VA Linux profit outlook depends on hardware

The company, flush with funds from its record-setting IPO, has launched an ambitious plan to become one of the leading providers of servers to the Internet, said CEO Larry Augustin in an interview with News.com. Intel's upcoming Itanium processor and improvements to the Linux OS will be the first steps in the company's expansion, and plans for Europe and Asia will follow.

Profit, however, will still be some time off, at least two years, Augustin said. Analysts expect VA to become profitable in late 2001 or early 2002, he said.

VA Linux manufactures computers with Intel chips and the Linux operating system, a clone of Unix that competes with Microsoft. Linux, with its original programming instructions open for all to work with, is developed by a small army of "open-source" programmers.

VA Linux, whose record IPO last month raised $132 million, plans to use the money to expand into Europe and Asia and increase its effort to packages services along with its hardware, Augustin said.

It seems to be increasingly painless for Linux companies to get funding, with some winning investments from venture capital or computing companies, and others pulling in tens of millions through IPOs. Caldera Systems, a seller of Linux software, broke new ground yesterday by announcing both a $30 million investment and plans to go public.

But getting money wasn't the main reason for an IPO, Augustin said.

"We felt it was very important to be a public company because of the legitimacy it brings to the company and to Linux," he said. "It's not so much the cash infusion."

Augustin admits there's increasing competition for Linux computers, with newer companies such as Penguin Computing joining established giants such as IBM, Dell Computer, Compaq Computer and Hewlett-Packard. But VA Linux doesn't want to conquer the entire market, Augustin said, just the back-end part of things.

"We will dominate the Internet infrastructure market," he said.

VA Linux has ambitious plans to expand its product line from its current stronghold--low-end server systems that companies often buy in bulk--into higher-end servers. To make these machines worthwhile, VA Linux is awaiting better chips from Intel and better high-end features in Linux itself.

The guts of Linux, the software known as the kernel, is about to be upgraded from version 2.2 to version 2.4. Linus Torvalds, founder of the Linux movement and leader of the kernel development effort, initially hoped to release 2.4 before Jan. 1, but said in December that the revised schedule was to release it in the first quarter of 2000.

Some have suggested that the new kernel will be released on Feb. 17, the same day Microsoft plans to make Windows 2000 available to customers.

The 2.4 kernel will enable two key features for VA Linux in servers: the ability to let Intel chips talk to larger amounts of memory and a "journaling" file system that will make it easier for Linux computers to recover from crashes.

Currently, Linux on Intel chips can handle only 2 gigabytes of memory. But Intel's Xeon chips can handle up to 32GB, a capability Linux will be able to take advantage of with the 2.4 kernel. Handling that extra memory is important for VA Linux, whose customers want to be able to hold entire Web sites in memory for fast response to Web servers.

VA Linux also is awaiting Intel's 64-bit Itanium chip, due in mid-2000, which will allow computers to talk to vastly larger amounts of memory. That feature will be key for use of Linux by corporations who have large databases they want to hold entirely in memory, something that's generally possible only with 64-bit chips from Compaq, Sun, HP, IBM or SGI.

Eight-processor systems also hold appeal for VA Linux. Currently, with the 2GB memory limitations of Linux, four-processor systems are barely justifiable, and eight-way machines aren't. "You need to have enough memory per processor for it to make sense," he said. "It's sort of an imbalance."

For more modest servers, VA Linux ultimately hopes to whittle its rack-mountable, two-processor, 3.5-inch-tall FullOn servers into a size half that tall, a move that would enable the servers to be stacked even more densely at companies that need oodles of servers to house Web pages or fire queries at back-end databases.

VA Linux also plans to sell more Linux computers for desktop use in the future, though right now such products generally sell only to developers and other technically savvy users, Augustin said. However, VA doesn't intent to ever get into smaller devices such as set-top boxes.

Though companies such as Red Hat, Linuxcare, Santa Cruz Operation and even IBM are gunning for the same Linux services as VA Linux, Augustin is confident it will be able to stave off competitors. VA Linux will focus its expertise on helping companies design and assemble collections of hardware and software heavily customized for the task at hand. "This is the space we will own and go after," Augustin declared.

Apparently investors were convinced by the plan. VA Linux had no difficulty rounding up underwriters to help the company go public, and the company met a strong response while pitching its business to potential investors on the "road show" that precedes an IPO.

"As we were out on the road show, we knew there was a lot of interest," he said. "The bankers came back (with) very strong investor interest." Indeed VA Linux raised its expected price range from $11 to $13 to $21 to $23, then eventually to $28 to $30.

The shares eventually priced out at $30, raising the company $132 million instead of the initial $57 million that was expected.

Augustin acknowledges a debt of gratitude owed to Red Hat, whose IPO four months earlier paved the way for other Linux companies to come. Red Hat taught investors about the nature of Linux and open-source software, and instructed VA Linux ways to improve a Linux IPO, Augustin said.

For Augustin, that improvement meant reworking the directed shares program Red Hat used to include thousands of open-source programmers in their IPO, with mixed results.

"We discovered that a lot of individual investors who didn't understand the process were filling out forms," Augustin said. VA Linux didn't have those difficulties.