Red Hat faces stiff challenges to move beyond its core technology
Red Hat wants to build a developer base and collect a critical mass of partners as it looks to the future
By John Fontana, Network World | Network World US | Published: 01:00, 28 September 2007
Clad in his pyjamas, Red Hat co-founder Marc Ewing arrived at work at 1100 one day in 1998, unlocked the office for a new employee, and promptly left to go back to sleep.
For a guy who developed the Linux distribution in his spare bedroom it just seemed natural. Today, however, such sleepy days are but a dream at Red Hat.
The company is a powerhouse in the open source community: It owns 80 per cent of the Linux market and posted $400 million in revenue for fiscal 2007 -- a 44 per cent increase over the previous year -- and has $600 million in cash stashed under its blazing red fedora.
Last week’s second quarter 2008 earnings showed a 65 per cent increase in net income and a 28 per cent climb in revenue over the same quarter last year.
But Red Hat is moving out of its Linux operating system comfort zone and everyone from Microsoft to IBM to Oracle to Wall Street seems to be breathing down its neck. The company faces stiff challenges to spread beyond its roots, create a middleware platform, build a developer base and collect a critical mass of partners all so it can turn its IT infrastructure platform strategy to gold.
The challenges start with investments in strategic technology areas led by middleware to support intranets, service-oriented architectures (SOA) and online services; and server and desktop virtualisation as part of Red Hat Enterprise Linux (RHEL) 5, which was released in March.
The company for the first time is courting wayward Java developers, and six months ago launched Red Hat Exchange to certify applications from other open source software vendors and back them with Red Hat support services.
Red Hat also is carrying the torch among its open source peers in denouncing Microsoft’s cross-patent licensing deals with open source vendors such as rival Novell.
In addition, the company has expanded its reach with 58 offices around the globe and is bulking up its client list as evidenced by 42,000 new customers added in fiscal 2007.
And it has started fiscal 2008 with contracts inked by Virgin America, Singapore Airlines, Swisscom, the French Ministry of Education and the Swedish Association of the Pharmaceutical Industry.
“Red Hat in many ways is how we measure success in the open source start-up arena," says Raven Zachery, an analyst with the 451 Group. “It transitioned away from packaged software to enterprise sales earlier in this decade and it paid off. It was a great move. Most of us knew Red Hat as a box on the shelf at CompUSA but now it is the Linux that you run in your data centre."
Indeed, it was a time of prosperity for Red Hat as the company saw yearly revenue grow from $42 million in fiscal 1999 to $400 million in fiscal 2007, an 852 per cent increase.
These aren’t times for reflection, however, as the powerhouse has put itself in front of new obstacles that will determine if it can reach the next plateau.
Wall Street tags Red Hat as being in an investment phase and will harshly judge a less than stellar result to its infrastructure platform strategy around middleware and virtualisation. So far, returns are not good on Wall Street as Red Hat's shares have fallen more than 25 per cent in the past year.
The company is being chided for less than expected first-year results in its middleware business anchored by its 2006 JBoss application server acquisition.
Subscription services for JBoss contributed $23.1 million to the overall revenue increase of $122.3 million last year, which amounts to 18.8 per cent.
In last week’s earnings call with financial analysts, CEO Matthew Szulik admitted he wasn’t happy. “The rate of JBoss bookings and revenue growth has not met my expectations,” he said. “We know we can do much better.”
Red Hat’s revenue, based 100 per cent on its one- to three-year subscriptions for support and its training/consulting services, faces erosion as users get more familiar with Linux, defect to Oracle’s cut-rate operating system support services for Red Hat users, or to services from system integrators.