Red Hat: First $1 Billion Open Source Company

Red Hat's revenues grew 25% in fiscal 2012, allowing it to cross the $1 billion mark at the end of its fiscal year on Feb. 29, making it the first open source company to reach that mark.

When Red Hat was founded in 1993, the value of an open source company was an unknown quantity. The rapid adoption rate of open source, such as the Apache Web server and Linux inside companies was still a remote phenomenon. Whether Red Hat would survive long or thrive was a periodic debating point in public forums.

In addition, because Red Hat produces GPL open source code, other parties could pick up its work--and did. In 2004, CentOS collected Red Hat code modules and compiled them into its own products. Such is the reputation of Red Hat that CentOS, derived entirely from Red Hat Linux, vies with Debian as the most frequently used version running today's web servers.

Oracle's announcement in 2006 that it would start offering "Unbreakable Linux Support" at half the price of Red Hat prompted another round of doubt that Red Hat could ever thrive. Red Hat and Oracle had earlier parted ways over how frequently Red Hat would update its Enterprise Linux kernel.

But Red Hat persevered and appears to be prevailing. Red Hat's first billion "lays to rest the argument that nobody can make money with open source," wrote Jim Zemlin, executive director of the Linux Foundation, in a blog post on Wednesday. "I want to congratulate Red Hat for this incredible achievement."

[ To learn how Gluster handles unstructured big data, see Red Hat Expands Storage Portfolio With Gluster Acquisition. ]

Zemlin also noted that the collective investment in Linux to date is $10 billion, much of it through the Linux Kernel development process funded by companies that heavily use Linux in their products and support the employment of key Linux developers.

Today, successful open source companies are recognized as valuable assets and often acquired by commercial software companies. Not only do the buyers obtain the rights to the code, they get a core of skilled developers, who have a wider following of developers using the product. MySQL is now part of one of the largest software companies in the world. Sun Microsystems paid $1 billion for it, and was then acquired in turn by Oracle. SpringSource, the supplier of a Java application development framework, was bought by VMware for $420 million.

Red Hat, however, got started earlier than others, before it was clear that open source code produced by projects such as Samba or Spring would be recognized as quality code by enterprise IT managers. As the acquisition era materialized, Red Hat maintained its independence and switched over to a subscription model for Red Hat Enterprise Linux and JBoss middleware, foregoing upfront license revenue in favor of ongoing subscriptions.

Subscription revenue made up $965.6 million of Red Hat's 2012 revenues of $1.13 billion, an increase of 25% over the prior year. Red Hat CFO Charlie Peters said the firm continues to enjoy a high rate of subscription renewals among its customers and many of its top 30 deals for the year were over $1 million. One of the deals was for more than $5 million, he said.

Red Hat's operating income for the year was $199.9 million, with a GAAP operating margin of 17.6%.

Red Hat has expanded its product line with the acquisition for $136 million of Gluster, a maker of an open source storage system that can be used in a scale-out setting where additional nodes are added to a live network.

With a big data oriented, storage management system added to its open source lineup, CEO Jim Whitehurst said Red Hat is ready to increase its share in industries beyond the ones in which it's already entrenched. Linux is heavily used in financial services, government, and education and will expand its share in retail, transportation, energy, and health care, he predicted during an earnings call Wednesday.

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