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SCO's 4Q and Y2005 Financial Conference Call
Friday, December 23 2005 @ 03:01 PM EST

The SCO 4th quarter and year-end financial results conference call was the weirdest yet. Ever get invited to a party, and you get there and while the table is set for 25 people, only 4 or 5 ever show up? You feel so awkward. [Cf., for contrast, the SCO 1Q teleconference in 2004.]

Overview: if it were not for the litigation, they'd be making a little money. Most CEOs would take a hint.

Perhaps the problem is they don't want a *little* money.

Here's Steven Vaughan-Nichols' article on the grim financials. And Bob Mims.

SCO announced at the beginning of the call that they'd entertain questions only on their core Unix business. But they did mention yesterday's deadline for filing with the court, which they said would be filed after the call. Darl's description of what they filed regarding allegedly infringing code sounds like it isn't much about copyright infringement, if at all. He wasn't clear as to whether they will make any public announcements. The filing will be nonpublic. So much for the "mountain of evidence" about copied code. Lanham Act, here they come, both IBM and Red Hat, one assumes. Since Red Hat is asking the court to declare that there is no copyright infringement in Linux, it is sounding a bit like a slam dunk on that.

Of course, one never takes what SCO says as cast in stone, or at least I never do, but here's what Darl said:

[16:34]

OK, now let's move over to the litigation front. We'd like to briefly update you on a couple of the key developments with regard to where we are in protecting our rights inside of the court system.

Over the past few months we've made what we believe is good progress in discovery. The Court has denied a few of our requests for discovery that we believe are material but what we have received so far has established a sound basis for claims but there is still more work to be done and more discovery to be finished over the coming next few months.

We believe that we will have a compelling case to be presented at trial in early 2007. On October 28th, working with our outside technical consultants, we identified for IBM and the Courts 217 separate and distinct disclosures of material by IBM which we claim violated the Unix license agreement and enhanced Linux for use in the enterprise.

Today our team will be filing a final report that expands on the October filing. Discovery will be closing early next year and then both sides will be finishing off expert reports, motions, and getting ready for trial.

[17:46]

With regard to the Novell litigation, the court has issued its scheduling order for the case, and the trial date that has been set is June 27, 2007. We look forward to gaining discovery and further preparing that case for trial as well.

To summarize the status of our legal cases, we remain confident of our claims, and our legal team, and look forward to a successful conclusion to the litigation so we can turn our full attention to our business initiatives.

In answer to a question from Steven Vaughan-Nichols as to whether there was more being filed yesterday in addition to the 217 items filed in October, Darl amplified:

[19:02]

We'll take our first question from Steven Vaughan-Nichols with Ziff-Davis.

Vaughan-Nichols: Hello Darl, Blake.

Darl McBride: Hey, Steve.

Vaughan-Nichols: My question concerns what you will be turning in to the courts today. Could you give me any kind of color or characterization if this is just going to be an expansion on the 217 areas or is this going to be digging into new ground?

McBride: Well, it will be out there, and when it is fully filed they'll have some official comment that will surround that. I think that as we see this going in, it's basically taking the 217 that were there before and it will be expanded beyond that and it's going to be deeper and it will be broader but it's basically homing in and polishing the submission that was done in October. So it will be joined in later today and look forward to it. Again that information will be put in front of the courts as well as being sent to IBM and I don't know what will be said about that publicly. Obviously the submission itself won't be public but whether anything else will be flavored around that, I don't know we'll just have to wait and see how the attorneys deal with that.

Translation: nothing much new. No wonder they were begging for more discovery up until the bitter end. Essentially nothing was found between October and December. Certainly no headlines. Of course, the deposition of Sam Palmisano hasn't happened yet. If they can just waterboard him, who knows? They may find their pot of gold at the end of the rainbow yet.

Here's a snip from another Vaughan-Nichols' article, from yesterday:

In these papers, SCO is expected to identify in more detail the exact technology that was improperly disclosed by IBM or Sequent, who made those disclosures, how the disclosure was made, exactly where in the Unix or modified Unix code the disclosure came from, and the manner by which it had been contributed to Linux.

Taken as a whole, SCO will claim that this will show how IBM made a pervasive, sustained effort to disclose methods, concepts, and often, literal code, from Unix-derived technologies in order to enhance Linux.

Uh huh.

The ever-faithful Forbes also put as positive a spin on the ball as one can, under the circumstances:

The SCO Group, a provider of Unix software, reported a narrower loss per share for the fourth quarter. The company posted a loss of 19 cents per share, versus a loss of 37 cents in the year-ago period. Revenue fell to $8.5 million from $10 million. The SCO Group blamed its continued unprofitability on outstanding legal issues and said the decrease in revenue was due to continued competitive pressure. Last month, the company negotiated $10 million in private placement to help cover ongoing litigation costs.

Ah, yes. The PIPE Fairy.

Vaughan-Nichols quotes one of the SCO attorneys from June of 2003 on what SCO's claims were back then:

Back on June 16, 2003, Mark J. Heise, a Miami-based partner in The SCO Group Inc.'s law firm Boies, Schiller & Flexner LLP and complex commercial litigation specialist, said, "Through contributing AIX source code to Linux and using Unix methods to accelerate and improve Linux as a free operating system, with the resulting destruction of Unix, IBM has clearly demonstrated its misuse of Unix source code and has violated the terms of its contract with SCO."

All that's left of that list, I gather, is the contract stuff. And may I take a moment to point out that Unix hasn't been destroyed, but continues to make money, even for SCO, apparently? That's what they told us in the call, that their "core Unix business" is positive cash flow. But that quotation is somewhat misleading, because it doesn't include any of the fiery language that spewed out of SCO like a volcano for two years or so about copied code and copyright violations. Oh, and trade secret violations too. Both now seem to have evaporated into the mists. If you have forgotten, I suggest you visit our Quote Database. For example, on the page of Darl quotes, you'll find that what SCO alleged was actual code being improperly put into Linux, not methods and concepts. One example, from April of 2003:

It's substantial System V code showing up in Linux.

Now it's methods and concepts, based on some aged contracts never before enforced in this novel way that they allege restrict such, as long as they ignore totally all the documents that said IBM was free to use anything but the actual code. Here's an example of SCO's claims from May of 2003:

"We're finding...cases where there is line-by-line code in the Linux kernel that is matching up to our UnixWare code," McBride said in an interview. In addition, he said, "We're finding code that looks likes it's been obfuscated to make it look like it wasn't UnixWare code--but it was."

Remember all that? And what about those three teams that Darl told us in May of 2003 found gobs of Unixware in Linux?

McBride: I understand why people are upset. And I understand why people are asking, 'Those SCO guys, what are they doing now?' But I would turn the question around to them and ask the question: 'What would you do if you were in our shoes?' What would you do if you had turned three independent programming teams loose on the question of 'Is our UnixWare inside of Linux?' and all three of those groups came back independently and said yes.

VB: But being in the legal right isn't always the same as being in a position to move on so many people. So how did you decide to proceed? What's the potential upside to collect or get the violations to stop?

McBride: At that point in time when the teams came back and said, 'Yes, there are violations, and it's not an insignificant amount of code we are talking about,' we, after much dissecting of the problem and kicking it around, came to that we conclusion that we needed to send out an alert or notice to let people know that these problems existed. That notice came in two forms. One was a press release that went out [on May 14,] while the second was a letter that went out to customers.

VB: How many customers did you send that out to?

McBride: We sent that out to the Fortune 1000 and the Global 500 public companies.

So much for MIT deep divers, huh? They were not alleging they found methods and concepts or contract violations. They were talking code. Copied code. And that is precisely what they will have to answer to Red Hat and IBM about. As it happens, you can't legally bad mouth a company's product with false information and get off scot free.

That interview includes a quotation from Darl that, in hindsight, stands out. In talking about Linux and the future, he is asked about their ownership of the Unix IP:

McBride: But, one thing that's interesting, T.C., is if you look at the online music business and the path that that's gone through over the past few years, it started off where Linux is now where millions of people around the world were excited about online music, Napster, because it was music for free. You now have millions around the world that love Linux because it's Unix for free. Free models have a way of not sustaining for a long period of time. And I believe that's the case here as well. But if you look at how the evolution continued on the music side, you have the [Apple] iTunes product line that came out two weeks ago and in the first week you have over 1 million songs that are downloaded for a buck a song. I believe that at some point, you are going to see a more rationale business model attached to Linux than something that is called 'free software.'

VB: I have heard this [comparison] before, but the one thing that those who say this isn't an apples to apples comparison is that there was no question in the world of online music who owned the intellectual property. It was out and out thievery. In the Linux case, some say there's a broader interpretation of who does own things. I guess you guys are stepping forward and saying 'well, from our perspective, at least, it's pretty clear cut.'

McBride: I don't think you are going to have any challenges worldwide with the argument that SCO owns the majority of the Unix operating system intellectual property. The arguments will come in that we don't all of it. And that is a challenge in this case, versus the online music business, I would agree with that.

If I were deposing Darl, and I were Novell, I'd certainly want to ask him what he meant by that. Did he have doubts about owning it all? Was he aware that others, significantly Novell, challenged their ownership? If so, where's the slander of title, pray tell?

That first interview from April 2003 includes my all-time favorite quotation from Darl, by the way:

We're either right or we're not. If we're wrong, we deserve people throwing rocks at us.

Hmm...he's speaking metaphorically, of course.


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