Red Hat is the world’s leading provider of open source software. Seeking to attack the 40-60% of company IT budgets that are consumed by operating and maintenance costs, open source is considered a cheaper and more flexible alternative to licensed models of software for company IT departments. Red Hat currently maintains about 60% of the Linux market for software products, and with its consistent high growth, the company is investing in the future as open source and Linux continue to gain popularity.
Revenue comes from two sources: software subscriptions and training and services. The company makes about 85% of its revenue from software subscriptions, whi ,,ch include set-up, ensurance of compatibility with existing software, and other services involving upgrades and trouble-shooting. In fact, Red Hat derives its revenue from these services rather than the software alone. The remaining 15% from services that include advanced technical support, hourly consulting, engineering, and customer training and education services.
Red Hat employs an open source software model. It opens up software code to innovation from an international community of contributors while licensing and selling software that has been tested for reliability and interoperability with a variety of popular applications. Leveraging the volunteer community of users working to improve the code, RHT sells its software for prices often under-cutting their competitors.
Red Hat generates nearly 60% of bookings through channel partners. Dell, Hewlett Packard, IBM and system builder Sun Microsystems (JAVA) are some of the larger Red Hat partners. The company seeks to increase that share by launching a partner portal that simplifies the ordering of Red Hat applications for distributors.
For the fiscal year ended February 28, 2007, total revenue increased 44% to $400.6 million from $278.3 million the year before. Within the past three years, Red Hat has seen consistent rapid growth since 2003, with revenue increasing around 40-50% every year.
The increase in revenue resulted primarily from an increasing global willingness to switch to open source and Linux, and an increasing adoption of Red Hat Enterprise Linux as the primary computing platform by large companies. The popularity of Red Hat has created an increase in demand for subscriptions, which in turn drives the need for training of Red Had Certified Technicians, Engineers, and Architects. However, training revenue has increased at a much slower pace than subscriptions revenue, increasing only 40% since 2003 while subscriptions have increased by more than 600%. Subscriptions now compose 85% of total revenue, bringing in $342.2 million to Red Hat.
In addition, revenue resulting from the June 2006 acquisition of JBoss contributed approximately $23.1 million to the $122.3 million overall increase in revenue.
|Year Ended, (in $ thousands)||2007||2006||2005||2004||2003|
|Training and Services Revenue||$59,418||$47,886||$45,341||$42,329||$42,334|
|Total Subscription and Training and Services Revenue||$400,624||$278,330||$196,466||$124,737||$90,275|
Costs are about 7-8% of revenue. Software subscription costs have decreased as a percentage of revenues due mainly to newfound efficiencies in electronic delivery of software, but training and services is much more costly, growing both in absolute numbers and as a percentage of its revenue.
|Year Ended, ($ in thousands)||2007||2006||2005|
|Cost of Subscriptions||$27,457||$21,003||$13,488|
|Cost of Subscriptions, % of Subscriptions Revenue||8.0%||9.1%||8.9%|
|Cost of Training and Services||$37,279||$27,504||$24,999|
|Cost of Training and Services, % of Training and Services Revenue||62.7%||57.4%||55.1%|
|Research and Development||$71,038||$40,883||$32,626|