Red Hat: Hung Out to Dry? Jeff Fischer (TMF Jeff)
August 10, 1999
Despite weak interest for Internet-related IPOs, operating system software company Red Hat (proposed Nasdaq ticker symbol, RHAT) is expected to price its IPO shares today and begin trading on Wednesday. Red Hat markets a commercial version of Linux, an operating system developed by programmers on the Internet and used by approximately 10 million people. Red Hat's version is called Red Hat Linux. Red Hat Linux is an open source operating system that allows programmers to make suggestions and amendments to the code. Red Hat markets the latest version on CD-ROM and offers instructive manuals for use.
Linux is primarily used as server software, so large companies and Internet Service Providers will account for the bulk of Red Hat's customers. America Online (NYSE: AOL) supports and owns a minority position in Red Hat through Netscape, as does Intel (Nasdaq: INTC). Other industry leaders supporting Linux include IBM (NYSE: IBM), Hewlett-Packard (NYSE: HWP) and Dell Computer (Nasdaq: DELL). All of these companies, as well as Compaq (NYSE: CPQ) and Oracle (Nasdaq: ORCL), have minority stakes in Red Hat. Intel got the ball rolling as an early investor.
Despite a corporate-bias, Red Hat wants to make Red Hat Linux marketable to the masses. Microsoft (Nasdaq: MSFT) has internally accepted the threat that the new operating system poses to Windows NT, primarily, and perhaps eventually to Windows. If Red Hat can make its Linux product successful with the mass consumer market (currently Linux lacks applications), the IPO valuation that we're likely to see tomorrow could eventually be more than merited. That is a large "if," however.
Red Hat will sell 6 million of 66.6 million company shares at $12 to $14 per share, up from an earlier indication of $10 to $12 per share. At $12 a share, the company would be valued at approximately $800 million if the sharecounts from Hoover's are accurate.
Employing over 130 people, Red Hat had revenue of $10.8 million in the year ended February 28, 1999, up 109% from 1998 revenue of $5.1 million. The company lost $91,000 for the year, or $0.01 per share. In its most recent quarter, Red Hat lost $2 million ($0.09 per share) on sales of $2.7 million. If the company does price today and open for trading tomorrow, trade will begin in late morning to early afternoon Wednesday. To discuss Red Hat, visit its message board. For more on the company, visit http://www.redhat.com.