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RHT Earnings Preview: Red Hat Stock May Exceed Expectations

The largest distributor of open-source enterprise Linux products, Red Hat (RHT), is due to announce its first quarter fiscal 2015 results on Thursday. While some investors have remained skeptical regarding whether RHT can maintain the strong momentum it has shown over the past few quarters, there are good reasons to believe that the company is on the right track and can continue to exceed investor expectations.

red hat rht stockMeanwhile, Red Hat stock has been doing well, tucking on gains of 12.5% year-to-date and 48.4% over the last 12 months.

A Different RHT

The Ret Hat of today is vastly different from the Red Hat of three or four years ago. The old company was more or less a one-trick pony that relied almost exclusively on Linux (the company has traditionally bundled its KVM hypervisor with RHEL subscriptions).

But this has now changed. RHT has been able to successfully integrate and monetize OpenStack IaaS, a leading open-source cloud platform, as well as OpenShift PaaS hardware, thus providing new cross-selling opportunities that have helped it beat estimates for several quarters now.

Meanwhile, Red Hat’s new Linux container software, a lightweight version of its KVM server virtualization software, has been eliciting a lot of positive response, with analysts saying that as many as 82% of Red Hat customers are interested in the new container.

During the the last quarter, RHT reported that 31% of its revenue came outside its traditional Red Hat Enterprise Linux, products. Analysts at RBC Capital Markets see that increasing to 46% by the end of the current year, with

OpenStack Maturity

OpenStack is the world’s largest open source IaaS cloud platform that was developed through the collaborative efforts of Rackspace (RAX) and NASA in 2010. OpenStack bears several AWS-like similarities, including S3 and EC2 compatibility, but lacks the vendor lock-in that many enterprises avoid making it a good alternative to Amazon’s (AMZN) dominant cloud.

But despite its attractions, OpenStack’s journey has not been an easy one. Being an open-source project, many companies regularly contribute code to the platform. RHT is currently the second-largest code contributor to the platform after Hewlett-Packard (HPQ). The cloud platform was dogged by concerns about being too fragmented during its early days, which made it difficult for many organizations to deploy. The cloud also ran poorly right out of the box and required lots of tinkering to get it up in usable form.

But, OpenStack has improved its functionality tremendously over the past few years, so much that mainstream companies such as Best Buy (BBY), eBay (EBAY), PayPal, Comcast (CMCSA) and Bloomberg, among others, now run their core e-commerce websites on the platform. The OpenStack momentum is not about to slow down, with Cisco (CSCO) and IBM (IBM) being the latest companies to join the bandwagon with major acquisitions.

One of the biggest reasons why large organizations are falling in love with OpenStack lies in the fact that it offers good value proposition for companies with large workloads compared to other competing open source cloud platforms.

For instance, VMware (VMW) provides an open source cloud computing virtualization platform that is readily supported by many vendors via ESXI. But, a reseller has to purchase a different license for each core, which makes it expensive to deploy for organizations with large workloads. OpenStack bears no such limitations.

RHT has seized this opportunity to monetize OpenStack. The company scrapped its Linux, Virtualization, Cloud Management and OpenStack division last year and instead replaced it with OpenStack IaaS. Red Hat even went ahead and stated that it will not provide support to RHEL customers who deploy OpenStack versions other than its own.

There are several OpenStack versions in the market, one of the latest being Oracle’s (ORCL) OpenStack Distro.

RHT and OpenShift

RHT has gone further and developed OpenShift, an open source PaaS cloud platform that is a fully extensible and customizable cloud that allows developers to use any programming language of their choice. OpenShift is rapidly gaining in popularity due to the popularity of DevOps approach that many companies with large app development projects are opting for.

DevOps involves sharing code on a large scale in such a way that development teams in remote locations can work on a single project at the same time.

Red Hat’s OpenShift falls under the application development and emerging technologies segment. The segment grew 38% during the last quarter, the fastest by the company, and contributed 16% to Red Hat’s top line. RHT projects that the segment’s growth will hit 45% during the current year, which should provide a nice boost to the company’s overall growth.

Bottom Line

RHT has been able to successfully diversify into new revenue streams that have helped wean it off over-reliance on Linux. The company’s OpenStack and OpenShift clouds have been driving new growth, and the momentum appears to be building up.

As of this writing, Brian Wu did not own any of the aforementioned securities.

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Article printed from InvestorPlace Media, https://investorplace.com/2015/06/rht-earnings-preview-red-hat-stock-may-exceed-expectations/.

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