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VA Linux tumbles on profit warning

The company's shares drop as much as 25 percent after it lowers estimates for its fiscal second quarter.

VA Linux Systems fell as much as 25 percent Wednesday after the company lowered estimates for its fiscal second quarter.

Shares fell to $6.88 before recovering slightly. In midday trading, shares were down $1.78, or 19.5 percent, at $7.34.

This is the second quarter in a row that the company has issued a warning. It managed to hit reduced estimates in November.

The Fremont, Calif.-based company said Tuesday it expects a loss for its second quarter, excluding noncash charges, in the range of 24 cents to 28 cents per share. Its quarter ends Jan. 27. A consensus of analysts polled by First Call was expecting a loss of 14 cents a share.

VA Linux said revenue for the second quarter would be $43 million to $50 million.

Blaming an economic slowdown, the company also reduced revenue expectations for fiscal 2001. It now expects revenue to increase 60 percent from a year ago. VA Linux had been projecting 125 percent year-over-year growth.

"We are in the midst of an overall economic slowdown which is affecting all of our sources of revenue, ranging from Linux servers to Web advertising banner sales," CEO Larry Augustin said.

Augustin added that although its fiscal second quarter has traditionally been slow because of fewer selling days around the holiday season, the company didn't see its previous January acceleration.

"Additionally, the current economic conditions are creating a difficult pricing environment resulting in lower gross margins. We intend to focus on higher margin business and to manage expense levels such that we can achieve profitability given our revised revenue expectations,'' Augustin added.

J.P. Morgan Chase analyst Walter J. Winnitzki said the shortfall was "not surprising." He kept a "long term buy" rating on the stock despite admitting that he sees "few catalysts" for the stock. He added that it "will be difficult for the company to hit its goal of profitability by the end of the calendar year."

On a positive note, Winnitzki added that VA Linux "has a healthy balance sheet with sufficient cash to last at least through fiscal 2002.

ABN AMRO analyst Keith Bachman was bearish. He maintained a "hold" and said the company "will have a significant challenge generating near-term positive momentum in its stock."

"Since VA has preannounced in the last two quarters, we are assuming the lower end of VA's new guidance," Bachman said.

Bachman added that although Red Hat and VA Linux have different business strategies, he expects it to trade in sympathy over the near term.