How Red Hat Inc (RHT) Is Improving Its Top Line

Tech company Red Hat Inc (NYSE:RHT) has become the face of Linux, an open-source operating system used by most corporations and hosting companies on their servers, including Rackspace Hosting, Inc. (NYSE:RAX) and Amazon.com, Inc. (NASDAQ:AMZN)‘s Amazon.com, Inc. (NASDAQ:AMZN) Web Services.

The company, which generates most of its revenue from selling server technology, has been challenged by the rise of cloud computing. But despite increasing competition from public cloud vendors, Red Hat Inc (NYSE:RHT) surprised investors on Dec. 19, when it announced that earnings from its enterprise software business unit grew 45%, year over year, on a 15% revenue increase. This caused the stock to jump by as much as 20% overnight. Considering there’s a fierce war for the cloud going on, how did Red Hat Inc (NYSE:RHT)  manage to improve its top line by such a significant amount?

The Red Hat Inc (NYSE:RHT) way
Red Hat Inc (NYSE:RHT)’s all about competitive advantages. The company, aware of fast-growing competition in the cloud space, is using its open-source advantage to develop better server software and provide more efficient data-center solutions.

Red Hat Inc. (NYSE:RHT)

Red Hat Inc (NYSE:RHT) gives away its software, but charges for support and services. This is essentially the razor-and-blades business model. By not charging anything for its software, Red Hat Inc (NYSE:RHT) provides a strong incentive to use its technology. Potential clients get accustomed to Red Hat Inc (NYSE:RHT)’s system, and it later collects profits from support and other related services.

This has allowed Red Hat Inc (NYSE:RHT) to build a strong franchise. Further, to protect its reputation as the face of Linux, the company hires thousands of developers and engineers, who are engaged in more than 100,000 open-source projects, most of them related to server technology.

 

Source: Red Hat Investor Relations

Strong demand for Linux
The company is also active in promoting the use of Linux over Windows and other operating systems. Linux has been the fastest-growing server operating system over the past decade. Red Hat Inc (NYSE:RHT) has more than 60% of the Linux server operating system market.

In the latest quarter, Red Hat Inc (NYSE:RHT) experienced healthy demand for its core products, including the JBoss middleware platform — a set of cloud-friendly products that are used to automate business processes in servers — and the Red Hat Inc (NYSE:RHT) Enterprise Linux operating system.

Competitors
One of Red Hat Inc (NYSE:RHT)’s strongest competitors is Rackspace Hosting, Inc. (NYSE:RAX), a global leader in hybrid cloud, which grew its revenue by 3.4% last quarter.

Rackspace Hosting, Inc. (NYSE:RAX) is also aware of the importance of open-source contribution in the server space. That’s why, together with NASA, the company developed OpenStack, the world’s fastest-growing open cloud platform and developer community. It involves more than 13,000 engineers across 140 countries. As an operating system designed specifically for the cloud, OpenStack has become popular quite quickly. Due to its robustness, it is already being used by PayPal, Inc. , MercadoLibre (NASDAQ:MELI), and Workday Inc (NYSE:WDAY).

Red Hat Inc (NYSE:RHT) has built a partnering foundation with OpenStack. The company released the first version of its Red Hat Inc (NYSE:RHT) Enterprise Linux OpenStack platform only a few months ago, but it has already seen a number of initial OpenStack wins, including several six-figure deals, according to James Whitehurst, Red Hat Inc (NYSE:RHT)’s CEO, who identified this platform as a serious growth driver.

Amazon.com, Inc. (NASDAQ:AMZN) is another strong competitor. The company has developed its own operating system, Amazon Linux. To promote cross-selling, this software has been optimized for the Amazon.com, Inc. (NASDAQ:AMZN) EC2 cloud servers, which the company sells to developers via Amazon.com, Inc. (NASDAQ:AMZN) Web Services. Early reception has been quite positive, with customers praising its regular maintenance, optimization for Amazon.com, Inc. (NASDAQ:AMZN) EC2 environment, and usability.

Foolish takeaway
Red Hat Inc (NYSE:RHT) continues using its open-source advantage to improve its execution. The company’s diversified revenue — from selling Linux support to data-center solutions — and well-known Linux expertise, combined with the positive effect of a partnership with OpenStack, should help Red Hat Inc (NYSE:RHT) to continue improving its top line.

The article How Red Hat Is Improving Its Top Line originally appeared on Fool.com.

Adrian Campos has no position in any stocks mentioned. The Motley Fool recommends Amazon.com, Inc. (NASDAQ:AMZN) and Rackspace Hosting, Inc. (NYSE:RAX). The Motley Fool owns shares of Amazon.com, Inc. (NASDAQ:AMZN). We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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