Red Hat’s cloud products continue to grow faster than the company itself during its fourth quarter, and while the price tag attached to its $250 million bet on CoreOS during the quarter surprised more than a few cloud watchers, CEO Jim Whitehurst believes the deal gives Red Hat a strong path forward as companies adopt containers as part of their software development strategies.
The cloud-based subscription version of its flagship Red Hat Enterprise Linux operating system and newer products like OpenShift and Ansible pushed Red Hat to record $772 million in revenue during its fourth quarter, a 23 percent jump compared to the same period a year ago and well beyond analyst expectations of $762 million. Like a lot of tech companies, Red Hat took a substantial charge during the quarter to bring money back to the U.S. from overseas operations after new tax laws passed in December, but excluding that charge, net income was $167 million, or $0.91 a share. Analysts were expecting $0.81.
Red Hat makes money selling subscriptions to Linux-based enterprise software products, such as the Red Hat Enterprise Linux operating system, DevOps tool Ansible, and OpenShift, a container-management product. Like many companies born before the era of cloud computing, Red Hat has attempted to shift its revenue mix away from products designed for on-premises data centers toward products built to run in public cloud provides like Amazon Web Services, or at least for hybrid cloud computing.
There’s still work to be done, but that shift appears to be in motion at Red Hat. During its 2018 fiscal year, revenue from infrastructure-related offerings (like RHEL and the cloud version of RHEL) grew 15 percent to $2 billion. But sales of the application development-related products are growing much faster, up 42 percent compared to last year to $624 million.
In an interview with GeekWire following the company’s earnings call, Whitehurst held up “the three horsemen” of Red Hat’s application development and emerging businesses: Ansible, OpenShift, and cloud infrastructure platform OpenStack. Red Hat added 650 OpenShift customers during the fourth quarter and Whitehurst singled out Ansible’s performance as “on fire,” while noting that its OpenStack product continues to grow among telecom providers despite falling short as an overall enterprise-tech movement a few years ago.
Red Hat made a substantial move during its fourth quarter, snapping up container-management startup CoreOS for $250 million, a price that raised many an eyebrow when discussed over cloud tech happy hours.
In general, Red Hat avoids big deals because big companies tend to have a fair amount of intellectual property, and it’s tricky for an open-source company like Red Hat to buy closed-source software and release it as open source, Whitehurst said.
“We buy influence in communities and talented engineering teams,” he said. “There are times when these open-source communities have one company that has key contributors, and in those cases we’ll look to buy,” he said, citing the 2011 Gluster deal as an example.
Whitehurst acknowledged that the CoreOS deal was on the larger side, but thinks the payoff will be worth it.
“For Red Hat, it increases our likelihood of success in the container platform, and that is a many billions-of-dollar-opportunity for us.” There was other interest in CoreOS around the time Red Hat bought the company, but there wasn’t a bidding war, he said.