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New CEO Must Prove Red Hat's More Than A One-Trick Pony

Jim Whitehurst will have to expand Red Hat's place in the open source community.

When Matthew Szulik stepped down as CEO of Red Hat in December to cope with his wife's illness, the company picked a surprising successor: Jim Whitehurst, the former chief operating officer at Delta Air Lines whose main tech cred seemed to be that he runs loads of Linux on his home PCs.

If Whitehurst is a controversial pick, that might be a good sign for Red Hat, a company that's at a key juncture. It's doing just fine as a quiet company, racking up an overwhelming majority of the businesses that pay to use the Linux server operating system. With 21% profit margins, 40% annual sales growth, and more than a half-billion dollars in the bank, it has proved that selling subscription-based support is a viable business model for open source software. Under Szulik, however, Red Hat shied away from becoming an activist leader of the open source software movement. Now Red Hat needs to prove it's more than Linux, and that means assuming a much larger role than the company--or its CEO--has ever had in the open source community.

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When Oracle in 2006 charged that Red Hat was too slow to fix bugs and issued its own version of Red Hat Linux with the logos stripped out, Szulik responded that it was no cause for alarm. When Novell moved SUSE Linux into a tighter relationship with Microsoft, that was another company's affair. And when Microsoft last year said that Linux infringed on 107 Microsoft patents, even that bombshell was no cause for Red Hat to mount the ramparts and shout out in defiance. Furnishing leadership to the generally contentious ranks of open source developers simply wasn't in Red Hat's plans.

In its early days, Red Hat took so much criticism from open source purists--its goal, egads, was to make money--that the Szulik era was devoted to getting its relationships right. (Szulik remains Red Hat's chairman.) That meant holding no pretensions of speaking for the open source community, dutifully giving back properly to that community, while also getting cozy with its big brother partners, foremost among them Oracle and IBM, which direct much business Red Hat's way when customers want to run databases and applications on Linux.

But Whitehurst won't have to tiptoe around the profit motive. Quite the opposite--he must prove Red Hat can remain a high-growth company. Enterprise Linux alone might be able to keep sales growing at 20% or more for several more years, but investors won't settle for that. Red Hat leaders "aren't aggressive enough given the opportunity to leverage their brand selling other open source products as well as the eventual price compression that comes into many mature categories," wrote Credit Suisse analyst Jason Maynard, in a research note in December.

To Whitehurst, the key to Red Hat's future is to continue to build out its product line--as its acquisition of JBoss middleware did--to make Red Hat a premier open source company with an operating system and middleware stack that can compete with proprietary offerings. Yet for those looking for Red Hat to snap up big open source companies like database vendor MySQL AB (which Sun Microsystems last week said it's buying for about $1 billion), Whitehurst doesn't sound like he's on a wild acquisition binge. "I've told people in my first days here, 'Let's not come up with a whole new set of things,'" he says. "I am a strong believer in focus."

One reason to be cautious of growth by acquisitions is the JBoss deal, which has yet to prove it's worth the $326 million Red Hat paid for it. But Whitehurst says Red Hat's doing even better than the company's sales growth and margins imply, because it depends on subscription revenue and not big up-front licensing fees. Because of multiyear subscriptions, "we have the majority of our revenues already in the bag as we go into the next year," he says. That results in Red Hat's margins "being reasonably understated." Yet at more than 20%, he says, those margins are highly respectable for a growing software company.

Red Hat grew at a rate of 44% in its 2007 fiscal year, up from 42% the year before. It projects revenue for fiscal 2008, ending Feb. 29, of around $522 million, so if its growth rate doesn't fall off a cliff, it will join the ranks of software companies with more than $1 billion in revenue within a few years. The subscriber growth and healthy margins give Red Hat "a degree of freedom" many companies lack, says Whitehurst, one of the reasons he was drawn to the Raleigh, N.C., company.

Above Photo By Bruce DeBoer

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