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VA Linux beats 3Q forecasts, bullish on future

VA Linux Systems (Nasdaq: LNUX) lost far less than analysts expected in the third quarter.

After market close Tuesday, the maker of servers running the Linux operating system reported a fiscal third quarter net loss of $4.5 million, or 13 cents per share, excluding non-cash items. First Call's survey of four analysts predicted a loss of 23 cents per share.

Including pre-tax charges of $10.2 million in amortization related to stock options, $1.9 million in goodwill writedowns and $4 million to write-off acquired in-process R&D, VA Linux lost $20.6 million, or 58 cents per share.

Third quarter revenue increased to $34.6 million, up 710 percent year-over-year and up 71 percent sequentially. Revenue was also well above analysts' expectations. Gross margins rose to 17.8 percent from 14 percent in the third quarter.

The company reported unit growth more than nine times the market growth rate estimated by International Data Corp, which saw the Linux server market expand 166 percent year-over-year.

Services revenue increased to $1.5 million, up 379 percent sequentially.

Officials were optimistic about the outlook and touted the company's multi-tiered business model, which includes hardware, software, services and open source Web properties. Because of a growing services business, VA Linux said margins will improve sequentially with a long range goal of about 30 percent to 40 percent.

VA Linux financial chief Todd Schull said 60 percent of sales were from repeat customers. The company said Akamai (Nasdaq: AKAM) was accounted for 20 percent of sales with and DoubleClick (Nasdaq: DCLK) also headlining the customer list.

"We are seeing significant repeat business," said Augustin, on a conference call with analysts. Augustin said the company can grow as long as the Internet grows. VA Linux customers create an annuity-like revenue stream as traffic surges.

Schull said the company will continue to grow at its current clip "at least for the next couple quarters."

"We also see opportunity as the brick-and-mortar companies move out to the Internet," Augustin said.

Also Thursday, VA Linux said it expects to complete is acquisition of (Nasdaq: ANDN) by mid-June. Officials said they didn't anticipate cost savings from the combination.

Shares of VA Linux closed Tuesday's regular trading at 38 1/2, down 5 3/4 ahead of the quarterly report. Stocks that rose on the Linux wave have fallen in recent months, including Red Hat (Nasdaq: RHAT) and Corel (Nasdaq: CORL).

As for competition from the likes of IBM (NYSE: IBM), Dell (Nasdaq: DELL), Compaq (NYSE: CPQ) and Hewlett-Packard (NYSE: HWP), Augustin said the landscape hasn't changed much. "Jumping on the bandwagon is not going to win in this market," he said.

Augustin also played down competiton from Microsoft (Nasdaq: MSFT) and Sun Microsystems (Nasdaq: SUNW).

VA Linux ended the quarter with $125 million in cash. The company burned through $2 million in the quarter.

Larry Dignan contributed to this report.

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