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Revenue tumbles for Linux foe SCO

Maybe a major investor was right in saying the company should chase Linux users and drop Unix licensing.

Dawn Kawamoto Former Staff writer, CNET News
Dawn Kawamoto covered enterprise security and financial news relating to technology for CNET News.
Dawn Kawamoto
4 min read
The SCO Group reported lackluster second-quarter results Thursday, with revenue falling across its three divisions, its loss from operations widening and almost no success convincing companies to license its intellectual property.

SCO, which is embroiled in a number of lawsuits over Unix intellectual property, reported revenue at the low end of its earlier forecast range and missed expectations by the one analyst that follows the company.

One dud for the company thus far has been its controversial SCOsource plan to license SCO intellectual property to Linux users to avoid the threat of Unix-related legal action. The company spent $4.4 million on SCOsource and its related lawsuits but garnered only $11,000 by selling SCO intellectual property licenses, the company said.

"We acknowledge the licensing program did not take off the way it initially appeared it might," Chief Executive Darl McBride said, blaming the situation on the assertions by earlier Unix owner Novell that it still has the Unix copyrights. SCO sued Novell to settle the matter, but meanwhile, "We are offering some discounts reflecting the fact that there is uncertainty with all these claims being finalized," McBride said.

During the second quarter, which ended April 30, SCO generated $10.1 million in revenue, compared with $21.4 million in the year-ago period.

In March, the company had said it expected to generate second-quarter revenue of between $10 million and $14 million. The analyst following the company had been estimating that SCO would make $11.6 million in the quarter, according to Thomson First Call.

SCO's stock dropped 55 cents, or 10 percent, to close at $4.89 on Thursday.

Also in March, McBride said SCO had budgeted $2 million to $3 million per quarter for its legal actions. Thursday, he said the company expects those costs to be $3 million to $5 million, but said it's enough.

"We're going have enough cash to get to our destination," McBride said. "We've got firepower on the legal side, the cash necessary and very strong claims."

SCO posted a decline in all three of its revenue segments in the quarter--products, services and licensing. Last month, the company said it had cut a "small" number of jobs in an attempt to make its Unix products group profitable.

The net loss for the quarter was nearly $15 million, or $1.06 a share, compared with a net gain of $4.5 million, or 33 cents a share, in the year-ago period. Meanwhile, SCO's net loss from operations, excluding special charges, reached nearly $6.6 million, or 47 cents a share. Wall Street was expecting a smaller loss of 33 cents a share, according to First Call.

"Our revenue for the second quarter was consistent with our expectation, and we also incurred significant expenses for the impairment of goodwill and intangibles, and for the exchange of our...convertible preferred stock," McBride said in a statement.

The impairment came because SCO had to write off revenue that it had expected but didn't get from the 2003 acquisition of Vultsus, said Bert Young, SCO's new chief financial officer.

For the current quarter, which ends July 31, SCO said Thursday that it expects total revenue in the range of $10 million to $12 million.

Earlier this month, SCO reached an agreement with BayStar Capital, under which the company would pay $13 million in cash and 2.1 million in shares to retire all series A-1 convertible preferred stock held by BayStar. After the payment to BayStar, SCO said it would still have sufficient cash reserves to pursue its intellectual-property lawsuits.

As a result of the deal, SCO expects to end up with $37 million of the $50 million initially invested. The company had $61.3 million in cash and marketable securities.

SCO's declining Unix revenues underscore one of BayStar's concerns, that the Unix business is valuable when it comes to intellectual property but not when it comes to products.

SCO stands by its products business, though. It just released UnixWare 7.1.4 and by the end of the year will release a new version of its other Unix product, OpenServer, based on the UnixWare code. "Our upcoming releases will mark the largest across-the-board product enhancements from SCO in several years," McBride said.

McBride said SCO's goal includes positive cash flow from its Unix operations in the last two quarters of fiscal 2004. He didn't rule out further layoffs, if necessary.

SCO is embarked on an ambitious but expensive campaign to profit from Unix intellectual property that it argues it owns but has been illegally transferred into the Linux operating system. In the second quarter, its SCOsource licensing effort yielded only $11,000 in revenue at a cost of $4.5 million in expenses.

The company is engaged in several lawsuits, most prominently a case in which it argues that IBM violated its Unix contract with SCO by moving Unix technology to Linux. IBM denies the charge.

SCO's legal actions have riled Linux advocates, triggered new intellectual-property protections for Linux users and programmers, and don't seem to have stopped the fast growth of the open-source operating system.

"Some of their core customers are being scared off by the lawsuits," said Dion Cornett, an analyst at Decatur Jones Equity Partners. "SCO has sued some of its customers, and that is what's scaring people off."

As customers go from Unix to Linux, Cornett said, SCO's business is falling off at twice the pace of other software, like Novell's NetWare, a Unix derivative.

The company also announced on Thursday that it had notified the Berlin-Bremen, Stuttgart and Frankfurt Freiverkehr stock exchanges that its ticker symbol had been listed without the company's permission. SCO is asking the exchanges to remove the symbol.