Re Need to remember how Intel, Microsoft types differ from those that are on the brink (or have) of major losses.
yep, and M$FT don't owe a dime -- in contrast just look at the all-singing-and-dancing penguin :-)
Winners and Losers in the Great Linux Shakeout
By Gavin Clarke
Linux companies are suffering. Not as badly as their bigger peers, but the pain is palpable. Vendors who tasted venture capital investment and inflated stock prices are struggling with mergers, lay-offs and worthless share valuations. Taking their place in this dubious line up are LinuxCare, TurboLinux, VA Linux Systems, SuSE Linux and Caldera Systems.
The only Linux winners today, it seems, are analysts and observers who predicted the shakeout last year and who can now say "I told you so." But as the chaos increases, the real questions occupying minds once happy to build open source software and leave the business to someone else are: "Will I survive?" and "What makes a likely winner?"
Ask the key Linux vendors how they will survive the storm and each will point to four factors they think makes them a likely winner. Each says they have a sound enterprise and services play. Those who announced lay-offs will say they have their cash-burn under control, while those who have not yet held an IPO claim they have sufficient funds. Each will point to ever- optimistic figures from IDC and mention "growth potential". Each will say that open source is a low-cost, high-value IT proposition for cash-strapped organizations. Obviously, someone's going to lose, the question is who and when?
Caldera Systems is playing a high-risk strategy. Last year's announced acquisition of the Santa Cruz Operation's Unix business and services was supposed to guarantee a network of channel partners to deliver Linux with services. Only the deal has now been expanded from the high-end UnixWare to the low-end OpenServer business. Plus, completion was pushed back to the second quarter of 2001. Orem, Utah-based Caldera promised Linux compatibility with the UnixWare kernel and applications due in April.
Evidence suggests the deal is mired in difficulty and financial miscalculation. Caldera executives have used presentations to say they are inheriting an $80m sales and services business from SCO, according to one source who claimed SCO is actually seeing a big decline in its revenue base. The prime culprit is Linux, as customers can see little reason in adopting UnixWare. Research Triangle Park, North Carolina-based rival Red Hat Inc, meanwhile, said last week that it is stealing customers from Caldera.
And that valued channel, a key factor in the deal, doesn't seem to be proving such a plus. Caldera has admitted it faced day-to-day trouble in getting channel staff to sell both companies' products. On February 28, meanwhile, the company reported increased first-quarter losses on increased sales. Operating losses for the period ended January 31 leapt from $5.6m to $10.2m, while net losses were $9.8m compared to $5.5m a year ago. Clearly the company is still digesting its acquisition - a process that must be settled quickly to hit profitability.
Caldera's hope for surviving the shakeout rests in securing volume on its Linux business, through services and enterprise work. The company last month announced that its Volution Linux management and monitoring software would tie into online services from Acrylis Inc. The goal? To capture a slice of the Linux services market that IDC said will be worth $285m by 2004 - up from $28m in 2000. Like most Linux companies, though, it has not said how much revenue it expects from its services. Caldera was unable to respond, despite repeated requests.
Brisbane, California-based TurboLinux Inc is also grappling with merger problems after its $60m acquisition of Linux services specialist LinuxCare Inc. Both companies have wielded the jobs axe, with San Francisco, California-based LinuxCare cutting 10% of staff while TurboLinux refused to reveal numbers. LinuxCare is a vital acquisition to TurboLinux, which last week finally canceled its doomed IPO. LinuxCare simply provides services excellence and established relationships with Oracle, IBM and Silicon Graphics.
LinuxCare, meanwhile, seems to have been rescued from itself. Executives claim LinuxCare would have hit profitability by the first quarter of 2002, but the businesses suffered from an unfortunate mix of poor planning, lucky business decisions - such as creation of the revenue-spinning Delta Base Linux knowledge base - and an unsound corporate structure. For example, there was no separation between sales and services, which LinuxCare founder and incoming TurboLinux chief technology officer Art Tyde said meant individuals "threw stones at each other."
The new TurboLinux is now under the gun. Like Caldera, it must rapidly wrap up the merger to cut overheads and move forward. This includes biting the bullet and closing either the San Francisco or the Brisbane office. The smart money is on waving goodbye to the San Francisco premises. "We've got to integrate the companies quickly otherwise we will see burn," Tyde said.
Meanwhile, the target is growth and Tyde said TurboLinux will achieve profitability in either its fourth quarter or first quarter. Sales people are being recruited and the drive is into serious enterprise computing, in addition to expanding work with existing and new partner OEMs. TurboLinux last week joined a line-up that included Red Hat to pitch backoffice Linux services to Wells Fargo Bank.
"Until TurboLinux acquired LinuxCare, TurboLinux didn't have a way to back up products with professional services. We can walk into a place like Wells Fargo and say we can offer the software and product side to get something running," Tyde said. There are no questions over TurboLinux's technology competence with the LinuxCare acquisition; the big question is whether TurboLinux can pitch convincingly. That's down to those additional sales people, who will need take time to be trained.
Profitability by the end of the year? Tyde insisted the venture capitalists - who have poured more than $30m into both companies - have not cracked the whip and specified a date for the company to achieve profitability. If they do, and the company fails to deliver, expect the lights at TurboLinux to get permanently turned out.
VA Linux Systems Inc is in a different, but no less precarious situation. Shaky second quarter financials barely in line with lowered revenue expectations, recent job cuts, increased operating expenses despite a 110.6% increase in sales to $42.5m, and a 99% drop in share price to around $3 each since making its debut in 2000 mean VA Linux couldn't be any less the darling of Wall Street it was when it floated.
VA Linux claims its financials have been hit hard by the economic slowdown and has established reserves to cover potential "financial exposures." Profitability is expected in October 2002, nine months later than previously expected, but to reach profitability VA Linux needs revenue of about $60m to $70m per quarter. The company has enough cash to last the longer wait, according to chief financial officer Todd Schull.
John T Hall, VA Linux senior vice president of marketing, said growth will come from services, like its SourceForge Onsite offering, and vertical Linux-based products such as network attached storage devices expected next year. Hall refused to provide revenue projections for SourceForge Onsite development community or explain how SourceForge Onsite translates into cold-hard revenue - VA Linux is taking two hits on the service: charging to install at customers' sites and creaming off a subscriptions fee. Instead Hall played the standard business get-out-of-jail card on revenues, promising "a tremendous amount of interest" and a "significant number of customers" in SourceForge Onsite.
VA Linux is also pushing its tools for systems management along with its consulting services, targeted at enterprises. VA Linux's strategy seems to be VA Linux products and VA Linux services for enterprise customers. Deals with any big-name OEMs - valued by TurboLinux and Red Hat with Dell Computer Corp - haven't yet materialized. Hall said it's a matter of converting technology expertise into business focus for enterprise customers. The industry though is waiting. With profitability postponed by nine months, the company has given itself breathing space and lowered expectations. Missing that deadline by failing to translate services or products into revenues will could signal the end of VA Linux.
Question marks also hang over SuSE Linux AG. The Nuremberg, Germany-based company has failed to repeat its European success in North America. SuSE stripped its US operations to the bone last month, laying off 30 support staff, with support transferred to back to Europe, and leaving just 15 engineering, sales and administration personnel in the US. SuSE said the move reaped monthly savings in the six- figure range.
On the plus side, SuSE is honing its support offerings through 200 services and support personnel. It is planning an enterprise edition for its support which borrows from Windows rival Microsoft Corp. SuSE will issue software updates and patches through an online push service in addition to phone, fax and email-based maintenance. A candid SuSE revealed its goal is for two-thirds of its revenue to come via services and support during the next two to three years, up from today's 50%. Sources close to the company expect it to hit profitability in the next two quarters.
Another factor favoring SuSE's survival is a number of fruitful relationships with major OEMs and ISVs. Its server product is distributed via IBM, delivering SuSE Linux right into enterprise territory, and it has collaborated with Oracle by engineering the company's server clustering software for Linux. SuSE is also developing a Linux-based appliance server bundled with Redwood Shores, California-based Oracle applications on an as-yet-unspecified vendor's hardware box. The server vendor is expected to be Dallas, Texas-based Compaq Computer Corp, but SuSE was unable to provide further details.
SuSE's survival is a relative question. European survival seems a done deal thanks to those deals with OEMs and ISVs, and a string of enterprise relationships with big spenders that include BMW, Daimler Chrysler and Lufthansa. Only a European version of the US economic slowdown will challenge the company. Its future in the US is less assured, and SuSE has gone back to fundamentals with restructuring, lowering its support costs and installing an experienced North American sales director who can build up the European operation and whose mission is to deliver direct sales.
"The European market is very strong. Our focus is to create the retail revenues and product revenues in the US. We will focus more on the sales side of things," the company's recently appointed president of North American operations Dirk Hohndel said. Unlike VA Linux, TurboLinux and Caldera, SuSE has another additional strength. As a private company it is untroubled by what investors may think of its performance, which cuts it some essential slack.
Red Hat, meanwhile, is looking like a survivor. The company posted a net $600,000 loss for the fourth quarter last week, breaking even on a per share basis, on sales of $27m. It beat Wall Street expectations by $0.01 and investors - desperate for some good news - sent the stock soaring on Nasdaq last Friday, with shares closing up 12.6% at $5.87.
Red Hat expects to achieve profitability during its first fiscal quarter, growing 15% to 23% for fiscal 2002 with the second and third quarter seeing biggest growth. Executives said Red Hat would notch up $17.4m income, or $0.10 per share unadjusted. Adjusted that would give Red Hat income of $13.1m or $0.08 per share. Executives said they are stealing increased amounts of business from Caldera, and proposed a range of database and storage products that could challenge VA Linux.
Services will make up a key component of the Red Hat pie. Its goal is for $80m services revenue in fiscal 2002 overtaking subscriptions on an expected $59m for the year. Services revenue will come from the subscription-based Red Hat network and lucrative server support deals with Round Rock, Texas-based Dell Computer Corp, the company said.
How can Red Hat fail to survive? Well, Red Hat can fail to survive if the US economy slows further. By predicting growth and revenue for fiscal 2002, Red Hat executives have dared to do what their peers at Oracle Corp and Palo Alto, California-based Hewlett-Packard Co say they can no longer. That is to predict the rest of the year and beyond.
Red Hat is clearly confident, but it should take a lesson from Oracle, which said expectations for its fourth quarter that will end in May are similar to the third quarter. However, Oracle's third quarter was strong for two months and went flat in the closing weeks as businesses delayed spending on software.
Red Hat's future is tied to that of the economy, and a deepening slowdown would hit customers' spending, postpone Red Hat's move into profitability and potentially yield no growth. Red Hat's future after consecutive quarters of flat growth could be less certain, but the company would almost certainly try to tread water and cut costs until the crisis passes. That could mean job cuts, depending on its cash reserves.
The Linux market today is pervaded by paranoia and anxiety. Everyone knows there will be more victims, but no one knows who will fall next. Those vendors who made jobs cuts, reported losses or made acquisitions have unwittingly placed themselves on a deadline to achieve profitability and build a truly viable business model.
As the fiscal quarters tick past, you can expect the next victim to be increasingly fingered sometime after the summer, as vendors like VA Linux and Caldera reach the end of their financial years. Those like Red Hat that are relatively successful today face a simple set of problems thanks to the US economic slowdown.
Only one thing is certain: the Linux industry is growing up. Gone are those hazy days at the LinuxWorld Conference and Expo, where individuals passionate about Linux talked about how to they might make money from Linux and debated the merits of providing packaged versions. Now vendors are mired in the process of simply surviving, and the clock is ticking. gavin.clarke@computerwire.com
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