VA Linux Earnings Reflect Tough TransitionVA Linux Earnings Reflect Tough Transition

Apparently, transitioning from hardware to software is a pretty tricky undertaking. VA Linux Systems, in reporting quarterly earnings for the first time since it said it would abandon the Linux-compatible server business and enter the market for software-development applications, appears to be learning that the hard way. The company posted revenue that was down 90% from the previous quarter, due largely to the demise of its server sales and its focus on securing customers for its SourceForge collaborative software development application.

For the fiscal 2002 first quarter ended Oct. 27, excluding restructuring costs and other one-time charges, VA Linux posted a loss of $8.7 million, or 16 cents a share, on revenue of $5.6 million, compared with a loss of $7 million, 15 cents, on revenue of $56.1 million for the same period last year. Revenue for the most recent quarter included $3.9 million in sales of SourceForge and $1.7 million related to the last vestiges of the company's server business. Company execs expect second-quarter revenue to be between $4 million and $4.5 million, all from software sales, and for losses to be in the $8 million to $8.5 million range.

During a conference call with analysts, CEO Larry Augustin described the quarter as one in which VA Linux successfully transitioned from its focus on selling Intel servers running Linux to the collaborative software development market. Augustin pointed to sales to Pfizer, Cornell University, Agilent Technologies, Hewlett-Packard, and Japan's IIJ Technology as signs of market acceptance of SourceForge, which is designed to enable customers to develop better software and to do it quicker. Improving software development efficiency is crucial to companies Augustin described as being "under mounting pressure to accomplish more with less." Augustin also revealed that the company has asked shareholders to approve a name change to VA Software Corp.

The new name notwithstanding, Gartner analyst George Weiss says VA Linux's first-quarter results did nothing to fuel his confidence in the company's future. Weiss says transitioning from hardware to software is very difficult to do successfully, and that the complexity of SourceForge only adds to that difficulty. Not to mention that the company faces growing competition in the market from the likes of CollabNet Inc. and others. With $71 million in cash on hand, the company can survive about two more years at its current pace. "It's a long shot to see this as a growth vendor," says Weiss. "It's kind of a last gambit."