Well. I guess you heard. In today's teleconference, SCO reported that they posted a decline in all three of its revenue segments in the quarter--products, services and licensing. SCO isn't making money bullying Linux. The company posted a net loss of $15 million in its second quarter versus net income of $4,5 million a year ago. Revenue fell to $10.1 million from $21.4 million. That is a 52% drop, Biz Yahoo is saying. As you know, I don't do math. Analyst Dion Cornett does, and even he overestimated SCO. They did worse than he expected:
"'Some of their core customers are being scared off by the lawsuits,' said Dion Cornett, an analyst at Decatur Jones Equity Partners. 'SCO has sued some of its customers, and that is what's scaring people off.'
"As customers go from Unix to Linux, Cornett said, SCO's business is falling off at twice the pace of other software, like Novell's NetWare, a Unix derivative."
Well, yeah. Motley Fool calls SCO a serial litigator.
It's all Novell's fault, in the world according to SCO:
"SCO CEO Darl McBride acknowledged that Novell's claims that it owns Unix copyrights have been a hurdle to signing more SCOsource licensing deals. . . 'The reality now is I believe it is a war of patience,' McBride said in a conference call Thursday."
$11,000.00. That's not a typo, says Motley Fool:
"SCOsource is the Linux users' shakedown program. Apparently, no one is paying up. It took in $11,000 last quarter. That's not a typo. President and CEO Darl McBride paid more lip service to 'increasing shareholder value,' but you really have to wonder about the viability of his vision when his firm's most engrossing initiative brings in less money than the guys who mow lawns in my neighborhood. By the way, McBride was paid more than $1 million last year -- most of it in cash -- to preside over this impending disaster."
There doesn't seem to be a lot of money shaking down Linux users after all. Yoo Hoo. Bay Star. Earth calling Mr. Goldfarb. The Washington Post [reg. req.] got him to tell us about the Microsoft connection. According to Goldfarb, it was *not* an ex-MS employee that did the matchmaking between him and SCO, and what a match made in heaven it has turned out to be:
"'I would not have known about the existence of SCO, but for the
introduction by Microsoft,' BayStar President Lawrence Goldfarb said in an
"SCO officials say the introduction was made by a former Microsoft employee,
but Goldfarb said he was approached by two current, senior Microsoft
executives whom he did not name except to say they were not Chairman Bill
Gates or chief executive Steven A. Ballmer.
Goldfarb added that Microsoft's involvement stopped at the introduction,
and that Microsoft is not an investor in BayStar.
"'We're a pure financial animal,' Goldfarb said of the venture capital firm.
The terms of the investment deal were attractive, he said, with BayStar
purchasing $20 million worth of preferred shares that paid an ongoing
dividend. The firm mitigates its risk by shorting the common stock of the
company it is investing in. . . . .
"Initially, BayStar also sought a refund of its investment, which could have
stripped SCO of much of its cash.
"'We do not like to be in the public forum,' Goldfarb said. 'We were not
happy with what we thought was a cavalier attitude [by SCO management] . .
. in dealing with investor relations and the press. This is an issue of
Pure financial animals should do more research, methinks. And if being in the public eye is distasteful, I'd suggest not investing in public companies who are in numerous lawsuits where you could get deposed or called on the witness stand. One puzzling thing in the article is that Goldfarb says he has concerns about the GPL. What do pure financial animals have to do with the GPL? Maybe they have invested in Microsoft. One thing I like about the guy. He won't lie for SCO and back up their stories about ex-employees of Microsoft. Of course, Jonathan Krim might just be a really good reporter. He says, by the way, that legal eagles on both sides use Groklaw as a resource:
"One Web site focused exclusively on the case, known as Groklaw, was started
by a paralegal named Pamela Jones and now has roughly 5,000 contributors.
Though it is ardently pro-Linux, the site has grown into such an exhaustive
archive of software history and law that attorneys on both sides use it as
Actually, since the interview, we've grown. We have 6300+ members now and millions of hits a week. As SCO sinks, we keep rising. Go figure. Dan Gillmor noticed the Post article and says this about it and Groklaw:
"This may be the best roundup of the SCO case by any mainstream newspaper. Note the tip of the hat to Groklaw, which is clearly the single best repository of information about the case.
"Groklaw is in my book a particularly fine example of grassroots journalism, where people at the edges of the networks are feeding data back into the middle and then back out to the edges. This is a powerful trend. I'm glad to see it used for such excellent purposes in this situation."
The EV1 money isn't yet in the picture . Next quarter. Shorting the stock seems to be the chief method of making money on SCO stock, I gather. Somebody in Germany seems to think so, anyway. SCO stock was
listed on an obscure board that they say makes it possible to short, short, short your stock gently down the stream. SCO didn't give permission to be listed and has asked to be removed. SCO isn't the only company:
"'By listing the company's common stock on the Berlin Stock Exchange, market manipulators sought to benefit from an arbitrage loophole,' read a Pickups Plus press release, one of dozens issued by U.S. companies that employed nearly identical diction."
U.S. securities regulators are looking into the matter, according to TheStreet. Here's Motley Fool's conclusion:
"Here's the sad truth: SCO is working hard to erase whatever viability it had as a software provider. It is now little more than a shell -- a lawsuit with a fancy name. We saw this coming awhile back when the company's sugar daddy, hedge fund BayStar Capital, muscled the firm away from its languishing enterprise business and demanded it concentrate on the litigation. A legal victory looks highly unlikely, and even if a decision went SCO's way, the probable remedy would not be money for SCO, but a rewrite for Linux, something the open-source community would accomplish in the blink of an eye.
"At 5 bucks a share, with almost nothing available to short, SCO isn't worth much of your investing effort. But it's definitely worth watching, if only as an example of the way a company can be run into the ground, taking investors along."
Groklaw doesn't give financial advice obviously, and if we did, you would be a fool indeed to follow it, because I know very little about finance. I am finding it fascinating though. Melanie Hollands has just done a helpful article on legal and illegal insider trading.
So. $11,000. That is the entire SCOSource income this quarter. SCOSource cost $4.4 million. There seems to be an imbalance in SCOUniverse. Oh, there is another way to make money from SCO. Be David Boies:
"SCOsource revenue was $11,000 for the quarter, compared to $8.25 million in Q2 2003. SCO has collected $31,000 in SCOsource revenue since last October.
"SCOsource expenses, meanwhile, reached $4.4 million. The bulk of that money is going to the high-profile legal team fronted by David Boies, who tried and won the antitrust case against Microsoft. McBride said those expenses will remain consistent as the court case, expected to reach trial in April, plays out. This week, SCO asked for a delay in the trial until September 2005.
"McBride said SCO has been diligent in providing the courts with samples of the code it believes IBM has contributed to Linux. He said IBM has not been as forthcoming.
"'IBM is trying to slow the case down,' McBride said. 'It took IBM nine months to produce AIX code for us. We have been diligently going through that code and will respond to the court. The pieces are on the table. It's in the court's hands.'"
Maybe God's too. I don't think God likes liars. *IBM* is trying to slow the case down? Is there even one person left on planet earth who doesn't know that is not true? They just went to a lot of expense and trouble to ask the court NOT to slow the case down, which SCO is asking the court to do.
OK. One person. And he was paid a million bucks last year.
Update: Groklaw has done an unofficial transcript of the teleconference:
everyone and welcome to the SCO Group's second
conference call. At this time everyone is in a
mode. Later a
question and answer session will be opened.
Today's call is being recorded.
Participating on the
call today are
Darl McBride, President and Chief
Executive Officer, and
Chief Financial Officer. Each of you
should have a copy
of the press
release issued this morning containing our
results for the fiscal year 2004, which we'll be
discussing in further
detail in this call.
to point out to the participants on today's
conference call that
information provided during this call will include
within the meaning of private securities
litigation reform act
These forward-looking statements are made only as far
as the date of this
conference call and we undertake no obligation to uptake
or revise the
projections of the revenue or earnings or other
whether as a result of new information, future
developments, or otherwise.
Our performance is subject to significant risks and
that could cause our actual results to differ materially
anticipated by the forward-looking statements.
risks and uncertainties may cause our actual
performance of achievements to materially
any of our projections
of future results implied by these
looking statements. In particular
our projections of
revenue for 2004 contain revenue from our
We have limited experience with this initiative
intellectual property is the subject of pending
litigation, all of
which makes the projection of this revenue particularly
subject to both known and unforeseen risk.
Accordingly, you should not place undue reliance on
of the future revenue and results or other forward-looking
For a full discussion of this and other risks, please see
report form 10K for the fiscal year ended October 31, 2003
quarterly report on form 10Q for the first quarter ended
January 31, 2004
other reports we have filed with the SEC, all
will turn the call over to Darl McBride, President
and Chief Executive
the SCO Group incorporated.
thank you very much, and thank you all for joining us
today. As we
call, I want to formally welcome Bert Young, our
CFO, who joined
SCO in April
of this year. Bert brings to SCO a seasoned
management responsibilities from a variety
companies, including worldwide finance
operations and M&A
Today we'll be discussing ways in which Bert has
the company's operations and has driven additional
In addition to the appointment of our new CFO, we this
announced that Bob Bench will assume the responsibilities
vice president of corporate development. Bench has been
CFO for the past three and a half years and will now focus
opportunities and industry partnerships.
As we look to the future, these
changes in executive
will allow significant
focus on efficient internal
of our current
product lines and the addition of
technology and products
During Q2 we remained focused on the protection of our
and during today's call, we'll give you some
the status of our
intellectual property enforcement activities.
Additionally the company is committed to the
profitability of our core
Unix business and we will review our plans to increase our
efficiencies, to release new versions of our major product
both of these initiatives are focused on generating
for the Unix division as we move forward.
On today's call we will also
provide an update on our
concerning our series A-1
financing in BayStar capital.
As we proceed
with the review of the second
quarter results and review
against our key objectives for 2004,
I'm confident that
you will see that
we are committed to taking advantage of
the strength of
property assets, loyal Unix installed
customer base, and
However, before I comment
any further, I'd like to ask
Bert to review
our second quarter financial
results in more detail.
Thanks, Darl. Good morning, everyone.
Revenue for the second quarter of
fiscal year 2004 was
Second quarter revenue was primarily
attributable to our
We believe this level of revenue represents
stabilization of revenue
in the Unix business at or near 10 million a
While current quarter revenue is down from revenue of
the comparable period of the prior year, this is primarily
a lack of SCOsource licensing revenue. SCOsource
revenue was 8.3
the second quarter of fiscal year 2003.
for our Unix
division was 21.5 million.
We are continuing to face increasing competition
operating system products, primarily Linux, which
our Unix division's revenue.
The company reported a net
loss to common stockholders
of 14.96 million
or $1.06 per basic and
diluted share for the second
quarter of fiscal year
The net loss
from operations for the second quarter of
fiscal year 2004
was 9.4 million and
included a charge of approximately 0.7
costs related to streamlining our
operations and a charge of 2.1
million related to the
goodwill and intangible assets.
Exclusive of these two
net loss from operations would have been
For the first two quarters of fiscal year 2004, the
a net loss to common stockholders of 17.2 million or $1.23
and diluted common share. However, our cash and
position remains strong at April 30, 2004, totaling 61.3
and our cash used in operations during quarter two totaled
talk a little bit more about cash later on in the
The breakdown by
geography of our Unix products and
for the second quarter was
58 percent of revenue in the
Americas and 42
percent international, which
includes our customers in
EMEA and Asia.
Turning to operating costs and
expenses of the Unix
the second quarter of fiscal 2004 were 9.9
costs related to our Unix division continue to trend
expected. Additionally, the company is focused on cost
streamlining operations in the Unix division to the point
business will cover its expenses and throw off cash.
We will use the cash
generated by our Unix division to add
to our working
appropriate reinvest in our business.
Turning to the
SCOsource division, due to questions
being raised in end
users' minds arising
from Novell's claims that SCO does
not hold the
copyrights to Unix, which we
believe is a false claim,
revenue to date
from our SCOsource division has been
minimal. However our
initiatives are moving forward. Our sales
continue to build,
and we've engaged in discussions with potential
As in previous
quarters, we are continuing to classify
professional fees and other
costs and expenses that relate
enforcement of our intellectual property
rights as costs
For the second quarter of 2004, these costs were
million. We expect
that costs and expenses relating to the enforcement of
property rights will remain at approximately the current
level for the
next quarter as we protect our valuable Unix intellectual
aggressively pursue our legal claims through the court
During quarter two, we completed the previously
agreement of our Series A convertible preferred stock for
convertible preferred stock. As a result of this exchange
derivative financial instrument associated with the
Series A shares.
As part of the exchange, we recorded a non-cash
expense in the
6.3 million that represents the difference between
fair value of the
A-1 shares and the carrying value of the
Series A shares
The dividend increased our net loss
to common shareholders
for the second
but does not affect our cash
As we announced on June 1, we are pleased to
completed an agreement
Capital. The company has agreed to
repurchase and retire
all 40,000 Series
shares owned by BayStar for 13
million in cash and the
million common shares.
The transaction will be completed upon the effectiveness
of a shelf
statement for the resale of the common stock by BayStar.
completing the repurchase, all Series A-1 shares will
be canceled and
rights and preferences of the series A-1 shares will be
net result of our preferred stock financing
activities will be the
receiving 37 million in cash and issuing approximately 2.8
effective price of 13 dollars per share.
retirement of the preferred stock was important ...
valuable to the
There are a number of reasons we feel that this
was a positive
outcome for our
common stockholders including: the
only one class of outstanding stock; the
preferences in voting
rights and covenants relating to the
stock were eliminated; the
accrual of quarterly dividends
eliminated; and the accounting
equity and strengthen our balance
sheet; the stock
overhang relating to
the future conversion of preferred to
common stock has
and now all our shareholders will now be
aligned with the
strategy going forward.
Prior to the purchase
and retirement of the preferred
stock, we reviewed
our cash balance and
projected our cash needs for the
future. We believe
that our cash balance is
sufficient to fund our legal
the foreseeable future and are
committed to maintain that
cash for the
protection of our valuable
Finally, on this point, we're delighted that we've
to an agreement
BayStar and upon completing the purchase, welcome
stockholder to the company.
to the third quarter, we expect
consolidated revenue to be
range of 10
to 12 million dollars.
Now before I turn things back
to Darl, I want to give
you my perspective
on the business after my first 45
While this quarter has had some write-offs and losses
significant, as I look at where we are right now, I think
SCO is in good
financial condition. My reasons for this conclusions are
First off, the write-offs that we've had for goodwill
and intangibles are
Second, the accounting around the Series A preferred
This includes eliminating the dividends and gains and
instrument. All this is gone now.
Number three, we've
tightened down things in the core
business so that the
generate cash going forward.
Fourth, we're obviously going to spend cash on
lawsuits and our IP
enforcement as we go forward. It's approximately 3 to
We will offset some of that spending with SCOsource
capital from the Unix division.
Fifth, the company has
no debt, and once the BayStar
deal is closed we'll
solid equity on the
And number six and finally, as far as the cash balance
when I got
here, I went back and looked at the last few quarters in
looked back to a year ago when the IBM lawsuit was first
now, and there's been a huge amount of progress in the
past year. A year ... as of the quarter now we're just
the company's current cash and equivalents was 61.3
We take into
effect the 13 million dollar payment the company will make
closing the transaction, the company's cash position will
Now this cash position of 48 million is the result of
There was 5 million dollars on the balance sheet, January
The second thing is we've we've generated cash from the
operations during the last five quarters of 8 million,
generated out of the business, 8 million. And the net
effect of the
company's capital raising efforts net of the fundraising
costs has been 35
million dollars. So, when I look at that I think that the
have is sufficient to fund the lawsuits for several
years to come.
thanks for the time, and with that I'll turn it
back to Darl.
OK, thanks Bert, and thanks for your
good work here in
this first couple
being on board.
I'd like to
spend the remainder of the call focused on
initiatives that are
designed to drive revenue and
during the remainder of 2004
and beyond. The foundation
of our business
is built upon our Unix
intellectual property products and
During our second quarter we
had Unix product wins with
-- let me just run
through like we typically do on our
calls here by
In the US the
list included, CVS Pharmacy, McDonald's,
Lucent, and Geotronics. In China, we had
Commercial Bank of
China, Shanghai Branch of China
Construction Bank, and
State Administration of
Foreign Exchange. Germany, we had
BMW. In Japan,
we had Image Partner,
Matsushita Electronics and Toshiba
In Korea, we had the Korean
government Ministry of
Samsung Insurance. And, as we go to
the UK, Pizza Hut,
Army, and the Department of Navy.
are many other customers, but that just
highlights again that we are
worldwide operation selling into 82 countries. That was
just a snapshot
some of the deals that we did during the quarter.
Again, those are
UnixWare and OpenServer wins.
Looking to the future of our Unix division, as
continue to make the necessary changes to increase
designed to create positive cash flow in this division
of 2004. We also reiterate our investment in and
commitment to the
current projected product releases and future development
of our Unix
In fact our upcoming
releases will mark the largest
enhancements from SCO in the last
Let me highlight a few of
those for you.
Starting shipping this month are two products, UnixWare
7.1.4 that is now
available. It's our leading high-end Unix
system on the Intel
and AMD platform.
embedded Unix. This is a complete embedded
organizations to create a small footprint based on Unix
inside of various
Those are now available as of this month.
We have a
new product coming out next month called SCO
Office Server 4.1.
This is a
reliable full-featured internet email and
solution for small and
medium businesses. It seamlessly
with Microsoft Outlook and other
industry standard email
web browsers. So that product is coming
out next month.
it here. It's very strong. I think our users are
to like that.
Our next product that will be coming out in August of
this year is
Vintella authentication from SCO. This is the company's
for managing a single-user identity across the
And then finally as we announced in our SCOForum
we are coming out with a new version of OpenServer. We
OpenServer Legend. It will ship in the first quarter of
2005, and we
will get into more details of this at our forum event this
development effort is designed to be the first step
in supporting a
single Unix development path for both
and UnixWare. It enables us
to continue to support the
architecture while adding support for
The benefit to our customers is enhanced
applications written for Unix, Java, and the ability
connect them with
web services. Legend will continue our commitment to
Additional information regarding the
release of our
UnixWare 7.1.4 product
as well as the other products I've just
gone through will
during a separate press and analyst call
next Tuesday, June
15, at 11:00 Eastern time. I cordially
invite all of you
to join us on
On a similar note I'd also like
to extend an invitation
to each of you
on today's call to join us at SCOForum,
which is our
technology summit showcasing our technology and
with our strategic business partners. An event this
is scheduled for
August 1 to the 3 at MGM Grand in Las Vegas. Attendees
SCOForum will be the exclusive recipients of the
kit as well as the latest technical and sales training on
and solutions, as well as giving you insights into our
the coming year. To register you can attend ... to
register that event,
go to www.sco.com.
In addition to our continued
commitment to our Unix
products business, we
firm in our resolve to
protect and enforce our
Let's take a minute and talk
about our intellectual
You know, last year we
announced a license program for
our IP. Companies
had asked us about our IP
claims and whether there was a
way they could
become compliant with us. There
was a major reason that
the program ... that was the major
reason. Based on some
initial feedback, including at least one
company, we believe
that the licensing program was a reasonable
option for our
We understand that many people out there have
But imagine what would have happened if we
taken the following
approach. "No, we're not going to offer you
to this problem.
You'll just have to wait and ride the
uncertainty for an
time and then you'll hear from us.
We can't promise what our license will look like then, or
might be subjected to, but we aren't going to offer you a
If we had done that people would have claimed that we
weren't being fair,
and so we
didn't take that approach. Instead we want to provide a
fair business solution that allows companies to
continue to run
businesses knowing that they are not violating our IP
We are still
working through that process with a decent
customers and believe
that we are presenting them with
business alternatives to resolve
the issue now rather than
wait to see
what the landscape looks like in a year
or two, with
and uncertainty that that brings. We believe we
companies move forward in a positive way now. We
licensing program did not take off the way initially it
appeared it might.
We believe that the claims of Novell ... that Novell has
what they sold or didn't sell to the Santa Cruz
Operation in '95
questions in the minds of our customers about
should license our
As a result, we are now involved in a lawsuit against
that they are slandering the title of the copyrights we
clear, we did not cause this problem. We
believe that the
problem was caused
by others who have violated our
ownership rights. As you
know, we are also litigating
We have an obligation to protect
property assets for the
of our shareholders.
Commencing with the IBM case
and following up with Novell, AutoZone, and the
we have moved to protect these assets.
Before I leave this subject, I'd like to update you on
the status of a
couple of our legal cases. In the IBM case we are
rulings on our motion to amend the scheduling order and
bifurcate, which were heard on June 8. We anticipate a
scheduled for August 4 regarding our motion to dismiss and
partial summary judgment.
In the Novell case, we are currently awaiting the
judge's ruling on our
remand. If that motion is not granted, then
we would also
Novell's motion to dismiss.
On a new topic, I'd like to comment on Linus Torvalds's
developer's certificate of origin system. It validates
problems we have expressed over the past year about the
process that has been fraught with opportunities for
code with minimal checks and balances. We believe it
is in part
this unchecked process that SCO has improperly
made its way
... SCO code has
improperly made its way into Linux. Of
course the new
DCO system announced by
Torvalds cannot help answer
questions about code
and the impact of code
already included in Linux. We will
educate our partners,
customers and others about the bases
for both IBM and
others that have improperly contributed
code to Linux.
When we began
talking about our intellectual property
the original response from
leaders of the open source
was an admission that there were errors
in the Linux
and that they had worked to
remove the offending code
from future versions of Linux. However this does not
all of the
other issues that are surrounding this.
think ... and to summarize, as a company we have gone
to great lengths
commercial users understand the gravity and the
To summarize before we go to the final Q&A part of
call, the ...
we move into the last two quarters of fiscal 2004, the SCO
focus on the following major initiatives: being cash flow
in operations for our Unix business, a continued
commitment to the
enforcement of SCO's intellectual property rights, and
from our SCO IP licensing initiatives. SCO Group
forward and we are
excited about the revenue opportunities
solutions that we are
bringing to our customers.
OK, Bert and I are now available to take your
questions. Let me throw it
back over to
At this time, if you do have a
question press the star and
one on your
touchtone phone. Once again, if you
do have a question
press the star
and one at this time.
OK, we'll go ahead and take our first question from the
side of Maureen
I see you have a separate ... Hi guys, how you doing this
I see you have a separate
press release here about
goings-on on the stock
exchanges in Germany. What
exactly is happening?
I was contacted by a ...
The stock is ... pardon me.
Yeah, I was
contacted by a shareholder a couple of weeks
ago who was
concerned -- he had
been hearing there were a number of
companies here in the States
that were getting listed on
exchanges, primarily in Germany, on
the Berlin exchange,
and it seemed
there was a lot of short trading
going on around those
stocks that he was very concerned about and
had fallen into this category as well. We did some
research into that.
Our attorneys have looked into it, and upon investigation
we found that
we were listed not only without our authorization on the
but also ... Bert, what was the other one, Stuttgart?
Fro ... Stuttgart and Frankfurt exchanges.
Yeah, and so Bert ... I guess
Bert's really taking this
and is driving it, and we're
going to make sure
whatever is happening
there that's improper gets cleaned
Yeah, so Maureen,
we're looking into it. It's early.
We've sent a
letter to these folks and
asked them to delist the shares
hasn't happened with our
permission. But, it's early. We
need to make
people aware of it. We're going
to investigate it, and
they saying that this is something that's ...
I don't understand how one gets
listed if there's no
Well, these are
unregulated exchanges, and apparently you
don't ... the
company doesn't have
to do anything to be filed there,
which is what's
happened. But we think that
that's improper. And so
we're trying to
get it reversed. And, you know, it's
only just been a
week. We're really
getting up to speed as quickly as we can
on this and
... it's just ... I've never heard of such a thing,
so maybe I'm
naive or something, but ....
After I heard about it,
Maureen, I went out and did a
Google search and
number of companies
in like situations that have ...
... had this happen to them. If you go out and just do a
going to find a lot of things going on. In fact there was
from last week, Bert, where apparently the NASD and the
other agencies are
there investigating as we speak.
We're not in contact with them directly, but we
in contact with
exchanges. We've told them that we are
demanding to be
delisted off from
and any activity that's going on over
there. Because this
know, we want to make sure that this
isn't coming to the
detriment of our
trade in actual shares? Or I mean ... you know,
here a foreign
stock is a
deposit, you know, a certificate of ... depository
certificate or whatever
they do. I don't know how they would do that from there.
Our legal counsel has looked into this. It's premature
for us to say
what's going on, but they do have some speculation about
what might be
but it's premature for us to comment now until we know for
again if you
look just publicly at what's being said out there, you'll
see what some of
other companies have started to conclude.
So, did you guys get any revenues at all from the
We had a few deals on the SCOsource side, Maureen.
know last quarter
announced a major deal with EV1. That is not
part of the
reporting in second quarter. That
revenue will start to
be accounted for
quarter that we're currently
OK, and you're saying that this is because of SCO's
that you don't
own the ...
I'm sorry, Novell's claims.
We've had a
healthy pipeline as we've gone through the
issues. A number
continue to work with us. There are other
companies that have
by not just Novell, but IBM and others that have
come out with
programs to try and, you know, block that type of
licensing move. Again,
we've tried to say is, look, this customer program was put
in place ..
program was put in place from requests from customers.
going to be
thoughtful. We're going to work through the issues, and
those that, you
know, step up and
work with us now, we're going to work
through those issues
with them, and
we're going to continue to move
down that path.
Are you ... you said
... you seemed to suggest that
you're in active
I believe Bert
said ... used the word significant.
opportunities as far
as some of these things going
forward. I mean is
representation of what's on the table here.
Yeah, so the
pipeline is healthy. There are not just one
there are many. And a good majority of them are
But the other guys are just slamming the door on you and
saying, "We don't
Some of them are not really
slamming the door, Maureen. I
think there's a
some are watching,
some are moving, some are waiting. You
know, the heavy
exactly the way I would describe it.
No. They're just
They're just hesitating.
Right. They're pausing.
Well, we'll see how that ....
Now, you forecast 10 to 12
mostly from the Unix
business, which ....
Yeah, until there's a stream of
revenue that comes out of
not going to get in the
business of handicapping or
forecast of it.
You know, the
pipeline that Bert is talking about that is
now is not
part of that 10 to 12. Once we have more
get projections on that.
You don't anticipate to close any
of those deals this
I didn't say that. I'm just
saying that we'll announce
them when they
And the E1 revenues ....
Last question, Maureen.
Sorry. The E1 revenues will show up on this quarter?
Yes. They will start this quarter, and they'll be booked
All right, thanks
OK, thanks Maureen.
Once again if you do have a question press the star and
one. And we do
you only ask one question when it is your turn.
Uh-Oh, Maureen's over quota.
ahead and take Stephen Shankland with CNet. Go
missed the first part of the call. It seemed
like, from the
that you guys spent 6.5 million, roughly, on the
SCOsource ... that
SCOsource expenses. Is that correct for the quarter?
the legal efforts were 4.4 million is what was
OK. And the reason that's interesting, I guess you guys
had said you
it would be in the range of 2 to 3 million per quarter.
Are you ...
anomalous quarter. Are you [inaudible] being more
No, I don't.... I think we've been projecting 3 to 5 is
what we've been
pretty consistently for the last number of months.
OK, we'll take our next question from
from the side of
Terry Tillman with
In terms of the EV1, just to clarify, was
there any revenue
SCOsource side on the first quarter or is that just going
to start in the
From the EV1 side,
contribution won't start until the quarter
we're in right now,
The deal was closed in Q2, and the revenue
recognition will start the
And in terms of ... I think earlier it was
pipeline's healthy for the SCOsource opportunities". I
mean do you
any kind of tipping point, or is it just very volatile
it's hard to
predict on when or if some of these will really monetize?
I think it's more ... I think there could be some tipping
breakage of the dam, depending on how some legal cases
through in the coming weeks and months. I think that
independent of that
there are some companies that are just saying we want to
move ahead and
have to deal with all of the issues. The reality is
this is a very
set of issues. You know, you have contract
issues. You have
issues. You know, going from various parts of
the code base,
and it's going
to be a while we've all of us realized
before all of
these things are done.
So some people are saying we're
going to step
up and resolve that now. We are
offering some discounts
the fact that there is some uncertainty
with all of these
being finalized. But you know, on the back side of
probably be a different profile in terms of, you know,
what we're going
to be offering in terms of license fees. So, you know, we
a complex environment and some are going to move their way
the short term. Depending on the timing and nature of how
court cases evolve, you know, you could see some things
But as it stands now
with the cash on the balance sheet,
able to take
these court cases at least for two full years
least that. I think, Bert, your modeling of it has us
going for several
given we're going to start to throw off some cash on the
Exactly. That's correct, Terry.
OK, we'll go next to
the side of Larry Solomon with
Hey Darl. You know when you talk to Novell, they
never got a copyright and that this contract and the
amendment were very
ambiguous, and you know, they say if you go to the
you won't find, you know, that we actually issued any
though in that document it states pretty clearly that you
copyrights needed to complete the transaction. So can you
talk about how do we get that resolved sort of once and
I know you
guys didn't sue to have the judge interpret
you interpret it as
you've already got it, but how do you
get the world
to see that. Because it
seems that that's where the
licensing of Linux
really hinges is on that
difference in interpretation with
I think that is
a big factor that we've heard from some of
the people that
in the short term. We obviously feel very
strongly about our
In the hearing that we had this week in the courtroom, the
said that he would be ruling on this case ... on the
Novell case in a
days, so we're waiting on that. Now that's going to be
it's going to be in state court or federal court. If it's
in federal then
obviously he'll also rule on the motion to dismiss, I
So I agree with you that that is an important point
So when did he say that he would rule in a matter of days?
That came out in the hearing earlier this week.
And so specifically, he's just ruling on venue?
We don't know. We don't know exactly. The two motions in
him are whether to remand the case as well as a motion to
we can't comment on that. I think as it relates to all of
with respect to the suits.... Let me transition off from
there or question there a little bit, Larry.
I want to back up just a
little bit. Let's go back to
where we were
when we filed these these cases.
A year ago, you know,
a small company. We had a set of claims
here. We tried
to work through
issues that we had. You know, we got backed
into a corner
had really two choices. Either forfeit our claims or
rights or to put our issues before the authority of the
them resolve the issues for us. All the shareholders here
today probably would have not been very happy with us if
we had said,
"Well, we're just going to forfeit our rights and continue
on our path
going our of business based on the damage that was
being done to our
business from Linux." We stepped up. We, you know,
for the shareholders' rights to go in and say,
have this property
and we want the court authority to come
in and rule
on this for us." We have
put this in front of the courts.
it's there, we have a limited
amount that we can really
I mean, I'd love to sit here and tell
you, Larry, that you
August 13, the dam's going to break and this
to go and
licensing profits are going to take off. I mean
shareholders would all
like to hear that. The reality is, we have put the
vehicles in place
to get our claims heard. The reality is, I believe it is
now a war
of patience. I think that if we are all patient and let
the various venues take care of these issues and work them
mean we all have eyes, we can all read. You look at the
say, "Gosh, how could this not be that SCO owns
Well, the court takes care of that. So we've
put that case in
front of the
court. We've taken the problem of our
allegations that our
Unix code has
seeped into Linux. We've put that in front
of the court.
And so, where
there's this barrage of battles going on,
this war of words
that continues day
in and day out. You know, we've backed
the position of trying to
have a daily commentary on what
issues are. We're making our
comments through our legal
through the Boies, Schiller law firm in
the court system.
And so we
believe that, again, by being patient and working
that the shareholders that are patient with us right
are going to be highly rewarded as our claims are finally
And what about the idea
that Novell says that if you go to
you know, it says
that they have ... it says in the
contract that they
but they never did. Is that something that
you just need to
court to compel them to actually do that?
I mean, we've put our claims.... We
Novell has said and what they have done in the
our suspicions as to why they have done that.
Obviously that's had
impact on our licensing program in the short term, but the
courts will be
work through our issues. We'll have our day in court, and
that that will turn into a positive outcome for us. But
terms of the
I can't, I don't know.
OK, we'll take our next question from the side of Herb
Hey, most of my questions
have been answered with the
exception of the
would you expect the delisting to take
effect, or have
We sent a notice letter out, what was it
Yesterday. This is new territory for us, so we don't
answer to that question. All we know is we're going to
make sure that nothing is being done here that is damaging
Is the short interest
visible on the German exchanges?
The guy that I met with a
couple weeks ago, that was his
story he was
hearing was that
the short interest that's out there on
show up on the NASDAQ. But I don't know.
Again, this is
expertise. We got this feedback and we're
following up on it.
to sort out what's going on.
Got you. Is there any color
that you can add to ISV or
development, in terms of if
there was a trigger on the
Novell issue and
you had the
opportunity to ...
We're looking at it. We've had some
demand from resellers
to take this.
demand from customers and from
resellers to say is there a
that we can
layer in. We're being
very sure-footed on these issues.
If we're going to do anything around
that aspect with
probably be addressing that at our reseller
conference in August.
OK. Good stuff.
OK, we'll take our next question from the side of Paula
Rooney with CRN.
you say to those who continue to doubt SCO's
in court. And then secondly if you could give a
possibility that Sun may open source Solaris or is looking
at that. Do
any concerns about that?
OK, so, on the ability to
finance it, Bert, do you want to
take that on
yeah, I mean ....
Darl, could we get you to answer that. I
did hear what
Bert said during
but I want to get your color on it.
The real simple answer is we're going to have enough cash
to get to our
destination. We're on a journey right now. We have a
place to get us to our destination. We have the vehicles
in place. We
best litigator and litigation team in the world in
I might add, we
have David Boies, but one of the top guys in
Robert Silver, that
heavily engaged on top of the team with
Mark Heise that
has been engaged
year. We have got the firepower on
the legal side. We
have got the cash
and very strong claims to get
to where we need to go. So
we feel good on
respect to the Sun side of things. You know, Sun
has the broadest
any of SCO's Unix licensees and it has been a good
licensee in good
us for many years. And there are no details of Sun's plan
to open source
that are clear at this team, and so we really don't have
We're confident that Sun will continue to be a good
when we hear
he words "open source," all our minds rush to a certain
concept of what
I think in ... if you look at Unix in total, even
look at where
from, we have made Unix very open over the
thing is available
major university and research
institution. There's a lot
of ways of
code up. You know
Microsoft has a thing called Shared
Source, so there's
a lot of
or aspects that people can do out there.
I don't know exactly what Sun's
talking about, but
from, you know, the
fact that we've had a good
relationship with them and discussions over the years and
them, we feel confident that they will continue to be a
good licensee of
ours as we
You mean they won't open it up
under the GPL?
Yeah, again, I ... until they talk about
really comment on it. You know, I'm
very comfortable and
Sun's going to do things that
are going to enhance
property rights, not
OK, we'll take our next question from the side of Robert
Yeah, hi there. Just a question
about SCOsource revenue
for Q2, can you
what that was?
Well, it's not ... go ahead Bert.
I mean, it's Bert. It was just a couple of small
that, you know, signed up for our SCOsource agreement.
you're not saying what the ... so was it zero?
eleven thousand dollars.
Eleven thousand, OK. And can you
explain the impairment
you have. What does that ...
in English, what does that
So we had an acquisition we
completed a little over a year
certain level of revenue as
a result of that. That
revenue has not
date, and as we do our
quarterly review of the balance
sheet items and do
the asset that had been booked for
this, for this
we felt like
we needed to impair it, so we've written that
acquisition was that?
OK, and we'll take
our next question from Dion Cornett
with Decatur Jones.
Hi guys. Hey, yeah, first of all let me say
the A-1 exchange
agreement. You know, as we wrote about in our
certainly a good deal for the common
quickies here on the income statement. Your core
about 24% year over year. This is about twice the rate
we've seen of
companies that are suffering from their Unix business
and to some extent Windows. Is there anything specific
that you would
Well, I think one of the challenges we
have.... When I
the company had three operating
systems, and the two that
we are currently
under hadn't ... didn't
have a lot on the development
plan, didn't have a
firepower in terms
of upcoming releases. That was
corrected this week and
another one coming out with Legend in six
months. And so, as
software companies live and breathe on new releases. And
so we have a new
Another one in six months. So I think the anomaly here
is that we went through a dark period where there just
a lot going
the Unix development for a significant period of time.
OK, fair enough. And the revenue from EV1 I originally
had estimated at a
million dollars for the April quarter, and
guys were far
that. You know, based on comments you
made last quarter
about it being
recognized in Q2,
Q3, can you sort of
explain why the shift in accounting
there. And my
back in March when the deal was originally
they didn't pay. We signed the deal back then. The
payments were to
in future periods. The first of those future periods is
Just what's the magnitude going to be? I mean is the
for the July quarter?
be a little high.
From them that would be high. It's going
to be spread out
but it will be in the six figures.
And then Bert, just one quickie. What would share count
have been had you
a profit, ball park?
and a half million shares.
All right, thank you very much.
OK, we'll take our next question
from Larry Greenemeier
Hi guys. How are you.
I just wanted to go over the ... just quickly
that you had
run off earlier in the call. You
about an August ...
you had called it Vintella,
did I get that right?
V I N T E L L A, and that's for managing single-user id?
And this month it was UnixWare 7.1.4?
sorry, what was that?
Yeah, that's correct.
You mentioned this idea of Unix development is where
you tell us any more about the relationships
and AMD and how
you know, how you're working with
them to improve these
Unix on ... I
guess x86 products.
Yes. We continue to work with those guys. We're moving
for Unix on Intel. The Legend product we think is going
to be very
There's going to be a lot of very nice features that come
And we're really on the
front end of developing some broader based
support as we run down
OK, we'll take our next question from Stephen
Vaughan-Nichols from senior
EWeek.com, actually. Hi gents.
I was curious about your attempts to realize
your Unix division. Does that mean that we're going to
see more cuts ...
cuts in that division in the upcoming
in other words.
We've made some ... we've tightened down
some things in
the past there. You know, as with any
going to continue
to look for efficiencies. One of the things
brought to the
table here is trying to figure out how to get your
products to market more
efficiently and effectively. You know, how do you get
with your development teams as well as with the fact that
we have this
large reseller channel. So, I mean, we're not commenting
issues other than to say we're going to be as streamlined
and if there are additional adjustments, we'll make those,
we're going to take a, you know, prudent
business approach to
Thank you very much.
OK, we'll take our next question from
Peter Williams who
is an independent
Good afternoon, gentlemen. This is a question for Mr.
You said that you had
... are in the process of explaining
gravity and magnitude of improper code contributions
to Linux, and
that as a
result they should go and buy a license to effectively
against any future claims you
may make. I understand "gravity and magnitude"
there to be
significant contributions, and lots of
them, yet you
haven't been able to
in the IBM lawsuit. How do you
reconcile the two
I'm glad you brought that
up, Peter, because this is a ...
really a point
of concern, and quite honestly
frustration in large part
with how things
are being positioned in this IBM
case versus the reality.
I think it's
important to not confuse IBM's
positioning with the
reality of what's
going on in this case. If you look at
the ... first of
all, I'm not
going to get into all of the details of what's
going on in
the court, but
what I would tell you is that there's a dramatic
difference between what
IBM postures and what they say in their documents that
available and what we have provided to them under
In other words, they're kind of getting the best of both
They're going around saying, "Boy, you know, SCO's not
showing the code."
Whereas if you get to the realities, you look behind the
filings. If you
look under the protective order and look what's there, SCO
diligent in providing substantial amounts of
information back to IBM.
that the judge ... the magistrate came out and
said, "SCO has
acted in good
faith." I mean the magistrate can see what
So there's a reason
she's making that comment, I believe,
and that is
that we are producing
volumes of information back to the
court and back
to IBM. Unfortunately, all
of us on the call here and all
of us as end
users and those in the Linux
community and everywhere else
are not able
to see all of that. So I want to
make sure that we
understand the game
that's going on.
issue going on here around the
posturing about saying
"SCO's just trying to
drag this case out." You know,
to drag this on, whereas IBM
wants to rush in and get it
that's the positioning that IBM wants
to rush the case,
but if you look
at their actions, they're really the ones
trying to slow
From the time we filed the case, going forward
months, we did not
... we had zero versions of the source code in dispute
already agreed we were going to see. And it took them
It took them March of this year before they ever produced
AIX or Dynix code to us, when we had ... I guess AIX in
that case. When
we got the
versions of code that came in we have been diligently
and we have responded back into the court over the last
So the reality is there's a long delay that was put in
haven't supplied all of the versions that we've requested.
IBM has filed 14 counterclaims, unrelated to our question,
our claim that
tainted and there are problems there with IBM's
They filed 14 counterclaims totally unrelated to our case.
Well, there's something I don't
understand, which is that
Linux is open
source, and the source is openly
available, so can you not
just go to
a source repository and pull up a file
and say, "Here, you
that from our intellectual property. This is
is." You can
point at it because you don't need to wait for IBM to
provide it, do you?
Well, it's a little bit ... There's
one more step you have
to do there.
The first thing that you've got to do is
you've got to be
able to take
the code. You take the contracts that we have
you take the
code that is in question and that is protected between
and you get that settled. Again, they still haven't
versions that we've asked for, but with the versions that
we have we've
been able to go back in and we've put claims on the table.
seeing those, but they are on the table, and there
will be more as
through the case here. Then the next step is to
compare the code
that is in
question that is in violation against our
rights, against what
available there. So, you're right, on one
is not a difficult game
here to play, it's not a difficult
figure out, but it is difficult
if that middle interim
piece isn't there.
So I would ask IBM a question, why
are you not putting up
Well, would it not help
your SCOsource licensing program
if you could
go to your potential customers
and say, "Look, here's what
we put in from
Make up your minds
yourself." I mean, your potential
help tremendously. It would help tremendously.
And if we
didn't have these
things under protective seal of the
court, we would be
doing that. And so, I
guess one of the things that I want
to make sure
all of you take away from
this call today is that there is
a major gulf.
There's a Grand Canyon size
gulf between what IBM is
and the real facts of this case and
what we are supplying
that are under
Mark my words,
there will be a day that will come when
you will all
see many, many documents
that will directly contradict
OK, thank you for the answer.
OK, although we have further questions, unfortunately we
have run out of
time. So we appreciate your interest and feel free to
... human relations department if you have any further
Then I'll turn it back to Darl for closing comments.
Well, I think I just made my closing comment. I believe
in our case. I believe very strongly in our claims.
like to make one final comment regarding the
wrap up on the
BayStar case. As
Bert said, we welcome them on board as
shareholders. There were
some concerns that BayStar had
you know, was management out
talking about this case too
much in the
press. The answer to that was a
resounding yes. I
totally agree with
Larry on that and part of the ... I
think that what we got
drawn into was
that IBM has a lot of agents that are
out there day in and
day out that
attack us. And we felt like, from a defense
shareholders that are on the call today, we were
only guys in
town to fight back. And for a number of weeks and
we did that.
Well, the reality as we said earlier, we're going to fight
out through the courtrooms. And it is a game of patience.
frustrating for all of us when you see a claim out there
else owns our copyrights, and there's somebody else saying
this or that.
we can all be patient here over the coming months,
long it takes, I don't know, but I believe, we're
going to have
a very firm
In the meantime, the Boies team is really stepping up
with the key
generals there running the case now as it relates to the
firmly driving that. Management here is focused
on the licensing,
innovation of the core Unix products, and seeing the
the innovative products that its working on.
So, we're going to continue
down the path that we've
laid out. We feel
good about the direction we're
going. We appreciate all
of you as
shareholders. And, you know, we look
forward to continuing
Thanks for joining us today.