June 4, 1999 5:15 PM PDT

Red Hat files to go public

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It's official: Red Hat, the number one seller of the Linux operating system, is going public.

Red Hat, currently the most popular seller of the Unix-like operating system, announced today it has filed a registration statement with the Securities and Exchange Commission for an initial public offering, as expected.

The company is hoping to raise $96.6 million and will trade on the Nasdaq under the ticker symbol "RHAT." The initial pricing range was not included in the SEC filing.

For the fiscal year ended February 28, 1999, Red Hat stated in its filing that it earned $10.8 million in revenue, compared to $5.2 million for the same period a year ago. About 7 percent of its yearly revenue came from services and the remainder from sales of software and related products. The company posted a net loss of $130,000 for fiscal 1999.

Red Hat intends to use the funds for working capital and other purposes, such as "geographic expansion" and could be used for acquiring "businesses, products, and technologies that are complementary to our own," it said in the filing. The company noted that there are no agreements or commitments already in place to make any such moves.

The lead underwriter of the offering will be Goldman, Sachs & Company, which is expected to sell all of the stock offered. Other underwriters include Thomas Weisel Partners and E*Trade Securities.

The IPO shows how far Linux has come since its beginnings as an amateur effort for founder Linus Torvalds and the coterie of programmers who have contributed to its development. The operating system has gained significant momentum in the last year, winning a place in the product lineup of blue-chip companies such as IBM, SGI, Compaq, Hewlett-Packard, and Dell. The explosion of interest in Linux has caused Microsoft to consider the operating system as a competitor.

Red Hat, which International Data Corporation has said was the top-ranked seller of Linux in 1998, already lists as its investors Oracle, SAP, IBM and Dell, among others.

Red Hat listed several risks in the filing. Among them are weaknesses in its open source model, including the lack of formal service and support and the hesitation to write software for an operating system not controlled by a specific company, the filing said.

In addition, Red Hat also is dependent on the pool of programmers, led by Torvalds. "Mr. Torvalds and a small group of engineers are primarily responsible for the development and evolution of the kernel [the core of the Linux operating system]. If this group of developers fails to further develop the kernel, we will either have to develop it ourselves or rely on another party to develop it," Red Hat said.

The company has a strong cast of developers. Of the four "prominent Linux developers" the company mentions by name in the filing, Alan Cox, David Miller, and Stephen Tweedie are on the Red Hat payroll. That leaves only Torvalds himself, an employee of Transmeta Corporation.

While open source software has its risks, there are reasons for its popularity, the company said. "Customers and users are able to acquire the software at little or no cost, install the software on as many computers as they wish, and customize the software to support their particular needs. In addition, customers and users can obtain software updates, improvements, and support from multiple vendors, reducing reliance on any single vendor," Red Hat said.

Another risk, the company points out, is that the open source community may react negatively to its business strategy.

"Some members of the open source software community have criticized the expansion of our strategic focus as encouraging the fragmentation of the Linux community. Others have suggested that by expanding our focus, we are trying to dominate the market for Linux-based operating systems and the open source community in the same way that some companies have been able to dominate the traditional software markets," the company said.

Though selling Linux itself has been the biggest part of the company's revenues so far, Red Hat plans to expand its professional services capabilities to capture large corporate business on an enterprise basis, the company said.

In addition to competition from Microsoft, Red Hat points out rivals Novell, Sun, and Santa Cruz Operation, as well as more than 23 suppliers of Linux.

 

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