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What Drove Red Hat's Fiscal 2Q18 Earnings?

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Part 6
What Drove Red Hat's Fiscal 2Q18 Earnings? PART 6 OF 18

Why Red Hat’s App Business Looks Promising

Red Hat’s application development holds promise

Earlier in the series, we discussed Red Hat’s (RHT) revenue mix and the dominance of subscription offerings in its overall revenue. Though Red Hat’s app development business contributes less than its infrastructure-related offerings to its total revenues, it’s worth paying attention to. Red Hat’s application development and related revenue rose ~44% on a YoY (year-over-year) basis in the last quarter.

Red Hat’s application development consists primarily of JBoss middleware. Middleware is the software that connects the OS (operating system) with individual applications like OpenStack, virtualization software, and storage software.
Why Red Hat&#8217;s App Business Looks Promising

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OpenStack, an open source platform, moves local computer networks into the cloud while virtual machines (or VMs) form the basis of virtualization software, which helps companies harness the most from hardware.

JBoss and app development technologies’ contribution towards overall revenues is on the rise. Its contribution rose from 11% in fiscal 2015 to 15% in fiscal 2017, respectively. Its increasing share in the company’s revenue mix shows the importance of its new offering initiatives. Recent offerings like Red Hat Openshift, which is the company’s container infrastructure, and OpenStack, which is a private cloud infrastructure, are gaining traction and have contributed to the growth in the company’s subscription offerings.

Cross-selling opportunities in OpenStack space

According to Cote.IO, Red Hat is the market leader in Linux with a market share of 67%. Thus, RHEL’s strong presence in the application infrastructure space would boost Red Hat’s OpenStack, which is its private cloud infrastructure.

Red Hat aims to boost revenue growth by leveraging its dominance in Linux to sell more add-ons to its customers. The above chart by 451 Research shows that companies working to commercialize Open Stack could generate total revenues of $2.5 billion in 2017 and that the increased transition towards the cloud means that this space could generate more than $5 billion in revenue annually by 2020.

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