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

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.

, 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.”

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 [email protected] Week
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 [email protected] Week
, 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
). And if a customer list can be “overly impressive”, then
Linuxcare has done its best to be especially over-prepared in that

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

Where Will Linuxcare Place in the Linux IPO

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.