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With $1b in sales, Red Hat really takes off

Linux stalwart hits $1b in sales, plans local growth

Red Hat Chairman and CEO Matthew J. Szulik rang the New York Stock Exchange opening bell in 2006.

Richard Drew/AP

Red Hat Chairman and CEO Matthew J. Szulik rang the New York Stock Exchange opening bell in 2006.

Red Hat Inc. has just hit a major milestone in its business of packaging and selling freely available Linux technology - topping $1 billion in annual revenues for the first time in the North Carolina company’s 17-year history.

Red Hat

A conceptual design for the new Red Hat Westford facility.

And it has its Westford office to thank.

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Largely unknown outside the tech world, Red Hat’s business is booming due to the success of its Westford operations, which is responsible for much of the engineering that goes into the company’s software. Now, 80 percent of Fortune 500 companies use Red Hat.

The local office has recently signed a lease to build a new 100,000-square-foot office this spring, and its pledge to hire at least 181 new employees - there are currently about 300 - won it nearly $4.4 million in tax breaks from the state of Massachusetts and town of Westford in December.

Red Hat, which was founded in 1995 by Bob Young and is run today by chief executive Jim Whitehurst, has more than 3,760 employees worldwide.

Al Gillen, a software analyst at IDC Corp., said the company’s decision a decade ago to compete for enterprise business against such giants as Microsoft Corp., seemed risky at the time and had opposition even within Red Hat.

“The company brought forward a business model that really raised a lot of eyebrows, and a lot of people questioned if they could really be successful,’’ said Gillen. “They’ve proven it could work.’’

‘They were actually tapping a pool of deeply experienced engineering talent.’

Al Gillen 
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On March 28, Red Hat reported revenue of $1.1 billion ended in February - 25 percent higher than the previous year - and profit of 75 cents a share. The company’s stock price closed Thursday at $60.95, and is up 31.4 percent over the past year.

The newfound success is beginning to justify the hoopla that greeted Red Hat when it went public in 1999, at the height of the tech boom and Internet bubble. With the open-source Linux operating software a hot item, Red Hat’s public debut was one of the biggest one-day stock gains in Wall Street history. Priced at $14 for its initial public offering, it closed that first day at $52.06.

The company initially focused on getting consumers to use the Linux operating system, a technology based on license-free source code. But in 2002, it made what seemed like a foolhardy move: challenging Microsoft for a piece of the lucrative market of providing businesses with their software.

Many industry observers doubted businesses would use an operating system that was perceived as a software mainly for tech enthusiasts.

In 2001, Microsoft founder Bill Gates said Linux was only a competitor in the “hobbyist market, but I really don’t think in the commercial market we’ll see it in any significant way.’’

Now, all of Red Hat’s business, which involves selling Linux systems to businesses and charging them subscription fees for upgrades and maintenance, is focused on commercial customers.

“We made a tough choice 10 years ago, and we totally focused on Red Hat Enterprise,’’ said Paul Cormier, president of the Red Hat technology and products division in Westford. “If you look at that in hindsight, it was a brilliant move.’’

Techies have long championed Linux because it’s easily customized. And analysts say that many businesses have embraced it to avoid some of the licensing issues associated with Microsoft, or as they add new systems and databases to their businesses.

Cormier, a Massachusetts native, opened Red Hat’s local division in 2001 to spearhead the move into the enterprise business. A key strategy was finding software developers from local institutions such as Digital Equipment Corp., which was bought by Compaq in 1998.

“They were actually tapping a pool of deeply experienced engineering talent,’’ said IDC’s Gillen.

Red Hat’s first local outpost was a 900-square-foot office in Tyngsborough. As business grew, Red Hat moved to Westford. Cormier remembers 1,500 people showing up at one job fair to apply for 11 positions.

Red Hat is still far from challenging Microsoft’s dominance in the enterprise software market, and even within the universe of Linux users, the company has only about 25 percent of the overall market, said George Weiss, an analyst at Gartner Inc., based in Stamford, Conn.

But Linux continues to be popular among business clients, especially those that are expanding data centers or are moving networks and storage to cloud platforms.

All of that, said Weiss, will give Red Hat even more forward momentum.

Michael B. Farrell can be reached at michael.farrell@globe.com.
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