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JUNE 11, 2004
By Jim Kerstetter Little Cheer for SCO Shareholders Considering the legal swamp the software maker is stuck in, its dismal quarterly earnings report is hardly uplifting SCO Group, the tiny Utah software company that has sued IBM for billions over Linux computer code, continues to struggle. In the quarter ended Apr. 30, revenues were $10.1 million –- less than half of sales from the same quarter a year ago, SCO (SCOX ) announced June 10. While it managed to turn a $4.5 million profit a year ago, the net loss this time around was $15 million. SCO shares closed down more than 10%, to $4.89 cents, on the news –- well off the 52-week high of $22.29. What's the problem? SCO execs say a controversial intellectual-property licensing program that had pumped up revenues a year ago has stalled. As anyone with even a vague interest in open-source software knows, SCO claims to own the key programming underpinnings of Unix software and, in turn, claims the Linux operating system illegally contains some of that code. Unix is used to run the biggest corporate computer networks and is at the heart of some of the most processing-intensive systems in the world. In 2003, SCO sued IBM (IBM ), charging that Big Blue illegally provided SCO's technology to Linux developers. It has since sued two major Linux customers, AutoZone (AZO ) and DaimlerChrysler (DCX ), claiming they should be paying SCO for use of its technology. IBM and the customers dispute those claims and are challenging the suits in court. "WAR OF PATIENCE." But SCO doesn't plan to stop there. CEO Darl McBride wants to turn SCO's claims into a long-term business to sells licenses for the use of its intellectual property. A year ago, it looked like a good idea, with quarterly license sales topping $8 million. Since then, the program has drifted. In the recent quarter, the licensing total dropped to just $11,000. Most of the Lindon (Utah) company's revenues came from sales in its traditional business, selling Unix software that runs on Intel (INTC ). McBride blames the fall-off on fellow Utah-based software-maker Novell (NOVL ). SCO says it bought the old Unix technology from Novell in 1995, but Novell execs dispute what exactly was sold. SCO has sued Novell, claiming it's misleading SCO's customers and causing irreparable harm to its business. "The reality now is, I believe it's a war of patience," McBride said in the earnings conference call on June 10. FUNDED FIGHT. While Novell's competing claims have certainly muddied the waters, SCO's struggles don't end there. Customers are likely holding back on paying for a license until they see the results of the four lawsuits. If SCO can't even win the fight with Novell over what it owns, it'll be hard-pressed to win the other three. To customers, the maze of lawsuits leads to an obvious question: Why pay for a license they might not really need? The good news for SCO shareholders is that the big loss of the Apr. 30 quarter isn't likely to be repeated. Execs say revenues in the current quarter are expected to be between $10 million and $12 million. Though they didn't give earnings guidance, costs do appear to be coming down. And SCO will still have $48.3 million in cash and securities after it pays investor BayStar Capital to retire its convertible preferred stock, a move SCO announced in early June. That's more than enough to fund the varied lawsuits and keep it afloat. For investors, SCO remains what it always has been: A high-risk stock with a future that relies heavily on success in the courtroom. If SCO wins its long-shot case against IBM, Novell, and the Linux customers, it could reap billions. If it doesn't, it'll be a tiny company holding on to a shrinking installed base. And until the legal drama is finished, investors have little reason to believe SCO's stock price will suddenly regain its lost ground.  Kerstetter is a correspondent in BusinessWeek's Silicon Valley bureau Edited by Beth Belton
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