April 27, 2001 1:00 PM PDT

VA Linux issues third earnings warning

VA Linux Systems is warning that revenue for its fiscal third quarter, which ends Saturday, will come in at least one-third lower than previously projected.

Revenue will be $18 million to $20 million, at least 33 percent less than the $30 million expected earlier, the Linux server specialist said Thursday. The company expects a pro forma loss of 39 cents to 41 cents per share, considerably deeper than the 31 cent loss expected by a consensus of analysts surveyed by First Call.

It's the third consecutive quarter that the Fremont, Calif., company has issued a revenue warning. The company, like many of its Linux-focused comrades, has been hurt by the vanished entrepreneurial enthusiasm for the Unix-like operating system, the collapse of Internet businesses and the slowdown in corporate computing spending.

VA did report increasing demand for its consulting services and its Open Source Development Network, a Web OSDN site with news, programming projects and other resources.

However, VA's consulting and development network accounted for a relatively small part of its revenue in the previous quarter, 8 percent and 11 percent respectively, according to Lehman Brothers analyst George Elling. "While VA has valuable Linux capabilities, we believe that the market has become increasingly crowded, and VA will be challenged to compete in this environment," Elling said in a research note Friday.

VA had a record-breaking one-day gain after its initial public offering in December 1999, when its stock closed at $239.25. In afternoon trading Friday, VA's stock was down 24 cents, or 8 percent, to $2.79.

VA laid off about 114 people in February and announced profitability would arrive later than expected.

JP Morgan H&Q analyst Walter Winnitzki considers the magnitude of the company's shortfall surprising. "The softness in this market has deepened to affect a wider range of the company's more financially stable customers," Winnitzki wrote in a research note.

And VA faces more risks in the future, W.R. Hambrecht analyst Prakesh Patel wrote in a research note. Among them are a weak demand for low-end servers, the fact that the larger, more stable customers VA is seeking take longer to buy products, and its potential inability to keep key employees amid drastic restructuring efforts.

On Wednesday, Linux software seller Caldera Systems said it would have to lay off 32 of its 188 employees.

 

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