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VA Linux tumbles on latest profit warning

VA Linux Systems (Nasdaq: LNUX) fell 22 percent Wednesday after the company lowered estimates for its second quarter. Analysts said they saw few catalysts for the stock.

Shares were down 2.06 to 7.06. This is the second quarter the company has had to issue a warning. It managed to hit reduced estimates in November.

The company said Tuesday it expects loss for its second quarter, excluding non-cash charges, to be in the range of 28 cents to 24 cents per share. First Call was expecting a loss of 14 cents a share. VA Linux also said revenue for the second quarter would be $43 million to $50 million.

Blaming an economic slowdown, the company reduced revenue expectations for fiscal 2001. It now expects revenue to increase 60 percent from a year ago. VA Linux was projecting 125 percent year-over-year growth.

"We are in the midst of an overall economic slowdown which is affecting all of our sources of revenue, ranging from Linux servers to Web advertising banner sales,'' said president and CEO Larry Augustin.

Augustin added that though the second quarter has traditionally been slow because of fewer selling days around the holiday season, the company didn't see its usual January acceleration.

"Additionally, the current economic conditions are creating a difficult pricing environment resulting in lower gross margins. We intend to focus on higher margin business and to manage expense levels such that we can achieve profitability given our revised revenue expectations,'' Augustin added.

J.P. Morgan analyst Walter J. Winnitzki called the shortfall "not surprising," and kept a "long term buy" rating on the stock despite admitting that he sees "few catalysts" for the stock.

He said it "will be difficult for the company to hit its goal of profitability by the end of the calendar year."

On a positive note, Winnitzki added that VA Linux "has a healthy balance sheet with sufficient cash to last at least through fiscal 2002.

ABN AMRO analyst Keith Bachman was bearish. He maintained a "hold" and said the company "will have a significant challenge generating near term positive momentum in its stock."

"Since VA has pre-announced in the last two quarters, we are assuming the lower end of VA's new guidance," Bachman said.

Bachman added that though Red Hat (Nasdaq: RHAT) and VA Linux have fundamentally different business strategies, he expects it to trade in sympathy over the near-term. Red Hat was up 0.22 to 9 Wednesday.