RHAT summary from SEC Filings:
Linux-based operating systems represented 17% of new
license shipments of server operating systems in 1998, according to
International Data. Despite strong initial market acceptance, these operating
systems have been slow to penetrate large corporations at the enterprise level
due in part to the lack of viable open source industry participants to offer
technical support and other services on a long-term basis.
OUR STRATEGY
We seek to enhance our position as a leading provider of open source
software and services by:
- continuing to enhance our web site to create the definitive online
destination for the open source community;
- expanding our professional services capabilities to capture large
corporate business on an enterprise basis;
- increasing market acceptance of open source software, particularly through
technology alliances and sharing our development efforts and resources
with third-party developers;
- continuing to invest in the development of open source technology; and
- enhancing the Red Hat brand through targeted advertising and public
relations campaigns.
THE OFFERING
<TABLE>
<S> <C>
Shares offered by Red Hat.................... 6,000,000 shares
Shares to be outstanding after the
offering..................................... 66,835,104 shares
Use of proceeds.............................. To provide working capital and for other
general corporate purposes including
geographic expansion. See "Use of Proceeds".
YEAR ENDED FEBRUARY 28, MAY 31,
------------------------------------------------------- --------------------
1995 1996(1) 1997 1998 1999 1998 1999
--------- ----------- --------- --------- --------- --------- ---------
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue......................................... $ 482 $ 930 $ 2,603 $ 5,156 $ 10,790 $ 1,551 $ 2,797
Net income (loss)............................... (128) (155) 33 8 (91) (53) (2,089)
Net income (loss) available to common
stockholders.................................. (128) (155) 33 8 (130) (53) (2,132)
Earnings (loss) per common share:
Basic......................................... $ (0.01) $ (0.01) $ 0.00 $ 0.00 $ (0.01) $ 0.00 $ (0.09)
Diluted....................................... (0.01) (0.01) 0.00 0.00 (0.01) 0.00 (0.09)
OUR BUSINESS MAY NOT SUCCEED BECAUSE OPEN SOURCE SOFTWARE BUSINESS MODELS ARE
UNPROVEN
We have not demonstrated the success of our open source business model,
which gives our customers the right freely to copy and distribute our software.
No other company has built a successful open source business. Few open source
software products have gained widespread commercial acceptance partly due to the
lack of viable open source industry participants to offer adequate service and
support on a long term basis. In addition, open source vendors are not able to
provide industry standard warranties and indemnities for their products, since
these products have been developed largely by independent parties over whom open
source vendors exercise no control or supervision. If open source software
should fail to gain widespread commercial acceptance, we would not be able to
sustain our revenue growth and our business could fail.
OUR RELIANCE ON THE SUPPORT OF LINUS TORVALDS AND OTHER PROMINENT LINUX
DEVELOPERS COULD IMPAIR OUR ABILITY TO RELEASE MAJOR PRODUCT UPGRADES AND
MAINTAIN MARKET SHARE
We may not be able to release major product upgrades of Red Hat Linux on a
timely basis because the heart of Red Hat Linux, the Linux kernel, is maintained
by third parties. Linus Torvalds, the original developer of the Linux kernel and
a small group of independent engineers are primarily responsible for the
development and evolution of the Linux kernel. If this group of developers fails
to further develop the Linux kernel or if Mr. Torvalds or other prominent Linux
developers, such as Alan Cox, David Miller or Stephen Tweedie, were to join one
of our competitors or no longer work on the Linux kernel, we will have to either
rely on another party to further develop the kernel or develop it ourselves. We
cannot predict whether enhancements to the kernel would be available from
reliable alternative sources. We could be forced to rely to a greater extent on
our own development efforts, which would increase our development expenses and
may delay our product release and upgrade schedules. In addition, any failure on
the part of the kernel developers to further develop and enhance the kernel
could stifle the development of additional Linux-based applications.
WE MAY NOT BE ABLE TO EFFECTIVELY ASSEMBLE AND TEST OUR SOFTWARE BECAUSE IT
CONSISTS LARGELY OF CODE DEVELOPED BY INDEPENDENT THIRD PARTIES OVER WHOM WE
EXERCISE NO CONTROL, WHICH COULD RESULT IN UNRELIABLE PRODUCTS AND DAMAGE TO
OUR REPUTATION
Red Hat Linux, in compressed form, consists of approximately 573 megabytes
of code. Of that total, approximately 500 megabytes have been developed by
independent third parties, including approximately 10 megabytes of code
contained in the Linux kernel. Included within the 573 megabytes of code are
approximately 645 distinct software components developed by thousands of
individual programmers which we must assemble and test before we can release a
new version of Red Hat Linux. If these components are not reliable, Red Hat
Linux could fail, resulting in serious damage to our reputation and potential
litigation. Although we attempt to assemble only the best available components,
we cannot be sure that we will be able to identify the highest quality and most
reliable components or to successfully assemble and test them. In addition, if
these components were no longer available, we would have to develop them
ourselves, which
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would significantly increase our development expenses.
THE SCARCITY OF SOFTWARE APPLICATIONS FOR LINUX-BASED OPERATING SYSTEMS COULD
PREVENT COMMERCIAL ADOPTION OF OUR PRODUCTS
Our products will not gain widespread commercial adoption until there are
more third-party software applications designed to operate on Linux-based
operating systems. These applications include word processors, databases,
accounting packages, spreadsheets, e-mail programs, internet browsers,
presentation and graphics software and personal productivity applications. We
intend to encourage the development of additional applications that operate on
Linux-based operating systems by attracting third-party developers to the Linux
platform and by maintaining our existing developer relationships through
marketing and technical support for third-party developers. If we are not
successful in achieving these goals, however, our products will not gain
widespread commercial acceptance and we will not be able to maintain our product
sales growth.
OUR CUSTOMERS MAY FIND IT DIFFICULT TO INSTALL AND IMPLEMENT RED HAT LINUX,
WHICH COULD LEAD TO CUSTOMER DISSATISFACTION AND DAMAGE OUR REPUTATION
Installation and implementation of Red Hat Linux often involves a
significant commitment of resources, financial and otherwise, by our customers.
This process can be lengthy due to the size and complexity of our products and
the need to purchase and install new applications. The failure by us to attract
and retain services personnel to support our customers, the failure of companies
with which we have strategic alliances to commit sufficient resources towards
the installation and implementation of our products, or a delay in
implementation for any other reason could result in dissatisfied customers. This
could damage our reputation and the Red Hat brand, resulting in decreased
product revenue.
NEGATIVE REACTION WITHIN THE OPEN SOURCE COMMUNITY TO OUR BUSINESS STRATEGY
COULD HARM OUR REPUTATION AND BUSINESS
Some members of the open source software community have criticized the
expansion of our strategic focus in online chat rooms, electronic bulletin
boards and articles posted on the web. These critics argue that our strategy
could fragment the Linux community into a variety of competing factions,
resulting in a less cohesive and cooperative development process. 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. This
type of negative reaction, if widely shared by our customers, developers or the
rest of the open source community, could harm our reputation, diminish the Red
Hat brand and result in decreased revenue.
WE MAY NOT BE ABLE TO MATCH THE PROMOTIONAL ACTIVITIES AND PRICING POLICIES
OFFERED BY OTHER SUPPLIERS OF LINUX-BASED AND OTHER OPEN SOURCE OPERATING
SYSTEMS, WHICH COULD RESULT IN A LOSS OF MARKET SHARE
In the new and rapidly-evolving market for Linux-based operating systems, we
face intense competition from a number of other suppliers of Linux-based
operating systems. We also face competition to a lesser extent from developers
of non-Linux-based open source operating systems such as BSD-based operating
systems. BSD-based operating systems such as FreeBSD, NetBSD and OpenBSD are
open source operating systems produced by communities of developers working
together via the internet, and which are published and distributed by Walnut
Creek CD-ROM, among others. We expect competition in broader open source
operating systems and the Linux-based operating systems market to intensify. In
addition, companies like Sun Microsystems, Corel and Cygnus Solutions, which
have large customer bases and greater financial resources and name recognition
than we do, have indicated a growing interest in the market for Linux-based
operating systems. These companies may be able to undertake more extensive
promotional activities, adopt more aggressive pricing policies, and offer more
attractive terms to their customers than we can. Furthermore, because
Linux-based operating systems can be downloaded from the internet for free or
purchased at a nominal cost and modified and re-sold with few restrictions,
traditional barriers to entry are minimal. Accordingly, it is possible that new
competitors or alliances among existing competitors may emerge and rapidly
acquire significant market share. See "Business--Competition".
IF WE FAIL TO ESTABLISH AND MAINTAIN STRATEGIC DISTRIBUTION AND OTHER
COLLABORATIVE RELATIONSHIPS WITH INDUSTRY-LEADING COMPANIES, WE MAY NOT BE
ABLE TO ATTRACT AND RETAIN A LARGER CUSTOMER BASE
Our success depends on our ability to continue to establish and maintain
strategic distribution and other collaborative relationships with
industry-leading hardware manufacturers, distributors, software vendors and
enterprise solutions providers. These relationships allow us to offer our
products and services to a much larger customer base than we would otherwise be
able to through our direct sales and marketing efforts. We may not be able to
maintain these relationships or replace them on attractive terms.
In addition, our existing strategic relationships do not, and any future
strategic relationships may not, afford us any exclusive marketing or
distribution rights. As a result, the companies with which we have strategic
alliances are free to pursue alternative technologies and to develop alternative
products and services in addition to or in lieu of our products and services,
either on their own or in collaboration with others, including our competitors.
Moreover, we cannot guarantee that the companies with which we have strategic
relationships will market our products effectively or continue to devote the
resources necessary to provide us with effective sales, marketing and technical
support. See "Business--Sales, Marketing and Distribution".
ANY DISRUPTION IN OUR RELATIONSHIPS WITH OUR TWO LARGEST DISTRIBUTORS, ON WHOM
WE RELY FOR A SIGNIFICANT PERCENTAGE OF OUR PRODUCT REVENUE, COULD CAUSE OUR
REVENUE TO DECLINE
We are highly dependent on revenue from sales to our two largest
distributors, Frank Kasper & Associates and Ingram Micro, who together accounted
for approximately 54% of our total revenue for the fiscal year ended February
28, 1999. These distributors are not obligated to purchase products from us and
the loss of one or both of these distributors, or a reduction in the amount of
product sales generated by them, could significantly reduce our product revenue.
See "Business--Sales, Marketing and Distribution".
Prior to March 1999, we did not provide any service offerings to our
customers. In March 1999, we expanded our service offerings to include
comprehensive support and maintenance, custom development, consulting and
education services. Although these services generated only an insignificant
amount of revenue through February 28, 1999, we earned $0.6 million in service
revenues during the three months ended May 31, 1999. We believe that because our
revenue has historically been derived from product offerings, this expansion in
and active marketing of our service offerings will cause our services revenue to
continue to increase significantly as a percentage of total revenue in the
fiscal year ending February 29, 2000. Revenue from support and maintenance
agreements is deferred and recognized ratably over the term of the related
agreement, which is typically one year. Revenue from custom development,
consulting and education services, which includes offering training courses and
hardware certification services, is recognized as the services are provided.
Our software products are sold worldwide, with all of our total revenue
coming from North America, except for some royalties received from international
sources which totalled less than $50,000 for the fiscal year ended February 28,
1999. In June 1999 we established international operations and we expect that
total revenue derived from sales outside of North America will increase in the
fiscal year ending February 29, 2000 as we expand these operations.
Sales of software products to distributors comprised $0.7 million or 26.1%
of total software and related products revenue in the fiscal year ended February
28, 1997, $0.9 million or 17.3% of total software and related products revenue
in the fiscal year ended February 28, 1998, and $5.9 million or 58.2% of total
software and related products revenue in the fiscal year ended February 28,
1999. Sales of software products to end users through our REDHAT.COM web site
and call center comprised $1.9 million or 73.9% of total software and related
products revenue in the fiscal year ended February 28, 1997, $3.0 million or
58.8% of total software and related products revenue in the fiscal year ended
February 28, 1998 and $3.2 million or 29.6% of total software and related
products revenue in the fiscal year ended February 28, 1999.
Sales of Official Red Hat Linux have represented our principal source of
revenue since its introduction in October 1994. We derive our software and
related products revenue primarily from the sale of software products:
- through distributors to enterprise and retail accounts;
- directly to individual users and enterprises through our REDHAT.COM web
site and our call center; and
- from original equipment manufacturers which license our software directly.
We recognize revenue from software product sales to distributors and original
equipment manufacturers for which no technical support is provided at the time
our products are shipped, net of a reserve for estimated sales returns. This
reserve is recognized based on our historical experience of these distributors'
rates of sell-through to the end user. Revenue from the sale of software
products to individual users and enterprises for which no technical support is
provided is recognized on the date we ship the software products.
Sales of software products to distributors comprised $0.7 million or 26.1%
of total software and related products revenue in the fiscal year ended February
28, 1997, $0.9 million or 17.3% of total software and related products revenue
in the fiscal year ended February 28, 1998, and $5.9 million or 58.2% of total
software and related products revenue in the fiscal year ended February 28,
1999. Sales of software products to end users through our REDHAT.COM web site
and call center comprised $1.9 million or 73.9% of total software and related
products revenue in the fiscal year ended February 28, 1997, $3.0 million or
58.8% of total software and related products revenue in the fiscal year ended
February 28, 1998 and $3.2 million or 29.6% of total software and related
products revenue in the fiscal year ended February 28, 1999.
Sales to Frank Kasper & Associates, one of our primary distributors,
constituted approximately 16.0% of total revenue in the fiscal year ended
February 28, 1997, and
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26.0% of total revenue in the fiscal year ended February 28, 1998. Sales to
Frank Kasper & Associates and to Ingram Micro, our two largest distributors in
fiscal 1999, comprised 54.0% of total revenue in the fiscal year ended February
28, 1999. We provide our distributors an advertising allowance on a quarterly
basis, determined upon our approval of the distributors' advertising plans.
Distributors must then submit to us a detailed list of expenses incurred by us.
We pay all approved expenses and recognize these costs as a component of sales
and marketing expense as such expenses are incurred.
As a
percentage of total revenue, sales and marketing expense increased to 58.2% in
the three months ended May 31, 1999 from 24.6% in the three months ended May 31,
1998. These increases were due to higher advertising and promotional costs
incurred to promote the release of Version 6.0 of Official Red Hat Linux, and
costs incurred to promote our web site and service offerings.
The internet has emerged as a global communications medium, enabling
millions of people to gather information, communicate and conduct business
electronically. International Data estimates that there were approximately 142
million users of the internet at the end of 1998 and that the number of users
will grow to over 500 million by the end of 2003. In addition, International
Data estimates that worldwide internet commerce revenue will increase from
approximately $50 billion in 1998 to more than $1 trillion in 2003.
PROFESSIONAL SERVICES
Although we have not generated significant revenue to date from our
professional services, we have recently significantly expanded the scope of our
service offerings and expect them to generate significant revenue in the future.
SUPPORT AND MAINTENANCE. Customers who purchase our Official Red Hat Linux
Version 6.0 product are entitled to 30 days of telephone installation support or
90 days of e-mail installation support at no additional charge. Customers
seeking additional technical support may purchase telephone support agreements
from us ranging in price from $995 for up to three incidents to $60,000 for
24-hour-a-day unlimited support for one year. We have a highly-trained and
skilled staff of technical support engineers to provide these services to our
customers. In addition, we maintain relationships with several third-party
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support providers in order to enhance and expand our technical support
capabilities.
TRAINING AND EDUCATION. We provide training and educational programs to
those customers who want to learn how to optimize their use of Red Hat Linux.
The most popular of these programs is the "Red Hat Certified Engineer" course
that we offer at our corporate offices. This week-long course, taught by Red Hat
instructors and priced at approximately $2,500, gives a comprehensive overview
of the use of Red Hat Linux. We also conduct on-site training for customers. We
anticipate that we will work with third-party training and educational program
providers to develop and offer additional training courses on a variety of
topics related to Red Hat Linux and open source software.
CONSULTING AND CUSTOM DEVELOPMENT. We offer specific consulting and custom
development services on an individualized basis. We have performed such services
related to the optimization of Red Hat Linux when used in conjunction with
certain hardware products. We intend to expand our consulting and custom
development capabilities in the near future.
HARDWARE CERTIFICATION. We perform testing and certification services for
hardware vendors seeking to market their products to Red Hat Linux users.
Hardware vendors submit their products to us and, in exchange for a fee, we test
the hardware to determine whether it is compatible with Red Hat Linux. Products
meeting our performance criteria are certified as Red Hat Linux compatible.
Companies for which we have performed such services include Dell, IBM and
Toshiba. |
