THE DAY AHEAD: VA Linux vs. the big guys

Larry Dignan
4 min read

COMMENTARY -- Linux system vendor VA Linux (Nasdaq: LNUX) is boxed in. On one side of the equation you have broke dot-com startups that can't buy VA Linux boxes. On the other side, you have enterprise giants IBM, HP, Compaq and Dell getting serious about Linux systems.

It stinks to be in the middle. The dot-com implosion dinged VA Linux in its fiscal first quarter, and the only way to grow sales is to boost sales to Fortune 1000 and 500 companies.

The problem? VA Linux has about 70 direct sales folks compared to the sales armies of big guys, who are preaching Linux. Needless to say there was a bit of skepticism from analysts on VA Linux's conference call. How is VA Linux going to break into big enterprise accounts when it doesn't have the entrenched relationships with customers?

CEO Larry M. Augustin said VA Linux has pilot programs with major enterprise customers, but sales didn't move along fast enough to keep the company on its predicted growth trajectory. "Our effort to diversify into a number of large enterprises didn't pay off," said Augustin, who said the company has been pushing to land financial services customers.

VA Linux's move into the enterprise is crucial if the company is going to diversify its customer base. The company met lowered expectations with a first quarter loss of 15 cents a share, on sales of $56.1 million.

Augustin said $15 million in first quarter sales evaporated as funding dried up for venture-backed dot-coms and customers re-evaluated business models. Luckily, VA Linux is still doing well with sales to customers such as Exodus (Nasdaq: EXDS) and Akamai (Nasdaq: AKAM), which accounted for 28 percent of the company's sales in the quarter.

But those sales from the business-to-consumer dot-coms aren't coming back. That means VA Linux has to take on the big guys to complement its booming sales to the likes of Akamai.

Augustin said the company is up to the task. "We believe we bring to the table some unique capabilities in our ability to work with Linux and open source and really assemble some great value and solutions around those components," he said. "We can offer considerable cost savings and solve problems that those other companies aren't focused on."

The catch is that "those other companies" are hardly ignoring Linux. HP, IBM and others have declared solidarity to Linux. Big Blue has been among the most aggressive.

IBM has rolled out its WebSphere Commerce Suite Start 4.1 high-end e-commerce platform for Linux. It has launched a Linux-based Small Business Suite -- including its DB2 Universal Database, WebSphere Application Server and Lotus Domino -- and sold 15,000 Linux-based computers to a Japanese convenience store chain.

When IBM puts everything behind Linux it's bad news for VA Linux.

Corporations are looking at Linux systems and are on the edge of committing major investments. Augustin said VA Linux has roughly 30 enterprise customers, which are testing the company's systems. VA Linux is also on the short list for many rollouts.

Augustin couldn't name those enterprise customers because the relationships weren't strong enough with the companies. "They are on the edge of committing, but they are in pilot programs," said Augustin. "We remain cautious until the revenue passes through."

Until VA Linux can name names and tout big enterprise wins, investors are likely to be just as cautious as Augustin's guidance.

Speaking of guidance

The company stuck with its previous guidance that it could post about $270 million in sales in fiscal 2001 and be profitable by the end of calendar 2001.

Officials, however, noted the company would be watching its expenses. The company burned through more than $30 million in cash and equivalents during the quarter because of a move and the rollout of Oracle software. VA Linux said its cash burn will fall in line with its operating loss in upcoming quarters.

Revenue in the fiscal second quarter will be modestly higher due to seasonal slowness with stronger growth in the third and fourth quarters.

Loaded question of the day

One analyst dropped a loaded question on Augustin. The analyst asked if it would make sense to do a deal with Red Hat to boost its offering. It was a bit disingenuous.

What the analyst was really trying to find out was whether VA Linux would merge with Red Hat (Nasdaq: RHAT) to jump-start the stock.

Augustin replied with a standard answer. VA Linux provides "solutions" with hardware, vertical stacks of software and support. "Red Hat doesn't add value to what we do," said Augustin.TDAIN

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