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SuSE expects break-even second quarter

The feat would be a significant milestone for the company: It was profitable for a time, but it now faces heavy competition from Red Hat and established titans such as Microsoft and Sun.

NEW YORK--German Linux seller SuSE was thwarted in its first attempt to go public, but Chief Executive Gerhard Burtscher believes a reorganization has laid the groundwork for a second try.

SuSE, based in Nuremberg, Germany, sells the Unix operating system clone along with technical support and consulting services. In the second half of 2001, the company cut staff, reorganized and named Burtscher the top executive.

SuSE now expects revenue to surpass expenses in the second quarter of this year, Burtscher said in an interview at the LinuxWorld Conference and Expo here.

"Breakeven is planned for the second quarter," Burtscher said. It would be a significant milestone: The company was profitable for a time before the enthusiasm for Linux took off like wildfire, but it now faces heavy competition from Red Hat and established titans such as Microsoft and Sun Microsystems.

To meet its financial goals, the company cut its staff from 550 employees to 380, sparing only its programmers. Among those cut were people working in support, administration and professional services, Burtscher said, but the company preserved the programmers at the core of the company.

SuSE also closed three of its seven offices and backed off from projects that might have been strategic but didn't bring the company revenue, Burtscher said.

Two Linux companies made it public during the more forgiving investor climate that prevailed through early 2001. Red Hat, the leading Linux seller with top market share, held not one but two public offerings. And struggling competitor Caldera International just managed to squeeze in its IPO before the Internet bubble burst and investors lost their willingness to fund unprofitable companies.

During the same period, Turbolinux, Lineo, LynuxWorks and Linuxcare withdrew their IPO plans.

SuSE had been hoping to go public too, but the company's financial records weren't detailed enough to meet the standards required by such a move, said Peter Jelinski, head of SuSE's enterprise business unit.

"They had a lot of difficulty (attaining) the financial auditing position that would allow them to go onto the stock market," Jelinski said.

Now things are different. "Since August, we have been running SuSE completely differently from in the past," Jelinski said. "It was a different management. It had to be run more like a business."

To fund the company in the meantime, SuSE is relying on a $13 million (15 million euro) investment from the e-millennium 1 venture fund, whose founders include German corporate-software giant SAP, Deutsche Bank and Accenture. Part of the funding also came from Apax Partners.

SuSE has three main elements to its business strategy, Burtscher said: selling boxed copies of its version of Linux, selling consulting services that take advantage of SuSE's Linux expertise, and piggybacking its products on servers sold by mainstream computer companies.

"IBM Global Services is becoming more and more our primary partner," Jelinski said.

The partnership with IBM is strong. SuSE was an early ally in IBM's vocal effort to bring the new-age Linux operating system to IBM's old-guard mainframe servers.

Indeed, all three IBM mainframe customers touting Linux at the conference used SuSE's version of the OS.

Rival Red Hat, unsurprisingly, believes it will dent SuSE's mainframe sales, said Mark de Visser, Red Hat's vice president of marketing. But Red Hat's chief focus remains replacing expensive Unix servers with Linux systems running on cheaper Intel hardware.

The Linux business is being changed for the better by the wholehearted support of hardware companies such as IBM, Hewlett-Packard and Compaq Computer, Burtscher said. "The opportunity is huge. We can follow the hardware sales," he said.