Analyst(s):Andrew Butler, George J. Weiss, Yefim V. Natis, Philip Dawson, Arun Chandrasekaran, Gary Spivak, Dennis Smith, Massimo Pezzini
Red Hat continues to achieve consistent ratings across its product portfolio and corporate measures, reflecting a strong sustained Mode 1 market presence with a strategy to position the company for Mode 2 growth, as the adoption of hybrid and public cloud for mission-critical deployment gains pace.
Source: Gartner (February 2017)
During 2016, Red Hat consolidated its strong market positions for Linux, middleware products and cloud management, with continued investment in more nascent market categories like containers, hybrid cloud platform as a service (PaaS) and storage. Red Hat is a modern-day success story; its open-source software (OSS) model has now penetrated nearly every layer of IT systems that were once proprietary — compute, storage, cloud, middleware and others. This allows Red Hat to exploit the data center trends that enable constant and predictable growth for its established core products like Red Hat Enterprise Linux (RHEL) and JBoss. That growth has enabled Red Hat to achieve the status of a strategic, multiproduct portfolio software vendor among many enterprise users. Red Hat knows that it cannot sustain its business model on standard enterprise Mode 1 Linux indefinitely. But — in keeping with most other successful data center hardware and software vendors — Red Hat also faces the challenge of maintaining relevance as the world of on-premises and hosted computing gives way to growing public/hybrid cloud influence. Thus, the company is investing heavily in both messaging and new product development. Few, if any, other vendors have embraced the concept of "bimodal" so enthusiastically as Red Hat, which appreciates that a successful future for data centers lies in the ability to bridge Mode 1 and Mode 2 thinking and implementation — a process that will take many years to fully accomplish (see Note 1 for a more complete explanation of bimodal IT). The task of making Red Hat a true leader for Mode 2 workloads will also be ongoing through this decade, as early public cloud deployment more often favors the likes of Amazon Web Services (AWS) Linux and Ubuntu instead of RHEL.
Red Hat anticipates that as new-generation projects become business-critical and strategic, enterprises will value the proven credibility of the vendors they know and trust, rather than blindly believing that new-generation vendors can learn these skills. But no evidence yet exists to confirm — or deny — these beliefs.
Red Hat is gaining recognition as a vendor of software products and related services that span multiple tiers of data center investment; this is a far cry from the Linux roots that earned Red Hat its initial success, and demonstrates the successful marketing strategy that is gradually changing market perception of the company. But the company's market presence and perceived leadership varies greatly by product category. Red Hat's revenue is understandably still heavily influenced by its operating system business. But the declining share of RHEL revenue as a total share of the company's business demonstrates that Red Hat is succeeding in its mission to become a complete software portfolio provider. RHEL continues to maintain very strong Mode 1 presence, and is the mainstay of Red Hat's Mode 2 strategy. But the company faces considerable early competition from AWS Linux and Ubuntu as the market for Mode 2 application development evolves. Red Hat is claiming that 5% of RHEL revenue is coming from public cloud today; while this represents good progress compared with a year ago, the company still lags significantly behind AWS Linux and Ubuntu in terms of public cloud adoption. Meanwhile, the company is increasingly recognized for its application development and integration software. This includes middleware products (where Red Hat is gaining market share) and the cloud management portfolio. Virtualization and storage/data management products form a less significant — but still growing — share of business, helping to position Red Hat as an innovator and to drive partnering opportunities. To augment the product investment, the company is investing in training, certification and consulting practices to complement the requirements of customers in both traditional and emerging areas; the company has also created what it calls "Open Innovation Labs" in the U.S. and EMEA. The overall Positive rating is a composite score that reflects a breadth of different individual scores that would vary from "Strong" to "Variable."
Mode 1 users value strong and consistent quality of support and account management, and Red Hat is generally respected by its legacy client base. The company is particularly well-positioned compared with other open-source software vendors who are sometimes challenged to deliver the same breadth and depth of support quality. Support strength also positions Red Hat well to benefit further from ongoing trends like Unix migration, and new business opportunities like SAP Hana adoption. But these strengths do not carry the same weight for those developing Mode 2 applications, where absolute lowest price and convenience still usually outweigh the business values that Red Hat espouses.
Red Hat's open-source subscription pricing strategy continues to encompass a broad and expanding OSS landscape. Red Hat offers various SLA plans and pricing models, including:
Configurations by socket count
Virtual machine (VM) management and guest
High availability and cluster management
JBoss middleware and SaaS
High-performance computing (HPC) nodes
Gluster and Ceph storage management; Ansible configuration management
CloudForms cloud management
OpenStack integration and upgrades
OpenShift application development and hosting, especially for Docker and Kubernetes
Satellite and Proxy administration of patch delivery
The wide range of solutions (and this is not an exhaustive list) provides Red Hat with strong open-source influence (beyond the OS) with expanded subscription service revenue opportunities. In the past year, Red Hat has also introduced analytic services (Red Hat Insights) to monitor and predict potential problems in Red Hat hosted configurations prior to occurrence and supports containers, mobile devices and Internet of Things (IoT)-edge systems.
Gartner client inquiries indicate that Red Hat subscription contract values continue to grow, where multimillion dollar contracts are becoming more common. However, with the growing contract sizes, procurement departments are raising concerns about fair pricing, often associating open source with low pricing. Further exacerbating these issues, resellers often avoid disclosing manufacturer's suggested retail pricing and discounts at line-item level, leaving procurement specialists concerned about appropriate fairness. In some cases, users have told Gartner they were warned about increased potential for Red Hat audits if they pursue a multivendor Linux strategy.
At times, we have been surprised at the high variability in discounts across similar size contracts. Often, asserting greater negotiating leverage based on loyalty, commitment, volumes, contract duration, expanded product breadth and potential marketing testimonial support will help IT leaders and procurement obtain more beneficial results. End users should demand that Red Hat continually review subscription value propositions so that the company can bring higher clarity and coherence to how and why it determines its pricing matrix. With its ongoing effort to penetrate higher up the stack, Red Hat's traditional paradigm of the OS as an enterprise operating system value-priced to run mission-critical and business applications is diminishing relative to end-to-end integrated systems (for example, hyperconvergence and software-defined storage) and hybrid cloud support (for example, Linux subscription pricing in AWS, Azure, and others). Enterprises are able to employ a "pay as you go" strategy on AWS or Azure where a RHEL license exists, but users will need to better understand the value and pricing of these more agile (Mode 2) systems compared to traditional infrastructure (Mode 1).
Red Hat had its early roots in Linux 25 years ago, and now enjoys significant success as an open-source software vendor. It now approaches a transition in which the market shift to cloud and Mode 2 agility will test its own agility (and internal willingness) to respond to changing market forces while leveraging its enterprise foundations. This will mean that its financial success will increasingly depend on up-the-stack revenue rather than the base RHEL operating system. To accomplish this will require a change in its business model, pricing strategy, and sales and marketing. The challenge will be to maintain its growth as validation of its versatility to play in both Mode 1 and Mode 2 markets — and to demonstrate the ability to succeed in both.
The company has long demonstrated absolute commitment to the principles of open source, which positions Red Hat well to benefit from the acceptance of open source as a viable — even preferred — methodology for building and distributing software across most geographies and vertical industries. With most Mode 2 new application development favoring an open-source approach, Red Hat should be better-positioned to succeed in this market compared with other software vendors who have also made their name primarily in the market for Mode 1 computing using a proprietary software development model. But this depends on the company's ability to successfully transition business models for established lines of business toward a multicloud, multiplatform future that will succeed or fail on the basis of trusted partnerships with clients and aligned vendors. Red Hat faces an additional challenge as more IT organizations standardize on OSS, as they gain greater skills and become less dependent. So the company needs to keep increasing its value proposition, even as IT organizations become more experienced in deploying and supporting OSS packages from a variety of other vendors.
Red Hat's strategy reflects the polarized nature of an IT market that is poised between the established ecosystem of Mode 1 users, workloads and buying behavior, and the fast-evolving, but still adolescent, Mode 2 user environment. The strategy for Mode 1 success is demonstrated by Red Hat's growing recognition as a panenterprise software stack vendor, rather than being typecast as " the Linux vendor." Mode 2 success is more elusive. With strong commitments to hybrid IT and investment in the growing market opportunities for OpenStack and its OpenShift Container Platform, Red Hat is determined to position itself as a contender for Mode 2 leadership. But if the market takes an aggressive shift toward Mode 2 and widespread public cloud adoption, Red Hat would need to project a market/brand image that stretches beyond that of an "enterprise provider with cloud options"; it would have to demonstrate that a Linux provider can be excitingly innovative.
Yet, the company is sometimes hampered by the early phase adoption of these technologies; the inconsistent state of alliances with hardware, software and service partners; and the lack of a strong solution strategy across multiple vertical industries (although the company is making good progress in some verticals, such as telecom, through the focus on network function virtualization [NFV]). Meanwhile, Red Hat remains firm in the belief that as regulation (whether governmental or industry) and compliance affect the deployment of business-critical workloads in the public cloud, this will drive enterprises to insist upon the use of branded and trusted software vendors that are already prevalent in their on-premises infrastructure.
As a leading vendor addressing on-premises and hosted infrastructure, Red Hat's corporate viability through the remainder of this decade should be assured; the combination of dominant Linux market share and visible enterprise growth for the JBoss suite creates a solid subscription model that becomes an annuity stream to help fund more speculative investment. Server market momentum for x86 migration remains strong, providing Red Hat with an effective annuity stream. Red Hat is also able to benefit from the promotion of Linux for non-x86 architectures like Power and mainframes; and growing (but still nascent) momentum for ARM processors will provide Red Hat with additional opportunities. But the company will need to ensure that its marketing/brand image evolves along with its products and pricing approaches if it hopes to generate a stronger balance of Mode 2 revenue share.
Vendors like Amazon, Google and Microsoft will strongly influence the evolution of Mode 2; their strategies are not intended to compete directly with those of Red Hat, but are capable of impacting Red Hat's progress in the market. So the current Strong rating is tenuous, and will become increasingly vulnerable to attrition; this will hinge on Red Hat's ability to become a leading and sustainable presence in public and hybrid cloud infrastructure, which will become a more enduring migration influence. Achieving this goal — for any vendor — will depend on the evolution of market behavior that is both unpredictable and changeable today. The company must also mitigate the risk that users will perceive subscription pricing getting beyond budgets, as they will be most likely to evaluate Ubuntu, CentOS and AWS Linux as reprieves from the high licensing fee. The vulnerability will also be exacerbated by the high license costs levied by other data center software vendors, so Red Hat cannot fully control the longer-term evolutionary pressures.
Gartner's proprietary Vendor Financial Rating measures companies against five distinct financial ratios (see Note 2). Red Hat saw revenue grow 17% (up from 14% a year ago) for the trailing twelve month (TTM) period ending 31 August 2016, scoring seven points (out of 10) in our model. This represents a one point increase from last year.
The company's TTM net profit margin of 10% also earns seven points. The margin has remained essentially flat from a year ago. Its strong TTM cash flow from operations to revenue ratio is 32%, down from 36% last year but still earning nine points. Finally, its current ratio, after adjusting for the impact of significant deferred revenue balance (a positive result from subscription business) measured four, which scores the maximum 10 points in our model. Finally, it has no net debt and therefore gets no penalty earned by high-debt companies in our model.
The total of 33 points places the company toward the high end of the Positive category (27 to 33). In other words, the company is financially healthy, enjoys double-digit revenue growth and profit margins, while displaying a very strong ability to generate cash and increase investment in growth areas.
Source: Gartner (February 2017)
Analysis by George Weiss
For nearly 25 years, Red Hat has held a strong market position in open-source operating systems. This sustained "annuity stream" has made Red Hat the clear No. 2 operating system vendor in the data center market, surpassed only by Microsoft. Revenue from 2015 showed that Red Hat owned over 70% of total Linux market spending. As an inheritor of a major migration and transformation from Unix to Linux, Red Hat's subscription business model grew ever stronger in solidifying the allegiance of IT departments to RHEL to ensure that reliability, performance, availability and security have single-vendor support as long as systems are deployed to hardware specs (hardware compatibility list [HCL]). Red Hat was chosen early as a strategic operating system in the financial sector, thus its subscription renewal rate remains at nearly an estimated 90%. Few Gartner clients are willing to shift to another Linux OS, other than purpose-built solutions.
However, the "other" purpose-built opportunities are not as clear cut as the monolithic market. From 2017 to 2022, a great deal of market change is expected because of: cloud computing, containers, serverless computing, web scale/hyperscale, blockchain, hyperconvergence, hybrid IT, IoT and composable infrastructure. Each example poses both challenges and opportunities for Red Hat's traditional OS model (which already suffers from SKU bloat). Instead of value-based subscription pricing on a nodal basis, the new value proposition subsumes the management and orchestration stack, high-density hyperscale configurations, and alternative OSs such as AWS and Ubuntu in public cloud OS cloud infrastructures. Furthermore, the new wave of storage-defined systems as part of hyperconvergence and virtualization (such as Kernel-Based Virtual Machine [KVM] management, Ceph storage management and Ansible tools under the umbrella of a system integrator or hardware-/software-defined vendor) threaten to disintermediate OSS aggregation.
As infrastructures move increasingly to web scale, microservices, Mode 2 processes and large scalable configurations, Red Hat will need to clarify the distinction in revenue from the traditional Mode 1 environments versus Mode 2 and how to value DevOps, containers and mobility so as to compensate for expected diminishing on-premises revenue streams. Red Hat must seek greater proportions of revenue up the stack to compensate for the flattening market opportunity for traditional OS, and engage with third parties, for examples from:
More security across domains and infrastructures (e.g., Windows, SQL server)
Manageability (recovery functions)
Enablement for containers (Atomic Host and Docker)
Composable core modules
IoT and mobility
Red Hat needs to address and counter user perceptions that containers abstract away the OS. Red Hat will amplify the message that RHEL 7 is threaded with Docker to deliver seamless microservices. Red Hat is leveraging its vast knowledge base into an analytics advisory service (Red Hat Insights) to aid IT organizations on project priorities, situational use and stack integration.
Red Hat stresses RHEL's intimate integration and interoperability with the stack (e.g., applications, cloud, OpenStack and OpenShift) and the infrastructure, including storage management; identity management, particularly with Microsoft Active Directory (AD); and test/development/production with container implementations. These features are being stressed specifically in the latest versions of RHEL 7. The market transition to RHEL 7 and beyond will be gated by users' perceptions of compelling needs and independent software vendor (ISV) interest governed by user demand. The transition period has started.
Analysis by Dennis Smith
OpenStack Platform and CloudForms, along with Red Hat Virtualization, Satellite and Insights are a part of both Red Hat's Cloud Infrastructure and Cloud Suite bundles. OpenShift and Ceph storage are added to the Cloud Suite bundle. Red Hat's goal is to provide a full software stack that supports virtualization and multiple cloud computing aspects (for example, infrastructure as a service [IaaS], PaaS, and private and hybrid cloud computing). Both OpenStack Platform and CloudForms can also be purchased alone.
OpenStack Platform 9, which is built on Mitaka, has again added new features over previous OpenStack releases, including easier deployment and tight integration with CloudForms. Community and subscription-based offerings are available.
CloudForms is positioned as a hybrid cloud management offering that works in conjunction with OpenStack and other private and public cloud offerings. So, in Gartner's terminology, it is both a "hybrid" and "multicloud" management utility. It offers multiple functions, such as service request, service catalog, service provisioning and the ability to tie SLAs to cloud costs (see "Market Guide for Cloud Management Platforms: Large, Emerging and Open-Source Software Vendors" ). Its strength lies in its policy engine for dynamic tagging and provisioning, as well as a horizontal scalable architecture with console management across geographies or business units via multitenancy. Ansible, which Red Hat acquired last year, is a key and versatile component of Red Hat's overall strategy. It is used in traditional infrastructure operations, configuration automation and DevOps use cases. Red Hat Insights, which links operational analytics to automation, is integrated with CloudForms with plans to be integrated with Ansible.
Red Hat offers a competitive OpenStack distribution and cloud management platform (CMP). Multivendor support is provided, but Red Hat has been aggressively marketing the full cloud software suite since its introduction in 2Q16. This suite is for enterprises seeking a single-vendor solution; however, many enterprises want to be able to pick individual vendor components. Red Hat has a strong data center presence, and is showing up more on shortlists when there is a private cloud project involving containers. However, Red Hat will also find itself increasingly competing against the integrated hyperconverged integrated system (HCIS) vendors such as Nutanix, Hewlett Packard Enterprise (HPE; with SimpliVity), Dell and others, as these vendors have their own cloud ambitions to integrate a CMP on their own hardware.
Analysis by Philip Dawson
Red Hat has achieved a visionary position in the x86 virtualization market (see "Magic Quadrant for x86 Server Virtualization Infrastructure" ), and now has established options as lightweight bimodal alternatives to hypervisors, including KVM/Red Hat Virtualization (RHV), plus Linux containers (LXC) but managed by Docker Swarm or Kubernetes. The continued Microsoft alliance allows Red Hat to package virtualization solutions that span CloudForms and Microsoft Azure initiatives, all managed under CloudForms, which will allow the brokering of Azure public cloud, link to Azure Stack or OpenStack where appropriate, and leverage Red Hat Atomic Host alongside RHEL. This interoperability and heterogeneity helps Red Hat attract partners, but also creates the potential for Red Hat to overlap (and often directly compete) with Docker and other companies that decide to build their own container frameworks with Kubernetes, Mesos and other solutions. However, this bimodal diversity also appeals to existing RHV/KVM converts and limits the appeal of RHV (and other hypervisors) in the RHEL installed base, where users consider Linux containers to be good enough bimodal alternatives. Clients that negotiate a strong RHEL maintenance contract will expect this to include virtualization with KVM and Linux Containers. So RHEL core success limits Red Hat's ability to monetize these layered incremental products and enhance broad application support.
Analysis by Yefim Natis
Red Hat application infrastructure offerings are available in three major delivery forms:
Traditional software products (JBoss family)
Private cloud software (OpenShift Container Platform)
Public cloud services (OpenShift Online and Dedicated)
The core capabilities are carried across from a traditional environment to cloud-enabled software infrastructure and public cloud in the form of JBoss xPaaS services for OpenShift offerings. These include application, integration, data virtualization, rule/decision management, API management and mobile back-end platforms. The broad collection of capabilities differentiates Red Hat from its specialist competitors like Pivotal, but does not match the breadth of offerings of its megacompetitors like IBM.
Red Hat application infrastructure software is almost entirely open source, which continues to be a notable differentiation, even though in the cloud the nature of the source underlying services is a lot less consequential. The company re-established its commitment to openness in the most recent release of its OpenShift software by replacing its proprietary container "cartridge" management environment with the Docker and Kubernetes alternatives. With the new release, Red Hat also repositioned the offering from the category of "PaaS" to "container platform," narrowing its focus from general cloud application platform to advanced infrastructure management. Red Hat has developed a strong reputation for quality and efficiency with enterprise customers from its success in the on-premises Java Platform, Enterprise Edition (Java EE) market, where it is one of a market-dominating trio with the much larger IBM and Oracle. The significant enterprise installed base of Red Hat is another advantage the company has over its specialist competitors.
Given these strengths, the company also faces significant challenges in the application infrastructure market that is transforming from software to services; from licensing to subscription (the former Red Hat differentiation); and from the controlling focus on Java frameworks to multicloud, multiplatform and polyglot models. The gradual decline of the traditional Java EE software market challenges the company to shift the center of its business strategy elsewhere. OpenShift has been a visionary answer by Red Hat to this challenge, but some challenges remain. Some missing capabilities in the OpenShift suite — such as DBMS, IoT or artificial intelligence (AI) services, its dependence on third-party IaaS services and its relatively limited marketing capacity — put Red Hat at a disadvantage when competing with the leading cloud platform service providers.
In summary, the company invests in a collection of platform services, especially application, integration, API management and mobile platforms; and it shows understanding of market trends and endorsement of the prevailing open-source software, notably Docker and Kubernetes. Red Hat's strong enterprise reputation carries over from the on-premises application platform world, and its affinity with RHEL, the industry-leading distribution of Linux, helps to balance the challenges.
Analysis by Arun Chandrasekaran
Red Hat's storage portfolio consists of Red Hat Ceph Storage, a scale-out block and object storage platform and Red Hat Gluster Storage, which is primarily aimed at scale-out file deployments. A regular cadence of software releases is keeping the products competitive while allowing them to target new market opportunities, such as object storage and container workloads. In the past 12 months, Red Hat has expanded its direct sales force as well as the number of field system engineers to stimulate market adoption beyond the traditional use cases. Embedded reseller agreements with Western Digital and Fujitsu continue to exist, although they haven't yielded the expected results. The major focus during the Ceph Storage 2 release in June was on improving authentication and enhancing Amazon Simple Storage Service (S3) and OpenStack Swift compatibility. To make the deployment of both product easier, Red Hat recently released a common administration platform with Red Hat Ceph Storage 2, which is intended to manage both products in the future.
Red Hat continues to see growing adoption of both products in technology, research and service provider market segments. However, both Ceph and Gluster deployments often require a major effort from enterprise users, calling for careful instrumentation to optimize and fine-tune cluster performance and reliability for chosen hardware, which limits their broad appeal within enterprise IT.
Bimodal IT is the practice of managing two distinct, coherent modes of IT delivery — one is focused on stability and the other on agility. Mode 1 is traditional and sequential, emphasizing safety and accuracy; Mode 2 is exploratory and nonlinear, emphasizing agility and speed. Bimodal IT becomes a paradigm shift in how IT approaches its role within the enterprise. Bimodal IT combines a number of diverse capabilities, including innovation management, adaptive sourcing, DevOps, changes to project and innovation funding, and a nonlinear approach to software development. The challenges involved in achieving bimodal IT maturity primarily relate to addressing cultural issues. However, since it touches most aspects of IT, it extends to organizational structure issues, skills and competency challenges, and revamping enterprise constructs like governance mechanisms and investment approaches. While the bimodal capability often starts in the IT organization, it does not have to, and it must quickly extend to the wider enterprise as it embraces a more exploratory and nonlinear approach to business change and development. This is, therefore, not an easy or seamless evolution, though it is a critical one to undertake in the age of digital business. This learning, however, will have to be adapted and customized to the unique realities, opportunities and constraints specific to each enterprise.
Gartner's Vendor Financial Statement Scorecard methodology measures a combination of growth, profitability and liquidity based on a company's financial results from public financial statements according to generally accepted accounting principles (GAAP). Gartner uses a standard methodology to derive its vendor financial statement scorecard to provide a like-for-like view among a pool of more than 750 vendors using publicly available financial information. The four basic criteria are: (1) revenue growth (trailing twelve-month year-over-year revenue growth); (2) profitability (trailing twelve month GAAP net profit margin) with net income as a percentage of revenue; (3) balance sheet liquidity (current ratio) as current assets divided by modified current liabilities (which adjusts for the presence of deferred revenue); and (4) cash flow based on the trailing twelve months of cash flow from operations as a percentage of the trailing twelve months of revenue. For companies with large amounts of net debt, a fifth criterion, net debt divided by trailing twelve-month cash flow from operations, is incorporated. Gartner's policy is to use financials based on GAAP in calculating the ratios needed for the Vendor Financial Statement Scorecard (see "Understanding the Methodology Behind Gartner's Financial Statement Scorecard for Public Companies" ).
Headquarters: Raleigh, North Carolina, U.S.
Red Hat is a multinational vendor of open-source software. The company develops and sells a comprehensive suite of infrastructure software products, including operating systems, virtualization, application development tools and cloud management software. Red Hat also sponsors a number of community open-source software projects.
Is viewed as a provider of strategic products, services or solutions:
Demonstrates strength in specific areas, but execution in one or more areas may still be developing or inconsistent with other areas of performance:
Shows potential in specific areas though still variable in more than one of the required categories:
Faces challenges in multiple required categories and execution is inconsistent:
Has difficulty responding to problems in multiple areas: