hat’s evolving containerization strategy, as community development positions Red Hat for continued innovation and an expanded footprint in the growing marketplace. Red Hat is offering containerized application certification and launched the Project Atomic and GearD community development projects as well as a high-touch beta program to spur development of containerized applications on RHEL 7 and Red Hat OpenShift. Red Hat will also lean on the more expansive traction of partners, such as Dell, across joint customers’ organizations to accelerate adoption of Red Hat’s OpenShift-enabled Linux container solutions.
- Red Hat enhances its development tools and expands engagement with the OpenStack community to drive portfolio monetization and enterprise visibility
Red Hat is focused on developer engagement and loyalty, as the company aligns its strategy around improving enterprises’ ability to build, test, deploy and manage applications and clouds. Service-oriented architectures and next-generation applications are becoming core to success in today’s business environment and are driving IT infrastructures to become increasingly open. As a result, the developer is rising in importance to the C-Suite. Red Hat is expanding investment in areas such as programming languages and PaaS to protect this important touch point into customers’ evolving cloud and application requirements and heighten visibility across customers’ organizations. As a result, laying the foundation for OpenStack development frameworks will help to spark proliferation and monetization of newer Red Hat offerings, such as CloudForms and OpenShift.
Over the past 90 days, Red Hat announced platform and community expansions geared toward improving governance, integration, orchestration and automation of clouds and applications. Specifically, Red Hat updated its collection of programming languages and database management systems for Red Hat Enterprise Linux developers, Red Hat Software Collections; formed an OpenStack community around its acquired ManageIQ software, which serves as the basis for its CloudForms open hybrid cloud management offering; and improved the DevOps capabilities of its OpenShift Enterprise on-premises PaaS offering. As vendors such as Pivotal and HP make a landgrab for developers through 2014, leaning on its history in open-source innovation through Linux and touting new capabilities such as automated application services that make it faster, easier and more cost-effective to stand up and manage clouds and applications across the life cycle will help Red Hat differentiate. Additionally, contributions from partners such as AutoTrader Group and CiRBA will provide tested reference architectures that will help Red Hat validate its technologies as enterprise-ready.