SCO posts $2.3 million loss

With mounting legal fees, and revenue from licensing deals with Microsoft and Sun Microsystems drying up, The SCO Group on Wednesday reported a net loss of US$2.25 million for the first quarter of its fiscal 2004 year, which ended January 31.

The loss, which amounted to $0.16 per share, came as revenues from the company's SCOsource initiative plummeted from $10.3 million in the third quarter of 2003 to $20,000 in the company's most recent quarter.

SCO had reported a loss of $724,000, or $0.06 per share on revenue of $13.5 million in the year-ago quarter.

The drop in SCOsource revenue came because both Microsoft and Sun had completed the quarterly completed payments they had been making to SCO for Unix licensing deals they had signed with the Lindon, Utah company.

SCO expects its licensing revenue to gradually increase in the year ahead as the company begins to sign deals with Unix vendors and Linux end-users, said Bob Bench, the company's chief financial officer. In fact, SCO has walked away from a number of short-term licensing deals in pursuit of agreements that would be more profitable in the long-term, he said. "There are (deals) we could have closed last year in the tens of millions, but we felt that expediency was no longer required and we needed to look at the longer term," he said.

SCO's financial results were announced on the same day that the company announced it has launched lawsuits against automaker DaimlerChrysler AG and auto parts retailer AutoZone Inc., alleging that AutoZone had violated SCO's copyright by using Linux, and that DaimlerChrysler had violated its SCO software licensing agreement with SCO by failing to comply with a software audit.

SCO is also engaged in lawsuits with IBM, Novell, and Red Hat relating to its claim that the Linux operating system illegally contains SCO's intellectual property.

SCO spent $3.4 million operating the company's SCOsource program, which seeks licensing revenue for the AT&T System V Unix license that SCO acquired in 2000, SCO said.

The company expects to expand SCOsource operations in the next quarter with more lawsuits against Linux users, but one financial analyst expressed skepticism that this would help SCO's bottom line.

Dion Cornett, a managing director with Decatur Jones Equity Partners LLC, said that he had been expecting SCO to earn $7 million in SCOsource revenue in 2004, but that he cut that number to zero recently, based on feedback from Linux users. "I had been expecting customers to sign up rather than risk litigation," he said. "My sense is that SCO is sort of losing the PR (public relations) battle in the IT community."

Linux customers do not expect to sign license agreements with SCO until the company proves its case, Cornett said.

Cornett, who does not own any SCO stock, said he had set a target price of $5 for SCO's stock. He expected to revise this number based on Wednesday's results. "I've been recommending that people sell the stock," he said.

SCO's stock was down $1.66 or just over 12 percent, trading at $11.76 on Wednesday.

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