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SCO's 1Q 2005 Earnings Conference Call - transcript
Monday, April 18 2005 @ 02:44 AM EDT

Here's the SCO 1Q conference call as text. Sorry for the long delay, but my laptop broke, and I had to scramble to make arrangements. You can follow along with the call if you wish as an MP3. I want to thank div_2n and jbf particularly, and all those who labored to make this transcript possible. As always, if you notice any errors, please let me know, so I can perfect it.

My overview impression of the call is that it was an attempt to resurrect SCO's old bullying persona, to go back to the "good old days", when a few companies bought SCOsource licenses and we were all under the impression the litigation was about Linux, and the stock went flying. Is it about Linux? You tell me. If you say it is, kindly also inform me exactly what code is allegedly infringing will you? With specificity? My inquiring mind wants to know. We've been asking that question for two years now. Silence from SCO. Or evidence the judge found not credible.

SCO tries very hard to create that impression here, that it is still about Linux. Maybe they'd greatly prefer it if Red Hat is unable to go forward with its litigation against them, and they can only block that from happening if the case *is* still about Linux. Or just maybe they were hoping no one would notice their dismal financials currently, if the message on the call was Pie in the Sky Someday.

They even say they sold a few more SCOsource licenses this past quarter, but they won't tell us who to. Natch. Always with the mystery and the signifying. My rule with SCO is this: where's the proof of what you just said? I find it a prudent rule.

I formed the impression that Renaissance Venture's Herb Jackson's question was maybe even a plant, to give SCO a chance to talk about the CompuWare-IBM litigation, and to imply that settlements can happen, even after a trial commences, even with IBM, hint hint. Renaissance Ventures have been true believers since at least September of 2003, when I first wrote about them. The persistent fantasy that IBM will pay SCO to go away. I consider it impossible of realization, however, from all I know, because, for one thing, CompuWare didn't trash talk IBM in the media in quite the way SCO has, and continues to do, and it didn't attack Linux.

It's also interesting that McBride accuses IBM of using patent infringement counterclaims as a strategy to make trials more complex and expensive, so they'll take longer. Take longer? IBM? Talk about the pot calling the kettle black. IBM was trying to bring partial summary judgment motions like crazy to get this this narrowed down as efficiently as possible.

Remember some months ago, when I wrote that I saw a connection between publicity about the CompuWare case and the SCO litigation with IBM? I viewed it as supportive harassment of IBM. Some thought it was just a coincidence that attorneys who worked closely with Boies in the past just happened to be working on the CompuWare case against IBM simultaneously. See what you think after you read what Darl says here, that they followed the case closely, learned from it, and even sent their General Counsel -- Mr. Tibbits I presume -- to the trial to "watch". I didn't just fall off a turnip truck, you know. That's why SCO hates me, I expect. And do they ever.

I also noted that every time there was a question about money, shares, the 10K, delisting, anything financial, Bert Young leaped in to answer. McBride was used only for general questions about how they'll make out like bandits one day, un Bel Di, after they win in the courtroom, and how various third parties ruined their SCOsource business by offering indemnification (that's called the free enterprise at work, by the way) and he took the time to smear some folks and maliciously try to destroy people's good names and professional reputations.

Like mine.

Does SCO imagine that they can hire private investigators to try to destroy a private individual's reputation? To retaliate against an investigative journalist reporting on the company? Perhaps SCO has forgotten that when General Motors tried that hire-a-PI trick on Ralph Nader, it seriously backfired and the company was forced to publicly apologize. Passing the baton to a journalist pal isn't going to fool anyone either.

By the way, there was an interesting case decided in Utah on Friday, that found that a reporter was not a public figure. To qualify as a public figure in Utah now, you basically have to be a household name. That caught my attention, because any number of states have laws, such as stalking laws, that can be attributed either to the state the victim is in or the state where the perpetrator initiated the conduct. I've been reading up on libel laws, privacy laws, harassment statutes, and stalking laws, naturally. If you'd like to read up on it, too here is one source. And here's the Federal Interstate Stalking Institute's Stalking Resouce Center for information on those victimized by stalkers who cross state lines to stalk or harass.

McBride also asserted in the call that Groklaw is full of misleading information. I would like to remind them that this is the third time in over a year's time that I have publicly offered them the opportunity to correct any information they feel is incorrect factually. They have never once contacted me with any such information or complaint. We even ran a daily thread just for them to express themselves for months and month, every story, every day, but they never used it. Don't tell me it is because they don't read Groklaw. They do read it. And they comment. But they do it anonymously. Thursday, someone using their IP address left the same comment with the intent to attack me approximately ten times on one article alone. I deleted it, as I do all such astroturfing and trolling. But I kept the evidence, naturally. They have launched, I therefore conclude, a villification campaign against me, for starters.

On who I am. I am a blogger. I am a private citizen, who started a blog to learn how to blog for a job interview and found people liked to read what I write. I am now a journalist as well, even by old-fashioned definitions. And I have a paralegal background, and I still do that kind of work as well. That's it. Nobody cares who I am, though. I already told them. I'm nobody in particular. Just a person. What's to know? Groklaw is a group effort anyway. It's never been about me, by design. It's the application of open source principles to legal research. That's it. And I have consistently maintained from day one that I have no desire to be a public figure in any way, that I wasn't the type to enjoy attention on me as an individual, didn't want to be famous, and I've taken steps to protect my privacy all along the way. When Wikipedia asked me for biographical information, I declined and explained my reasons:

"I originally wanted to stay anonymous, in a sense, by just saying PJ. Eventually media attention and other factors made it impossible to remain just PJ but I would have if I could have. I have no desire to be famous, for one thing. And I have been creatively influenced by Scott McCloud's work. He points out in Understanding Comics (p. 45-51) in a section on iconic representation that people respond most strongly to a drawing of a character that simplifies to the point that anyone can identify with the character. I guess I was hoping for that effect. In other words, I was hoping people could assume whatever they wanted and just focus on what I said, rather than on who was saying it. For that reason, I chose PJ, because it could be anyone, either sex, any nationality, anyone and no one in particular. I wanted participation by anyone interested in the SCO story. No politics. Nothing extraneous. Just an effort to locate and provide evidence that could be useful. I knew the community could answer SCO, if they just knew what was needed. And they have."

I wrote that back in 2003, if memory serves, but it's still true. I want readers to focus on what is said, not on me. It's a large part of what made Groklaw work. Groklaw's credibility stems from the fact that we provide urls to all the evidence we find, so you can check it for yourself and draw your own conclusions. But I do all I can to be a private person and to preserve my privacy. I don't do interviews about me as an individual, I decline all invitations to speak at conferences and seminars, and I've turned down all invitations to be interviewed on camera. I seriously don't want to be famous. I never sought it, and while I felt I could contribute my research skills to this project, I never signed on to be famous. Those of you who have been with Groklaw from the beginning know that this is true.

As to Groklaw's purpose, that too is a matter of public record. It had nothing to do with destroying SCO. I just want Linux to survive SCO's assault. Read our mission statement for yourself. As you can see, Groklaw, among other things, is an effort to give voice to the Free and Open Source Community, to be an independent journalistic voice telling the story from that point of view, as the statement puts it, in part:

Groklaw is an all-volunteer and noncommercial community-supported site. Groklaw is not affiliated with IBM, Red Hat, Novell, or any other party to the SCO litigation. We don't accept either direction or money from any such party, and it has never been offered. It's an independent journalistic voice, telling the story from the point of view of the FOSS community, who are, after all, while not a direct party to this lawsuit, directly interested in and affected by its outcome, since it is their code and their community that is under attack. For that reason, we believe it is both natural and appropriate that we try to contribute positively to that outcome.

SCO should be ashamed. They should also cease and desist.

************************

time: 0.00 - 2:15

Operator: Good day everyone and welcome to The SCO Group 1st Quarter 2005 earnings conference call. Today's call is being recorded, at this time for opening remarks and introductions, I would like to turn the conference over to Mr. Blake Stowell, Public Relations Director. Mr. Stowell, please go ahead.

Blake Stowell: Thanks, good day everyone, and thanks for joining us on today's call. At this time everyone is in listen-only mode. Later a question and answer session will be opened. During that question and answer session, the company will only be providing a general update on the status of our pending litigation and cannot address evidence, rulings, strategies, or other specific details. Today's call is being recorded. Participating on the call today are Darl McBride, President and CEO, and Bert Young, Chief Financial Officer. Each of you should have received a copy of the press release issued this afternoon containing our results, which we'll be discussing further in this call. I wish to point out to the participants on today's conference call that the information provided during this call will include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are made only as of the date of this conference call, and we undertake no obligation to update or revise the forward-looking information, whether as a result of new information, future developments, or otherwise. Our performance is subject to significant risks and uncertainties, known and unknown, that could cause our actual results to differ materially from those that may be anticipated by the forward-looking statements. These risks and uncertainties may cause our actual results, level of activity, performance, or achievements to be materially different from any projections or future results implied by these forward-looking statements. Accordingly, you should not place undue reliance on these forward-looking statements. For a full discussion of these and other risks and uncertainties, please see our annual report on form 10K for the fiscal year ended October 31, 2004, and other reports we have filed with the SEC, all available at www.sco.com. I will now turn the call over to Darl McBride, President and Chief Executive Officer of The SCO Group.

time: 2:15 - 3:40

Darl McBride: OK, thanks Blake, and thanks everyone for joining us on today's call. Well, as always, an active quarter in the media for SCO, and one not without its bumps in the road. But, through all of the noise, we have remained focused on the business. To that end, we are pleased to note that as expected, our core Unix business is generating meaningful cash flow, a trend we believe will continue throughout fiscal 2005. At the same time, our legal costs remain in line with our expectations as announced last quarter. The result is, as we said at year end, the combination of the operating results in our Unix business and the cap on the costs of litigation will ensure we can remain steadfastly focused on driving success in both the marketplace and in the courtroom, and demonstrate our focus on taking whatever steps are necessary to ensure success in both areas. With that, as we move forward with our litigation, we are focused on continuing to develop new products and services for the Unix platform to the benefit of our customers. I'll speak more specifically on this later, but the introduction of our next-generation Unix platform, SCO OpenServer 6, code-named Legend, is a perfect example of those efforts. I will now turn the call over to Bert Young, our CFO for, an overview of the company's financial results. Bert?

time 3:40 - 7:30

Bert Young: Thanks, Darl. The company reported revenue of 8.9 million for the first quarter of fiscal year 2005, as compared to revenue of 11.4 million for the comparable quarter of the prior year. The net loss for the first quarter was 3 million dollars or 17 cents per diluted common share, compared to a net loss of 2.5 million or 18 cents per common share reported in the comparable quarter of the prior year. Revenue for the Unix business was 8.8 million. Unix revenue was down year-over-year and sequentially, primarily as a result of continued competitive pressure for operating systems.

Revenue derived from SCOsource licensing for the quarter was $70,000 dollars, which represents a year-over-year increase from the first quarter of 2004. As we have stated in prior quarters, we have cautioned that predicting this revenue stream is very challenging and will continue to be difficult to predict.

Cash and cash equivalents in available for-sale securities were just over $20 milllion at January 31, 2005, of which, approximately $4.8 million remains in an escrow account for certain expenses associated with our IP litigation. I will talk in more detail about the company's cash in a few minutes.

For the first quarter of 2005, the cost of revenue for the Unix business was 1.4 million, resulting in gross margin of 7.4 million or 84%. Cost and expenses for the Unix business were $7 million, and have trended downward as we expected. We anticipate the cost of the Unix business will stay at the current run rate going forward. As a management team, we're pleased with the progress we've made in the Unix business, despite a challenging and very competitive operating environment.

As in previous quarters, we are continuing to classify legal and professional fees and other costs and expenses that relate directly to the enforcement of our intellectual property rights as cost-of-revenue. For the first quarter of fiscal year 2005, these costs were $3.5 million, which was down from the prior quarter as a result of our revised fee arrangement with Boies Schiller & Flexner. As we told you on last quarter's call, we have received $500,000 from Vintella for a note receivable which they owed us, which we recorded in our first quarter as "other income".

Now switching gears, let me address the issues relating to the filing of our form 10K and our NASDAQ listing. As you know, we've identified certain equity matters that required us to restate our 2004 quarterly financial statements and related footnotes. Rather than repeat the detail again which you're all aware of, I remind you to review our amended form 10Qs that we filed with the SEC two weeks ago. One thing I'd like to point out is that the restatement did not impact the company's previously reported revenue, net loss, or its earnings per share for the fiscal year ended October 31, 2004. Equally important, it did not impact our cash and available for securities balances either. As a result of the restatement, we've implemented in our internal control procedures additional detailed transactional controls, an equity compliance checklist, and additional review and approval procedures to ensure these errors are not repeated. While this certainly caused significant angst for the company and its shareholders, we're committed to total transparency in our financial reporting and ultimately are glad we caught these issues and corrected them appropriately, which we think's in the best interests of all our shareholders.

time 7:30 - 12:42

Now, there are some residual issues from that, so let me address those. First, the NASDAQ listing. As you may be aware, the chain reaction of our needing to restate and the need for more time to file our 10K resulted in our failure to comply with NASDAQ's continued listing requirements. We subsequntly received a notice that we were being considered for delisting, and the NASDAQ added an E to our ticker symbol. We were then granted a hearing with the NASDAQ listing qualifications panel. We participated in the hearing with the NASDAQ listing qualifications panel on March 17th, and addressed the reason for the delay with both our form 10K and form 10Q for the first quarter of fiscal year 2005 and our anticipated plan to get these filings made. On April first, we filed our form 10K, and anticipate filing our form 10Q for the first quarter by this Friday, April 15, 2005. We believe that with the filing of our 10K for 2004 completed and once our 10Q for the first quarter is filed, that we will satisfy the continued listing requirements for NASDAQ, and the E will be removed from our ticker symbol.

However, while the company is awaiting the decision of the panel, we continue to be listed on the NASDAQ small cap market under the symbol SCOXE. Now I'd like to take a minute to break down our cash position so that everyone on the call can understand this in more detail. As you'll recall, when we announced our agreement with our lawyers last year, expenses for the litigation were capped at approximately $31 million, which included $5 million for escrow and experts and other costs, leaving $26 million in fees due to the legal team. The $26 million in fees was broken into two buckets, $14 million in payments we owed for services rendered, of which $1.7 million was paid in quarter 4. The rest, or $12.3 million, had been accrued for on the balance sheet. The second bucket includes 6 $2 million quarterly payments we would make in each of the next six quarters, or $12 million dollars. Now, in quarter 1, we paid $16.3 million in fees under this arrangement, made up of the $12.3 million accrued from the first bucket and two quarterly payments of $2 million each for quarter 4 and quarter 1. We ended quarter 4 with a little over $36 million in cash, less the $16 million in payments, equals $20 million in cash at the end of quarter 1. So, going forward, if you subtract $8 million dollars, or four more $2 million quarterly payments, to be paid from the ending cash of $20 million, that would leave approximately $12 million dollars of which $4.8 million is reserved for escrow, leaving over $7.4 million to operate the business going forward or to pay additional escrow fees if required. So, in summary, let me emphasize that at the end of quarter 1 we had over $20 million dollars in cash, and $7.4 million is free and clear of any obligations and can be used at our discretion. In addition, with the Unix business generating cash, we believe we are in a solid position to operate our core business and see the litigation through to its conclusion.

Before I hand it back over to Darl, I'd like to quickly note a recent transaction we closed. Please note that this transaction actually occured in our second quarter, and as such will be accounted for in our Q2 income statement, but it is an important one, so I'll just review it quickly. In December 1999, SCO entered into an agreement with TrollTech AS to acquire shares in TrollTech. During the fiscal year 2001, SCO management determined that the [unclear] value of the investment in TrollTech would most likely not be recoverable, and the investment was written down to zero. However, last month we received notice from TrollTech that a third-party investor was interested in acquiring our shares. On March 14, we sold our shares for proceeds of $779,100. The company will account for the sale and proceeds of the TrollTech shares in its second quarter, numbers consistent with when we received the proceeds. Since all amounts related to the book value of the shares have been written off during fiscal year 2001, we expect to record the proceeds as a component of other income in our Q2 statement of operations. With that, I'll hand things back to you, Darl.

time 12:42 - 15:46

McBride: Thanks, Bert. I'd like to spend the remainder of the call addressing our business performance and prospects. We were pleased at the performance of our Unix business and that business is focused on generating positive cash flow, despite a challenging business environment. The company generated sales through products and professional services with the following customers worldwide including, Carafor, UK Ministry of Defense, UCO Bank in India, Marconi UK which is a division of British Telecom, AFB online in Germany, Siemens ITN, also in Germany, Thomson Financials, CVS Pharmacies, NASDAQ, McDonalds, People's Bank of China, The China Post, Korea's Ministry of Defense, and Unisys in Japan. The company continues to receive great feedback from numerous product beta testers of the pre-release version of our OpenServer 6 product. In some cases, the product is seeing double the performance in product benchmarks compared to the previous versions of SCO OpenServer. Upon its release, SCO OpenServer 6 will support thousands of applications, including thousands of Unixware and SCO OpenServer applications, Java applications, and other applications that run on MySQL, PostGreSQL, Tomcat, Apache, and many other popular applications. The company will also continue to include backward compatibility for applications that have run on previous versions of SCO OpenServer. Our resellers are telling us that they anticipate a lot of interest in their customer base in this release of OpenServer. The company will host a significant product launch event in New York City. It's going to happen over a couple of days. A key part of the launch event that will be interesting is going to happen at Yankee Stadium, where we will launch Openserver 6. This will happen in June. We anticipate that it's going to be well-attended by SCO software and hardware partners, many of SCO's key customers, as well as several members of the media and analyst community. This has been a multimillion dollar multi-year development effort, and is the most significant product release from this company in the last several years.

During the past year, we have put the majority of our development, marketing and sales efforts behind SCO OpenServer 6, and we hope to see many positive returns come as a result. Given the current status of ...let's see, let me flip over here. . . so in addition to our June launch event for SCO OpenServer, we have scheduled our annual SCO Forum event in August, that will be the 7th-9th, in the MGM Grand Hotel in Las Vegas. The SCO Forum has been well attended and seen significant interest in recent years. We look forward to another great gathering this year for our resellers and software and hardware partners. Now, let me go to where I was going to talk, the litigation update.

time 15:46 - 20:48

As stated earlier, we're not able to offer specifics on many of the aspects of our litigation matters. We will however note that we remain confident of the merits of our cases, and the next few months promise to be telling as key events in the various matters unfold. We are also pleased to note that we have launched a SCO IP website at sco.com/scoip. Those interested in our litigation efforts can access the site for information on filings and upcoming hearings. You won't find any spin on this site, but rather just the facts. Since the website launch about 20 days ago, it has been very well-visited, and we plan to continue keeping the site updated on a regular basis for those who would like to follow our litigation more closely.

We believe we made important progress in the IBM case this last quarter by obtaining critical rulings from both the US Magistrate Judge and the US District Court Judge. In January, the Magistrate Judge issued an order requiring IBM to provide us with information including code and revision information that we have long believed we are entitled to under the rules of discovery and that we believe will be important in preparing our case for trial.

Some of that information has recently been delivered to us, and more will come in over the next couple of weeks. We are ready and eager to begin the analysis of that information. The Magistrate Judge also cancelled the scheduling order in the case, and directed the parties to propose a new schedule. The parties have now submitted proposed schedules, and we anticipate the court will set a new schedule for the case in the near future. Our proposed schedule sets out a reasonable timeline for the parties to complete discovery and proceed to a jury trial next summer. In early February, the US District Court Judge issued an order that among other things granted our request to deny IBM several motions for summary judgment as premature. Under that order, the court also directed the parties not to file any additional such motions until after discovery in the case has been completed. These rulings place the case on a more reasonable and standard trajectory and have provided us with a framework to move this case to a successful conclusion.

A hearing on our motion to file an amended complaint to assert an additional copyright claim regarding IBM's AIX product is currently scheduled for April 21. Given the current status of discovery and other factors, including our intent to file additional amendments, we have requested that the hearing be delayed until we have an opportunity to bring these other matters before the court. The court has not yet ruled on our request.

Several entitites in the press have asked the court to unseal certain documents that have been designated as confidential by the parties, and that motion is set for a hearing on April 26. There seems to be significant interest in that motion. Otherwise in the IBM case, we will continue to analyze the evidence that we have received thus far, and the evidence that IBM will soon produce under court order, and we will continue to prepare to present our case to a jury next year.

In the Novell case, a hearing on Novell's second attempt to have the case dismissed is scheduled for May 25, and we believe our position for a denial of this second motion is strong. By mutual consent of the parties, the discovery period in the AutoZone case has been extended to May 9, 2005, and we will be reporting to the court some time after that.

We do believe that we made significant progress with our litigation efforts and continue to work toward the day when we will present our claims and evidence to a jury.

On a final note, as you may be aware, the Canopy Group and our Chairman Ralph Yarro, as well as one of our directors, Darcy Mott, announced a settlement agreement by which Mr. Yarro received Canopy's 5.4 million SCO shares or approximately 30% ownership interest in SCO. As a result, we expect that Mr. Yarro will remain chairman of our board of directors and that Mr. Mott will remain a director. Our company's board of directors will be voted on at the company's annual shareholder meeting which we expect to announce in the near future. We are pleased by this result as both Mr. Yarro and Mr. Mott have been ardent supporters of our current strategy. We look forward to Ralph's continued input as both our chairman and a major shareholder, and Darcy's contributions as a director. We believe that they both have, they hold a long-term view of the shareholder value in our company which we believe will be beneficial for SCO. With that, I'll now turn the call over to the operator to open up the phone lines for questions.

time 20:48 - 21:20

Operator: The question and answer session will be conducted electronically. If you would like to ask a question, please do so by pressing the * key followed by the digit 1 on your Touchtone telephone. If you are using a speakerphone, please be sure that your mute button is turned off to allow your signal to reach our equipment. We will proceed in the order that you've signaled us, and we will take as many questions as time permits. Once again, please press *1 to ask a question, and we'll pause for a moment to assemble our roster.

time 21:20 - 23:48

We'll have our first question from Steven Vaughan-Nichols, Senior Editor, eWeek.com.

Steven Vaughan-Nichols: Hi, folks.

McBride: Hi, Steven.

Vaughan-Nichols: Sun continues to say that they are going to be open sourcing Solaris, probably around June now, at the latest guesstimate I'm getting from them, and that this would indeed be not just the drivers but the large chunk of the actual open source kernel. We've spoken about this before, and your representatives have always assured me that while Sun has the broadest IP rights of anyone over the Unix kernel, they do not have the right to actually open source the kernel. Have there been any further discussions with Sun about this matter, or any more news to report in this venue?

McBride: We believe we have a pretty good idea of what Sun is trying to do. I don't want to speak ahead of what they actually do in June, but after reviewing what their plans are and given what our agreements with them are, we feel comfortable with the direction they are going, and we believe that after their announcements are in the marketplace and the dust is settled, it will be more clear for all of us to see what they are doing, and I believe that what they are doing will be well within the rights they have with our agreements, and its something that will still be very protective of the rights we have in the Unix operating system. So, again, I don't want to get into the details of what that means, let's wait until they come out with it, but we have had some insights there. From our perspective, you know, Sun has been a great licensee for a long time, with us or our predecessors-in-interest, and if all our licensees had kind of toed the line the way Sun has with their agreement, I don't think we'd be having some of the issues we're having in the courtrooms today.

Vaughan-Nichols: If i could have a followup on that, were these discussions between SCO and SUN attorneys or at an executive level between yourself and McNealy or other people at Sun?

McBride: I'd rather not comment on the exact nature of the discussion, Steven, but suffice it to say that it's a levels we have a good understanding of what each other is doing.

Vaughan-Nichols: Thank you very much.

McBride: Yep.

time: 23:48 - 28:40

Operator: We'll have our next question from Dion Cornett, Decatur Jones.

McBride: Hey, Dion.

James Gilman: Good day, this is James Gillman for Dion Cornett, can you hear me okay?

McBride: Sure.

Gilman: I want to congratulate you on getting your operating expenses in line with the business.

McBride: Thank you.

Gilman: You're welcome. We do have projected legal expenses. While they were lower sequentially, they were a little bit higher than our expectation. Do you expect these costs to be fixed flat here or do you expect them to go up?

Young: Good question. Let me answer that, this is Bert. The SCOscource costs are made up of three general areas, so let me explain that and then I'll answer the question. The first one, of course, is the $2 million a quarter legal payments that we will continue to make to our lawyers for the next few quarters. Then we have expenses, other expenses, that are paid out of this escrow account for experts and other type expenses to support the lawsuit, and then we have some additional costs internally here within SCO for the folks inside the company that support the lawsuit and work on it. So to answer the question, our thought, my thought, would be that in quarter 2 you'll probably see other expenses a little bit lower than in quarter 1, as you know in quarter 2 the rulings from the judge, we've pretty much stopped discovery in the case, and so I think expenses will come back down a little bit in quarter 2, but the other costs will continue to be in line. We'll continue to have $2 million a quarter for the next few quarters, and our internal costs are pretty standard every quarter.

Gilman: All right, I have several other questions -- this goes in reference to your K you recently filed -- you mention in there that there could be additional legal fees. Could you be a little bit more specific on that? Are these associated with this particular litigation, or . . . and also in the K, you mentioned that there a [pause] re other proceedings with the SCOscource initiatives. Are those beyond what are listed in the K and what you have listed on your website? Are they... you know...

Young: No, well, so I'm not quite sure of the question. We don't have any additional litigation that we haven't talked to anybody about, if that's the question.

Gilman: Correct, so you mention in the K and website, you list the companies, but you do not have anything in addition to those proceedings?

Young: No, no, we don't.

Gilman: OK. The other question would be, what is the fully diluted share count including all authorized and issued options? We were expecting a little bit higher share count, but maybe with the share price, that share count is lower?

Young: So, if, let me see if I understand the question. The fully diluted share count we issued in the release was 17.7 million shares, and if you wanted a fully diluted number would be an additional 3.8 million shares.

Gilman: OK, right. And one last question, because, I know other people have questions, what conditions may NASDAQ impose upon you to remain listed?

Young: Well, there's a number of requirements to maintain a listing on any of the stock exchanges, right? So there's a long list of NASDAQ requirements. We meet all of those requirements except we did not file our 10K on time. . .

Gilman: OK.

Young: . . . and consequently we didn't file the Q on time. That is the requirement that we've run afoul of, and that we're trying to fix, and so our anticipation -- and I think the panel understood why we didn't meet those filing deadlines, understood what we're doing to get it fixed, and we anticipate that as soon as we're current on our filing, that NASDAQ will review that, see that the filing is appropriate, and we would hope that they will remove the E within a matter of days.

Gilman: So, we're looking at some time next week then?

Young: That's what we're hoping, Yes, clearly what's in our hands is to make the filing. What's out of our hands is what NASDAQ does. But our view is that as they see we've met all the requirements, there's no reason for them to not go ahead and find us in compliance and remove the E.

Gilman: I do thank you for answering my questions.

Young: You bet.

Operator: Just a reminder to our audience, it is *1 if you would like to ask a question.

time: 28:40 - 31:03

We'll go next to Herb Jackson, Renaissance Ventures.

Herb Jackson: Gentleman, greetings.

McBride: Herb, how ya doing today?

Jackson: Doing great. I noticed the CompuWare case settled late last month. Do you have any comments or observations on that?

McBride: Yeah, interesting question. We did follow the CompuWare case. For those of you not aware of it, there was a case between CompuWare and IBM -- in fact our General Counsel attended much of the trial. Obviously the underlying facts in the two cases are somewhat different, but like our case, CompuWare has asserted some tort claims that basically IBM had misappropriated its intellectual property and proprietary information and then used that information to compete against it in the marketplace. CompuWare actually received a very favorable settlement after approximately, I think it's 5 weeks of trial, but before the jury could actually decide on IBM's alleged conduct.

A couple of other interesting points about the CompuWare case are worth noting. First, as in our case, IBM asserted patent infringement claims against CompuWare. We see this as a strategy IBM has employed to prolong and complicate cases like this one, in order to make them unduly expensive. It's also interesting to contrast that behavior with IBM's recent public claims, including those from their VP over intellectual property, Jim Stallings, who just came out the other day and said the US patent system needs to be overhauled of patent misuse. So we found that interesting.

Second, it's also worth noting that IBM was sanctioned in the CompuWare courtroom for discovery misconduct before the CompuWare trial actually began. I guess to summarize, in short, we learned a great deal from the CompuWare-IBM trial experience, and we expect to bring some of that understanding to bear in our particular case.

Jackson: Thanks, that's great.

McBride: Yep.

time: 31:03 - 36:20

Operator: We'll have our next question from Al Petrofsky, who is a private investor.

McBride: How are ya doing, Al?

Al: Good, thanks, how are you doing?

McBride: Good.

Al: I'm looking at the press release from a year ago about you naming Wolf Bauer as vice president of engineering and Scott Lemon as chief technologist. Now I understand those are both gone now?

McBride: that's correct.

Al: I don't remember an announcement of who hired. Do you have someone running engineering and technology now?

McBride: Yeah, we have back in New Jersey in our old AT&T offices and across the street from Lucent, back in Murray Hill, NJ, where we have the core of our engineering staff, Sandy Gupta, who is running the group there -- Sandy is extremely qualified, a great technologist, and at the same time being a great technologist is a very good leader, very dynamic, and under his leadership we have been able to move Legend from where it was a year ago through the process and get it to beta and now soon it's ready to release, so we're very happy with the leadership that Sandy has been stepping up and providing for us there.

Al: OK. So what title does he have now, then?

McBride: He's Vice President of Engineering.

Al:OK, and then CTO is not a title you're using any more then?

McBride: Sandy is really providing the leadership there. It's interesting because with Wolf you had more of a pure manager. With Lemon, you had more of a technologist. I was just going to say Sandy is a blend of the two. Sandy comes to our executive staff meetings and our planning meetings and provides great input and insight into where we're trying to go, and underneath him there are a handful of individuals that are very bright, that provide technology leadership, and I won't go through the detailed list of those names, but the relationship -- kernel-level engineering -- we believe we do have some of the brightest people in the world on our staff.

Al: OK, and on the SCO IP web site -- you said you are going to be keeping that up to date as you go forward here?

McBride: Yes, absolutely.

Al: That's great. I noticed that the DaimerChrysler and AutoZone cases seemed to stop back in November. Is that something you'll be catching up on?

McBride: Yeah, there haven't been a lot of new information in those particular cases, particularly with the Daimler case but. . .

Al: But the whole appeal and . . .

McBride: I know you're, I've seen some of the things out there. You're pretty good at tracking some of these things down. Maybe you can help Blake out a bit.

Al: Sure.

McBride: The AutoZone case, I would point out, is going to be interesting here, coming up here, again. Part of the reason we don't see a lot going on here, as you recall, we had a requirement to be back in front of the judge, and based on the early discovery we got, both sides agreed to go through another round, and then that will be coming to closure here in the next several weeks, and we encourage you all to look towards the result of that get-together out in Nevada that will be coming up sometime after May 9.

Al: And DaimlerChrysler, then, who is [unclear] what's the . . . are you going to leave that until something else happens with IBM?

McBride: Yeah, the Daimler case, the attorneys are basically reviewing our options there. There was some quirky things about the appeal process and how that works under Michigan state law, based on the substantive nature of claims versus the timeliness claim, and it's still a little bit up in the air, and the legal team is still reviewing their options, and that's basically where that one is.

Al: OK, one last thing. On the April 21 hearing, you said you wanted to delay that to later on the amending your Complaint issue?

McBride: Right.

Al: April 21 is also going to be a hearing to depose Sam Palmisano. Are you still hoping for that to go forward or what?

McBride: Right, I believe the plan is still for that to happen on the 21st, but if the court decides that since we're all getting together the following week on motions to unseal, if they want to move it then or to another date, our legal team is okay with that, but we don't actually have a ruling yet on what happens there in any event. We're still waiting for the court to rule on the issue on the 21st, again, the main driver for us on the 21st was that, as you know, we looked to bring additional claims and amend our pleadings if you will. It doesn't make sense to tighten all these little things down at once, either through the renewed scheduling order or through a different time, so that was the reason for the request to vacate.

Al: OK, thank you. I've taken up too much time.

McBride: All right, yep, thanks, Al.

time: 36:22 -37:35

Operator: We'll have our next question from Dion Cornett from Decatur Jones.

Gilman: Thank you again for taking the call. I just wanted to follow up on a question, in reference to proceedings, do you have any subsidiaries that are presently under any legal proceedings?

Young: No, no, we don't. I guess this is James?

Gilman: Yes, I'm sorry, this is James again, for Dion.

Young: Yeah, no, I don't, and you asked this question about the 10K, I'll go back and look at it, but I'm sure all we're talking about in the legal section there is the current legal lawsuits. I mean, there's nothing else -- now we do talk in our 10K about our IPO class action lawsuit that's been settled, we're still disclosing that, but there's nothing new that's come up in terms of legal matters.

Gilman: Right, I'll just mention to you two places -- page 42 and 78 of your 10K -- it's on risk factors, page 42, on risk factors, and on page 78, "Other Matters", is where the particular wording which is, we looked at, caused some questions there...

Young: OK, we'll look at it, maybe we can talk about it offline.

Gilman: OK, that'd be great.

Young: OK.

Gilman: Thank you.

time: 37:35 - 38:33

Operator: We'll go next to Maureen O'Gara, Client Server News.

Maureen O'Gara: Gentlemen.

McBride: Hello, Maureen.

O'Gara: Is it my understanding that SCOscource produced absolutely no revenue this quarter?

Young: No, Maureen, it had $70,000 of revenue.

O'Gara: I'm sorry, I must have missed it somehow, and that came from where?

Young: Well, we had a couple of arrangements in prior quarters that continue to go forward and will go forward for a few more quarters, and then we had a few additional people purchase licenses in quarter 1.

O'Gara: I see. Can you identify any of those people?

McBride: We're going to protect their identities for the time being so they can run their business.

O'Gara: Uh-huh, thank you.

Operator: And it's *1 if you'd like to ask a question...

time: 38:33 - 43:38

And we'll go next to Wolfgang Gruener with Hardware Guide.

Wolfgang Gruener: Hi, guys.

McBride: Hi, Tom.

Gruener: I would like to follow up on this question that asked, now with the lion's share of practically all revenue coming from the Unix business, how would you describe the importance of the Unix business to the SCOsource licensing program going forward in the near future? How would you weigh the importance of both parts to your overall business?

McBride: I think they're both important parts of the business, I view it all as part of one initiative here, which is driving revenues from our major product line and ownership of the Unix technology. The technology marketplace initiative is obviously where we are with our products, driving those forward is very important to our customers, reclaiming money that we feel are due us that we feel we have been damaged over the years is part of the process of going backwards and is probably more important to our shareholders, whereas the first one is more important to our customers -- but they're both important. My current view on the initiatives, I guess as you look at the product side of things, this OpenServer launch, the Legend launch, is pretty exciting for a lot of our customers. It's been 7 or 8 years since we've had this sort of a major upgrade in functionality to OpenServer, even though we have millions of servers around the world running, it's a chance for people to really upgrade their system, and the primary reason for upgrading their system is so they can tap into a lot of new application power that's coming around from the different ISVs . . .

Gruener: You said early in the call that the licensing program is very challenging or difficult to predict. Would it be too strong to say that it has become less important for SCO going forward?

McBride: No, I wouldn't say it's less important going forward, I'd say right now it's a very challenging environment to be selling the SCOsource licensing program. When we started the SCOsource licensing program, as a historical footnote, it was promptd by customers that had come in asking us if you would have some kind of license like that available, given the legal claims you're making in the marketplace. We put that program together, we started to make some sales, things were moving along, and then roughly a year ago, we had a number of third-party companies, there's probably over a half dozen companies out there, that stepped up and said, "We're going to provide indemnification to basically preempt you from taking a SCOsource license, I'm sorry, indeminification from having to worry about SCO lawsuits in the future", which basically then had a lot of other customers come back and say, well, they are either going to take one of those licenses or they are going to come back when our claims are more complete, and then talk about a license. So my view on the trajectory of the SCOscoure licensing is that it's probably not going to kick in fully until we have some legal courtroom wins, and that's why we're focused on winning there in the courtroom.

We also have a major website that's out there that has stated their core reason for being is to try and destroy SCO and to try and put a big damper on what our claims are in the marketplace, so we have a lot of misinformation flying around out there on this website, and the reality is that the website is full of misinformation, including the people who are actually running it, and I think when you get to the point where you start to strip away the people that are in front of Groklaw, I think you'll find that Pamela Jones is not who she says she is, and the key to finding out who is behind Groklaw is to understand who is Pamela Jones, and we think that when you get to the point where you find out some of the things that we know, you'll find out that everyone is being misled as to who she says she is, and that the identity of Pamela Jones is much different than is advertised, so, some of those things that are happening over on that website are having a dampening effect on SCOscource, and as some of these issues become more transparent in the public marketplace, we think that will have an impact as well.

Gruener: OK, thank you.

McBride: OK.

time: 43:39 - 55:28

Operator: We'll have our next question from George Weiss, Gartner.

George Weiss: OK, hi, I think you answered some of this, but I just wanted to clarify on that last issue about SCOscource.

McBride: Yeah.

Weiss: Now you had originally sent out well over 1,000 letters to various users in the Linux community, and I gather by what you're just saying now is that -- that is kind of an effort on hold until you receive more of a resolution in this particular case, but that you can always revisit that and require or ask for users to, you know, take out a license with SCO if you're successful?

Darl: I think that's the right way to view it, George. I think the correct sequence of events here is, let's go ahead and settle the claims inside the courtrooms, and as it relates to Linux, obviously the two main cases there, the IBM and AutoZone, so let's get through these cases and obviously Novell has some impact as well -- so let's go ahead and work through these cases and when we're done, a lot of the companies we have talked to and have been talking to have stated, "Look, if we've got a problem here, we'll step up and resolve it" -- so, I think rather than putting a lot of energy behind that, or creating an environment that is somewhat vague based on the fact that the courtroom issues have not been resolved, let's go ahead and finish off the courtroom decisions and then we'll revisit the issue. I think at the end of the day, it's real simple -- it's buy now or buy later, and if they want to wait 'til later, we're fine with that.

Weiss: So you haven't really given up on what you think is the legality of the issue, that there is code that the Linux community is ostensibly running that you feel has been misappropriated, from the fact that IBM, you claim IBM volunteered that code to the Linux community, right?

McBride: I think as you go -- to say it real simply -- if you read our filings, which we stand behind 100%, that's the essence of what we're talking about, that IBM has misappropriated information that has caused problems inside of Linux, and we'll continue to drive through those issues and try and get a courtroom verdict that resonates with what we believe to be true.

Weiss: And there's a second issue here too, because during the process you've also said that because of this you've revoked the license, the Unix System V license, that IBM has to its AIX operating system.

McBride: Correct.

Weiss: Is that still part of this case, and you know, you haven't really gotten any satisfaction obviously from IBM, and they are continuing to license AIX, but if again, there is a favorable decision in this case, are you going to pursue that, in terms of IBM's legal rights to System V?

McBride: Absolutely, we have a number of claims on the table right now, and the cancellation of AIX went all the way back to, I believe it was June of 2003, is one of them, and so that is absolutely an issue that we will be addressing at the appropriate time. Again, we fundamentally believe that the actions that IBM took as it related to not just AIX but also Dynix are what has created the problem inside of Linux. You know, there's a lot made of us having a lot of beefs with the Linux community, we really, it's not where our problems are centered. The problems are centered on what IBM has done that has caused problems for the Linux community, and we believe that when we get through with our claims and we're able to have everything heard, that that's the way it's going to play out.

Weiss: If I could ask one last question, during this discovery process, could you give us any time frame when during this discovery -- which I think you're asking for more information -- you'll be able to reveal more specifics with regard to the violations, the trade secrets, you know specifically where and how the code is violating your IP?

McBride: Right.

Weiss: Where will that point be where we'll learn more about the specifics?

McBride: The specifics -- I'm not going into the details right here of going through all of the claims and everything that is out there, whether it's copyright or contract or whatever it may be -- but the core issue of being able to prove our claims in front of a jury is dependent on, to make those claims fully and 100%, is dependent on getting the information that the court has ordered IBM to deliver to us. And some of that, as a result of the court order that was issued a couple of months ago, some of that information has shown up, there's more that's supposed to be showing up here in a few weeks, and so we're busy cranking through what we've been receiving. And we definitely look forward to the day where we will have that information going front and center in front of a jury here in Utah.

Weiss: Thank you.

McBride: Thanks, George.

[time: 49:11]

Operator: We'll have our next question from Gregory Brauner [?], Goldman Sachs.

Gregory Brauner: Hi, I was wondering when you planned on filing an S1 so that [unclear] securities so that securities that are registered under an S3 will be allowed to trade again?

Young: Uh, I didn't quite hear that, are you asking about when our S1 will be filed?

Brauner: Yeah.

Young: We would certainly think within the next week or two, we will make the initial filing to the SEC for their review process. We just received information from Baystar that we needed to complete that, so even next week we could get the draft filing in front of the SEC, and then of course you know they have a time frame they go through to do their review, but we're working to get that completed just as quickly as we can.

Brauner: My next question is, I noticed the compensation was way down, and I wondered how you planned on retaining key executives as well as technical employees given that you're trying to [unclear] expenses?

Young: Well, the main reason for compensation being down is just less people here. It's not like we've cut . . .

McBride: Are you talking about executive comp or the overall comp?

Brauner: Executive comp primarily.

McBride: Yeah, on that front, we have stock option plans in place and we have incentives in place for bonus plans, for this year as well. So the combination of those two, and the plans are out there on the stock and the bonus not just for the executives, but for the rest of the company as well.

Brauner: OK, thank you very much.

McBride: All right. Thank you.

time: 51:00

Operator: And we'll have our final comment, Robert Mims, Salt Lake Tribune.

Robert Mims: Hi, Darl, how ya doing?

McBride: I'm doing great. How are you doing, Bob?

Mims: Good. I wanted to ask you if you are able to expand any further on just who Pam Jones is?

McBride: It's an interesting question. What I would say without getting into all the details of what we do know right now is that it is not what it is reported to be, and I believe that anybody that goes over there and spends any amount of time flushing out the reality of the Pamela Jones situation will come to the understanding that we have, and the knowledge that we have, that all is not as it appears in Groklaw-land, and you know, clearly there are a lot of -- there is a lot of spinning, a lot of hype over there around virtually anything that is about SCO to the negative, unlike traditional media outlets such as yourself, that will take more of a balanced approach on things. We appreciate that we do have things that people say about us that deservedly need to be talked about that are negative, or so, this disaster we had going through the NASDAQ listing this last quarter was no fun, so we'll be glad to take our lumps, but the whole situation of having a website that is up there that is so biased and has only one thing to say, which is how do we destroy SCO? I believe that when that happens, you need to understand who is behind that, just like when you read a book you tend to go to the author as to the credibility. Well, we live on transparency here with this company, we're as transparent as you can get at this point after having just gone through this restatement process and the 10K process and the 10Q's and all of you have had a chance to see who and what we're all about. Let's turn some of that same energy toward the other side and find out who these other people are just so that we can have a fair fight.

Mims: Well, certainly she has, Pam has had a close relationship with the Open Source community, and at one point took a job but then backed off on that, but are you also saying she has some sort of connection to IBM perhaps?

McBride: I don't want to go to the IBM card. What I want to go to is, who is Pam Jones, and it's about credibility, and I believe once people learn some of the things that we've come to learn, there is going to be a serious question as to the credibility of that organization.

Mims: Well, when do you plan to release what you've learned then?

McBride: We're still digging to the bottom of this. I think once we have all of our facts complete, we'll be glad to do that. We're near the bottom of what that situation is all about, and we'll be glad to do that at a certain point in time.

Mims: Okay.

McBride: Okay.

time: 54:00

Operator: And that does conclude today's question and answer session. I'll turn the conference back over to Darl McBride for any closing remarks.

McBride: OK, thanks a lot. So in summary, while there has been a lot of distraction in the press regarding our SEC filings and NASDAQ listing, we have remained focused on our business and delivered good results. The company's Unix business is continuing to generate solid cash flow, the legal fees are in line with expectations, we have introduced the next-generation Unix platform that is receiving strong reviews in the marketplace, and we have made solid progress with regard to our litigation effort and look forward to having our case heard. As to the NASDAQ issue, let me just say that while it's been a real pain, I'm proud that our internal systems identified the issues and we took the right measures to correct them. We are and will always be a company predicated on transparency, and doing what's right for our shareholders, customers, and employees. And that's all we have for today. Thanks again for joining the call, and we'll look forward to reporting our 2Q results here soon. Thanks.

Operator: That does conclude today's SCO Group 1st quarter 2005 earnings conference call. You may disconnect at this time. We do appreciate your participation.


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