A Bright Road Ahead After a Solid 3Q

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

Red Hat (NYSE: RHT), the provider of open source solutions recently posted its 3Q13 results. They were definitely better than what I had expected in this global challenging environment. The results came up as a New Year bonanza for investors. The company's revenue saw a jump of ~18% y/y at ~$344 million. The company was mainly benefited by its growth in billings which was up by ~18% y/y against the consensus forecasts of 16%. The subscription revenue also posted growth of ~19% y/y at ~294 million and it again outpaced overall revenue growth. I believe the company's strong product portfolio has helped it to achieve this level of growth in billings and subscriptions. Another favorable aspect in the results was that its top 25 deals were all renewed in this quarter at ~120% of the original value.

This proves Red Hat's capability to deliver the best of solutions to its customers over time. Red Hat is generating most of its revenue from its RHEL platform and its middleware segment, though I believe Cloud adoption will be the key factor for the company to accelerate its revenue gain in the next 1-2 years. Let us have a look at Red Hat's Cloud strategies in detail. 

All Eyes on Cloud

Red Hat has always been known as an operating system company, however since last few years it is re-inventing itself as a Cloud software company. But, many companies are still not ready to automate their processes with Cloud technology, as it requires a lot of technical as well as organizational changes. With new technologies emerging every year in Cloud computing, the companies need such solutions which help them to upgrade their processes from time-to-time. In such a scenario, Red Hat has a strategy to deliver such solutions to enterprises which provide them the flexibility to adopt the innovations in Cloud computing.

To solidify its position in Cloud computing, Red Hat recently launched a new range of open source solutions for hybrid Clouds aimed at reducing the complexities of the companies while moving to hybrid Cloud computing. It includes Open Shift Enterprise PaaS Solution, Hybrid IaaS Solution, Cloud with Virtualization Bundle, and Red Hat Storage. The one which is liked the most is the Open Shift Enterprise PaaS, which is the first ever solution that offers on-premises deployment within data centers or Clouds. It offers complete flexibility to the enterprise in the choice of Cloud along with the support of full stack and open source solutions. It is now available in North America, UK and continental Europe and will be expanded globally in 2013. According to Gartner, the PaaS revenue is expected to reach ~1.8 billion in 2015. And Red Hat will definitely gain out of this opportunity with such strong solutions in place.

This solution from Red Hat will directly compete with VMware's (NYSE: VMW) Spring and Cloud Foundry. I feel Red Hat Open Shift will attract more developers because VMware doesn't support the on-premises version of its solution. Also the Open Shift supports the use of Java Enterprise Edition whereas Cloud Foundry does not offer this platform. These are the areas where VMware solutions lose the battle against Red Hat. Moreover most of the public Cloud providers are building their solutions on the open source technology which comes from Red Hat. Even Microsoft (NASDAQ: MSFT) has all the elements to build a complete Cloud structure, but it is too expensive as compared to Red Hat's open source structure. As a result, Cloud Linux now has a ~80% market share whereas the Windows Cloud holds a very small portion. This gives Red Hat a clear edge over its competitors in the public Cloud computing. 

After Private and Public Clouds, Hybrid Cloud is the next major technology which all Cloud providers want to excel in. And both, VMware and Microsoft have their dominance in Hybrid Cloud computing. VMware recently extended its partnership with Hitachi to encourage the hybrid Cloud technology. Under this deal, Hitachi will offer vCloud data center services in its Cloud solution which is expected to be launched in 2013. Also it will include VMware services in its premium support solutions. The companies will together market vCloud services in the Cloud market to speed up the distribution of reliable hybrid Cloud solutions. This move will further expand VMware's presence in the hybrid Cloud computing segment.

On the other hand, Microsoft has been a late entrant into the Cloud market but still holds a favorable position to drive the competition. The company in its last update on Azure merged IaaS and PaaS capabilities to from a single Cloud platform. The company is also offering Linux based operating systems on its Azure solutions which were once a competitive threat to Microsoft. Now even it has realized that Cloud computing is majorly Linux based and an open source matter. So it agreed upon another operating system to be technically sound in the industry. This again was a favorable move for Red Hat enhancing its leadership position in Linux based Cloud solutions. 

Along with its positive 3Q13 results, Red Hat also announced its acquisition of ManageIQ for ~104 million. ManageIQ being an automation software to the Enterprises is a perfect fit for Red Hat's growing portfolio in Cloud. The acquisition also supports the company's strategy to promote its open-source software with the public Cloud services like Amazon. This deal provides Red Hat some additional tools to fight with VMware for the Cloud management arena.

Besides this, the company is looking forward to one of its major releases in 2013. Red Hat targets at a new version of its operating system after every three years and year 2013 will witness the release of version 7 of Red Hat Enterprise Linux (RHEL). It will be launched with a new interface with several new exciting features such as GNOME 3 which will be a new experience for the users. There are around 1 million servers awaiting the launch of this new version which creates a huge opportunity for Red Hat. Looking at Red Hat's above average growth profile and its strong competitive position I expect its billings and subscription revenue to grow in a range of ~18-20% in FY13. Moreover, its growing Cloud segment will further enhance its portfolio and will increase the total revenue. 


ShwetaDubey has no positions in the stocks mentioned above. The Motley Fool owns shares of Microsoft and VMware. Motley Fool newsletter services recommend Microsoft and VMware. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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