VA Linux stock tumbles on earnings warning

The stock plummeted $12.63 to close regular trading at $17.38, on volume of more than 10 million shares. It was the second-biggest percentage loser on the Nasdaq exchange Monday.

The Fremont, Calif.-based company said that revenue for its first quarter, which ended Oct. 27, should grow by 10 percent from its fiscal fourth quarter and by 275 percent from the same quarter last year. Revenue for fiscal 2001 will be approximately 2.25 times fiscal 2000 revenue, less than the previous guidance of 2.5 times fiscal 2000 revenue.

VA, which specializes in workstations and other hardware for the Internet, has experienced a wild ride on Wall Street. The company went public at the height of Linux mania last year.

In the first minute of trading, VA chief executive Larry Augustin was a billionaire on paper. Since then, however, doubts have grown among investors as to whether start-ups can build profitable businesses on the back of Linux, which is essentially free software, especially when established PC scions like Dell Computer and Hewlett-Packard have embraced open-source programming.

VA said it expects to lose between 14 cents and 16 cents per share because of lower revenues and increased spending. Analysts polled by First Call/Thomson Financial had expected the company to lose 9 cents per share.

The company blamed the shortfall on slowing sales orders from new customers in the venture-funded dot-com sector. VA has traditionally looked for new customers in this group, on the understanding that start-ups are more likely to adopt new technology than larger, more established companies. With the recent dot-com slowdown, however, orders from this group have slowed.

"We knew that that segment was declining, but it really fell off the table to a greater extent than we were anticipating," said Patrick Fossenier, director of investor relations.

VA had anticipated the need to diversify its customer base and earlier this year began shifting its focus toward larger companies. As Linux has gained greater legitimacy in the information technology market, larger companies have become more open to purchasing related products.

"They started introducing products targeting high-end customers like (America Online), Cisco or Fidelity," said Prakesh Patel, a senior research analyst with WR Hambrecht. "That was a really smart thing. In addition to greater predictability of revenue, they can more efficiently sell to these customers."

However, larger companies often move slowly, and revenues did not immediately materialize. "This new group has not brought in as much revenue as we had anticipated because of a longer sales cycle," said Fossenier.

Analysts say VA must now clearly outline its new strategy and show how it will quickly lead to growth. "Investors don't want to pay for a 10 percent grower," said Patel.

VA is scheduled to announce its earnings Nov. 16 after the market closes.