SCO's quarterly filing
The company claims a profitable quarter, of course. Total revenue is reported at $20 million, of which $11 million came from products, $2 million from services, and $7 million from SCOsource. As a result of this revenue, the company's claimed assets have gone from $21 million at the beginning of the fiscal year (October, 2002) to $26 million now; of that, almost $15 million is cash in the bank. $15 million is also, of course, what the company has received in licensing revenue from Microsoft and Sun this year.
The company has spent almost $4 million ($1.7 million in the quarter) on SCOsource. This figure includes internal SCOsource staff along with external legal fees. Most other expenditures are in decline; the company spent 31% less in research and development than it did last year. SCO laid off 35 employes - about 10% of its staff - over the quarter. It also shut down SCO Group Ltd., a subsidiary in the UK.
Litigation
Not surprisingly, ongoing litigation is an important topic in this filing. It mentions the Red Hat suit, stating:
It is interesting to hear that "no case or controversy exists" with Red Hat. SCO may well be restricting its options with regard to the creation of future cases against Red Hat. The first amendment defense is interesting; the first amendment rights of companies in the U.S. is currently a topic of much debate - and an ongoing Supreme Court case.
Things are happening in other parts of the world:
Several entities in Germany have obtained temporary restraining orders in Germany precluding SCO GmbH, the Company's German subsidiary, in substance, from making statements in Germany that disparage Linux, or entities involved in the Linux business, or implicate Linux as infringing the Company's intellectual property rights. SCO GmbH has received an administrative fine of 10,000 Euro for a technical violation of one of the temporary restraining orders. [...]
Informal letter complaints similar to those raised in Germany have been received from companies in Austria and Poland. [...]
Pursuit and defense of the above-mentioned matters will be costly, and management expects the costs for legal fees and related expenses may be substantial. The ultimate outcome or potential effect of the Company's results of operations or financial position as a result of the above-mentioned matters is not currently known or determinable.
The end result is that the limited countermeasures taken against the company so far are being felt. The "risk factors" section of the filing also has this statement:
In other words, SCO is discovering the costs involved in angering its customers.
Sun and Microsoft
Of course, SCO's customer base is shifting; a large part of its revenue comes from exactly two companies: Sun Microsystems and Microsoft.SCO's previous quarterly filing had noted that the "second SCOsource licensee" (being Sun Microsystems) had received, as part of its deal, a warrant allowing it to buy 210,000 shares of SCO stock at $1.83 each. Subsequently, a second warrant for 12,500 shares has been issued to Sun, at the same $1.83 price. There is still no explanation of why SCO stock is being issued to Sun. Most software licensing agreements do not include this sort of equity component.
Sun, which was responsible for 12% of SCO's revenue over the quarter, still owes $2.5 million on its licensing deal. That money is to be paid by the end of November.
Microsoft contributed 25% of SCO's revenue over the quarter. "On
July 31, 2003, Microsoft exercised an option to acquire expanded licensing
rights. Upon delivery, we expect to recognize additional revenue related
to this option.
" There is no further discussion of what these
"expanded licensing rights" are, or what Microsoft is paying for said
rights. Chances are, however, that this is the "Fortune 500" customer for
SCO's "Linux license" that we heard about in early August.
Vultus and Vista
The quarterly filing gives a few details with regard to SCO's dealings with a couple of other Canopy-funded companies. In June, SCO acquired Vultus, Inc., which is a web services business. The purchase itself required the issuance of 167,590 shares of SCO stock, of which almost 37,000 went to Canopy. But Vultus also owed Canopy a little over $1 million, so another 138,000 shares of stock (worth over $2.5 million now) went in Canopy's direction to take care of that little problem. This deal is a significant transfer of resources from SCO to Canopy; the benefit to SCO remains unclear, however.We've previously looked at SCO's dealings with Vista, which included the acquisition of $1 million in the company's debt for 800,000 shares of company stock, now worth many times that amount. The company has also fed the company $200,000 in other financing. The current state of that debt?
Vista is fortunate to have such an understanding creditor.
Summary
This filing describes a company whose regular product and service offerings continue to decline in market share and revenue. The filing mentions new initiatives ("web services") but lacks specifics and does not go so far as to predict any sort of revenue from those initiatives. SCO's great hope for the future remains SCOsource. In that context, it is interesting to note that the company's "Linux license" is not mentioned in any significant way here. The first public announcement of this license came after the close of the quarter, but it was clearly in the works at that time. If SCO thought it would get any kind of real revenue from this license, it would not have hesitated to say so. Instead, we continue to hear about exactly two companies - Sun and Microsoft - which are keeping SCO on life support and, apparently, intend to continue doing so. Meanwhile, attacks through the courts and the market are making themselves felt; SCO is finding itself fighting an increasingly defensive battle.
Anybody who is considering investing in SCO would be well advised to read
this filing in its entirety.