SCO's press release blowing their own horn is here. I see no Linux license sales except the usual suspects, Sun and Microsoft:
Fourth quarter revenue from UNIX products and services was $14.0 million. In addition, revenue generated from the Company's SCOsource licensing initiative was $10.3 million, which was derived from licensing agreements reached with Microsoft Corporation and Sun Microsystems, Inc. earlier in fiscal 2003.
They spin it by comparing it to last year's fourth quarter, and I'm guessing they had no place to go but up from last year:
The SCO Group, Inc. (Nasdaq: SCOX -News ), owner of the UNIX operating system and a leading provider of UNIX-based solutions, today reported revenue of $24.3 million for the fourth quarter of its fiscal year ended October 31, 2003, a 57% increase over revenue of $15.5 million for the comparable quarter a year ago. So, I see they are marking on a curve.
But take a look at this paragraph:
For the fourth quarter of 2003, the Company reported a net loss to common stockholders of $1.6 million, or $0.12 per diluted common share. Excluding the previously reported charge of approximately $9.0 million incurred in connection with its October 2003 private placement for compensation paid to law firms engaged to enforce its intellectual property rights, the Company would have reported net income for the fourth quarter of $7.4 million, or $0.44 per diluted common share. The Company reported a net loss to common stockholders of $2.7 million, or $0.26 per diluted common share, in the comparable quarter a year ago. A GAAP reconciliation of net income (loss) and earnings per share for the fourth quarter and fiscal 2003 excluding the above charge is included in the financial tables at the end of this release. Sun and Microsoft gave them a lot of money this year. And they paid their lawyers a lot of money. And they report a net loss to common stockholders. Am I missing something here? This is their best year ever?
Here's the transcript of SCO's 4th quarter earnings call, dated December 22, 2003, prepared by Groklaw members kelledin, elrond_2003, rcrook, rc, Cableguy,
Frank Jaffe, Screenwriter, be2weenthelines, peterwn, Jude.
Good day everyone and welcome to the SCO Group's fourth quarter 2003
conference call. At this time all participants are
in a listen-only mode. Later we will conduct a question and answer
session. At that time if you have a question you will need to press star-one
on your touch tone telephone. Any reproduction of this call, in whole
or in part, is not permitted without prior written authorization from
the SCO Group.
As a reminder, this call is being recorded today, Monday, December the
22nd, year 2003. Participating in today's call are Darl
McBride, President and CEO, and Robert Bench, Chief Financial Officer.
Before we begin today's call, I would like to inform you that our
discussion may contain forward-looking statements, including without
limitation statements relating to our future operation and financial
performance. Such forward-looking statements reflect management's
current expectations and beliefs, but they are not guarantees and are
subject to risks and uncertainties that cause our results to differ
materially from those contained in the forward-looking statements. These
risks and uncertainties include, but are not limited to, those set forth
in our earnings press release issued earlier today and in our filings
with the SEC.
Now ladies and gentlemen, I'll turn the call over to Darl
McBride, President and CEO of the SCO Group. Please go ahead sir.
OK, thank you and thank you all for joining us today. Fiscal 2003 was a
year of tremendous progress for SCO on many fronts. First, we achieved
record financial results in the fourth quarter. Our revenue of 24.3
million dollars represents an increase of 57% over the fourth quarter of last
year. These results are in line with our expectations.
Second, we achieved record financial results for our full fiscal year. We
posted net income of 5.3 million dollars or 34 cents per diluted common
share, reversing a net loss of 24.9 million or a $1.93 per diluted
common share in fiscal 2002.
This marks the first time that SCO has generated cash and been
profitable on a full-year basis.
Third, we ended up the year in a position of financial strength that
represents a substantial turnaround from this time last year. Our
positive financial results along with the $50 million equity financing
completed in October have given us the resources and flexibility we
need to pursue our strategies. At the close of the fiscal year we have
64.4 million of cash on the balance sheet.
Overall, I would characterize 2003 as a year in which we created a
strong platform for SCO. A platform upon which we expect to generate
long term growth in 2004 and beyond. We have taken important first
steps over the last twelve months, strengthening our management team,
our financial footing, our core Unix product offerings, and our
intellectual property positioning. We're excited about our future at
SCO, and in fact today we're announcing two important new
initiatives. But before we get into those announcements, I would like to
turn the call over to Bob to review last year's financial results.
Thanks, Darl. The fourth quarter ended October 31, 2003 was our third
consecutive quarter of strong revenue and cash contribution. Of the 24.3
million in fourth quarter revenue, 58% was related to our Unix product
and services business line and 42% was generated from our SCOsource
The fourth quarter revenue performance for our Unix product line was the
strongest quarterly performance this year. The breakdown of revenue for
the fourth quarter by geography was as follows: 58% in the Americas, 31%
in EMEA, and 11% in AsiaPac.
Our gross margin of 16.9 million, or 70%, was lower than prior quarters,
primarily as a result of increased legal fees incurred with the
connection with our SCOsource initiatives. Operating costs and expenses
for the fourth quarter of fiscal 2003, exclusive of the compensation
charge to law firms, were 12.1 million, which is trending as expected
and was consistent with our prior quarter. Operating expenses in the
fourth quarter of fiscal 2003 were 2.8 million lower than operating
expenses of 14.9 million in the fourth quarter of the prior year.
Our full year revenue for fiscal 2003 increased 23% to 79.3 million
from 64.2 million for 2002. And on a fiscal year basis, operating
expenses declined 20% from 70.1 million to 55.9 million.
Additionally, our gross margin percentage increased
from 71 percent to 75 percent compared to the prior
year. These operating improvements were expected, as
we delivered and met our fiscal 2003 operating
objectives. For fiscal year 2003 net income to common
shareholders was 5.3 million, or 34 cents per common,
diluted share. That's compared to a net loss to
common shareholders of 24.9 million or $1.93 per share
the prior year. Fiscal 2003 results include
revenue from our SCOsource initiative of 25.8 million,
and as Darl noted earlier, the company's 2003 net
income of 5.3 million represents the first profitable
year for the SCO Group.
As the company had previously announced, we raised net proceeds of 47.7
million in October. The accounting treatment for this transaction was
complex although not uncommon for financial transactions such as this.
The financing was required to be split into two pieces: temporary equity
and a derivative financial instrument. The temporary equity was assigned
29.7 million of the value of series A preferred stock.
The company engaged an outside firm to assist in the valuation of the
derivative, which was the reason for our delay in this earnings call.
As of October 31, 2003, the company recorded the fair value of the
derivative of 15.2 million as a current liability. And the change in
that fair value of the derivative from October 16 to October 31 of 2.8
million has been recorded in the company's fourth quarter and fiscal
year 2003 income statement as "other income". The accounting for the
derivative will require the company to mark to market its value at the
end of each quarter, and any difference in the carrying value will be
included in the income statement as other income or expense. As was
the case for the fourth quarter, this charge could be material.
Our positive financial results for fiscal 2003, and the 50 million
funding completed in October have increased our cash balance to 64.4
million and our working capital to 37.2 million.
The significant increase in cash, and working capital
coupled with the fact that we have no long term debt
puts the company in a very strong financial position
to pursue our strategic goals in fiscal 2004. We
believe our revenue outlook for 2004 will be enhanced
by the strength of our financial position.
Furthermore, management's attention can be directed
towards growth initiatives and revenue generating
activities. For fiscal 2004, the company has three
major business initiatives to drive increasing
revenue. Our Unix operating systems and services
business. Two, Our SCOsource vendor licensing program
that was successfully rolled out in fiscal 2003. And
three, our recently introduced SCOsource intellectual property licensing
Revenues for the two SCOsource initiatives is
expected to be minimal for this first quarter of 2004,
as the company finalizes license agreements with its
vendors, and begins the implementation of its
intellectual property licensing programs. Our future
revenue pipeline has strengthened this year, along
with our increased confidence in our intellectual
property claims. We therefore anticipate significant
revenue in subsequent quarters from both SCOsource
licensing initiatives. However, the nature and
predictability of these lines of revenue and the
variability of revenue recognition does not allow for
accurate near-term guidelines.
In its first quarter, ending January 31 2004, the
company expects total revenue to be in the range of 10
to 15 million, which is in line with first quarter
revenue of last year. The company's Unix line of
products and services are expected to represent the
majority of the consolidated revenue for this quarter.
Operating expenses relating to our core business
lines should remain consistent with recent quarters.
Expenses related to SCOSouce are expected to increase
in fiscal 2004 as the company expands and pursues its
With focused attention on our Unix product development,
our strong financial position and the increased size of our pipeline of
licensing opportunities, we look forward to strong results from both our
divisions in 2004.
With that, I'll turn it back to Darl.
OK. Thanks Bob.
As Bob mentioned in his financial review our results demonstrated SCO's
business in 2003 not only stabilized but thrived as we developed and
emphasized new areas of our business, created and strengthened relationships
with key partners, and worked to enforce and protect our intellectual
property. We've put together a strong foundation from which we will build
our business in the new year.
We have also introduced and built our SCOsource business unit to enforce our
intellectual property rights. As we move into the digital age, intellectual
property enforcement is a necessary and proper area of focus for companies
around the world. Profitability will be sustained only to the extant
intellectual property is identified, cataloged, and protected. We at SCO are
pleased to be a leader in this important new area.
Before we move on to today's SCOsource announcements, I'd like to make a few
comments on our core Unix operating business. In our OpenServer and
UnixWare product lines, we continue to see good uptake from existing
customers while attracting new customers in our key vertical markets, which
encompass large as well as small to medium businesses. Let me just rattle
off a few of the customer deals that we completed transactions with during
the previous quarter.
In North America the list would include organizations such as: the
Department of Justice, Lockheed Martin, US Air Force, Accent Oil, Goodyear,
AT&T, Avaya, CSK Auto, Pinkertons, 84 Lumber, Cracker Barrel restaurants.
McDonald's, GE aircraft engines, Daimler-Chrysler, and NASDAQ.
To move on to Europe, we are looking at organizations like Barcrest,
Marconi, Dolond and Atchison, Fleet Air Army, and Argos;
in Germany BMW;
out of Italy, ministry of Finance.
Moving on to AsiaPac area: out of Japan, we have companies like Toshiba,
Matsushita Electronics, and Image Partner.
Out of Taiwan: LCC, Taiwan educational training group.
In China: China Central Bank, Peoples Bank of China, Highway Administration,
and Shandong Province.
In India: India Overseas Bank, Bank of Pakistan, and Bank of India.
As you can see, we have a global business. We have large and medium sized
customers that work with us and we are very pleased with the continued
progress of our core business.
For the future of OpenServer and UnixWare, SCO is focused on developing
products and services that build on our historical strength in vertical
markets, which is a key part of our strategy. There are a lot of high tech
companies out there trying to align their offerings to vertical markets. SCO
is already there today with a partner base of more than 4300 application
providers selling in to markets such as retail, health care, and financial
services. At SCO Forum last August, our annual reseller and customer
conference, we announced that we had begun work on new versions of the
company's flagship UnixWare and OpenServer Unix operating systems. We also
added to the company's road map plans for a 64 bit Unix product. We expect
to deliver the upgrade to UnixWare and introduce the beta for OpenServer,
currently code named "Legend", during 2004.
So let's now move on to our SCOsource initiatives.
As most of you are probably aware by now, throughout the course of 2003, SCO
has been actively engaged in protecting and enforcing our valuable
intellectual property under our SCOsource business unit. We believe this is
a model that many companies will adopt in one form or another as
intellectual property protection becomes a key area of focus in our digital
age. This coming year SCOsource will continue to focus on winning the IBM
lawsuit, and we will expand our focus to enforce our Unix intellectual
property rights against other companies.
Let's talk for a moment about the IBM litigation then. Our lawsuit with IBM
is progressing to our satisfaction as we have been building our case through
the discovery process. The case is scheduled to come to trial on April 11,
2005. We are encouraged by the strength of our case there, as reflected by
the evidence that we have been able to discover thus far. And we are
absolutely prepared to see this case to its full conclusion.
Based on our claim that IBM's breached its software agreement with us, we
have terminated its ability to license any product based on Unix System V.
IBM's ongoing business related to AIX licensing is therefore operating
outside its license grant in Unix technology.
IBM does not have the right to
currently license Unix technology and customers do not have the right to
license Unix technology from IBM. This is a significant legal right that
we will enforce in the coming year.
In addition, we will enforce and
protect the company's intellectual property rights against unauthorized
use and distribution under the Digital Millennium Copyright Act.
We are beginning with enforcement of certain copyrighted Unix header
files that are found in Linux which have been used improperly in Linux
with copyright attributions removed. We've identified specific code that
must be removed from Linux prior to any further use or distribution.
Failure to remove this copyrighted code from any new distribution under
the GPL may subject the distributing company to liability under the
Digital Millennium Copyright Act, section 1202, for knowing distribution
of copyrighted material with copyright management information improperly
From today's press release I'd like to call particular attention to the
written notices we're sending to our Unix source code licensees.
And I'd really like to emphasize a couple of points here. First,
these source code agreements are the legal foundation upon which much
of the industry's enterprise Unix operating systems are licensed.
Second, the list of Unix source code licensees is substantial, both in
number and in scope. These source code licensees include 41 companies in
the Fortune 100. They include leaders in numerous industries, including
pharmaceutical, financial services, transportation, energy, automotive,
computer hardware, and computer software. And there are thousands of them.
Third, under the terms of these agreements, SCO is requiring each of
these licensees to certify in writing that they are utilizing the code
in compliance with the terms of the agreement.
This means that each
company must certify to SCO that each of the following three points.
First, the company is not running Linux binary code that was compiled
from any version of Linux including code that contains SCO's copyrighted
application binary interface code. Second, the company, its employees'
and contractors, have held, at all times, all parts of the Unix products
in confidence for SCO. And third, no employees or contractors who have
had access to Unix have contributed any software code based on that
product to Linux or any other Unix based product. SCO has requested
that such certification be provided by the end of January. Failure to
respond or failure to certify full compliance gives SCO the right to
terminate the agreement and require the licensee to discontinue use of
the Unix software. I might add here it's important to understand
also that we're not talking about the previous products group. When we
talk about SCO Unix, UnixWare, OpenServer that was sold in as a product.
These are the underlying source code agreements that emanated from AT&T
that have been passed on and are still valid today.
The Unix source code license
agreements were put in place years ago to allow companies themselves to
make source code changes to their versions of Unix. That activity alone
is fine if exercised within the terms and conditions of the agreement.
However, some of these same companies are using, modifying and
redistributing Linux. To the extent any Unix information, methods,
or concepts have been used by a company ... by such a company in making
its Linux modifications, our source code agreement has been violated.
We therefore will require that every SCO source code licensee verify its
compliance with its Unix software agreement with us as a condition of
continued use of its Unix technology. If verification is not complete
or if violations are found inside any company, we will terminate that
company's right to use Unix consistent with the terms of our source
code agreement. We will not allow any Unix licensee to use Unix
technology to build Linux. Unix source code licensees who are doing
this will lose the right to use any version of Unix. We expect that
this will also become an area of focus for our enforcement initiatives
in the near term.
So to put a summary on all of this, fiscal 2003 was
a pivotal and successful year for SCO. This was the first profitable
year in more than 7 years for this company. We have no long term
debt, we have more than 64.4 million in cash on our balance sheet,
and this strong financial basis will provide SCO with the resources
and flexibility to focus on its strategies for the new year.
key things going forward for us will be: delivering new Unix products
and services which address customer demands for greater flexibility and
interoperability; pursuing our claims against IBM; building awareness
with Linux users and providing them with a path for continued Linux use
which will build recurring revenue for SCO through a flexible licensing
program, and also building industry relationships which
support our Unix business and our SCOsource initiatives.
We're encouraged by the positive momentum we have in these areas as we
head into FY2004, and we are looking forward to an outstanding year.
With that, why don't we turn it over to the operator to build
the Q&A list.
Thank you, sir. If you would like to ask a question on today's call,
you may do so by pressing star-one on your touch tone telephone. Again,
to ask a question, you may do so by pressing star-one on your touch tone
telephone. If you are on a speaker phone, please make sure your mute
function is turned off to allow your signal to reach our equipment.
Once again, that is star-one to ask a question. We'll pause a moment to
assemble our roster.
We'll take our first question from Brian Skiba with Deutsche Bank.
Yeah. Yes, hi, good morning. And congratulations on that quarter.
A question around the notices you're sending out of the
letters to the Fortune 1000 Linux end-users .... Darl, can you
give us any kind of range about how many of those sort of letters have
been sent out, and whether this is, you know, more-or-less a first
set of letters and there's more to follow, and then what kind of legal
options, as it mentions in the press release, are available to them at
OK, so let's talk about the numbers first, then we'll go to the
options. On the numbers side, really the two
letters that we started last week, we've got a few days we're down
for Christmas this week, and then after the Christmas break we'll
jump back in, and by the first of the year, we expect we will have
several thousand letters in the hands of the Unix licensees who have a
requirement to certify back to us that they are not using Linux in
contradiction of our Unix license agreements. With respect to the
Linux end users, basically we're starting with a
list we have of fifteen hundred. We have a lot of intelligence there
now. We know a number of those organizations that are not using
Linux, but we also know of a number that are, so I would say
that list is going to be in the hundreds, but it probably won't get
to a thousand, but it will be substantial in terms of those
that receive the DMCA notice. Those who receive the Unix letters
will also receive a copy of the DMCA letter stating that use of
Linux in their environment, on top of the Unix violations that
they may face would be relevant to them as well from a
Let's talk then about the options organizations have.
You know, I think it's ... there's really three ... you know,
the first one is to cease and desist use of Linux. We
absolutely see our copyrighted code inside of there; we've said that
continually. This is a very clear-cut set of violations. We
have spelled those violations out in the letters. People have been
asking for discreet disclosure of where these files are.
We have over forty files that are disclosed here. And so, you
know, basically discontinued use of Linux would be the option
number one. Or removing those header files out of
Linux I suppose would be a subset of that option. The one
challenge of trying to remove the header files is that when you
get into the middle of this, you're going to see that the header files
touch virtually every application that's been written in Linux. So
removal of the files themselves would tend to create an incompatibility
of the application that's running inside of your organization on Linux.
So option one then, summarized, is essentially stop using. Option
two would be I want to keep using Linux, but I want to be straight
with the legal side of things, and we have provided the
mechanism for licensing there, and in our price by
there is 399 per CPU. We have extended for some
period of time the 699 price yet going on that,
and so that would be the option two. And then the final one would be
to continue using Linux, and then at that point, we would be pursuing
whatever ... all the legal options that we have at our ...
within our hands at that point in time. So I think those are the three
remedies that I see, the three options.
OK, and the 699 is a one-time fee, and they have the source code
rights to use Linux and everything at that point?
They basically would have a right to use a binary version
and continue to run Linux, is the way that program works.
OK. Very good, thank you.
We'll take our next question from Nicholas Donovan with J.P. Morgan.
Yes, Darl, how you doing this morning. Congratulations on your
My question to you is ... as it relates to the source-code licensing,
how will ... if you process on a per-CPU on a multiple-processor machine
... and what about distributed application
Well, I think the ... the per-CPU, the reason we license by CPU, it's
important to recognize that the world is moving to larger and
larger machine types and expanded environments here, and
our licensing program on the source code side has always
been listed as a CPU count. If you go back to the Unix
license agreements that were signed 20 years ago, from 20 years ago
going forward, what you'll see is these thousands of companies that are
out there today that have these agreements have an obligation to report
to us by CPU. And if the source code that is licensed to us is
exceeding the CPU count that they have licenses for, then they're out
of bounds. So, you know, I think it is an important
distinction to make that we're focused on CPU count here, not on the
the server count. When you get into these large, expanded server
farms, you know, this is a key point to understand
from a distributed application standpoint, that there is a focus on the
CPU side of things.
Does that address your question? Nicholas?
Yeah, it sure does, thank you.
Once again, that is star-one if you would like to ask a question. And if
you're on a speaker phone, please make sure your mute function is turned
off to allow your signal to reach our equipment. Once again, that is
star-one to ask a question. We'll take our next question from Herbert
Jackson with Renaissance.
Hey, good morning, good quarter. Congrats.
Couple of questions. One's been answered, but the Fortune
1000 Unix IP licensees that you referenced in some prior press
interviews, do those begin to book in subsequent quarters? Have
those been finalized?
Yeah, you're talking about the Unix side of things.
Yes, we see a very healthy pipeline right now, Herb, in a handful
of different areas. As we move forward here, we have
basically very strong contractual rights going down to the end use
customers that hold Unix source licenses that came down through
the AT&T side. As we go out and go through this process that
was just initiated last week, you know, we think that as we move
primarily into Q2 and beyond, that that is going to be a very
healthy pipeline. I mean, the point is, someone who's out there and
has Linux source licenses is either going to have to -- and they
have a lot of Linux inside their shop, and that's ... there's going to be
a lot of companies that fit that bill that are really going to be forced
into a situation of discontinuing use of Linux or paying a fee
here. And you know, it's going to be one or the other. There's no
doubt that Linux is popular out there. It's popular in large part
because it's free. But we do see a healthy pipeline coming from
that side. The second pipeline that we see that's healthy heading into
the new fiscal year is that on the vendor side, we see our
vendor pipeline healthy. You know, obviously we did some deals last
year. As we head into this new year, quite frankly one of the biggest
issues that is basically between us and some deals here has
been our coming out and putting on the table some things on the legal
side that relate not to IBM. You know, the ... a lot of folks have
become a little bit conditioned to saying "Well, let's wait until the
IBM thing turns out, and we'll go from there." Let's be 100% crystal
clear on what we announced this morning. The DMCA copyright violations
that were announced this morning are independent of the IBM legal case.
You know, the contract case has been moving since March with
IBM, and we like where that's going. The case that came out this
morning is the first time we've come out definitively saying, "Here is
our set of issues, here are our problems that we have, here are the
set of files."
And we're going to go out and pursue that. It's not the
only set of files. Think of this again as the tip of
the iceberg. We rolled out a small set of code in the
summer timeframe -- 80 lines or so -- the Linux community
came out and said, "We've removed that." Well, by
removing it, essentially there are a few million
servers out there today that don't have it removed on.
So on that basis alone, Linux is tainted. But what
we're talking about here is much more than 80 lines of
code. We're talking about 43 or so header file that
touch virtually all of the applications that have been
written in Linux. So as those come together now,
that's where a lot of the vendors, as well as the end
users quite honestly have been looking for before they move forward
on the licensing program.
Great, Thanks. If you'll take one more
question, totally unrelated, but any visibility for
your web services platform sell through in subsequent
Yeah, on the web services sell through, we had
it set in the summer time frame that we thought in
2004 we would see some traction there, and we're
starting 2004 right now. We are basically putting
together this program to go the 4300 applications in a
vertical environment and we have some interesting
partnerships that we're in the middle of right now
that we think we will really drive that in a positive way.
We're well positioned there. I don't see the uptake on
that hitting in Q1, but I see some positive momentum
that comes out of that in this fiscal year.
We'll take our question from Dion Cornett with Decatur Jones.
Good morning all and congrats on a strong
A couple quick questions about the guidance
coming forward and trying to model that out. Now
obviously it's a ... you know, it's complicated and unusual for a software
company to migrate to some things you're having
to with these end user agreements. But, you know I had a
number of two and a half million for January. Looks like if I'm
reading the guidance right, it's now zero, and I'm
trying to figure out how I get a handle on what the
April numbers should look like. Could
you ... the easiest way to do this is if you
look at the last initiative where you sent out the
1500 letters and you talked about this a little bit with
Brian's question. Can you break down, the best you can
to the nearest 100, nearest 10 percent of those 1500
letters, what percentage of folks responded to you,
and of those people that responded, how many did you
meet with, and in the general ballpark, how many said,
"Yes" and it was just a matter of some administrative
stuff to get the licensing fees in, how many "No"?
Yes, all good questions Dion. When we rolled
this thing out initially last summer, there was a lot
of stuff flying around out there. We were going to
send out invoices, we were going to do this, we were
going to do that, it sounded like a direct mail
campaign. That wasn't obviously what we were trying
to do. What we did do during the last quarter was
spend a lot of one-on-one time meeting with large
end-users of Linux. Probably had twelve to fifteen or
so direct, one-on-one meetings.
And we learned a lot through that process. I
would really look Q4 as more of a modeling, as almost
like a testing time that we went through here, to tell
everybody where we were and we listened to where
everybody else was, and essentially what comes out of
that then is ... you know, we had several people sign up for the
license, and these are people we don't have other
deals going with in the technology industry. These are
Fortune 500/Fortune 1000 level accounts that signed
up. We have another group of those people we met with
that have basically said "Fine, I'm not going to use
Linux." You know, CIO's were in meetings, and they
said, "Fine, we're not going to do it." And then we
have another group that essentially has said that
"We're looking for something. We're either going to
wait until the IBM litigation is done, or we're
looking for something on your copyright claims, and if
you show us something there, then we'll step up and
So, if you take those, and you say, you know, the
greatest group of those -- you know, again there were some of them
that said that they're not going to use any -- but the
greatest group either licensed or said they would upon
seeing something that legally they felt like they
should moving on now as opposed to waiting for the IBM
case. The other thing to recognize is in Q4 we
only had two people involved in this. One coming from
more of a legal side, and one more from a market place
presence perspective/accounts perspective. We
intentionally kept this thing very tight, very controlled
because we wanted to not let this thing get out ahead
We feel now from where we sit that we are in a mode to move this out.
We announced this today, and we are now and we are going to be moving
very aggressively. Whereas, last quarter we had two people working
on this, starting next week when we come back from the holidays we're
going to be moving essentially dozens of resources on to this project.
And as we move forward with those resources internally backed by the Boies
team externally, we think that -- again, we might see some uptake here
in Q1 as it relates to this, but as we get into Q2 and beyond, you know,
it's hard to give guidance exactly, Dion.
What I can tell you is that
the people we're meeting with have thousands and thousands of units of
Linux inside the shop. You take, some of these that have anywhere from
five to ten thousand units going. You can model out, you know, the 699,
the 1399 price point. That [unclear] I'd stick on the lower end of that
right now, because we still have that as an option. As we move into the
legal side of this it's important for people to understand that under
copyright law, people who are violating copyright law can face statutory
damages as high as 30,000 dollars for not willful infringement on a per
instance basis, so per server per CPU basis, and as high as 150,000 per
instance for willful violations. So people are going to be staring at
these letters that say, you know, we're going to be considering you a
willful violator if you continue to copy our IP going forward. So you
know, I think that the options are really clear. You go down a legal path
and it's going to be, you know, where it is with the legal remedies. The
licensing path is another. The third would be to just not use it at all.
But I think the realistic path probably is going to be the licensing
path for many companies.
OK, and then so ... just, you know, one of the other points you made ... you have
signed up several, and I can understand why these customers would want
anonymity, but how ... for the three, four you have signed up, in rough
ballpark what are the dollars associated with those deals.
Yeah, we haven't signed up any yet that are in the thousands of users
so you know we've ... I haven't seen the exact number on that, but I
would say that we've not signed any of the large users yet. I can say
that we have large users that are north of five thousand boxes in their
enterprise that are on the bubble waiting to see where they go on this.
OK, and then just one final thing on this morning's initiative.
If the Linux community were to come back and say, that's fine, we've got
to take the header files out which are, you know, largely definition files.
guys take Samba and some of our stuff out of your software, what would be
your response. Would you remove those open source components or do you
believe there is a valid licence out there that allows you to ship them.
Well, again, we're not taking a shot at the whole open source community.
We're saying we see that there is a flaw in the process out there where our
stuff is seeping in there. So you know we're not ... you know, this is not
a case of SCO versus Open Source. This is a case very clearly where
our IP has been misappropriated. The fact that, you know, we're seeing these
violations there is what has given us the basis to step up and
make those claims.
All right, thanks very much.
We'll take our next question from Gary Dean with Jetstream Capital.
Hi, good morning. A couple questions. I'm newer to the story. What was
the revenue from last year's fourth quarter from the Unix product segment?
Bob, do you have that on the tip of your tongue? I don't have the exact
on the units from a year ago.
Yeah, that was about 15 million, Gary, just a little over about 15.5
million. Almost all of last year, since we did not have the SCOsource
initiative at that time, all of the revenues we reported were really from
the Unix related business line.
OK, and .... thank you. My second question was related to Darl's
comment earlier about the action ...
the notices being sent out to Linux customers being an independent
action. Assuming ... if the customers who receive the notices ... I think Darl
let out two choices. They could either stop using Linux, or they can
remove the code. If they decide to wait and say, "Wait,
we want to wait to see what the outcome of the IBM action is, we can
see if the base argument being made here is valid", and you decide to
pursue them, would you pursue customers individually, collectively,
what is the strategy for pursuit if they decide to do nothing and not
move on your letter?
Yeah, that's going to be a decision for David Boies. In terms of
the ultimate strategy, on our call a month ago he did say within 90 days,
you know, that
you should expect to see an end user facing a lawsuit showing up during
that period of time that would basically give us the basis to go in and
establish the claims that we have here on the copyright side.
announcing here today with these violation notices will eventually tie in
to that litigation. So now, do you go after one, do you go after a set?
You know, those are going to be calls for David.
With respect to some of
the concerns that have come up from various folks saying it's crazy to be
going after end users, I know that some folks in the industry have been on
record coming out of the Free Software environment saying, "You know, this
is as crazy as going out and finding someone who bought a book at Barnes
and Noble and chasing them down at home and while they're in their living
room, suing them for reading the book." But I would point out two major
differences with the free software example that they're floating around
out there. The first one is that when you look at the GPL, you realize
that you don't actually buy this. So in other words this would be like
going into Barnes and Noble and not buying a book, but Barnes and Noble
bookseller gives you a book for free. And then they point you to the GPL
language that says "by the way Since this is free, there's no warranty,
and essentially this is as is. If somebody comes after you, you're on
you're own." So that's one significant difference.
The second difference
that I'd say is even bigger is, the bookreader that went home and sitting
by his fireplace reading the book, when he got through with it, he didn't
intend to get up and make 500 copies and give it to his closest friends
and neighbors. That's what's happening with Linux. There's huge amounts
of copying. So this would be like getting the book, you read the book,
and then you make 500 copies and you send it around the neighborhood.
That is the whole point here. Copyrights are to protect people from
making copies. At the end user level is where the substantial amount of
copying is going on. And that is thus the target area for the litigation
that will be coming up with respect to Linux-related lawsuits.
OK. Thank you.
Yes. I'll just mention on that, the GPL forces that issue. It pushes
everything down to the level. When I met with IBM earlier this year,
they said you can't sue us, we don't do distributions. If you look at
Linux distributors, everybody can point to some out clause where they
don't have liability. And technically, whether they have contributory
infringement, that's for lawyers to decide. But clearly what's happening
here is they are pushing the liability down to the users. OK, go ahead.
We'll take our next question from Andy Schopick with
Hi. A couple of questions, I hope you can clarify.
In connection with the IBM litigation, can you give us any sense of
what the general expected litigation costs will be in this upcoming fiscal
year, and what they actually were in the fiscal year you've just reported?
Um, yeah. Bob, do you want to take that?
Yeah, Andy. This past year we spent about nine million dollars
in total costs. That's including the cost for internal expenses. And
probably spent about seven million dollars on legal fees, uh, last
year. So about two and a half to three million per quarter. We are
expecting that will increase. Our activity has increased dramatically,
and we would expect an additional million to two million dollars per
quarter as we move forward in this year compared to last year's costs.
Of just the legal costs?
Legal, expert advice, all the relevant costs associated with pursuing
these claims, Gary.
OK, so it's an extra one to two million per quarter above the rate
of spending that we have seen this past year.
Right. That's right.
And what you should factor in there also is that we are stepping up
our enforcement activities, and there's a level of almost variability
here, that when you talk about going after this end user campaign, very
clearly we fully expect to see some pretty big returns coming back to
us either through the licensing or through the litigation program.
And so it's not just a dial up against the IBM related expenses. It's
also against things we expect are going to generate revenues during this
On the revenue side, secondarily, in connection with having terminated
IBM's rights to Unix 5.0 ...
... what were the, you know, license revenues associated with that in
the most resent fiscal year? I assume those will go to zero now.
Yes, it's a little bit quirky. The thing that ... if you go back and have
a look at the IBM agreement, IBM had bought out the royalty suit, so they
actually didn't have an obligation to pay ongoing royalties, and I think
that is a little bit of the confusion of how we got to where we were.
You know, on their side, they sort of probably felt like, "Hey we've
already bought this thing out". What we own though is the underlying
intellectual property rights that essentially said, you know, you can
go ahead and sell your product, but what you can't do is disclose this
source code in an unconfidential manner. And certainly you can't give
the source code away, in violation of our contract rights.
So what it is ... what we have been in the middle of here is a ... you
think of it as a dumping case. What happens when you have a dumping case,
you basically take the value of the market and you take it down.
Well, Linux is the ultimate dumping case. The price is zero. You can't
destroy a market any more than that. And so our claims are against
the destruction of our marketplace as the owners of the Unix operating
system. And they taking that and destroying the value, and trying to
take the value down to zero. You know, we are losing a lot of ability
to monetize our assets along the way.
So there is no real additional revenue impact from having outright
terminated IBM's rights.
That's correct. Again, even when you go to the ... when we talk about
thousands of Unix licensees, you know, the people we are out meeting
with on this, are not really our customers per say, on the OpenServer
and Unixware side. Those guys are already buying products from us, most
of those are not using Linux, so they're independent ... they're really
separate from this.
We are talking about a lot of folks out there, who have the requirement
to keep Unix safeguarded and protected. And they may fall under an HP
camp, they may fall under an IBM camp, or, you know, one of the other
big vendors out there.
OK, thank you very much.
Let's take our next question from Peter Richards with Empire Capital.
Thank you, my question's been answered already.
We'll go to Robert Phillips with RLP Capital.
Hello. I think I may have missed it earlier. Is there a web
site I could go to with a list of the 65 files in question, so I can
kind of get an idea of how good this is going to work out?
We already have that out there. There is going to be a posting ... I
think there was a lot of requests coming in from the press earlier today,
so we will probably put that up on the web site here today.
So either go to ...
Could you get Blake, and just ask what time and where that's going to be ...
We will have it up on the web site and you should be able to take a
look at that. Either go to sco.com/scosource and they should have out
On later today?
OK, he's just given me the high sign. He said it'll be out there in
about two hours.
About two hours. OK. Thank you very much.
This concludes the portion of our question and answer session. At this
time I would like to turn the call back over to Mr. Darl McBride.
OK. I would like to ask one more question that is on the mind of some
people out there. I know because they have called in separately, and it
didn't come up here now, so I take that one head on.
That is the question about Novell and a recent action that they have
taken. We found out over the last couple of weeks that
Novell snuck into the copyright office and tried to file some copyrights
that would be basically on top of the claims ... the copyright
registrations that we have made.
You know, the acts that Novell is going through here seem to be
desperate. I know they are tied in very closely with IBM, and I know
IBM and those guys are working very closely to try and win this battle
As we found out two quarters ago on the day of our earnings release,
when Novell came out and said, "We own the copyrights", and then we had
produced amendment 2, that basically said, "Well no actually those
copyrights have now been transferred over to us". We find it very
interesting behavior on their part, that they are still trying to play
some games here.
Let me be real clear with anybody who has any questions about some of
the legal rights, that SCO acquired in its transaction with Novell. In
the contract that we received from them, on the included assets it says
"We have all rights and ownership of Unix and UnixWare". That was later
amended with Amendment 2 to include all copyrights for Unix and
Turn the page, we have the right to all claims that arise after the
closing date. So if there is any claim with respect to copyright
violation, it says in our contract that those claims are all owned by
So that's another key point there to understand.
If you go look at the press release that was issued the day that SCO and
Novell did their deal, very clearly said that the intellectual property
rights to Unix were transferring over to SCO.
I found that ... I've heard that Novell had actually pulled that press
release off from their web site. I guess that they don't like that
floating around out there.
I think in Novell's case, very clearly they're getting money funded to
them from IBM right now. We get a lot of communications that come from
Novell where they cc IBM, and these guys are obviously working closely
If you turn the clock back exactly a year ago when I first brought the
issues up around our intellectual property rights being violated with
IBM, they came back and said, "Well, you know, we've looked at the asset
purchase agreement, and you didn't appear to get any of the intellectual
property rights." So that's been the defense they used all the way
up to May 28, when we produced amendment 2.
When that happened, it was a bad day on that side. We see them taking
desperate steps at this point to try and grasp for something that
doesn't appear to be there.
So, they're trying to force some kind of issue here. We'll be
glad to take the necessary legal steps to remedy that. We see this as a
fraudulent filing of copyright notices on their side, and we'll take
the appropriate measures as necessary with our legal team.
In summary, I see the Novell case as being one of tall hat and no
With that, we'd like to thank you all for joining call here today,
and have a good holiday season. We'll look forward to talking to you in
the new year.
And this does conclude todays conference call, at this time you may