SCOs Revenue Plummets as Legal Costs Mount

Despite reporting that the company's revenues dropped by half in the second quarter from a year earlier, SCO executives find a silver lining in its flush cash reserves and the resolution of its funding and management problems with investor BayStar.

Mounting legal costs and dwindling license revenues drove The SCO Group back into the red for its second fiscal quarter, as it poured money into its legal fight claiming that the Linux operating system infringes on its intellectual property.

For the quarter, ended April 30, The SCO Group Inc. on Thursday reported its revenue decreasing by more than half to $10.1 million, down from $21.4 million in the same quarter last year. The company said it expects its third-quarter revenue to be between $10 million and $12 million.

It reported a $7.9 million loss, or $1.06 per diluted common share. In the same period last year, SCO reported a net profit of $4.5 million, or 33 cents per share.

Lindon, Utah-based SCO blamed the sharp drop primarily on the lack of revenue from its SCOsource division, which makes money by licensing SCOs Unix intellectual property.

While SCOsources revenue was $8.25 million in the same quarter last year, this quarters revenue came to a mere $11,000.

"Our licensing program did not take off as we had hoped," Darl McBride, president and CEO, said in a news conference.

SCO didnt break the numbers down, but most of the revenue in the earlier quarter came from one-time Unix licensing deals with Microsoft Corp. and Sun Microsystems Inc.

Looking ahead, SCO said it expects to do slightly better in the next quarter if revenues materialize from its SCOsource division. McBride declined to offer a figure, saying SCOs legal cases have led potential customers to question whether they need to pay it a licensing fee for Linux. McBride made a point of singling out Novell Inc., which is contesting SCOs Unix copyrights.

The company reported a net loss of $9.4 million from operations this quarter. This included a $682,000 write-off for the general and administrative costs of streamlining SCOs Unix business operations, which consisted of the company laying off about two dozen employees.

In what may be a foreshadowing of more employee cuts to come in the third quarter, SCO said it expects operating expenses related to its Unix division to decrease to $10 million a quarter.

SCO also wrote off $2.1 million in good will and intangible assets because its acquisition last year of Vultus Inc. failed to realize any significant revenue.

Over the fiscal year to date, SCO reported a net loss applicable to common stockholders of $17.2 million, or $1.23 per diluted common share, compared with a net income of $3.8 million, or 29 cents per diluted common share, for the first two quarters of fiscal year 2003.

Next Page: SCOs cash position remains strong, CFO says.