November 30, 1999

Caldera fights it out in the stock market with reverse split

Author: JT Smith

- By Steven J. Vaughan-Nichols -

Remember when people fought over getting Linux company stock options? Today, it's the Linux companies fighting to keep their stock prices above water. Caldera, in danger of being delisted by Nasdaq thanks to a stock price lurking around 50 cents a share for months, is taking the radical step today of a reverse stock split. For every four shares of Caldera International, stock owners will now receive one pumped-up share.

Caldera CFO Bob Bench explains, "This will drop our number of outstanding shares from 60 million to 15 million. In theory, the price should go up four times to $2 from 50 cents. Historically, though, a reverse split usually leads to a 25 to 50% drop." So far, as of noon (US EST) today, the stock (now CALDD instead of CALD on the Nasdaq), has dropped a mere 1%. Still, Caldera needs only to keep its stock price above a dollar to avoid delisting.

It's essential, Bench says, for Caldera to stay on the Nasdaq rather than go to the pink sheets of the so-called penny stocks. Once there, any stock becomes less attractive to buyers at the national brokerage firms. In addition, stock buyers would no longer be able to use margin accounts -- credit -- to buy Caldera stock. In short, such companies' stocks become much less attractive to buyers.

While all the publicly held Linux stocks, including Red Hat and MandrakeSoft, have taken hits in the depressed
, Caldera has faced unique problems by being the one Linux company to also embrace the old Unix-on-Intel business by agreeing to buy SCO's Unix operations in August 2001.

At first glance, the deal has helped Caldera. SCO's Unix products -- UnixWare (now OpenUnix) and OpenServer -- and its professional services division lifted Caldera's gross revenue from $1 million in the year-ago quarter to almost $18 million in the just reported first quarter. A closer look, though, shows
that the SCO cash flow has declined and that Caldera took a $74 million charge in goodwill and intangible assets from the purchase .

Bill Claybrook, research director for Linux and Unix for the Aberdeen Group, thinks Caldera may be ready to turn the corner. He believes that the SCO merger didn't go well, but that with some of SCO's old personnel now gone, "the potential is there for them to get rolling. 2001 was a bad year for everyone. The real question is whether they can take all the stuff in place, and make the jump, but they haven't made the jump yet."

While noting that in terms of revenue, Red Hat is doing much better, he also thinks that Caldera isn't on the same path as Red Hat. "When business people think of Linux they think of Red Hat."

Dan Kusnetzky, IDC's vice president for system software research, adds that in Europe, when business people think Linux, they think SuSE. Caldera, though, isn't about direct and retail Linux sales (Red Hat) or Linux services (SuSE), but about providing business solutions using both Unix and Linux on Intel.

Claybrook also points out that Caldera has a strong reseller channel and an installed base of more than 2 million users working with OpenServer, OpenUnix and OpenLinux. Indeed, in terms of small to medium business (SMB) users, Caldera's Unix operating systems are probably still more widely used than any individual Linux brand.

Unfortunately for Caldera's growth, that installed base doesn't want to move from their existing systems. Kusnetzky observes that OpenServer, a mid-'90s vintage Unix-on-Intel system that SCO tried and failed to retire, still sells more copies than OpenUnix and OpenLinux. Kusnetzky even says that the urban legends of OpenServer boxes being drywalled in closets because no one realized that there was a working server in them are literally true. OpenServer costs little, requires minimal maintenance, and can run for years without a glance. It, Kusnetzky explains, is the operating system for people who instead of boasting about their server's hot new features, boast about having paid a few thousand dollars for a server seven years ago and never having had to spend a penny since.

Thus, one challenge for Caldera is to find compelling reasons for their old SCO users and
resellers to buy new products. Claybrook says, "For Caldera to make money, their buyers need to want to switch from OpenServer to OpenLinux."

That's not going to be easy. Kusnetzky says that the Unix-on-Intel business has "seen a dramatic decline. SCO's [previous ownership] saw grosses of $110 million. The majority of that was Unix system software, training, clustering, and development tools." Now, the most recent quarter has declined to $60 million. This, he says with understatement, is "not the sign of a healthy business." He goes on to say that while "we can't prove a direct relationship, but it seems that Unix-on-Intel users move to Linux with other vendors."

Kusnetzky adds that while "Unix-on-Intel scales up, most of Caldera's SMB customers don't want to scale up on Intel. They want small servers. Many of Caldera's old SCO business customers can run 40 to 50 users with point-of-sales systems or other terminal based programs on old 486s." For them, "Pentiums are overkill." Thus, the multiple processor and other enterprise features of OpenUnix and high-end Linux really don't interest these customers.

On the plus side, Claybrook says that "their staff is very good" and that the Volution line of network and system management tools are excellent. To him, moving Volution on the marketplace and making Caldera a brand for inexpensive, effective business computing is vital.

Kusnetzky agrees, saying that Caldera has "great products, and great people, they're just not doing a good job of selling that to people. The power in their existing systems is amazing, at a cost per user that's much less than a Windows-based solution and have real savings at staffing and help desk costs." It may not as exciting, but "server-centric computing is cheaper" and Caldera needs to get the word out. He doesn't think that Caldera's reseller channel is helping the company do that.

Bench says that Caldera is aware of the issues and working on them. Caldera, however, still strongly believes in its reseller channel and has recently been working to improve it.

In addition, he says Caldera is working with partners on creating new business
applications that can deliver a complete business solution based on OpenUnix or OpenLinux to customers. An early example of this is its Caldera Volution Messaging Server, which is based on Postfix, OpenLDAP and
OpenSSL. These new turnkey business solutions will be sold through its reseller partners.

Bench goes on, "Caldera has been working on tactical plan to move forward and we've just completed some very extensive planning sessions. The specifics of this plan will be released in a few weeks." One major part of that plan will be to produce products and services that will bring Web services to the company's SMB customers. "These products will require vertical solution providers and VARs to put that solution together and will enable users to move from legacy applications to Web enabled applications." From where he sits, "vertical integrators and VARs are our competitive advantage."

Another part of Caldera's vision is to "build a bridge for all of our customers with the old SCO projects. So that when they are ready to change, the bridge will be there to enable them to move up seamlessly." At the same time, though, "we'll continue to support you where you are." Of course, Caldera hopes that its new Volution products and Web service lines will finally tempt its existing customers to cross that bridge and persuade new value-conscious SMB customers to give the Caldera Linux and Linux-enabled Unix lines a try.

Can Caldera survive to make these plans come through? Stock price or no, Bench says that Caldera actually plans to grow and acquire other companies this year. In part, Bench can make such plans with a straight face because the Canopy Group, with Novell founder and multi- millionaire Ray Noorda, still remains a firm Caldera stockowner and supporter. Claybrook and Kusnetzky also think that Caldera can make it, but that time is running out, and that Caldera must turn the corner by the end of 2002.

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