Red Hat ends speculation, buys JBoss

Will the OSS consolidation never end? Today, Red Hat announced that they would buy JBoss for up to $420 million in a stock and cash deal.

(I sat in on today's today's press/analyst call and entered a real time transcript. I've attributed who said what when possible. Any errors in transcription are my own. -Ed)

9:18 - here we go, it's started.

Main participants: 

Matthew Szulik, chairman and CEO of Red Hat

Charlie Peters, executive VP and CEO of Red Hat 

Marc Fleury, founder, chairman, and CEO of JBoss

(skipping the legal fine print and usual disclaimers about forward looking statements.)

(The participants started with a short statement and then took questions from the audience.) 

(Matthew): The open source development model is being advanced today by announcing we've entered into a definite agreement to acquire JBoss. It's clear the market is demanding an integrated set of OSS solutions. JBoss's microkernel architecture is a good foundation.

The acquisition demonstrates our commitment to an integrated open source solution for our customers. It'll be exciting for RH to bring together both our communities. 

We will advanced the suite of low cost, high value solutions, vertical content for our customers. We're motivated as a united entity.

(Marc): We chose RH because we see tremendous opportunity for a large independent open source provider. RH and JB are the leaders in their fields and it's a great combination. I won't comment on the rumors in the press, but we feel the companies go well together. There's no impedance mismatch.

A lot of our partners want to see a large open source pure-play. It's good for our customers too. RH's geographical presence and sales force will help increase the reach of the GEMs platform.

Our business models are aligned too. RH is kind of like our big brother. We copied what RH did for a long time, with the subscriptions and services model. 

(Charlie): I'll discuss the financial implications. RH will acquire JBoss for $350 of base consideration plus $70million if performance targets achieved. This will be subject to customer and regulatory reviews. Both boards of directors have already approved.

Both RH and JBoss generate revenue primarily through subscriptions. Subscriptions are growing faster than services in both companies. We believe JBoss can achieve >$60million in booking in 2006 and >$100million in booking in 2007. These formed the basis of the consideration paid.

As a private company, JBoss has had negative cash flow but was anticipating profitability in September this year.

RH's revenue was growing >40% per anum, and JBoss was growing even further. JBoss employees 150 people, and RH about 100 people. There are no big hires planned beyond those already announced.

(Matthew): We look forward to the continued success and collaborative opportunities of open source.

(The floor was then opened up for questions.)

How about lockups for some of the key employees and developers, and what about subscription revenue write-down?

(Marc): JBoss's employees are very excited so we don't think lockups will be necessary. However there are various mechanisms in place including lockup on shares for a very small number of employees and appropriate incentives to keep some key people.

What are the benefits of coming over to RH?

(Marc): It'll help greatly. First let me reiterate that we chose the RH option because it was a great place for employees. I wouldn't have done this without the buy-in by some of the key guys, developers, sales, and management. In terms of market penetration there are several synergistic areas. There's geographic expansion... JBoss was struggling with this, for example Asia/Pacific. We'll be able to greatly expand our opportunities worldwide now.

Walk us through the go to market strategy?

(Marc): JBoss will remain an independent division of RH. The merge makes a lot of sense from the business model. We both have the same OSS business model. When you talk about stacks, our models match very well. But the J2EE and Operating System markets are different. We aim to be the largest independent pure-play software vendor and we're going to leverage each other. The larger company will be stronger which will give 'warm and fuzzies' for some of our customers. At the end of the day, we'll leverage some of the indirect relations that RH has, and the RH sales team will benefit from an extended portfolio of offerings. And the customer will benefit from one-stop shopping. Competitors are moving into open source, but we're here first.

What's the head count?

JBoss has about 150 employees, 100 in US, 50 in EMEA.

How will it be branded?

Those issues are still being discussed but clearly the representation that JBoss has in the market gives strong reasons to continue that brand.

Have you gotten any feedback from your partners like IBM and Oracle? 

We've had long relationships with those firms and we'll continue to partner with them, and in some situations compete with them. We're putting more emphasis on what the customer thinks and decides. The relationships will continue and evolve.

What about Novell and JBoss?

Answer: We look forward to having Novell as a productive partner.

Will you be adding more to your portfolio and stack?

(Marc): JBoss has been working with technologies such as Java and .Net. We also have support for the PHP model. So you have JAMP and the LAMP stacks. JBoss will over choice to the customer. If they want to use .Net, that's ok, if they want to use PHP, that's ok. We will embrace the LAMP programming model and other models. The OSS industry as a whole has been moving up the stack, like SugarCRM, but this announcement is clearly focused on the infrastructure part of the SOA platform.

You have the integrated virutalization as part of RHEL5. Customers are scaling out to grid-like infrastructure. We're excited to support a heterogeneous environment.

How many ISVs support JBoss?

(Marc): We don't keep precise tabs on that. We've launched recently a certification program to help OEMs and ISVs. The RH merge will be perceived by them in a positive light in terms of the lack of conflict we have with them. We remain an independent community providing them with the infrastructure. We'll continue to serve our customers in OEMs and ISVs.

How much revenue comes from OEMs.

Answer: More detail will be available later.

(Goldman Sacs, calls it a good stragetic fit): Did you have any higher offers? Shouldn't database be included?

(Matthew): Marc didn't say anything about any other offers on this phone call. We feel good about the offer we (RH) has made and it wouldn't be appropriate to comment on other offers.

Regarding databases, we need to get these companies integrated first (RH and JBoss), then we'll see.

(S&P, congratulations on the deal): This direction conflicts with previous comments Marc has made doesn't it?

(Marc): Look at all the companies playing in these markets. We're throwing our hats in the ring and saying we're going to be the largest *independent* player. Our models are very much align. Personally, I do report to Matthew. When I speak about integration I'm talking about marketing and reach and so forth. It was very important to me to take us into a conflict-free environment where there could be trust and a shared goal. We're whole and intact. We have somewhat different cultures so it's not a shoe-in but we copied RH for a long time on our model.

(Charlie): Our existing infrastructure is 31 offices in 17 companies, systems and staff already set up and working. We think we can jumpstart JBoss' business - they have 4 offices in EMEA and no offices in APAC for example.

(Credit Suisse): Can you give us more detail on the earnings?

(Charlie):  Earn-out goals are slightly higher than the numbers I gave on the call this morning.

JBoss's development model for contributors is a little different than the Linux model. Will there be changes?

(Matthew): They both have very compelling open source models.

(Marc): The one difference in terms of development models, I used to say this was 1st generation vs. 2nd generation, is that we push the 'professional open source' model. Linux was before distributions. The Professional open source model which is pervasive in newer communities like MySQL and JBoss, is we employ the leaders of the different projects. Our development model is not to prevent contributions by others, we just admit that OSS doesn't happen by itself, you still have to fund it. It's cheaper and more effective than other models but we're realistic in what it takes to run it. We keep separation of 'church and state' and map OSS innovation into consumable OSS products.

For example there's a mantra in OSS that says 'release early and often', but enterprise IT says release once or twice a year and support it well. Another example is investments and how we think about acquisitions. If we have $10mil we don't do one thing, we do 10 things. So yes, some of our proprietary competition likes to paint us with a nonsensical line that we're not open source. Our model is slightly different from the Linux model but we bring some of the professional methodology to RH. We have order of magnitudes more outside contributors than competitors.

How will the acquisition affect the RH application server and Jonas?

(Matthew): Those integration details are going to get the benefit of Mark and his team so it'd be premature to answer the app server question yet. 

Can you quantify the customer base expansion expected?

(Matthew): I was traveling recently and a number of customers asked what we were doing. There's great consistency there. Marc and his team will bring a good mood there.

What does JBoss have in terms of components for vertical markets?

(Marc): In terms of vertical components remember we're here more focused on the infrastructure that enable vertical plays. Both RH and JBoss are extensively used as the modern platform for SOA. We have pioneered the microkernel architecture that allows ISVs to assemble their infrastructure without having to 'eat' a one size fits all solution. A lot of telcos, wall street apps, travel, government, etc. applications are usually trapped in the buy or make choice. They're stuck with building things that don't offer competitive advantage, or if they buy then the don't get the flexibility. We offer a third way to all our enterprise IT and OEM/ISVs. They're buying a platform but because it's OSS they can 'make' as well. We're the first movers, we're creating a 'pole of attraction' for our ecosystem. It's very attractive, not locked into one vendor, open source presence, etc..

What are your typical customer deal sizes?

We'll have to answer that tomorrow at analyst day. There will be an open house at RH's HQ in Raleigh Tuesday, and Marc and Matthew will both be there.

10:00am: This concludes the presentation.