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Red Hat’s Fortunes Rising With New Linux, Middleware Wins

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The last three months have been good ones for Red Hat. The enterprise Linux vendor reported its first-quarter fiscal 2011 financial results this week, showing growth coming from all sides with Linux platform, JBoss middleware and professional services revenues up, and customers new and old expanding their spending with Red Hat.

Red Hat’s earnings report comes as the company is gearing up for a major release of its flagship Red Hat Enterprise Linux (RHEL) platform as well as new cloud and virtualization efforts.

For the quarter ending May 31, Red Hat reported revenue of $209.1 million, a 20 percent year-over-year increase from the same quarter a year earlier. Net income came in at $24.1 million, or $0.12 per share — an increase over the $18.5 million reported last year at this time. Minus one-time charges, earnings totaled $0.18 per share — up three cents from a year ago, and in line with Wall Street estimates, according to Thomson Reuters. Looking forward to the second quarter of fiscal 2011, Red Hat provided guidance of revenues estimated at between $210 million to $212 million.

“We experienced solid demand in all major geographies and across all our products suites,” Red Hat CEO Jim Whitehurst said during the company’s analyst call. “This demand was further highlighted by winning the largest deal in our history in the past quarter, an eight-figure deal with a mainstream customer, which was primarily middleware.”

Whitehurst did not name the company that had signed the deal, though he noted that it was a new customer. Additionally, he said that Red Hat is continuing to win over customers with its free-to-paid initiative, which included one of the quarter’s largest deals.

The free-to-paid effort is an attempt by Red Hat to convert users of free Linux operating systems, including Red Hat clone CentOS, and get them to become Red Hat subscribers. Red Hat has been going after the free-to-paid market since at least 2008 as a way to help boost revenues.

Among the big drivers for Red Hat’s growth during the most recent quarter is the fact that existing customers are staying with Red Hat and renewing subscription at higher values. Whitehurst said during the company’s analyst call that Red Hat renewed all of its top 25 deals during the quarter at over 120 percent of their original value.

Red Hat CFO Charlie Peters noted that Red Hat’s product subscription revenues represented 86 percent of the company’s total revenue, and that for the quarter, subscription revenues hit $179 million, which is a 20 percent year-over-year gain. Additionally, Red Hat’s training and services revenues were up by 18 percent on a year-over-year basis, totaling $30 million.

Whitehurst also said that during the quarter, Red Hat’s existing customer NYSE Euronext has now standardized on JBoss middleware, though he did not provide a dollar figure for the deal.

The cloud is also a key area of growth for Red Hat, with wins during the quarter with both IBM and NTT. Whitehurst added that the Red Hat also closed a multimillion dollar deal with a global cloud provider, who is recognized as a top leader in cloud services. He did not name the provider.

Among the big items on the horizon for Red Hat is the next release of its flagship operating system platform, Red Hat Enterprise Linux 6 (RHEL). RHEL 6 is currently in beta and will be the first major version release since RHEL 5 in 2007.

“We anticipate that RHEL 6 will be one of our most ambitious, important platform releases to date,” Whitehurst said. “The architecture of RHEL 6 is designed to address the shift in the modern IT environment, whether physical, virtual or cloud.”

Though RHEL 6 is a major update for Red Hat’s users in terms of technology, it won’t necessarily translate into more immediate revenue for Red Hat.

“When we come out with a new release, it does not generate incremental revenue for us. If you are a subscriber, you have access to that,” Whitehurst said. “So new releases aren’t a revenue event for us, so it really is driven by the technology and when it is really time to do the full update.”

Sean Michael Kerner is a senior editor at, the news service of, the network for technology professionals.

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