SCO losses mount

In an announcement Thursday, Lindon, Utah-based SCO Group Inc., which is embroiled in lawsuits with IBM Corp. and Novell Inc. over the rights to the Unix operating system and related issues, said a drastic revenue drop was “primarily the result of a lack of SCOsource licensing revenue” from its SCOsource division.

A spectacular 99 per cent drop in Unix licensing revenue for the second quarter of 2004 led overall revenue for the Unix vendor to plunge to US$10.1 million for the quarter, which ended April 30. That’s down 53 per cent from US$21.4 million one year ago.

The division was created in late January 2003 to protect the company’s intellectual property and bring in new revenue from companies that would pay to license SCO’s Unix intellectual property.

For the second quarter, SCOsource revenue was US$11,000, a drop of 99 per cent from its US$8.25 million in revenue for the same quarter one year earlier.

After the financial announcement, the company’s stock fell. Shortly before the market close Thursday, it was off 10.85 per cent, to US$4.85 per share.

In an interview after the company’s earnings call with analysts, CFO Bert Young said the drop in SCOsource revenue was not a surprise. “This is a new thing to sell an IP (intellectual property) indemnification license,” he said. “It’s going to be very cyclical. It’s going to be up, it’s going to be down.”

Right now, SCOsource has “many, many deals in our pipeline, people we’re in active conversations with” for possible licensing, he said. “Some of them are very, very large, equaling the size of last year.”

Most are in the mid-six-figure range, Young said.

The US$8.25 million SCOsource brought in during the second quarter of last year was largely because it had signed Microsoft Corp. and Sun Microsystems Inc. to sizable licensing deals. This year, it’s been harder for SCO to convince corporate IT users that they should buy the licenses, he said. “The largest thing we hear from our potential customers that is causing hesitation are the claims being made by IBM that we don’t hold these (Unix) copyrights, which of course we think are false,” Young said. “That’s clearly the issue, for every one of these” that have not yet signed up.

Young said he understands that it’s tough for users, since the major part of SCO’s case is under court seal and can’t be shown. “Signing up for this when there’s a big question mark that Novell (and IBM) have raised in everybody’s minds, that’s a hard thing to sign up for.”

On the other hand, he said, as SCO’s lawsuits progress through the courts and companies’ confidence in the claims grows, SCO believes the IP revenue stream will begin to increase. For users, that means lower initial pricing models will disappear and license prices will go much higher, he said.

“If they’re willfully not buying licenses, the price will be a horrific price” with penalties, because they didn’t act early, Young said. “They run a huge risk. What they’re looking at right now is a bet, and that bet is going to get more expensive.”

For the first two quarters of 2004, total revenue was US$21.5 million, compared with US$34.9 million for the same period a year ago.

SCO’s net loss for the quarter was US$9.4 million, compared with a net income of US$4.9 million for the same period one year earlier. Basic and diluted shares lost US$1.06 each in the quarter, compared with a US$0.39 gain per basic share and a US$0.33 gain per diluted share one year earlier.

Darl McBride, president and CEO, said in a statement that second-quarter revenue was consistent with company expectations, while SCO also incurred significant expenses for the impairment of goodwill and intangibles and for the recent exchange of its Series A-1 Convertible Preferred Stock.

“Both of these charges negatively impacted our second-quarter results,” McBride said. “As the company looks forward to the last two quarters of fiscal year 2004, we are committed to increasing shareholder value through profitable operations and increasing cash flow from our Unix division as well as remaining focused on our intellectual property lawsuits and licensing strategies.”

SCO said its outlook for the third quarter, which ends July 31, calls for total revenue in the range of US$10 million to US$12 million.

In May, SCO worked to cut expenses by laying off less than 10 per cent of what had been about 275 workers. The cuts were made in every area of the company, including marketing, sales, administration and engineering.

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