Growth Story for Open Source Leader …Continued

Ranu is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Despite macroeconomic uncertainty and currency headwinds, Red Hat (NYSE: RHT) reported strong Q3 FY13 financial earnings. The company generated double digit revenue growth where its billings increased by ~ 18% on a y/y basis to $378.8 million. The major revenue drivers were “Renewal Subscription” (up 22% year over year) and “Training & Services” which showed remarkable growth because of the availability of new online classes in North America and open enrollment registration in Europe.

Initiatives in Cloud Computing

Seeing the increasing demand of PaaS this year which IDC quotes as “Industry Outburst”, Red Hat recently launched OpenShift Enterprise which enables enterprise customers to change Linux administrator into a Cloud administrator. OpenShift is built on RHEL, JBoss, Red Hat Storage and Red Hat Enterprise Virtualization (RHEV) technologies and its key differentiator would be its capability to be installed within the customer’s data center or on hybrid clouds within a heterogeneous environment.  Though the PaaS market is smaller in comparison to SaaS/IaaS, recent moves by VMware (Cloud Foundry) and Red Hat (OpenShift) will surely escalate market demand. Added to it, Microsoft’s recently increased Windows Server prices and its shift to dual-processor pricing should help Red Hat in gaining market share through consumer shift.

Discussing Red Hat’s releases in IaaS, the company recently launched OpenStack with Folsom. It will give its clients the capability to raise clouds as well as act like a pseudo cloud service provider. Additionally, it allows enterprise and service providers to make open source IaaS a part of open hybrid cloud. On the other side, to strengthen its cloud portfolio, it recently acquired Manage IQ. It will help Red Hat in monitoring cloud usage, coordinating complex cloud administration duties, and provide mechanisms for internal billing and governance. All these acquisitions have increased the company’s addressable market opportunity.

A Focused & Strong Competitor

Another industry peer VMware (NYSE: VMW) has also expanded its offerings with virtual infrastructure automation and management products for heterogeneous infrastructure challenges. Even though it is facing tough competition from Red Hat in the virtualization segment, VMware’s pricing went down by a mere 1%. Added to it, VMware was able to retain 100% customers using it as a primary vendor last year and is seeing an improvement in Enterprise Licensing Agreement renewals. The company showed a remarkable growth rate of 20% (y/y) in 3QFY12 revenues and the post Hurricane Sandy era could further benefit the company in luring more customers with increasing focus on disaster recovery and datacenter Investment.

Analyzing its recent Pivotal Initiative with EMC (NYSE: EMC), I feel it will allow VMware to remain sharply focused on evolving software defined datacenters and increase its profitability via load-shedding of non-core assets. Pivotal Labs is the same company that EMC acquired last year and this application developer company makes collaborative project management tools. I think the strategy behind this spin-off is an advanced version of Cloud Foundry PaaS with Pivotal Lab Advantages typically using its Pivotal Tracker capabilities. Greenplum and Certas on the other side should be providing data analytics capabilities at the backend.   

Investor’s Takeaway

Red Hat is continuously widening its customer reach, including expansion in the indirect distribution channel, geographies and its focus on users of Linux unsupported versions. Its recent move into Middleware, Virtualization and Storage supports the fact that this company is diversifying intelligently beyond its successful and core RHEL operating system. Also I see further monetization possibilities if it continues its capitalization on the UNIX to Linux shift in BRIC countries.

Apart from the strategic growth, Red Hat has also seen robust growth in financial services where it has captured 30 deals across large banks, insurance companies which account for 23% of worldwide spending. The company has repurchased about $52 million worth of shares in 3Q13 and has about $215 million left for further financing activities. I believe that Red Hat is strongly positioned among its competitors to avail the benefits from its multiyear growth phase by increasing footprints in its installed base and expanding more into middleware, virtualization and cloud computing. 

I do not own shares in any of the above companies mentioned in this piece. 

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