Linux vendors consolidating, cutting back

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 US$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 US, 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. 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.

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