Consolidation and cutback moves by Linux vendors accelerated this week, highlighted
by VA Linux Systems Inc.'s disclosure yesterday of increased losses, a 25 percent
workforce reduction and a new president and chief operating officer.

The cutbacks and management change at Fremont, Calif.-based VA Linux was followed
today by an announcement that rival Turbolinux Inc. in Brisbane, Calif., has
agreed to acquire Linuxcare Inc., a San Francisco-based company that offers
Linux-related consulting services. Both Turbolinux and Linuxcare went through
layoffs and management changes of their own last spring.

VA Linux reported a pro forma loss of $13.4 million for its second fiscal quarter
ended Jan. 27, more than double the $6.3 million deficit in the same period
a year ago. With acquisition-related costs and other expenses taken into account,
the company had a net loss of $74.1 million in the second quarter on revenue
of $42.5 million. The revenue total was up from $20.2 million a year ago but
fell below earlier expectations.

As part of the financial results announcement, VA Linux said about 140 of its
560 or so workers are being laid off. The company also named Ali Jenab as its
new president and chief operating officer. Jenab, who joined VA Linux as head
of its systems division last August, will take over day-to-day operating responsibilities
from CEO Larry Augustin.

In an interview today, Augustin said financial analysts and VA Linux itself
had expected better results in the second quarter. But the company couldn't
overcome the economic slowdown in the U.S., he added. "We've had very strong
revenue growth, but ... the market was looking for more," he said, describing
the retrenchments taking place at Linux vendors as "a normal phase in any
new market."

Tony Iams, an analyst at D.H. Brown Associates Inc. in Port Chester, N.Y.,
said Linux vendors as a whole have had to rethink their business strategies
in recent months as numerous dot-com companies have shut down or moved to sharply
reduce their spending.

E-commerce ventures had been big Linux users because of the fast deployment
and low costs associated with the open-source operating system, Iams said. And
VA Linux was especially exposed because its user base was heavily weighted toward
the dot-com world, he added. VA Linux is "going to have to struggle through
this," he said.

Bill Claybrook, an analyst at Aberdeen Group Inc. in Boston, said the layoffs
are needed to help reduce costs at VA Linux. But the company also needs to generate
more revenue by selling software, according to Claybrook. VA Linux currently
gets most of its revenue from hardware but can't compete with the likes of IBM
and other system vendors over the long haul, he said.

Meanwhile, Turbolinux's acquisition of Linuxcare had been expected for several
months. The combined company will keep the Turbolinux name and will be run by
Turbolinux CEO T. Paul Thomas, with Linuxcare CEO Arthur Tyde III becoming chief
technology officer. The financial terms of the deal weren't disclosed.

Al Gillen, an analyst at International Data Corp. in Framingham, Mass., said
the acquisition is a sign of things to come in the Linux business. "We've
expected some degree of consolidation," Gillen said. "The Linux market
is very fragmented." More than 100 companies or groups are currently offering
their own versions of the operating system, he added.

Jerry Greenberg, senior vice president of worldwide marketing at Turbolinux,
said the acquisition should help fill "a very large hole in our strategy"
by giving the company improved services capabilities. Since both Turbolinux
and Linuxcare went through layoffs last year, he added, no additional cutbacks
are expected at either company.

» posted by ITworld staff

Computerworld

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