VA Linux strong 3Q can't restore stock's glory

After beating analysts' expectations in an upbeat third quarter report, VA Linux Systems (Nasdaq: LNUX) only rose 6 percent Wednesday, not nearly enough to take back the 13 percent it declined ahead of the report.

Shares of VA Linux were up 2 1/2 to 4 1/4 Wednesday after closing down 5 3/4 to 38 1/2 Tuesday, ahead of the quarterly report. The stock's 52-week high was 320.

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.

Third quarter revenue increased to $34.6 million, up 710 percent year-over-year and up 71 percent sequentially, putting it well above analysts' expectations.

A report from W.R. Hambrecht said the company exceeded its expectations for all its focus areas: revenue growth rate, gross margins and revenue from professional services. The company's growing services business is expected to increase gross margins going forward, and the report predicts VA Linux will break even, excluding non-cash charges, in the later half of fiscal 2001.

W.R. Hambrecht, which rated VA Linux a "buy," called the company a strong player in a rapidly growing market, and said its acquisition of Andover.net (Nasdaq: ANDN) should strengthen its leadership in the Open Source market. The company's purchase of TruSolutions and NetAttach, which closed this spring, will also help it move into the network attached storage market, the report stated.

Other stocks that have risen and fallen on the Linux wave include Red Hat (Nasdaq: RHAT) and Corel (Nasdaq: CORL). VA Linux competes with the likes of IBM (NYSE: IBM), Dell (Nasdaq: DELL), Compaq (NYSE: CPQ) and Hewlett-Packard (NYSE: HWP), Microsoft (Nasdaq: MSFT) and Sun Microsystems (Nasdaq: SUNW).