Red Hat CEO Whitehurst Talks About Slowdown, Virtualization, Linux
In an exclusive interview, Red Hat's Jim Whitehurst opens up about the open source software firm's short-term prospects in troubled times and longer-term opportunities for growth.
Jim Whitehurst Red Hat CEO
Red Hat is one of the few software companies that kept a strong growth trajectory during the 2001-2002 recession. When the company reported results recently for its second 2009 quarter, revenue was up 29% over the same quarter the year before, with ongoing subscription revenue, which tends to renew each year, accounting for $135.7 million, up 24%.
Can one of the first open source companies maintain its position or get stronger in what appears to be the recession of 2008-2009? Four days after this Nov. 13 interview with Red Hat CEO Jim Whitehurst, the company's CFO, Charlie Peters, announced a program to buy back up to $250 million in stock over the next 11 months in a bid to use its cash to strengthen its stock price.
Robert W. Baird equities analyst Steven Ashley said Monday his firm was lowering its projected growth range for Red Hat, currently selling at $10.49. The firm had previously forecast a potential increase to $18, but now pegs that growth at $16. Ashley wrote, "We have become more comfortable that the risk elements around Red Hat will not materially impact future business."
Risks cited included: "competition from Oracle and Microsoft/SUSE; patent enforcement threats from Microsoft; cannibalization of O/S licenses by virtualization; slowing overall growth of the server market; ... and integration risks associated with JBoss. We expect these noise elements to dissipate over time."
InformationWeek editor at large Charles Babcock asked Whitehurst, who's been in place for a year now, about Red Hat's short-term prospects in troubled times and longer-term opportunities.
Q: How is Red Hat faring under these economic conditions?
Whitehurst: Well, the stock is obviously falling. But the business continues to look strong to me. We presented to the board the results of our strategic planning session a week ago. We're executing a lot better against our JBoss [application server, middleware] strength. ... We're very focused on expanding our commercial capability. We engage well with [enterprise] developers. We need to engage more with systems integrators, independent software vendors, and value-added resellers. One of the interesting things about Red Hat is we do extremely well with technology-sophisticated customers. For those customers who buy for ease of use, for solutions that are understood by SIs, ISVs, and VARs, we don't have as high a share as Microsoft.
Q: Are you saying Red Hat will do well in a recession?
Whitehurst: Nobody's finished a full quarter in a recession yet, but we think we'll grow and grow robustly through it. In a downturn, you get customers to think about the cost of the software they're buying. In meetings now, we hear customers saying, 'We've got to take 15% to 20% out of the budget,' customers who weren't interested in discussing savings before. That's especially true in middleware. We're getting a lot of interest in JBoss. JBoss will outperform its proprietary competitors [in the downturn].
Q: Is there value now in having subscriptions instead of new license sales?
Whitehurst: The vast majority of our revenue now is subscriptions. In a downturn, we don't have to go out and scare up a lot of business to replenish the base. Our business model has been my biggest learning curve. Subscriptions are so much friendlier to the customer. The average proprietary company has to get people to buy more licenses. They have to make you upgrade to get new functionality. They stop supporting old versions. Seventy percent of the features they provide go unused. Our biggest competitor is simply people who stop buying subscriptions. When we add new features, it's just a code update under a subscription, not revenue generation for us. It leads to functionality that the customer wants.
Q: I've heard horror stories of customers who inadvertently let their subscription lapse. Their e-mail address changed and they didn't get notice of the deadline. Then they had to go around, updating hundreds of end-user machines to restart the subscription.
Whitehurst: It shouldn't work that way. If there's a lapse, the software keeps running on the machine until the new subscription is in place. We're trying to do a much better job of touching all customers before renewals. We now have a flow chart of how customer renewals are handled. We also have the Red Hat Network for customers with 1,000 or more subscribers. They automatically get updates, bug fixes, and renewals from a satellite server over the network. We're trying to make the renewal process more palatable. It's just the basics of execution.
Q: Can you attract smaller customers by focusing on execution?
Whitehurst: We have the majority of the largest companies in the world running Red Hat to some extent. We have really good relationships with large companies and we're adding in our virtualization and JBoss middleware. Now we need to focus on building our channel partnerships, going down to medium-sized and smaller business. We're making a major push for stronger relationships with system integrators ... to build out the commercial ecosystem. Microsoft built a massive network and it served them well.
Q: What is Red Hat's strategy with virtualization?
Whitehurst: You'll see some really exciting things. It's a key focus for us. We believe virtualization is a key component of the operating system. It's a different point of view from VMware, which wants to sell you a separate layer of software. Fifteen years ago, everybody bought a separate TCP/IP stack. Now it's just built into the operating system. We've closed on Qumranet, which includes all the maintainers of the KVM hypervisor [now part of the Linux kernel]. On YouTube, you can see an AMD/Red Hat demonstration of Qumranet being migrated from an AMD server to an Intel server, running a live video and never dropping a frame. Live migration doesn't normally happen unless you're migrating between servers that you bought all on the same day [servers with identical chipsets]. It's not a product yet, but we demonstrated it could be done. We'll be offering both server and desktop virtualization. The first use-case of server consolidation is just the tip of the iceberg. There's a long-term use for grids of servers running large numbers of desktops. We plan to be the leading virtualization vendor based on the server operating system. ... We'll have a clear and compelling value advantage.
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