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VA Linux: Its IPO Could Be Hotter Than Red Hat's Far from another overhyped Linux stock, VA has a distinct edge. It actually sells something As if the craze for Internet initial public offerings weren't enough, Wall Street has gone gaga for companies that support the variation of Unix operating system software called Linux. It started with the August IPO of Red Hat (RHAT), whose stock has since advanced 480%. That provided enough momentum for a company such as Cobalt Networks (COBT), which has a tenuous connection to Linux, to jump nearly 500% on its first day of trading, on Oct. 9. Despite the endless optimism of stock hypesters, most Linux companies have a big flaw: The software on which they base their businesses is nonproprietary and, most troubling, free. Technically, it's owned in part by any developer who has added a wrinkle to it and then, as a condition of getting the software for free, has posted the changes on the Internet. Linux will thus be an eternally evolving operating system that's essentially in the public domain. A well-managed company can probably figure out how to make money by selling Linux services and support, but no one has ever earned much doing that, which makes owning shares in Linux companies risky. Sometime later this week, another Linux-related company, called VA Linux Systems, will go public under the ticker symbol LNUX. It will probably double or triple in price while market pundits criticize it for being another overhyped IPO. LINUX-READY. This time, they'll be wrong. That's because VA Linux could be poised to cash in on the best source of business that Linux will present: VA sells computers, not software. And making money by selling hardware is not exactly like giving away software: Just ask Dell Computer's Michael Dell or Sun Microsystems' Scott McNealy. VA Linux makes Internet servers that are maximized for Linux, which could turn out to be a huge market. By 2003, predicts International Data Corp., companies will spend $56 billion annually on Web infrastructure hardware and install more than 6 million servers. Industry sales figures show that approximately 31% of Web servers ran Linux in 1998. And the number of servers running Linux has risen 181% so far this year. In short, the market for Linux Web servers and related products could reach several billion dollars by 2003. Of course, tiny VA Linux won't have that market all to itself. Giants such as IBM (IBM), Sun (SUNW), and Compaq (CPQ) will compete for every sale. But VA has an advantage: It may know Linux better than anyone else. At least, it has hired several premier Linux programmers and advocates, including Carsten Haitzler, Eric Raymond, and Jon Hall. VA distributes Debian Linux, a version of the software that is favored by many programmers. VA's revenues are small but growing fast: They totaled $17.7 million in its 1999 fiscal year ended in July, a 216% increase over the year before. Like most IPOs, the company isn't profitable and doesn't expect to be for the foreseeable future. That isn't surprising, considering that VA has gone from 15 employees to 179 in the past year. MAJOR CLIENTS. Much of that increase has been in the sales and marketing departments. That's because the company stopped making its own computers this summer: It now designs them and contracts out the manufacturing, which has significantly reduced VA's overhead. So far, the sales force has found it easy to sell systems. VA's clients include hot Internet outfits ranging from Akamai Technologies (AKAM), which used its servers to host the NetAid concert in October, to eToys (ETYS) and advertising host 24/7 Media (TFSM). No single buyer represents more than 15% of VA's sales, making its client list more diversified than that of a lot of startups. Wall Street has noted VA's potential. Tom Taulli, Internet stock analyst for Internet.com, expects the underwriters to raise the initial share price from its target of $12 before the IPO commences. "In this market, anything with the word Linux in the title is going to be successful," says Taulli. "But VA ... is going to be one of the hot ones." Jaffe writes about the markets for Business Week Online _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ |
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