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Red Hat, Inc. - Linux Software
(919)
754-3700
1801
Varsity Drive
Raleigh, NC 27606
www.redhat.com
Sales
$126
million
Business Description
We
are the global leader in providing an enterprise operating system and
related systems management services based on open source technology for the
information technology infrastructure requirements of large enterprises. We
developed an enterprise operating system, Red Hat Enterprise Linux AS, which
we introduced in May 2002. Since the original release, we have added two
additional versions of Red Hat Enterprise Linux: Red Hat Enterprise Linux ES
and Red Hat Enterprise Linux WS. With these offerings we provide a Red Hat
Enterprise Linux operating system that, we believe, is suitable from a price
and functionality perspective for a wide range of application areas of the
information technology infrastructure of the large enterprise, including the
technical/developer workstation, the middle tier of the information
technology infrastructure, which includes applications such as database ERP
and large file systems, and the data center. Red Hat Network provides an
integrated management service that allows Red Hat Enterprise Linux
technologies to be updated, configured, provisioned and the performance of
these technologies to be monitored in an automated fashion. These technology
solutions, and the enterprise technology and systems management offerings
that will follow them, reflect our commitment to provide an enterprise-wide
infrastructure platform based on open source technology.
Many of the leading independent software vendors to the large enterprise, or
ISV’s, have caused their applications to run on the Red Hat Enterprise Linux
operating system. We believe that this widespread support from companies
such as Oracle (Oracle 9i Database, Oracle 9i Application Server, Oracle
E-Business Suite), IBM (WebSphere, DB2, Lotus, Tivoli, Rational), BMC,
Computer Associates, EMC/Legato, VERITAS, BEA, SAP, Peoplesoft and Network
Applicance among others has increased the market acceptance of the Red Hat
Enterprise Linux operating system. In addition, we have signed global
strategic agreements with leading global Intel-based server and workstation
hardware vendors to the large enterprise, or IHV’s, including Dell, HP,
Fujitsu, NEC, Hitachi, Fujitsu Siemens and IBM, all of which have agreed to
support Red Hat Enterprise Linux offerings on certain of their Intel-based
servers and workstations. In addition, each of these hardware providers has
agreed to pre-load Red Hat Enterprise Linux on certain of their Intel-based
servers and workstations and sell the hardware and Red Hat Enterprise Linux
to their customers as a pre-configured solution. We believe that the
distribution of Red Hat Enterprise Linux and our layered infrastructure
technologies by these companies will be one of our most critical channels of
distribution.
We have developed a complete suite of consulting and training offerings that
enable large enterprise customers to capture the significant cost,
performance and scalability benefits of our enterprise solutions. We persist
in our core belief that the collaborative open source development model is
the most effective method to create and deliver high quality software to
enterprise customers. We believe that the adoption of Red Hat Enterprise
Linux, which is based on open source technology, as a mission critical
operating system by the large enterprise, is a significant shift in the
computing industry, which has by all accounts continued to gain significant
momentum during calendar 2003.
We view Red Hat Enterprise Linux as the foundation upon which we will build
an open source architecture for the enterprise. It is our strategy to
provide an open source alternative to many of the proprietary infrastructure
software applications currently used by large enterprises. However, we
believe it is essential to our success that we provide our customers choices
at all times, which means that we will aim to ensure that competing
proprietary software performs as well on our Red Hat Enterprise Linux
operating system as any alternative open source software that we distribute.
PRODUCTS AND SERVICES
The Red Hat Enterprise suite of products, consisting of Red Hat Enterprise
Linux, Red Hat Network, and Red Hat Applications, are at the center of our
subscription strategy and our open source architecture. Our professional
services offerings, principally directed toward our large enterprise
customers and the leading hardware providers with whom we have strategic
agreements, include technical support and maintenance, custom development,
consulting, training and education, and hardware certification.
Many of our software products come with a limited services subscription.
Users are entitled to access Red Hat Network in addition to various levels
of Internet-based or telephone-based support.
Red Hat Enterprise Linux
Red Hat Enterprise Linux is a version of the Linux operating system designed
expressly for enterprise computing. Red Hat Enterprise Linux is built around
a common core that delivers the features required for commercial
deployments, including:
· Support for a wide range of ISV applications, including Oracle, VERITAS,
IBM, and BEA;
· Certification on multiple architectures and leading Intel-based hardware
original equipment manufacturer, or OEM, platforms, including Dell, HP,
Fujitsu, Fujitsu Siemens, IBM, NEC, Hitachi, and Sun Microsystems;
· Comprehensive service offerings, up to 24 x 7 with 1 hour response,
available both from Red Hat and selected ISV/OEM partners;
· Performance, scalability, and availability, with leading audited industry
benchmarks;
· Stability with 12-18 month version upgrade cycles and five years product
support; and
· A fully homogeneous suite of products that enables interoperation of
systems from the technical/developer workstation to the data center.
Red Hat Enterprise Linux is available in three versions:
Red Hat Enterprise Linux AS Red Hat Enterprise Linux AS is our
top-of-the-line Enterprise Linux product designed for use in mission
critical areas of the information technology infrastructure. Supporting the
largest commodity-architecture servers and available with the highest levels
of support, Red Hat Enterprise Linux AS is designed for large departmental,
middle tier of the information technology infrastructure and data center
server deployments.
Red Hat Enterprise Linux ES Red Hat Enterprise Linux ES is our version
designed for systems ranging from the edge-of-network to medium scale
departmental deployments.
Red Hat Enterprise Linux WS Red Hat Enterprise Linux WS is designed for
technical/developer workstations and high performance computing/clustering
applications. It is designed for client-server deployments, development
environments, and client applications environments (such as electronic
design automation and oil/gas applications).
Our Red Hat Enterprise Linux products are primarily delivered on an annual
subscription basis with one year of subscription services and access to the
basic software update and configuration management functionality of Red Hat
Enterprise Network.
Red Hat Network
Red Hat Network provides simple systems management services for Linux-based
infrastructures. With a focus on open standards and scalability, Red Hat
Network helps organizations increase productivity, lower costs, and enhance
security. The modular design allows customers to purchase desired services
for provisioning, managing, and updating systems. Red Hat Network services
are also available through different architectures—Hosted, Proxy, and
Satellite—that are designed to provide organizations with the right level of
support and functionality based on their size or needs.
Red Hat Network consists of three modules: Update, Management, and
Provisioning. Customers purchase entitlements to these services on an annual
per-system subscription basis.
Update Module Complimentary with a RHEL subscription. The Update Module is
the entry-level offering for Red Hat Network. It allows our customers to
maintain single systems and includes functionality such as a graphical user
interface, priority notification, errata information, Red Hat Package
Manager (“RPM”) dependency checking, and auto update.
Management Module Includes all of the functionality of the Update Module.
The Management Module allows our customers to manage their entire Linux
infrastructure. Designed for enterprise scalability, the Management Module
features systems grouping, role-based administration for policies and
permissions, scheduled actions, and higher-end functionality (with Satellite
server – see the discussion of our architecture below), such as third-party
channels, custom channels, local package caching, and off-network
capability.
Provisioning Module Includes all of the functionality of the Management
Module plus the Provisioning Module includes features such as operating
system provisioning (from bare metal boxes or previously deployed boxes),
configuration management, multi-state rollback, scheduled remote actions,
Kickstart configuration tools, and RPM-based application provisioning.
Red Hat Network has three architectures designed around our customers’
requirements: Hosted, Proxy, and Satellite.
Hosted In the Hosted architecture, individual systems of the customer
connects to the Red Hat Network via the Internet and exchanges packages and
information with the central Red Hat Network servers. This is the default
architecture for purchasing a subscription to Red Hat Network.
Proxy In the Proxy architecture, individual systems of the customer connect
to a Red Hat Network proxy hosted on the customer’s network. The proxy
aggregates all necessary data and performs selected tasks locally. It also
communicates via the Internet with the central Red Hat Network servers. All
information stored in the Red Hat Network database is kept on the Red Hat
Network servers. The Proxy architecture is available for all of the service
modules listed above.
Satellite In the Satellite architecture, all Red Hat Network functionality
(system profiles, reporting data, application server, etc.) is stored
locally on a customer’s network. The satellite server connects with Red Hat
Network over the Internet to download updates. This architecture allows our
customers to take their Red Hat Network technology off the Internet if
desired to improve security. The Satellite architecture is available for all
of the service modules listed above.
Red Hat Applications
Red Hat Applications include software for managing Web content, software
development, and high availability clusters of Linux systems. These
applications are a key component of our vision of open source architecture
for the enterprise. In the application infrastructure layer, we offer a
range of standards-based open source technologies to enable JavaTM-based Web
application development and deployment. In addition, the Red Hat Developer
Suite provides an Integrated Development Environment for application
developers. The Red Hat Cluster Suite features high availability clustering
using application failover technology, which is designed to make
applications available at all times. Network load balancing technology
provides performance and availability improvements for network-intensive
applications. Red Hat GFS is an enterprise-strength clustered file system
for Linux, designed for commercial and technical computing applications
requiring access to fully shared data.
This growing suite of products and services that comprises our open source
architecture provides new opportunities for our customers to deploy open
source technologies that integrate with their Red Hat Enterprise Linux
operating system and make it even more productive.
Professional services
Our professional services are designed to help individuals and enterprises
derive the full value of our products and open source technology.
Global Professional Services Our strategy is to provide comprehensive
solutions to assist our customers at every phase of the infrastructure
lifecycle, from analysis and design of use of our open source products to
development and deployment. We also offer services in areas such as
migration to Linux from UNIX and integration of disparate operating
environments, high-performance computing, and high-availability clustering.
Global Learning Services Red Hat Global Learning Services (“GLS”) provides
comprehensive Linux training for system administrators. The central element
of our training program is RHCE (Red Hat Certified Engineer) certification,
which has been consistently ranked as one of the top three technical
training certification programs by groups, such as Certification Magazine.
The GLS curriculum includes courses on security, developer skills, and much
more. We offer open enrollment in more than 85 cities worldwide, and the
majority of the curriculum also can be delivered via e-learning or a
customized on-site course.
THE
RED HAT BUSINESS MODEL
We have created a business model based on a suite of enterprise software
products and technology-based systems management services (Red Hat
Enterprise Linux and Red Hat Network), which are developed as open source
technologies. We sell these technologies and services to our customers in
the form of annual subscriptions on a per-server basis. Most of the
contracts we have with our customers are for subscriptions to Red Hat
Enterprise Linux. The base subscription entitles the end user to one year of
maintenance, which includes configuration support and updates to the
technology, when and if available, during the term of the subscription. We
believe we have developed a compelling list of reasons for the CIO’s of
large enterprises to pay on a per-server basis for the software solutions
and technology base-based systems management services that we provide. These
reasons are based on the business value that we provide to our customers
rather than the traditional lock-in of proprietary technology. Our business
model is predicated on the acceptance and widespread deployment of Red Hat
Enterprise Linux as a significant operating system by the large enterprise,
our success at receiving annual subscription revenues on a per-server basis
for Red Hat Enterprise Linux and related enterprise technologies and our
ability to receive increasing annual average per server subscription
revenues by providing additional value to our customers in the form of
layers of technology and additional systems management services that our
customers will purchase as needed.
Widespread support by the leading independent software and hardware vendors
to the large enterprise
We engineer what we believe to be the most comprehensive, technically
advanced, reliable and stable operating system based on open source
technology, the Red Hat Enterprise Linux platform and related technologies.
Red Hat Enterprise Linux AS, ES and WS provide an integrated operating
system that we believe meets the performance, reliability and scalability
demands of the chief information officer of the large enterprise from the
edge of the network to the data center. In order to facilitate the
widespread deployment of Red Hat Enterprise Linux, we have focused on
gaining widespread support for the Red Hat Enterprise Linux operating system
from the providers of hardware and software technology critical to the large
enterprise. We believe that we are currently the only Linux company to have
(i) the leading software vendors to large enterprises, such as: BMC,
Computer Associates, IBM (Websphere, DB2, Lotus, Tivoli, Rational), EMC,
Oracle (Oracle 9i Database, Oracle 9i Application Server, Oracle 10g, Oracle
E-Business Suite), BEA, SAP, PeopleSoft, Network Appliance and VERITAS,
cause their applications to run on our Red Hat Enterprise Linux operating
system and (ii) support from the top Intel hardware providers, like: Dell,
Fujitsu, Fujitsu/Siemens, HP, IBM, NEC, and Hitachi.
Red Hat Enterprise Linux is:
· flexible and scalable—capable of running the entire network of a large
enterprise or a single device;
· functional—able to handle discrete or multiple applications accessed by
multiple users;
· adaptable—allowing the user to modify the software to meet particular
needs and requirements;
· stable and reliable—constantly monitored and fine-tuned by thousands of
developers worldwide; and
· economically compelling—providing a hard dollar, rapid return on
investment (in most cases the return on investment occurs within six months
or less).
Technology-based systems management services that significantly reduce the
cost of managing the information technology infrastructure
Red Hat Network, the first of our systems management offerings, improves the
system reliability and security of the Red Hat Enterprise Linux operating
system while increasing system administrator productivity to reduce the
overall cost of managing the Red Hat Enterprise Linux infrastructure. Red
Hat Network brings together the tools, services, and information customers
need to maximize the reliability and security of enterprise systems. With
Red Hat Network, a single administrator can set up and maintain hundreds or
thousands of Red
Hat Enterprise Linux systems more easily than maintaining a single system
without Red Hat Network. The basic level of Red Hat Network services are
received as part of an annual subscription to Red Hat Enterprise Linux.
Options such as Proxy Server and Satellite Server can be purchased as
additional annual subscriptions and can provide systems management services
from inside the corporate firewall by changing the delivery point of the
service from Red Hat, via the internet, to a server located inside the
corporate firewall. In addition, we have recently expanded the functionality
of Red Hat Network to provide, as an additional annual subscription,
performance monitoring of the operating system, the network and certain
infrastructure applications and provisioning of the operating system and
certain applications. This performance monitoring service can be provided in
a hosted model over the Internet or through a satellite model which moves
the delivery point of the service inside the corporate firewall.
Extensive professional services
We offer a broad range of professional services relating to the development,
deployment, and use of Red Hat Enterprise Linux and related technology-based
systems management services. These professional services include information
technology architecture consulting, Red Hat Enterprise technology deployment
services, training and education and hardware certification. We believe that
providing these services and establishing ourselves as our customers’
technology development, deployment and systems management provider will
allow us to facilitate the widespread adoption of Red Hat Enterprise Linux
and other open source technologies by the large enterprise.
An online destination for the open source community
We are dedicated to serving the interests and needs of open source software
users and developers online. redhat.com serves as our primary customer
interface and delivery mechanism for many of our products. redhat.com also
serves as a comprehensive resource for the latest information related to
open source initiatives. It contains news of interest to open source users
and developers, features for the open source community, a commerce site and
priority access for software downloads and upgrades. Visitors to our website
can organize and participate in user groups, make available bug fixes and
incremental code improvements and share knowledge regarding the use and
development of open source software.
By acting as a clearinghouse of open source and Linux-related information
and by facilitating the interaction of developers, businesses and technology
enthusiasts, we believe our website has become a community center for the
open source movement.
Commitment to the open source development model
We have fully embraced the open source model in the development of its
technology solutions and services. Whereas some of our competitors have
incorporated certain aspects of this model into their businesses while
retaining various features of the proprietary model, our product offerings
are true open source offerings. We share our improvements to the Linux
kernel and other open source products with the development community. In
this way, we help independent developers by making our products more useful
for them in their own development projects. We believe that the
collaborative open source development model is the best way to develop and
deliver high quality software.
BUSINESS STRATEGY
Our business strategy is to rapidly gain widespread acceptance and
deployment of Red Hat Enterprise Linux as a mission critical operating
system by the large enterprise, to generate annual subscription revenues on
a per server basis for Red Hat Enterprise Linux, to generate increasing
annual subscription revenues on a per server basis by providing additional
value to our customers in the form of additional layers of open source
technology that will be provided on top of our Red Hat Enterprise Linux
operating system and to generate increasing revenue from providing
additional systems management services. In addition, we are focused on
selling our products and services to the Global 2000. The key elements of
our strategy are:
Increase the adoption of Red Hat Enterprise Linux by the large enterprise
The past twenty-four months have seen market acceptance of the Red Hat
Enterprise Linux operating platform by the large enterprise and the
acceptance of Linux in general as a viable operating system for mission
critical areas of the information technology infrastructure of large
enterprises, and we intend to promote further acceptance of Red Hat
Enterprise Linux and Red Hat Network through a variety of means. This
includes developing additional layers of technology for our Red Hat
Enterprise Linux operating system, bringing new systems management services
to market, focusing on the success of our strategic relationships with
companies such as Dell, Oracle, HP, IBM, Fujitsu, NEC, Hitachi, and Network
Appliance and continuing to add strategic relationships with other major
information technology companies and focusing on new geographic areas. The
strength of our strategic relationships with these companies is crucial to
the continued expansion of the use of our enterprise technologies globally,
the technical advancement and widespread distribution of our enterprise
solutions, the migration of existing third-party enterprise applications to
Red Hat Enterprise Linux and the development of new third-party enterprise
applications suitable for Linux-based operating systems.
Continue to pursue strategic acquisitions and alliances
We intend to continue to pursue a selective acquisition strategy as
opportunities arise to complement and expand our systems management
offerings, add additional layers of infrastructure products to our Red Hat
Enterprise Linux operating system and extend our service capabilities.
During fiscal 2004, we acquired Sistina Software, Inc., or Sistina. Sistina
provides us with a global file system software product that provides our
initial entry into the storage management marketplace. We also intend to
create additional strategic alliances where it is beneficial to our business
model.
Continue to grow our market share in international markets
We have operations in many countries in Europe and Asia. We are continuing
to expand our operations geographically. We offer Red Hat Enterprise Linux
in English, French, German, Italian, Spanish, Japanese, traditional Chinese,
simplified Chinese, and Korean, and plan to introduce it in additional
languages in the future. We expect that our international operations will
remain an integral part of our business and that we will expand into new
countries such as Korea, China and continents such as South America. Please
see NOTE 2 to the Notes to the Consolidated Financial Statements for a
discussion of our revenues by geographic area.
Continue to invest in the development of open source technology
We intend to continue to invest significant resources in the development of
new open source technology, capitalizing on our extensive experience working
with the open source model. We expect this continued investment to take the
form of increased expenditures on internal development efforts, as well as
continued funding of third-party open source projects. We also plan to
continue our financial support of the development efforts of many of the
top-tier engineers in the open source community.
OPEN
SOURCE SOFTWARE INDUSTRY BACKGROUND
Growth of open source software
The Internet has accelerated the development of open source software. Open
source software has its origins in the academic and research environments
and is based on an open, collaborative approach to the development and
distribution of software, whereby multiple groups of developers collaborate
on specific projects from remote locations around the globe. Developers can
write code alone or in groups, make their code available over the Internet,
give and receive comments on other developers’ code and modify it
accordingly. The growth of the Internet has greatly increased the scale and
efficiency of open source development through the availability of
collaborative technologies such as e-mail lists, news groups and web sites.
These technologies have enabled increasingly large communities of
independent developers to collaborate on more complex open source projects.
We believe that open source software has emerged as a viable alternative to
traditional proprietary software. Under the proprietary model of software
development, a software developer generally licenses to the user only the
object, or binary code. Binary code consists of the 1’s and 0’s that only
computers understand. By contrast, under the open source development model,
the software developer provides the user with access to both the binary code
and the source code. Source code is the language used by the developers. As
compared to the proprietary model, the open source model:
· allows a company’s in-house development team to collaborate with a global
community of independent developers;
· provides the user access to both binary and source code, and the rights to
copy, modify, alter and redistribute the software; and
· permits the user ongoing access to improvements made to the software by
others.
We believe open source software offers many potential benefits for software
customers, users and vendors. Customers and users are able to customize the
software to suit their particular needs. Vendors are able to leverage the
community of open source developers, allowing them to reduce development
costs and decrease their time to market.
One of the better known open source technologies is the Linux kernel, the
engine of our Linux-based enterprise operating system. An operating system
is the software that allows a computer and its various hardware and software
components to interact. Thousands of developers worldwide continually
collaborate on improving the Linux operating system and we believe we are
able to take the best of those improvements and integrate these improvements
into our Red Hat Enterprise Linux operating system and provide a stable,
rapidly innovating and high performing operating system which has the
support of all of the major independent software and hardware vendors in the
world.
Since 1991, the use of Linux-based operating systems has grown rapidly.
According to International Data Corporation (“IDC”), only two operating
systems have shown growth in net new shipments over the last three years:
Linux and Microsoft NT/Windows 2000.
Challenges to the widespread adoption of open source by the large enterprise
Despite a strong initial market acceptance of our Red Hat Enterprise Linux
operating system and other open source products by the large enterprise,
there exist a number of obstacles to widespread adoption within the
enterprise, including:
· the need for additional third-party enterprise applications to run on our
Red Hat Enterprise Linux operating system;
· limited number of well-financed, viable open source industry participants;
· competition from well-established industry participants; and
· success of a technology business model not based on the protection of
proprietary technology.
COMPETITION
In the market for operating systems, we compete with a limited number of
large and well-established companies that have significantly greater
financial resources, larger development staffs and more extensive marketing
and distribution capabilities. These competitors include
Microsoft, IBM, and
Sun Microsystems, all of which offer
hardware-independent, multi-user operating systems for Intel platforms, and
HP and Unisys, each of which, together
with IBM and Sun Microsystems, offers its own version of the UNIX operating
system with their own hardware offerings. Many of these competitors bundle
competitive operating systems with their own hardware offerings, thereby
making it more difficult for us to penetrate their customer bases.
In addition, in January 2004, Novell, Inc. acquired Suse, Inc., a Linux
company. Novell is significantly more capitalized than Suse had been and has
historical relationships with many of the Intel hardware providers.
With the development of our enterprise consulting and training and education
offerings, we now face competition in the market for providing consulting
services related to the deployment of our enterprise technologies, including
Red Hat Enterprise Linux and Red Hat Network. Our competitors in the market
include IBM Global Services, with which we have a global strategic
agreement, as well as other technology infrastructure consulting companies.
In the market for systems management services, we compete with a limited
number of large companies that have significantly greater financial
resources, larger development staffs and more extensive marketing and
distribution capabilities. These competitors include IBM, HP, Computer
Associates and BMC, all of which offer heterogeneous operating system
support including Linux, Solaris, AIX, HPUX and Windows. Many of these
competitors have legacy client/server offerings that require long
implementation cycles and are more difficult to replace in enterprise
customers due to switching costs.
The open source software market is not characterized by the traditional
barriers to entry that are found in most other markets due to the nature of
open source technology. For example, anyone can copy, modify and
redistribute Red Hat Enterprise Linux and most of our other open source
products themselves. However, they are not permitted to refer to these
products as “Red Hat” products unless they purchase such products from us
and, as it relates to our Red Hat Enterprise Linux and Red Hat Network
offerings, our customers agree not to utilize the benefits of the
subscription services that they receive from us on any server/workstation
for which they have not purchased a subscription. In addition, the only
means by which customers can receive a certified version of Red Hat
Enterprise Linux and receive certified updates and upgrades to a copy of Red
Hat Enterprise Linux is to purchase and maintain a current subscription
directly from us, our certified distributors/resellers or the hardware
vendors with which we have global strategic agreements.
We believe that the major factors affecting the competitive landscape for
our products include:
· the name and reputation of vendor;
· the product performance, reliability, functionality and price;
· the alliances of the vendor with major industry hardware providers such as
Dell, HP, IBM, Fujitsu, Fujitsu Siemens, NEC, and Hitachi;
· the quality of subscription services;
· the number of Global 2000 reference accounts;
· the availability of third-party enterprise infrastructure applications
that run on the operating system;
· the breadth of hardware compatibility;
· the distribution strength and number of distribution partners of the
vendor; and
· the strength of the vendor’s relationships in the open source community.
Although we believe that we compete favorably with many of our non-linux
competitors in a number of respects, including product performance,
functionality and price, and breadth of hardware compatibility, we believe
that many of our competitors currently have superior distribution
capabilities. In addition, there are significantly more enterprise
infrastructure applications available for competing operating systems, such
as Windows NT, Windows 2003, and UNIX, than there are for Red Hat Enterprise
Linux. An integral part of our strategy has been to address these
shortcomings by, among other things, strengthening our existing strategic
relationships and entering into new ones to expand our distribution
capabilities, and attracting more attention to the open source movement,
which in turn should create additional incentives for software developers to
write more applications for Red Hat Enterprise Linux.
Ticker
RHAT
Operating System & Server Software
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