Editor’s note: Red Hat’s latest earnings report shows the Raleigh-based Linux powerhouse remains red hot. So what’s driving growth? Technology Business Research analyst Andrew Smith offers his detailed insight.

RALEIGH, N.C. – Red Hat (NYSE: RHT) delivered another quarter of revenue growth in 4Q14, increasing a reported 15% from the year ago quarter to $456 million. This marks the 11th straight quarter of year-to-year revenue growth for the vendor. Red Hat’s operating margin was 23.8%, down 1% from the year ago quarter. Steady mid-teen growth within Red Hat’s core Linux business buoyed Red Hat’s operating margin.

During earnings, the vendor explained that aggressive investments in its emerging products and services may continue to eat into its overall operating margin; a scenario the vendor is comfortable with as long as its emerging technology products continue to experience “hyper growth.” Emerging technology products grew a reported 48% year-to-year during the quarter. Red Hat’s focus on growth and investment in emerging technology, coupled with OpenStack and OpenShift platform growth continues to be the focal point for long-term success.

TBR believes the vendor will continue to lean on core Linux and middleware solutions as it seeks increased wallet share among customers adopting open source cloud and analytics workloads within their enterprise environment.

  • Brand awareness among line of business decision-makers and application developers will remain a key theme for Red Hat during 2015

Red Hat continues to deploy targeted programs to spur developer and line of business brand awareness. CIO and developer exposure and engagement is critical to accommodate cloud-, mobile- and big-data-driven disruptions to enterprise IT infrastructures, particularly in a Linux-based environment. TBR believes that Red Hat’s differentiation continues to lie with its open source software expertise, which promotes ease of access and integration along with business outcomes.

Within the open source community, maintaining a healthy developer base is essential in order to sustain innovation and utilization of a platform. TBR believes Red Hat’s brand awareness continues to present a challenge due to the vendor’s history as a base-layer OS and middleware solutions provider. Red Hat seeks to overcome this perception by promoting messaging and integration of its high-profile OpenStack cloud capabilities.

During the vendor’s earnings announcement, CEO Jim Whitehurst highlighted the announcement of Red Hat Cloud Infrastructure Version 5 (RHCI5), as well as the vendor’s success closing large OpenStack deals during the quarter. TBR believes that Red Hat is well positioned to continue to capture customer demand for OpenStack-based software-defined and cloud-enabled infrastructure capabilities, ultimately driving higher value with customers and demonstrating the vendor’s capability to extend deeper into large enterprise deployments using Linux-based, open source platforms for modern applications.

  • Increasing adoption of OpenStack and OpenShift platforms has positioned Red Hat solutions as a legitimate end-to-end solutions provider within the channel

During earnings, Red Hat CEO Jim Whitehurst recalled a statement from a customer who said, “You don’t get fired for choosing Red Hat.” The statement illustrates Red Hat’s increasing adoption among both customers and channel partners as a mainstream solutions provider. Red Hat reported that 70% of its sales during the quarter came through its channel, and that channel partners were able to close several large deals. The strong performance of Red Hat’s channel partners not only underscores the investments the vendor has made over the last seven years, but also the increasing success channel partners are having communicating the value of open-source solutions.

TBR believes Red Hat will be able to build on this success, ultimately generating better stickiness across its customer base and accelerating the adoption of its broader portfolio. As customers invest in Red Hat as their primary middleware and OS provider, they are increasingly adopting adjacent storage and cloud products from the vendor. During earnings, Red Hat reported that approximately one-third of the top 30 deals during the quarter contained five or more Red Hat technologies, demonstrating an increasing prevalence and success cross-selling within large accounts.

TBR believes Red Had will continue to cultivate opportunities to cross-sell its portfolio, generating long term relationships with its customers.

  • Red Hat solutions will continue to gain traction in large enterprises by scaling open-source capabilities for cloud and big data

Unlike many competitors who are seeing their cloud-enabled software portfolios cannibalize existing offerings, Red Hat benefits from having core offerings – specifically Red Hat Enterprise Linux (RHEL) – which provide a springboard for its emerging solutions. This relationship allows Red Hat to adeptly stitch together a broad, cloud-based development environment for large enterprise customers by scaling out their existing Linux-based solutions to accommodate new workload implementations for cloud- and analytics-based applications.

TBR also believes the emergence of OpenStack as a de-facto cloud standard gives enterprises more confidence choosing Red Hat. Platforms like OpenShift also help Red Hat expand its addressable market to reach cloud integrators and ultimately SMB and end-user customers, who are increasingly turning to SaaS consumption for best-of-breed solutions at an economical price.

Finally TBR believes that Red Hat’s success displacing Windows through the deployment of next generation applications and workloads gives Red Hat ample opportunity to gain market share in the services-based operating system market over the long-term.