Here is our transcript of SCO's March 3, 2004 teleconference with Darl McBride, Robert Bench and Mark Heise.
There are a number of hints about "third-party websites" allegedly presenting IBM's side. I believe they mean Groklaw, because yesterday SCO again tried to make a connection between IBM and Groklaw, telling Bob Mims of The Salt Lake Tribune that IBM had "leaked" a letter which allegedly was posted "anonymously" to Groklaw. Today, Mims has corrected that false information.
I can tell you truthfully that IBM has never leaked any information to Groklaw.
SCO may prefer secrecy, but I believe the public has a proper interest in this case, because the outcome will affect more than just the parties. For one thing, authors of the kernel code, which can be distributed only under the GPL, have a need and, I think, a right to know who takes a potentially conflicting SCO "IP" license. I fail to see how anyone can properly assert a "right" to "confidentiality" if the goal or the result is to hide violations of the license rights of others.
I suspect that SCO may be working up to asking the judge to make Groklaw stop covering the case or to restrict our coverage. That may be why they keep insisting, falsely, that Groklaw is sponsored by IBM.
Their overzealous supporter, who calls himself "ledite" on the Yahoo Finance board, wrote in his recent message threatening my person that it was "just a matter of time" before the judge shut Groklaw down. If he is a SCO insider, as some on the Yahoo board have conjectured based on his past record of predictions, then SCO may attempt this. Time will tell.
I have marked the transcript in blue, wherever there seemed to be particularly significant information. This is not an official transcript. While we try to be as accurate as we can be, for anything that matters to you, go by the video SCO makes available on its website. As always, if you note any errors, kindly let us know, so we can correct.
Thank you for joining us on our call here today. As we begin our 2004 fiscal
year, I'd like to start off by taking a look at how the SCO Group has evolved
since I became CEO a little over 18 months ago. Upon joining the company, one of my first decisions was to identify the
strengths and the core assets of the company. This quickly resulted in a renewed
focus on our UNIX intellectual property and a return to the recognized SCO UNIX
Since that time we've been successful in re-establishing SCO in the
marketplace as the owner of the UNIX operating system and as a leading provider
of UNIX-based technology and solutions.
During 2003 we worked to improve and to strengthen SCO's financial foundation.
As a result of our efforts, the company's cash position has increased from $6.6
million to $68.5 million during the past year. We've remained debt-free, and the
Company reported net income and generated positive cash from operations for the
first time in SCO's history last fiscal year.
Looking at 2004, we're committed to building on our stable foundation, taking
advantage of the strength of our intellectual property assets, loyal UNIX
customer installed base, and longtime partners and customers, delivering a
powerful business model for the future. As we implement our longer-term
strategic plan for 2004 and beyond, the management team at SCO continues to
place emphasis on meeting near-term quarterly objectives.
Accordingly, for the first quarter of fiscal year 2004 our revenue and
operating results came in as we had expected, and are in line with the
guidance we had previously provided.
During this call I will ask Bob, our CFO,
to review our first-quarter results in more detail. Following his comments, I
will highlight recent activities and review the progress we're making in
connection with achieving our longer-term objectives. Bob?
Thanks Darl. Our first-quarter revenue was $11.4 million, primarily attributed
to our UNIX products and services. Revenue from our SCOsource division relating
to compliance licenses was $20,000. Our SCOsource initiatives are continuing as
planned, and we expect SCOsource related revenue will gain traction this quarter
and continue to increase momentum in future quarters.
As we've indicated in
prior calls, the nature of the SCOsource revenue makes it difficult to predict
the timing and level of revenue in the near term or in any given quarter.
The breakdown by geography of our UNIX products and services revenue for the
first quarter was 59% from the Americas, 32% from EMEA, and 9% from Asia. It appears to us, based on our customer orders and economic
reports, that IT spending is beginning to increase in the Americas and
stabilizing in Europe and Asia.
As in previous quarters, we're continuing to classify legal and professional
fees and other costs and expenses that relate directly to the enforcement of our
intellectual property rights as a cost of revenue.
Even though cost and expenses
may exceed associated revenue in any given quarter, we anticipate these efforts
will result in license fees during our 2004 fiscal year, and that this
presentation will reflect the economic effectiveness of our IP revenue
For the first quarter of 2004 these costs were $3.4 million and were in line
with our expectations. We expect that these costs and expenses relating to the
enforcement of our intellectual property rights will remain at similar levels
for the next several quarters.
The gross margin for the products and services in our UNIX division was $9.2
million or 81%, consistent with the gross margin generated from these
product lines in prior quarters. We expect these percentage trends to continue
and be consistent in future quarters.
Operating costs and expenses for our UNIX division for the first quarter of
fiscal 2004 were $10.9 million and continued to trend down as expected and were
10 percent lower than the operating expenses of $12.1 million incurred in the
Our general and administrative expense costs of $2.2 million for this first
quarter of fiscal 2004 were higher than those costs of $1.7 million last quarter.
This is comparable to the prior period, and primarily related to the increase in
legal and professional fees as a result of increased compliance and corporate
governance this past quarter.
We expect to continue to gain efficiencies in our worldwide operations, and
therefore project our ongoing operating expenses for the UNIX division will
continue to decrease in future quarters.
As the company had previously announced, we're accounting for the conversion
feature included in our Series A convertible preferred stock financing as a
derivative financial instrument, which requires us to determine its fair value
at the end of each quarter. The decrease in the derivative valuation for the
first quarter of 2004 was $3.6 million and is included as other income.
On February 5, 2004 we exchanged our Series A preferred stock for Series A-1
preferred stock. As a result of the exchange, we eliminated the derivative
financial instrument. Subsequent to February 5th we will no longer report a
charge with a change in fair value of the derivative. Any difference between the
fair value of the new Series A-1 preferred stock and the carrying value of the
Series A preferred stock and related derivative will be recorded as a dividend
in our income statement for the second quarter ending April 30, 2004. This
dividend may be material and increase loss (ph) to net common shareholders for
our April 30th quarter. This dividend will not affect our cash balance or our
operating margins, and will decrease our current liabilities.
Looking forward to our second quarter, consolidated revenue is expected to be
in the range of $10 to $14 million. Revenue from our SCOsource initiatives is
expected to increase in the next several quarters. However, the nature and
predictability of SCOsource revenue is continuing to prove difficult. The
company's cash and working capital position, coupled with the fact that we have
no longterm debt, places the company in a very strong financial position to
pursue our strategic goals for fiscal 2004. With that, I will turn it back to you, Darl.
I'd like to spend the remainder of the call before we go to Q & A and focus on
several major initiatives that are designed to really drive revenue and build
shareholder value during 2004 and beyond.
Although many people's perception of SCO is dominated by our SCOsource-related
activities, I want to take a moment or two here to underscore the value and
importance of our UNIX operating business, its people, its products, and its
Not only does SCO own Unix System V, I'm proud to say we have the best
UNIX on Intel engineering talent in the industry. A number of our senior
engineers have well over 25 years' experience in the software industry, and in
many cases their careers go back to include time at AT&T Bell Labs. We are proud
of our vibrant, engaged ISV and retailer channels. These relationships represent
many years of working together to serve the needs of corporate customers who
want reliable software at affordable prices.
We're also proud of SCO's
technological support teams who year in and year out continue to garner best in
class accolades from industry organizations. And we're proud of our loyal
customer base, end users who span numerous industry verticals who have come to
rely on SCO software to run their businesses.
The foundation of our business is built upon UNIX-related intellectual
property, people, products, and services. During our first quarter, we continued
to see the value of these UNIX operating assets with UNIX product wins with
notable customers such as Kroger, McDonald's, Rent-a-Center, CitiFinancial,
Telecom Italia, and Japan Family Mart [inaudible] value
from these UNIX-based assets. We're committed to addressing the ongoing customer
demands for interoperability in heterogeneous environments and access to
Web-enabled application servers. We reiterate our commitment to the future
development of our UNIX OS products and are anticipating the release of SCO
Legend and our 64-bit product during 2004 or early 2005, as we have discussed on
prior calls. And we will continue to make the changes necessary to increase
operating efficiencies designed to create positive cash flow in this division
for the remainder of 2004.
Now, turning our attention to SCOsource, for over a year we've maintained that
SCO has strong and deep intellectual property rights in UNIX. We have been
engaged in an ongoing effort to educate and inform end users of the rights we
hold, which include broad contract rights as well as extensive rights under US
and international copyright laws.
Beginning today, with our actions over the
last few hours, we're now moving to enforce these contract rights and copyrights
through legal action against end users who have chosen to ignore SCO's position.
SCO will be enforcing its legal rights in the US and around the globe.
First, regarding SCO's contract rights, early today, in fact, as we speak
here, SCO is in the process of filing a lawsuit in Oakland County Circuit
Court in the state of Michigan against DaimlerChrysler Corporation.
DaimlerChrysler is one of several thousand companies that have a source code
and/or source reference license agreement with SCO. These agreements, such as
the one with DaimlerChrysler, describe the terms under which the licensee may
use UNIX System V, as well as the derivative works of UNIX System V, which
include certain other flavors of UNIX, as well as Linux.
Beginning in December of last year, SCO notified thousands of these licensees of
their obligations under these agreements. Some companies responded appropriately
and certified their compliance with the terms of the agreement. Some companies,
including DaimlerChrysler, have failed to respond appropriately. As we've
previously noted, SCO's Unix System V source code license agreements serve as
the legal foundation upon which much of the industry's enterprise UNIX operating
systems are licensed. These UNIX licensees include some of the largest companies
in the pharmaceutical, financial services, transportation, energy, automotive,
computer hardware and software industries. These UNIX licensees include
approximately one-third of the Fortune 100.
Second, regarding SCO's copyrights, yesterday afternoon SCO filed suit in
Federal District Court in Las Vegas, Nevada against AutoZone. I invite you to
read a copy of the complaint for full details, but in essence our complaint
alleges that AutoZone as a business enterprise running Linux is infringing SCO's
copyright. Our copyright claims relate to core operating system functionality of
essential root structure and sequence of UNIX System V that was used in the
design of Linux in the categories defined in our complaint.
Use of copyrighted
material without permission is prohibited under copyright law and can carry
significant monetary damages. I reference these actions as elements of SCO's enforcement initiatives and to
underscore SCO's commitment to vigorously protect and enforce our intellectual
property, our System V code, our contract rights, and our copyrights. With
representation of Boies, Schiller & Flexner and their associated firms, we have
now taken the significant next step in the process of enforcing our contract
rights and copyrights through legal action against end users.
We believe that there are important similarities between our recently legal
actions against end users and those actions that have taken place in the
recording industry. It wasn't until RIAA ultimately launched a series of
lawsuits against end user copyright violators that the community-at-large became
fully educated regarding the liabilities associated with using copyrighted
materials without providing remuneration to the copyright owner. We believe that
the legal actions we have taken and will continue to take will have a similar
impact on end users of UNIX and Linux. We anticipate that there are many
end users who have not considered the ramifications of the unlicensed use of SCO
copyrighted technology and that an increasing number of companies will now take
appropriate action to license SCO's intellectual property.
On Monday of this week, we announced a SCO Intellectual Property IP Licensing
Agreement with EV1servers.net, one of the largest dedicated hosting firms and
independent Internet service providers in the United States.
one of several companies so far that has made the business decision to eliminate
the SCO intellectual property violation risks for its own business and that of
its customers. As more companies work with SCO to understand our claims and
complete their risk-analysis assessments, we anticipate that others will choose
to take advantage of the SCO IP license, and that consequently SCO will begin to
see increasing revenue from this initiative over the next several quarters.
Finally, as a quick update to our existing case against IBM, we continue to
look forward to having our case heard in a Utah courtroom. That is currently
scheduled for April 11, 2005. We believe that a jury will come to the same
conclusion we have, namely that the rule of law provides protection to SCO's
intellectual property. We are currently continuing the discovery phase of that
case and look forward to this case going to a jury trial.
To summarize then, with another quarter behind us, SCO continues to make notable
progress on our effort to build significant longterm value for our
shareholders. As we move into 2004, we will continue to focus on harvesting and
building new value from our UNIX operating assets, continuing the enforcement of
SCO's intellectual property rights, and generating increased traction and
revenue from our SCO IP licensing initiatives. Our work last year produced a
firm and stable financial and legal foundation from which we can enforce our
rights and build our business. Our actions this year should indicate to our
shareholders that we are aggressively moving forward to enforce our rights to
generate value from the assets that we own.
So at this point we would like to switch gears and go to Q & A. Bob and I will be
available to take your questions. We've also invited Mark Heise, who is
partnered with Boies, Schiller & Flexner Law Firm, to be on the call and
entertain whatever questions you may have from a legal front. So with that,
why don't we turn it back over to the operator to build the Q & A list?
Operator: . . . Dion Cornett, Decatur Jones.
Good morning. I have to admit here just when I give up on you guys bringing in
some SCOsource revenue and filing end-user lawsuits, you guys prove me wrong. So
I guess congrats on the steps forward there.
Real quick on the AutoZone case. Looking at your Supplemental Response
Interrogatory Numbers one and two, you state there that you believe AutoZone
is using your shared libraries because of their speed in porting to Linux. Do you
have any other evidence that they're using those, particularly given that
AutoZone employees, including Jim Greer, that once served on your Advisory
Board, said that those were not used? Earlier in the comments you talked about
it being core to their use in the copyright. I assume this goes to their use of
Red Hat, and this is the general part that would apply to all end users as
opposed to the shared libraries which would only apply to your customers.
Let me start off by making a general statement as we get into these legal
questions and then I am going to turn some time over to Mark on these as well.
From a company standpoint, as a public company we have a very strong need to
get as much information as we can to our shareholders, and we've been trying to
do that over here the last year and be as open as we can down to as much detail
level as we could. Our counterparts that we're in battle against here have
convenient third-party websites that promote their cause, whereas we've
basically had the responsibility to tell our story ourselves.
In the Utah case, Magistrate Wells has asked both parties to show restraint in
what we say publicly, especially as it relates to the details of the case and
beyond some the questions we're getting to here, you are starting to get into
So the judicial process is most important to SCO. Obviously we're
going to get as much information as we can out publicly, but in deference to
Judge Wells and her request, we will be answering things in a general as opposed
to a specific nature.
I will give one response to your questions there, and then if Mark has anything
else to add. What I would say in the case that we filed today: this is a general
set of claims that we have [inaudible] . . .
Cornett: I'm losing you. Could you speak up a little bit?
McBride: . . . Did that not come through? [inaudible] Hello?
I didn't hear anything that you said, Darl.
Guys, I think we've got a problem with the phone in there. Can you get
something else? Take it off speaker or something. Apparently they're not even
hearing what we are saying.
Operator: Mr. McBride, you are coming through again.
Was it a problem on your end?
You faded out. I didn't hear your response.
I want to make sure [inaudible] faded back in before I start talking
again. Can you hear me now?
Let me restate that as a public company we have a very strong desire and need
to get information out to our shareholders. Our counterparts on the IBM front
have convenient third-party websites that promote their cause. We've been in a
position of having to basically go out with detailed information.
In the IBM case, Magistrate Wells has asked both parties to show restraint in
talking about this case in a public forum such as it relates to the details. The
judicial process is very important to SCO, and in deference to Judge Wells'
request from a going-forward standpoint, we will be speaking at a general level
as opposed to specifics.
What I would say about your question, Dion, the case we filed today was not
specific to the SCO shared libraries that you mentioned. This was a case that is
very general to anybody who would be using the Linux operating system.
Mark, do you have anything to add to that?
Heise: No. I would repeat what you said. First, we all are very much concerned and
don't want to do anything in opposition to the Magistrate Judge's request. And I
agree that, as a result, we really don't want to get into specifics.
But I think it is important to emphasize at this time that with the actions
that have been taken this week, including the case that we filed later today,
make it very clear while copyright is certainly an issue, SCO is a company that
has literally thousands of software agreements and licenses that have very clear
restrictions on them, and SCO is committed to [inaudible]
and will do everything in its power to do so. It has tried voluntarily to get
people to certify their compliance with these Unix System V licenses, and where
it meets resistance it is going to, unfortunately, have to resort to the legal
process and spend the time and money to do so. But SCO is committed to doing so.
And when a company has this many valuable contracts it certainly is not just
appropriate but is important for the company to vindicate its rights.
In recognition of deference to the judge, I certainly understand that, but
there's an assumption that you would have filed your best end-user lawsuit
first, and that AutoZone must be the best case you have and if filed in a
different venue certainly I would expect you to put out details to bolster that
case, particularly given the fact that there are tremendous amounts of details
coming out of the other side that make your case there appear weak. Furthermore,
it's sort of surprising that if you are going to file an end-user lawsuit you
would pick a past customer, which has all kinds of other agreements tied to
that that a general end-user that was not once a SCOsource -- a SCO user would
I don't really want to get into the detail of how a particular end user is
selected or not. But with respect to your comment that there are folks on the
other side or out on the Internet that are claiming X, Y, and Z, that's the kind
of detail that is best left to the courtroom. And that's exactly where the
company is going to present all of its detail.
Brian Skiba, Deutsche Bank.
First one, perhaps, maybe for clarification. You mentioned $3.4 million in costs in
the quarter for IP enforcement. Does that figure included contractual
enforcement, i.e. IBM and the preparation for the Daimler suit or is that simply
on the copyright and IP side?
That's all of the legal and cost and fees associated with the full SCOsource
initiative. We've chosen to leave those in one bucket so our readers of our
financials could follow the cost and expenses associated with the full SCOsource
initiative. And that would include all of our litigation, IBM, discovery, and
also these claims that are being filed now with the end users.
And perhaps for Mark here, and I know you don't want to comment extensively
on this, but it would be fair to say that it's been a long time since Judge
Wells has responded back from post-SCO providing materials to IBM to, in effect
mandate that IBM return the favor, if you will, and put the AIX source code up
and basically make it available for you guys? I think it's something that the
world anticipated being measured in days, and now it's already been weeks. I'm
just wondering whether it's possible to get any kind of read on why that
time frame has been so long? And just as a followup to that, if we can get any
color on why the end-user lawsuit against AutoZone basically was 3.5 months in
the making? And should we anticipate that each, there will be subsequent suits
faster, or whether . . .How we should take a read on that?
Heise: With respect to Magistrate Judge Wells, I cannot speculate as to what it is
that's causing her delay, although I can tell you when we did meet in the
hearing in Utah, she was very clear that she, like many federal judges, has a
very busy calendar. So beyond that, I don't have any other information.
With respect to future suits, I think there's not going to be this concern of
having to wait three months or six months between litigation.
Suits will be filed to the extent they are appropriate as done. But these are
not cases that the company takes lightly, and they want to fully investigate
before filing any claims.
Operator: Hiawatha Bray, Boston Globe.
Kind of an obvious question: this thing about DaimlerChrysler is all news to
me, and I'm not really clear what it means. It sounds similar to the IBM case,
if I have understood it correctly, some kind of a contract case. I'm wondering
what exactly is the connection, if any, with the dispute over Linux?
In the IBM case, clearly that is a contract case. There are some similarities
that way. But these are very different in terms of being end users of the UNIX
license as opposed to IBM, which is a vendor. So the two cases we filed today
are separate from the litigation that is going on in Salt Lake. The requirement that we have in our agreements with DaimlerChrysler and with
thousands of others that we have mailed out here over the last couple of months
is a performance requirement that they come back and certify to us that they're
in fact living up to the obligations that are found inside of the agreement
We've had many that have fulfilled that certification requirement. We
have many others who have not. So that has put us in this position where we have
an absolute demand requirement that we can put out on them. They have a
requirement to respond back to us, and when they don't respond, the only way to
follow up on that is with the litigation enforcement steps we took today. So as
you read through the suit, you'll be able to see what we're looking at there
that mainly is a breach of a UNIX software agreement by failing to voluntary
certify its compliance with our software agreements.
It has nothing to do, then, with any assertion that they are, for example,
misappropriating your intellectual property by using Linux or adding code to the
Linux operating system? Does Linux have anything to do with this one at all?
McBride: It does relate to it in that to the extent that they have taken . . .they have
had access to our source code, and then they have in fact imported that
knowledge or that code or in other ways broken their contract rights on the UNIX
source code license as they have developed or grown or contributed to Linux, then
that would absolutely create a violation. That is why we sent out the
certification demands. And to the extent that people have not broken those
agreements, then that's fine. To the extent they have not had a clean-room
implementation or a clean-room environment as they have been working on Linux,
then that absolutely creates the problem with the requirements they have under
their UNIX source code . . .
But are you saying that they actually have done this with Linux? Or are you
just saying we don't know, and we insist that you confirm one way or the other?
That's all this suit is about is: you need to confirm one way or another.
Bill Claybrook, The Harvard Research Group.
You may have answered this question that I have before about why Daimler and
AutoZone were the two companies you picked. If you've answered that, then I have
In the case of Daimler, they were one of a number of companies that didn't
respond to the request we sent out. If you remember, in December we sent out
requests to UNIX licensees, asking them to certify their compliance with the
software agreement. Back to one of the questions that came up earlier from Brian,
why is it taking a longer period of time . . . why did it take three months? We
went in December, we sent out letters to large users of Linux, and to UNIX
licensees. We gave them a time frame to respond. January 31st was the first
deadline that came . . . after that deadline came, we looked at the companies that had
violated the agreements just in terms of not responding, so that in itself
creates a contractual violation. And based on a variety of other factors I'm not
going to get into, that put Daimler at the head of the class.
With respect to AutoZone, a similar type of situation where we have been in
communication with them, we have had various talks with them over the last
several months. And then back to the situation again of sending out a letter to
them regarding the use of Linux, and that put them into the camp.
One thing to think about here is that these are not just two users that we
randomly picked. They're basically at the head of two different classes of end
users that we feel are violating our agreements or our copyrights. And that's
the two groups: one is source code licensees and then the other group is
Linux end users that we feel are violating our copyrights.
Claybrook: As you know, I've been following this for a long time. And recently, after
talking to SCO in another briefing, I went back and looked at the history of
development of UNIX. Just about everything [inaudible] BSD jumpstarted from
AT&T's efforts with Richie and Thompson. And BSD code went into their
version and some code from their version went into the BSD, back and forth. Why
is it that . . . I don't think you're saying that you own copyright to Linux, but
why aren't you?
We're not claiming rights on all of Linux. What we're claiming is rights to our
UNIX System V that we own. And if you look at . . . if you take a hard look at the
AutoZone suit, what you'll see in there are claims we have on structural
copyright components that tie to pieces inside of Linux that we feel are
violating those copyrights. It's not the entire code base of Linux. It is
structural components that we feel are significant, by the way, that map
over to Linux.
Mark, do you have anything else to add on that?
No. I think that, as we discussed earlier, in keeping with the court's request,
that there's not much else that can be said or should be said at this time.
Stephen Vaughan-Nichols, Eweek.com.
My question is a clarification of the situation of AutoZone. Am I correct in
assuming that the real problem with AutoZone is not so much that they're using
Linux, it's that they're in violation of their OpenServer license agreement
concerning shared libraries and that that is the core of your complaint with
AutoZone, that they're using these OpenServer shared licenses in
Linux, which is of course not according to the license for those libraries?
With respect to that issue, the fact that they've got the OpenServer shared
libraries is an issue, but that is not the core of the copyright claim that's
been asserted. As set forth in the complaint, it lays out the various structure
sequences and functionalities of UNIX System V that appear in Linux which is
being used by AutoZone.
So, it's both the issue that they are using Linux, which SCO maintains contains
copyrighted SCO System V, and the OpenServer shared libraries?
I think the two. The OpenServer shared libraries just adds an additional
layer, but at its core, it is a copyright claim for the use of the UNIX System V
as is shown in the complaint.
Maybe the simple way to think about it is that if you took a near replica of
this current complaint and filed it against someone we've never had an agreement
with, it would look just about the same.
One further clarification. And the difference between this and DaimlerChrysler
is that in DaimlerChrysler's case, the core of that case is that they had access
to UNIX source code? They have not complied with your request to assert that
they have not in any way, shape or form allowed any of that source code to go
Correct. That's one of the things we're asking for certification on.
Among other items.
Todd Weiss, Computer World.
Two quick questions. Again, I wonder, what if the companies don't want to line
up for these licenses and want to wait for the court to decide? What's SCO
going to do if they don't all line up like you're hoping they do?
Let's take that one on first. I believe our story right now is pretty simple.
We feel very strongly that we have these end-user problems relating to contracts
and to copyrights, and if people would prefer to work through the court system,
then we will file complaints and we'll work through the court system. That's what
we have announced here today. Earlier this week we had another end user that
chose to take the licensing path, and a substantial, material sites deal that we
signed on Monday where EV1servers.net is going to be going out to their
customers and having a safe environment to operate in. So depending on which way
customers want to go, we will accommodate their desires.
One other question, and that is . . .and I've asked you this before, Darl . . . but
now, as we get into these lawsuits, it really makes me wonder: What if, at the
end of all this, say this goes to trial, and the trial's completed and SCO
loses. Are you guys going to . . . you're going to have a bunch of companies,
whoever signed up for this, angry. Are you going to refund these fees, if in fact
it is found at the end of this trial, however long it takes, you're wrong?
I think as a simple answer on that one, we wrote some code out, we sent
some out last summer. Community members in the Linux program environment came
out and admitted that the code was in Linux in error, that our System V code was
in there in error. And we feel very comfortable at various levels that we have
infringement problems going on today. We're not saying take a license for Linux,
the whole thing. We're saying when you take the license for Linux, you can use
out IP, wherever it may be showing, in this case inside of Linux. And there's
already admitted violations going on inside of Linux. So we feel very
comfortable on that front that we're giving people coverage. In that environment,
people don't have to go start ripping code out. They have the mechanism to be
safe while they're running Linux.
Larry Greenmeier, Information Week Magazine.
Most of my questions have been asked already, but I wanted to get back to the
UNIX license question with DaimlerChrysler. Could you explain to me, just
quickly, what the certification means? What you were looking for them to prove
when you sent that letter out a few months ago?
Just in terms of, as laid out in the complaint, there are various obligations
of licensees like Daimler and many others have agreed . . . in exchange for their
access to the UNIX operating system, they've agreed to certain restrictions. For example, confidentiality, not disposing of it in whole or in part. And the
company in December sent out a letter very clearly specifying that they wanted
certification that the UNIX System V was being used in pursuant to the terms of
the agreement and wanted to make sure that it was being maintained in
confidence, was not being disposed of in whole or in part, that anybody that had
access to it was keeping it confidential, that employees were being told and
required to keep it confidential and issues like that. That is all very clearly
laid out in the suit that will be filed.
So them not returning that certification sent up a red flag to SCO, is that
what we are talking about here?
More than a red flag. It created a contract violation in and of itself. They
have a contract requirement to, in fact, certify, and so at a first pass it's a
pretty simple contract violation. Then as we go through discovery and we go
through the process of finding out what is going on over there, we will see if
there are further violations.
Herbert Jackson, Renaissance Ventures.
I have got one question with respect to discovery on Novell and then a follow.
Where are you? I'm not sure who is due to reply to the last set of a
In the Novell case?
In the Novell case, yes.
The Novell case was originally filed in the state court and was removed to
federal court, and, as a result, discovery does not take place until there's been
a scheduling conference, which usually does not take place until down the road.
So there's been no discovery back and forth in the Novell case at all.
The end-users suits that you're filing now, they seem to be non-dependent upon
the allegations that you made against Novell. Could you comment?
I think that's an accurate statement. These cases don't implicate the issues in
Novell. And SCO is the owner of UNIX System V, both the software sub-licensing
agreements, the copyrights and everything related thereto, and it also is the
holder of claims arising out of any breach of the agreements. That's where SCO
finds itself. And the Novell case really has little to do with that.
Thanks. That is great.
Phil Keys, Nikkei Electronics.
I just wanted to ask if there was any reason why you chose a couple of
companies resident here in the United States? And if there's also any plans to
look at companies residing outside the United States for possible lawsuits?
We started here in the US. That's where we have the cornerstone of our legal
team based right now. We do have other initiatives we're looking at in Europe,
as well as in Asia. But clearly for us the important starting point was here in
the United States.
Just as importantly, if you look at these thousands of UNIX license agreements
we have, it clearly is not a US-only situation. And just as obviously, Linux is
not a US-only situation. So we will be enforcing our legal rights not
just here in the US, but around the world. But the starting point is definitely
Ken Brown, Investors Business Daily.
In the customers that are the subjects you chose to file the first lawsuits
against, are you afraid of sending the message that you're going to go after
your own customers, your own licensees first? And when do you expect to file
some against Linux users who are not UNIX licensees?
I think if you look at the people we have filed suit against today, they're not
currently customers of SCO. We sat down with 25 of our largest customers here
several months ago at our national advisory board meeting, and we have very good
relationships with our current customer set. The current customers we have are
paying us licensing fees, and that is not where we have the problem. It's been
years since we have had a relationship with AutoZone and a similar situation
What we're looking at that with these UNIX license contracts, basically even
though we don't have revenue coming in from those right now, what we do have,
like in the case of Daimler, is a requirement that they keep those source code
licenses upheld in terms of the restrictions on confidentiality. And so that's
what we're doing in that case.
Matthew Mark, Jet Capital.
Can you walk through the timeline on the user litigation and how it is going
to be affected most likely by the timeline on the IBM suit, as well as the timeline on any of the other litigations the company has pending against it?
With respect to predicting the future, I'm not particularly adept. I can tell
you that the copyright claims are all going to be in federal court, and so just
depending upon the district in which they're filed, they will proceed
accordingly. There should be no impact one way or the other to the IBM case.
With respect to the Daimler case, that is filed in state court, so I don't know
if that created a different timeline or not. But there is a subtle difference
there between state and federal courts, I suppose.
It would be expected that the case outside Detroit will proceed a little bit
Peter Williams, VNU Business Publications.
Can you tell me whether there's any company in the UK that's likely to be
assessed for a lawsuit in the next couple of months?
We're not here to talk about future litigation or other [inaudible] but
I can absolutely tell you that we have enforcement activities going on in Europe
that would include the UK and other various countries over there, as well as
we do over in Japan. So they will be lagging a bit behind us from where we are
right now, but absolutely we would expect at some point in time we would end up
in that situation.
Can you comment on the fact that an Australian company is actually suing you at
We don't have any outstanding lawsuits against us in Australia right now.
Just a moment. A company called CyberKnights . . .
If it's happened in the last 12 hours, I wouldn't know -- I'm not familiar with
one over there . . .
Not actually familiar with it?
Heise: [inaudible] . . . I don't believe a lawsuit has been filed.
Terry Tillman, Schwab Soundview.
In terms of the SCOsource licensing, you said you had one customer that signed
up for that earlier in the week, and you put out an announcement. How does the
revenue recognition work for that?
As with some of the other licenses, that revenue will be recognized as the cash
comes in. Some of these are structured over time rather then up-front payments.
And since we don't have any trends right now established, we will recognize that
as the cash comes in.
This seems like it was a bigger contract. Are they paying monthly, or are they
paying once a year, or . . . ?
They are paying on a periodic basis, and right now that contract requires that
we not disclose the terms of that. But it will be over . . . as we announced, we
will recognize that income over the next several quarters.
It is material and sizable compared to deals that we have had up to this point.
Got it. Thanks.
Stephen Shankland, CNET.
I had two questions. First of all, Mark, you said, I believe, that the case
with Novell does not have any bearing on this. It seems to me that establishing
ownership of the copyright to UNIX System V would have a great deal of bearing
on this case.
SCO has consistently maintained its ownership of the copyrights. And Novell has
come out and said that they owned it, then realized that they didn't, retracted
from that, and then they went ahead and started on. But SCO has always
maintained the unequivocal position of ownership of the copyrights, and as a
result is the precise reason why it filed a slander of title action against
Novell for its actions in the marketplace claiming ownership to the copyrights
that SCO owns.
With Novell also having registered UNIX copyrights, isn't the first thing a
court is going to do is say, "OK, we have to wait and see who has actually
established rights to these, since this is under litigation"? Or do they just go
ahead and do it since you have established some copyrights?
As you noted, both of us have registered copyrights. How a court would react to
that will remain to be seen.
Another question on the business. Actually a legal question. Why Nevada for
Nevada is where AutoZone is incorporated, and so it's taking advantage of the
corporate benefits of being a resident of Nevada and has been sued where it is a
For Darl, more on the business side, I wonder if you fear the fact that you're
suing licensees? And granted it's a former customer, but if that sends a
message to potential future customers, do you think that people are going to be
excited at the opportunity of buying or licensing your technology given your
litigious nature right now?
Again, back to our current customer set, that is not where we have the problem.
In fact, many of our current customers have come in and said, "Go, fight, win.
We're glad that you're fighting for your rights and we hope that you win."
I'm talking future customers, not current customers.
Right, and so to the point, we didn't have a lot of future customers to talk
about in the world where we had a thing out there called a Linux operating
system that was replicating our UNIX, and whenever you put something out there
for a zero price versus what we were charging, the future was not very bright in
What I can say is that this quarter alone, we have signed new customers. We've
actually seen some rebound effect starting to come in to the core business on
the UNIX side. And our expectation as we go forward is that people are going to
I think a lot of this comes down, as Bob said earlier, from an education
standpoint people need to understand what's going on here and once they get
educated and they get a better understanding of what our rights are, then for
the most part 90 some odd percent of the marketplace actually agrees very
strongly with the copyright and contract protection. So we think that as we go
forward and we educate people on our rights that it's going to be favorable for
If you go to the music industry as an example, think about when Napster was in
its heyday. There were 40 million people downloading songs, and the initial
response when the word came out that this might be illegal was, "Oh, I didn't
know about it." Then there was a period where people kept downloading, but then
once things started to really tighten down on the legal front, then the RIAA
actually saw a decrease of over half the people who were doing music downloads
illegally quit doing them. So we think that for the most part we're going to see
some similar trends here.
Just wondering if you could give us an idea on what you're going be seeking in
terms of damages.
That's going to be stated at trial. Mark, I don't know. Do you want to just
. . .? We're not talking specifically on this, but Mark maybe you can give . . .?
A ballpark figure maybe.
Mark, maybe you can give a tutorial on how copyright damages work in the
willful or nonwillful categories.
At this juncture a dollar figure has not been presented and is not required to
be presented, so I would rather really not comment on what is we're seeking from
any individual user.
Could you clarify again your relationship with DaimlerChrysler? Are they a past
customer or a current customer?
DaimlerChrysler has a software agreement with SCO, actually its predecessor.
That's the agreement that's the operative agreement in the litigation.
Paula Rooney, CRN.
I'm trying to narrow down the case against AutoZone. So, the copyright claim
has nothing to do with the Linux kernel per se, correct?
No, this does have to do with the Linux kernel.
You said that the case is not specific to SCO shared libraries, that it's a
very general . . . to anyone using the operating system . . .
I'm saying anybody using Linux. I guess what I'm trying to say here is a lot of
people . . . I think we are trying to say. . . because there is the fact that AutoZone
has been a SCO UNIX user in the past, a OpenServer user until a couple of years
ago, that in the migration to Linux there could have been some problems with the
SCO shared libraries that would have been unique to a customer using SCO moving
to Linux. The case that was filed today was much broader than that, and
basically impacts anywhere the Linux kernel would be showing up in an end-user
But you said it has to do with structural components that is tied to pieces
And those would be kernel-related.
But the components are those developed by AutoZone the customer?
No. Again, I guess the simple way to think of it is if you took the case we
filed against AutoZone yesterday and did a search and replace on the name of an
end user who we never had a relationship with but is running Linux, that suit
would pretty much hold up. It's going to be a little bit different obviously,
but in general the claims that we're making there are pervasive throughout
the end-user Linux community.
But you are saying it's not the shared libraries, so what is the code in
It's all spelled out in the complaint, and it's pretty detailed to go through
right now. But there are a number of structural components as you read through
the complaint that you will see where those are.
Let me just interject for one moment. This is the precise type of information
that was specifically requested by the court to not go into. So it's really just
something that I want to caution Darl on that we just really don't want to be
getting into that kind of detail.
It's the heart of the case, I think it's fair to ask the question on what the
Again, it's in the filing.
Then you mentioned that there were specific programmers who acknowledge
violation. Who are these programmers?
Again, we're not getting into the witnesses in the case, the underlying
information of the case. It's not where we're going.
Rebecca Reid, ITWorld Canada.
I actually just have a couple of questions. How many SCO IP licenses have the
Company sold so far?
We haven't published the exact number right now, but it is still measured in
the handfuls. The significance of this week is the level and materiality of
those in this last case has definitely increased significantly.
When you say a handful, is that less than 10 or less than 50?
Less than 50.
I'm also interested in -- I know you sent out, you have about 3,000 UNIX
licenses. How many of those did respond to the December letter?
I don't have those exact numbers in front of me. I can tell you that we had a
number of responses that did come back to us. I can tell you there was a
substantial number that did not respond.
So, more than half?
I would say more than half did not respond.
Great. Thank you very much.
Ladies and gentlemen, due to time constraints, we will conclude today's question-and-answer session. At this time, for any closing or additional remarks, I will
turn the conference back to Mr. Darl McBride. Please go ahead, sir.
Thanks for joining us here on our call today. As we said earlier, 2003 fiscal
year was really about shoring up the balance sheet. Our cash position did get
significantly stronger. We built a war chest to be able to go out and defend our
intellectual property rights, which we think are substantial, and we're doing
that, as we did last year in the IBM case and as we're doing today, as we have
broadened the enforcement down to the end-user playing field.
As we go through this year, we're very focused on building this company from a
shareholder-value standpoint, not just around big [inaudible] revenue that show up and
then don't continue. We had actually some opportunities at the end of last year
to do some other major tens of millions of dollars-type of licensing deals that
would have given a substantial amount of absolution to the Linux marketplace,
but it would have had a very dampening effects on our company's longer-term
future. What we're focused on is not something that is going to be measured in
tens of millions, but something that has another zero or two behind that over
the coming years. So with today's announcement, even though the actual numbers
were down for the quarter, we're very encouraged about the progress we're making
on the legal front. We're encouraged about the foundation we have on the balance
sheet-side, and we're encouraged that we now have end users that are starting to
step up in a substantial way. So we believe that we're going to have a
good year this year rebuilding the operating statement like we had rebuilding
the balance sheet last year.
The final thing I would say is it is a tough position we're in [inaudible] a number of the questions today. Gosh, it's hard to go out and sue somebody.
Yes, we're not particularly thrilled with it ourselves, but we do believe that
this is an education process and that as we work through these issues with the
end-user environment, both on the UNIX and the Linux side, that we will come to
some positive resolutions as we move forward. And the same [inaudible] hope too on the
copyright front as well.
I appreciate you joining our call today, and we look forward to talking to you
Ladies and gentlemen, this will conclude today's teleconference. We do thank
you for your participation and you may disconnect at this time.