Red Hat flips its lid for open-source computing tools. The company dominates the market for Linux, the open-source computer operating system (OS) for enterprise computing infrastructure and applications. In addition to its Red Hat Enterprise Linux OS, the company's product line includes database, content, and collaboration management applications; server and embedded operating systems; and software development tools. Red Hat also provides consulting, custom application development, support, and training services. The company's business model is a mix of providing free, open-source software paired with subscription-based support, training, and integration services. In 2018, Red Hat agreed to be acquired by IBM for about $34 billion.
Change in Company Type
If acquired by IBM, Red Hat would continue to operate independently as a distinct part of Big Blue's cloud division. Its open source software concerning Linux-based software (the preferred computer language for cloud applications) would help IBM develop its hybrid cloud computing services. IBM has fallen behind companies such as Amazon, Google, and Microsoft, in the race to provide cloud computing services. The addition of Red Hat would enable IBM to offer a software-centric approach to hybrid clouds. IBM and Red Hat have partnered to offer software services for about 20 years. The deal was expected to close in late 2019.
Red Hat makes two types of software. One is for running computing infrastructure and the other is for developing applications and managing cloud environments. Subscription revenue for infrastructure software accounts for about two-thirds of the company’s sales.
Infrastructure products include the flagship Red Hat Enterprise Linux software, which generates the majority of the company’s revenue. It is an operating system platform that runs applications on a broad range of hardware and is used in hybrid cloud environments. The Red Hat Satellite, system management software eases deployment and management of Red Hat infrastructure across hybrid cloud environments. Red Hat Enterprise Virtualization software allows customers to run multiple operating systems and applications over common hardware.
The company’s application-related products generate about 20% of sales. The segment’s products include Red Hat JBoss Middleware, which are offerings for running and managing applications across hybrid cloud environments; Red Hat Mobile Application Platform, software development tools for enterprise mobile applications; and Red Hat Storage, software for managing large, unstructured or semi-structured data at using commodity hardware in hybrid cloud environments.
Red Hat is based in Raleigh, North Carolina and has significant facilities in the US. Around the world the company has about 95 offices in 35 countries.
About 55% of Red Hat's revenue comes from customers in the US with a fifth from EMEA customers, and about an eighth from Asia/Pacific clients.
Sales and Marketing
Red Hat sells directly to users through its sales staff and website. Other sales channels include certified cloud and service providers, distributors, embedded technology partners, independent software vendors, systems integrators, and value-added resellers. Makers of computer hardware also sell systems with Red Hat software installed.
The company sells through yearly or multi-year subscriptions.
Red Hat's customers are in a variety of industries, including financial services, government, healthcare, retail, telecommunications, and transportation. US government agencies account for about a 10th of revenue.
Red Hat’s financial performance kept climbing in 2018 (ended February) with increases in revenue, profit, and operating cash flow. The numbers: $2.9 billion revenue, up 21% from 2017, $259 million profit, up 2%, and $923 million in operating cash flow, up from 18%.
Revenue from Infrastructure-related subscriptions rose 15% in 2018 from 2017 due to higher volumes sold. Revenue from Application Development-related subscriptions jumped 42% driven by Red Hat JBoss Middleware and the Ansible, OpenShift, and OpenStack offerings. Sales grew in all major geographic regions led by a 27% rise in EMEA.
Profit inched 2% higher as Red Hat set aside money to comply with the US Tax Cuts and Jobs Act of 2017. The company’s income before tax was about $475 million in 2018 compared to $320 million in 2017.
Cash generated by operations increased on higher operating income and billings. The company repurchased $237 million worth of its stock in its 2018 fiscal year.
Although Red Hat originally offered support for consumer-oriented Linux products, the company shifted its focus entirely to the more lucrative business of supporting and servicing Linux technologies in enterprise environments. Companies have embraced open-source platforms for back-end tasks such as managing data center operations including virtualization, server and data management, and enterprise application integration.
The trend of companies moving large amounts of data to hybrid cloud systems matches up with Red Hat’s strengths in deploying and management software and application development. Companies also have trended toward open source software and away from proprietary technologies.
Red Hat is betting that container technology will be a growth engine for the company. Container-based applications provide more flexibility in that they can work in multi-cloud and hybrid cloud environments. Red Hat’s recent acquisitions, including that of CoreOS in 2108, strengthened the its container offerings.
Mergers and Acquisitions
In 2018 Red Hat acquired NooBaa, a startup developing software for managing data storage services across hybrid and multicloud environments. NooBaa can enable data to be written to one place, or move it as needed for viewing the data across multiple environments. The technology augments Red Hat's hybrid cloud offerings.
Also in 2018 Red Hat acquired CoreOS, developer of Kubernetes and container-native technologies, for $250 million. The deal plays into Red Hat’s container strategy to help customers build any application and deploy it in any environment.
Red Hat acquired Permabit Technology Corp., an open source provider of software for data deduplication, compression, and thin provisioning, in 2017. Adding Permabit technology to the Red Hat Enterprise Linux platform is to permit more efficient storage options.
In 2017 Red Hat also acquired Codenvy, a developer of tools for creating cloud software. The deal continued Red Hat's effort to expand its portfolio of tools for developers of cloud software. Red Hat is to make Codenvy a part of its OpenShift.io development environment for building hybrid cloud services.
In 2016 Red Hat acquired 3scale, a provider of application programming interface (API) management technology. 3scale strengthens Red Hat's API-related portfolio of JBoss Middleware, OpenShift, and Mobile Application Platform.
Red Hat acquired Ansible Inc., a provider of IT automation tools, for $126 million in October 2015. Red Hat expects that the combination of Ansible's tools with Red Hat's portfolio will help users get to lower costs in deploying and managing cloud-native and traditional applications across hybrid cloud environments.
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Employer Type: Publicly Owned
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