Here is the transcript of SCO's June 10, 2004 2nd quarter earnings conference call. The most significant news, to me, was McBride saying that one of the "top guys" at the Boies firm, Robert Silver, is now helping Mark Heise. That and Mr. McBride saying that he wishes the protective order didn't prevent him from showing us the code they've filed with the court. Since he says he feels that way, and has said it publicly, I hope IBM will now let Judge Kimball know, so the protective order can be lifted enough to make public any Linux code that SCO may be alleging is involved -- with specificity. Now that he's on the public record with this accusation, it'd be appropriate for him to let the world see what he is talking about. Or issue a retraction.
Second, he now agrees that he said too much to the media. He blames it on IBM "agents", who just made him respond. It's laughable to those of us who have watched this closely to hear that. We remember him proudly bounding on to the stage last year at SCOForum and showing off his notebooks of press clippings. And we remember who started the media blitz. I won't even go into the agents business again. It seems SCO just can't understand genuine moral outrage. Then there is the chronology issue. It isn't hard to go back and see who started with the media circus back in January of 2003. You can't go back that far on Groklaw, of course, because there was no Groklaw until May of 2003.
Third, I note how he tries to spin it that they only came up with the licensing program because companies asked for it. Funny. That's not what I remember. My memory is that nobody on planet earth wanted to license whatever that Linux IP license was then being called -- unless they were threatened with a lawsuit. And not even then. I got the distinct impression that the teleconference was scripted, literally, and that the lawyers combed through every word. Just not at all the old Darl McBride.
Thanks to to LHJ and Screenwriter for doing the transcribing for us.
Operator: Good day everyone and welcome to the SCO Group's second quarter 2004 earnings conference call. At this time everyone is in a listen-only mode. Later a question and answer session will be opened.
Today's call is being recorded. Participating on the call today are Darl McBride, President and Chief Executive Officer, and Bert Young, Chief Financial Officer. Each of you should have a copy of the press release issued this morning containing our second quarter year-to-date results for the fiscal year 2004, which we'll be discussing in further detail in this call.
I wish to point out to the participants on today's conference call that the information provided during this call will include forward-looking statements within the meaning of private securities litigation reform act of 1995.
These forward-looking statements are made only as far as the date of this conference call and we undertake no obligation to uptake or revise the projections of the revenue or earnings or other forward-looking information, whether as a result of new information, future developments, or otherwise. Our performance is subject to significant risks and uncertainties, known as the unknown that could cause our actual results to differ materially from those that may be anticipated by the forward-looking statements.
These risks and uncertainties may cause our actual results, level of activity, performance of achievements to materially differ from any of our projections of future results implied by these forward looking statements. In particular our projections of third quarter revenue for 2004 contain revenue from our SCOsource license initiative. We have limited experience with this initiative to date, and underlying intellectual property is the subject of pending litigation, all of which makes the projection of this revenue particularly difficult and subject to both known and unforeseen risk.
Accordingly, you should not place undue reliance on these projections of the future revenue and results or other forward-looking statements. For a full discussion of this and other risks, please see our annual report form 10K for the fiscal year ended October 31, 2003 and our quarterly report on form 10Q for the first quarter ended January 31, 2004 and other reports we have filed with the SEC, all available at www.sco.com.
I will turn the call over to Darl McBride, President and Chief Executive Officer of the SCO Group Incorporated.
McBride: OK, thank you very much, and thank you all for joining us today. As we begin the call, I want to formally welcome Bert Young, our CFO, who joined SCO in April of this year. Bert brings to SCO a seasoned background in executive level management responsibilities from a variety of information technology companies, including worldwide finance operations and M&A expertise.
Today we'll be discussing ways in which Bert has already assessed the company's operations and has driven additional efficiencies in these operations.
In addition to the appointment of our new CFO, we this quarter also announced that Bob Bench will assume the responsibilities of acting vice president of corporate development. Bench has been the company's CFO for the past three and a half years and will now focus on external growth opportunities and industry partnerships.
As we look to the future, these changes in executive management responsibilities will allow significant focus on efficient internal operations, ongoing development of our current product lines and the addition of technology and products through licensing and partnerships.
During Q2 we remained focused on the protection of our UNIX intellectual property, and during today's call, we'll give you some updates on the status of our intellectual property enforcement activities.
Additionally the company is committed to the profitability of our core UNIX business and we will review our plans to increase our core business efficiencies, to release new versions of our major product offerings, and both of these initiatives are focused on generating cash-positive operations for the UNIX division as we move forward.
On today's call we will also provide an update on our recent announcements concerning our series A-1 financing in BayStar capital. As we proceed with the review of the second quarter results and review our progress against our key objectives for 2004, I'm confident that you will see that we are committed to taking advantage of the strength of our intellectual property assets, loyal UNIX installed customer base, and long-time industry partners.
However, before I comment any further, I'd like to ask Bert to review our second quarter financial results in more detail. Bert.
Bert Young: Thanks, Darl. Good morning, everyone.
Revenue for the second quarter of fiscal year 2004 was 10.1 million. Second quarter revenue was primarily attributable to our UNIX division. We believe this level of revenue represents a stabilization of revenue in the UNIX business at or near 10 million a quarter.
While current quarter revenue is down from revenue of 21.4 million from the comparable period of the prior year, this is primarily the result of a lack of SCOsource licensing revenue. SCOsource revenue was 8.3 million in the second quarter of fiscal year 2003. Year-to-date revenue for our UNIX division was 21.5 million.
We are continuing to face increasing competition from other operating system products, primarily Linux, which continues to negatively impact our UNIX division's revenue.
The company reported a net loss to common stockholders of 14.96 million or $1.06 per basic and diluted share for the second quarter of fiscal year 2004.
The net loss from operations for the second quarter of fiscal year 2004 was 9.4 million and included a charge of approximately 0.7 million for general administrative costs related to streamlining our UNIX business operations and a charge of 2.1 million related to the impairment of goodwill and intangible assets. Exclusive of these two charges, the net loss from operations would have been 6.6 million.
For the first two quarters of fiscal year 2004, the company reported a net loss to common stockholders of 17.2 million or $1.23 per basic and diluted common share. However, our cash and available-for-sale security position remains strong at April 30, 2004, totaling 61.3 million, and our cash used in operations during quarter two totaled 3.4 million. I'll talk a little bit more about cash later on in the call.
The breakdown by geography of our UNIX products and services revenue for the second quarter was 58 percent of revenue in the Americas and 42 percent international, which includes our customers in EMEA and Asia.
Turning to operating costs and expenses of the UNIX division for the second quarter of fiscal 2004 were 9.9 million. Our operating costs related to our UNIX division continue to trend down as expected. Additionally, the company is focused on cost containment and streamlining operations in the UNIX division to the point where the UNIX business will cover its expenses and throw off cash. We will use the cash generated by our UNIX division to add to our working capital, and as appropriate reinvest in our business.
Turning to the SCOsource division, due to questions being raised in end users' minds arising from Novell's claims that SCO does not hold the copyrights to UNIX, which we believe is a false claim, revenue to date from our SCOsource division has been minimal. However our SCOsource initiatives are moving forward. Our sales funnels continue to build, and we've engaged in discussions with potential customers for significant licensing opportunities.
As in previous quarters, we are continuing to classify legal and professional fees and other costs and expenses that relate to the enforcement of our intellectual property rights as costs of revenue. For the second quarter of 2004, these costs were 4.4 million. We expect that costs and expenses relating to the enforcement of our intellectual property rights will remain at approximately the current level for the next quarter as we protect our valuable UNIX intellectual property and aggressively pursue our legal claims through the court system.
During quarter two, we completed the previously announced exchange agreement of our Series A convertible preferred stock for Series A-1 convertible preferred stock. As a result of this exchange we eliminated the derivative financial instrument associated with the Series A shares.
As part of the exchange, we recorded a non-cash dividend expense in the amount of 6.3 million that represents the difference between the fair value of the new Series A-1 shares and the carrying value of the Series A shares and related derivative. The dividend increased our net loss to common shareholders for the second quarter, but does not affect our cash balance.
As we announced on June 1, we are pleased to have completed an agreement with BayStar Capital. The company has agreed to repurchase and retire all 40,000 Series A-1 shares owned by BayStar for 13 million in cash and the issuance of approximately 2.1 million common shares. The transaction will be completed upon the effectiveness of a shelf registration statement for the resale of the common stock by BayStar. Upon completing the repurchase, all Series A-1 shares will be canceled and the rights and preferences of the series A-1 shares will be terminated.
The net result of our preferred stock financing activities will be the company receiving 37 million in cash and issuing approximately 2.8 million shares, or an effective price of 13 dollars per share.
The retirement of the preferred stock was important ... valuable to the company. There are a number of reasons we feel that this was a positive outcome for our common stockholders including: the company's equity structure simplified to only one class of outstanding stock; the significant preferences in voting rights and covenants relating to the preferred stock were eliminated; the accrual of quarterly dividends has been eliminated; and the accounting classification will increase stockholders' equity and strengthen our balance sheet; the stock overhang relating to the future conversion of preferred to common stock has been eliminated; and now all our shareholders will now be aligned with the company's strategy going forward.
Prior to the purchase and retirement of the preferred stock, we reviewed our cash balance and projected our cash needs for the future. We believe that our cash balance is sufficient to fund our legal activities in the foreseeable future and are committed to maintain that cash for the protection of our valuable intellectual property.
Finally, on this point, we're delighted that we've come to an agreement with BayStar and upon completing the purchase, welcome them as a significant common stockholder to the company.
Looking forward to the third quarter, we expect consolidated revenue to be in the range of 10 to 12 million dollars.
Now before I turn things back to Darl, I want to give you my perspective on the business after my first 45 days here.
While this quarter has had some write-offs and losses which are significant, as I look at where we are right now, I think SCO is in good financial condition. My reasons for this conclusions are the following.
First off, the write-offs that we've had for goodwill and intangibles are behind us.
Second, the accounting around the Series A preferred shares are now behind us. This includes eliminating the dividends and gains and losses on this derivative instrument. All this is gone now.
Number three, we've tightened down things in the core business so that the UNIX business will generate cash going forward.
Fourth, we're obviously going to spend cash on the lawsuits and our IP enforcement as we go forward. It's approximately 3 to 5 million per quarter. We will offset some of that spending with SCOsource deals and working capital from the UNIX division.
Fifth, the company has no debt, and once the BayStar deal is closed we'll show solid equity on the balance sheet.
And number six and finally, as far as the cash balance goes, when I got here, I went back and looked at the last few quarters in the company, and looked back to a year ago when the IBM lawsuit was first filed compared to now, and there's been a huge amount of progress in the company over this past year. A year ... as of the quarter now we're just reporting, April 30, 2004, the company's current cash and equivalents was 61.3 million. We take into effect the 13 million dollar payment the company will make to BayStar upon closing the transaction, the company's cash position will be 48.3 million.
Now this cash position of 48 million is the result of three things. There was 5 million dollars on the balance sheet, January 31, 2003. The second thing is we've we've generated cash from the company's business operations during the last five quarters of 8 million, positive cash generated out of the business, 8 million. And the net effect of the company's capital-raising efforts net of the fundraising costs has been 35 million dollars. So, when I look at that I think that the cash position we have is sufficient to fund the lawsuits for several years to come.
So, thanks for the time, and with that I'll turn it back to Darl.
McBride: OK, thanks Bert, and thanks for your good work here in this first couple of months being on board.
I'd like to spend the remainder of the call focused on several major initiatives that are designed to drive revenue and shareholder value during the remainder of 2004 and beyond. The foundation of our business is built upon our UNIX intellectual property products and services.
During our second quarter we had UNIX product wins with notable customers such as -- let me just run through like we typically do on our calls here by country.
In the US the list included, CVS Pharmacy, McDonald's, Thompson Financial, Baytech, WebMD, Lucent, and Geotronics. In China, we had Industry and Commercial Bank of China, Shanghai Branch of China Construction Bank, and State Administration of Foreign Exchange. Germany, we had BMW. In Japan, we had Image Partner, Matsushita Electronics and Toshiba Corporation. In Korea, we had the Korean government Ministry of Administration and Samsung Insurance. And, as we go to the UK, Pizza Hut, Fleet there, Army, and the Department of Navy.
There are many other customers, but that just highlights again that we are a worldwide operation selling into 82 countries. That was just a snapshot of some of the deals that we did during the quarter. Again, those are primarily UnixWare and OpenServer wins.
Looking to the future of our UNIX division, as Bert discussed, we'll continue to make the necessary changes to increase operating efficiencies designed to create positive cash flow in this division for the remainder of 2004. We also reiterate our investment in and commitment to the current projected product releases and future development of our UNIX OS products.
In fact our upcoming releases will mark the largest across-the-board group of significant product enhancements from SCO in the last several years. Let me highlight a few of those for you.
Starting shipping this month are two products, UnixWare 7.1.4 that is now currently available. It's our leading high-end UNIX operating system on the Intel platform and AMD platform.
Smallfoot embedded UNIX. This is a complete embedded solutions toolkit that allows organizations to create a small footprint based on UNIX inside of various embedded devices.
Those are now available as of this month.
We have a new product coming out next month called SCO Office Server 4.1. This is a reliable full-featured internet email and collaboration solution for small and medium businesses. It seamlessly integrates with Microsoft Outlook and other industry standard email readers and web browsers. So that product is coming out next month. We've used it here. It's very strong. I think our users are going to like that.
Our next product that will be coming out in August of this year is Vintella authentication from SCO. This is the company's offering for managing a single-user identity across the heterogeneous UNIX and Windows environment.
And then finally as we announced in our SCOForum event last year, we are coming out with a new version of OpenServer. We call this OpenServer Legend. It will ship in the first quarter of 2005, and we will get into more details of this at our forum event this year.
The development effort is designed to be the first step for SCO in supporting a single UNIX development path for both OpenServer and UnixWare. It enables us to continue to support the 32-bit Intel architecture while adding support for higher-end advanced computing. The benefit to our customers is enhanced support for thousands of applications written for UNIX, Java, and the ability to connect them with web services. Legend will continue our commitment to value, security, and reliability.
Additional information regarding the release of our UnixWare 7.1.4 product as well as the other products I've just gone through will be provided during a separate press and analyst call scheduled for next Tuesday, June 15, at 11:00 Eastern time. I cordially invite all of you to join us on that call.
On a similar note I'd also like to extend an invitation to each of you on today's call to join us at SCOForum, which is our annual worldwide technology summit showcasing our technology and business solutions along with our strategic business partners. An event this year is scheduled for August 1 to the 3 at MGM Grand in Las Vegas. Attendees at this year's SCOForum will be the exclusive recipients of the OpenServer Legend preview kit as well as the latest technical and sales training on SCO's products and solutions, as well as giving you insights into our strategies for the coming year. To register you can attend ... to register that event, just go to www.sco.com.
In addition to our continued commitment to our UNIX products business, we stand firm in our resolve to protect and enforce our intellectual property. Let's take a minute and talk about our intellectual property licensing program.
You know, last year we announced a license program for our IP. Companies had asked us about our IP claims and whether there was a way they could become compliant with us. There was a major reason that we implemented the program ... that was the major reason. Based on some very rapid initial feedback, including at least one Fortune 500 company, we believed that the licensing program was a reasonable option for our customers. We understand that many people out there have complained about this program. But imagine what would have happened if we would have taken the following approach. "No, we're not going to offer you any solution to this problem. You'll just have to wait and ride the uncertainty for an unspecified period of time and then you'll hear from us. We can't promise what our license will look like then, or what liabilities you might be subjected to, but we aren't going to offer you a solution now."
If we had done that, people would have claimed that we weren't being fair, and so we didn't take that approach. Instead we want to provide a sound, fair business solution that allows companies to continue to run their businesses knowing that they are not violating our IP rights.
We are still working through that process with a decent pipeline of customers and believe that we are presenting them with reasonable business alternatives to resolve the issue now rather than wait to see what the landscape looks like in a year or two, with whatever risks and uncertainty that that brings. We believe we can help companies move forward in a positive way now. We acknowledge that the licensing program did not take off the way initially it appeared it might. We believe that the claims of Novell ... that Novell has publicly made about what they sold or didn't sell to the Santa Cruz Operation in '95 have raised questions in the minds of our customers about whether they should license our IP.
As a result, we are now involved in a lawsuit against Novell alleging that they are slandering the title of the copyrights we own.
Let's be clear, we did not cause this problem. We believe that the problem was caused by others who have violated our contractual and ownership rights. As you know, we are also litigating those claims.
We have an obligation to protect our intellectual property assets for the benefit of our shareholders. Commencing with the IBM case and following up with Novell, AutoZone, and the DaimlerChrylser cases, we have moved to protect these assets.
Before I leave this subject, I'd like to update you on the status of a couple of our legal cases. In the IBM case we are currently awaiting rulings on our motion to amend the scheduling order and motion to bifurcate, which were heard on June 8. We anticipate a hearing currently scheduled for August 4 regarding our motion to dismiss and IBM's motion for partial summary judgment.
In the Novell case, we are currently awaiting the judge's ruling on our motion to remand. If that motion is not granted, then we would also anticipate a ruling on Novell's motion to dismiss.
On a new topic, I'd like to comment on Linus Torvalds's proposed developer's certificate of origin system. It validates the concerns and problems we have expressed over the past year about the Linux development process that has been fraught with opportunities for illegal contributions of code with minimal checks and balances. We believe it is in part because of this unchecked process that SCO has improperly made its way ... SCO code has improperly made its way into Linux. Of course the new DCO system announced by Torvalds cannot help answer questions about code and the impact of code already included in Linux. We will continue to educate our partners, customers and others about the bases for our positions for both IBM and others that have improperly contributed code to Linux.
When we began talking about our intellectual property concerns, the original response from leaders of the open source community was an admission that there were errors in the Linux development and review process and that they had worked to remove the offending code from future versions of Linux. However this does not take into account all of the other issues that are surrounding this.
I think ... and to summarize, as a company we have gone to great lengths to help commercial users understand the gravity and the magnitude of these improper contributions.
To summarize before we go to the final Q&A part of the call, the ... as we move into the last two quarters of fiscal 2004, the SCO Group will focus on the following major initiatives: being cash flow positive in operations for our UNIX business, a continued commitment to the enforcement of SCO's intellectual property rights, and accelerating revenue from our SCO IP licensing initiatives. SCO Group is moving forward and we are excited about the revenue opportunities and business solutions that we are bringing to our customers.
OK, Bert and I are now available to take your questions. Let me throw it back over to the operator.
Operator: At this time, if you do have a question, press the star and one on your touchtone phone. Once again, if you do have a question, press the star and one at this time.
[long pause, whispering] OK, we'll go ahead and take our first question from the side of Maureen O'Gara with Client-Server News.
Maureen O'Gara: I see you have a separate ... How you doing this morning?
McBride: Hi, Maureen.
O'Gara: I see you have a separate press release here about goings-on on the stock exchanges in Germany. What exactly is happening?
McBride: I was contacted by a ...
O'Gara: The stock is ... pardon me.
McBride: Yeah, I was contacted by a shareholder a couple of weeks ago who was concerned -- he had been hearing there were a number of small cap companies here in the States that were getting listed on these foreign exchanges, primarily in Germany, on the Berlin exchange, and it seemed like there was a lot of short trading going on around those companies' stocks that he was very concerned about and was concerned whether we had fallen into this category as well. We did some research into that. Our attorneys have looked into it, and upon investigation we found that we were listed not only without our authorization on the Berlin exchange, but also ... Bert, what was the other one, Stuttgart?
Young: Fro ... Stuttgart and Frankfurt exchanges.
McBride: Yeah, and so Bert ... I guess Bert's really taking this and is driving it, and we're going to make sure that whatever is happening there that's improper gets cleaned up.
Young: Yeah, so Maureen, we're looking into it. It's early. We've sent a letter to these folks and asked them to delist the shares because this hasn't happened with our permission. But, it's early. We need to make people aware of it. We're going to investigate it, and we'll aggressively pursue ....
O'Gara: Are they saying that this is something that's ... I don't understand how one gets listed, you know, if there's no authorization.
Young: Well, these are unregulated exchanges, and apparently you don't ... the company doesn't have to do anything to be filed there, which is what's happened. But we think that that's improper. And so we're trying to get it reversed. And, you know, it's only just been a week. We're really getting up to speed as quickly as we can on this and investigating what our options are.
O'Gara: OK, so ... it's just ... I've never heard of such a thing, so maybe I'm just being naive or something, but ....
McBride: After I heard about it, Maureen, I went out and did a Google search and found a number of companies in like situations that have ...
McBride: ... had this happen to them. If you go out and just do a quick search, you're going to find a lot of things going on. In fact there was a CBS MarketWatch column from last week, Bert, where apparently the NASD and the other agencies are over there investigating as we speak.
McBride: We're not in contact with them directly, but we have been in contact with these exchanges. We've told them that we are demanding to be delisted off from them, and any activity that's going on over there. Because this is unregulated, you know, we want to make sure that this isn't coming to the detriment of our shareholders.
O'Gara: Do they trade in actual shares? Or I mean ... you know, here a foreign stock is a deposit, you know, a certificate of ... depository certificate or whatever they do here. I don't know how they would do that from there.
McBride: Our legal counsel has looked into this. It's premature for us to say exactly what's going on, but they do have some speculation about what might be happening, but it's premature for us to comment now until we know for sure. But again if you look just publicly at what's being said out there, you'll see what some of the other companies have started to conclude.
O'Gara: So, did you guys get any revenues at all from the SCOsource this ...
McBride: We had a few deals on the SCOsource side, Maureen. You know with last quarter we had announced a major deal with EV1. That is not part of the revenue stream that we're reporting in second quarter. That revenue will start to be accounted for in the quarter that we're currently in.
O'Gara: OK, and you're saying that this is because of SCO's claims that you don't own the ...
McBride: Novell's claims.
O'Gara: I'm sorry, Novell's claims.
McBride: We've had a healthy pipeline as we've gone through the issues. A number of companies continue to work with us. There are other companies that have been impacted by not just Novell, but IBM and others that have come out with various programs to try and, you know, block that type of licensing move. Again, what we've tried to say is, look, this customer program was put in place .. this licensing program was put in place from requests from customers. We're going to be very thoughtful. We're going to work through the issues, and those that, you know, step up and work with us now, we're going to work through those issues with them, and you know, we're going to continue to move down that path.
O'Gara: Are you ... you said ... you seemed to suggest that you're in active negotiations. I believe Bert said ... used the word significant. Significant business opportunities as far as some of these things going forward. I mean is that an accurate representation of what's on the table?
Young: Yeah, so the pipeline is healthy. There are not just one or two opportunities there, there are many. And a good majority of them are significant in size.
O'Gara: But the other guys are just slamming the door on you and saying, "We don't have to."
McBride: Some of them are not really slamming the door, Maureen. I think there's a sense of some are watching, some are moving, some are waiting. You know, the heavy door slams aren't exactly the way I would describe it.
O'Gara: No. They're just saying, "no."
Young: They're just hesitating.
McBride: Right. They're pausing.
O'Gara: Well, we'll see how that .... Now, you forecast 10 to 12 this quarter, but that's mostly from the UNIX business, which ....
McBride: Yeah, until there's a stream of revenue that comes out of the SCOsource side, we're not going to get in the business of handicapping or projecting the forecast of it. You know, the pipeline that Bert is talking about that is healthy right now is not really part of that 10 to 12. Once we have more predictability, then we'll start to get projections on that.
O'Gara: You don't anticipate to close any of those deals this quarter?
McBride: I didn't say that. I'm just saying that we'll announce them when they happen.
O'Gara: Uh-huh. And the EV1 revenues ....
McBride: Last question, Maureen.
O'Gara: Sorry. The EV1 revenues will show up on this quarter?
McBride: Yes. They will start this quarter, and they'll be booked over multiple quarters going forward.
O'Gara: All right, thanks
McBride: OK, thanks Maureen.
McBride: Next question.
Operator: Once again if you do have a question press the star and one. And we do ask that you only ask one question when it is your turn.
McBride: Uh-Oh, Maureen's over quota.
Operator: We'll go ahead and take Stephen Shankland with CNet. Go ahead.
Shankland: Hi, guys.
McBride: Hi, Stephen.
Shankland: Sorry, I missed the first part of the call. It seemed like, from the statement here, that you guys spent 6.5 million, roughly, on the SCOsource ... that was the SCOsource expenses. Is that correct for the quarter?
Young: No, so the legal efforts were 4.4 million is what was spent.
Shankland: OK. And the reason that's interesting, I guess you guys had said you expected it would be in the range of 2 to 3 million per quarter. Are you ... was this an anomalous quarter? Are you [inaudible] being more expensive?
McBride: No, I don't.... I think we've been projecting 3 to 5 is what we've been saying pretty consistently for the last number of months.
Shankland: OK, thanks.
McBride: OK, Stephen.
Operator: OK, we'll take our next question from the side of Terry Tillman with Schwab.
Tillman: Thanks guys. In terms of the EV1, just to clarify, was there any revenue contribution on the SCOsource side on the first quarter or is that just going to start in the third quarter?
McBride: From the EV1 side, the revenue contribution won't start until the quarter we're in right now, which is Q3. The deal was closed in Q2, and the revenue recognition will start the quarter we're in.
Tillman: And in terms of ... I think earlier it was characterized as "the pipeline's healthy for the SCOsource opportunities". I mean do you foresee any kind of tipping point, or is it just very volatile and it's hard to predict on when or if some of these will really monetize?
McBride: I think it's more ... I think there could be some tipping points or breakage of the dam, depending on how some legal cases work their way through in the coming weeks and months. I think that independent of that there are some companies that are just saying we want to move ahead and not have to deal with all of the issues. The reality is this is a very complex set of issues. You know, you have contract issues. You have copyright issues. You know, going from various parts of the code base, and it's going to be a while we've all of us realized before all of these things are done. So some people are saying we're going to step up and resolve that now. We are offering some discounts reflecting the fact that there is some uncertainty with all of these claims being finalized. But you know, on the back side of this, then there'll probably be a different profile in terms of, you know, what we're going to be offering in terms of license fees. So, you know, we understand it's a complex environment and some are going to move their way through in the short term. Depending on the timing and nature of how some of these court cases evolve, you know, you could see some things really accelerate.
Tillman: But as it stands now with the cash on the balance sheet, you could foresee being able to take these court cases at least for two full years out.
McBride: At least that. I think, Bert, your modeling of it has us going for several years given we're going to start to throw off some cash on the core business now.
Young: Exactly. That's correct, Terry.
Tillman: OK, thank you.
Operator: OK, we'll go next to the side of Larry Solomon with Capital Guardian.
McBride: Hey, Larry.
Solomon: Hey, Darl. You know when you talk to Novell, they say that you guys never got a copyright and that this contract and the amendment were very ambiguous, and you know, they say if you go to the copyright office, you won't find, you know, that we actually issued any copyrights even though in that document it states pretty clearly that you get the copyrights needed to complete the transaction. So can you just sort of talk about how do we get that resolved sort of once and for all? I know you guys didn't sue to have the judge interpret that because you interpret it as you've already got it, but how do you get the world to see that? Because it seems that that's where the licensing of Linux really hinges is on that difference in interpretation with Novell.
McBride: I think that is a big factor that we've heard from some of the people that haven't stepped up in the short term. We obviously feel very strongly about our claims there. In the hearing that we had this week in the courtroom, the judge, Judge Kimball said that he would be ruling on this case ... on the Novell case in a matter of days, so we're waiting on that. Now that's going to be just an issue of whether it's going to be in state court or federal court. If it's in federal then obviously he'll also rule on the motion to dismiss, I assume.
So I agree with you that that is an important point there, Larry.
Solomon: So when did he say that he would rule in a matter of days?
McBride: That came out in the hearing earlier this week.
Solomon: And so specifically, he's just ruling on venue?
McBride: We don't know. We don't know exactly. The two motions in front of him are whether to remand the case as well as a motion to dismiss, so we can't comment on that. I think as it relates to all of our comments with respect to the suits.... Let me transition off from your statement there or question there a little bit, Larry.
I want to back up just a little bit. Let's go back to where we were when we filed these these cases. A year ago, you know, obviously we're a small company. We had a set of claims here. We tried to work through issues that we had. You know, we got backed into a corner where we had really two choices. Either forfeit our claims or our property rights or to put our issues before the authority of the court and let them resolve the issues for us. All the shareholders here on the phone today probably would have not been very happy with us if we had said, "Well, we're just going to forfeit our rights and continue on our path of going our of business based on the damage that was being done to our UNIX business from Linux." We stepped up. We, you know, fought for our rights, for the shareholders' rights to go in and say, "Look, we have this property and we want the court authority to come in and rule on this for us." We have put this in front of the courts. Now that it's there, we have a limited amount that we can really talk about. I mean, I'd love to sit here and tell you, Larry, that you know, on August 13, the dam's going to break and this thing's going to go and licensing profits are going to take off. I mean shareholders would all like to hear that. The reality is, we have put the vehicles in place to get our claims heard. The reality is, I believe it is now a war of patience. I think that if we are all patient and let the courts in the various venues take care of these issues and work them through.... I mean we all have eyes, we can all read. You look at the Novell thing and you say, "Gosh, how could this not be that SCO owns the copyrights?" You know. Well, the court takes care of that. So we've put that case in front of the court. We've taken the problem of our allegations that our UNIX code has seeped into Linux. We've put that in front of the court. And so, where there's this barrage of battles going on, this war of words that continues day in and day out. You know, we've backed off from the position of trying to have a daily commentary on what everybody's issues are. We're making our comments through our legal counsel, through the Boies, Schiller law firm in the court system. And so we believe that, again, by being patient and working through these issues, that the shareholders that are patient with us right now, we believe, are going to be highly rewarded as our claims are finally heard.
Solomon: And what about the idea that Novell says that if you go to the copyright office, you know, it says that they have ... it says in the contract that they transferred copyrights, but they never did. Is that something that you just need to wait for the court to compel them to actually do that?
McBride: Again, exactly. I mean, we've put our claims.... We obviously disagree totally with what Novell has said and what they have done in the public market place. We have our suspicions as to why they have done that. Obviously that's had some impact on our licensing program in the short term, but the courts will be able to work through our issues. We'll have our day in court, and we believe very strongly that that will turn into a positive outcome for us. But in terms of the specifics, I can't, I don't know.
Solomon: OK, thanks.
McBride: Thanks, Larry.
Operator: OK, we'll take our next question from the side of Herb Jackson with Renaissance Ventures.
Jackson: Morning guys.
McBride: Hey, Herb.
Jackson: Hey, most of my questions have been answered with the exception of the German stock exchange. When would you expect the delisting to take effect, or have they given you any indication?
McBride: We sent a notice letter out, what was it yesterday? Day before yesterday?
Bride: Yesterday. This is new territory for us, so we don't know, is the answer to that question. All we know is we're going to continue down this path and make sure that nothing is being done here that is damaging to the shareholders of this company.
Jackson: Is the short interest visible on the German exchanges?
McBride: The guy that I met with a couple weeks ago, that was his concern. The story he was hearing was that the short interest that's out there on these international exchanges don't show up on the NASDAQ. But I don't know. Again, this is not my area of expertise. We got this feedback and we're following up on it. We're trying to sort out what's going on.
Jackson: Got you. Is there any color that you can add to ISV or reseller relationship development, in terms of if there was a trigger on the Novell issue and you had the opportunity to ... through resellers...?
McBride: We're looking at it. We've had some demand from resellers to take this. We've had demand from customers and from resellers to say is there a program here that we can layer in. We're being very sure-footed on these issues. We're working through. We're listening. If we're going to do anything around that aspect with resellers, we'll probably be addressing that during our reseller conference in August.
Jackson: OK. Good stuff.
McBride: Thanks, Herb.
Operator: OK, we'll take our next question from the side of Paula Rooney with CRN.
McBride: Hi, Paula.
Rooney: What would you say to those who continue to doubt SCO's ability to financially fight IBM in court? And then secondly if you could give a quick comment on the possibility that Sun may open source Solaris or is looking at that. Do you have any concerns about that?
McBride: OK, so, on the ability to finance it, Bert, do you want to take that on ...?
Young: Well, yeah, I mean ....
Rooney: Darl, could we get you to answer that? I did hear what Bert said during the call, but I want to get your color on it.
McBride: The real simple answer is we're going to have enough cash to get to our destination. We're on a journey right now. We have a variety of legal vehicles in place to get us to our destination. We have the vehicles in place. We have the best litigator and litigation team in the world in place. I might add, we not only have David Boies, but one of the top guys in his firm, Robert Silver, that is now heavily engaged on top of the team with Mark Heise that has been engaged for a year. We have got the firepower on the legal side. We have got the cash necessary and very strong claims to get to where we need to go. So we feel good on all three points.
With respect to the Sun side of things. You know, Sun has the broadest rights of any of SCO's UNIX licensees and it has been a good licensee in good standing with us for many years. And there are no details of Sun's plan to open source Solaris that are clear at this time, and so we really don't have anything to comment on. We're confident that Sun will continue to be a good licensee. I think when we hear he words "open source," all our minds rush to a certain concept of what that means. I think in ... if you look at UNIX in total, even if you look at where SCO's coming from, we have made Unix very open over the years. This thing is available in every major university and research institution. There's a lot of ways of opening your code up. You know Microsoft has a thing called Shared Source, so there's a lot of open avenues or aspects that people can do out there.
I don't know exactly what Sun's talking about, but from, you know, the fact that we've had a good relationship with them and discussions over the years and months we've worked with them, we feel confident that they will continue to be a good licensee of ours as we go forward.
Rooney: You mean they won't open it up under the GPL?
McBride: Yeah, again, I ... until they talk about what they're doing specifically, I can't really comment on it. You know, I'm very comfortable and confident that, you know, Sun's going to do things that are going to enhance property rights, not destroy them.
Rooney: Thank you.
Operator: OK, we'll take our next question from the side of Robert McMillan with IDG.
McMillan: Yeah, hi there. Just a question about SCOsource revenue for Q2, can you tell me what that was?
McBride: [pause] Well, it's not ... go ahead Bert.
Young: Yeah, I mean, it's Bert. It was just a couple of small licensing deals, people that, you know, signed up for our SCOsource agreement.
McMillan: So you're not saying what the ... so was it zero?
Young: No, it's eleven thousand dollars.
McMillan: Eleven thousand, OK. And can you explain the impairment of goodwill charge that you have? What does that ... in English, what does that mean?
Young: So we had an acquisition we completed a little over a year ago and expected a certain level of revenue as a result of that. That revenue has not happened to date, and as we do our quarterly review of the balance sheet items and do our impairment analysis, the asset that had been booked for this, for this acquisition, we felt like we needed to impair it, so we've written that off.
McMillan: Which acquisition was that?
McMillan: OK, great. Thanks.
Operator: OK, and we'll take our next question from Dion Cornett with Decatur Jones.
McBride: Hi, Dion.
Cornett: Hi guys. Hey, yeah, first of all let me say congrats on the A-1 exchange agreement. You know, as we wrote about in our last couple of newsletters, that was certainly a good deal for the common shareholders.
Cornett: A couple quickies here on the income statement. Your core license revenue was down about 24% year over year. This is about twice the rate we've seen of other companies that are suffering from their UNIX business being cannibalized by Linux and to some extent Windows. Is there anything specific that you would attribute that to?
McBride: Well, I think one of the challenges we have.... When I joined the company, Dion, the company had three operating systems, and the two that we are currently operating under hadn't ... didn't have a lot on the development plan, didn't have a lot of firepower in terms of upcoming releases. That was corrected this week and then we'll have another one coming out with Legend in six months. And so, as you know, software companies live and breathe on new releases. And so we have a new one now. Another one in six months. So I think the anomaly here relative to the other guys is that we went through a dark period where there just wasn't a lot going on with the Unix development for a significant period of time.
Cornett: OK, fair enough. And the revenue from EV1 I originally had estimated at a quarter million dollars for the April quarter, and obviously you guys were far short of that. You know, based on comments you made last quarter about it being recognized in Q2, Q3, can you sort of explain why the shift in accounting there? And my impression was they paid back in March when the deal was originally signed.
McBride: No, they didn't pay. We signed the deal back then. The payments were to show up in future periods. The first of those future periods is this quarter.
Cornett: Just what's the magnitude going to be? I mean is the quarter million still right for the July quarter?
Young: That'd be a little high.
McBride: From them, that would be high. It's going to be spread out over multiple quarters, but it will be in the six figures.
Cornett: And then Bert, just one quickie. What would share count have been had you reported a profit, ball park?
Young: Sixteen and a half million shares.
Cornett: All right, thank you very much.
Operator: OK, we'll take our next question from Larry Greenemeier with InformationWeek Magazine.
McBride: Hi, Larry.
Greenemeier: Hi guys. How are you.
Greenemeier: I just wanted to go over the ... just quickly the product announcements that you had run off earlier in the call. You mentioned something about an August ... I think you had called it Vintella, did I get that right?
McBride: Yes, correct.
Greenemeier: V I N T E L L A, and that's for managing single-user id?
Greenemeier: And this month it was UnixWare 7.1.4?
I'm sorry, what was that?
Young: Yeah, that's correct.
Greenemeier: You mentioned this idea of UNIX development is where the company is heading. Can you tell us any more about the relationships between Intel and AMD and how they're ... you know, how you're working with them to improve these UNIX on ... I guess x86 products.
McBride: Yes. We continue to work with those guys. We're moving the development forward for UNIX on Intel. The Legend product we think is going to be very interesting. There's going to be a lot of very nice features that come out on that. And we're really on the front end of developing some broader based industry support as we move down that path.
Greenemeier: All right, thanks.
Operator: OK, we'll take our next question from Steven Vaughan-Nichols from senior editor [unclear]com.
McBride: Hi Steven.
Vaughan-Nichols: EWeek.com, actually. Hi gents.
Vaughan-Nichols: I was curious about your attempts to realize more profit out of your UNIX division. Does that mean that we're going to see more cuts ... more employee cuts in that division in the upcoming quarter?
McBride: We've ....
Vaughan-Nichols: Layoffs, in other words?
McBride: We've made some ... we've tightened down and streamlined some things in the past there. You know, as with any business, we're going to continue to look for efficiencies. One of the things that Bert's brought to the table here is trying to figure out how to get your products to market more efficiently and effectively. You know, how do you get more efficiencies with your development teams as well as with the fact that we have this large reseller channel. So, I mean, we're not commenting on future issues other than to say we're going to be as streamlined as possible, and if there are additional adjustments, we'll make those, but you know, we're going to take a, you know, prudent business approach to the business.
Vaughan-Nichols: Thank you very much.
Operator: OK, we'll take our next question from Peter Williams who is an independent trader.
McBride: Hi, Peter.
Williams: Good afternoon, gentlemen. This is a question for Mr. McBride.
Williams: You said that you had ... are in the process of explaining to potential SCOsource customers the gravity and magnitude of improper code contributions to Linux, and that as a result they should go and buy a license to effectively insure themselves against any future claims you may make. I understand "gravity and magnitude" to mean there to be serious, large significant contributions, and lots of them, yet you haven't been able to show any in the IBM lawsuit. How do you reconcile the two statements?
McBride: I'm glad you brought that up, Peter, because this is a ... really a point of concern, and quite honestly frustration in large part with how things are being positioned in this IBM case versus the reality. I think it's important to not confuse IBM's positioning with the reality of what's going on in this case. If you look at the ... first of all, I'm not going to get into all of the details of what's going on in the court, but what I would tell you is that there's a dramatic difference between what IBM postures and what they say in their documents that are publicly available and what we have provided to them under protective order. In other words, they're kind of getting the best of both worlds right now. They're going around saying, "Boy, you know, SCO's not showing the code." Whereas if you get to the realities, you look behind the filings. If you look under the protective order and look what's there, SCO has been very diligent in providing substantial amounts of information back to IBM. The fact that the judge ... the magistrate came out and said, "SCO has acted in good faith." I mean the magistrate can see what we're filing. So there's a reason she's making that comment, I believe, and that is that we are producing volumes of information back to the court and back to IBM. Unfortunately, all of us on the call here and all of us as end users and those in the Linux community and everywhere else are not able to see all of that. So I want to make sure that we understand the game that's going on.
There's another issue going on here around the posturing about saying "SCO's just trying to drag this case out." You know, they're trying to drag this on, whereas IBM wants to rush in and get it done. Well, that's the positioning that IBM wants to rush the case, but if you look at their actions, they're really the ones trying to slow the case down. From the time we filed the case, going forward nine months, we did not ... we had zero versions of the source code in dispute that everybody already agreed we were going to see. And it took them nine months. It took them March of this year before they ever produced one version of AIX or Dynix code to us, when we had ... I guess AIX in that case. When we got the versions of code that came in, we have been diligently going through that, and we have responded back into the court over the last couple months.
So the reality is there's a long delay that was put in place by IBM. They still haven't supplied all of the versions that we've requested. IBM has filed 14 counterclaims, unrelated to our question, our claim that Linux is tainted and there are problems there with IBM's contributions into Linux. They filed 14 counterclaims totally unrelated to our case. . .
Williams: Well, there's something I don't understand, which is that Linux is open source, and the source is openly available, so can you not just go to a source repository and pull up a file and say, "Here, you guys stole that from our intellectual property. This is where it is." You can point at it because you don't need to wait for IBM to provide it, do you?
McBride: Well, it's a little bit ... There's one more step you have to do there. The first thing that you've got to do is you've got to be able to take the code. You take the contracts that we have with IBM, you take the code that is in question and that is protected between us and IBM, and you get that settled. Again, they still haven't provided all the versions that we've asked for, but with the versions that we have we've been able to go back in and we've put claims on the table. Again, you're not seeing those, but they are on the table, and there will be more as we go through the case here. Then the next step is to compare the code that is in question that is in violation against our rights, against what is publicly available there. So, you're right, on one level, this is not a difficult game here to play, it's not a difficult scenario to figure out, but it is difficult if that middle interim piece isn't there. So I would ask IBM a question, why are you not putting up the code?
Williams: Well, would it not help your SCOsource licensing program if you could go to your potential customers and say, "Look, here's what we put in from of IBM. Make up your minds yourself." I mean, your potential customers ...
McBride: It would help tremendously. It would help tremendously. And if we didn't have these things under protective seal of the court, we would be doing that. And so, I guess one of the things that I want to make sure all of you take away from this call today is that there is a major gulf. There's a Grand Canyon size gulf between what IBM is saying publicly and the real facts of this case and what we are supplying that are under protective order.
Mark my words, there will be a day that will come when you will all see many, many documents that will directly contradict IBM's current public posturing.
Williams: OK, thank you for the answer.
Operator: OK, although we have further questions, unfortunately we have run out of time. So we appreciate your interest and feel free to contact relations ... human relations department if you have any further questions. Then I'll turn it back over to Darl for closing comments.
McBride: Well, I think I just made my closing comment. I believe very strongly in our case. I believe very strongly in our claims.
I would like to make one final comment regarding the wrap up on the BayStar case. As Bert said, we welcome them on board as long-term shareholders. There were some concerns that BayStar had expressed that, you know, was management out talking about this case too much in the press. The answer to that was a resounding yes. I totally agree with Larry on that and part of the ... I think that what we got drawn into was that IBM has a lot of agents that are out there day in and day out that attack us. And we felt like, from a defense standpoint to protect our shareholders that are on the call today, we were like the only guys in town to fight back. And for a number of weeks and months we did that. Well, the reality as we said earlier, we're going to fight this game out through the courtrooms. And it is a game of patience. And it is frustrating for all of us when you see a claim out there saying somebody else owns our copyrights, and there's somebody else saying this or that. If we can all be patient here over the coming months, quarters, years, however long it takes, I don't know, but I believe, we're going to have a very firm outcome.
In the meantime, the Boies team is really stepping up with the key generals there running the case now as it relates to the litigation. They're firmly driving that. Management here is focused on the licensing, the innovation of the core Unix products, and seeing the core business completing the innovative products that it's working on.
So, we're going to continue down the path that we've laid out. We feel good about the direction we're going. We appreciate all of you as shareholders. And, you know, we look forward to continuing the battle. Thanks for joining us today.