The Good, the Bad and the Disparaged

SAN FRANCISCO (08/25/2000) - The volatility of tech-stocks has become a cliche.

Even in a week where the U.S. Federal Reserve remained relatively inactive, 20 percent swings of a vendor's share price can sometimes go unnoticed in a sector that oscillates so violently as a whole.

This week, however, four stocks -- VA Linux Systems Inc. (LNUX), Caldera Systems Inc. (CALD), MicroStrategy Inc. (MSTR) and Emulex Corp. (EMLX) -- showed behavior more in line with the tradition built by brick-and-mortar operations. The group of four companies proved that improved earnings still help, bad earnings continue to harm, and false reports remain, well, catastrophic.

As a sign that giving products away can pay off, VA Linux posted earnings Wednesday well above analysts' estimates, giving rise to a jump in the Sunnyvale, California-based company's share price. The open-source systems vendor posted fourth-quarter revenue of US$50.7 million which was a 547 percent increase year over year. The strong results pushed VA Linux shares up almost 16 percent at the start of Wednesday's trading and lead to the stock's $45.87 Friday close. [See "VA Linux Posts Strong Quarter," Aug. 24.]While VA Linux still lost 10 cents per share, the company and analysts predicted increased earnings in the quarters to come. Keith Bachman, an analyst at ABN Amro Inc. based in San Francisco, said that the Linux systems vendor's name recognition along with its position as a consolidator in the open-source market would help push VA Linux toward impressive future results. "VA Linux's announcements were a shot in the arm for the open-source sector overall," Bachman said.

For Bachman, one of the keys for VA Linux will be a continued focus on acquisitions. By using capital to buy other open-source vendors and consolidate a fragmented market, VA Linux might match some of the impressive growth predictions made by company executives this week. Bachman did, however, warn that the company would be hard pressed to match dramatic recent growth. "They can't sustain the growth they have had just as a matter of numbers," he said.

Caldera failed to provide the same boost for the open-source market when the Orem, Utah-based company announced earnings Tuesday. The Linux distribution company reported third-quarter revenue of $1.2 million -- a 9 percent increase compared to the same period last year. The company attributed losses of 19 cents per share to infrastructure investment, marketing costs, and strategic development. The vendor's stock declined sharply following the results and ended the week at $5.75. Caldera began the week at close to $7 a share, well under its March high of $33.

Jennifer Jordan, an analyst with First Security Van Kasper in Portland, Oregon, a subsidiary of First Security Corp., said that Caldera should focus on creating software that attracts widespread corporate use. Unlike a larger company such as VA Linux, Caldera suffers from the discounted and often free nature of the open-source market. "You have to get large manufacturers to feel compelled to pay for the embedding of solutions," Jordan said.

Although demand clearly exists for Linux, many vendors will only commit a small portion of their resources to a segment with vague future applications, she said. Jordan explained that one way to attract the attention of large vendors comes from offering a free product and then charging for the services to run it. "You have got to have a high level of technical support and training for network managers," she said.

Jordan gave Caldera's stock an $11 per share target based, in part, on revenue that should come from the company's planned October acquisition of two Santa Cruz Operation Inc. (SCO) divisions. "With SCO, Caldera gets access to strong distribution channels," she said. Additionally, Caldera could gain close to $24 million in revenue per quarter from the acquisition, Jordan added. [See "Caldera's SCO Grab Brings great Promise," Aug. 7.]While not posting earnings this week, MicroStrategy Inc. managed to give its shares a lift Monday, when the vendor announced IBM Corp. will provide MicroStrategy's data-related software as part of Big Blue's services offerings.

The software maker's stock climbed over 40 percent on Monday to end the day's trading at $29.56. Earlier this year, MicroStrategy split shares, but has performed poorly in recent months.

Mark Murphy, an analyst with First Albany Corp., said that MicroStrategy shares are typically volatile but the deal with IBM pushed shares surprisingly high.

While he said the partnership could help provide a global presence for MicroStrategy's software, Murphy added that the agreement encouraged excessive attention. "I don't think (the deal) warranted the massive move the stock made on Monday." he noted.

Murphy also said that he expects the company's shares to remain topsy-turvy in the short term due to a lack of product visibility. Over the long term, however, MicroStrategy's core technology will add significant business value, he concluded.

In a strange happening, shares of Emulex Corp. plummeted Friday morning due to a fictitious press release claiming that Emulex's chief executive officer had resigned and the company's fourth-quarter results would be re-released to reflect a loss. In addition, the hoax release alleged that the supplier of Fibre Channel products for SANs (storage area networks) would face investigation from the U.S. Securities and Exchange Commission. [See "Emulex Stock Dives On False Press Release," Aug. 25.]Emulex denied all the claims in the release and is currently seeking an investigation into who wrote the misleading document. Shares in Emulex fell over 50 percent in Friday morning's trading before Nasdaq officials ordered a halt in the exchange of the vendor's stock. When trading resumed in the afternoon, the company managed to recoup most of the day's loss, closing at $105.75. Over the course of the day shares moved between a low of $43 and a high of $130.

VA Linux, in Sunnyvale, California, is at +1-408-542-8600, or at http://www.valinux.com/. Caldera, in Orem, Utah, can be reached at +1-801-765-4999 or found on the Web at http://www.calderasystems.com/.

MicroStrategy, based in Vienna, Virginia, can be contacted at +1-703-848-8600, and on the Web at http://www.microstrategy.com/. Emulex, based in Costa Mesa, California, can be reached at +1-714-662-5600 or http://www.emulex.com/.

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