Red Hat becomes first $2 billion open-source software vendor

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It turns out there is money to be made in open source.

Red Hat Inc. beat Wall Street expectations and edged over the $2 billion annual revenue threshold, reporting fourth-quarter revenues of $544 million, beating analyst estimates of $534 million. Revenues were up 17 percent year-over-year. Perhaps more importantly, subscription revenues were up 18 percent to $480 million.

The growth in subscription revenues was seen by analysts as a particularly encouraging trend, indicating that Red Hat’s business is stabilizing and gaining more predictability. CEO Jim Whitehurst said increased adoption of Red Hat’s hybrid cloud and open source technologies were chiefly responsible for the growth. He added that Red Hat closed the year with a record backlog, which Abhey Lamba of Mizuho Securities told The Wall Street Journal “is a good indication of its growing strategic importance.”

The company is also benefiting from Microsoft’s new embrace of open source technology. The two companies announced a broad partnership in November to promote their cloud offerings and to make Red Hat’s enterprise Linux distribution available on Microsoft’s Azure cloud platform. The partnership “gives Red Hat a strong partner with enterprise and web-scale presence to build a hybrid cloud foundation,” wrote Wikibon’s Brian Gracely. The company also did a deal with Rackspace Inc. last month to offer Red Hat’s Enterprise Linux OpenStack platform on Rackspace’s private cloud.

Red Hat Enterprise Linux is enjoying increasing popularity as a standard for corporate hybrid clouds. Correspondingly, subscription revenue from infrastructure-related products grew 15 percent to $391 million in the quarter. Application development-related subscriptions grew an eye-popping 38 percent. Adjusting for currency fluctuations, the gains were even greater.

Red Hat’s full-year revenue edged over the $2 billion mark to $2.05 billion, up 21 percent in constant currency terms. The company raised guidance for the rest of the year to between $2.38 billion and $2.42 billion, exceeding analyst estimates of $2.36 billion.

Red Hat shares declined about three percent in after-hours trading, but the company’s stock has been steadily climbing from a low of $61 per share in early February to more than $75 a share before yesterday’s earnings announcement.