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SCO warns of sharp shortcoming

The maker of Unix systems surprises Wall Street by warning that its net income and sales will be significantly below expectations.

Santa Cruz Operation, the maker of Unix systems, surprised Wall Street today by warning that its third-quarter net income and sales will be sharply below expectations.

Citing inventory reductions and "anomalous events in India," SCO said its losses for the quarter are expected to be between 49 cents and 59 cents per share. A consensus of analysts had expected SCO to earn 10 cents per share, according to First Call.

SCO issued its warning after close of market today. It said the company expected to post quarterly revenue of between $25 million and $29 million. In addition, SCO took a $13 million to $16 million reserve that it said equated to accounts receivable for existing inventories.

Without the revised figures, SCO said earnings would have been between 2 cents and 5 cents per share, and revenue would have been about $46.5 million.

The company said it is changing the way it distributes its software. Instead of shipping it in shrink wrap, SCO will distribute it electronically, a method that will result in significantly lower costs.

"What we're moving to is a completely different system," said April Burke, program director for investor relations at SCO. "We need to clear the remaining physical inventory from the channel."

She added that many of SCO's customers in India have had trouble getting financing due to problems in the region, costing the company $1.5 million in revenue this quarter alone.

Nonetheless, SCO remained bullish on its prospects.

"SCO believes electronic licensing and distribution of products will be a standard for the industry," SCO chief executive Doug Michels said in a statement. "I have come to realize the urgency of eliminating any channel-inventory obstacles to the adoption of electronic distribution and licensing, which will offer opportunities for our greatly improved profits."

SCO makes Unix operating systems for Intel-based machines. Until recently, the company specialized in writing software for desktop PCs and low-end servers. It increasingly has focused on higher-end products.

The company's products compete directly with Microsoft's Windows NT, the fastest-growing OS for corporate servers.

SCO's stock price has been in a slump, and it announced a management shake-up in April. Michels was named chief executive officer, succeeding Alok Mohan, who stayed on as chairman.

The company's stock closed today at 4.875, down 0.0625. It has traded as high as 7.25 and as low as 3.25 during the past 52 weeks.