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VA Linux shares jump on strong earnings report

The company's shares rise more than 20 percent after it reports earnings a nickel better than analysts predicted.

Shares in VA Linux Systems climbed by more than 18 percent today, fueled by a report of stronger-than-expected revenue.

Late yesterday, the company surpassed analyst expectations by reporting revenue of $50.7 million and a loss of 10 cents a share, a nickel better than analysts predicted.

Shares were up $6.88 to $44 at the close of regular trading.

Analysts generally expected revenue between $42.7 million and $44.5 million, and those surveyed by First Call/Thomson Financial expected a loss of 15 cents a share. In the same quarter a year ago, VA had a net loss of 34 cents a share on revenue of $7.8 million.

VA's net loss was $4.1 million, compared with $7.8 million the year before, the company said.

The 10-cent loss excludes several items, including "write-off of in-process research and development, amortization of goodwill and intangible assets, amortization of compensation expense related to acquisitions, amortization of deferred stock compensation, and the dividend related to convertible preferred stock," VA said.

ABN Amro analyst Keith Bachman and Credit Suisse First Boston analyst Amit Chopra both predicted next quarter's revenue will be about $65 million. "We see VA Linux continuing to exploit Linux's entry into new markets such as midrange servers and storage," Chopra said.

The company's sales came chiefly from sales of rack-mountable servers used to build up Internet infrastructure, chief executive Larry Augustin said in an interview today.

The most popular product is 3.5 inches thick, but future demand is moving to models 1.75 inches thick, he said. In addition, the company expects sales of servers packed with hard disks to be popular.

Augustin predicted revenue next fiscal year to be 2.5 to 2.75 times this year's $120 million--$300 million to $330 million--but that still likely won't be enough to carry the company to profitability. "We're expecting to be in the black by the end of calendar 2001," the second quarter of VA's fiscal year, Augustin said.

WR Hambrecht analyst Prakesh Patel sees VA's profit margins increasing. Several acquisitions by VA "show the solid progress VA has made" in shifting its revenue stream to high-margin professional services, hardware and software integrated to work together. The company's products sell to Internet service providers, customers needing data storage and Internet infrastructure, and all high-growth markets.

VA's results mean Linux companies have surpassed analyst expectations twice in two days. Linux seller Caldera Systems yesterday reported a loss of 19 cents a share when analysts expected a loss of 25 cents. Caldera, though, had revenues of $1.2 million, much less than VA's.

Though VA's growth has been swift, it still faces formidable competition. Dell Computer, IBM and others have aggressive plans to sell Linux servers, but those companies have deep relationships with customers, resellers and suppliers. And Sun Microsystems' $5 billion in revenue last quarter is 100 times that of VA.

VA has some features its bigger siblings lack. The company touts its Linux experience, of course, but it also has a new build-to-order software system that lets customers choose in great detail what Linux software they want installed and save configurations for future purchases. VA expects these features to help build repeat business.

The company also competes with other Linux companies, such as Red Hat, Caldera, SuSE, TurboLinux, Atipa, Penguin Computing, SteelEye and Mission Critical Linux.

VA doesn't see any need to stray from designs based on Intel CPUs, Augustin said. Intel is an investor in VA.

VA will be able to expand into new markets with the arrival of Intel's first 64-bit chip, Itanium, and its successor, code-named McKinley, Augustin said. "Clearly the driving application is big databases," which require 64-bit chips' ability to contain large amounts of memory, Augustin said.

VA plans eight-processor servers for Itanium machines, he said. Currently, Linux isn't able to take good advantage of all those CPUs, but a new version is due soon.

About 8 percent of VA's revenue in the last quarter came from services and from corporate sponsorship of its Open Source Developer Network, Augustin said. In the long run, VA expects about 15 percent of its revenue to be from services and 10 percent from its OSDN.

OSDN, unveiled last week, collects news and other information from a number of VA-owned content sites including Linux.com, Slashdot, Freshmeat and SourceForge. Compaq, EMC, Hewlett-Packard, Intel, IBM and Sun are "technology partners" of OSDN, VA said.

Meanwhile, many early investors have been selling shares in the company. Computer maker SGI sold 800,000 shares for about $31.5 million total today and yesterday. Two weeks ago, the company sold 350,000 shares for $15 million.

Hughes Aircraft's retirement fund sold about 35,000 shares today for nearly $2 million. And the William Hambrecht Trust sold about 55,000 yesterday for $2.3 million.

"While there continues to be insider selling, the majority of these are small amounts of stock from venture capital distributions. There have been no large blocks sold by key, operations-involved employees," Patel said.