VA Linux leaves hardware, lays off workers

In a radical change, VA Linux Systems announced it will stop selling Linux computers on July 10, abandoning a business central to the company since its founding in 1993 and its phenomenal initial public offering in 1999.

The Fremont, Calif.-based company also will lay off 35 percent of its staff--about 153 of 436 employees, according to a statement the company issued Wednesday.

Leaving hardware means VA instead will work on Linux software, its collaborative programming tools and its Web site. The move puts VA into closer competition with software specialists such as Red Hat and CollabNet.




"Based on where the economy is going, it doesn't make sense to just sell hardware," Chief Executive Larry Augustin said in an interview. "We've always said in the past that we do a lot of software work, and that's a lot of what we sell on."




The move is reasonable, said WR Hambrecht analyst Prakesh Patel. "Their hardware business up to now has been pretty unprofitable. They're looking for a way to stay a viable company without running out of cash."

But it's not just a business matter when a company exits what has been its core business. "On the morale side, this has to affect the company," Patel said.

VA went public during the height of the frenzy around Linux, a clone of Unix that's collaboratively developed by hundreds of programmers. Its share price rose 698 percent by the end of their first day of trading, closing at $239.25.

But VA has been hammered by slowing computing spending and the collapse of Internet companies that once were major customers. The company has issued three earnings warnings in a row, and Wednesday the stock closed at $3.29.

"VA expects its revenue to significantly decline with the elimination of the hardware segment," according to the statement. However, the company expects to consume less cash--$8 million per quarter initially and less in the future.



The company had been spending an average of $25 million per quarter for the last three quarters. "The hardware business is a business that uses a lot of cash. With the downturn in the economy, we just couldn't see we could get it back to a profitable level," Augustin said.




The company will take a $10 million cash charge as a result of the change.

It has been a tough environment for Linux companies, but VA in some ways had it harder because it had to worry about hardware as well as software.

Companies such as Compaq Computer, Dell Computer, Hewlett-Packard and IBM--all of which continue to voice strong support for Linux--have been in direct competition with VA. Red Hat, SuSE, MandrakeSoft and Turbolinux, by comparison, have had to grapple only with Microsoft.

VA's primary business will be selling its SourceForge OnSite service, which lets companies run collaborative software programming projects. In addition, VA will continue development and consulting services such as writing Linux software for storage devices or remote server management, the company said.

Among VA sites that will remain is the advertising-sponsored Open Source Development Network (OSDN), a series of Web sites such as the "news for nerds" Slashdot site, the SourceForge programming site, and the Freshmeat software update site.

The news doesn't bode well for other Linux computer companies, such as Penguin Computing. "It's really tough to be a standalone Linux hardware vendor," Patel said. "I think IBM's going to blow them out of the water, or maybe Dell on the low end."

SourceForge OnSite, with customers such as HP and Goldman Sachs, has some potential, Patel said. "It could be a...large opportunity. But they're going head-to-head with more established competitors such as CollabNet."

Most of the layoffs will take place among hardware sales, manufacturing and hardware operations employees, Augustin said.




It's "highly unlikely" VA will try to re-enter the hardware business later, he added. "Once you make this sort of transition, it doesn't make a lot of sense to go backward."