The man who led Linux seller Red Hat from a newly public but largely unproven open-source company to a force to be reckoned with is giving his office to an executive largely unknown in the software industry.
In a surprise move, Red Hat said Thursday that Matthew Szulik is as president and chief executive on January 1, to be replaced by James Whitehurst, 40, Delta Air Lines' former chief operating officer.
Szulik, who took over as CEO from Bob Young in 1999 just a few months after its initial public offering, said he's stepping down because of family health issues.
"For the last nine months, I've struggled with health issues in my family," and that priority couldn't be balanced with work, Szulik said in an interview. "This job requires a 7x24, 110 percent commitment."
Szulik, who remains chairman of the board, praised Whitehurst in a statement, saying he's a "hands-on guy who will be a strong cultural fit at Red Hat" and "a talented executive who has successfully led a global technology-focused organization at Delta."
On a conference call, Szulik said Whitehurst stood "head and shoulders" above other candidates interviewed in a recruiting process. He was a programmer earlier in his career and runs four versions of Linux at home, he said.
Moreover, Szulik said he wasn't satisfied with more traditional tech executives who were interviewed.
"What we encountered was in many cases was a lack of understanding of open-source software development and of our model," he said. During the interview, he added about the tech industry candidates, "When you take them out of the big buildings, without the imprimatur of Hewlett-Packard, IBM and Oracle, or HP around them, they just didn't hold up."
The surprise move was announced as the leading Linux seller announced results for its third quarter of fiscal 2008. Its revenue increased 28 percent to $135.4 million and net income went up 12 percent to $20.3 million, or 10 cents per share. The company also raised estimates for full-year results to revenue of $521 million to $523 million and earnings of about 70 cents per share.
According to a regulatory filing Thursday, Whitehurst will be paid $700,000 per year with a possible bonus of the same amount. He also will be paid up to $150,000 for relocation from Atlanta, and will be granted options to purchase 500,000 shares of common stock and 175,000 shares of restricted stock.
Whitehurst worked at Delta from 2002 to August 2007; before that, he was at the Boston Consulting Group, Red Hat said.
Red Hat's strategy shift
In his years at Red Hat, Szulik presided over a major change in business strategy. Until 2003, its single product, Red Hat Linux, was freely available as a download, and the company sold technical support. The business depended on converting people who got the free versions into paying customers.
But it changed dramatically to two versions. First came Red Hat Advanced Server, later to become Red Hat Enterprise Linux, available as a support subscription that has to be purchased for each server it runs on. Next was the freely available Fedora, fast-changing, a proving ground for new features before they were fully tested, and coming only with short-term, informal support.
The elimination of the free, supported product angered some--and triggered the eventual founding of rival Ubuntu by . But it's been hard to argue with Red Hat's financial success.
In the quarter ended May 31, 1999, the last before Red Hat's IPO, the company had revenue of $2.7 million. In the most recent, revenue was $135.4 million.
In a parting blog message, Szulik said he's proud of the strides the open-source software movement has made.
"Through our actions, the open source community and the people of Red Hat are defining a modern economic relationship between developer and customer," he said. "Our customers and marketplace are responding, as evidenced by our financials and strong market potential. What was once considered a joke in 1998 no longer is," Szulik said.
Fending off challenges
Szulik has withstood many challenges over the years as his company grew to more than 3,000 employees. Among them:
Novell's acquisition of Suse Linux, combining a well-known software brand with the second-place Linux version and getting a $50 million investment as an endorsement from IBM. Novell struggled financially since the acquisition, however, though it remains the top Red Hat rival commercially.
A legal assault on Linux by the SCO Group, a former Linux seller that acquired a disputed amount of the original Unix intellectual property and sued IBM, arguing that Big Blue broke its Unix contract by putting proprietary Unix code into open-source Linux. The court case has largely fallen apart, and SCO is in bankruptcy court.
The arrival of Oracle's "Unbreakable Linux" initiative, an effort to rebuilt the operating system off Red Hat's publicly available source code and sell support at lower cost. But the database giant hasn't stopped Red Hat's growth, and indeed it was Red Hat, not the database giant, that has remained at the top of the CIO Insight value survey.
Microsoft's intellectual property challenges. The software colossus has tried castigating the free and open-source programming movement, then tried playing nice for a time, and in 2007 reverted to saber rattling with the threat that Linux customers should pay for the Microsoft patents that Microsoft believes the Linux and related open-source software infringes. So far, the customers keep buying, though Linux hasn't made much of a dent on Microsoft's PC dominance.
A 2004 earnings restatement in which the company changed its accounting procedures for when it recognized revenue from its subscriptions.
Red Hat's acquisition of JBoss, which made open-source server software. Red Hat missed financial targets for the acquisition, but in the last quarter it had two JBoss deals worth more than $1 million, Szulik said, and the pipeline for future deals is fuller than it's been.
"The company had to learn how to sell into the application environment. It's a different purchaser of technology," he said of the JBoss software. "There's not the same sense of urgency" compared to operating system purchasing, which often is driven by the purchase of new servers, he said.
Unlike many Linux products that fell by the wayside, Ubuntu remains a rival, but Szulik believes that its sponsor, Canonical, has yet to face the difficult transition into a full-fledged business.
"I think they're a creative packager," Szulik said, referring to the process of gathering and unifying existing open-source products. "There is a big difference in being able to distribute an integrated product for free and getting someone to pay for it. When there is zero expectation of financial remuneration, everything is Hollywood."