June 5, 2002

MandrakeSoft looks at Red Hat's cash and says "we need more of that"

- by Tina Gasperson -
It's not a huge surprise that Paris-based Linux distributor MandrakeSoft is selling stock to raise money.
The company has displayed a fair amount of creativity in recent attempts to fill the
company coffers; the Mandrake Linux Users Club and the Corporate Club are both
subscription-based options that provide perks for a monthly fee. Mandrake isn't
saying one way or the other whether these offerings have been successful
fundraisers, but an announcement Tuesday said that "despite a difficult
economic climate" Mandrake has achieved a "solid increase in revenues."
Mandrake needs to break even before the end of the year; back in May 2001 there was
talk
of getting out of the red in a "few months." In its February 2002 shareholder newsletter, it was "confident that it will reach its
break even point by the last quarter of 2001/2002," through greater income and a
bigger profit margin. Now, heading into the last quarter of Mandrake's fiscal
year, the push is on to fulfill the "break even promise." Even KBC Securities, a
French financial analysis company, predicted a near profit for Mandrake by
September 2002.

So the company is raising money through a stock sale that is only available to Mandrake Club members. Current stockholders have offered to freely give their warrants to allow Mandrake Club members to purchase stock easily. Warrants are pieces of paper that give a potential shareholder the right to purchase a predetermined number of shares at a set price, similar to a stock option, except that with warrants, new shares are created, and with options, you get existing shares.

The April shareholder newsletter doesn't mention the extent of Mandrake's
gains or losses, or progress toward the goal of profitability. The fact that the
company doesn't participate in a regulated stock market means the requirements
for financial reporting are much less stringent; if you don't want to talk about
how much money you lost, you don't have to. Instead the report focused on an
increase in sales generated by online product sales and OEM sales, particularly
through Hewlett-Packard, and by Mandrake Club memberships. There's a brief
mention about a drop in sales caused by a slowdown in American distribution
channels, namely MacMillan, which the KBC Securities report touted as one of
Mandrake's biggest sources of income, along with French retailers, calling it
the "lion's share" of revenue. There's also a hint about the stock sale: "In
order to continue its development and increase its market share, MandrakeSoft
plans a capital increase, with the aim to further strengthen its financial
structure."

But along with the stock announcement, Mandrake posted a better breakdown of
its financial situation, showing its current loss at 3.67 million Euros, an
improvement over the previous quarter's loss of 6.05 million Euros. Even though
it may be tough to bring the company to a break-even point by September, if the
current trend continues, it is possible, especially if Mandrake is successful
with this stock offering.

Digging a little deeper, an interesting read is found in the FAQ about this
stock offering
. Mandrake compares its value with Red Hat by extracting some
market cap information and manipulating it a bit. For instance, Mandrake has
determined that Red Hat's revenue trend is down over the last six months, yet
Mandrake's revenue trend is up. Plus, Mandrake calculated the ratio of its revenue
to the market cap, and found that Red Hat's cash is a good buffer for that company,
increasing its revenue/market cap ratio to 9.3 (with cash) from 6.1 (without
cash). Mandrake's ratio is 8.2, without the cash buffer Red Hat has, so the
company feels it is in a good position to remain viable, especially if the stock
offering brings in the green.

Mandrake goes on to list its strengths compared to Red Hat:

MandrakeSoft's revenue is growing while Red Hat's revenue is going down.

MandrakeSoft has an important position in the market due to the size of its user base which has not yet been fully utilized for revenue
purposes compared to Red Hat's user base.

MandrakeSoft generates only 9% of its revenue from services while Red Hat's revenue is generated 80% from services, so
MandrakeSoft's future growth potential is much greater. Also, MandrakeSoft has interesting sources of revenue such as the
Corporate Club and the User Club which provide highly sustainable and recurrent revenue sources.

MandrakeSoft has an outstanding reputation as a dedicated Open Source company that provides IT solutions that follow, as much
as possible, public standards and protocols.

And recognizing Red Hat's advantages, Mandrake points out:

Red Hat is listed on an established market (Nasdaq) while MandrakeSoft is on a small market (Marché Libre and OTC U.S. market).

Red Hat is an established leader and has strong partnerships with major players.

MandrakeSoft's loss/income ratio is higher than Red Hat's. For MandrakeSoft 13.6ME/3.6ME=3.7 last fiscal year (Oct. 2000-Sept.
2001), or 3.7/2.3ME=1.6 first semester (Oct. 2001-March 2002), while Red Hat's fiscal year gives $129M/$78.9M=1.6 (March
2001-Feb. 2002), which includes probable deprecation of acquisitions.

MandrakeSoft does not have the cash of Red Hat -- and cash is life insurance.

That last statement could be a telling one.

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