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RealTime IT News

Cobalt's Bionic IPO

If you were building the perfect Internet IPO, what components would you use?

Well, infrastructure plays are hot on Wall Street, so something that addresses bandwidth or storage constraints would be good. E-commerce software and services also are a current favorite among investors.

And don't forget Linux, the operating system that has become wildly popular this year. That's sure to build a buzz, as is a freshly inked, multi-year deal with a major high-tech partner, say a leading computer maker.

Finally, it's important to have influential backers, especially an A-list underwriter that can whip up keen interest among institutional investors, whose ability to snap up large chunks of stock has provided the fuel for many an Internet IPO moonshot.

Put it all together and you have Cobalt Networks, a manufacturer of Linux-based server appliances targeting small to mid-sized organizations trying to establish effective Internet operations.

Cobalt is slated to go public this week, offering 5 million shares at a proposed range of $14 to $16 each. Underwriters for the IPO include top-tier names such as Goldman Sachs and Merrill Lynch. Cobalt's Nasdaq ticker symbol will be COBT.

A server appliance is different than a regular server in that it is designed to deliver specific network-based applications, rather than handling a range of applications and services. The premise is that application-specific server appliances can do the job more efficiently and cost-effectively, and are easy to install and maintain.

In its S-1 filing with the SEC, Cobalt cites a forecast from research firm Dataquest, which predicts the server appliance market will grow from $2.2 billion this year to $15.8 billion in 2003, with Linux-based server appliances comprising nearly one quarter, or $3.8 billion, of that total.

Cobalt's server appliances can be used for file serving, Web hosting, e-mail, e-commerce and application delivery over the Internet. Cobalt also makes caching server appliances that eliminate redundant Net traffic by storing information closer to the user, thus improving delivery time. In May it introduced a network-attached storage product that provides overflow file storage for network users. Product prices range from $899 to $1,899 each.

The company, founded in 1996, claims sales to 1,300 customers in more than 65 countries. For the nine months ended Sept. 30, revenue was $13.8 million, an 815 percent increase over the comparable period last year. Gross margin has increased more than fourfold to 35 percent in the most recent nine months, compared to 8 percent in the three quarters of 1998.

Cobalt had a net loss of $10.5 million in 1998 and $13.7 million in the nine months ended Sept. 30.

Competitors include large vendors such as Hewlett-Packard (HWP) Hewlett-Packard and IBM (IBM); server appliance companies such as Encanto Networks and Freegate; network caching firms such as CacheFlowl; and network storage vendors Meridian and Network Appliance.

To compete more effectively, Cobalt in September began a five-year agreement with Gateway (GTW) in which the PC maker will sell Cobalt products under the Gateway brand.

With strong revenue growth, products in several hot markets, key partnerships and solid financial backing, don't be surprised to seeCobalt end up with one of the year's hottest IPOs.


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