[LWN Logo]

Linux Weekly News
Contact us

Red Hat's IPO filing

Red Hat Inc. filed for its initial public offering (IPO) of stock on June 4. For those who do not want to plow through the entire filing, here is a list of highlights. It is not intended to be a thorough analysis of the document by any means - just a list of interesting things.

First of all, most of the numbers are still missing. This is evidently common practice; they will be filled in via an amended filing closer to the actual IPO. So, in particular, there is currently no information on what percentage of the company they intend to offer for sale. Current practice for high-tech stocks is to make that percentage small - it keeps most of the ownership in its current hands, and tends to drive the price up by limiting the supply of stock.

Traffic on Red Hat's web site was 2.5 million page views from 265,000 unique visitors in March, 1999.

Red Hat's strategy from the filing:

  • Continue to enhance their web site to "create the definitive online destination for the open source community."

  • Expand their professional service capabilities, aiming at large corporate business.

  • Increase market acceptance of open source software.

  • Continue to invest in the development of open source technology.

  • Enhance the Red Hat brand through advertising and PR campaigns.
Nowhere in the filing is anything about "make more money selling our distribution." Red Hat clearly sees its future elsewhere.

There is a financial table which appears to indicate that Red Hat has, over the course of its existence, lost roughly $372,000. In 1995, they had a $128,000 loss on revenues of $482,000. In 1999 (their fiscal year ends in February) they lost $130,000 on revenues of just under $11 million. There are currently almost 44 million shares of stock outstanding.

There is a set of risk factors, things that potential investors should worry about. The list may look scary - it's supposed to. Red Hat is supposed to think up everything that could go wrong here. Here's some of the things they came up with:

  • The Linux market is still developing, and open source business models are unproven.
  • They rely on Linus Torvalds and other prominent Linux developers. They also worry about kernel hackers joining a competitor.
  • They depend heavily on large numbers of independent developers, making integration and testing difficult.
  • Linux applications are still scarce.
  • If faster Internet connections become widely available, more users may download the distribution from the net, and fewer will buy it.
  • The open source community may not like their business strategy.
  • They expect to incur "significant losses for the forseeable future."
  • Rapid growth has strained their resources.
  • Their senior management team has a lot of new faces, and is highly dependent on a few key personnel (listed are Robert Young, Matthew Szulik, Tim Buckley, and Marc Ewing).
  • They are competing with Microsoft and a number of other established OS vendors.
  • Competition with other Linux distributors is intense, and the barriers to entry into the business are low.
  • Their international expansion plans could be risky.
  • The planned expansion of their services business may not work out.
  • Competition for skilled employees is intense.
  • They may not be able to attract visitors to their web site, or they may not get the advertising revenue they expect.
  • The GNU General Public License (GPL) might not be enforceable. This concern arises mostly because the GPL has never been tested in court.
  • They could be sued for infringing on the intellectual property rights of others. The fact that their code is developed by others does not help here.
  • They might get nailed by Y2K.
  • They have "broad discretion" as to the use of the money from the IPO. Look for the Red Hat yacht fleet at a trade show sometime soon.
Obviously there's a lot that could go wrong. That's business.

Dividends. Red Hat has never paid any, and has no plans to anytime soon.

Sources of income. Red Hat wants to increase its services business, but it's almost insignificant now: in 1999 they brought in $10,000,000 from software sales, and $777,000 from services.

Expenses. They spent just over $3 million in sales and marketing in 1999. Research and Development falls behind that, at $2.2 million.

Staff. They currently employ 127 people; on March 1, 1998, instead, the number was 36. They expect to need to move to new offices in 12-18 months. The breakdown of their employees is: Software Engineering: 52, Sales and Marketing: 30, Customer service: 28, Finance and administration: 17.

Year 2000 compliance. They have done testing of various versions of their distribution, and have also hired an independent company to test 5.2 and 6.0. This testing is still happening, and should be complete by the end of this month. They do not have a contingency plan if the 6.0 release turns out to have Y2K problems, but they are not too worried about it.

Their internal assessment (looking at the systems they use to run the business) is running late - it is still in progress as of the filing date. That leaves them with not much time if something serious turns up. Again, they seem not to be worried; they use Linux for their internal operations.

The web site currently has "20 professionals" working on it. Their plans for the web site include: personalizations ("my.redhat.com" - really), advertising and sponsorships, content subscriptions (things like "market reports" and support will be available - for a fee), e-commerce, and licensing of their content to other content providers.

Distributors. The two biggest distributors of Red Hat Linux are now Ingram Micro and Frank Kasper and Associates. The various Linux-specific distributors out there do not figure into the picture. They also list OEM agreements with Dell, ASL Workstations, and CPU Micromart.

Competitors. For operating systems in general they list Microsoft, Novell, IBM, Sun, and so on. The usual crowd. In the Linux world, they worry about competition from Sun, Corel, and Cygnus. There is no mention in the document of the other companies currently in the Linux distribution business (such as Caldera, SuSE, or TurboLinux). Evidently none of the other distributors currently are seen as a real competitor.

Who owns Red Hat stock. The biggest stockholders are as follows. Percentages are before the IPO; afterwards they will drop, but the numbers are not there yet:

Greylock IX Limited Partnership  14.5
Benchmark Capital Partners 9.7
Intel Corporation 5.0
Robert Young 15.1
Marc Ewing 15.1
Frank Batten, Jr. 25.0

Notable in their absence is the whole list of companies which have invested in Red Hat over the last several months: IBM, Dell, Compaq, Netscape, etc. None of them bought a stake large enough to make this list.

Much more information can be found in the filing, of course.


Eklektix, Inc. Linux powered! Copyright 1998 Eklektix, Inc. all rights reserved.
Linux ® is a registered trademark of Linus Torvalds