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Linux Today In-Depth News Feature: Linuxcare's Finally Ready, Launches IPO

Jan 21, 2000, 04:25 (0 Talkback[s])
(Other stories by John Wolley)

by John Wolley, Linux Today Silicon Valley correspondent

SAN FRANCISCO, California, January 20, 2000 - While Red Hat, Cobalt Networks, and VA Linux, have made headlines with spectacularly successful IPOs, Linuxcare's president and CEO, Fernand Sarrat, has consistently given the distinct impression that he is in no hurry to go public--that is, up until today, when the company formally filed the papers with the SEC for an initial public offering of stock (IPO). Always before this, Sarrat's message has been that Linuxcare needed to prepare.

In September of '99, CNET (9/99) called Linuxcare "an oasis of calm amid the Linux frenzy", a reference to the lack of IPO fever there, in comparison with the perceived frenzy that led up to and surrounded IPOs at Red Hat, Cobalt, and VA Linux. "Given the populist support for the Linux operating system, Linuxcare would seem like a top candidate to sell stock to the public. Not so fast, says the company. ... Instead, Sarrat is busy signing Linux-support contracts so the company has a solid revenue stream before launching an IPO. Linuxcare... is raising enough in corporate investments 'to have enough flexibility to pick our IPO time whenever we want next year,' he said."

Big Plans Announced in Mid-December
Even when Linuxcare launched a flurry of press releases in mid-December, focusing on its second round financing--and use of those funds to acquire three companies and expand its global services (Linux Today 12/99)--the trade press generally continued to reflect Sara's "go slow on the IPO" position.

SRO (12/99), titling its coverage "The Linux Company That's Not Heading For An IPO...Not yet anyway", noted: "If you're a stock watcher, the first thing that pops into your mind when you hear 'Linux' anymore is IPO. That wasn't the case, though on Dec. 14 as leading Linux help-desk company, Linuxcare, announced finance news, partnership news, leader news--everything but IPO news."

Forbes (12/99) echoed: "Linuxcare biding its time" - "While the amount of funding the company has raised so far--about [US]$38.5 million in the first two rounds--is considered by industry analysts to be substantial for a Linux company, that doesn't mean Linuxcare is ready to take the plunge into the public pool. 'We're still building the company--it's really only a year old,' notes [founder and executive VP Arthur] Tyde in response to a question about when the company plans to go public."

Only Inter@ctive Week (12/99) seemed to see the December announcements as a prelude to an IPO filing. The story, headlined "Linuxcare: Next Big Linux IPO?", expressed the opinion that the second round financing and acquisition of the Puffin Group "did little to dampen expectations that Linuxcare is moving toward an initial public offering. After hugely successful IPOs by Linux distributor Red Hat and Linux server makers Cobalt Networks and VA Linux Systems earlier this year, speculation has begun to focus on Linuxcare - a virtual unknown a year ago - as the next Linux company that will run up massive market capitalization."

"Bulking Up" for an IPO
Commenting on Linuxcare's December announcements in Inter@ctive Week (12/99), Scriptics CEO John Ousterhout said, "It sure looks like they're bulking up" for an IPO. While Linuxcare may have been "biding its time" on going public, it definitely has been using that time to good advantage, to "bulk up"--to lay a really solid business foundation. If anything, Linuxcare seems almost "overprepared" for its IPO. Its second round of pre-IPO financing was "oversubscribed"--in the second round financing that raised US$32.5 million, Sarrat had to turn down investors, who were offering more than US$300 million (Linux Journal 12/99). And if a customer list can be "overly impressive", then Linuxcare has done its best to be especially over-prepared in that area.

Unlike Red Hat and VA Linux, all of Linuxcare's revenues come from services. Billing itself as the only "pure-play Linux support company", its customer list is the only thing it can point to that makes its future high revenue growth prospects credible. So Linuxcare has gone all out, inking major deals with (in alphabetical order) Amdahl, Dell, DTTS (Hitachi subsidiary), IBM, Informix, Inprise (formerly Borland), MacMillan USA Books, Motorola, Sun Microsystems, TurboLinux, NetAid, VMWare, Wave Technologies, and others. And with the second round funding, announced in December, expanding their offices worldwide, their reach is now truly global.

The services that Linuxcare offers span the range from traditional phone support, to application porting, to software certification, to working with a vendor on a "very high end" Linux distribution. And Linuxcare has expanded its range of software for which it provides service far beyond its Linux roots. Linuxcare now is currently supporting "all major relational databases that have been ported to the Linux platform... Apache, Sendmail, and Samba... IBM's WebSphere, SecureWay and VisualAge ...and end-user support for VMWare and Sun Microsystem's StarOffice." (Linux Today 12/99)

Where Will Linuxcare Place in the Linux IPO Race?
Will Sarrat's attention to preparation in depth pay off? How will Linuxcare's IPO fare in relation to those that have gone before, against which it will inevitably be compared?

Linuxcare's exclusive focus on services, and the customer list they have established in advance of the IPO, may give the company a big edge. The Forbes (12/99) article reports, 'Services are going to be the most profitable and the largest-revenue part of the Linux marketplace,' argues George Weiss, an analyst with the Gartner Group. And while companies like Red Hat and VA Linux have services components, it's a big advantage for a pure play services company like Linuxcare not to be bound to any one particular distribution of Linux or hardware platform."

Both Red Hat and VA Linux see services as providing a significant portion of their revenues long term. But since Linuxcare is so far ahead of any other Linux service provider in establishing itself with the "Global 1000"--the largest 1000 corporations worldwide--Red Hat and VA may have a difficult time catching up. It will be interesting to see how the financial markets view this. Early indicators will be provided in the next few weeks, as details on share pricing emerge.

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