Hey, if you're not making money the old-fashioned way, you might as well see what you can get through lawsuits. That seems to be the primary strategy these days at UNIX software provider SCO Group
The trouble is, the company's litigious attempts at jump-starting revenue cost a lot more than they bring back. This morning's first-quarter earnings provide a revealing glimpse at this poorly executed strategy.
For those who need a brief recap, SCO appears to own a version of UNIX that it claims has been duplicated, at least in part, in the open-source operating system Linux. For months now, the company has been threatening to sue anyone who uses Linux without paying SCO a license fee. Verified targets have so far included IBM
In response to these shakedowns, a band of technology companies including other heavy-hitters like Intel
For the first quarter of fiscal 2004, revenues dropped 16% to $11.4 million. Losses totaled $2.3 million, or $0.16 per share, more than twice the $0.06 per-share loss from the period before.
But it gets worse. The red ink was tempered by a one-time benefit of $3.8 million related to a "change in fair value" of the derivative associated with its series A convertible preferred stock. Without this credit, the loss on operations would have amounted to over $0.37 per share. (Now we know why the maxim "Earnings are an opinion" makes sense.)
It's my opinion that SCO is doing everything wrong. In addition to the horrific, self-inflicted damage to its reputation, the licensing-lawsuit strategy is delivering a one-two punch to SCO's bottom line. Efforts to license Linux cost SCO $3.4 million in the first quarter. That's right, one-third of total revenue was wiped out. The payback? Twenty thousand dollars. That's not a typo. I know guys who make that much mowing lawns for a summer. Moreover, the balance sheet already currently lists $8 million in liabilities to legal firms. That number is likely to increase with the company's new lawsuit against AutoZone
With declining revenues, increasing losses, and an expensive and damaging litigation policy, SCO looks like one of the best short candidates I've seen in a while.
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Fool contributor Seth Jayson wonders how much SCO would charge him for a Linux license on his home-built PCs. He has no stake in any companies mentioned here.