Open-source stocks react to Linuxcare woes

As earlier reported, Pat Lambs, who has been vice president of service delivery for the San Francisco-based provider of Linux technical support and services, will replace him.

The moves come amid a gloomy climate on Wall Street, particularly for Linux companies. Red Hat, VA Linux Systems and Andover.Net have been sliding since their wildly successful IPOs in 1999, and Caldera Systems had a lukewarm IPO in March.

Still, Linuxcare's announcement helped boost shares of some rival Linux companies in early trading today. VA Linux gained $3.13, or more than 6 percent, to $53.25; Caldera Systems jumped 75 cents, or nearly 5 percent, to $17; and Andover.Net shares piled on $1.25, or almost 7 percent, to $19.88. Red Hat, flying against the trend, slipped lower in early trading today, falling $1.56, or about 4 percent, to $36.56.

In an interview Friday, Lambs declined to say why Sarrat resigned but said his last day of employment was today, when the Linuxcare board voted to appoint Lambs as head of the newly created "office of the CEO." Lambs said she believes Linuxcare and other Linux companies will be relatively unfazed by the change. "We don't feel the change at the top will affect the IPO," she said.

"I think it is an issue about the individual, not the company," said Giga Information Group analyst Stacey Quandt.

"If a CEO or chief financial officer leaves a company and they can prove to the underwriter and Securities and Exchange Commission that they have a solid management team in place, they'll let the deal go through," said Jeff Hirschkorn, senior analyst with IPO.com. "This deal will probably be delayed about a week or two."

Venture capital firm Kleiner Perkins Caufield & Byers invested in Linuxcare and brought Sarrat in to provide some seasoned management to the company, which was founded by San Francisco Linux enthusiasts Art Tyde, Dave Sifry and David LaDuke.

Sarrat left his last CEO position at security software firm Cylink because of disagreements with its board. In an earlier interview, Sarrat said he and the board didn't agree about how a revenue recognition issue had been handled.

"We are confident that Linuxcare's business plan, management strength, technology infrastructure, employee base and technical expertise will enable us to work through this event and pursue our path toward an initial public offering and a long-term leading position in the Linux industry," Lambs said in a statement.

Linuxcare didn't give a new date for the IPO but said the company and its investment bankers will work to determine the best time.

The IPO has not been pulled, just delayed, Lambs said. "Clearly we have the support of our board and our bankers to continue to grow the business and pick up on our IPO."

Though the company declined to comment on the most recent financial performance, chief financial officer Christian Paul expressed optimism. "We're certainly pleased with the performance of the company and the fundamentals of the business," Paul said.

The company isn't worried about obtaining operating money. "Money is freely available these days, so that's not an issue," Lambs said.

But the unfavorable climate prevailing on Wall Street was a factor, Paul said.

"Given the environment on Wall Street overall, it may not have been an opportune time to go public," said Quandt. "The question is when one of these companies will become profitable."

Linuxcare said in a filing that it expects to be unprofitable in 2000 and 2001. While that may sound pessimistic, it's comparable to the expectations of the two largest publicly traded Linux companies, Red Hat and VA Linux Systems. Linux seller Red Hat expects profitability seven quarters from now, according to a spokesman for the company. VA chief executive Larry Augustin said analysts expect his Linux computer company to become profitable in late 2001 or early 2002.

In 1999, Linuxcare had revenue of $1.5 million but a net loss of $21 million, according to Securities and Exchange Commission filings. About $10 million of the company's expenses were in the last three months of the year.

Linuxcare provides technical support, education, consulting, customization and other services for companies using the Linux operating system. The company supports all of the major versions of Linux and many minor ones. It also plans to offer customized versions of Linux that companies will be able to label with their own brand name instead of having to subordinate their brand name to Red Hat, SuSE, TurboLinux, Caldera Systems or one of the other Linux sellers.

The company received a $32.5 million investment from Patricof & Co. Ventures, Dell Computer, Sun Microsystems, Oracle and Motorola.

Last year, Linuxcare acquired the Puffin Group, a consultancy based in Ottawa that was working on translating Linux to Hewlett-Packard's PA-RISC chips, and Prosa, a Linux consulting firm in Padua, Italy, whose customers include Telecom Italia and the Vatican.

The Puffin Group acquisition cost $527,000 and brought in about $97,000 in revenue in the first nine months of 1999. Prosa, which cost Linuxcare $290,000, brought in $223,000 for the year.

The new office of the CEO will manage the company until the Linuxcare board decides otherwise, Lambs said. Douglas Nassaur will continue to be chief information officer, she added.

Other members of the office of the CEO are Tyde, co-founder and former chief executive; Ted Schlein, chairman of Linuxcare's board and a partner at Kleiner Perkins; and Paul Vais, a Linuxcare director and a managing director at Patricof & Co.

Lambs most recently spent five years Ascent Logic, where she was chief operating officer. Before that, she spent 18 years in management roles at Digital Equipment Corporation, where she managed the company's professional services operation.