Some intriguing data behind Red Hat's 29 percent growth

Red Hat announces strong results for its fiscal second quarter, demonstrating the continued power of open source.

Matt Asay Contributing Writer
Matt Asay is a veteran technology columnist who has written for CNET, ReadWrite, and other tech media. Asay has also held a variety of executive roles with leading mobile and big data software companies.
Matt Asay
3 min read

Red Hat continues to impress. Coming off its already-strong first quarter and higher guidance for its fiscal year, Red Hat announced on Wednesday 29 percent year-over-year growth for its fiscal second quarter and 5 percent growth over its first quarter.

Total revenue for its second quarter hit $164.4 million. Both revenue and profit came in above analyst expectations.

This was the first time in years that Red Hat's second-quarter billings exceeded its first quarter billings. Not bad for a company that gives away free software.

Importantly, Red Hat appears to be doing longer-term deals, as its total deferred revenue balance was $496.9 million, growing 32 percent year-over-year and 1 percent sequentially. This would suggest that Red Hat customers are increasingly comfortable making a long-term bet on Red Hat's future. Indeed, on the analyst call, Red Hat Chief Financial Officer Charlie Peters indicated that the average booking for Red Hat is 24 months and that 36 percent of its subscriptions are for a term greater than one year.

In selling longer-term deals, Red Hat is successfully blocking competitive pressure from Novell, Microsoft, and other companies that might want to cut into its accounts.

On the earnings call, Peters and CEO Jim Whitehurst identified several key trends:

  • Strong renewals and upsells across its customer base.
  • Red Hat's middleware business is growing at twice the rate of the platform business. Middleware growth is driven by several factors: leveraging RHEL for cross-selling opportunities, increasing embedded JBoss opportunities, and a rising number of companies standardizing on JBoss as a strategic platform (rather than merely a point solution), especially as companies' Weblogic maintenance terms come due.
  • Each of Red Hat's top-25 accounts due to renew in its second quarter did so, and at roughly 120 percent of subscription value.
  • Of Red Hat's top deals, 17 were over $1 million and two were over $5 million (billed on an annual basis, which I interpret as $5 million per year, which would be very impressive).
  • Nearly half of Red Hat's top deals came from new customers.
  • There was a major middleware component to roughly 25 percent of Red Hat's top deals in the quarter, and several of its larger middleware deals were displacements of proprietary incumbents.
  • Subscription revenue was 83 percent of Red Hat's revenue for the quarter, and came in at a 93 percent margin (consistent with past quarters).
  • The channel delivered 52 percent of Red Hat's bookings in the quarter and is still expected to top 60 percent of the company's revenue in the future.
  • Revenue was 58 percent from the Americas, 25 percent from the European/Middle Eastern/African region, and 17 percent from the Asian/Pacific region.
  • No material revenue is expected from Qumranet this year.
  • The falling dollar hurt Red Hat's earnings to the tune of $1 million in the quarter.
  • (An analyst asked a question as to a new business/revenue model for Fedora as a way to stave off CentOS and other leakage to free alternatives to RHEL, to which Red Hat replied:) Red Hat has no plans to introduce a paid version of Fedora and intends to keep it free and 100 percent open source.
  • Government and telecom markets have grown to push financial services into a lesser third-place role, making up 10 percent of Red Hat's revenue. Peters stressed that Red Hat has been renewing much of its financial services customer base, often with three-year terms and doesn't see the recent trials weighing negatively on Red Hat's business.
  • When asked whether JBoss IT spending is "more discretionary" than Red Hat's core platform (RHEL) business, Whitehurst countered that he didn't see customers viewing middleware as discretionary. JBoss, in other words, is getting the same spending priority as RHEL.

In sum, Red Hat is doing exceptionally well and has finally turned JBoss into a thriving asset rather than a Marley's ghost come back to haunt it for clutching too eagerly at its past. Everyone in open source benefits when Red Hat does well. And Red Hat is demonstrating that it is doing very, very well.