Part 2 [Part 1 is here.]
Red Hat’s CEO Jim Whitehurst wants to get Red Hat to the $1bn revenue mark by 2011. So has the ex-airline industry executive got what it takes? Jason Stamper reports.
If incoming CEO Whitehurst lacked open source credentials he was not lacking in credibility: he took the COO role at Delta Airlines just weeks before it was forced into declaring bankruptcy, and he was credited with helping get the company back on track – or at least to get back in the skies.
Whitehurst: the right man for the job? Image (c) CBR 2009; Do Not Copy.
So why did the board want someone like Whitehurst? “The company is at an interesting size,” Whitehurst told CBR on a recent trip to London. “We’re growing very rapidly, doing over $500m in our last fiscal. The board recognised the need for someone who comes from a large company to drive Red Hat forward, and who will put in management reports, processes and so on. We’ve produced the first strategic plan the company has ever done.”
Click continue reading for The 451 group analyst Matthew Aslett’s view of Whitehurst’s strategy, and how CBR sums up Whitehurst’s progress so far.
“When you’re growing at 30% and profitable, there’s not been a huge need for planning,” says Whitehurst. “But you have to ask yourself where you want to be in five years’ time. In some senses we have an embarrassment of opportunities; how many offices could we open in Europe, Asia, South America? But there is only a certain amount of dollars that you can invest and still manage it well.”
So what is Whitehurst’s big plan? “We’re building out our sales processes and business development capabilities,” he says. “We need to get better at explaining our proposition. When we compete for deals where it’s all about ‘feeds and speeds’, we win those. Companies that use technology for competitive advantage? We do very well there.
“We do very well on Wall Street. We don’t do as well on ‘mainstreet’ – amongst customers who might not consider that they are using technology for competitive advantage,” Whitehurst says. “They have a different set of buying criteria: perhaps it’s more key for them that the technology integrates well with other products, or that their preferred systems integrator has good skills in that particular technology.”
It’s clear that Whitehurst sees the ability for Red Hat technologies to sit comfortably alongside the array of other products in the typical enterprise as pretty vital. Just this month, Red Hat announced an interoperability agreement with one of its closest rivals: Microsoft. Saying that ‘Customer demand has spoken’, Red Hat announced that it will certify Microsoft Windows Server as a guest atop the Red Hat hypervisor, while Microsoft reciprocally will certify Red Hat Enterprise Linux guests atop the Windows HyperV hypervisor.
“We’re going to forge stronger relationships with other ISVs [independent software vendors] as well as with major SIs [systems integrators],” Whitehurst explains. “We need to build broader commercial capabilities if we are to get from Wall Street to ‘mainstreet’.”
One year anniversary
Around a year into the job, and Whitehurst seems to be settling in rather well. In its latest quarter announced on December 22, it posted sales of $165.3m, up 22%. It makes its money from companies paying subscriptions, which provide them with things like training and up to 24×7 technical support. Its subscription revenue was up 17% year over year.
“Purchasing decisions for IT have changed dramatically for CIOs,” Whitehurst said at the time of the results announcement. “In this budget-constrained environment, IT professionals are adopting open source and more specifically Red Hat to save money and enhance their competitiveness.”
CBR asked Matthew Aslett, an enterprise software analyst at The 451 Group with a close eye on open source, what Red Hat’s latest results say about the firm and about Whitehurst. “Red Hat remains the standard bearer for commercial open source software vendors, and continues to impress with financial growth that shows little sign of being hit by current economic conditions,” Aslett says.
“The company’s subscription model does help to spread the impact of fluctuating demand, however deferred revenue growth has slowed in recent quarters. Nevertheless the company appears to be one of a handful of vendors with the potential to not only weather the storm, but also to thrive.”
“This is in part thanks to the steps Red Hat has taken to diversify its focus,” Aslett continues. “Red Hat noted in announcing its Q2 results that the middleware business is growing twice as fast as Linux business, and although JBoss will still not represent a reportable segment of the company’s revenue this year, Red Hat is now beginning to drive significant revenue from the middleware unit.”
In announcing its latest results, Red Hat conceded that JBoss middleware has a longer sales cycle than its Linux business, something that Aslett believes the firm is working on: “The acquisition of systems integration and consulting firm Amentra will help it deliver better value to JBoss customers,” he says, “and Red Hat has shown that it will be aggressive in targeting existing proprietary middleware users with its MASS migration programme.”
So does it seem that Whitehurst was a good choice? “Eyebrows might have been raised when Red Hat looked outside the technology industry for a successor to Matthew Szulik,” Aslett notes, “but under Whitehurst’s leadership the company has continued to play to its strengths and he has shown himself to have a solid understanding of both Red Hat’s business model and its open source principles.
“Whitehurst also has aggressive growth targets for the company — 50% of server operating system market share by 2015 and 50% of the entire middleware market by the same year, as well as $1bn in revenue over the next three years,” Aslett notes. “Meeting these targets is probably the biggest challenge that faces Whitehurst and Red Hat. The company will have to be very aggressive and make a number of acquisitions and it will have had to have learnt lessons from the acquisition of JBoss, which posed problems in terms of cultural differences and executive departures,” Aslett says.
Whitehurst is unbowed. “We released more new products in 2008 than in any year in our history,” he says. “Open source ‘commoditises’, standardises, modularises, and it doesn’t lock you in. These are the key values it delivers.
“We think the whole move towards ‘cloud computing’ will work in our favour too,” Whitehurst says. “We’ve been working with customers that have thousands or tens of thousands of x86 servers for quite a while – this is in our wheelhouse. Whether you call it a grid or a cloud I don’t think I care. Amazon’s EC2 [cloud platform] runs Red Hat. You’re going to see more of that.”
Will acquisitions play a stronger part in Whitehurst strategy as he attempts to build it into a $1bn company? “Technology ‘tuck-ins’ could be interesting but really we don’t need technology,” he says. “We need to strengthen our commercial capability. I believe we’re blowing through a straw; I want to at least make it into a pipe.”
CBR Opinion
Whitehurst by his own admission is more of an “operations guy” than a visionary like Matt Szulik. But outlining a strategy that could see the company hit $1bn in three years takes a certain amount of vision too, and things certainly seem to be going in the right direction under his stewardship. Deals like the interoperability agreement with Microsoft prove he and his team are able to put competitive posturing to one side for the sake of customers, and that should help to keep subscription renewals coming in. But it must be said that for the poster child of the open source world to be making under $200m a quarter is pitiful, and shows just how tough it is to get that business model right. As Whitehurst says, “It’s hard to sell free.”
