The Road to $1 Billion

Based on reports, Red Hat Inc. is close to joining the $1 Billion dollar club for FY2012.   First, congratulations are in order as not many software companies ever reach this mark. Second, this is a testament to the big business of free and open source software.

Having worked at BEA for several years prior to the Oracle acquisition, I couldn’t help but wonder how this compared to BEA’s path to $1B and decided to do a bit of research and decided to share what I discovered.

First, both companies were formed in 1995 through the acquisition/merger of other companies. Both companies had acquisitions early in the life of their respective companies that set their course for the next several years. With Tuxedo already part of BEA’s offerings, BEA set their sites on becoming the foundation for transactional e-commerce systems with the purchase of WebLogic. Red Hat moved down the path of providing a support organization for open source software and acquired Cygnus Solutions in January of 2000.

In terms of getting to $1B in revenue, there was no contest.  BEA hit the $1B mark in 2004, eight years before Red Hat, and was well on the way to $2B at the time of the Oracle acquisition.

In addition, $100 invested in each company at the time of IPO produced very different results. In 2004, the year BEA hit the $1B mark, $100 would have grown 788% to $888.  In 2008 when the company was bought, the $100 would have been worth $1162, providing a 1063% return.  Contrast that to RedHat in 2004, where $100 invested at IPO would have been worth $53 resulting in a 47% loss.  In 2008 the numbers are very similar for Red Hat, with $100 being worth $52 dollars and a 47% loss.  If somebody held on to Red Hat long enough to see the $1B mark, the $100 at IPO would be worth about $165 today or a 65% ROI.

Company Founded IPO $1B Revenue ROI-2004 ROI-2008 ROI-2011
BEA 1995 1997 FY2004 788% 1063%
RedHat 1995 1999 FY2012 -47% -47.1% 65.2%

These are very different results from what I believe to be a very similar business model. There will be several of you who disagree with me, but in the end, the BEA business model and the Red Hat business model boiled down to the same thing.  The ability to create and sustain a re-occurring revenue stream.  BEA sold licenses, and services, Red Hat sells subscriptions and services.  The amount of software licenses sold provided an indicator of how much revenue BEA could expect.  The amount of subscriptions sold by Red Hat is an indicator of their revenue. The two companies had very different approaches to how their products are brought to market, but at the end of the day both companies measured success on the ability to ‘sell’ the license or subscription that feeds the continuous revenue stream.

The big question for Red Hat is whether or not they can stay on target for the next billion.  SaaS and PaaS offerings are changing the dynamic of how organizations purchase/use software as well as how investors value software companies. (Some good thoughts on that topic here. ) If Red Hat wants to make it to the next billion they are going to have to figure this out.