Red Hat breaks high-growth streak, but parent company IBM remains confident in a rebound

Brian Gordon
·2 min read

A notable streak at Red Hat has ended as the Raleigh software firm recorded single-digit quarterly growth for the first time since being acquired by IBM.

On Wednesday, IBM announced Red Hat revenue rose 8% from July through September, higher than IBM’s overall growth but under what the parent company had predicted for the Triangle’s prominent open source software provider.

“First of all, (IBM CEO Arvind Krishna) and I would acknowledge, we came in a couple of points below our expectations,” IBM Chief Financial Officer Jim Kavanaugh told investors. “And I think that’s an execution discussion overall.”

IBM spent $34 billion to acquire Red Hat in 2019. The deal ranked among largest in the history of the software industry.

Since then, Red Hat had delivered double-digit revenue growth every fiscal quarter. Until this summer.

While the 8% jump at Red Hat exceeded IBM’s overall 3.5% growth, it fell short of the 11% to 13% rise the parent company had anticipated.

Kavanaugh said the dip was driven by a decrease in Red Hat’s consumption-based services, which in contrast to its subscription-based services allow customers to pay for individual software services as needed. Growth for this segment of Red Hat fell from the high single-digits to the low single-digits over the past three months. IBM had projected Red Hat’s consumption-based services to remain in high single-digits growth, Kavanaugh said.

He pointed out consumption-based services only make up around 20% of Red Hat. The other 80%, consumption-based services, is doing very well, he said.

Red Hat’s three “core” subscription services — Red Hat Enterprise Linux, OpenShift and Ansible — grew 19% in the quarter. OpenShift and Ansible rose more than 40%.

Developed in 2011, OpenShift is a hybrid cloud platform that allows customers to create, use and manage applications. Ansible is an automation platform Red Hat acquired in 2015.

“We feel very confident in the long-term posture of Red Hat growing double digits,” Kavanaugh said. “We just got to get through and monitor what’s happening to us on the services side.”

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