SCOXE CEO meeting does little to shift opinion

Last week we had the opportunity to meet with The SCO Group’s (SCOXE: Market perform) CEO, Darl McBride. The meeting did little to alter our fundamental outlook for the business. Despite the Company’s high hopes for its pending release of an updated version of OpenServer, we remain skeptical that the product will drive significant new license revenue given the litigation cloud surrounding the Company. Past conversions with SCOXE customers suggest the Company’s core products are reliable and effective solutions, but that a relatively narrow swath of SCOXE’s installed base would be willing to make a new platform investment in the older x86 UNIX technology versus simply moving to Linux with its relatively guaranteed long-term viability.

Also, while the Company acknowledges that separating the UNIX business from the litigation could unlock some shareholder value and help product sales efforts, we believe that such a move is unlikely.

As part of legal preparations, one mock jury awarded $2 billion to SCOXE when it could show a damaged UNIX business, yet a separate mock jury awarded only $80 million under the scenario that the lawsuit was pursued by a separate intellectual property company.

We believe that hopes for a large jury win, partially driven by skepticism of the jury system itself, is likely to provide support for SCOXE’s shares regardless of minor legal losses that SCOXE may suffer from in the interim. Also, given this fact and that Ralph Yarro, post his settlement with Canopy, is now SCOXE’s largest shareholder at approximately 30% shares outstanding, we envision very little change in the Company’s legal strategy. In addition, this transfer of ownership indicates to us that Canopy Group believes little upside exists for the SCOXE shares and may have wanted to distance itself from the ongoing litigation.

Separately last week, SCOXE announced that they received a second delisting notice from the Nasdaq for failure to file its form 10-Q in timely fashion. Recall that SCOXE has still not filed its long-overdue form 10-K. Nonetheless, the Company reports that it continues to work with regulators and auditors and we are inclined to believe that SCOXE will be able to avoid delisting.

Update: Dion Cornett has provided the following correction:

After publishing our weekly newsletter, Open Source Wall Street, this morning, we were contacted by SCOXE’s CEO asserting that the mock jury findings he shared with us were related to a separate case SCOXE’s counsel had experience with and were not results from an SCOXE mock jury. We apologize if we misunderstood Mr. McBride’s original comments and regret any difficulties such misunderstanding may have caused.