Editor’s note: A 55th straight quarter of revenue growth as reported last week demonstrates the enduring strength of Raleigh-based Red Hat (NYSE: RHT), reports Technology Business Research analyst Andrew Smith.

HAMPTON, N.H. – Red Hat delivered 15% revenue growth year-to-year in 4Q15 totaling $523 million. Revenue growth was driven by subscriptions, which expanded 6% year-to-year to $457 million. Subscriptions accounted for 87% of total revenue during 4Q15. The vendor also kept gross and operating margins steady while continuing to invest in its high-value portfolio of application development and emerging technologies, which grew 37% year-to-year.

However, estimated increases in go-to-market and sales expenses for OpenStack and OpenShift combined with Ansible acquisition costs are expected to constrain any margin growth in 1Q16.

Many of Red Hat’s product updates and investments during 4Q15 focused on building the vendor’s container management and orchestration capabilities.

We believe this strategy will generate significant market traction for Red Hat in 2016. Emerging container formats such as Docker and Rocket, cannot address all enterprise IT requirements; they need the help of additional management, networking and security capabilities to make the application of the technology feasible within the enterprise ecosystem.

Red Hat is extending its leadership in this space by adding container expertise and more options for implementation and scaling of cloud workloads across its hybrid cloud portfolio, gaining share in a market that is rapidly diminishing the value of traditional data center and storage virtualization.

The company’s partnership with Microsoft further validates Red Hat’s open-source approach to hybrid cloud management

Red Hat’s strategic partnership with Microsoft confirms the impact and clout its open-source solutions have in the hybrid cloud space. Over the past year, Satya Nadella has evangelized Microsoft’s cloud strategy using Azure. Part of that process involves opening up traditional, Windows-centric development frameworks such as .NET to cloud developers that require a flexible technology stack that can be purchased using nontraditional subscription and licensing options. It was only a matter of time before Microsoft and Red Hat brokered a partnership given Red Hat’s leadership in Linux and open-source space.

On Nov. 4 Microsoft and Red Hat announced a strategic partnership, which will be built around five key areas. First, the vendors will co-locate engineers to jointly address customer requests. Second, the recently open sourced .NET framework will now be available through RHEL, Atomic Host and OpenShift. Third, Red Hat products will now be available on Azure and sold through Red Hat subscriptions. Initial products include RHEL, RHEL Atomic, OpenShift, JBoss and various storage solutions including Ceph. Fourth, Red Hat CloudForms will be expanded to include management workflows on Azure. Fifth, Microsoft will join Red Hat’s Certified Cloud and Service Provider (CCSP) program. Full OpenStack support on Azure was missing from these five pillars, meaning support will remain limited to OpenShift.

The deal represents a win for both vendors. Microsoft gains access to more OpenStack community projects and developers through integration with Red Hat services, and Red Hat gains access to Azure developers, bolstering its hybrid cloud ecosystem. Microsoft and Red Hat have collaborated before; the two vendors signed a partnership in 2009. But the new agreement has a much larger scope. The partnership signals Microsoft’s willingness to embrace customers’ and developers’ needs for alternative OS’s to facilitate hybrid cloud development and application integration. And for Red Hat — the gold standard for enterprise open-source and OpenStack cloud solutions — it adds Azure to its repertoire of public cloud partners and furthers its leadership in the market.

The Ansible acquisition may be the first of many purchases of configuration management providers, as management vendors look to enable DevOps and microservices architectures

Red Hat’s mid-October acquisition of Ansible — estimated at approximately $100 million — will help the vendor quickly expand its DevOps and configuration management capabilities. Configuration tools from providers such as Ansible remain critical for orchestrating and automating containerized applications, network functions virtualization (NFV) and Internet of Things (IoT) across OpenStack- and OpenShift-based PaaS. According to the 2015 OpenStack Adoption Survey, Puppet, Ansible and Chef were the top three tools used for OpenStack configuration. TBR expects all three of these vendors to be acquisition targets as firms seek to bolster their hybrid cloud orchestration toolsets. With Ansible off the table, we believe HPE and VMware could be potential suitors for Chef and Puppet Labs, respectively. HPE participated in Chef’s most recent round of funding and already has tight integration with OneView. VMware invested $30 million in Puppet in early 2013, and the two have partnered around solutions since 2012.

Following the acquisition, Red Hat launched Ansible Tower 2.4 in November, which added a host of new features including support for OAuth2 authentication via GitHub and Google Apps, and authentication support for SAML2.0 and RADIUS.

OpenShift Dedicated adds a single-tenant environment for AWS developers, lowering the barriers to entry for the development of containerized cloud applications

In December Red Hat launched OpenShift Dedicated, a new flavor of OpenShift PaaS. The platform provides a third consumption option designed specifically for customers running OpenShift on Amazon Web Services (AWS). Red Hat will play the service provider role, managing OpenShift Dedicated and offering support and additional services to customers such as JBoss Middleware.

The announcement stands out from other Red Hat product launches for two reasons. First, Red Hat now has the capability to host and manage OpenShift instances in a single-tenant environment with access to independent pools of storage and networking resources. Second, it gives AWS developers quick and easy access to a platform on which they can develop, test and deploy containerized applications. Red Hat wants its management and orchestration tools to be at the center of the container universe, and OpenShift Dedicated provides a quick, low-cost avenue for developers to get started.

Other notable events and product updates during the quarter include:

  • RHEL 7.2 was released in mid-November, including security, networking and admin updates. The update also adds a slew of container support capabilities. The update includes improvements to Docker, Kubernetes, Cockpit and Atomic command.
  • Red Hat released CloudForms 4 with Azure support, container support and improved self-service capabilities to its OpenStack cloud management platform.
  • Red Hat joined the Node.js Foundation as a Platinum member. Involvement with the Foundation will help Red Hat promote Node.js developer adoption of OpenShift and Red Hat’s Mobile Application Platform. Node.js remains a leading development framework for mobile applications and IoT platforms.
  • Red Hat announced two new OpenStack training and certification offerings. Red Hat has struggled to promote enterprise OpenStack adoption due to a lack of available skills and reference architectures, what CEO Jim Whitehurst refers to as “OpenStack supply constraints.” We expect Red Hat to continue to invest in education and training programs to familiarize enterprise architects and developers with the Red Hat ecosystem, promoting adoption with large enterprise customers that have been slow to adopt open-source software and operating systems.
  • In October Red Hat partnered with Black Duck, a provider of open-source software management and security solutions, to establish a security model for containerized application delivery. Security concerns will remain a major barrier for container technology adoption within large enterprises. Red Hat seeks to address this issue through new security solutions and partnerships with vendors such as Black Duck to spur ongoing container adoption.
  • In October Red Hat transitioned leadership of Ceph to the newly formed Ceph advisory board. The advisory board will be responsible for Ceph’s strategic direction and open-source community. The advisory board includes Red Hat, Canonical, CERN, Cisco, Fujitsu, Intel and SUSE, among others.

(C) TBR