Embedded Linux firm Lineo plans IPO

Undeterred by a lukewarm market, Lineo, a company pushing Linux into set-top boxes and other non-PC computing devices, has filed to raise about $60 million in an initial public offering.

Lineo's Securities and Exchange Commission filing yesterday comes amid IPO troubles at Linuxcare and a generally lackluster stock performance for Linux companies no longer benefiting from the buzz caused by the surprise acceptance of the new operating system.

Lineo is insulated to an extent from this climate because it's aiming at a very different market than the existing public Linux companies. Lineo's version of Linux is intended for "embedded" devices, where the operating system is usually hidden from users. The market includes devices such as network hardware, factory robots and cell phones.

By buying six companies since February for a total of about $7.8 million, Lineo single-handedly consolidated much of the market for "embedded" Linux. But Lineo still faces a host of competitors.

Embedded Linux competitors include Red Hat, Transmeta, TimeSys, MontaVista Software and LynuxWorks. Lineo also goes against traditional proprietary embedded operating system companies such as QNX and Wind River Systems.

Although Linux currently isn't as well suited to embedded computing as traditional operating systems, there are reasons it's moving in that direction. For one, it's free, a big concern for companies shipping thousands or millions of gadgets and are worried about royalty payments. Lineo will charge royalties but says they'll be less than with proprietary operating systems. MontaVista and LynuxWorks, however, say they won't even charge royalties.

Another reason embedded Linux is catching on is that Linux is much more comfortable running on a wide variety of processors than many other operating systems. Linux's design makes it easier to move it to new chips. And because its source is open for anyone to toy with, moving it to new chips is a popular hobby among Linux fans.

Lineo had pro forma revenue of $2.8 million and a pro forma net loss of $10 million in the six months ended April 30. Lineo has a deficit of $10 million total and expects "to incur losses for at least the next 15 months," the company said.

The company proposes to trade on the Nasdaq market under the symbol "LNEO." Underwriters are Credit Suisse First Boston, Lehman Brothers, Dain Rauscher, and Wit SoundView.

The company's three largest customers in the fiscal year that ended Oct. 31 were Sun Microsystems, which accounted for 23 percent of Lineo's revenue; Brooktrout, which accounted for 13 percent; and Symbol Technologies, which accounted for 12 percent.

That picture has changed dramatically, however, with the company's Linux push. In the last six months, Taiwanese manufacturer DaiShin now accounts for 34 percent of the company's revenue, Lineo said. In the last six months, 69 percent of the company's revenue was from Linux products.

Lineo expects to make money from royalties on its software, from selling software development kits and from offering technical support and customization services. In addition to its Linux products, Lineo also makes money from its DR-DOS version of DOS, which still is used in several non-PC products.

DaiShin is among several investors who showered Lineo with $37 million two weeks ago. Other investors were Motorola, Samsung, Mitsubishi, Citrix Systems, Access, Acer Group, Arima, Compal Electronics, First International Computer, Global Alliance, Hikari Tsushin, and Mitac International. In addition, investment firms including Egan Managed Capital, J&W Seligman and Astoria Capital Partners participated in the funding round.

Lineo's version of Linux, called Embedix, is based on the OpenLinux product from Caldera Systems, Lineo's sister company.

Ray Noorda, who grew wealthy on the success of Novell and its operating system, founded Caldera Systems and Lineo, formerly called Caldera. Noorda, 75, who has a 73 percent stake in Caldera Systems, beneficially holds 44 percent of Lineo stock.

The other major stockholder is Ralph Yarro, 35, who beneficially holds 47 percent of Lineo stock.

Lineo disclosed the amount that its six acquisitions cost in its SEC filing. Zentropix, the first acquisition, was far and away the most expensive, costing $6.7 million. Fireplug cost $581,000, USE $373,000, Rt-Control $90,000, Moreton Bay Ventures $60,000, and Inup $60,000.

Linux letdown

Companies that based their IPOs on the Linux operating system include Linux software and services seller Red Hat, Linux computer maker VA Linux Systems, technical information and news site Andover.Net, Linux software seller Caldera Systems, and Linux server appliance company Cobalt Networks.

Other publicly traded companies involved with Linux include eSoft, which builds special-purpose Linux-based servers; Corel, which makes a version of Linux along with higher-level software such as word processors; Enlighten Software, which makes Linux management software; Santa Cruz Operations, which sells Linux services; and TiVo, which sells TV recording devices based on Linux.