Red Hat CEO Says Q2 Marks Enterprise Linux 'Bottom'

Open source solutions provider Red Hat Inc (NYSE: RHT) reported second-quarter results klast week that mark "the bottom" of poor performance in its core enterprise Linux operating system business, CEO Jim Whitehurst told CNBC's Jim Cramer.

What Happened

Red Hat showed a miss on the sales line, while the enterprise Linux business grew at just 8 percent — a disappointing performance for a "cloud king" that should be showing a double-digit growth rate, Cramer said during his daily "Mad Money" show Friday.

Whitehurst said the company decided around three years ago to lock in clients with three-year agreements on Linux to give the sales team sufficient time to cross-sell new products. These agreements are typically fixed, so the bulk of the Linux business in the three-year deals "isn't growing at all,"  he said. They are projected to grow next year, when the first round of new deals are up for renewal, which should prompt growth for the company as a whole, he said. 

Why It's Important

One of the more notable assumptions Red Hat is making in its outlook implies a strong renewal rate at a time of heightened competition in the cloud sector. Whitehurst said that of the 300 deals the company signed in the past three years, only two left for a competitor.

"If you went all 300 out of 300, it probably means you're underpricing," he said. " 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."

What's Next

Red Hat's total backlog did grow by 20 percent in the reported quarter, and there is reason to believe the report marks a "bottom" and growth will "accelerate from here," the CEO said. Looking forward to 2019, investors should expect to see more growth from the backlog along with "a lot more" contract renewals, he said. 

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