SuSE, SCO bullish on profits

29 May 2003 07:35

The two companies, on opposite sides of a Linux dispute, both say they see a brighter financial future ahead

SuSE and SCO Group issued bullish statements about their business prospects on Wednesday, even though the estranged business partners sit on opposite sides of the Linux fence.

German Linux seller SuSE expects to be profitable in the second quarter of 2004, chief executive Richard Seibt said in an interview on Wednesday. Newly profitable SCO Group, meanwhile, expects its abandonment of the Linux market and efforts to enforce Unix intellectual property claims will lead to revenue growth.

The two companies formerly were allies in the UnitedLinux consortium, under which SCO and two other companies agreed to use SuSE's version of Linux in an attempt to make Linux relationships easier for other computing companies. Through the arrangement, SuSE hired about 15 SCO Linux programmers and was paid for each copy of the software shipped.

The companies now have parted ways in their Linux plans, but not their hopes for success.

"We will generate cash... starting in the third quarter," SuSE's Seibt said. Because SuSE's maintenance and support contracts generate revenue over several quarters, "I would guess that profitability is in the second quarter of 2004," he said.

SuSE is hoping to profit in particular from a potential contract in its own back yard, under which the city of Munich plans to use Linux on 14,000 desktop computers for employees now using Microsoft Windows.

Profitability, a top priority on Seibt's agenda, hasn't been easy for Linux companies to achieve. SuSE's top rival, Red Hat, first became profitable for the quarter ended on 30 November, 2002, but slipped back into the red the quarter after that.

MandrakeSoft, based in Paris but with most of its sales in North America, has pleaded for cash and is under bankruptcy protection. Turbolinux has retrenched to its Asian stronghold.

SCO Group, formerly Caldera International, made a go at selling Linux -- including a $70m (£42m) initial public offering in 2000. But SCO Group has all but abandoned that in favour of selling Unix products it acquired from the Santa Cruz Operation. It filed a lawsuit alleging that IBM misappropriated SCO's Unix trade secrets, has claimed Unix code was illegally copied directly into Linux and earlier this month withdrew its own Linux product.

Dropping the Linux product will help the company's business, chief executive Darl McBride said in a conference call on Wednesday.

"It represented less than 2 percent of our revenue for the quarter," McBride said. By diverting the roughly 50-person Linux sales staff to join their 50 Unix sales colleagues, SCO expects more money out of Unix sales, McBride said.

In addition, revenue from its SCOx plan to build Web services into Unix should begin arriving in 2004. SCOx is part of an effort to rebuild Unix products that the company acknowledges have languished: "No doubt we lost some ground on it during the time we were chasing the Linux dream," McBride said.

SCO warned in a filing that its legal costs could be expensive, but the company revealed on Wednesday that it doesn't have to bear the brunt of much of its legal costs. To pursue its case against IBM, SCO hired high-profile attorney David Boies -- famed for his antitrust victory over Microsoft as well as his loss in the vote-counting controversy representing Al Gore in the 2000 presidential election.

SCO's legal costs are being paid under a contingency arrangement, McBride said. In such cases, lawyers typically are paid not by the hour but with a percentage of whatever money they can win for their clients in the case.

The company's SCOsource effort to increase revenue from Unix licences accounted for $8.3m of its $21.4m in revenue for its quarter ended on 30 April. That SCOsource revenue included a Unix licence Microsoft signed and another Unix licence by an as-yet undisclosed company.

SCO expects revenue of $19m to $21m for its current quarter, and McBride said SCOsource is again expected to account for about a third of that.

SCO is in negotiations to buy two smaller companies that will bolster its SCOx plan, McBride said. Acquisitions have become easier because of the company's increasing stock price, he added. The company's stock climbed from $4.75 on May 16 to a high on $8.89 on 22 May, shortly after SCO announced the Microsoft licence deal.

But that stock price dropped on Wednesday after Novell, which sold Unix technology to a company that eventually sold it to SCO Group, disputed SCO's claims of Unix intellectual property ownership. SCO's stock dropped $2.11, or 24 percent, to close at $6.60.

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