Raleigh’s Red Hat has delivered in five years under IBM. Keeping it going only gets harder.
What IBM sought, Red Hat has largely delivered.
Software platforms with higher profit margins and more reliable, reoccurring subscriptions. Growth that outpaces its parent company, quarter after quarter.
A jolt to a lumbering technology giant.
Between 2013 and 2018, IBM recorded 22 consecutive fiscal quarters of declining revenue growth as it struggled to transition from traditional hardware — which has one-time sales and fixed equipment costs — toward cloud computing. The next year, IBM spent $34 billion to acquire the Raleigh open source software provider Red Hat in one of the richest software deals of all time.
In an earnings call last week, IBM CEO Arvind Krishna celebrated five years of Red Hat under Big Blue, noting Red Hat has doubled its annual revenue since the purchase. OpenShift, the company’s hybrid cloud platform, has leapt from making $100 million a year to $1.3 billion. Other core subscription services, Red Hat Enterprise Linux and the automation platform Ansible, have performed strongly as well.
Of the 21 fiscal quarters since IBM bought Red Hat, the Raleigh company has grown by double-digits in 17 of them. “Red Hat saved IBM’s bacon this quarter,” the industry outlet TechCrunch wrote in July 2023 after Red Hat’s 11% growth mitigated an overall IBM revenue dip. It is a headline that could apply more than once since 2019.
“If IBM never made that (Red Hat) acquisition, I think they would have fallen further behind in its cloud computing division,” said Logan Purk, a financial analyst who covers IBM for Edward Jones. “It’s been such a monumental driver of growth.”
“Red Hat was a linchpin deal for IBM that changed the course of its cloud path,” said Dan Ives, an analyst for Wedbush Securities.
The corporate marriage hasn’t been without moments of doubt, like when longtime Red Hat CEO Jim Whitehurst left IBM less than two years after the deal completed. The second-highest ranking official at IBM, Whitehurst had been considered a likely candidate to replace Krishna as CEO.
“There was fear of a culture clash, that there could be integration concerns, which wasn’t helped when the Red Hat CEO eventually left,” Purk said.
When Red Hat was sold, the company had 13,360 employees and offices in 40 countries. It had built a distinct brand sine the 1990s adhering to an open-source ethos that stressed the best and safest code is free and open.
At least on the balance sheet, the integration between Red Hat and IBM has been smooth. But the law of large numbers suggests high-growth companies can’t sustain their pace forever. With each 15% revenue increase, jumping another 15% requires steeper raw gains.
Beginning last year, Red Hat’s growth rate dipped into the single-digits for four straight quarters. The software provider rebounded this summer with a 14% increase, but its recent results could pose a problem for its owner.
“Red Hat is such an important piece of the growth picture (for IBM) that if Red Hat starts to slow, that software business will also show a meaningful slowdown as well,” Purk said. “And since IBM leans on software for a lot of its growth, then the growth algorithm for the whole of IBM ticks down.”
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This story was originally published November 1, 2024 at 6:00 AM.
