Posted on 09/14/2006 8:36:27 AM PDT by ShadowAce
SCO has filed its 10Q for the quarter ending July 31, 2006, and it's a sad story of decline, which it blames squarely on everyone but itself:
Revenue from our UNIX business decreased by $1,931,000, or 21%, for the three months ended July 31, 2006 compared to the three months ended July 31, 2005 and decreased by $5,549,000, or 20%, for the nine months ended July 31, 2006 compared to the nine months ended July 31, 2005. The revenue from this business has been declining over the last several periods primarily as a result of increased competition from alternative operating systems, particularly Linux. We believe the inclusion of our UNIX code and derivative works in Linux has been a contributor to the decline in our UNIX business because users of Linux generally do not pay for the operating system itself, but pay for services and maintenance. ...Our SCOsource revenue for the years ended October 31, 2005 and 2004 was significantly lower than revenue generated during the year ended October 31, 2003, and we believe and allege our revenue and related revenue opportunities have been adversely impacted by Novell’s claim of UNIX copyright ownership, which may have caused potential customers to delay or forego licensing with us until an outcome in this legal matter has been reached.
I hate to break the news, but I don't think anyone is foregoing or postponing licensing with SCO. I think they don't plan on doing so ever.
Their tale of woe is compounded by legal expenses, as described in the Risks section, those expenses going up just as their income is going down. It seems they had to fill up the escrow glass again in June and those experts aren't cheap:
On June 5, 2006, we entered into an amendment to the Engagement Agreement and agreed with the Law Firms to deposit an additional $5,000,000 into the escrow account to cover additional expert, consulting and other expenses. In the event that we exhaust these funds, we will continue to pay for expert, consulting and other expenses through the conclusion of our litigation with IBM. As we continue with discovery and other trial preparations, we may be required to place additional amounts into the escrow account, which could harm our liquidity position. As of July 31, 2006, we had a total of $13,960,000 in cash and cash equivalents and available-for-sale marketable securities and an additional $1,561,000 of restricted cash to be used to pursue the SCO Litigation. Since October 31, 2004, we have spent $8,439,000 for expert,
consulting and other costs as agreed to in the Engagement Agreement with our legal counsel in the SCO Litigation.
How about that? 8 1/2 million dollars in about two years just for experts and consultants. Let's face it. It has to be hard to get anyone to agree to help you if you are the SCO Group.
I am imagining SCO approaching an expert and asking for help with the litigation. "Could you say that errno.h violates our copyrights or copies our methods and concepts?" And in my imagination I hear the expert snort, "Hah! Maybe for a cool million!" "Done," says SCO, reaching into a suitcase.
Joke, joke. But 8 1/2 million is a lot of money, particularly since it's on top of the $26 million already paid for attorneys' fees. Only a million and a half left in the escrow pot. And no end in sight.
Here's the breakdown:
The Company incurred a net loss of $12,855,000 for the nine months ended July 31, 2006 and during that same period used cash of $7,050,000 in its operating activities. A significant portion of the net loss and the cash used in operating activities was associated with the Company protecting and defending its intellectual property rights. As of July 31, 2006, the Company had a total of $8,861,000 in cash and cash equivalents, $5,099,000 in available-for-sale marketable securities, and $2,010,000 in restricted cash, of which $1,561,000 is designated to pay for experts, consultants and other expenses in the SCO Litigation, and the remaining $449,000 of restricted cash is payable to Novell for its retained binary royalty stream.
The one advantage to making less is they owe Novell less this quarter. Last 10Q it was $3,200,000. Lower income taxes too. So that's the good news.
Here's the 8K filed on June 8, 2006 announcing the
amendment to the agreement with Boies Schiller and the gang, otherwise known as "The Three Original Firms", the amendment being titled First Amendment to the Letter Agreement dated October 31, 2004 among The SCO Group, Inc., Boies, Schiller & Flexner LLP, Kevin McBride, and Berger Singerman:
The purpose of the Amendment is to replenish, as necessary, the escrow account (the “Escrow Account”), which is designed to cover the expert, consulting and other expenses of the current litigation between the Company and International Business Machines Corporation, Novell, Inc., Red Hat, Inc., AutoZone, Inc. and Daimler Chrysler, Inc. The Company and BSF mutually agreed, pursuant to the terms of the Amendment, to initially replenish the Escrow Account in the amount of $5 million.
We also get to understand what Darl McBride was talking about in the recent 3Q financials call, when he mentioned troubles with certification:
The success of our UNIX business will depend on the level of commitment and certification we receive from industry partners and developers. In recent years, we have seen hardware and software vendors as well as software developers turn their certification and application development efforts toward Linux and elect not to continue to support or certify to our UNIX operating system products. If this trend continues, our competitive position will be adversely impacted and our future revenue from our UNIX business will decline. The decline in our UNIX business may be accelerated if industry partners withdraw their support from us for any reason, including our SCO Litigation.
The problem SCO faces is a kind of Catch 22. No one wants to bother with certification or application development efforts for software not many folks are buying. And then because of a lack of certification or applications, fewer will buy. Here's the part about fewer buying:
If the market for UNIX continues to contract, our business will be harmed.
Our revenue from the sale of UNIX products has declined over the last several years. This decrease in revenue has been attributable primarily to increased competition from other operating systems, particularly Linux. Our sales of UNIX products and services are primarily to existing customers. If the demand for UNIX products continues to decline, and we are unable to develop UNIX products and services that successfully address a market demand, our UNIX revenue will continue to decline, industry participants may not certify to our operating system and products, we may not be able to attract new customers or retain existing customers and our business and results of operations will be adversely affected. Because of the long adoption cycle for operating system purchases and the long sales cycle of our operating system products, we may not be able to reverse these revenue declines quickly.
See, if you put almost all your money into the pot marked "Litigation" and very little into the pot marked "R&D" you can end up with very few, if any, customers. Pipe fairies, maybe. But not customers for your products. And if you quit selling Linux just as it really starts to take off, well, as my mom used to tell me when I was a kid and made poor decisions, "You made your bed. Now you must lie in it."
Their R&D expenses were actually up a bit, but that was, they say, "primarily attributable to increased travel costs and from stock-based compensation."
Of course that isn't the primary problem. Their primary problem I would think would be persuading their customers that they'll still be around a year from now. SCO first says this:
A material, negative impact on the Company’s results of operations or financial position from the Red Hat, Inc., IPO Class Action, or Indian Distributor matters, or the IBM or Novell counterclaims is neither probable nor estimable.
OK. That's in the Legal section. But a little further down, they repeat that information, and then they add this:
Because these matters are not probable or estimable, we have not recorded any reserves or contingencies related to these legal matters. In the event that our assumptions used to evaluate these matters as neither probable nor estimable changes in future periods, we may be required to record a liability for an adverse outcome, which could have a material adverse effect on our results of operations and financial position.
Then in the Risks section, they say this:
If we do not prevail in our action against IBM, or if IBM is successful in its counterclaims against us, our business and results of operations would be materially harmed and we may not be able to continue in business.
That's the part that may be scaring off customers. Do they sincerely believe losing the IBM litigation is in the improbable category? Then there are these ominous-sounding words, at least if one is looking for a long-term relationship:
Because of the unique and unpredictable nature of the SCO Litigation, the occurrence and timing of certain expenses is difficult to predict, and will be difficult to predict for the upcoming quarters. We will continue to make payments for technical, damage and industry experts, consultants and for other fees. However, future legal fees may include contingency payments made to the Law Firms as a result of a settlement, judgment, or a sale of our Company, which could cause the cost of SCOsource licensing revenue for the three months ending October 31, 2006 to be higher than the costs incurred for the three months ended July 31, 2006.
The case doesn't go to trial until February of 2007, so a judgment before October is pretty much out. IBM has shown zero interest in settling. So that leaves sale of the company. Things that make you go hmm. If I were an employee, I'd probably notice this section:
General and administrative expenses consist of the salaries and benefits of finance, human resources, and executive management and expenses for professional services and corporate allocations. General and administrative expenses increased by $182,000, or 11%, during the three months ended July 31, 2006 as compared to the three months ended July 31, 2005. The increase in general and administrative expenses was primarily attributable to increased professional services costs and stock-based compensation, offset in part by decreased personnel and related costs. General and administrative expenses decreased by $307,000, or 6%, during the nine months ended July 31, 2006 as compared to the nine months ended July 31, 2005. The decrease in general and administrative expenses was primarily attributable to decreased personnel and related costs as well as decreased accounting and legal fees, offset, in part, by an increase in stock-based compensation. Included in general and administrative expenses for the three months ended July 31, 2006 and 2005 was $264,000 and $0, respectively, of stock-based compensation. Included in general and administrative expenses for the nine months ended July 31, 2006 and 2005 was $736,000 and $0, respectively, of stock-based compensation.For the three months ending October 31, 2006, we anticipate that the dollar amount of general and administrative expenses will be lower than that incurred during the three months ended July 31, 2006.
Time to dust off that resume? They seem to be losing service contracts too:
Services revenue consists primarily of technical support fees, engineering services fees, professional services fees and consulting fees. These fees are typically charged and invoiced separately from UNIX products sales. The decrease in services revenue of $179,000, or 13%, for the three months ended July 31, 2006 as compared to the three months ended July 31, 2005 and the decrease in services revenue of $358,000, or 8%, for the nine months ended July 31, 2006 as compared to the nine months ended July 31, 2005 was primarily attributable to a decrease in professional services revenue as well as from a decrease in support and engineering services contracts.
It's just crazy woe after woe. It probably wasn't received well that they started suing their own customers. Folks starting lining up at the Exit signs. I guess SCO must feel they flew past the point of no return, and they are course committed now. But it's suicide by courtroom and it's hard to watch. Just think for a minute if they'd put $34 1/2 million into R&D and marketing instead of this wacko litigation. Or just fed the world's hungry. Even that would have made more sense than this endless gushing of money out of every body cavity SCO has straight into their lawyers' pockets. Well, one of the lawyers is Darl's brother, so at least some of it is staying in the family.
Poor babies, your plan to get free money backfired, and now running your company into the ground. Caldera (SCO's original name) was never a good company though, and performed worse than the other dotcom Linux companies. Buying the UNIX business and filing the suits may have helped it limp along for a while longer, but it's been doomed for a long time. It will be finally dead when the lawsuit scheme fails.
I gotta admit--I've never seen a wreck take this long to finally destroy a company.
Cash. Up. Front.
Can someone give me a quick readers digest version of what's going on here.
I am Joe's Failure.
What I think we are seeing and I am not alone is Microsoft using a company to delay Linux from taking over as the leading operating system. You have to admit it. If this is true that really got their money's worth. Poor SCO stock holders.
lol!
They're not "immortal" like "Highlander" ... they're "undead", like zombies.
The company acquired some rights to the Unix operating system. They then sued IBM, claiming infringement. They also claim that Linux infringes, and tried to get large Linus users to pay licensing fees to SCO.
When IBM dug in for the long haul, SCO then began to sue customers (Daimler Chrysler and other litigation). Some companies apparently don't want to do business with a company that has a business plan based upon suing customers.
As to the original litigation, IBM has repeatedly filed discovery seeing to have SCO identify the specific infringing code.
Somewhere along the way, claims cropped up that SCO may not have bought all of the Unix rights that it claims to have bought.
Finally, some of the funding flowing into SCO which supported the litigation has been traced back to interests with ties to Microsoft.
Disclaimer. This is a broad brush summary. All of the pleadings and rulings in all of the litigation should be reviewed to obtain a full picture of the background and status of the various lawsuits.
You left out the amusing part where SCO attempted to portray the GPL as illegal and non-binding. They did this when blogs revealed SCO had been distributing the code in question as part of a SCO Linux distribution. So SCO had to argue that 1) they didn't know they had freed the code into public use or 2) it doesn't matter because the GPL is unconstitutional.
"Why would a Wookiee, an eight-foot tall Wookiee, want to live on Endor, with a bunch of two-foot tall Ewoks? That does not make sense!"
SCO eventually abandoned this legal tactic.
You left out the funny part. Here's a rewording:
A Linux company acquired some rights to the Unix operating system and renamed itself to sound a lot like the former owner of Unix.
The thing is... if they'd stayed with Linux, and invested that $34.5M in the business instead of handing it to the lawyers, they'd probably be sitting pretty now. Caldera contributed a lot to Linux under Ransome Love, unfortunately, Love just didn't quite get it. Remember that Love is the one who did the SCO Unix deal.
Then Darl came in and thought he could be the king of monetizing Unix. And it's all been going downhill ever since.
You are not alone.
Why do you think Microsoft went from calling open source a "cancer" in 2003, to getting all buddy-buddy with open-source in 2006?
They placed their bets on a losing horse, and no amount of whipping would get it to run.
IMO any SCO shareholder who still held shares by 2004 should have bailed. I had an argument to that effect with the President of the company where I was Engineering Manager in late 2002 (he was convinced that SCO would kill Linux). By mid 2003 the end was clear for SCO, all over but the shouting.
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