SCO's Unix Sales Continue to Slide, But Red Ink Is Shallower

Published: March 7, 2007

by Timothy Prickett Morgan

Commercial Unix operating system vendor The SCO Group has announced its financial results for its fiscal 2007 first quarter ended January 31. While the company continues to see its Unix software sales drop--and drop much faster than the decline of the Unix server market at large--SCO's legal fees relating to its lawsuit with IBM have fallen dramatically, which means that the company's losses are smaller than they were a year ago.

For the quarter, SCO posted sales of just under $4.9 million in product revenues, which is almost exclusively related to its OpenServer and UnixWare Unix software for X86 and X64 platforms. Product revenues dropped by 19 percent in the quarter. Licensing of Unix intellectual property continued to be a tiny amount of money, only $23,000, compared to $30,000 a year ago. The SCOsource licensing effort, launched soon after the lawsuit against IBM in 2003, initially brought in lots of money, but as soon as it became clear that this case would drag on forever and that the legal standing of SCO was not necessarily good, licensing of Unix intellectual property, which aims to protect end users and other software vendors from similar lawsuits, dried up. SCO's services sales, which are for maintenance and implementation of OpenServer and UnixWare, followed product sales southward, dropping 14 percent in the quarter to $1.1 million. Total revenues were down 18 percent to just over $6 million.

As in past quarters, SCO attributed the sales decline to "competitive pressures" on its Unix products and services. Those pressures kept SCO in the red, with a net loss of just over $1 million. This is better than the $4.6 million loss SCO posted in the year-ago first fiscal quarter, to be sure. But the company's cost structure means it has to sell around $6 million in products, even with the reduced legal expenses, just to break even. Legal fees in the quarter were $654,000, compared to over $4 million in the year ago quarter. SCO warns that it cannot predict legal costs going forward, given the uncertain nature of a trial, but did say that it expects legal costs in fiscal 2007 to be lower than in 2006. And they had better be, if the company wants to stay in business.

SCO has a market capitalization of $21.7 million as we go to press, down from the $110 million peak it set over the past 52 weeks back in mid-April 2006. SCO's stock is trading at just over $1 a share these days, and in the wake of the $1 billion lawsuit against IBM over Unix intellectual property, which was launched in March 2003, the company's share price steadily rose to around $20 a share, giving it a value of around $435 million as far as Wall Street was concerned.

If market cap is an indication of the odds that SCO will prevail in its lawsuit with IBM and get all or even some of the money it has spent on legal fees back, and perhaps even some damages, then it is safe to say Wall Street used to think this was possible, but now it doesn't look likely. There are other factors in the SCO share price, of course--most importantly that despite a substantial refresh of its OpenServer product line in June 2005 and a very large installed base, SCO cannot grow revenues in the face of the onslaught of Linux. In the past five years, SCO's sales have been cut in half, and it has lost a cumulative $76.5 million, including fiscal years 2002 through 2006 and the first quarter of fiscal 2007. That is roughly as much money as SCO raked in during its only profitable year--fiscal 2003--in the past five years. And that year was only good because of money from Microsoft and a number of other companies that shelled $25.8 million for SCOsource licenses. The point is, that is a lot of money to lose, even if SCO is now in hot pursuit of $3 billion from IBM in the Unix intellectual property lawsuit.

The SCO-IBM lawsuit may yet go to trial. It was supposed to have started on February 26, after being pushed out from a November 1, 2006, date back in July 2005. But the case is on hold pending the resolution of a related lawsuit with Novell, from which SCO bought the rights of Unix (which is, in fact, the matter under dispute) back in 1995.

SCO exited the quarter with $7.1 million in cash and equivalents, up 33 percent from the last quarter of fiscal 2006 ended October 31. It's restricted cash, which I set aside for payments to Novell and to cover future legal fees, stood at $4.5 million. SCO had only $500,000 in marketable securities at the end of January, down from $2.2 million at the end of fiscal 2006. That increase in cash seems to have come largely from the sale of stock investments.

In addition to announcing its financial results for the first quarter, SCO also said that one of its board members, Ed Iacobucci, who is president and chief executive officer of DayJet, which runs a fleet of small jets that do on-demand daily flights for customers in various regions around the company, will not seek re-election to the SCO board of directors. The board elections are scheduled for April 26, when SCO is hosting its annual stockholder's meeting. Iacobucci explained that running DayJet as well as other commitments have shortened his available time to participate on the SCO board; he served on SCO's compensation committee and litigation oversight committee.

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