Red Hat's Bet on OpenStack Starts to Pay Off

by Ostatic Staff - Sep. 23, 2015

“There’s few of us out there who are growing like this...Salesforce might be one of the few others,” Red Hat CEO Jim Whitehurst told Barron's after the company reported 17% year-over-year growth and its ninth straight quarter of beating analysts' expectations this week.

Many observers missed one of the most important aspects of the earnings report, though, which is that Red Hat's OpenStack cloud computing effort is beating its own expectations. The huge news about the quarter was that the company reached $100 million in terms of its annual cloud computing revenue run rate. It had forecasted hitting that milestone in Q3, not Q2.

Red Hat has made a name for itself as the only U.S.-based public company that is exclusively focused on open source, and it has proven that its Linux-focused strategy is very profitable. In fact, the company was the first open source-focused company to hit the $1 billion revenue mark, primarily based on its Linux-focused business. Wall Street had been questioning where else the company might be able to generate revenues in the future, and the answer is cloud computing.

Red Hat has done well getting its corporate clients to renew subscriptions for its Linux support offerings, but growth had slowed at the company and cloud computing is all the rage now, with OpenStack rapidly gaining momentum. 

The question everyone had been asking is whether Red Hat can find the same kind of success in the cloud computing arena as it has found on the Linux front. The key to finding cloud success will be support, and support is what Red Hat is good at. Red Hat's business model has always been organized around charging for subscription support and its cloud offerings are also subscription-based. Companies deploying OpenStack need support.

If you listen closely to Red Hat executives, they characterize OpenStack as possibly driving the next 10 years of revenue growth for the company. That's no small feat for a cloud computing platform that has its roots in open source.