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Lineo's IPO filing

May 19, 2000
Jonathan Corbet
Lineo Inc., the embedded systems sister to Caldera Systems, filed for its initial public offering (IPO) of stock on May 18. It evidently plans to raise around $60 million; its planned stock symbol is LNEO. Lineo is the first real Linux company to file to go public since January. A lot of things have changed since then, and the Linux stock market isn't the wild place that it once was. Expect there to be a lot of eyes on this offering as an indicator of what the market's interest in Linux stocks really is at this point.

The masochistic among us can plow through the S-1 registration statement for this IPO. But it's 2.3MB of legalese, not for the faint of heart. We would never have started LWN if we weren't a bit on the masochistic side, so we're perfect for this job. Here, thus, is our quick summary of what Lineo is up to.

Lineo is, of course, positioning itself at the center of the embedded systems arena. They see the potential for a lot of growth there, and they want a piece of it. Their primary customers are OEM manufacturers; they list ast, Inc., CIS Technology, Inc., DaiShin Information & Communications Co. and MiTAC International Corp. They also mention "strategic relationships" with itachi, Ltd., Motorola Computer Group and Samsung Electro-Mechanics Co., Ltd. This is a very different mix of customers than we have seen with other Linux companies that have gone public; the embedded systems market is a different place.

Products. The products they list include:

  • Embedix Linux - their embedded version of the system.

  • The Embedix Software Development Kit. The SDK will start shipping in June, and contains a bunch of proprietary stuff.

  • The Embedix Browser (which used to be known as "Embrowser"), a proprietary web browser for embedded systems.

The S-1 talks much about the two add-on products, and rather less about the embedded operating system itself. Lineo perhaps sees Embedix Linux as the loss-leader that gets them in the door; the add-ons and services then are to bring in the real cash.

Lineo is not really positioning itself as a services company. While services are a part of its mix, the embedded products appear to be their primary area of operation.

Money. Revenue has grown from $945,000 in 1997 to $2.8 million in 1999 - $4.6 million if all the firms acquired by Lineo are also counted. If you look at Lineo itself, it lost "only" $1 million in 1999; by the time you deal with all the acquisitions that number jumps up to just under $10 million. Lineo currently (as of April 30) has $30 million in the bank.

Risks. The very first item in the obligatory list of scary "risk factors" is that Lineo has been focussed on Linux only since the beginning of 1999; previously its main revenue source was DR DOS - its embedded DOS clone. Thus, they say, "we believe that our financial history to date is not indicative of our future performance." In the six months ending April 30, 2000, 69% of Lineo's revenue came from Linux-based products. They had "no material service revenue" during that time.

Other risk factors include:

  • They have never been profitable, and don't expect to be anytime soon. Business as usual.

  • They could have trouble integrating their acquisitions - six of them, so far. More acquisitions are planned for the future.

  • They are growing very quickly and could have trouble managing that growth.

  • When you sell to OEMs, you're dealing in large contracts with a relatively small number of customers. There just aren't that many OEMs out there to sell to. Thus the loss of even one customer can really hurt. That puts the OEMs in a good bargaining position, and can make it hard to get really good terms. In 1999, 48% of Lineo's revenue came from three customers (23% Sun Microsystems, 13% Brooktrout, Inc., and 12% Symbol Technology).

  • They expect all of their future money to come from Linux; if Linux does not continue to grow they will be in trouble.

  • The combined open source/proprietary software business model is unproven. "We know of no company that has built a profitable business based on open source software."

  • They are vulnerable to third-party intellectual property claims - as are we all.

  • Since proprietary software is a big part of their business model, they will be in trouble if they fail to protect it properly. "In addition, a third party could attempt to interpret the GNU General Public License in a manner that could put the protection of our intellectual property at risk because of the interaction between our intellectual property and the intellectual property covered by the GNU General Public License."

  • They have the usual risks that apply to international operations, but perhaps more so: 65% of their 1999 revenue came from customers outside the U.S.

  • They could run out of money. They expect the IPO funds (and what they have in the bank) to last for 15 months. The S-1 doesn't say so, but if the IPO fails Lineo might find itself in a Linuxcare-style cash crunch.

Acquisitions. Lineo has acquired six business so far: Zentropic, USE, Fireplug, Inup, Moreton Bay and RT-Control. They managed to do them all by issuing just over 4.5 million shares of stock and $1.3 million in cash. They also issued options for 673,000 more shares.

  • Zentripic was acquired for $6.7 million, being 1.745 million shares of stock and $112,000 in cash. Zentropic didn't do much for Lineo's balance sheet: it lost $752,000 on revenues of $85,000 last year.

  • USE came in for $373,000 in cash and 682,000 shares worth of options.

  • Fireplug cost them $581,000, 70,000 shares of stock, and 62,000 shares worth of options.

  • Inup was acquired for 2.1 million shares of stock, and $60,000.

  • The Moreton Bay acquisition, finalized on May 10, took 956,000 shares of stock, 209,000 shares in options, and $60,000 in cash.

  • RT-Control came in for 404,000 shares, 17,000 in options, and $90,000.

Employment. As of May 15, Lineo employed 200 people. 119 of those are in engineering, 43 in sales and marketing, and 38 in general and administrative. 128 people are in the U.S., 15 in Australia, 14 in Canada, 7 in France, 25 in Japan, 6 in Taiwan, and 5 in the U.K.

Ownership. The largest owner of Lineo stock is the Canopy Group - it has 44.4% of the company. Then comes Caldera Systems, which has 13.1%. The "real ownership" behind those shares could be seen to be Raymond Noorda and Ralph Yarrow, who control Canopy, though they "disclaim beneficial ownership." Dry Canyon Holdings has 8.2% - Bryan Sparks, Lineo's CEO, has an interest in Dry Canyon. Egan-Managed Capital has 6.1%.

There does not appear to be any mention of a directed share program in the filing. This does not mean that no such offering will take place, just that they have not mentioned it at this point.



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