RealTime IT News

Throwing Its Hat Into the Ring

Not satisfied with existing operating systems, a Finish student, Linus Torvalds, created his own in the early 90s. Unfortunately, he didn't have a multi-million dollar budget; nor did he have a team of programmers; there were no beta testers or focus groups; he didn't have OEM agreements or any other distribution channels.

But he did have a connection to the Internet. So, he posted his new creation, known as Linux, into cyberspace. But he also posted the source code, allowing programmers across the world to evolve the operating system.

As of 1998, Linux is the fastest growing server system, accounting for 17 percent of all new license shipments (according to International Data Corp.). This compares to 36 percent for Windows NT and 24 percent for Novell.

Why the growth? Simply put, Linux is flexible, cheap (you can get it for free if you download it), relatively stable, allows for a high-degree of Net support and is multiplatform.

But there is an inherent problem: Suppose you are using Linux in your company and, as is always the case, there is problem. Who do you call?

Well, there are several companies that offer Linux support services -- of course, for a price. One such company is Red Hat, which is expected to go public this week.

Below are the valuation metrics (assuming the IPO is priced at its top range of $12 per share):

Red Hat   RHAT
pro forma IPO    
Shares offered   6.00
Price target/actual   $12.00
Proceeds   $72.00
Shares out   66.8
IPO market cap   $801.60
less working cap   $73.30
less LTD   0.38
Enterprise value   $727.92
Annual Losses   $0.09
Annual Revenues   $10.70
Red Hat    
Revenue multiple   75
Rev. multiple enterprise   68

The company's site, www.redhat.com is the destination point for Linux resources commentary, how-to's, news, community, downloads, online manuals and bug fixes.

The company also provides comprehensive professional services. There are a myriad of pricing plans, which range from $995 to $60,000 (for 24-hour-a-day unlimited support for one year). Red Hat offers the "Red Hat Certified Engineer" course. And there are also consulting services.

Red Hat is also a leading developer of the Linux operating system, adding key features (like a sophisticated installation program).

The result is a high-powered software suite called Red Hat Linux 6.0, which retails for $79.95. According to IDC, Red Hat accounted for 56 percent of all new license shipments of the Linux operating server systems in 1998.

The company has many happy customers. For example, Amerada Hess replaced $2.5 million in supercomputing hardware with 90 servers using Red Hat Linux for $420,000.

For its IPO, Red Hat plans to sell 6 million shares between $10 and $12. The lead underwriter is Goldman Sachs and the proposed ticker symbol is RHAT.

True, the IPO waters have been extremely hazardous lately, as many IPOs have fallen below their offering prices or delayed their offerings.

Then again, the market has shown that it still likes companies with huge potential, as was the case when Internet Capital Group, which soared 103% last week (this company is an incubator for business-to-business companies, such as VerticalNet).

To me, Red Hat fits in this category.

Assuming a strong performance from Red Hat, dont be surprised to see other Linux companies file with the SEC, such as VA Linux Systems, Caldera, and LinuxCare.

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