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VA Linux reports strong revenue, beats estimates

The computer maker reports quarterly revenues of $34.6 million and a net loss per share 10 cents better than expected.

Computer maker VA Linux Systems today reported quarterly revenues of $34.6 million and a net loss 10 cents better than expected.

Analysts surveyed by First Call/Thompson Financial expected a loss of 23 cents per share for the fiscal third quarter, which ended April 28. Excluding non-cash items, VA reported a net loss of 13 cents per share, the company said. Excluding non-cash charges, net losses declined from $6.3 million the previous quarter to $4.5 million in the third quarter, the company said.

Revenue this quarter grew 71 percent from the previous quarter's $20.2 million and 710 percent from the same quarter a year ago.

"It was a fantastic third quarter by almost any measure," VA chief executive Larry Augustin boasted in a conference call. Deutsche Banc Alex. Brown analyst Phil Reuppel agreed, calling it a "breakthrough quarter."

VA Linux makes Intel-based computers with the Linux operating system, a clone of Unix and competitor to Windows created by a host of programmers. The company's revenues come chiefly from hardware sales, but the company wants to increase the amount it earns from services such as customization and consulting.

One key facet watched by W.R. Hambrecht analyst Keith Bachman is the success of services. "VA, we think, needs to broaden its revenue opportunity into professional services. Professional services offer the opportunity to earn higher margins," he said in an interview today.

Services revenue was $1.5 million, or 4.2 percent of total revenues, VA said. That made the services business unit profitable, said VA chief financial officer Todd Schull. Although the company expects the services unit to remain profitable, aggressive hiring in the next two quarters will mean the margin won't be as plump, Schull said.

Services revenue came chiefly from projects translating software that works on Windows NT so it works on Linux and from hosting open-source programming efforts on the company's developer site, SourceForge, Augustin said.

Linux is still respected, though it's no longer enjoying the Wall Street euphoria that sent its stock skyrocketing after its IPO last year. The most recent Linux company to go public, software seller Caldera Systems, has been living in a less jubilant market. Its stock price of $10.38 is below the company's initial public offering price of $14.

Caldera Systems reported revenues of $1.4 million and a net loss of $9.2 million, or 32 cents per share. Analyst expectations for Caldera earnings weren't available.

VA currently is in the process of digesting several companies it has acquired.

VA concluded two acquisitions in the last quarter. The first, TruSolutions, will result in new server models. The second, NetAttach, will bolster VA's coming push to sell storage products as well as servers, Augustin said.

"It is our intention to provide (customers) with a broad-based range of storage products," Augustin said. One such product would be "network-attached storage," or NAS, essentially hard disks that can plug straight into a network to expand storage capacity.

Bachman wasn't overly enamored with the TruSolutions acquisition. "It's buying more of the same. I'd like to see VA diversify its revenue stream," he said.

Meanwhile, VA's acquisition of Andover.Net is expected to close next quarter, the company said. Andover.Net is a collection of Web sites such as Slashdot and Freshmeat for programmers and other technically savvy readers. A total of 70 million pages of VA and Andover.Net Web sites are viewed each month, VA said.

About 77 percent of VA's business comes from selling Internet infrastructure--the servers that deliver Web pages and handle other parts of the Internet's inner workings. Augustin said such customers have an ongoing demand for new servers as their businesses grow. "As they get more clicks, they need more infrastructure," he said. "They just keep coming back."

VA's biggest customer is Akamai, a company that speeds Internet Web page delivery, whose purchases provided VA with about 20 percent of its revenue. Other large customers in the last quarter included, USinternetworking and Doubleclick, Augustin said.

VA said it now has a sales force of 60 and has begun to hire its first European employees. Sales subsidiaries have been established in France, Switzerland and the Netherlands, with new offices to come in the United Kingdom and Germany, Schull said.

Walter Winnitzki of Chase Hambrecht & Quist was concerned that VA's sales would be affected by the stock market woes, which could curtail purchasing plans of Internet companies.

Such concerns are "exaggerated," Augustin said. "We're still seeing significant rollouts."