SCO Drops Back Into The Red

One year after reporting record quarterly revenue, the SCO Group is again operating in the red. More than a year into its multibillion-dollar lawsuit against IBM over alleged misuse of SCO's Unix intellectual property, the company has seen little revenue from sales of its intellectual-property licenses for Linux while enduring mounting legal bills, and backpedaling from key investors.

For its second fiscal quarter, ended April 30, SCO on Thursday reported a $7.9 million loss, or $1.06 per share, on $10.1 million in revenue. SCO's performance dropped significantly from the year-earlier quarter, when the company reported a profit of $4.5 million on $21.4 million in revenue. SCO says it expects its third-quarter revenue to be between $10 million and $12 million.

SCO attributes its financial decline largely to weak sales from its SCOsource licensing division, whose primary mission is to sell Linux users licenses to use the SCO Unix intellectual property SCO claims is contained in Linux. SCOsource scratched out only $11,000 in second-fiscal-quarter sales, compared with $8.3 million in sales for the same quarter a year ago.

SCOsource revenue has dropped, and legal fees have doubled, as Novell continues to question SCO Group's ownership of Unix copyrights. During the second quarter, SCO spent $4.5 million to pursue its lawsuits against AutoZone, DaimlerChrysler, IBM, and Novell, compared with $2.2 million in legal fees during the same quarter a year ago.

SCO Group president and CEO Darl McBride acknowledged during a conference call that the intellectual-property licensing program hasn't taken off the way the company had hoped. "Novell has raised questions in the minds of our customers," he said. As a result, SCO in January sued Novell, alleging Novell has "slandered" SCO's Unix ownership rights.

The news isn't all bad for SCO. CFO Bert Young, who joined SCO in April, said the company should be able to sustain about $10 million in quarterly revenue from sales of its Unix-on-Intel operating system. "We want the Unix business to cover its expenses and deliver cash that can be used to reinvest in the business," he said.

Despite BayStar Capital LP's move last month to cash in 40,000 shares of SCO Series A-1 shares, SCO managed to hang on to $37 million of a $50 million investment BayStar and Royal Bank of Canada made last year. SCO also keeps them on as investors by issuing BayStar 2.1 million shares of common stock and Royal Bank of Canada about 785,000 common shares This maneuver leaves SCO with $48.3 million in cash, an amount that Young said is enough to fund the company's lawsuits "for several years to come."

"We're going to have enough cash to get to our destination," McBride said.

SCO also has plans to deliver a number of products over the next several months. In May, it debuted the latest version of UnixWare, 7.1.4, with SCO Office Mail Server Release 4.1 scheduled for July and Vintela Authentication 2.2 coming in August. The next version of OpenServer, code-named Legend, is scheduled for early 2005.

The tone of SCO's financials report was a bit different from previous conference calls. McBride acknowledged during the question-and-answer session that he and other managers have spent too much time talking to the media about the company's various lawsuits, especially the IBM suit. That was one reason BayStar cited for asking SCO to either make changes to its management team or exchange its Series A-1 shares.

McBride devoted some time to positioning SCO's case against IBM as a way to protect SCO shareholders from the business that Linux has diverted from SCO's Unix-on-Intel strategy. The U.S. District Court for the District of Utah has set an Aug. 4 date to hear IBM's motion to dismiss SCO's case.

Still, McBride remained confident that SCO's lawsuit is justified. "We'll have our day in court, and that will turn into a positive outcome for us," he said. "It's now a war of patience."