Jan 25 2000 6:01AM ET
More on IPO Pipeline...
Will Caldera's IPO Be Another Red Hat?
by Hal Plotkin
Silicon Valley Correspondent
Caldera Systems Inc.'s pending initial public offering is likely to be
boosted by the same Linux-fever that propelled the recent Red Hat Inc.
{RHAT} and VA Linux Systems Inc. {LNUX} IPOs to soaring opening-day
performances.
"The market has demonstrated that it still has a thirst for Linux
IPOs," says Stacey Quandt, an analyst at Giga Information
Group, based in San Jose, Calif.
Orem, Utah-based Caldera Systems is widely regarded as one
of the top four Linux companies, alongside Durham,
N.C.,-based Red Hat; VA Linux Systems, based in Sunnyvale,
Calif.; and Germany's SuSE GmbH. Canadian-based Corel
Corp. {CORL}, which recently introduced its own version of the
Linux operating system and which offers several applications
that run on the Linux OS, is also fast becoming a major Linux
player.
Red Hat
Linux Systems
Corel
All told, there are now more than 145 different companies
distributing versions of the free Linux OS, according to
International Data Corp., based in Framingham, Mass.
"There's no doubt Caldera is bunched up near the top of that
pack," says Philip Rueppel, an analyst with Deutsche Banc
Alex. Brown, based in San Francisco. "The company certainly
is perceived very highly."
As such, Caldera could well be the next beneficiary of the
investor enthusiasm that greeted previous Linux-related IPOs.
Red Hat, for example, went public last Aug. 10, with shares
initially priced at $14, while VA Linux Systems, which posted
one of the biggest first-day trading gains ever, went public on
Dec. 8, with shares initially priced at $30.
Red Hat post-IPO stock
performance
Linux Systems post-IPO stock
performance
"Linux is the operating system of choice in the Internet world,"
says Walter Winnitzki, an analyst at Hambrecht & Quist, based
in San Francisco. "A lot of that has to do with scalability and
reliability. You have a whole global community of Linux
developers that are working on making it work and improving it."
Unlike proprietary operating systems sold by companies such
as Microsoft Corp. {MSFT} and Sun Microsystems Inc.
{SUNW}, the vendors of open-source Linux make the source
code of their products freely available. Armed with the source
code, programmers can modify or improve the software without
needing the help or permission of the original manufacturer.
Microsoft
Sun Microsystems
"Everyone who uses open-source software can benefit
whenever the software is improved," Quandt says.
Rather than make money selling software or software-user
licenses, open-source companies generate most of their
revenue by selling documentation and related professional
services that help businesses use Linux to maintain and improve
their operations.
At present, Linux is finding its widest acceptance powering Web
servers, the powerful computers that pump information onto the
Internet. Analysts see several other growing markets for Linux in
the future, including so-called thin-appliance servers, used to
deliver software applications over the Internet, along with a wide
variety of other devices, ranging from set-top boxes to personal
digital assistants.
The worldwide market for thin-appliance servers is projected to
grow to $16 billion by 2003, up from $2.2 billion last year,
according to Dataquest, based in San Jose, Calif. Overall, the
total market for Linux shipments is projected to grow at a 25
percent compound annual rate between now and 2003,
according to IDC.
Analysts say Caldera Systems is well-positioned to benefit from
that projected growth due, in part, to its close relationship with
Sun Microsystems, a leading vendor of server hardware. Sun
has its own Web-server operating system, called Solaris, that
competes with both Microsoft's Windows NT and Linux.
Earlier this month, however, Sun took an equity position in
Caldera, joining with Citrix, Inc. and several other firms that
banded together to make a $30 million pre-IPO investment in the
company.
"Sun's role is the most intriguing for investors," Quandt says.
"Sun could potentially shift the market in Caldera's favor if it
starts installing its Linux software on its hardware." That
development would also give Caldera access to Sun's enormous
base of installed users.
Dan Kuznetsky, program director at IDC, agrees that Caldera is
one of the top Linux distributors but says the company hasn't
done as good a job building brand awareness as competitors
Red Hat and VA Linux Systems did prior to their IPOs.
"They have a wonderful demo, and the product looks very
good," Kuznetsky says. "But if you asked people on the street
about Caldera they would probably think you are talking about a
volcano in Hawaii."
Kuznetsky says Caldera's relative anonymity could hurt the IPO.
"I think it is going to be a challenge for them," he says.
Compared with Red Hat and VA Linux, "I just don't sense as
much of a buzz about the company. At this point, most people
outside of the Linux community are not aware of it. That said,
what they are offering is a solid product."
Citrix Seen as Hot Stock for 2000
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Example
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It's also a very well-reviewed product within the Linux
community. Caldera Systems' ersion of Linux, for example,
makes the formerly cumbersome process of installing Linux
considerably easier. Users can, for example, play a computer
game called Tetris while the software automatically installs itself.
"Even the experts appreciate that," Rueppel says. "If you can
save 10 minutes every time you load it on a system, that's a
very valuable feature."
The product's user-friendly features have won the company
several recent awards, including the 1999 product of the year
nod from The Linux Journal, a trade publication.
Despite general optimism regarding the Linux OS, most analysts
warn, however, that the business case for Linux companies has
yet to be fully established. There are concerns, for example,
that both Caldera Systems and Red Hat may eventually suffer in
the marketplace because they are too closely tied to their own
distributions, or versions, of the Linux OS.
Other companies, such as CollabNet Inc., a privately held firm
based in San Francisco, use whatever Linux distributions are
best-suited to serve the customers for whom they customize
products, a key revenue stream targeted by all the Linux
companies.
"The single-distribution vendors could be at a disadvantage in
the future," Quandt says.
What's more, rival Red Hat has already scooped up many of the
key software developers who work on improving the heart of the
Linux OS, which is called the kernal. Caldera, by contrast, has
fewer programmers employed who are publicly associated with
the continual improvement of the software.
"That could give an advantage to Red Hat down the line," Quandt
says. "They could take Linux in a direction that might leave
Caldera having to play catch-up."
In the meantime, given the reaction to previous Linux-related
IPOs, it seems likely investors will find the pending Caldera
Systems IPO attractive, perhaps even irresistible.
"Right now, we're seeing enormous growth in [Linux] shipments
and modest growth in revenues," Kusnetsky says. "In the future,
though, free software could drive the need for all of the other
related ancillary business services."
Caldera Systems posted a loss of $9.3 million on revenue of
$3.05 million in fiscal 1999, as compared with a loss of $7.9
million on revenue of $1.05 million during the previous year.
The precise date for the IPO, which is expected early this year,
hasn't yet been set. Company insiders and investors will own
84.2 percent of the firm's stock once the offering is complete.
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