SCOSource Sinks Below the Poverty Line

Thursday, June 10 2004 @ 04:40 PM EDT

Contributed by: PJ

Well. I guess you heard. In today's teleconference, SCO reported that they posted a decline in all three of its revenue segments in the quarter--products, services and licensing. SCO isn't making money bullying Linux. The company posted a net loss of $15 million in its second quarter versus net income of $4,5 million a year ago. Revenue fell to $10.1 million from $21.4 million. That is a 52% drop, Biz Yahoo is saying. As you know, I don't do math. Analyst Dion Cornett does, and even he overestimated SCO. They did worse than he expected:

"'Some of their core customers are being scared off by the lawsuits,' said Dion Cornett, an analyst at Decatur Jones Equity Partners. 'SCO has sued some of its customers, and that is what's scaring people off.'

"As customers go from Unix to Linux, Cornett said, SCO's business is falling off at twice the pace of other software, like Novell's NetWare, a Unix derivative."

Well, yeah. Motley Fool calls SCO a serial litigator.

It's all Novell's fault, in the world according to SCO:

"SCO CEO Darl McBride acknowledged that Novell's claims that it owns Unix copyrights have been a hurdle to signing more SCOsource licensing deals. . . 'The reality now is I believe it is a war of patience,' McBride said in a conference call Thursday."

$11,000.00. That's not a typo, says Motley Fool:

"SCOsource is the Linux users' shakedown program. Apparently, no one is paying up. It took in $11,000 last quarter. That's not a typo. President and CEO Darl McBride paid more lip service to 'increasing shareholder value,' but you really have to wonder about the viability of his vision when his firm's most engrossing initiative brings in less money than the guys who mow lawns in my neighborhood. By the way, McBride was paid more than $1 million last year -- most of it in cash -- to preside over this impending disaster."

There doesn't seem to be a lot of money shaking down Linux users after all. Yoo Hoo. Bay Star. Earth calling Mr. Goldfarb. The Washington Post [reg. req.] got him to tell us about the Microsoft connection. According to Goldfarb, it was *not* an ex-MS employee that did the matchmaking between him and SCO, and what a match made in heaven it has turned out to be:

"'I would not have known about the existence of SCO, but for the introduction by Microsoft,' BayStar President Lawrence Goldfarb said in an interview.

"SCO officials say the introduction was made by a former Microsoft employee, but Goldfarb said he was approached by two current, senior Microsoft executives whom he did not name except to say they were not Chairman Bill Gates or chief executive Steven A. Ballmer.

Goldfarb added that Microsoft's involvement stopped at the introduction, and that Microsoft is not an investor in BayStar. "'We're a pure financial animal,' Goldfarb said of the venture capital firm. The terms of the investment deal were attractive, he said, with BayStar purchasing $20 million worth of preferred shares that paid an ongoing dividend. The firm mitigates its risk by shorting the common stock of the company it is investing in. . . . .

"Initially, BayStar also sought a refund of its investment, which could have stripped SCO of much of its cash.

"'We do not like to be in the public forum,' Goldfarb said. 'We were not happy with what we thought was a cavalier attitude [by SCO management] . . . in dealing with investor relations and the press. This is an issue of grave importance.'"

Pure financial animals should do more research, methinks. And if being in the public eye is distasteful, I'd suggest not investing in public companies who are in numerous lawsuits where you could get deposed or called on the witness stand. One puzzling thing in the article is that Goldfarb says he has concerns about the GPL. What do pure financial animals have to do with the GPL? Maybe they have invested in Microsoft. One thing I like about the guy. He won't lie for SCO and back up their stories about ex-employees of Microsoft. Of course, Jonathan Krim might just be a really good reporter. He says, by the way, that legal eagles on both sides use Groklaw as a resource:

"One Web site focused exclusively on the case, known as Groklaw, was started by a paralegal named Pamela Jones and now has roughly 5,000 contributors. Though it is ardently pro-Linux, the site has grown into such an exhaustive archive of software history and law that attorneys on both sides use it as a resource."

Actually, since the interview, we've grown. We have 6300+ members now and millions of hits a week. As SCO sinks, we keep rising. Go figure. Dan Gillmor noticed the Post article and says this about it and Groklaw:

"This may be the best roundup of the SCO case by any mainstream newspaper. Note the tip of the hat to Groklaw, which is clearly the single best repository of information about the case.

"Groklaw is in my book a particularly fine example of grassroots journalism, where people at the edges of the networks are feeding data back into the middle and then back out to the edges. This is a powerful trend. I'm glad to see it used for such excellent purposes in this situation."

The EV1 money isn't yet in the picture . Next quarter. Shorting the stock seems to be the chief method of making money on SCO stock, I gather. Somebody in Germany seems to think so, anyway. SCO stock was listed on an obscure board that they say makes it possible to short, short, short your stock gently down the stream. SCO didn't give permission to be listed and has asked to be removed. SCO isn't the only company:

"'By listing the company's common stock on the Berlin Stock Exchange, market manipulators sought to benefit from an arbitrage loophole,' read a Pickups Plus press release, one of dozens issued by U.S. companies that employed nearly identical diction."

U.S. securities regulators are looking into the matter, according to TheStreet. Here's Motley Fool's conclusion:

"Here's the sad truth: SCO is working hard to erase whatever viability it had as a software provider. It is now little more than a shell -- a lawsuit with a fancy name. We saw this coming awhile back when the company's sugar daddy, hedge fund BayStar Capital, muscled the firm away from its languishing enterprise business and demanded it concentrate on the litigation. A legal victory looks highly unlikely, and even if a decision went SCO's way, the probable remedy would not be money for SCO, but a rewrite for Linux, something the open-source community would accomplish in the blink of an eye.

"At 5 bucks a share, with almost nothing available to short, SCO isn't worth much of your investing effort. But it's definitely worth watching, if only as an example of the way a company can be run into the ground, taking investors along."

Groklaw doesn't give financial advice obviously, and if we did, you would be a fool indeed to follow it, because I know very little about finance. I am finding it fascinating though. Melanie Hollands has just done a helpful article on legal and illegal insider trading.

So. $11,000. That is the entire SCOSource income this quarter. SCOSource cost $4.4 million. There seems to be an imbalance in SCOUniverse. Oh, there is another way to make money from SCO. Be David Boies:

"SCOsource revenue was $11,000 for the quarter, compared to $8.25 million in Q2 2003. SCO has collected $31,000 in SCOsource revenue since last October.

"SCOsource expenses, meanwhile, reached $4.4 million. The bulk of that money is going to the high-profile legal team fronted by David Boies, who tried and won the antitrust case against Microsoft. McBride said those expenses will remain consistent as the court case, expected to reach trial in April, plays out. This week, SCO asked for a delay in the trial until September 2005.

"McBride said SCO has been diligent in providing the courts with samples of the code it believes IBM has contributed to Linux. He said IBM has not been as forthcoming.

"'IBM is trying to slow the case down,' McBride said. 'It took IBM nine months to produce AIX code for us. We have been diligently going through that code and will respond to the court. The pieces are on the table. It's in the court's hands.'"

Maybe God's too. I don't think God likes liars. *IBM* is trying to slow the case down? Is there even one person left on planet earth who doesn't know that is not true? They just went to a lot of expense and trouble to ask the court NOT to slow the case down, which SCO is asking the court to do.

OK. One person. And he was paid a million bucks last year.