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VA Linux to sell proprietary software

The company revises its business plan after posting a quarterly loss of $290 million on revenue of $16 million.

Stephen Shankland principal writer
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Stephen Shankland
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VA Linux Systems, once one of the flagships of the open-source software world, will rely on sales of proprietary software in the future, the company said Thursday as it reported a $290 million loss for the most recent quarter.

VA created an open-source program called SourceForge used to house open-source collaborative programming projects. The site was an adjunct to its now-abandoned Linux computer sales strategy.

Now the Fremont, Calif., company will sell closed-source enhancements to companies wanting to use the collaborative programming software, called SourceForge Enterprise Edition, Chief Executive Larry Augustin said in an interview Thursday.

While some companies such as Red Hat have stayed with the open-source philosophy, under which software may be changed, modified or redistributed by anyone, others such as ArsDigita have reversed that direction to focus instead on more traditional sales of proprietary software modules. And Covalent Technologies always has sold proprietary additions to the open-source Apache software.

The mixture of open and proprietary software "is a model we saw a lot of people going to," Augustin said. With VA still backing an open-source core to SourceForge, "We felt we could still be true to the open-source roots and at the same time go to a business model that was proven," he said.

And VA needs a proven business model. It reported revenue of $16 million Thursday; most of its loss was from its abandonment of Linux computer sales in favor of software and services. The company said $267 million of the loss was from noncash charges for goodwill, intangible assets and restructuring charges because of VA's departure from the computer business.

The loss for the fiscal fourth quarter of 2001, which ended July 28, came to $5.58 per share. The company expects its new business plan to produce revenue of $3 million to $4 million in the current quarter, with a net loss from operations of $10 million to $13 million.

The $16 million in revenue was a steep decline from the $51 million from the year-ago quarter, when VA's dependence on Internet customers hadn't yet become a problem.

Analysts surveyed by First Call, who factor out most of the charges that led to VA's deep loss, expected a loss of 32 cents per share.

VA in June shucked the business that got it started: building computers running Linux. As it shifted to become a software and services company, VA also laid off about 150 of its 436 employees.

It's been a tough time for Linux computer makers. Would-be VA competitor Atipa sold off its hardware business in April, and Penguin Computing laid off 24 percent of its staff in August.

Hardware sales were the mainstay of VA's business. In the third quarter, 73 percent of VA's revenue, or $14.9 million, came from hardware sales, said J.P. Morgan analyst Walter Winnitzki.

Now VA is focusing largely on its SourceForge software, which lets customers set up collaborative programming sites. It faces competition from CollabNet and others for this market.

Red Hat, which sells Linux software but not hardware, broke even in June, but analysts from Merrill Lynch and Goldman Sachs project a meager profit of a penny per share for the fiscal year that will end in February.

Most of the revenue in the current quarter will come from advertising and sponsorship from VA Web sites such as Slashdot and Freshmeat, Augustin said. At some point, though, SourceForge will become the main revenue source.

The company's $80 million in cash is enough to take it to profitability under the new direction, Augustin said. But he declined to offer more details about VA's financial future. "We need to get SourceForge Enterprise Edition going a quarter or two before we have a good sense of visibility" into future revenue, he said.

Current SourceForge customers include Hewlett-Packard and Agilent, with more to be disclosed next week, he added.

Though the company has fewer than 300 employees, "that will continue to come down as we wrap up the hardware business," he said.

The company is considering an eventual name change to better reflect its new strategy, he said.