When VA Linux (Nasdaq: LNUX) president and CEO Larry Augustin spoke to ZDII in ;January, he expressed hope that hype over Linux would fade to some extent, so the stock market could focus on what he described as "real" Linux companies.
And the wild enthusiasm did recede. Right along with his company's stock, which now trades in the low 40s, far below its peak shortly after its IPO late last year (chart).
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Nevertheless, Augustin seems to take it in stride, at least when he talks to ZDII. He has reason to remain calm this week -- his company easily beat the consensus analyst estimate for the latest quarter. I spoke with Augustin this week, shortly after the quarterly report. Excerpts from the phone interview follow.
Augustin on revenue drivers:
"It was the Internet infrastructure buildout, people building out Internet sites and I think in terms of us as a company operationally, we've got all the pieces together for those customers now, it's really paying off.
"It's primarily emerging service providers, so ISPs and ASPs, and more traditional dot-coms. So Akamai (Nasdaq: AKAM), DoubleClick (Nasdaq: DCLK), Evoke, NetLedger, those are some of our biggest customers."
On relying heavily on one customer for sales (Akamai generated a fifth of VA Linux's quarterly revenue):
"Well, you know, repeat business is a big part of our customer base. We were excited by the Akamai buildout this quarter, I think Akamai will continue to be a strong customer for us in the next quarter, but we're seeing other customers grow as strongly and appear, so we think they'll definitely be a much lower percentage of our revenues next quarter.
"I think we'll get (to the point where no single customer generates a significant percentage of revenue) pretty quickly. If I had to guess, just thinking about it a little bit here ... I'd say maybe two quarters away."
On the effects of recent turmoil among tech and Internet stocks:
"That's a question a lot of people have been asking us. We've looked at it pretty closely. I mean, we've done things like look at our credit procedures to make sure the companies are solid (that) we're selling to, we looked at our sales forecasts to make they're consistent and in line with customers', and we're not really seeing any signicant impact yet.
"I think that maybe the concerns that people have had because of the drops in the stock market, slowing Internet buildout, I think they're a bit exaggerated, because the user base is still there, the increasing clicks are still there, so people are still building to meet it. We also believe that as companies here become a little more cost conscious, they're looking for better price-performance, they'll turn more aggressively to open source solutions and that benefits us.
"I don't think we've really seen much change in our plans. We think it's great that people are focusing more on fundamentals of companies, because I think we've got a very strong story. We've got very strong revenue growth, we're showing big steps toward profitability. If you look, our losses were only $4.5 million this past quarter, and we're moving pretty aggressively towards profitability. I think that's the real key, that we've got a strong company there, so I want people to be looking at that and focused on that."
On the retreat of hype over Linux and Internet companies:
"In terms of the bloom coming off and all those pieces, I think again, investors are just being a little more cautious and they're looking for solid companies. And I think that's good."
"We see mostly white box vendors ... generic custom build guys. And I think a lot of that is because the big box companies out there -- you know, they're really jumping on this bandwagon with this old model of loading someone else's CD on their box, and that's not what this market wants.
"This market is coming to people like us -- and we really have the scale and the support and all the pieces in place that the white box vendors don't -- they come to us, and part of the reason they look at white box vendors is that they're willing to do what the market needs. This market is really about open source,and the power that comes with access to the source code. It's that power to create solutions for customers, by drawing on that incredible library of software that's out there on the Internet."
On large, brand-name OEMs chances to succeed in the Linux server business:
"I think it's completely contrary to their genes. Look at that what Dell (Nasdaq: DELL) has done. They have done their best to stay out of the software business, to stay out of the business where they do customization, development, all of those pieces. They've always pushed that off, they want Microsoft (Nasdaq: MSFT) to do that, they want Microsoft to support the OS. Their model around open source is no different.
"Our model, the reason we own and operate those key Internet sites at the core of development, is we believe that that's a very important piece of it. In the same way we do build to order hardware and we build in the systems for the target market and for the customers, we want to be able to do the same around software."
On getting employee talent, particularly for the services business:
"We're the people that want to work on Linux and open source, we're where they want to work, ok? We've had a great time going out and finding those people who are really Linux and open source developers, and being abe to offer them positions here at VA, and essentially do what they love. Which is, they can come here, they can work on open source software and they can do it as part of VA professional services. It's working out well for us, because the people we want to recruit know us and odds are, they spend part of the day on one of our websites already."
On consolidation in the Linux industry:
"I think there will be some consolidation in the industry. All industries go through that, that's normal, our goal is to be one of the consolidators in that, and I think we're in a very strong position to do that. But I do see that there will be consolidation happening."
On turning a profit:
"Our target for profitability is the end of next year, end of calendar 2001. Now our first qoal is to grow revenue, so what we'll do is, we'll keep that profitability target, and we'll grow revenue as fast as possible, while showing consistent progress towards a that profitability target. And I think people will see that, as it moves on -- the loss number is already a small fraction of revenue now, and it'll just continue to get smaller as the losses decline.
"What we see is a tremendous market opportunity out there, and we want to be able to hire ahead in sales and grow that as fast as possible. We could bring in the profitability target if we wanted to, but we think that would cost us some growth. It would cost us some market share. And I think that would be bad in the long run. So my first goal is to get that market share."22GO