Cobalt poised to become second Linux IPO

Cobalt Networks, a manufacturer of single-purpose "server appliances" based on the Linux operating system, filed plans to raise up to $86 million in an initial public offering.

Stephen Shankland Former Principal Writer
Stephen Shankland worked at CNET from 1998 to 2024 and wrote about processors, digital photography, AI, quantum computing, computer science, materials science, supercomputers, drones, browsers, 3D printing, USB, and new computing technology in general. He has a soft spot in his heart for standards groups and I/O interfaces. His first big scoop was about radioactive cat poop.
Expertise Processors, semiconductors, web browsers, quantum computing, supercomputers, AI, 3D printing, drones, computer science, physics, programming, materials science, USB, UWB, Android, digital photography, science. Credentials
  • Shankland covered the tech industry for more than 25 years and was a science writer for five years before that. He has deep expertise in microprocessors, digital photography, computer hardware and software, internet standards, web technology, and more.
Stephen Shankland
4 min read
Ravenous investors looking for the next Linux-related initial public offering may not have to wait for VA Linux Systems.

Cobalt Networks, a manufacturer of single-purpose "server appliances" based on the Linux operating system, plans to raise as much as $86 million in an IPO, based on its filing fee with the Securities and Exchange Commission. Goldman Sachs, Merrill Lynch, and BancBoston Robertson Stephens are listed as underwriters of the IPO.

Cobalt's IPO filing puts the company a step ahead of VA Linux, another manufacturer of Linux computers. VA's chief executive, Larry Augustin, predicted in August that his company would be the second Linux IPO after software seller Red Hat.

Red Hat's IPO a month ago ignited a trading frenzy that has driven the stock ever higher. The company's founder, chief executive, and lead investor have all become paper billionaires. In mid-day trading today, it had reached an all-time high of $123; its IPO price was $14.

Not all Linux companies are so eager to tap investor enthusiasm for the upstart OS. Linuxcare, a provider of Linux technical support and training services, has said it will conclude a round of corporate financing before it goes public.

Cobalt, based in Mountain View, California, is one of the smaller players in the server appliance market, which has attracted huge companies such as IBM, Sun Microsystems, Compaq Computer, Hewlett-Packard, and Dell Computer.

Server appliances are designed to be easy to install, use, and administer. Analysts say they're likely to grow in popularity as more companies tap into the networked world of the Internet. While some are multipurpose machines, most server appliances are designed to do one job well, such as hosting email operations, serving Web pages, or storing data on a network.

"In the market for server appliances, we face significant competition from larger companies who market general and/or limited purpose servers and have greater financial resources and name recognition than we do," Cobalt cautioned.

Not yet profitable
Since its founding in 1996, Cobalt has sold more than 11,000 computers, the company said. Cobalt still isn't profitable, however.

In 1998, the company had revenues of $3.5 million and net losses of $10.5 million. In the six months ending July 2, 1999, the company increased its revenues to $7.6 million but still lost $8.2 million.

Cobalt sells two major product lines, the Qube and the RaQ, but in April it added newer products.

Using Linux as the OS offers Cobalt two clear benefits. The company can "leverage the rapid application development cycles of the open-source software community" to cut down on the time it takes to bring new products to market, Cobalt said in the filing.

Additionally, because Linux programming instructions are freely available, the OS can be customized, the company said. Cobalt licensed "for a nominal price" a modified version of Red Hat's Linux product.

Relying on Linux also poses some risks. "We may not succeed if Linux fragments, and application developers do not develop software for our products," Cobalt said.

The company is led by chief executive Stephen DeWitt, 33; chief technology officer and co-founder Vivek Mehra, 35; chief operating officer Gary Martell, 36; and co-founder and board chairman Gordon Campbell, 55.

The company had 101 employees as of July 2, 34 of whom are involved in research and development.

A cluttered market
The server appliance market is cluttered, with different companies targeting different areas. Among the smaller players competing with Cobalt are Encanto Networks, Auspex, Network Appliance, TechNauts, Mirapoint, and CacheFlow. Intel also is emerging in the server appliance market, analysts have said, and SGI is hoping its high-end systems will be good server appliances for sending streams of audio and video information across the Internet.

In addition, there has been a spate of partnerships and acquisitions in the market: IBM purchased Whistle Communications and licensed technology from Network Engines; Compaq and Dell licensed a specialized operating system from Novell; Dell is selling Network Appliance storage servers under the Dell name, Quantum acquired Meridian Data; and database giant Oracle joined with Dell, Compaq, and HP for its "Raw Iron" project.

While server appliances can get very expensive, costing tens of thousands of dollars, Cobalt's are relatively inexpensive, with prices beginning at less than $1,000.

Cobalt wants to enter into original equipment manufacturing (OEM) deals in which other companies would sell Cobalt equipment under their own names, the company said.

The $86 million that the company hopes to raise is only an approximation used to calculate the fee the company paid to the SEC. The company hasn't yet said how many shares it wants to sell or its expected price range.

The company proposes to trade on the Nasdaq market under the ticker symbol COBT.