eSoft Gets a Boost From Intel (News) November 16, 1999

eSoft Gets a Boost From Intel

By Dave Marino-Nachison (TMF Braden)
November 16, 1999

A fortuitous turn of market enthusiasm appears to be paying off for investors in Linux-based Internet appliances and services company eSoft Inc. (Nasdaq: ESFT), shares of which rose more than 50% today, helping bring a pop to a mostly lackluster 1999.

With shares of server appliance maker Cobalt Networks (Nasdaq: COBT), which bases its hardware on the open source Linux operating system, rocketing in their IPO last week -- only cementing the current euphoria surrounding companies that help their clients get online through hardware, software, or service offerings -- the table was set.

Given the selection of a dining metaphor, investors' appetite for just about anything Linux amounts to the table itself: click here for a recent Foolish take on Linux operating system and services provider Red Hat (Nasdaq: RHAT).

But it took an investment from chip giant Intel Corp. (NYSE: INTC) to get investors to start helping themselves to eSoft stock, the companies today announcing a deal -- details unspecified -- that includes a software development for the companies to develop applications for Intel architecture-based Internet infrastructure appliances.

"We are very excited about the investment and development agreement with Intel," said eSoft President and CEO Jeff Finn. "We are confident this support will enable eSoft to accelerate our future research, development and business expansion activities."

In other words, it's more Intel's money that will be helping eSoft in the near term than the software deal. Good thing, too, since the company can use the cash.

It's worth noting, though, that eSoft has really only existed in its modern form for a few years now. Through 1995 most of the company's revenues came from the sale of TBBS software, which allows secure access to a company's computer system through direct dial-in access. The growing use of the Internet essentially made that technology obsolete, though, and though eSoft still gets some revenue from that product line it's impact on the company's financials is waning.

Instead, two years ago eSoft launched its "Internet Protocol ADapters" (IPAD) -- Internet/Intranet connectivity systems combining Internet hardware and communications software to help small and mid-sized businesses get on the Internet without heavy expenditures on equipment, staff, or training.

The early 1999 integration of Boise's Apexx Technology, an acquisition completed in May, provided eSoft's offerings with their current name: TEAM Internet. It's that deal that was to spur a beefed-up marketing campaign, and true to form selling, general and administrative costs have outpaced revenues so far this year. Predictably, cash has been fleeing the ship like fleas jumping an electrified dog.

But the company continues to find outside funding, the Intel news supplementing late September's announcement of about $2 million in second-round financing from original funding partner Brown Simpson. As of the end of the third quarter, eSoft had about $2.1 million in cash on its balance sheet -- and $3.3 million in long-term debt -- but that was before Intel chimed in. Intel is also an investor in Cobalt.

Is eSoft destined for Cobalt-like valuations? It certainly appears well-positioned for future growth with the company adding distribution channels and reporting encouraging sales momentum both in the U.S. and overseas. While it might be wishful thinking to buy and then simply sit back and wait for the market to multiply by 10, in examining this sector eSoft seems like a natural candidate for investigation.

Related Links:
eSoft Web Page
Fool News, 11/15/99: Red Hat and Cygnus Form Linux Link Up
Fool News, 11/9/99: Lustrous Cobalt Dazzles

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