Struggling SCO Hopes for Win in Court

Almost two years after it sued IBM, The SCO Group will begin this year hoping for a reversal of fortune. The company faces a decline in demand for its Unix server software and a drying up of its intellectual property revenue.

Almost two years after it sued IBM, The SCO Group Inc. will begin this year hoping for a reversal of fortune.

As it enters 2005, the Lindon, Utah, company faces a decline in demand for its Unix server software and a drying up of its IP (intellectual property) revenue.

SCOs greatest hope is a victory against IBM in a trial to start late this year. A negotiated settlement with IBM is an option, but it is remote because the Armonk, N.Y., company has said repeatedly it has no intention of settling.

The cases fact-discovery phase has a Feb. 11 deadline, while expert discovery must be completed by April 22. But the five-week jury trial is not expected until Nov. 1.

All of this means that as SCO fights for sales, its legal costs continue to rise.

SCOs financial outlook was reflected in its results for its fiscal fourth quarter, ended Oct. 31, in which the company reported a loss of $6.5 million and a drop in revenue, to $10.1 million, from $24.3 million for the same period a year ago.

SCO not only continues to see its Unix IP license revenues plummet, but it is also starting to lose business to competitors, CEO Darl McBride said, when presenting the financial results.

The companys Unix business, which includes UnixWare and OpenServer, shrank from $12 million in revenue a year ago to $8.3 million in the latest quarter.

/zimages/3/28571.gifClick here to read about Unix vendors losing market share to Linux and Windows.

SCO hopes the release of a new version of OpenServer, code-named Legend, will help. However, the company has delayed its release, which is now expected in the first half of this year. And since customer upgrades take time, new-product revenue may not come fast enough.

CSK Auto Inc., an auto parts retailer in Phoenix, is taking several years to move from one SCO Unix product to another. "We had to come up with a way of spreading the cost out over three years or so, where we could actually get it done," said George Duckworth, director of store support for CSK. "The first part, what we are doing now, is starting to migrate to hardware that will support the applications we want to write."

SCO officials certainly understand the challenges in not only keeping customers but also adding new ones. "We are not going to allow [our competitors] to take our customers away," said Jeff Hunsaker, senior vice president of SCOs Unix division. "We will protect them to the end. But for us to go head-to-head with them on a new customer—absolutely, thats a huge challenge."

Revenue from its SCOsource IP licensing unit plummeted to $120,000 in the last quarter from $10.3 million in the same quarter a year ago. When asked earlier this year if its controversial legal moves had negatively affected SCOs ability to attract new clients, Hunsaker said, "Absolutely, unequivocally, yes."

Stacey Quandt, an analyst at Robert Frances Group Inc., of Westport, Conn., said that the overall Unix market is consolidating, which will hurt SCO as customers migrate to alternative platforms such as Linux.

"The maintenance revenue from OpenServer and UnixWare is not sufficient for SCOs long-term viability," Quandt said. "SCOs wing-and-a-prayer strategy of monetizing its IP through a win or possible settlement with IBM is all it can hope for."

Compounding matters is trouble at SCOs parent company, The Canopy Group Inc., also of Lindon, which late last month ousted two top executives: Chairman, CEO and President Ralph Yarro and Chief Financial Officer Darcy Mott. Company officials would not comment on the moves.

/zimages/3/28571.gifClick here to read more about the changes at Canopy.

SCO officials have said that the shake-up at Canopy was not expected to have any impact on SCO and its multipronged Linux/Unix-related lawsuits with IBM and other companies, at least for the moment.

On top of the shake-up, SCOs officers entered into change-in-control agreements on Dec. 10, which means that the officers, including CEO McBride, CFO Bert Young and Senior Vice President and General Manager Christopher Sontag, have promised not to leave SCO in the event that its ownership were to change.

Yarro and Mott are two longtime associates of Ray Noorda, the founder of both Novell Inc. and Canopy. Yarro once worked as a graphic artist before rising to Canopys top position in February 1996. Mott had served as Canopys vice president, treasurer and CFO since May 1999.

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