SCO's Fight Continues

The SCO Group posted a nearly $15 million loss in its second fiscal quarter amid a freeze in SCOsource licensing, but company executives vowed that SCO has enough cash to continue its intellectual-property litigation against IBM for several years.

The embattled Lindon, Utah-based company reported revenue of $10.1 million and a loss of $14.95 million, or $1.06 per share, for its second quarter ended April 30. The negative results stemmed, in part, from the exchange of Series A-1 convertible preferred stock that generated $13 million for investor BayStar Capital, according to SCO.

For the same quarter last year, SCO posted a profit of $4.5 million, or 33 cents per share, on revenue of $21 million. The company said the sales decrease primarily was due to a slump in SCOsource licensing revenue, which plummeted to $11,000 last quarter. SCOsource benefited significantly last year after it launched a Unix source-code licensing program and signed on deep-pocketed licensees such as Microsoft.

In a conference call on Thursday, SCO CEO Darl McBride and newly appointed CFO Bert Young said the company is in ample financial shape to fund its legal fight against IBM, Novell, Red Hat and customers AutoZone and Daimler Chrysler. They noted that SCO has no debt, a sizable war chest and predictable quarterly Unix product revenue.

During the quarter, SCO structured a deal that paid investor BayStar Capital but left $48 million in SCO's coffers. SCO spent roughly $4.4 million last quarter on legal expenses, and it expects to burn $3 million to $5 million each quarter in legal costs related to its battle to protect its Unix intellectual property, Young said.Despite the disappointing SCOsource license sales, SCO partners, customers and shareholders should have no doubts about SCO's financial ability to fuel its legal effort against IBM, McBride said. "We're going to have enough cash to get to our destination. We're on a journey right now and have the legal vehicles in place to get us there and the best litigation team in the world in place," he said. "We have the firepower on the legal side, the cash necessary and very strong claims to get us to where we need to go."

McBride attributed the downturn in SCOsource licenses to Novell's public claim that SCO doesn't own the full copyright to the Unix System V code. As SCO awaits a decision on that issue from a Utah court, McBride said he's confident that SCO's Unix ownership rights will be confirmed and SCOsource licensing revenue will improve. He also dismissed industry speculation that SCO is backing down from its original claims against IBM and that it privately has provided IBM and the court enough evidence that it has acted in good faith.

Earlier this week, SCO asked the court to delay the start of the trial until September 2005. McBride said IBM's reluctance to divulge all AIX and Dynix code and its 14 counterclaims against SCO are slowing down the legal process. The trial is currently slated to begin next April.

"Some are saying SCO is trying to drag this out and IBM wants to rush in and get it done. But IBM is really the one trying to slow the case down," McBride said.

Some industry observers said SCO should be able to continue its legal charge. Dion Cornett, managing director of Decauter Jones, a Chicago-based equity research firm, said SCO can keep its head above water if it halts further litigation and tightens up operational expenses--despite a 12 percent decline in Unix product revenue in the second quarter and a forecast for a 13 percent decrease during the next quarter."If SCO can back out or slow down the pace of end-user lawsuits and focus on IBM, they might be able to eke out a jury [verdict] with $45 million left in the bank," Cornett said. "If they can keep the burn rate the same, that can get them through another nine, 10 or 11 quarters [of litigation]."

McBride said he expects SCO's product revenue to rise with this month's release of the Unixware 7.14 update and an embedded Unix toolkit, next month's release of SCO Office Server 4.1, the planned release of the Vintella authentication server in August and a major launch of a new OpenServer code--dubbed "Legend"--in the first quarter of 2005. He also said he expects SCO to cut operational costs, but he declined to comment about the prospect of more layoffs.

In addition, McBride said SCO plans to reduce costs in its reseller channel, though he didn't provide details. "We have a large reseller channel. We'll be as streamlined as possible," he said.