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Technology Stocks : Red Hat Software Inc. (Nasdq-RHAT) -- Ignore unavailable to you. Want to Upgrade?

To: ynot who wrote (447)	8/13/1999 8:22:00 AM
From: peter michaelson	Respond to of 1794

I love the whole idea of Linux and open source. Having trouble understanding how RHAT will ever become a profitable, valuable business commensurate with market cap. Can someone please hypothesize how profits can grow to justify the market cap? A few thoughts: Number of shares outstanding: 66.8 million Warrants with exercise price under $3. 9.0 million Market cap at $72 = $5.5 billion "As of June 30, 1999, we had a total of 140 employees. Of the total employees, 53 were in software engineering, 35 in sales and marketing, 32 in customer service and technical support and 20 in finance and administration." Current market cap per employee = $40 million. Revenue per employee = $85,700. Latest fiscal year software sales over prior year: 96% Latest quarter sales of software over same quarter last year: 35%. Latest quarter sales over prior quarter: down 45% Ouch. First time quarter over quarter growth less than 20%. What happened in the first quarter? Revenue latest 12 months = $12 million Price/sales ratio = 450 times No barriers to entry - no competitive advantage except brand name. Cost to expand brand name = ? Dependence on services for growth - low margins. Comparison with Microsoft: Microsoft revenues: $18 billion Microsoft operating margin: 53% Microsoft market cap: $417 billion Price to sales: 23 times Microsoft growth rate: 30% PASSAGES OF PROSPECTUS THAT I FOUND MEANINGFUL "Except for sales of common stock to the underwriters in accordance with the terms of the underwriting agreement Red Hat, the executive officers, directors, stockholders and substantially all optionholders have agreed not to sell or otherwise dispose of, directly or indirectly, any shares of common stock (or any security convertible into or exchangeable or exercisable for common stock) without the prior written consent of Goldman, Sachs & Co. for a period of 180 days after the date of this prospectus." "Red Hat has fully embraced the open source model. Whereas others have incorporated certain aspects of the open source software model into their businesses while retaining various features of the proprietary model, our product offerings are true open source offerings. We share all of our developments on and improvements to the Linux kernel and other open source products with the development community. In this way, we benefit independent developers by making our products more useful for them in their own development projects. In addition, we have aggressively promoted and distributed our products in the marketplace by making them available free of charge by download from our web site and other internet sites worldwide, by issuing thousands of free CD-ROMs containing Red Hat Linux at trade shows and through direct mailing campaigns, and by providing copies to academic and research institutions." "We believe that we must expand our services capabilities to address the market need for quality custom engineering and development. We are currently expanding our professional services organization to enhance our ability to provide such services. Between March 1, 1998 and June 30, 1999 we added 23 people to our professional services organization. We believe that as our user base grows, more of our customers, particularly our larger customers, will look to us to help them customize their operating systems to perform optimally within their particular computing environments. We expect that many of our larger customers will also expect us to assume the role of their technology partner, and perform on-site consulting services such as large-scale system assessments and enterprise-wide system enhancements. We believe that by increasing our capacity to offer such services, we will be able to significantly increase our services revenue and establish ourselves as the premier open source service provider. "

To: ynot who wrote (447)	8/13/1999 8:30:00 AM
From: peter michaelson	Read Replies (1) \| Respond to of 1794

Let's hypothesize that Windows loses the war with Linux in 5 years. Windows revenues is about $6 billion. RHAT market share - 20%. RHAT operating margins - 20%. Not MS' 50% due to competition. RHAT operating profit = $240 million Net income = $160 million or $2.11 per share. Pretty damn rosy scenario resulting in 34 times P/E. Oops, forgot to adjust for time value of money, risk of stock market P/E devaluation, risk of Linux not supplanting Windows, risk that RHAT loses market share, etc.