April 12, 2002

Lineo gets new funding and hopes for profit by the summer

- By Steven J. Vaughan-Nichols -

Life with Lineo has been a roller coaster ride lately. The embedded Linux company fortune's have been up, with the release of the Lineo-powered Embedix PlusSharp Zaurus PDA, and Lineo has been down
with recent layoffs and a cash crunch. Today, with a complete recapitalization, Lineo
could be back on an even ride.
But that new funding, the amount of which was not officially disclosed, comes with a price. After the reorganization, The Canopy Group will have a controlling interest in the company. Matt Harris, CEO and president, will still be in charge of the company from day to day, but he'll also be meeting with Lineo's board of directors twice a month.

In return for the funding, Canopy, according to Harris, has "committed funds to carry us through to profitability. This is long-term funding delivered on a going-forward basis."

Harris claims that profitability, despite rumors to the contrary, isn't far away. He says, "In the middle of March we had talks with our backers about our overall expense rate. To meet the goal of hitting profitability numbers and to be cash-flow positive by mid-year, we had to
lay people off. It's a miserable thing to have to do, but it was necessary, or we'd not be able to get additional funding to hit those expense targets."

Harris adds, "We're working to take care of former employees."

Indeed, some of those former employees may be on their way back into Lineo. While Harris expects that Lineo will still end up losing at net of five or fewer people because of the recapitalization, the company is looking to rehire and hire for a few key positions in marketing and senior engineering.

Although cutting costs, Harris observes that Lineo "has a healthy backlog of work" with $5 million dollars of work on current contracts underway. With that alone, he believes Lineo will meet its goal of being profitable by mid-year.

Given this, and a financial track record of what Harris says was a 100% growth over the last two fiscal years, how did Lineo ever end up in so much financial hot water?

Stacey Quandt, Giga Information Group's Open Source analyst, thinks that the answer is simple: "They acquired too many companies, too quickly."

Rick Lehrbaum, executive editor of LinuxDevices.com agrees: "Their strategy of swallowing up a lot of little companies and integrating them was very risky. They got to be a big size, but there wasn't the kind of value-add that you needed to get for their

Harris, while agreeing "Lineo got too big, too fast," doesn't think that acquiring companies was a problem. He says SnapGear, which makes customized virtual private network devices, has "helped Lineo to generate both software and service revenue." Indeed, these smaller
Lineo affiliated companies have "provided the dollars to run the company."

Instead, Harris believes "the bigger problem was that we sized the company, thanks to both acquisition and hiring, based on our predictions of early adoption of embedded Linux by OEMs. We sized for a revenue base that was twice as big as what we got. This resulted in a much greater loss than we expected or wanted." And, of course, "it was made worse by the economy downturn."

Looking ahead, Harris thinks that Lineo's business plan, revamped in November 2001, should see the company through, in addition to besides the cuts and fiscal reorganization. He explains: "Part of our plan is to provide not just embedded Linux, but embedded Linux solutions -- software stacks that go from the boot loader to the application for a particular market." For example, Lineo wrote the Zaurus' entire stack. Besides PDAs, he also sees opportunity for this kind of work in the next generation of
mobile phones and pagers, with new contracts to be announced soon in all three areas.

Harris also believes that Lineo can find work and deliver a complete operating system, development tools and applications to the residential Internet gateway market and, in 2003, the Digital TV markets. In short, Lineo is going "from being a tools and operating system company to a complete embedded solution company."

Not that the operating system and tools are being neglected. The Embedix software development kit 2.2, for example, was released last week.

Does all these changes mean that Lineo will make it? Lehrbaum thinks so. "They have a better-than-even chance of pulling through and getting back on track. Like many companies, they had too much capital initially without a real sense of how to use it.
Now, I think they're whittled down to a reasonable size. The terrible economy has been
hard on even companies doing everything well."

With Canopy looking over Harris' shoulder, and profitability expected shortly, we'll soon know see whether Lineo can get off its business roller-coaster safely.

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