SCO Reports $6.5 Million Loss

By Steven Vaughan-Nichols  |  Posted 2004-12-22

SCO Reports $6.5 Million Loss

The SCO Group Inc. on Tuesday reported a loss of $6.5 million, or 37 cents per share, in its latest quarter, which ended Oct. 31.

The litigious Unix companys revenue fell to $10.1 million, down from $24.3 million a year ago, when the company suffered a fourth-quarter loss of $1.6 million or 12 cents per share. Dion Cornett, a financial analyst with Decatur Jones Equity Partners, had predicted that SCO would only lose 18 cents a share on $10.8 million in revenue.

Darl McBride, SCOs president and CEO, blamed the revenue drop on the competitive market for its Unix server products and the companys declining Unix IP (intellectual property) license revenues. In last years fourth quarter, its SCOsource revenues amounted to $10.3 million. In this most recent quarter, SCOs IP revenue came to only $120,000.

Nevertheless, McBride insisted that licensing revenues would bounce back. "There is continued interest in the licensing of our Unix technology, and we believe that when our legal claims are substantiated in a court of law, we will see an increase in the demand for this licensing business," he said.

In large part, the vast difference between 2004s fourth-quarter revenue and the fourth quarter of 2003 is because then SCO had realized income from IP deals with Microsoft Corp. and Sun Microsystems Inc. Except for those two major licensing agreements, SCO has been largely unsuccessful in finding customers willing to pay for its Unix IP property.

Despite this glum financial news, McBride remained positive. "I am pleased to say we have continued to further our business objectives in the fourth quarter and ended the year on an upbeat note."

In particular, McBride pointed to SCOs Unix offerings. "Our core Unix business is generating meaningful cash flow and is poised to continue that trend into our 2005 fiscal year. As an organization during Q4, we continued to innovate and to introduce new programs like SCO Marketplace [a third-party developer program], and we successfully capped our attorneys fees."

McBride said SCO will continue to focus on both its Unix products and its legal claims. "The combination of the solid operating results in our Unix business and the cap on the costs of litigation will ensure we can remain steadfastly focused on driving success in both the marketplace and in the courtroom, and demonstrate our focus on taking whatever steps are necessary to ensure success in both areas."

Click here to read about SCOs plans to launch a Web site to present its side of the story of its IP fights with IBM and Novell.

As for SCOs Unix offerings, McBride said he believes that the companys release of a major upgrade to OpenServer, the companys low-end Unix server offering, code-named Legend, which is now scheduled for the second quarter of 2005, will do well for SCO and its partners.

"We believe the release of Legend will strengthen the overall ecosystem of partners, developers, customers, and resellers that rely on OpenServer and will also present SCO with opportunities to upgrade our current installed base."

SCO had previously said at SCOForum, SCOs annual reseller conference, that Legend would arrive in the first quarter of 2005. McBride explained that the delay was due to the beta process and that SCO is "just getting everything tightened down before it goes out."

Next page: Legal developments.

Page Two

In regard to SCOs lawsuits against IBM and other companies concerning Unix IP issues, McBride said, "Litigation efforts have centered around discovery and motion practice in the various cases."

In the one concrete new legal development, McBride indicated that SCO would no longer be pursuing its case against DaimlerChrysler AG at this time. In July, Judge Rae Lee Chabot of Oakland County Circuit Court in Michigan had dismissed SCOs claims, except for the issue of DaimlerChrysler not filing its response to SCO in a timely manner.

"After the court dismissed the certification claim, we determined that it would not be a wise use of resources to pursue the timeliness claim alone. Therefore, we moved to stay that claim pending further clarification of the issues on the IBM case," McBride said.

SCO is staying the course with its other legal actions with AutoZone Inc., IBM, Novell Inc. and Red Hat Inc. In no small part, this is because SCO has a new financial relationship with its lawyers.

The new agreement with Boies Schiller & Flexner "caps our legal fees and ensures we have their representation through the conclusion of the IBM litigation, including the appeal process," said Bert Youngs, chief financial officer of SCO.

"The revised fee agreement limits the overall cash costs of the legal fees associated with our litigation from September 1, 2004, to a total of 31 million, other than any contingency fees. In return for this new fee arrangement, weve agreed to increase the contingency associated with any award on a scaled basis from 20 to 33 percent, depending on the overall size of the judgment or settlement," Young said.

"We cant overstate the importance of our finalized agreement with our legal team," McBride added.

During the earnings call, McBride did not address the issues of a major executive shakeup at the Canopy Group, SCOs parent company and majority stock holder. Both Canopy Chief Executive Ralph Yarro and CFO Darcy Mott have left their positions.

Yarro has been replaced by Bill Mustard. Mustard comes from Smooth Engine, a senior management consulting company. A replacement for Mott has not been named.

According to Blake Stowell, SCOs communications director, however, Yarro is still SCOs chairman and Mott remains on SCOs board.

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