SCO Posts Q3 Loss as Legal Costs Mount

Unix vendor SCO Group , in the midst of copyright infringement lawsuits over parts of Linux, reported a net loss of $7.4 million for its fiscal third quarter on lowered revenues and higher legal fees. The results more than reversed its profit of $3.1 million during the same, year-ago quarter.

The company’s results were built on revenue of $11.2 million for the quarter, down about 44 percent from $20.1 million it took in during the same time last year. Its legal expenses related to copyright infringement cases involving IBM and Novell came to about $7.2 million as of the end of July.

Licensing fees were a mixed bag of news. In the most recent third quarter, they were $678,000. However, licensing revenue was up from the $11,000 it garnered in the second fiscal quarter of this year. During its third fiscal quarter in 2003, SCO reported $7.28 million in SCOsource licensing revenue.

SCO attributed its lackluster quarterly performance partially due to a lack or revenue from its SCOsource licensing program, which was formed to license SCO’s Unix intellectual property. The program, which licenses its Unix System V source code, is also aimed in part at taking in fees from Linux users on parts of the operating system code that it claims copyright.

Overall, the results narrowed the company’s losses from the prior quarter, which were $15 million.

SCO CEO Darl McBride maintained an upbeat tone during a conference call to discuss the results.

“The quarter can best be described as one where the company was firing on all cylinders from improved performance in the UNIX business to enhanced financial discipline and greater investment in our legal case,” he said.

SCO has improved the profitability in its Unix business, which in the last quarter introduced its first significant product upgrades in years.

So far, the SCOSource licensing revenue is coming from two clients, according to McBride, who declined to name the licensees. But he
noted two developments that he said have the potential to accelerate SCOsource revenue growth.

One would be a court resolution over competing copyright claims to parts of Linux by Novell . “We continue to believe that Novell’s claims have greatly impacted our ability to realize traction in this business,” McBride said.

Secondly, McBride cited a recent study by Open Source Risk Management (OSRM), a firm that provides risk mitigation and insurance offerings to the open source community, which found 283 non-court validated software patent risks in Linux.

“While SCO’s litigation hasn’t involved patents, it does give an indication regarding some of the problems that have existed for years with the Linux development process,” McBride explained. “SCO believes that this development process has also been responsible for the misappropriation of SCO’s intellectual property into Linux.”

Regarding its ongoing legal battles with IBM and Novell over Linux code claims, SCO announced an agreement with its legal firm that would cap its legal costs at $31 million. As part of the deal, SCO’s legal firm Boies, Schiller & Flexner could be awarded
between 20 and 33 percent of any potential settlement that may arise from SCO’s claims.

SCO also adopted a ‘poison-pill’ shareholder rights plan that would make it more difficult for it to be bought out by another entity. McBride said the move was not in reaction to any offer or prospective offer for the company.

SCO is expected back in court on September 15th over a motion by Novell to dismiss SCO’s lawsuit over Linux claims. Legal suits against Daimler Chrysler are still ongoing and the IBM case is expected to go to trial early next year.

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