SCO Woes Continue

FRAMINGHAM (07/12/2000) - The worries aren't over for The Santa Cruz Operation Inc. For the second quarter in a row, the company was forced to issue a profit warning.

SCO is facing an increasing threat from the marketing efforts behind Microsoft Corp.'s Windows 2000 and NT, and the rising popularity of Linux, said Dan Kusnetzky, an analyst at International Data Corp. in Framingham, Mass.

With its OpenServer and UnixWare products, SCO dominated the Unix-on-Intel market until the emergence of Unix derivative Linux. SCO executives initially derided Linux, then last year moved to offer services for the operating system.

In June, the company was about to announce its own version of Linux but unexpectedly canceled the introduction.

The previous quarter's results prompted a corporate reorganization into three independent business units with profit and loss responsibilities. The restructuring was a sound move that will take time to pay off, said Kusnetzky.

But Stacey Quandt, an analyst at Giga Information Group Inc. in Santa Clara, Calif., said it may be the prelude to a spin-off of one part of the company.

"The most likely candidate would be Tarantella," Quandt said. SCO's Tarantella Web-enabling software competes with Citrix Systems Inc.'s MetaFrame.

Further difficulties could lie ahead. SCO has long depended on a broad channel of value-added resellers. Those may be increasingly tempted to move their Unix applications to Linux so they can offer customers a more competitive price, said Kuznetzky.

Gene Christian, technical operations manager at office furniture dealer Goldsmith Inc. in Wichita, Kan., said that in 1994, he selected SCO's OpenServer for his company's furniture sales application primarily because he was familiar with Intel-based servers and because it was cheaper than other Unix offerings. "Now, the same arguments that persuaded me to select SCO are the very arguments used to encourage moving to Linux," said Christian.

SCO's third-quarter revenue is expected to come in between US$26 million and $28 million, compared with $57.1 million in the same three months last year, SCO said. The company expects to lose between 50 and 55 cents per share in the period. SCO blamed continued weakness in its channel and the delay of certain major contracts. SCO said it has hired an investment banking firm to help evaluate its financial options.

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