Red Hat Closing In On $2 Billion In Its Fourth Quarter

8 Cloud Computing Predictions For 2016

Red Hat reported its third quarter 2016 results Nov. 30, and largely contrary to expectations, it's still going strong.

Advances in cloud computing, VMware's strong virtualization product line, the Cloud Foundry open source development platform, and Amazon and other cloud computing services were all supposed to be sapping Red Hat's strength.

On the contrary, as long as Red Hat remains at the core of the enterprise data center with its Red Hat Enterprise Linux operating system, it will remain a viable competitor to VMware, the open source development platform Cloud Foundry, and proprietary clouds.

This is something that's not commonly understood about Red Hat and one reason its stock price, after limping through 2015 (with a low of $67 in August), closed Dec. 23 at $83.99, up over 22% since then. For all of Red Hat's earning power, its stock has been in the doldrums, as if competitive threats were overwhelming it.

If it were about to succumb, it would not be finishing the year this strong.

By The Numbers

The announcement for the quarter ended Nov. 30 revealed a revenue increase of 15%, to $524 million, over the third quarter of a year ago. Net income was $47 million, compared to $48 million a year ago. Subscriptions now make up 87% of all of Red Hat's revenue, up 14%; these subscriptions give it a highly stable and predictable revenue base. There's $1.4 billion in the pipeline, thanks to multi-year subscriptions.

Red Hat has now projected its fiscal 2016 revenue at $2.048 billion. It breached the $1 billion mark in 2012, taking 19 years to get there, and the company expects to reach $2 billion early in 2016.

It will, of course, be the first open source company to do so. It's unprecedented to become a firm whose product can be freely borrowed and duplicated (CentOS, Oracle Linux) and still reach the $2 billion mark, and another indication of Red Hat's core strength in the enterprise data center.

Red Hat has maintained developer interest in its products by being an early adopter of Docker containers. Its OpenShift 3.1 developer platform includes Docker container formatting and Kubernetes container cluster orchestration and management. Since Dec. 15, it's been offered as the OpenShift Dedicated cloud service from the AWS cloud data centers. Customers manage their own versions of OpenShift. It was already available online through AWS as a multi-tenant, on-demand service.

OpenShift Dedicated represents a more direct step by Red Hat to carve out its future as a cross-cloud supplier of an open source development platform. Only a few vendors are capable of doing so -- IBM, Microsoft, Google, Cloud Foundry -- and few have Red Hat's credentials and customer base in open source software.

That means Red Hat is building up an open source software stack from RHEL at the heart of the enterprise server through JBoss middleware to Docker containers and KVM virtualization. It's beefing up its CloudForms to manage workloads in different clouds and enhancing OpenShift to take on next-generation cloud application development.

All of this may not be enough to offset the switch in enterprise interest from legacy, on-premises systems to the cloud. Red Hat is heavily invested in supplying the operating system and surrounding software to those on-premises systems. Marketshare figures are hard to come by with OpenStack cloud software, but Red Hat, with its Red Hat Enterprise Linux OpenStack offering, is in as strong a position as any OpenStack distributor.

The End Of Unix

Furthermore, the movement of applications to the cloud is having less of a debilitating effect on Red Hat than many prognosticators have predicted, because Red Hat Enterprise Linux has been one of the primary replacements for Unix systems, and the movement to the cloud, if anything, has speeded up that process.

The decline of Unix was noted by InformationWeek 11 years ago, and it continues apace today.

Investor website Seeking Alpha estimates that Unix now constitutes just 2% of shipping systems, with an installed base of 600,000-800,000 Unix systems remaining in enterprises.

"The migration of these systems could accelerate, we believe, in the near term as many of them run on Intel's Itanium processors," according to a Dec. 21 column, "Red Hat Is Poised to Disrupt the Infrastructure Software Industry."

HP announced last December that two Itanium-based server series, the Superdome and Nonstop X servers, will be offered with Intel Xeon processors as well as with Itanium. Previously they had been Itanium-only, and at least some customers are likely to conclude that HP's continued steep investment in Itanium's future is not a sure thing.

Current Itanium/HPUX users are going to be thinking of migrating soon to Linux in one form or another. Whether it's on-premises or in the cloud, that migration favors Red Hat. If Unix users are forced to think about migrating, Red Hat will win a large share of them.

The remaining question is whether it's done enough to appeal to broad base of developers with OpenShift. "We think Red Hat has the credibility to win more business, given their open source code for cloud computing, than VMware, despite the latter's huge advantage in virtualization software," Seeking Alpha wrote.

The shape of applications to come has a heavy mobile component, and 15 months ago Red Hat acquired FeedHenry to give its OpenShift platform better mobile device support. Much remains to be done, but IDC gives it high marks in the mobile area.

[Read how Red Hat got to the $2 billion mark.]

"The Red Hat platform has good strengths in the mobile and security areas. Developers benefit from a wide variety of languages supported. Red Hat also provides strong support for start-ups," says the IDC MarketScape report. At the same time, it noted the limited industry support for OpenShift. Unstated is the wide industry support for Cloud Foundry.

At this stage of the discussion, no one has the last word over the future of next-generation applications. But Red Hat appears bent on making sure there's more than one broad-based system on the market to act as a springboard for building those applications in and for the cloud.

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