Linux server maker VA Linux Systems Inc. announced that it will stop selling hardware and focus on its applications and online businesses, a move that will significantly cut into the company's short-term revenue but is expected to reduce costs in the longer term.

The Fremont, California hardware and software vendor also said it will lay off 35 percent of its 436-person staff in an effort to cut costs at the money-losing company. Layoffs will take place during the current quarter, mainly in the hardware services and support divisions. This marks the company's second major staff cuts in the last five months.

"Competition is up, the business climate is very poor, overall IT spending is down and our original major focus -- the dot-com market -- got hit really hard," Larry Augustin, VA Linux chief executive officer, said in an interview. "Based on all those things, we just couldn't see a way to continue supporting our hardware business."

VA Linux announced its third quarter earnings on May 22, reporting revenue of US$20.3 million, down from $34.6 million in the same quarter a year earlier. Revenue declined more than 50 percent from the second quarter. The company also reported wider losses from a year earlier, but said it had about $100 million in cash and securities.

Augustin said the company has burned through an average of $25 million each quarter in the past two years. After restructuring its business and staff he said the company's burn-rate will be reduced to about $8 million each quarter.

"That will make (our cash) last a whole lot longer," Augustin said. "That's the whole point of this."

VA Linux made its name selling servers based on Intel Corp. processors pre-loaded with versions of Linux from Red Hat Inc., SuSE Linux AG and others. Its prominence in the open-source community helped it launch one of the most successful initial public offerings of 1999, in which its stock catapulted almost 700 percent in its first day's trading to close at $239.25. It's share price has since tumbled, closing Wednesday at $3.26.

During that time major hardware vendors such as Dell Computer Corp. and IBM Corp. have increasingly embraced the Linux operating system. Pressure from those large competitors have dug deeply into sales at VA Linux. The company said it will stop taking orders for its hardware on July 10 and complete all shipments by the end of its fiscal year on July 28.

VA Linux offers the SourceForge OnSite Collaborative Development System, a Web-based application for collaborating on software development projects. VA Linux said it will work on selling its SourceForge OnSite applications to corporate customers to build developer communities in-house, a similar move made this month by CollabNet Inc., an open source applications company that sells a similar product.

VA Linux will also maintain its Open Source Development Network (OSDN), which includes such developer community Web sites as SourceForge.net, Slashdot and ThinkGeek. It also said it will continue offering software development and consulting services.

"I don't think this says anything about Linux specifically," Augustin said, noting that he expects the market for Linux to continue to grow with industry support. "The hardware market is tough all around right now."

VA Linux, can be reached at +1-510-687-7000, or online at http://www.valinux.com.

ITworld.com

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