Report From the Red Hat Road Show

A person known as "Barry the Suit" wrote in to tell us that he has seen the Red Hat Road Show (eg, the time when the top dogs go try to convince guys with mega bucks to buy lots of their stock when the IPO happens). He wrote a summary of the event which is actually quite interesting- tends towards the financial side, but since Red Hat is the first Linux company to make this lonely journey, its really interesting to follow it. Hit the link to read the report.

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

Comments

The SEC demands that you scare people

[JoeBuck]

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.