‘We expect this is the bottom’ in enterprise growth


Wall Street wasn’t pleased with Red Hat’s second-quarter revenue miss on Wednesday, but the software company’s outlook is much brighter than this quarter made it seem, Red Hat President and CEO Jim Whitehurst told CNBC on Friday.

An open-source software provider that helps enterprises get onto the cloud, Red Hat gets much of its business from its Enterprise Linux operating system, which helps run companies’ applications via private and public clouds.

But the Enterprise Linux division’s modest second-quarter growth of 8 percent didn’t mean business was slowing permanently, Whitehurst told “Mad Money” host Jim Cramer in an exclusive interview.

“Two and a half years ago, we started down a path of trying to get our customers in three-year agreements. By getting them in three-year agreements on Linux, it gives us time to go then sell them new products,” he said.

“The problem with that is those three-year agreements are typically fixed, and so they don’t go up in value every year, so the bulk of our Linux business and these three-year deals isn’t growing at all,” Whitehurst continued.

As the three-year deals come closer to their renewal dates, however, the Linux business should turn up, the CEO said.

“We did say we expect this is the bottom and it should re-accelerate from here. We have good visibility and our total backlog grew 20 percent this quarter, so we have a pretty good sense that it’ll accelerate from here,” he told Cramer. “Next year, with a lot more renewals from those, you should see more growth.”

Investors were also concerned by what Red Hat called a “larger competitive loss” to a legacy on-premise software provider in the second quarter. The company chalked the loss up to price competition.

Whitehurst came back at the criticism by noting that of the 300 deals Red Hat has made in the last three years, only two clients left for competing offers and didn’t return.

“We’ve only had one other customer beyond this one which went away and didn’t then later come back,” he told Cramer. “If you went all 300 out of 300, it probably means you’re underpricing. So I’m OK losing one every now and then. Let the customer try something else and then realize the value of what we do.”

Red Hat’s stock ended Friday trading up 0.61 percent, at $134.62 a share. The company has announced partnerships with Microsoft and IBM to speed up cloud adoption across industries.

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