SCO Counts on Unix Sales, Cash Hoard to Fund Legal Battles.

By Timothy Prickett Morgan

SCO Group's latest numbers show its core OpenServer and UnixWare operating system businesses stabilizing, but the firm is under pressure to make its Unix business profitable so it doesn't burn through its cash as it takes on IBM Corp, Novell Inc, and Red Hat Inc in the courts over intellectual property rights related to Unix.

This is precisely why Darl McBride, SCO's president and CEO, hired a new chief financial officer in April. Bert Young, the new chief financial officer, used to be the top IT guy at Waste Management and was CFO for IT consultancy Whittman-Hart and software maker LANdesk Software. Young knows what it is like to be on both sides of the bargaining table. At SCO, his challenge is to come up with enough money to reinvest in OpenServer and UnixWare so these platforms get enough features to defend against the onslaught of Linux and Windows, while at the same time giving existing OpenServer and UnixWare customers a reason to stay put. Young has to do this while cutting costs in the Unix business, so it can throw off enough cash to help cover the $3m to $5m in quarterly costs that SCO is now spending on its lawsuits.

The SCOsource IP licensing effort, which has propped up SCO's numbers in a few past quarters, did not help at all this quarter, with only $11,000 in licensing. For the second quarter, which ended April 30, SCO booked $10.1m in total sales, less than half of the sales it booked in the same quarter in fiscal 2003. Unix licensing revenues were down 24.3%, to $8.4m, and services revenues for Unix products were down 14.3%, to $1.7m. The Unix business had operating costs of $9.9m. Legal fees were $4.4m in the quarter. Write-downs for past acquisitions that didn't pan out accounted for $2.1m, and restructuring costs in the Unix business accounted for $682,000 in charges. To these charges were added a non-cash dividend related to the fiscal engineering of venture capitalist BayStar Capital's investment from preferred shares to common shares. This pushed SCO deeply into the red, with a loss of $14.9m.

"We have gone through a dark period where there was not a lot of product development going on," explained McBride in a conference call with Wall Street analysts today. But the company is working to fix to that because Unix product sales on x86 iron are what SCO is supposed to be about. While there are plenty of people who are angry about the legal situation that SCO, IBM, Novell, and Red Hat are embroiled in, no one is saying that OpenServer and UnixWare are not rock-solid Unixes. SCO has to keep it that way.

To that end, SCO just two weeks ago began rolling out UnixWare 7.1.4, which includes the OpenServer Kernel Personality (OKP) to run OpenServer applications inside UnixWare, the Linux Kernel Personality (LKP) for running Linux applications inside UnixWare (remember, SCO invented the lxrun Linux environment for Unix on for x86 processors many years ago), and support for Windows applications through a third-party program called Merge, from Netraverse, which allows Windows programs to run on Linux platforms (and obviously now Unix with SCO's adoption of it). UnixWare 7.1.4 also includes better support for Intel's HT simultaneous multithreading, which improves application performance. The new release also includes a native Mozilla 1.2.1 browser and support for the Java Standard Edition 1.4.2 SDK and runtime environment, the javaxcomm V2.0 communications API, and the PostgreSQL 7.4.2 open source database. A whole slew of open source components (Samba, OpenSSH, OpenSSL, Apache, Sendmail, Squid, OpenLDAP, and others) have been added or upgraded. Clearly, SCO doesn't in theory or practice have a problem with open source software. It does believe that companies have stolen its intellectual property and put it into open source products, which IBM and Novell will argue in the courts is not the case.

Other product plans, says McBride, include the rollout of SCOofficeServer 4.1, the e-mail and collaboration software based on OpenServer that has been in beta for some time and that was expected to become generally available in April. It will come out next month, he says. In August, SCO plans to ship its Vintela Authentication software for integrating Unix and Windows networks. And sometime in the first quarter of 2005, SCO will roll out the "Legend" update to OpenServer, which, McBride says, will move SCO down the path of having a single code base for OpenServer and UnixWare. (Which probably means that Legend is UnixWare with a more sophisticated OpenServer runtime environment.)

As always, the talk in the call with analysts centered around the legal battles. After SCO has finished making payments to BayStar, Young said, SCO would have $48.3m in cash. With a burn rate of $3m to $5m a quarter on its legal bills, and with SCOsource sales having essentially dried up as Linux shops take a wait-and-see attitude now that Novell is refuting SCO's claims to Unix copyrights, SCO is going to have to generate cash out of its core Unix business, if it doesn't want to dip into its cash reserves. Both McBride and Young say SCO can sustain the lawsuits for several years, now that the Unix business has stabilized at around $10m a quarter. "It's now a war of patience," McBride explained, saying that the courts will have to work out the IP, copyright, and damages issues. "We have got the legal firepower, the cash, and the strong claims."

Both McBride and Young seem to think that any SCOsource IP licensing sales will be gravy. While Young says the pipeline has a bunch of deals, SCO is not counting on them coming in and warns investors that they may not. SCO is projecting that aggregate sales will be between $10m and $12m in the third fiscal quarter, ending July 31.