When Red Hat CEO Jim Whitehurst said in 2008 he planned to get the company to $1bn in annual sales by 2011, up from $500m at the time, there were those who scoffed. But as the open source vendor just closed its fourth quarter with sales of $244.8m, up 25%, it’s almost certain he will achieve his ambition, even if the firm’s first billion-dollar year will actually be its fiscal 2012, not 2011. Who’s counting?
As Whitehurst said at the time of the recent earnings announcement: "With record bookings and billings in the fourth quarter, we are on a run rate to become the first pure-play open source company to achieve a billion dollars in revenues next fiscal year, a milestone achievement for Red Hat and the open source community."
As well as the revenue milestone, Red Hat’s profitability has enabled it to squirrel away over a billion dollars in cash and other investments, while its market capitalisation on Nasdaq has soared to over $8.7bn. The firm has proven that it is possible for an open source company not just to survive, but to thrive.
CBR caught up with Whitehurst in London recently. Here are some of the highlights from our conversation, but see below for a link to the entire podcast interview.
What first attracted you to Red Hat?
Having come from a big, established company, I was enamoured with going to work for an attacker – not have to worry about an installed base but do what’s right for the customer and really drive things forward. The second thing was, I was looking for a company that had a lot of passion, where people are excited to come to work.
You left Delta Airlines and started as CEO in January 2008. What were some of your early observations about Red Hat, and what were some of the things you perhaps thought you needed to do first?
There were a lot of positives – the passion, the energy, how bright the people were, which is just incredible to see. As for my areas for development, very quickly you recognise that Red Hat had great technologies, but if you looked at our customer base it was primarily technically sophisticated customers – customers who use technology for competitive advantage therefore hire PhDs in computer science. Those people appreciated our technology and were big users – great initial customers to have.
What we had done a less good job of was branching out and talking about the business benefits of our technology, to the Delta Airlines of the world versus the stock exchanges of the world, and getting them as our customers. So we spent a lot of time trying to achieve the full potential of the categories we’re in, building out channels, messaging for mainstream markets.
I think we’ve done a great job of that. We’re nearing 20% market share of the server OS market, and our middleware portfolio has continued to expand and grow at tremendous rates. I wouldn’t say we’re done but we are achieving the full potential of our existing businesses, which has given us the opportunity then to invest in a whole new set of areas, whether that’s virtualisation or moving into the whole cloud management toolset and other things.
When you joined, the company had already bought middleware firm JBoss. The acquisition was widely considered to have been poorly handled. Were you happy with what you saw in terms of how JBoss had been made part of Red Hat?
Bluntly no. This is a learning lesson and it was easy for me to come in with hindsight, but I think we looked at JBoss when we acquired it and said we have a way we go to market, and we’ve been really, really successful, so let’s take this technology and go to market that way.
And I think what we ran into by the time I had gotten there is that we recognised, wow, the way you sell middleware is different from the way you sell operating systems. It’s a different buyer and a different way that they buy. It’s a different time-cycle to buy. And so I had the benefit of seeing the problems and getting the chance to fix some of those.
We have overlaid sales forces, we very quickly bought a services company in the US and we’re expanding that globally, because middleware is a services-led sale. So no, I wasn’t happy with where it was but it gave me the opportunity to turn course a bit and now it’s tremendously successful.
Is business intelligence a gap in the middleware portfolio?
I think ‘gap’ might be a strong word. When I think of a gap I think of a hole with a piece missing. I think BI is a logical extension from a middleware portfolio. We made an investment in [open source BI firm] Jaspersoft so we’re good partners with those people. So at some point in the future having a BI offering could be a nice way to augment what we have. Certainly it’s something that I think our core customer uses and likes and is interested in, so I think that’s an opportunity for us in the future.
In November you bought Makara for cloud management. Tell us about your cloud strategy.
There will be a lot of specifics at the Red Hat Summit in May, but in general we are excited by the potential of cloud. I know it’s a fuzzy term, but being able to run workloads in multiple different deployment models, being able to take advantage of elasticity – all of those wonderful things you hear around cloud.
Our biggest concern is if applications aren’t mobile, i.e. if you can’t move an application among clouds, into your data centre, out of your data centre, most of the promises of cloud go away.
If you were offered a job in the airline industry again, would you take it?
Definitely not! It’s much too fun in the technology industry.
Don’t miss the full 35-minute podcast interview with Jim Whitehurst exclusively on www.cbronline.tv.
The Red Hat story
Red Hat’s beginnings date back to 1993, when Bob Young incorporated the ACC Corporation, a catalogue business that sold Linux and Unix software accessories. In 1994 Marc Ewing created his own Linux distribution, which he called Red Hat Linux. Young bought Ewing’s business in 1995, and the two merged to become Red Hat Software, with Young serving as CEO.
The company went public on 11 August 1999 – right at the peak of the dot-com euphoria when goodwill was being lavished on all technology companies – and it saw the eighth-biggest first-day gain in the history of Wall Street. Gartner Group described Linux as the "hype du jour" in 1999, and Red Hat was there to capitalise on that hype.
Matthew Szulik succeeded Bob Young as CEO in November 1999. He quickly built a reputation as a visionary, passionate about the open source model. When he kicked off the first-ever Red Hat Summit conference in 2005 in New Orleans, he gave new meaning to the phrase ‘preaching to the choir’ when he took to the stage for his keynote dressed in a preacher’s robe and with a gospel choir in tow.
Szulik then led the Joyful Choir of New Orleans in a gospel-style song that summed up his feelings about the world’s reaction to Red Hat over the past several years: "I’ve been lonely, mistreated, been misunderstood," he sang. It was clear why. By this time Red Hat’s share price had fallen from over $160 to under $20 on Nasdaq.
Szulik’s sudden resignation from the post of CEO for "personal reasons" at the end of 2007 was a surprise. But if that was unexpected, the announcement of his successor was even more of a shock. Stepping into Szulik’s rather large, open source shoes came Jim Whitehurst, who not only hadn’t worked for an open source company before but was hardly a tech-industry veteran – he was previously COO at Delta Airlines, and before that CEO of Boston Consulting Group.
Since he joined Whitehurst has grown annual revenue from around $500m a year to an expected billion dollars for its current fiscal year, and the company’s market cap has grown to $8.7bn. Today, Red Hat offers customers not just its Linux distribution, Red Hat Enterprise Linux, but middleware, security, virtualisation and more.
Yet despite the apparent success, the company is not without its critics. In February JP Morgan downgraded its rating for Red Hat’s stock to ‘underperform’ from ‘neutral’. Analyst John Difucci questioned the business’s cash flow growth projections and whether Red Hat is really a "meaningful player" in the virtualisation space.
Virtualisation is certainly not the firm’s strongest suit, but few can deny that in the open source operating systems and middleware space, Whitehurst has done a brilliant job growing Red Hat into the most successful open source independent, and a more than credible competitor to many proprietary incumbents.