VA Linux files IPO plans

The maker of Linux-based computers intends to raise $70 million in an IPO, becoming the fifth Linux-related company to go public.

Stephen Shankland
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Stephen Shankland has been a reporter at CNET since 1998 and writes about processors, digital photography, AI, quantum computing, computer science, materials science, supercomputers, drones, browsers, 3D printing, USB, and new computing technology in general. He has a soft spot in his heart for standards groups and I/O interfaces. His first big scoop was about radioactive cat poop.
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VA Linux Systems, a prominent maker of Linux computers, has filed to raise about $70 million in an initial public offering.

VA Linux is to Linux hardware what Red Hat is to Linux software: the most prominent company in the market and the recipient of investments from big-name companies such as Intel. However, Red Hat and VA Linux are edging toward the same turf--sales of technical support and consulting services.

Founded in 1995, the Sunnyvale, California, company had 153 employees as of July 31, VA Linux said in documents filed yesterday with the Securities and Exchange Commission. VA Linux had revenues of $17.7 million and a net loss of $14.5 million in the year ending July 31, the company reported in its filing. The prior year, the company had revenues of $5.6 million and a profit of $1.1 million.

Credit Suisse First Boston will be the lead underwriter of the VA Linux IPO, with others participants including Deutsche Banc Alex. Brown, Hambrecht and Quist, and Lehman Brothers. The number of shares being offered and the price at which they'll be sold hasn't been determined.

The company proposes to begin public trading on the Nasdaq market under the symbol "LNUX."

A VA Linux IPO is not unexpected. Three months ago, VA chief executive Larry Augustin predicted VA Linux would be the second Linux company to go public after Red Hat. Actually, it will be the fifth. Other Linux companies that have filed to go public include server maker Cobalt Networks, Linux portal site Andover.Net, and new arrival LinuxOne.

The success of Red Hat's IPO has encouraged some companies to hasten their plans, sources have said. Caldera Systems, another Linux seller, may be close to going public, though TurboLinux and Linuxcare aren't likely to follow until 2000.

Some have likened the rash of Linux IPOs to the Internet-related public offerings that cropped up in recent years. That might not be coincidental, because Linux is often used for tasks such as delivering Web pages to browsers.

Linux is an operating system, the fundamental software such as Windows or MacOS that controls a computer. Linux, which began as a programming project by Linus Torvalds, works like the decades-old Unix operating system, but has been independently developed. And unlike most commercial versions of Unix for sale today, the Linux source code--the original programming before is has been translated into instructions a computer chip can understand--is freely available.

Moreover, anyone may modify and redistribute the source code, as long as the changes are published publicly. This "open-source" model is very different from the more proprietary realm of operating systems such as Windows.

VA sees an opportunity in this customizability because it means there will be a ready market of customers who will be willing to pay an expert--VA Linux in this case--to tweak Linux for a particular task.

"This customizability poses a challenge for traditional business models that separate systems providers from software expertise providers," VA Linux wrote in its filing to go public. "We believe successful Linux vendors must combine in-depth knowledge of Linux and other open source software with system design expertise and close ties with the open source developer community in order to maximize the benefits of Linux for customers."

Linux must be available for free under the terms of its license, which means Red Hat faces the challenge of convincing people to pay for it. As a result, it plans to bolster its revenue by offering technical support.

VA Linux faces a different challenge: Dell, Compaq, Hewlett-Packard, IBM, Gateway, and many other large computer manufacturers have begun selling Linux systems.

As VA Linux describes the risk in its filing, "The systems offered by these companies may have greater functionality and lower prices than those we currently provide, making our systems less attractive to our customers. Even if the functionality of the standard features of these products is equivalent to ours, we face a substantial risk that a significant number of customers will choose not to purchase products from a less well-known vendor regardless of the competitiveness of our solutions."

VA Linux's largest customers include Akamai Technologies, eToys, StarMedia Network, and 24/7 Media, the company said. More than 45 companies spent at least $50,000 with VA Linux in fiscal year 1999.

The company will use the proceeds from the IPO for expanding sales, marketing, and professional services, and for buying new equipment.

VA Linux spent about $3.2 million in research and development costs in the year ending July 31, 1999. The company has 30 engineers, including 20 programmers and five hardware designers.

The company needs to keep close ties with the Linux community in order to survive. Part of the way to accomplish this is through its Linux.com Web portal, the company said. "Linux.com and our other Web sites received more than five million page views in September 1999," VA Linux said.

Venture capital firm Sequoia Capital owns 25 percent of VA Linux. Intel is another large investor.