The SCO Group continues its downward slide

SCO Group reports revenue losses for Q4 2006

The SCO Group, which continues to fight legal battles over Linux and Unix, reported growing losses in 2006 as it jockeys to establish itself as a mobile application and services provider in the face of stiff competition in its traditional Unix business.

Revenue for the fourth quarter of 2006 was US$7.35 million, compared to US$8.53 million during the fourth quarter a year earlier. In addition, losses for the most recent quarter totalled US$3.74 million, up from the US$3.43 million net losses SCO reported in the fourth quarter of 2005.

For the year ended Oct. 31, 2006, SCO reported revenue of US$29.24 million, compared to revenue of US$36 million in 2005. Losses for the year totalled US$16.6 million, or 80 cents per diluted common share, up from a net loss of US$10.73, or 60 cents, per diluted common share for the year ended Oct. 31, 2005.

The losses came as SCO jockeys to regain its financial footing despite increased competitive pressures on its Unix business and a string of money-draining lawsuits it has filed in an effort to protect what it claims is its proprietary Unix code. In a legal filing last week, Novell claimed SCO was at the edge of "imminent" bankruptcy, but SCO has denied that.

Instead, SCO says it is focusing on its mobile business to help pump up its revenues. At the SCO Forum in August, SCO President and CEO Darl McBride said moving forward the company would focus on offering subscription-based mobile services called Me that it is developing using a new mobile software development platform called EdgeClick.

In a press release outlining its fourth quarter and year-end financials, SCO says its drop in revenue is "primarily attributable to continued competitive pressures on the company's Unix products and services. At the same time, McBride stresses that SCO remains committed to its Unix business. In the fourth quarter, SCO updated SCOoffice Server for SCO OpenServer 6 and UnixWare 7.1.4 and also began shipping SCO HA Clusters, high availability software for SCO OpenServer 6.

"Even though competition is strong and continues to impact our revenue and operating results, we are continuing to develop and promote our Unix solutions and mobile services strategy, as we believe that the market, as well as the benefits to our customers and partners, are significant," McBride said in a statement.

"The company's fourth quarter continued to be difficult due to competition in the marketplace for our Unix business," says McBride. "In addition we continued to incur legal expenses in defense of our intellectual property litigation. Because of decreased revenue and increased legal fees, the company too the necessary step of reducing expenses to ensure that our Unix business would generate positive cash flow."

In October, SCO reduced its headcount from 166 to 142 employees and saved US$400,000. The company also reduced marketing expenses and travel. SCO expects further price cuts to continue into the first quarter of 2007, says Bert Young, SCO CFO.

McBride also said that SCO remains committed to its legal battles, which cost the company US$2.22 million in the fourth quarter. Those legal expenses are down from the US$3.34 million SCO spent in connection with its legal efforts in fourth quarter of 2005.

"As a result of the recent scheduling orders in both IBM and Novell cases, we believe that costs related to the litigation will decrease for fiscal year 2007 as compared to fiscal year 2006," says Young. "However, because of the unique and unpredictable nature of the litigation, the occurrence and timing of certain litigation expenses will be difficult to predict for the upcoming quarters."

As for cash on hand, cash and cash equivalents, available-for-sale marketable securities and restricted cash to be used for certain legal expenses totaled US$12.66 million as of Oct. 31, 2006, compared to US$13.31 million as of Oct. 31, 2005.

"Some of the negativity [regarding SCO] is warranted," says McBride. "If you just look at the numbers, the scoreboard over the last few years, it's not a real pretty picture," says McBride. "The company is focused on actions to drive us into a cash flow positive position."

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