Press Release Index

VA Linux Systems Reports Record Second Quarter Revenue

SUNNYVALE, Calif. February 24, 2000 VA Linux Systems, Inc. (NASDAQ: LNUX) today reported record results for its second quarter which ended January 28, 2000. Revenues for the second quarter were $20.2 million, up 537% from the same quarter of the prior year, and up 36% from the prior quarter. Revenue from Professional Services, of $300,000, represented 1.5% of total revenue. According to IDC, shipments of Linux operating systems during calendar 1999 grew 93%, more than four times faster than shipments of any other software operating system. New customers accounted for 49% of total revenue. The top 10 customers represented 41% of total revenue, down 9 percentage points from the previous quarter. VA Linux's largest customers for the second quarter were Akamai Technologies, NetLedger, Vstream, Abba Technologies, and C/Net.

VA Linux' gross margins improved to 14.0% for the second quarter from 13.2% in the previous quarter. The operating loss, excluding deferred compensation charges of $4.2 million, was $8.4 million. The operating loss also included an additional $1 million in non-recurring non-cash charges associated with stock options issued for recruiting and marketing consulting services incurred prior to our IPO. As a percentage of revenue, the operating loss, excluding deferred compensation charges, improved 8.2 percentage points from the previous quarter to a 41.4%. The operating loss, including deferred compensation, was $12.6 million or 62.5%, an improvement of 6.4 percentage points from the previous quarter.

In another significant step, VA Linux virtually eliminated its manufacturing inventory as it expanded its high velocity contract manufacturing model.

In January of 2000, VA Linux introduced SourceForgeTM, a development center for open source projects. Since that time, SourceForge has become the development home for more than 2,200 such projects and more than 13,000 registered developers, and the numbers continue to grow. Web traffic on VA Linux' other web sites, such as and, grew 23% in pageviews sequentially versus the prior fiscal quarter. VA Linux also announced progress in strategic partnerships during the quarter. For example, VA Linux's announced relationship with nVidia and SGI is aimed at the creation of state-of-the-art workstation-class graphics processing on Linux systems this year. In VA Linux's Professional Services area, Hewlett-Packard and VA Linux announced a collaboration to create great Linux and open source printing. "This was an excellent quarter. We believe our results show that our open solutions model, a balanced ability to provide complete Linux solutions for customers, is the business model of choice for the Linux and Open Source markets," said Dr. Larry Augustin, CEO of VA Linux Systems. "We intend to grow aggressively in the forseeable future, both organically and through additional acquisitions."

"VA Linux's growth rate last quarter was tremendous. We are particularly happy with the growth in our services business after its first full quarter of operation," said Todd Schull, CFO of VA Linux Systems. "In addition, our progress on inventory asset management was outstanding. Inventory has been virtually eliminated allowing us to focus our resources on more strategic areas."

About VA Linux Systems

Since 1993, VA Linux Systems has been a recognized leader in advancing Linux and Open Source solutions. VA Linux provides a single point of contact for Linux systems, Open Source software, and world-class professional services and support. VA Linux Systems owns and operates SourceForge, the world's largest Open Source development center, as well as and Headquartered in Sunnyvale, VA Linux is located on the Web at

Forward-looking statements in this press release are made pursuant to the safe harbor provisions of Section 21E of the Securities Exchange Act of 1934. Investors are cautioned that statements that are not strictly historical statements, including, without limitation, statements regarding current or future financial performance, management's plans and objectives for future operations, product plans and performance, management's assessment of market factors, and statements regarding the strategy and plans of VA Linux and its strategic partners, constitute forward-looking statements which involve risks and uncertainties. These risks and uncertainties include, without limitation, VA Linux's limited operating history and the evolving market for Linux-based systems; the risks associated with VA Linux's dependence upon an open source business model; reliance on sales of server products; continued market acceptance of Linux; continued reliance upon independent third-party Linux developers; management of growth; reliance upon strategic relationships and ability to implement specific terms relating to them; reliance on our single source contract manufacturer; governmental clearance and successful integration of acquisitions; competition with larger and more established companies, particularly those with announced Linux strategies; continued introduction of new products; expansion of VA Linux's business focus and operations, particularly internationally; our ability to attract and retain qualified personnel - especially in the areas of professional services and overseas; the enforceability of the GNU General Public License; the scarcity of Linux-based applications; the risks of economic downturns generally; the risks associated with competition and competitive pricing pressures; the viability of the Internet and of our web-based businesses as profit-making entities; and other risks detailed in VA Linux's filings with the Securities and Exchange Commission, copies of which may be accessed through the SEC's web site at

Note: VA Linux Systems and SourceForge are trademarks of VA Linux Systems, Inc. Linux is a registered trademark of Linus Torvalds. All other trademarks and company names are property of their respective owners.

Condensed Statements of Operations
(In thousands, except per share data; Unaudited)

Three Months Ended
Six Months Ended
  January 28, 2000 January 31, 1999 January 28, 2000 January 31, 1999
Net Revenues $20,191 $3,170 $35,039 $5,605
Cost of Revenues 17,356 3,324 30,243 5,377
Gross margin 2,835 (154) 4,796 228
Operating expenses
Sales and marketing 7,111 406 12,175 583
Research and development 2,431 216 5,205 264
General and administrative 1,658 654 3,154 790
Amortization of deferred stock compensation 4,258 371 7,113 489
Total operating expenses 15,458 1,647 27,647 2,126
Loss from operations (12,623) (1,801) (22,851) (1,898)
Interest and other income (expense), net 1,062 (14) 1,235 (14)
Net loss (11,561) (1,815) (21,616) (1,912)
Dividend related to convertible preferred stock - - (4,900) -
Net loss attributable to common stockholders $(11,561) $(1,815) $(21,516) $(1,912)
Basic and diluted net loss per share $(0.50) $(0.44) $(1.73) $(0.41)
Pro forma basic net loss per share $(0.36) $(0.26) $(0.90) $(0.31)
Weighted-average shares outstanding
Basic and diluted 23,325 4,151 15,372 4,626
Pro forma 32,300 7,026 29,412 6,094

Condensed Balance Sheets
(In thousands)

Current Assets
Cash and cash equivalents $148,510 $18,653
Accounts receivable, net 11,537 4,033
Inventories -- 1,971
Prepaid expenses and other assets 1,470 381
Total current assets 161,517 25,038
Property and equipment, net 2,931 1,759
Other assets 807 798
  $165,255 $27,595
Current Liabilities and Stockholders' Equity
Current portion of loans and notes payable $563 $759
Accounts payable 9,629 6,243
Accrued warranty 607 239
Accrued liabilities and other 3,737 1,567
Total current liabilities 14,536 8,808
Notes payable and other, net of current portion 575 424
Stockholders' equity
Convertible preferred stock - 19
Common stock 41 15
Additional paid-in capital 219,956 45,461
Stockholder note receivable - (50)
Deferred stock compensation (28,376) (12,121)
Accumulated deficit (41,477) (14,961)
Total stockholders' equity 150,144 18,363
  $165,255 $27,595


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