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January 19, 2000
J. Corbet
Linuxcare has filed its S-1 form, indicating its plan for an initial public offering of its stock. This is a much-awaited offering, selected by the media as perhaps being the next big success along the lines of VA Linux Systems. S-1 filings tend to be lengthy beasts, but this one outdoes many, weighing in at 1.2MB of legalese. For those who don't want to plow through the whole thing, here's LWN's summary.

The plan is to issue $92 million worth of stock, which will trade under the symbol LXCR. The number of shares to be issued remains to be filled in; Linuxcare won't do that until near IPO time (probably March sometime). Given recent Linux IPO history, it would not be surprising to see an increase in the offering price - and thus the amount raised - before it's all over.

[Linuxcare] The S-1 describes four areas of endeavor: professional services, technical support, education (training), and product certification. Linuxcare often makes a point of presenting itself as a "pure Linux services" company.

Like all Linux or Internet companies at IPO time, Linuxcare loses money. However, Linuxcare seems somewhat more in the red than most of the others - through September 30, 1999 Linuxcare had lost $10.6 million, having brought in all of $518,111 in revenue - including revenue from companies it acquired. Its balance sheet for that time shows a total deficit of almost $7 million. The infusion of more than $30 million in venture capital since then will change that last number, of course.

Almost all of the revenue comes from the technical support and education activities. Professional services and certification are not significant generators of revenue at this time.

The usual set of scary risk factors applies:

  • They have a limited operating history, having been incorporated just over one year ago. They've been losing money, and don't expect to change that until 2002 at best.

  • Competition for Linux professionals is intense.

  • 72% of Linuxcare's revenues come from its three largest customers.

  • Fast growth is difficult to manage. Linuxcare hired 120 people in 1999, including most of its management team, which has not worked together before.

  • Linuxcare's customers could decide to go into the support business and become competitors instead; they could also ally themselves with other Linux support providers.

  • Efforts to promote the Linuxcare brand could falter; they could also lose the right to use the term "Linux" in their name. They have permission from Linus to use it now, but he could always change his mind.

  • More applications for Linux need to be developed and accepted. Linuxcare plans to support this sort of application development.

  • Fragmentation of Linux could hurt Linux in general, and force Linuxcare to support a wider set of distributions.

  • Linuxcare thinks it can get by for one year on the proceeds from the IPO. At some point, though, they may have to go out for additional funding.

The money will be used for general corporate purposes - essentially whatever they decide to do. Acquisitions are listed as one possible use; according to the S-1 they are currently in no acquisition negotiations.

With regard to recent acquisitions:

  • The Puffin group was purchased for 100,000 shares of stock, plus options to purchase another 325,000 shares at 13 cents each.

  • Prosa was purchased for $290,000 and options to purchase 25,000 shares of stock.
Among other things, the two acquisitions helped with Linuxcare's revenue figures. Without Puffin and Prosa, Linuxcare's total revenues through the end of September, 1999, would have been $305,000.

Frequent mention is made in the filing of Linuxcare's plans to deliver its services via the Internet. They seem to want to automate as much as possible, thus reducing their personnel needs. They count heavily on their information systems development to bring this about. To the extent that they are successful in this regard, they may encounter some criticism from the Linux community - support databases and associated systems are a competitive advantage only if they are kept proprietary.

Linuxcare also makes a point of its vendor-neutral stance - they support 21 different distributions currently. This approach is intended to make them more attractive to customers with diverse needs.

The professional services group is supposed to operate in a number of areas, including application porting, parallel computing and clustering, device drivers, network management, security audits, performance optimization, web and mail servers, open source strategy, and customized Linux solutions. With the acquisition of Prosa they have also gotten into embedded systems.

The technical support operation handled 140 incidents in the second quarter of 1999, and 15,000 incidents in the fourth quarter. "We capture the knowledge gained in resolving these incidents in the knowledge database, increasing our level of automation and improving our service quality."

Linuxcare provides a list of its Linux hackers, including Christopher Beard, Alex deVries, Paul Mackerras, Paul Russell, Andrew Tridgell, Joshua Uziel, David Welton, Matthew Wilcox, Rasmus Lerdoff, David Sifry, David Mandala, Stephen Rothwell, Phil Schwan, Jim Dennis, and Salvatore Sanfilippo.

Ownership of Linuxcare stock is spread among several people. The biggest piece belongs to Kleiner Perkins; they own 21.8% of the company. Patricof & Co. has 8.7%. The three founders (Art Tyde, David LaDuke, and David Sifry) have 8% each; CEO Fernand Sarrat has 7.4%, and most of the other officers have a little over 1%. Numerous people, especially Mr. Sarrat, also have a great deal of options for future stock purchases.

As far as this reader can tell, there is no mention of a community stock offering in this filing. That does not mean that no such offering is planned - only that it is not mentioned here.

The filing finishes with a detailed listing of agreements to which Linuxcare is a party - including employee agreements, acquisitions, etc. Those who really have to know what the management team is earning can look there.

The overall picture is of a company that sees services (or the lack thereof) as being one of the primary factors that is limiting further adoption of Linux. By filling in the services area, they feel they can not only be successful as a company, but help the Linux cause as well.

Eklektix, Inc. Linux powered! Copyright 1999 Eklektix, Inc. all rights reserved.
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