VA Linux to Quit Its Hardware Business to Focus on Software Applications

The server maker says the strategy will cause sales to 'significantly decline' as it restructures, firing 35% of its staff.
By Thomas Lepri ,

Like so many things, it seemed like a good enough idea at the time.

Addled by a string of quarterly losses, open-source server maker

VA Linux Systems

(LNUX)

said Wednesday after the close of regular trading that it is abandoning its core hardware business to focus on the software applications market.

The news has huge implications for the former highflier. VA Linux said it will fire 35% of its staff, or 153 workers, as it restructures. In the meantime, and not surprisingly for a company that makes its money from selling servers, business will fall off a cliff: The company said that the strategy shift would cause its sales to "significantly decline." VA Linux had revenue of $20.3 million in its fiscal third quarter, which ended in April, down from $34.6 million the year before.

Linux is a free operating system developed by a precocious Finn named Linus Torvalds. It's an open-source system, which means that its underlying code is available for any programmer who cares to view and modify it. Linux has become extremely popular in a short time, representing 27% of all server operating systems shipped last year, according to

International Data

. But finding a way to make money from a free operating system has always been a challenge.

VA Linux thinks it still has a shot. "Our differentiating strength has always been our software expertise," CEO Larry Augustin said in a statement. "With

SourceForge OnSite

as the core product in VA's new application software strategy, we will be better able to deliver our expertise in the areas where our customers have indicated that we add the most value."

VA Linux is one of a rare breed of what one might call

zeitgeist

stocks -- stocks that could be taken to typify the spirit of an era. In this case, that era was the open-source software craze of 1999, which held out to investors the promise of toppling

Microsoft's

(MSFT) - Get Report

Windows

from its dominant position in the low-end server market. As luck would have it, VA Linux's initial public offering in December 1999 coincided exactly with that mania. The company saw its shares rise 685% in their first day of trading and peak days later at $242.

History would have it otherwise. The stock closed Wednesday at $3.26, and was recently losing 25.5% to $2.42 on the

Nasdaq

.

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