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SCO turns a profit helped by licensing program

SCO's net income was $4.5 million, or $0.33 per share, on revenue of $21.4 million

(IDG News Service) — The SCO Group Inc. reported a profit in its second fiscal quarter thanks in part to its recently launched initiative to more aggressively collect licensing fees for its Unix operating system software, the company said Wednesday.

That initiative includes the filing of a US$1 billion lawsuit against IBM Corp. that alleges IBM engaged in illegal practices to damage SCO's Unix operating system software and benefit IBM's Linux business.

This is SCO's first profitable quarter since the company was founded as Caldera Inc. in 1994, said SCO President and Chief Executive Officer (CEO) Darl McBride in a conference call late Wednesday morning. "We couldn't be more thrilled with the results," he said.

Since 1994, the company has gone through a variety of transformations and reorganizations until its most recent name change to SCO.

SCO reported net income of $4.5 million, or $0.33 per share, on revenue of $21.4 million, in 2003's second fiscal quarter, ended April 30. That compares to a net loss of $6.6 million, or $0.47 per share, on revenue of $15.5 million in 2002's second fiscal quarter.

SCO reported a net loss of $724,000, or $0.06 per diluted share, on revenue of $13.5 million for its first fiscal quarter of 2003, which ended little over a week after the launch of the new licensing initiative, called SCOsource.

In 2003's second fiscal quarter, SCO, based in Lindon, Utah, generated $13.1 million in revenue from its operating systems business and $8.3 million from the SCOsource licensing initiative. SCO expects the SCOsource initiative to continue generating revenue in coming quarters. The company has over 6,000 licensees of its Unix operating system software, SCO said.

SCOsource was announced in January along with SCO's hiring of firecracker attorney David Boies and his law firm Boies, Schiller and Flexner to examine possible intellectual-property infringements against SCO.

In March, SCO sued IBM for US$1 billion alleging misappropriation of trade secrets, unfair competition, interference with contract and breach of contract regarding the Unix software SCO has licensed to IBM. SCO charges IBM with engaging in these allegedly illegal actions to benefit its Linux business.

McBride reiterated on Wednesday that SCO firmly believes it has a strong case against IBM and stands ready to make good on its threat to revoke IBM's Unix license, which IBM uses for its AIX Unix flavor, if the companies fail to reach an agreement. The deadline set by SCO for revoking that license is June 13, McBride said. At that point, SCO will decide how and when it will proceed, he said.

Since the filing of the lawsuit, SCO executives have said the company has evidence that proprietary Unix from SCO has been copied illegally into Linux software, including the Linux kernel, allegations that have made the company very unpopular in the Linux community. SCO had three teams independently examine Linux software and all three teams concluded there is significant misappropriation of SCO Unix code in Linux, McBride said.

Specifically, SCO claims all Unix flavors in use today are based on Unix System V, whose software code and licensing rights SCO owns. Novell Inc. on Wednesday issued a statement saying it didn't transfer Unix System V copyrights and patents when it sold the software to SCO in 1995. SCO countered Wednesday with a statement of its own saying it owns "contract rights" to Unix and that its lawsuit against IBM doesn't involve patents or copyrights. [See: "Novell hits back at SCO on Unix claims" May 28.]

The language in 1995's contract was confusing regarding the transfer of copyrights and patents, but SCO attorneys concluded that there is no question SCO acquired those copyrights and patents, McBride said.

SCO also announced recently it was suspending its own Linux business, which generated a small percentage of its revenue, and sent letters to about 1,500 large companies warning them they could be held liable for intellectual property violations related to their use of Linux software. The liability stems from provisions some Linux vendors include with their products which shield them from intellectual-property violations stemming from Linux code, effectively passing the "hot potato" to the end-users who buy the products, McBride said.

McBride acknowledges many Linux backers are angry at SCO, but said likewise there are many companies that think SCO has a valid claim and have approached SCO with questions and concerns.

Linux is an operating system that can be obtained free of charge and whose source code can be modified, copied and redistributed by anyone. In addition to the kernel, which is developed by Linux Torvalds and volunteer programmers worldwide, it also includes GNU operating system software from the Free Software Foundation Inc. SCO said recently it hasn't yet found infringements to its proprietary code in GNU software.

SCO expects third-quarter revenue to be in the range of $19 million to $21 million, with two-thirds coming from the operating-systems business and one-third from the SCOsource licensing initiative. So far, SCOsource has signed two licensing deals, so the potential for more business in the pipeline is very big, McBride said.

SCO is also counting on its forthcoming SCOx Web services strategy to boost revenue in coming quarters. SCO will be making important announcements regarding SCOx at its SCO Forum conference in Las Vegas in mid-August. SCO began working on SCOx in 2002's fourth quarter and expects to start generating revenue from it next year. It is already lining up partners for it, and plans to make acquisitions to fill out the SCOx technology, McBride said.

The company issued its earnings announcement before the opening of the financial markets in New York. Its stock (SCOX) was trading down 1.26 percent to $8.60 on the Nasdaq exchange in mid day EDT.

More Stories By Juan Carlos Perez

Juan Carlos Perez is Latin American bureau chief for the IDG News Service, a Linux.SYS-CON.com affiliate.

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