Red Hat’s strategy of enabling CIOs to incrementally embrace full public cloud computing is clear to see. Until last week’s significant earnings beat, however, it wasn’t as clear that the company’s pragmatic, hybrid approach would be enough to carry the open source giant to $5 billion in revenue. With Red Hat shares launching 10% on its break-out earnings news, we can safely put that question to rest.
Flying high again
There’s no question the trajectory for enterprise computing is toward full public cloud computing. In that market, Amazon Web Services leads, and by quite a ways, as Gartner’s most recent Magic Quadrant underscores. Only Microsoft Azure comes remotely close. According to Gartner, “AWS is the provider most commonly chosen for strategic, organization-wide adoption,” and further calls AWS the “safe choice” for cloud computing and says, “[AWS] is the provider not only chosen by customers that value innovation and are implementing digital business projects, but also preferred by customers that are migrating traditional data centers to cloud IaaS.”
This, however, is the future for most enterprises, and there has been a question as to how fast the rest could get there. The answer: not nearly as fast as CIOs would like. This, in turn, leaves a big opening for Red Hat with its hybrid strategy, built on the back of OpenShift.
SEE: How Red Hat’s strategy helps CIOs take baby steps to the cloud (TechRepublic)
Red Hat has been pretty open about that strategy. As I’ve written, after a discussion with Red Hat CMO Tim Yeaton,
It struck me that the company’s support for a wide variety of enterprise infrastructure choices isn’t indicative of a preference for private over public cloud, but simple pragmatism: So long as enterprises are plagued by lumpy, diverse infrastructure, Red Hat will make money by helping them to smooth it out. In so “smoothing,” Red Hat is actually paving the way for that same public cloud future [AWS chief] Jassy envisions, just sometimes with cobblestones comprised of OpenStack and other less sexy infrastructure.
As financial analyst Bert Hochfeld wrote in his post-mortem on Red Hat’s quarter, the blow-out earnings are a “validation of Red Hat’s strategy and, in particular, its investments in infrastructure software for the hybrid cloud.” He’s right, but let’s dig into the earnings commentary to figure out why.
The cloudy gift that keeps on giving
Red Hat’s cloud business doesn’t look like that of AWS or Microsoft Azure. Even its allegedly “legacy” Red Hat Enterprise Linux business has been humming lately, with new, cloud-centric workloads driving it, as Red Hat CEO Jim Whitehurst said on the earnings call: “As long as…new workloads come online, and as long as more workloads are being modernized we think we still have kind of solid opportunity in the core [RHEL business].”
This is so because, as CFO Eric Shander continued, “you still get Linux as part of the emerging technologies.” In other words, the enterprise may want OpenShift, but RHEL is the built-in plumbing for it.
The superstructure, however, is OpenShift, along with integral components like Kubernetes. Hatched at Google, Kubernetes has emerged as the leading orchestration platform for containers, and Red Hat is second only to Google in Kubernetes contributions. This puts it in a great position to help enterprises modernize their infrastructure, taking those “baby steps” to the public cloud, as Whitehurst told analysts: “[P]eople are going to want to rely on someone who knows how to build, deliver, and support and life-cycle this core component infrastructure [Kubernetes],” which Red Hat has productized within OpenShift.
Importantly, throughout this process, Whitehurst pointed out, Red Hat has gone from IT’s cost-cutting darling to the CIO’s innovation-driving champion. (“We’ve moved from having a seat at the table with the purchasing department to having a seat at the table with the CIO.”) It’s a better place to be, with much bigger price tags attached to deals (44 deals were north of $1 million, with five of those involving OpenShift and six including OpenStack).
It’s also a safer place to be. As Whitehurst went on to note, these “innovation deals” with the CIO tend to be “very, very sticky, and the renewal rates are higher, and the effort required to renew is very, very low.” They cost a bit more to sell, but once in…Red Hat is in for the long haul.
None of this is as sexy as AWS Lambda or other things that appear to obviate traditional IT, but that’s the point: traditional IT will be with us for a long time. It doesn’t really want to be obviated and, for most enterprises, it’s simply not feasible to do so. In the meantime, Red Hat will clean up by helping the CIO to innovate.
Nor does Red Hat lose with more workloads going to the public cloud. This simply introduces more complexity into the enterprise infrastructure mix, which is where Red Hat thrives.