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Report From the Red Hat Road Show
The following was written by "Barry the Suit"
Just got back from the Red Hat road show, Thursday, July 29th, 7:30AM at the Minneapolis Radisson. Was very interesting from an investment perspective. I'm up-to-date on Open Source, distros, etc., and was probably the only financial-type in the audience who knew who "Alan Cox" was when Bob Young mentioned him in passing. As for the rest (about 25 portfolio managers and analysts) I believe their collective reaction was "Huh?"
At least two other IPO road shows orignially scheduled for 7:30 a.m. moved to other time slots when they realized that Red Hat was the must-see road show of the day. Thus, while the Red Hat crowd was unusually large (most road shows in the Twin Cities host about 8-12 guests) it was full of people ready to see the next-big-thing, including some PMs who only come out for something special.
Bob Young, Matt Szulik, and Manoj George each made part of the presentation. Bob explained open source in general and Linux in particular. I thought he made a nice, newbie-level effort. He did, however, manage to confuse the crowd by explaining that the existence of "a Linux operating system" was a myth; there is only a Linux kernel, and then various distributions. Needless to say, the crowd did NOT go wild over that one.
Matt was more business-y, with descriptions of just where the revenue is going to come from, including the service offerings and the redhat.com portal, which according to the prospectus, now accounts for 17% of the company's total revenues. Finally, Manoj finished up, explaining that although RHAT operates at break-even right now, it plans to start losing money ("investing for growth") in the immediate future.
As if on cue, the first question in the Q&A was ... (drum roll), "you mean, one of your competitors could simply take your distribution's source code and repackage it as theirs and sell it?" Bob Young: "Yes." There were only a couple more questions (surprisingly few for such a large crowd attending such a hot deal road show) and then we were done at 8:35.
Takeaway: Bob Young couldn't have done a better job in presenting his case in an investor-friendly way, including an important description of the value-add of the Linux community, and what was in it for members who didn't get "the letter." But I couldn't help feeling, looking around the room, that people were wondering what the buzz was all about. Final tidbit: Goldman Sachs is the lead manager of the underwriting syndicate, and the research analysts covering Red Hat will be none other than Rick Sherlund, the research "axe" for Microsoft, and Michael Parekh, GS's lead Internet analyst. Pretty unusual, when you consider how much ink has been spilled and breath lost convincing people that Red Hat will make its money "in services."
Disclosure: I am an equity analyst for an investment company based in the Twin Cities. I have no opinion at this time about the value of Red Hat stock. The purpose of this post was simply to relay my view of the meeting. All the facts in my post related to Red Hat's performance are in the prospectus, which can be found at this page
Back in 1996 I could never interest anybody in using Linux if I mentioned that it was free. If I mentioned "oh yeah, it's $49.95 from Red Hat Software, and it does the same thing that Windows NT does but it costs $500 less", that's a different thing. Free = worthless in the PHB's head, whereas cheap = "oh boy, what a deal!". The box and manual gave them reassurance that they'd actually bought something, even if that was one of the ugliest boxes in creation (grin). (The old yellow/black RH3.0.3 box, that is).
Send mail here if you want to reach me.
I mean the idea that the company is 1) planning on loosing money,
Heard of any good IPO's for companies that weren't loosing money? The issue is whether they'll use their indebtedness to improve their business in such a way as to make more money later on.
2) any body can take their product,
That's what open-source is about. But that doesn't keep them from making money through services (which, for businesses, make up a much larger outlay than software purchases).
3) their biggest competitor is M$
Yep, and the fact that Microsoft sees Linux as a serious threat actually adds credibility. It's a Good Thing(tm).
These investors are just looking to see if they can make money off of this.
Yep. And they've sat through enough rah-rah glossy presentations to be pretty jaded concerning those "comforting things" you talk about. They'll go through the business plan with a microscope (and an accountant) before investing. The purpose of these presentations is to get them interested enough to read it. No one says "Great talk, Bob!" and whips out their wallet...
RH doesn't need investers playing "buzzword bingo." They need investers who will take the time to see just how this rather unusual business model would work, and who won't bolt the first time open source or Linux gets diss'ed in the trades. Honesty and a lack of pretentiousness is in their interest.
It sounds like Red Hat is being really open and honest about their IPO, which probably isn't what the suits expect. :)
:)
It's true that they aren't the only game in town, and they've been very good about funding R&D. It sounds like they're going to do that still, and try to grow, which would make them a huge distributor, as long as Linux continues to gain in popularity, and they hold onto their marketshare.
Redhat Linux 6.0 is already a superior product compared to Windows, (I'll love to see it when it stabilizes... 6.1, anyone?) and if the corporations buy the more expensive versions, they're going to get a lot of income.
Remember, many big corporations post losses. It isn't a sign of weakness, and sometimes it's expected. In fact, if you lose *less* than expected in quarterly earnings, don't be surprised if your stock goes up.
I want to get in on this as soon as I can, because of my faith in Red Hat, but if it weren't for that, I'd wait for it to drop, and then... buy a decent-sized chunk of it. Individual stocks are risky, but I like this company.
pb Reply or e-mail; don't vaguely moderate.
From what I understand, Red Hat makes money four ways.
1. Commercially selling new and frequently upgrading versions of the Red Hat Linux OS.
2. Extending new products to make customers happy... for example their Commerce Server edition , which includes transaction subsystems and credit-card-security systems.
3. Develops and sells user-friendly documentation. how user-friendly these are is up for debate of course.
4. Ongoing telephone and e-mail support. and this is what they try and stress the most. That your average person will BUY Linux depends on the support and services he gets.
If this is the best they can do. As the poster comments, Red Hat's purported revenue stream comes from support, but in reality they're squinting at two goals:
1) Make sure Red Hat is synonymous with Linux among newbies and PHB's
2) Aggregate brains in their development department so that the other distros can do little other than play catchup
(No, this isn't yet another "Red Hat is Microsoft!" rant.) The money they charge for their product is not much more than a "confidence payment" to satisfy the purchaser that they have made a legitimate business transaction. People who receive goods for free in our money-oriented economy can never really shake the impression that they're just playing around - gaining something trivial. In a sense, when you purchase Red Hat Linux, what you are really purchasing is the purchase price itself. Weird, huh?
-konstant
Yes! We are all individuals! I'm not!
--
Well, that, and then there's 30 days of phone support and 90 days of email support - that certainly is worth something.
Regarding hope or lack thereof, I really don't know what RHAT will do in the first 30 days, or in the coming year(s). It'll certainly be interesting. I'm glad to see that the Road Show was packed, because I hadn't seen that much buzz in many of the online investing sites.
> "you mean, one of your competitors could simply
> take your distribution's source code and
> repackage it as theirs and sell it?" Bob Young:
> "Yes."
Ummm... They already have - there are a number of companies selling Red Hat distributions which are not "Official Red Hat" - CheapBytes, Walnut Creek... This has been going on for quite some time, and it hasn't affected the bottom line... Red Hat's revenues have doubled every year since 1995 (look at the S-1/A filings).
As for the suggestions that RHAT is a poor choice due to the fact that they are not currently making a profit, take a look at MPPP (mp3.comcurrently @ 38 1/8, issued at $28 last week, then shot to $103 before levelling off)...
Let's see... Quarterly numbers for quarter ended Mar for mp3.com, May for Red Hat
Revenues Net income (loss)
Red Hat 2,797,000 (2,089,000)
mp3.com 665,785 (1,405,628)
so hmm... Red Hat losses last quarter were %75 of revenue. mp3.com's losses last quarter were %211 of revenues.
Even more interesting are the year end figures from last fiscal... Red Hat Revenues 10,790,000 against net loss of 91,000 (%0.8 of revenues). mp3.com revenues 1,162,438 against net loss of 357,538 (%30 of revenues).
So, hey, you know - Red Hat isn't doing that bad...
Companies that want to IPOs must put every scary fact or possibility out there in the prospectus and the IPO filings. Those are the rules. Furthermore, if something bad should happen to Red Hat's revenue stream in the future, and the possibility (even a remote possibility) of this happening could be forseen, but Red Hat didn't alert investors about this possibility, then the Red Hat principals could be sued or even criminally prosecuted.
For that reason, you can expect to read all kinds of dire things in the Red Hat IPO documents. They must spell out in big letters that investment in Red Hat is risky, even if they are convinced that Red Hat will conquer all obstacles and make piles of money.
Even after a company goes public, the quarterly filings with the SEC (the 10-Q statements) are always full of such warnings. The Linux community got all excited when Microsoft's SEC filing said that Linux was a possible threat to Microsoft's revenue stream. This statement doesn't mean that Microsoft believes it; it only means that they think that it is at least a very remote possibility.
Did Bob Young point out during presentation that 2/3 of all machines running redhat are servers and 2/3 of them are workstations? ;-) ;-)
I've seen him speak, and he makes a very nice presentation of Linux on a newbie level. I wonder if PMs and analysts were really looking for that though. I would guess that they are much more concerned about whether RH can keep it's market rather then if Linux is an OS or a kernel. According to trditional business theories RH position doesn't seem to be easy to defend since there is virtually no barriers to entry into the industry. On other hand two words "internet Portal" seem to have some magical powers to void all the existing business theories
That's what they're selling. The software is inconsequential (as it should be) it's the support and the confidence in that support that they get. Don't know if that came off in the road show. Got another quick anecdote from a guy who saw the "show" down in NC to some fortune 50 companies.
.....
Bob Young: How many of you use Linux as your main desktop/server OS?
Crowd: (no hands go up)
BY: How many of you officically use Linux for mail/web servers?
Crowd: (two hands go up)
BY: How many of you think Linux is running somewhere on your network?
Crowd: (all hands go up)
(Insert quote about using the back door to gain the riches of the kingdom here)
.....
+&x
Building a top notch support organization is not trivial. The distribution becomes more of a calling card than anything else ("we must know what we're doing, we built the thing").
I know lots of companies that have all the pieces that RedHat has (a good product, expert staff) but still suck at support. If they can integrate their pieces into a solid support organization and capitalize on their brand equity, they'll do well.
It is tempting, if the only tool you have is a hammer, to treat everything as if it were a nail. - Abraham Maslow