Off the Beat: Bruce Byfield's Blog

Bruce Byfield

Strictly speaking, the recently published annual report for the Canonical Group, the developers of Ubuntu, covers only its United Kingdom subsidiary for the year ending March 31, 2013. However, in practice, the report provides glimpses into both Canonical's global activities and the challenges that the company faces before it can become profitable.

The report lists three sources of income for The Canonical Group: engineering services to OEMs, consulting and cloud services to corporate customers, and online services to end-users.

If you read just the report, you might conclude that all three have equal weight in Canonical's financial plans. However, after watching Canonical's increasing efforts to monetize the desktop -- even at the expense of widespread community condemnation -- I would guess that services to end-users are by far the smallest source of revenues. Canonical would understandably want to monetize efforts that take up so much of its employees' time, but making money with a Linux distribution is an uphill battle, as at least a dozen companies have proved over the years.

Also, considering that my speculations that Ubuntu might have jumped the shark resulted in an invitation from a publicist to discuss Canonical's consulting and cloud services, I suspect that, if it is not Canonical's biggest moneymaker, it is at least the one that Canonical sees as having the most potential. The publicist mentioned Bloomberg, Deutsche Telekom and HP Cloud as customers for these services.

Written in December 2013, the report also mentions Ubuntu's efforts at convergence across form factors. However, both the failure of the Ubuntu Edge crowdfunding campaign and the fact that Canonical has announced that vendors are interested in Ubuntu Touch but has yet to name names, this potential revenue stream has probably been a major expense so far, backed by agreements in principles rather than signed contracts.

Gross Profit and Net Loss

All told, during the 2013 financial year, these revenue streams gave the Canonical Group a gross profit of of $60.6 million and a net loss of $21.3 million. In addition, the Canonical Group also has an interest-free loan of $105 million from its parent company, Futuristic Limited, a little known company which the report lists as ultimately controlled by Mark Shuttleworth.

The report takes some pains to explain that Shuttleworth has promised his continued support, and will not expect payment for at least twelve months.

The only breakdown of these figures is that $15.2 million of the revenue came from the UK subsidiary. $2.4 million came from Europe, and the other $48.2 million from the rest of the world -- although how that is divided between the subsidiaries in Canada, the United States, and China is not explained, since the report is about the UK subsidiary.

That means that what, if any income Canonical might be receiving from China's much publicized collaboration with Ubuntu remains a mystery. Given that the announcement of the collaboration happened only eight days before the end of Canonical's financial year, that could mean that, unless Canonical received a signing bonus, most of the $48.2 million from the rest of the world came from the United States subsidiary -- Canada being too small a market to be likely to be a significant source.

No breakdown is given, either, of how the different revenue streams contributed to the total, nor whether Futuristic Limited had any expenses of its own, or (as seems likely) exists to lend money to Canonical.

The search for profit

The report does not directly address Canonical's chances of profitability. However, you do not need to be a financial expert to see that Canonical faces enormous challenges in turning a profit - starting with an increase of a third of gross profits.

Whether Shuttleworth will eventually insist on eventual repayment of his $105 million loan is another consideration. He may be philanthropic enough not to insist. But if he does expect repayment, Canonical would require in the neighborhood of $180 million in a single year to become profitable -- nearly three times its gross income for 2013. That seems a figure so unlikely that I conclude that repayment would require several years and a highly successful product or two.

But are such increases in profitability plausible? While Canonical's gross profits were up 11% from 2012's total of $54.5 million, in 2013, the total loss nearly doubled from 2013's $10.2 million.

In fact, almost every figure for 2013 is worse than in 2012. For example, administrative costs went from $64.7 million in 2012 to $92.2 million. Salaries went from $39.4 to $47.7 million. Administrative expenses, $64.7 to $92.2 million, cash at the bank from $12.4 to $8.5.

In addition the loan through Futuristic increased from $67.3 million to $105 million in 2013. That means that, without the transfusion of funds, Canonical's net loss in 2013 would have been closer to $60 million than the official $21.3.

Nor are these figures atypical. Other financial reports for Canonical are not available online, but CompanyCheck lists several key statistics from 2010 to 2013.

CompanyCheck shows Canonical's financial worth declining from -£4.1 million (-$6.7 million) in 2010 to -£11.6 (-$19 million) and -£18.1 million (-$29.7 million) in 2011 and 2012 respectively to -£31 million (-$51 million) in 2013. Similarly, liabilities were £13.9 million ($22.8 million) in 2010, and rose £18 million ($29.5 million) in 2011 and £20 million ($32.8 million) in 2012 before jumping £33 million ($54 million) to £87 million ($142.8 million) in 2013).

2013 does seem to have been a more expensive year for Canonical than usual, presumably due to increased development costs. But these figures suggest that it was not entirely atypical, either. Not only is Canonical continuing to lose money, but it appears to be doing so at an accelerating rate.

True, in August 2013, Shuttleworth stated that Canonical could be profitable if it focused only on servers or cloud services.

Based on the example of similar companies such as Red Hat and SUSE, the statement sounds plausible at first. It emphasizes, too, that much of Ubuntu's loss is due to continual expansion.

Yet the question remains: if Canonical could become profitable, why hasn't it? Showing a profit might lend Canonical credibility with potential partners and investors that could make reaching its other goals easier.

Much of Canonical's financial picture could be explained by assuming that it is Shuttleworth's hobby or donation to the free software community, and its losses are simply not a primary concern.

However, assuming that Canonical is motivated by the usual corporate concerns, the report implies that it is a highly ambitious company that faces significant challenges that probably cannot be overcome overnight. If so, then how it confronts those challenges should continue to be a major story in the next few years, especially as the story resolves itself into a triumph or a failure.

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