VA Linux slashes revenue forecast, delays profit date

VA Linux plans to cut 139 workers as the company struggles to fit sharply reduced expectations of growth.

During a Tuesday conference call with analysts, VA Linux (Nasdaq: LNUX) executives said they're now planning for revenue of less than $30 million in the fiscal third quarter, which ends in April. Analysts surveyed by earnings tracking firm First Call were looking for sales of $70 million in VA Linux's third quarter.

The company also pushed back its date for reaching break-even. The provider of hardware and services for the Linux operating system now sees losses ending in the October quarter of 2002, or three quarters later than originally projected.

"Visibility in the short term remains poor overall. Frankly we find it difficult to give guidance for future quarters," CEO Larry Augustin told analysts. "We feel it is prudent to plan for less revenue rather than more."

Shares of VA Linux traded at $5.64 in after-hours activity on the Island ECN, following the report. VA Linux stock fell 50 cents to $7.25.

Lower growth expectations forced the company to take cost-cutting measures, including a 25 percent cut of its 556-member workforce, executives said.

The company on Tuesday reported a fiscal second-quarter loss of $13.4 million, or 28 cents per share, excluding special charges. The company last month warned of a second-quarter loss ranging between 24 cents and 28 cents per share.

VA Linux's sharply reduced revenue forecast shows the company isn't making progress in selling to corporate customers, said Prakesh Patel, analyst with W.R. Hambrecht & Co.

"What they really need to do is drive their sales-force hard and execute well on their product marketing," said Patel, who has a "neutral" rating on the stock. "They lack relationships at the large enterprise accounts."

Second-quarter revenue increased 111 percent year-over-year to $42.5 million. VA Linux expected sales of $43 million to $50 million.

Corporate sales made up about 20 percent of VA Linux's second-quarter revenue, Augustin said. The company's largest customer, as in previous quarters, was Akamai Technologies (Nasdaq: AKAM), with 17 percent of VA Linux's sales. Instinet was VA Linux's second-largest client, with 12 percent of revenue.

Analysts surveyed by earnings tracking firm First Call produced a consensus estimate calling for a second-quarter loss of 26 cents per share on revenue of $52.5 million.

Gross margin fell to 16.12 percent from 22.50 percent in the first quarter.

The company expects to record a undetermined restructuring charge in the fiscal third quarter to pay for the job cuts.

VA Linux will cut back on non-core areas, such as custom-designed hardware, and increase its focus on offerings such as the SourceForge OnSite application development tool, Augustin said.

"Our real value to the customer comes not in the hardware design, but in the software engineering and implementation," he said.

The company also shuffled high-level managers.

Ali Jeneb, previously general manager of the systems division, has been promoted to president and chief operating officer. Augustin will no longer serve as president and will focus more on VA's strategy.

John T. Hall, formerly vice president of support and professional services, is now senior vice president of marketing. Alan Ibara has been promoted to senior vice president of engineering.

Company executives expect their restructuring and refocusing of the business will boost gross margins and save $5 million a quarter. Cost savings should start to appear in the fiscal fourth quarter, Augustin said.

VA Linux ended the second quarter with more than $126 million in cash and marketable securities. That's enough cash to fuel the company until it reaches break-even, Augustin said. Once its latest cost-cutting plans are implemented, VA Linux should be able to break even on revenue of $60 million to $70 million, said Chief Financial Officer Todd Schull.

Fulfilling its new profitability schedule will be hard for VA Linux, Patel said, even though the date has been pushed back nine months.

"It's very difficult to have confidence in the company's ability to meet the targets they've set," Patel said, adding that VA Linux's string of disappointing quarters has turned away many investors. "The company really needs to get some financial performance on the books before investors lose all interest in the stock."

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