A Leading Open Source Software Company

Although the two organizations embrace an almost identical name and the same crimson headgear, Red Hat Inc is not the Society which encourages ladies of a certain age to enjoy their later years with gusto. It is in fact a leading open source software company with a global customer base. Originally founded in 1993 as ACC Corporation, the company’s aim was to support and develop Linus Torvald’s Linux open source operating system software, and Red Hat Enterprise Linux remains as the company’s core platform to this day. After resolving its early battles with Microsoft, Red Hat celebrated ten years of global partnership with IBM in 2009. The company claims to be ‘the most recognized open source brand in the world’.

Headquartered in Raleigh, North Carolina, Red Hat has been listed on the NYSE (ticker symbol RHT) since 2006. Its first public share offering in August 1999 recorded the eighth biggest first day gain in Wall Street history. It is an S&P 500 company with more than 70 offices globally and over 4,000 employees. Through its acquisitions of companies such as JBoss, MetaMatrix and Mobicents, and by developing its existing products, Red Hat now supports clients with systems for service-oriented architecture, virtualization and cloud computing, business process management and enterprise data services, as well as providing consulting services and training. Key customers include the NYSE (ticker symbol NYX), Amazon (AMZN), DreamWorks (DWA), Merrill Lynch (a division of Bank of America, BAC) and Morgan Stanley (MS).

Red Hat’s business model sees it collaborating in open source software development and selling annual or multi-year software subscriptions in place of the traditional approach of selling a software license. The pay-as-you-go format delivers both rapid innovation and lower costs to both Red Hat and its clients, with the added customer benefits of continuous updates, support and flexibility. Red Hat regards itself as the bridge between the communities that create open source software and the enterprise customers who use it. Red Hat Inc website

In fiscal 2010, which ended February 28 2010, Red Hat recorded total revenues of $748 million, an increase of 15% over 2009. Subscription revenue accounted for 85% of sales, the balance being training and services income. Net income was $87 million (up 11%), which amounted to $0.45 per diluted share. $646 million remained in deferred revenue at year end, an increase of 19%. Approximately 44% of revenue was generated outside the US, and the company expects to increase its geographical reach in the future. FY 2010 annual report

Results for the second quarter of fiscal 2011 (six months to August 31) showed revenues of $546 million, up 27% on the comparable 2010 period. The percentage distribution between subscriptions and training/services was unchanged. Gross profit margin was steady at 84%, but the operating margin improved significantly to 18%, compared with 16% in 2010. Net income for the six month period was $72 million (up 52%), or $0.37 per diluted share. President and CEO Jim Whitehurst stated that ‘Based on the strong first half results, we believe Red Hat remains well positioned to finish fiscal 2012 as the first billion dollar open source software vendor’. Q2 FY 2011 earnings news release

During the second quarter earnings conference call Jim Whitehurst commented on the upsell percentage achieved in the second quarter, when all  of the top 25 deals up for renewal were not only confirmed but delivered a total value increase of 50%. He believes that there is a fundamental shift happening in the way IT is being delivered, and that ‘open source is in the sweet spot’. CFO Charles Peters  commented on the geographic distribution of revenue: 42% came from outside the US, a slight de rease in the ratio compared with 2010. Q2 FY 2011 earnings conference call transcript

How safe is Red Hat in its ‘sweet spot’? In the operating systems market irt comptes with large and well-established companies like Microsoft (MSFT), Novell (a subsidiary of privately-held The  Attachmate Group), and Oracle (ORCL). Hewlett-Packard (HPQ), IBM (IBM) and Unisys (UIS) all offer the UNIX operating system, and Oracle has its own Linux open source projects. software companies VMware(VMW) and Citrix Systems (CTXS) are competitors in the area of virtualization. Red Hat always faces the potential threat of intellectual property infringement claims, and admits that a number of its key competitors have better distribution facilities than it does itself. However, it continues to experience broad demand for its open source solutions and has just posted its fourth consecutive quarter of accelerating year-on-year revenue growth. If Red Hat can continue to expand its product offerings and persuade new customers of the cost, development speed and flexibility of the open source model, it will be well-positioned to maintain its current progress.