Red Hat, Inc. (RHT)
November 15, 2011 3:00 pm ET
Executives
Paul J. Cormier - President of Products & Technologies and Executive Vice President of Engineering
Analysts
Unknown Analyst
Unknown Analyst
Okay. Thanks, everyone, for joining us. We have Red Hat with us this afternoon. I'm very excited to have Paul Cormier, EVP of Products and Technologies. Paul joined Red Hat 12 years ago.
Paul J. Cormier
11.
Unknown Analyst
11 years ago. I'm getting ahead of myself. And Tom McCallum, Director of Investor Relations. Tom has been with the company for 4 years. I think the one thing that is interesting that this company has really morphed into a much broader provider of cloud-based solutions, helping run the back end of a lot of the clouds. I think they've been commonly referred to as a Linux provider. I think after our discussion, you'll clearly understand that they're providing all the layers in the stack, the operating system, middleware, virtualization and now with the recent acquisition into storage with Gluster. We've had a chance to speak with a couple of customers and they have great things to say.
Question-and-Answer Session
Unknown Analyst
So with that, Paul, maybe if you can just give us a sense of -- I mean, the company's now on $1 billion run rate. It's a big change from what we saw in 2002 when you made the transition to the enterprise model. And following it back then, you've really come the long way. So from just a perspective of -- maybe you can just share with us at this point kind of where you see the company along that evolution and kind of what you think of the next growth curve that you're seeing for the company?
Paul J. Cormier
Sure. When we first started, when we first moved the operating system to the enterprise model, we moved from a retail box product into satisfying enterprise customers. It was really a much more of trying to get enterprise customers to adopt open source and Linux. The bulk of our day was spent convincing customers that Linux was ready for the enterprise, open source was ready for the enterprise. That really was the bulk of the day. That's just gone now. That's not -- that never comes up anymore. I mean, there's 2 operating systems in the enterprise today. It's Windows and RHEL, and that's it. And I think that has actually paved the way for more open-source solutions to be adopted by commercial companies more quickly. So when we acquired JBoss 5 years ago or so, we were -- it was a much easier sell to come back in. It was a difficult sell because it was different from the operating system but it was much easier sell from an open-source perspective of not having to answer the question, is open source ready for the enterprise. So we know how to harden the enterprise. We are known for that. So it was eased in. As we acquired Comonet [ph], same thing. We had the path laid for us. We just acquired Glusters and very interesting technology. Lots of enterprises are already looking at them, but not many had gone yet because they didn't want to buy from a storage from a small start-up company. When it was announced that we acquired Glusters, we literally -- our phones started ringing off the hook from our installed bases of other customers who now want to talk because we've already shown, I think, that we can make open source consumable by the enterprise. So I think that's really been that evolution of where we've been as a company over the last 10 plus years.
Unknown Analyst
The big wave that I think you're about to enter, at least one of the areas that you haven't been in as strong in is in virtualization. There's been one dominant gorilla that's been the jungle and now, effectively, your job is to potentially take part of that. I mean, when you look at this, it seems like there's big opportunity with RHEV 3. Can you just give us an update of the timing, kind of why that changes the game and where you see the biggest chinks in the armor from the big V?
Paul J. Cormier
Right, the big V. So with virtualization, early on, we were the first company to really integrate virtualization with the operating system. I know I've talked to some of you today about this already, but back then, we were a much smaller company and we had to make a choice back then of when we were going to continue to have RHEL be a solid platform or sort of spread the resources and start with management back then. We decided to continue to let RHEL become a -- continue to let RHEL be a solid platform and we sort of pushed off doing virtualization management. Now, we're a bigger company. We really got behind it. We're able to invest more in R&D. We've brought virtualization management first ones to the Linux platform. And so that's what our customers have really been asking us for. In looking at our data, at our internal data, I was a bit surprised, a surprisingly small percentage of our installed base or our RHEL installed base has virtualized already. And so we think that that's a very big opportunity for us as that Linux base gets ready to virtualize to come to their Linux provider for that. We have a pure play Linux-based virtualization platform. We are on the next-generation hypervisor that's within the operating system, within the enterprise, within the Linux operating system. So we think we have a very, very strong -- we have very strong offering especially targeted at that installed base that we've been building over the last 10 years that has just started to think of going virtualization. The bulk of virtualization out there right now is on Windows. And so even though we can support Windows, we have a deal with Microsoft to support each other's guest operating systems on each other's hypervisors. We think our installed base is very ripe for a Linux-based virtualization offering.
Unknown Analyst
As the data center increasingly goes to Linux, doesn't that put you at a unique advantage in the data center? Not necessarily on desktops but...
Paul J. Cormier
I think it puts us in a very unique advantage, and I think the other thing is that customers, they wanted 2 operating systems. They have 2 operating systems. It's Windows and RHEL. They want 2 virtualization providers because the bottom half of a virtualization solution is an operating system. I mean, ESX is -- it's a half an operating system. And so Linux customers that are used to working with Linux touching their hardware have been asking for a Linux-based solution for a long time, and that's where we're coming with. And as you say, as Linux grows and spreads out across the enterprise, continues to spread out across the enterprise, we think we have a lot of fertile ground with it.
Unknown Analyst
RHEL 6 has been about a year in the market, and there's been some pricing tweaks and I don't think there's a lot of go-to market changes but there's been some pricing changes. And maybe you can just give us a sense on where you're at on adoption, how you think about the next leg for the core platform.
Paul J. Cormier
I mean, RHEL 6, in terms of -- I'm really not prepared to give you a percentage as a base of this gone to RHEL 6. I think the thing to remember is it doesn't really matter, because we are a subscription model and so -- and I think that's one of the things that people like about RHEL. It's a subscription model. When they're prepared to go to the next version, they can go to the next version. It's not a force to go to the next version. And even from our side, from a revenue perspective, it's not a big revenue jump when customers go to the next version. It's when they add subscription. So that's one thing to remember. The second thing is on RHEL 6, we've had very good takeup on it, we've had extremely good takeup on it, and one of the big areas has been performance, added security that we've gone with as well. I think the other thing that's interesting about RHEL 6 is we've been in the -- we've been in beta with our virtualization product for about 5 months now and 6 months or so, 5,6 months. And one of the things that we did with RHEL 6 was, because we have an operating system and a virtualization layer, we really -- the features that we put in RHEL 6 -- many of the features that we put in RHEL 6 were very much targeted at performance and better performance, better monitoring and better functionality as a guest operating system. So a lot of our customers that have been beta testing RHEV with RHEL 6 have seen those features that we are able to build into the operating system. So couple that with a big part of our base now looking to go to virtualization, we think it's going to be pretty exciting that we can really give probably the -- we think the best solution in the market now because we can work together with that guest operating system in the virtualization layer. I mean, remember, any one's virtualization layer, an operating system is a key part to a virtualization solution. There's 3 parts to any virtualization solution. There is the hypervisor, the guest and the management platform. And when you have all 3 pieces and you have that ability to really prioritize what features you're going to do, really tweak and tune between those 3 pieces, I just think you're at a much bigger advantage to be able to give the best solution.
Unknown Analyst
I think the street has been overly focused on server sales. They've been growing single digits. You've been growing your billings 10x server growth. So when you think about the disconnect, you've obviously proven that there's a fairly big disconnect on the servers, and it just goes back to this bundled sale that customers are adopting more and more of the features as a stack. Is that the disconnect in terms of...
Paul J. Cormier
I think that's part of the disconnect. I think it's actually part of the bulk of the disconnect. I think one part of the disconnect as well is -- Tom and I were talking about this earlier. We've actually -- a couple of the analysts that we work with have told us that they've actually seen a fair amount of provisioning within the clients that they service, re-provisioning of servers that may have been running Windows in the past. They go to a new project and now it's no longer -- it's Linux ready. It's a choice. Do I want to run RHEL on the new project or Windows? They choose RHEL with re-provision those servers. So that's not something that's not going to show up in those numbers. But I think the other part of it is exactly what you talked about now the ability to actually sell more bundled solutions to our customer base. I think that's had a very big effect on it.
Unknown Analyst
And now you have Gluster.
Paul J. Cormier
I'll get to Gluster 1 second. One of the things I just want to add on that, it's very important to that bundling approach is we can always tune it to the customers' advantage. But also, from a stickiness perspective, with us, in the past, one of our biggest competitors has been ourselves. We're an open source company. So in the past, we would many times see clones of the operating system that we might have to go and compete with, et cetera. That's getting more and more diminished as the solutions -- even though the solutions are all different components of open source, as those solutions get more complex and need more systems level engineering, it's more of a need for a company like us to put the pieces together. It's no longer, "I go get an operating system out of the box. I install it. It just runs." It's more complex solutions. So I think that's been part of the uptick in what you're seeing with our business as well.
Unknown Analyst
And now you're getting an additional revenue boost with Gluster over time. Clearly, it's early that -- I mean, how do you think about that in terms of the TAM and the monetization of the Gluster?
Paul J. Cormier
Let me -- if I could just for a couple of minutes just talk a little bit about the logic around why we did Gluster. Gluster is very, very interesting. One of the things that we see, I talk about this a lot, is in the past, in the '80s and '90s, you had the vendors out there, sort of like what Oracle is trying to do right now is go back to the '80s with one stack from application through middleware through operating system all the way down to the metal. That's how the Digitals of the world, the IBMs of the world, that's how they used to work back then. And x86 came in and commoditized that layer. Windows came in, Linux came in, and commoditized those layers. And so that's really starting to change right now. You see the same thing on the storage side. The storage side has sort of had that model, that same model that servers had back in the '80s or a storage box, very vertically positioned storage box. It could do a lot of things but as long as you bought more storage boxes. Now you're starting to see storage solutions being built at a commodity hardware. The explosion of big data means that there's data everywhere and data is in different formats. It's no longer just in relational databases. Data is in files, in objects. It's on NFS file systems. It's on test [ph]file systems. It on ext3 file systems and it's -- that's what big data is all about. What Gluster does is it comes and leverages that commodity storage infrastructure and enables you to have one common storage name space on top of that commodity infrastructure without having to replace that commodity infrastructure and it allows you to have -- to build very complex and very, very large storage systems, clustered file systems. So that was in a software-only solution. That was really one thing that was very important to us, really seeing history repeat itself with what Linux did to the server market. The other thing that's very interesting with Gluster was that as -- we truly believe that cloud is going be a hybrid environment. It's going be an environment where customers run bare metal system applications, they run them on virtualized infrastructures, they run them on private clouds, some from VMware, some from Red Hat, and they run them on external clouds, whether it be from Amazon or IBM or NTT and others. And so customers want to be able to control that very disparate infrastructure as if it's one. With Glusters, as we move a workload out into the public infrastructure like Amazon or IBM, we can now move storage with that application, and that can still be part of my common name space within my enterprise. So if I want to move that application back in, I don't lose with my storage. And even if it's sitting out there, it's just part of that common environment that makes up my overall environment. You can't do that with hardware. That can only be done with software. And so the market -- there was no use for this kind of thing 2 years ago. But now, with the advent of cloud, especially in a hybrid configuration, that is one of the most interesting things about Gluster that we saw that will enable us -- a really key component to enable us to build out that hybrid environment.
Unknown Analyst
But that will take a while to get monetization among your customers.
Paul J. Cormier
But we think -- the first part that I talked about -- where I talked about going in with the software appliance in an existing environment, that will monetize in the very near future. That -- and for us, that's also a nice upsell to RHEL. Because it's a similar buyer on the customer side that buys the storage side of this in many cases, and it's just an additional upsell to RHEL from our sales force perspective. It's sort of just, "Can I get fries? Can I get a large order of fries with this?" It's upsell, just as we split out some of our other products for the sales force to upsell with what we did with RHEL 6. So that's the near term.
Unknown Analyst
Just on the platform -- I have another question and we can go to Q&A. But just on the platform real quick, everyone's got a platform now. VMware has one. Salesforce has one. Oracle now has Oracle cloud..
Paul J. Cormier
You mean Platform-as-a-Service?
Unknown Analyst
Yes, they are trying to move towards this model. So what's differentiating on your platform versus what you're seeing on others?
Paul J. Cormier
There's 2 key components. First, I'll quickly define what Platform-as-a-Service is, right? So Platform-as-a-Service is a platform for developers. It sits out in the cloud that allows and helps the developer build their application into one image that may include a guest operating system, may include an app server for that application, all in one image, and then move that application out, move that one image out somewhere in the cloud to be executed and run. Our Platform-as-a-Service -- that's exactly we have. We have a set of tools out there that we acquired in an acquisition called Makara. But really, the key components to it are JBoss and RHEL. If a developer has been used to building an application on the inside of their enterprise on JBoss and RHEL and now they go up to the Platform-as-a-Service to build a cloud-based application, having that same app server and that same operating system with the same revisions, with the same characteristics that they were used to in the inside environment is very, very important. And if you really believe, as we do, it's going to be a hybrid environment that applications will run as many on bare metal and across to the cloud, that becomes very important as you have to understand what the characteristics of the application are. So we think that the combination of our acquisition of Makara and the components, the standardized enterprise components of RHEL and JBoss are what make us very -- have a very differentiated effect. I don't think any other company can match that with us right now.
Unknown Analyst
Just last question on the competitive landscape. Sitting in the audience, when Larry Ellison rolled out the penguins that year and no one really kind of saw it coming, but you kind of fast forward, that was like one of the bottoms in the stock and it was a great opportunity and you've obviously really had no -- felt no impact from Oracle. But what have they done to not get this? They've put a lot of resources but they haven't been effective at the level. And I think when they've talked about the number of customers, the number of customers you're putting up a quarter is almost equivalent to what they put up cumulatively over quite a period of time. So...
Paul J. Cormier
The strength of open source is in the collaborative development of it. And what Oracle's solution around Linux is, is to take what everybody else does in the community, take it in and put just the changes in that make just Oracle run better. That's sort of counter to the whole open-source model. So I think that's one thing. But I also think on a practical sense, I think what they're doing is they're trying to tailor a Linux for their applications. But what customers really want is they want one operating environment. I mean, I'll give you an example. When we first started out, we had the leading Linux operating system across x86, i and p. Our z for IBM, our z implementation was not that great. SUSE had a better z implementation than us at the time back in '05 or so. And so we saw many times where they'd have a SUSE on 360 and everything else was RHEL. Our customers didn't like it. They wanted one operating environment. So we actually put a lot of push with IBM and a lot of resources and got a first-class, top-notch z RHEL implementations, so customers could have one operating environment across all architectures. Oracle is trying to go down the line and say, "It's Oracle Linux for the Oracle applications." And I guess whatever else in this case, RHEL for everything else. That's not what customers want. They want one operating environment across their entire infrastructure. So I think that's been part of the pushback from the customer base as well.
Unknown Analyst
And you've gotten pulled from the -- their competitors like IBM where it's actually strengthened your bond with IBM and their go-to market. So..
Paul J. Cormier
Very much. I mean, whether it's IBM or HP or others, they would much rather see a company like ours that has a neutral playing field for that level of infrastructure that they need to rely on. The operating system is a key piece for all the pieces that those other vendors sell. I think they would rather put their bet on a neutral player than on one of their biggest competitors.
Unknown Analyst
Just one fact check, I just wanted to ask you. You hear a lot about the free Linux market and then the paid-for Linux market. And I think the framework has been that you basically own 75% of the paid-for Linux market. Is that a fair...
Paul J. Cormier
Fair, yes, fair. I mean, it depends on which study you look at, but that's in the typical ballpark.
Unknown Analyst
Ballpark, okay. Any questions? I can keep going.
Unknown Analyst
With regards to Gluster, I think you said it's similar to the way the Linux is to UNIX or RHEL is to UNIX, I guess. Do you...
Paul J. Cormier
No. What I meant was the Gluster -- the storage market in general feels like it's similar in terms of ready to start commoditizing up that stack as servers and UNIX was, say, 10 years ago.
Unknown Analyst
So does that mean that in your mind, Gluster could have the same kind of cost-savings impact to customers as RHEL does in the UNIX market?
Five years out or x years out, can Gluster be as big as RHEL is?
Paul J. Cormier
I'm not going to make that prediction, but we can give as big of a cost savings on certain applications in the storage market as RHEL has and does on the server market. But I'd rather not give a prediction on what I think it's going to be.
Unknown Analyst
I'm just trying to get a sense of when you guys did the deal, is it just another product that will be one of many within Red Hat's portfolio? Or is this potentially could be as big as RHEL down the road?
Paul J. Cormier
I really do think the future -- I think the future is building more of these integrated environments and -- right now, I have 4 business units: RHEL, JBoss, middleware, cloud and storage now. And in some regard, each one sells into their own markets, but more and more customers are asking us and to put them together to build the next generation architectures. I think more of our future are more of the solutions type of delivery to the customer base than the piecemeal parts to the customer base. That's why this was a key element of that.
Unknown Analyst
Who do you think, who's Gluster hurt in the market?
Paul J. Cormier
We don't think it hurts anyone yet. I mean, I really don't think -- the storage vendors -- or the big storage vendors are so big and they've got such a wide array of solutions that I don't think it's a dent in them. I think -- we look at Gluster more as where the puck's going versus where it's been. So it's tough to say. I don't think it hurts any of them today. I don't really know where all of them think they're going tomorrow. But where we see the puck going, it's a natural evolution of that, but it's -- EMC is still a big partner of ours and NetApp is still a big partner of ours and so -- and I think they both saw it that way as well.
Unknown Analyst
I think many of us lived through the JBoss acquisition and it was a little more shiny, boxed up, packaged on the acquisition than maybe I thought and I was wrong and it took you a lot longer to digest JBoss. I mean, what has changed now on the M&A side? I mean, do you feel like you've gained a lot of knowledge from kind of the war wounds of JBoss and...
Paul J. Cormier
Yes, some of it, I mean. With JBoss, I think I'll be honest. I look back at JBoss. We wouldn't -- the best thing -- one of -- there are 3 defining moments in the company's history, and that's one of the 3 defining moments in the company's history was the acquisition of JBoss. Having said that, I think we probably underestimated how much work we had to do. When we bought JBoss, it was just an app server. And what we really had to do to compete with the other middleware vendors was have a complete stack, complete application stack and a complete SOA stack. I spent the last 5 years with heavy R&D investment to get there, and now we're there. We'd probably -- in my side of the world, we probably underestimated going into customer -- how much customers really wanted a complete solution there and not just an app server in the production environment. So that was one thing. I think from the sales side, we probably underestimated the specialty needed, both sales and channels, the difference in the ISP ecosystem. All of that kind of thing, we had to build that up. So I think we learned a lot about that. With the Gluster acquisition, from Day 1, we put a plan together to what we needed to do in engineering over the next 3 years, what we needed to do for sales, marketing and channels over the next 3 years. And we hit the ground running with all of those organizations budgeted and staffed up to move in a new product line. So I think we learned, and I think we sharpened it a bit, and we're way ahead of the game on this one.
Unknown Analyst
Okay. Thanks for your time.
Paul J. Cormier
Thank you.
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