SCO Financial Outlook (My Title)

This is an article at Groklaw on the financial outlook for SCO done by Decatur Jones' Dion Cornette. The article at Groklaw has links to the PDF, and I have taken the text from Groklaw along with Pamela Jones introductory commentary.

Here is the PDF of Dion Cornett's January 13 report on SCO. As you will see, the OSDL legal defense fund, the Novell indemnification, and the Open Source Risk Management vendor-neutral indemnification program seem to him meaningful events, which he believes make it unlikely end users will now want to purchase a license from SCO in 2004. "The 'safe' action for the reasonable executive has switched from license to fight," says the report. Here's a segment.

We believe it is now unlikely that SCO will generate meaningful end-user SCOSource revenue in 2004.

Yesterday an industry consortium of Open Source-related companies (OSDL) announced an IP defense fund for endusers;

In conjunction with its closing of the SuSE acquisition, Novell announced an indemnification program for its customers;

We have cut our previous SCOSource revenue estimate of $7 million by 90%; Our new FY04 GAAP EPS estimate is a loss of ($.43) down from a $.20 profit; Our new target price is $5 down from $8; We maintain our Underperform rating.

Our outlook for SCO has worsened given yesterday’s news that an Open Source industry group has formed a fund that may be used to defend end-users from SCO claims. Contributors to the fund include technology giant Intel (INTC: not rated). Novell (NOVL: Market Perform) piled on late in the day by announcing an indemnification program for its customers. Coupled with Novell’s previous filing of overlapping UNIX copyrights, we believe that end-users, already reticent to license from SCO, now have three justifiable reasons to wait to pay SCO even if SCO’s claims are eventually proven valid.

We believe yesterday’s news that an industry consortium, Open Source Developments Labs (OSDL), had established a fund to defend end-users against infringement claims, represents the third strike in SCO’s attempts to derive IP-related licensing revenue from end-users. The first couple items detailed in our prior reports include the ambiguity of SCO’s claim over header files and Novell’s copyrighting of duplicitous UNIX software code.

Furthermore, we previously had assumed that SCO would be able to generate $7 million in SCO Source licensing revenue this year. As stated in our prior report, "The ability to win end-user settlements is based on our presumption that SCO will be very careful in choosing its initial targets. Suing the wrong end-user early on, one that is willing to fight, poses several problems for SCO. An end-user willing to fight could mean higher legal fees, management distraction, and further Linux community scrutiny of SCO’s claims. More importantly however, the end-user does not even need to fight to victory to damage SCO’s ability to collect licensing fees. In our opinion, the first end-user that successfully wins a stay of proceedings pending the outcome of the IBM (IBM: not rated) or Red Hat (RHAT: Outperform) cases effectively could shut SCO’s efforts down as detailed in prior reports."

Now with the potential for legal costs to be borne by OSDL, whose defense fund contributors include heavyweight Intel, we now believe it may be difficult for SCO to win any settlement. Furthermore the “safe” action appears to have switched sides. Before, many organizations may have been willing to write a five-figure check to avoid legal risks and move on with business. We suspect anyone currently considering such an expenditure may now worry that they will be taken to task for wasting corporate funds. As a consequence, we have reduced our expectation for FY04 SCOSource revenue by 90%. Similarly our estimates for legal expenses have also increased in anticipation of more expensive initial end-user battles. Based on the pace of legal proceedings, it is highly unlikely SCO will be able to post a legal victory against an end-user this calendar year, even if it were to file an end-user lawsuit by mid-February as it discussed.

Later in the day, in what might be described as piling on, it was reported after the market close that Novell would indemnify its Linux customers. The indemnification program would apply to customers purchasing SuSE Enterprise Linux 8.0 after January 13, 2004. The timing of the indemnification corresponds to Novell’s expected and announced completion of SuSE GmBH (In a separate announcement last night Novell announced that the acquisition of SuSE had closed. ) Also this morning, in an interview reported on Groklaw, Daniel Egger, chairman of the Open Source Risk Management Group, announced plans for a vendor-neutral indemnification program. The program would operate similar to insurance for companies supplying and using Open Source code and its agnostic approach is meant to eliminate the vendor lock-in, and potential fragmentation, inherent with vendor specific indemnification.

With significant end-user licensing fees unlikely and cuts to the core business possibly necessary, the fortunes of SCO’s shareholders are increasingly tied to a victory or loss against IBM. Yet, with the jury stage of the IBM lawsuit not scheduled to commence until April 2005, SCO is at least two years away from a potential win against IBM. Thus, the near-term downside risk to SCO’s shareholders is greater than the upside potential as IBM could conceivably win a motion to dismiss at least portions of SCO’s complaint at almost any time during this same period. The legal doctrine that supports this assertion is that juries decide facts, while judges decide matters of law.

Over the next few months a number of events offer the potential to drive SCO’s stock price. Yesterday, SCO was required by a Utah judge’s December order to provide with “specificity” to IBM a list of files that form the basis of its complaint. While the materials presented are covered by a protective order, we believe SCO may attempt to release additional details over the next few weeks to bolster its case to the IT community where it appears to be losing the public relations battle as of late based on Linux’s momentum. The risk to SCO is that the Linux community, which consists of potentially thousands of free programming experts for every one expert that SCO hires, is able to quickly counter SCO’s claims. SCO’s management also points to the likely granting of its own motion to compel discovery against IBM and positive responses from its end-user certification letter as other potential near-term catalysts. Negative near-term catalysts include the expected denial of SCO’s motion to dismiss the Red Hat lawsuit and IBM potentially filing to dismiss portions of SCO’s complaint. The filing of an end-user lawsuit will most likely be touted by both bears and bulls on the stock as a positive for their position. We believe that in total the near-term catalysts are generally negative for SCO.

Beyond the ebb and flow associated with a tightly-held, volatile stock, with strong opinions on each side, we believe SCO’s stock price direction over the next year, will be dominated by its expected declining financial position. As legal expenses increase with limited offsetting SCOSource revenue, the declining cash balance is likely to become a concern. Furthermore, year-over-year comparisons are likely to be poor starting in April given that the $26 million in SCOSource revenue received from Sun (SUNW: not rated) and Microsoft (MSFT: not rated) is not likely to be repeated. This begs a question for SCO bulls; if an expected $45 stock price is two years away, but that expectation may drop to single digits at any point in the interim, why assume the risk and hold the stock today when fundamentals like cash per share and revenue growth will get worse before they get better? This risk return equation does not require a judgment on whether SCO’s claims are valid and potentially produces higher returns by facilitating a lower entry point and shorter IRR period.

OK. GE made a statement he refuses (or is unable) to back up. The burden of proof is on him. If you wish to agree with him, please provide the proof.

I merely said that because IBM provided funding to iBiblio, and iBiblio provides free hosting to Groklaw, does not mean the IBM has editorial input into Groklaw's website.

What I posited was not an accusation, as opposed to GE's assertion. As he made the accusation, it's up to him to prove it.

Do you disagree?

I don't know if IBM donated servers, but if they did it's because they approve of the editorial slant of the site.

If I buy commercial time on Rush Limbaugh's program it doesn't mean I endorce his politics. But if I donate money to NPR without compensation, it is because I approve of their programming.

I don't know if IBM donated servers, but if they did it's because they approve of the editorial slant of the site.

But that's the point--they donated nothing to Groklaw. The servers were donated to iBiblio, affiliated with the university of NC. iBiblio is donating free host space to Groklaw. iBiblio is a software/education/linux site.

So--until you can prove the editorial link across three parties, you have no case, nor anything resembling one. What you DO have is a mob screaming "Burn the witch!"

Which is all GE and the MS crowd ever do

I don't know if IBM donated servers, but if they did it's because they approve of the editorial slant of the site.

So--until you can prove the editorial link across three parties, you have no case, nor anything resembling one. What you DO have is a mob screaming "Burn the witch!"

Which is all GE and the MS crowd ever do

LOL at you spinning on your head like a top. Disprove either of these statements:

Groklaw runs on servers donated by IBM

IBM donated the hardware that is used to run Groklaw

I submit the article in Forbes magazine as evidence. Now what do you have other than more foaming at the mouth?

Your reasoning makes no sense at all. If FR runs on Linux does that mean FR's editorial policy is controlled by Open Source?

You implied that IBM donated servers directly to Groklaw, implying that IBM made its donation in order to make Groklaw possible. You haven't connected these dots.

The thing that has me amazed is the total lack of evidence that the SCO Group has been able to put forth. You'd think that in order to scare some small businesses into the license deal, they'd release some good examples of the code they're referring to.

IBM donated the hardware that powers Groklaw, and the content of Groklaw appears to be 100% in support of IBM's interests.

If you can't put the two together, I really can't help you. And if you can disprove either, you're more than welcome to try. But I can tell you this either way: when you login to Groklaw, you are logging into a server that was donated by IBM.

Groklaw didn't move to ibiblio until fairly recently - 22 Nov 2003 - see http://radio.weblogs.com/0120124

Not surprising that Groklaw link didn't mention their "IBM servers" at all, although it does seem to mention the word "IBM" what looks like about 1,000 times or more. Guess they want you to believe a lot of what they're saying about IBM, but still not giving you the full or true story.

I'm posting this from a PC running Windows 98SE. Does that mean Microsoft is contolling my editorial content?

33 posted on 01/30/2004 3:42:01 PM PST by kevkrom (YEEEEEAAAAAAAARRRRRRGGGGGGHHHHHHHH! <splat> -- a prarie dog coming off a speed high)

I'm posting this from a PC running Windows 98SE. Does that mean Microsoft is contolling my editorial content?

I highly doubt it. Did they donate the computer or software to you? Is every peice of content you manage and post to others 100% pro-Microsoft?

I highly doubt it. Did they donate the computer or software to you?

Nope. And IBM didn't donate anything to GrokLaw. They donated it to a site that GrokLaw has moved to well after the IBM donation.

35 posted on 01/30/2004 3:50:18 PM PST by kevkrom (YEEEEEAAAAAAAARRRRRRGGGGGGHHHHHHHH! <splat> -- a prarie dog coming off a speed high)

They donated it to a site that GrokLaw has moved to well after the IBM donation.

Really, where is this documented? It's a donation that directly assists Groklaw, and completely destroys any pretense of objectiveness. If Groklaw wants to maintain any level of credibility, they need to find another donor for their hardware. And the services that run the site, apparently Red Hat pays for that.

Actually I did a little quick research, Linux is derived from Minux not Posix. There seems to be some really good Intellectual Property Law Attorneys who believe that SCO has a case and there a some who believe they do not.

As for the lack of evidence presented by SCO, I don't think we have seen all of it. There will be more to come. The courts will decide sometime next year.

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