First-day IPO hype aside, VA Linux (Nasdaq: LNUX) is delivering on exactly what it said it would do -- boost margins, post eye-popping revenue growth and diversify its revenue base.
Once a company sets an IPO record and hits a high of 320 shortly after going public, its biggest enemy becomes the market's hype machine. Of course, VA Linux didn't create 1999's hype, but it's still hard to overcome.
VA Linux, which offers open source Linux systems and services, was put in a position where it could never live up to its IPO splash. To its credit, VA Linux has shown it can execute even as shares trade light years away from their 52-week highs.
The proof is in the earnings reports. VA Linux topped Wall Street estimates by a nickel in its fourth quarter with earnings of $4 million, or 10 cents a share, on record sales of $50.7 million. The results exclude charges. More importantly, gross margins jumped to 22 percent and sales surged 46 percent sequentially.
Prakesh Patel, an analyst with W.R. Hambrecht, projected sales of $42.7 million and gross margins topping 20 percent. Patel reiterated his "buy" rating earlier in the week.
The other notable point about VA Linux, primarily a hardware vendor, is its sales diversification efforts. In the fourth quarter, VA Linux's system revenue represented 92 percent of sales with the remainder being split between services and Web initiatives related to the Andover.net acquisition. The Andover acquisition was effective just for half the fourth quarter.
CFO Todd Schull said on a conference call that the company expects 2001 system revenue to represent 75 percent of sales with 15 percent derived from services. The remainder will be Web related.
As for fiscal 2001 sales, Schull said revenue will be 2.5 to 2.7 times 2000 sales of $120.3 million. Long-term gross margins should be in the 27 percent range with profits by the end of calendar 2001, said Schull.
Battling the big vendors
Much of the VA Linux conference call was spent talking about the competitive landscape. Hewlett-Packard (NYSE: HWP), Dell (Nasdaq: DELL) and IBM (NYSE: IBM) all have targeted the Linux server market.
CEO Larry Augustin said the company, which primarily sold rack-mountable servers in the quarter, had a good win rate in the market and wasn't going head-to-head with the IBMs of the world. Augustin said he "wouldn't be surprised" if VA Linux was winning two-thirds of the accounts it targeted.
However, that situation could change. VA Linux primarily targets service providers. Akamai (Nasdaq: AKAM) represented 21 percent of fourth quarter sales, with HP and Exodus (Nasdaq: EXDS) as other large customers.
Dell, HP and IBM are focused more on corporate customers. In the near future, VA Linux is likely to go head-to-head with big vendors as it ports Linux to Intel's 64-bit Itanium chip and targets higher-end systems. Augustin also noted that there's a lot of interest in Linux from financial services companies.
"We hear a lot of noise in the market, but there's a big difference in knowing it," said Augustin, referring to the open source movement. VA Linux contends it can deliver a full suite of open-source products and build-to-order capabilities -- something the big vendors can't match.
Although VA Linux and the big hardware/services vendors will happily co-exist for a few years because of the "tremendous market opportunity" in open source software, there will come a day where VA Linux will bump heads with the big vendors.
By this time, Linux will be a critical component of the big vendors' growth plans.
Given that equation, it's really hard to see VA Linux remaining as an independent company down the line. HP, IBM and Dell could all be acquirers of VA Linux -- assuming it keeps on executing. Another wild card would be Compaq (NYSE: CPQ), which needs the server help.
Nothing is imminent, but it's something to ponder. TDAIN
• VA Linux tops estimates on record revenue
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