The Dot-Bomb Claims Another CasualtyThe Dot-Bomb Claims Another Casualty

VA Linux Systems Inc., which set a Wall Street record by increasing its stock price 700% upon its 1999 IPO, is quitting computer hardware and laying off 35% of its staff. It's a reversal of fortune for CEO Larry Augustin, who founded VA in 1993 as a Stanford grad student bundling the open-source operating system, Linux, onto white-box PCs and PC servers.

VA [Nasdaq--LNUX] once boasted a market capitalization of more than $5 billion. By the close of trading Wednesday, VA Linux shares were worth $3.29, and the company had a market cap of $178.1 million. Large companies' preference for buying hardware from big-name suppliers and a stock market weary of specialized technology companies are partly to blame.

"Our original target was the dot-com market," Augustin says. "The dot-com market didn't have any established vendors you had to kick out. That's not the case anymore. You're talking about going into established companies. They have existing vendor relationships, and it's hard to get them to switch."

VA plans to lay off more than 150 employees of its 436-member staff, most by the end of July. The company says it will accept hardware orders through July 10, after which its business will consist of selling Linux-related consulting services, including operating a pair of developer-oriented Web sites, SourceForge and the Open Source Development Network.

Exiting the hardware business, which accounted for 73% of VA's $20.3 million in third-quarter revenue, should cut VA's burn rate to $8 million per quarter, Augustin says. VA was going through $25 million a quarter, according to the CEO. The company posted a third-quarter net loss of nearly $19 million. In addition, VA plans to take a $10 million charge against earnings during its fourth quarter, which ends July 28, to write off hardware-related expenses.