SCO Group Fourth Quarter and Year-End Fiscal 2005 Webcast and Conference Call
22 Dec 2005
05:00 PM EST

Announcer: Good day everyone, and welcome to The SCO Group's fourth
quarter 2005 conference call. Today's call is being recorded.  At
this time for opening remarks and introductions, I will turn the
call over to Mr Blake Stowell, public relations director.

Go ahead, Sir.

Blake Stowell:  Thanks and good day everyone, and welcome to The
SCO Group's fiscal fourth quarter and fiscal 2005 year end financial
results conference call.  At this time everyone is in listen-only
mode.  Later in the call we will have a question and answer session.
During that question and answer session, the company will only be
taking questions on the company's core Unix business.  Today's call
is being recorded.

Participating on the call today are Darl McBride, president and chief
executive officer, and Burt Young, chief financial officer.  Each
of you should have a copy of the press release issued this afternoon
containing our results, which we will be discussing further in this
call.  The information provided during this call will contain forward-looking
statements within the meaning of the private securities litigation
reform act of 1995. These forward looking statements are made only
as of the date of this conference call and we undertake no obligation
to update or revise the forward looking information, whether as a
result of new information, future developments, or otherwise.  Our
performance is subject to significant risks and uncertainties, known
and 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 or achievement to be materially different
from any projections or future results implied by these forward looking
statements.  Accordingly, you should not place undue reliance on
these forward looking statements.  For a full discussion of these
and other risks and uncertainties, please see our annual report on
form 10K for the fiscal year ended October 31, 2004 [sic] and other
reports we have filed with the SEC all available at www.sco.com.

I will now turn the call over to Darl McBride, president and chief
executive officer of The SCO Group Inc.

Darl McBride:  Thanks Blake, and thanks everyone for joining us on
today's call.  The fourth quarter was a productive quarter for SCO
with positive developments in many areas of our business.  The company's
Unix division generated cash during Q4, and the company closed sales
of SCO OpenServer and UnixWare to many of our marquee customers.
In September, the company successfully introduced SCO's network
digital services technology, called Me Inc. and many customers have
already begun using the pre-release version of this new technology
for smart, hand-held devices.

[2:40]

Overall for 2005 our core Unix business operated profitably and generated
cash and we recently received a $10,000,000 private equity investment
that will give us additional capital to assure that the company can
continue to achieve our business goals.  Lastly, we recently completed
our final $2,000,000 quarterly payment in attorney fees to our lawyers
in protecting the company's intellectual property.  We'll go into
more detail on each of these items shortly but first I want to turn
the call over to Burt Young, our CFO for an overview of the company's
financial results.  Burt...

[3:16]

Burt Young: Thanks Darl.  The company reported revenues of $8,500,000
for the fourth quarter, fiscal year 2005 as compared to revenue of
$10,100,000 for the comparable quarter the prior year.  The decrease
in revenue is primarily attributable to increased competitive pressure
on the company's Unix products and services.  The net loss applicable
to common stockholders for the fourth quarter was $3,400,000 or $.19
per share compared to a net loss attributable to common shareholders
of $6,500,000 or $.37 per common share reported the comparable quarter
the prior year.  Included in the net loss attributable to common
stockholders for the fourth quarter fiscal year 2004 were restructuring
charges and dispositions of long-lived assets totaling $2,700,000.
Revenue for the fiscal year 2005 was $36,000,000 compared to revenue
of $42,800,000 for fiscal year 2004.  The net loss attributable to
common stockholders for fiscal year 2005 was $10,700,000 or $.60
per diluted common share, compared to a net loss of $16,200,000 or
$1.07 per diluted common share for the 2004 fiscal year.

Turning to the Unix business, revenue generated from our Unix business
was $35,800,000 for fiscal year 2005 as compared to revenues of $42,000,000
for fiscal year 2004.  Even though revenue was down year over year,
we accomplished one of our goals for fiscal year 2005 which was to
generate profitability and positive cash flows from the Unix business.
Revenue for the Unix business for the fourth quarter of fiscal year
2005 was $8,500,000 as compared to $10,000,000 for the comparable
quarter the prior year.  For the fourth quarter of 2005, the cost
of revenue for the Unix business was $1,400,000 resulting in gross
margins of $7,100,000 or 84%.  Cost and expenses for the Unix business
were $7,200,000 which were in line with our expectations.  We expect
costs and expenses excluding stock compensation for the Unix business
to decrease slightly for the first quarter of 2006.

To reiterate, as a management team we are pleased that our Unix business
was profitable and generated positive cash flow in 2005 given the
extremely competitive landscape we operate in.  We plan for the Unix
business to continue to create positive cash flows going into fiscal
year 2006.

[6:20]

Turning to the SCOSource line of business, our revenue from SCOSource
licensing was $34,000.  As we have stated in prior quarters, we've
cautioned that predicting this revenue stream will be difficult to
predict.  However, we believe that as we progress in the courtroom,
and in the courtroom we are validating our intellectual property
claims, we may begin to see additional SCOSource revenues over time.
As in previous quarters, we are continuing to classify legal and
professional fees and other costs and expenses that relate directly
to the enforcement of our intellectual property rights as costs of
revenue.  For the fourth quarter of fiscal year 2005 these costs
were $3,400,000 which was in line with our expectations and includes
the fifth of six total payments of $2,000,000 to Boies, Shiller,
and Flexner.  The remaining $1,400,000 of costs were escrow related
expenses and internal costs associated with the litigation.  We expect
that in Q1 of 2006 these escrow related expenses will be similar
to or slightly higher than those incurred during Q4.  In addition,
in December we made our final $2,000,000 payment to Boise, Shiller,
and Flexner and beginning in Q2 2006 we expect that our SCOSource
costs of revenue will decrease significantly from prior quarters
as we will no longer make this quarterly payment to the attorneys.
This an important point that I'd like to emphasize and make clear
regarding these legal and professional fees.  During the past year,
the company has incurred the following legal expenses on a quarter
by quarter basis.  In Q1 for this cost of revenue in the SCOSource
business, $3,500,000.  Q2 $2,900,000.  Q3 $3,100,000.  Q4 $3,400,000.
Total of $12,900,000 during the year on these legal expenses.  The
company's losses in total for the year were $10,700,000.  Now, included
in each of these quarterly payments were a $2,000,000 payment for
our legal expenses for our legal teams.  Following the end of the
company's Q1 2006 at the end of January, the company will have fulfilled
its financial obligations to its legal teams in payments for the
defense of the company's intellectual property.  In other words,
the only costs the company will incur from a legal standpoint will
be from the company's escrow account for the payment of expert witness
fees and other minor internal expenses.

Now, before turning to our cash balances, I'd like to spend a moment
on a new accounting rule that will impact the company beginning in
Q1 2006.  As most of you know, companies including SCO will now be
required to expense the fair value of stock options in accordance
with SFAS No. 123R.  The adoption of this accounting rule will have
a material impact on our quarterly income statement for the next
quarter as we will record compensation expense for options granted
in the company.

[9:55]

So, to conclude our cash and cash equivalents and available-for-sale
securities were approximately $10,400,000 at October 31, 2005.  In
addition, approximately $2,900,000 remains in an escrow account and
is classified as a component of restricted cash as of October 31,
2005 leaving the company with $13,100,000 in cash.  If you deduct
the final $2,000,000 payment to made to Boies, and the escrow cash
of $2,900,000, the business is left with a cash balance of $8,400,000
which is down slightly from a balance of $8,600,000 we recorded in
Q3. And of course at the end of November the company announced that
a group of existing investors and a company board member participated
in a $10,000,000 private equity investment in the company.  When
you combine this invested cash with the company's ending cash balance,
we believe that the company has adequate funding to pursue its existing
business strategies including the resolution of the company's existing
legal proceedings.  With that, I'll turn things back to you, Darl.

[11:13]

Darl McBride:  OK, Burt, thanks for that detailed description of
where we are with our financials.  Now, I'd like to shift gears and
move over to the business side of things, and spend the remainder
of the call addressing the business performance and future opportunities
that we have there.

[11:29]

During Q4 the company's Unix business generated positive cash flow
despite a competitive business environment.  We gained sales with
a number of marquee customers including Siemens, McDonald's, Walgreen's,
CSK Auto, Kroger, Thompson Financial, WebMD, Taiwan Land Bank, Converse,
Marconi, The UK Ministry of Defense, Croatian Telecom, and many large
European retailers.  Indonesia's tax agency, one of the largest electrical
utilities in Japan, and we also closed significant deals in China,
and India, including many large Indian banking institutions.  We
also had deals with the Indian government's tax agency and the China
Post.  So, the teams are very active out there in the field and with
the new products that we have.

Let's talk a minute about OpenServer 6.  We continue to see an increase
in sales of SCO OpenServer 6 and while the majority of our OpenServer
sales still come from OpenServer 5.0.7 and previous versions it should
be noted that the sales product cycle for application server operating
systems is a relatively long-cycle and we expect that OpenServer
6 sales will continue increasing quarter over quarter going into
our 2006 fiscal year.

[12:48]

During the fourth quarter we announced our partnership with MySQL
and we anticipate that our partnership will soon begin adding value
to SCO sales efforts with the native version of MySQL 5.0 Network
Edition for SCO OpenServer 6 being made available in the second quarter
of 2006.  Some customers are already experiencing the benefits of
using MySQL and SCO Unix together across their environments.

[13:16]

Let's shift now and talk about Me Inc. During the quarter the company
introduced a new set of digital services branded under the name Me
Inc., at the computer industry's annual demo fall conference.  Through
Me Inc.  digital services, the company successfully attracted companies
and organizations that have participated in trial tests of the technology.
Me Inc. helps organizations and users connect and communicate with
small groups or extremely large audiences through an innovative mobile
environment.

I'd like to give you a few examples of how we've done this.

[13:50]

Following in the aftermath of Hurricane Katrina in September, Utah
State University used Me Inc. Shout service to alert thousands of
their football fans and season ticket holders to a game cancellation
against Louisiana-based Nichols State University.  In November, the
NBA's Utah Jazz basketball team used Me Inc. to notify their registered
season ticket holders and fans to the return of one of their star
players, Andre Karolynko was returning to the lineup and sent out
a 30 second Me Inc. Shout message to nearly 40,000 fans before the
media could report it on the news broadcast.  In December BYU's head
football coach used the Me Inc.  service to announce the team's invitation
to the Las Vegas Bowl to thousands of season ticket holders and school
supporters.  The power of Me Inc. in communicating with these vast
numbers of people comes from SCO's Me Inc.  digital services on the
smart hand-held device using thin-client technology combined with
SCO's new edge processor technology on the back end.  SCO's edge-processing
capabilities allow smart hand-held user to gain a richer mobile experience
because of all the information intensive heavy lifting that is being
done using the behind-the-scenes edge processor.

While all of these examples show the power of Me Inc. in communicating
to thousands of people through the new means of social networking
there is much more to SCO's new set of digital services than we described
here. SCO is creating a digital services platform for allowing customers
to work in completely new ways.  As an example, using our digital
services platforms, SCO easily and quickly created a new order entry
system for Musco foods Corporation.  This week we distributed a premiere
Italian foods to the New York area is testing a new use of their
sales team and is planning to roll it out across their entire sales
organization in the near future.  SCO's digital services will help
Musco to service more customers with fewer errors and less time than
was previously possible.  SCO is initially rolling out these digital
services on the Palm Treo with plans to make them available on the
RIM Blackberry devices as well as smart hand-held devices that run
the Microsoft Windows mobile OS as well as the Symbian OS.  The company
plans to announce a pre-release trial of these services beginning
in early January at the Consumer Electronics Show in Las Vegas.
Obviously with the large and growing market for smart hand-held devices
this is an area of growth for our company that we're very excited
about.  We look forward to sharing more with you in the near future
about SCO's innovative digital services for smart hand-held devices.

[16:34]

OK, now let's move over to the litigation front.  We'd like to briefly
update you on a couple of the key developments with regard to where
we are in protecting our rights inside of the court system.  Over
the past few months we've made what we believe is good progress in
discovery.  The Court has denied a few of our requests for discovery
that we believe are material but what we have received so far has
established a sound basis for claims but there is still more work
to be done and more discovery to be finished over the coming next
few months.  We believe that we will have a compelling case to be
presented at trial in early 2007.  On October 28th, working with
our outside technical consultants, we identified for IBM and the
Courts 217 separate and distinct disclosures of material by IBM which
we claim violated the Unix license agreement and enhanced Linux for
use in the enterprise.  Today our team will be filing a final report
that expands on the October filing.  Discovery will be closing early
next year and then both sides will be finishing off expert reports,
motions, and getting ready for trial.

[17:46]

With regard to the Novell litigation, the court has issued its scheduling
order for the case and the trial date that has been set is June 27,
2007.  We look forward to gaining discovery and further preparing
that case for trial as well.

To summarize the status of our legal cases, we remain confident of
our claims, and our legal team, and look forward to a successful
conclusion to the litigation so we can turn our full attention to
our business initiatives.

So, with that I'll now turn the call over to the operator to open
up the phone lines for questions.

[18:23]

Announcer: Thank you gentlemen.  The question and answer session
will be conducted electronically.  If you'd like to ask a question,
please signal us by pressing *1 on your TouchTone telephone.  Once
again, that's *1 if you have a question.  If you are joining us using
a speaker phone, please make sure that you pick up your handset to
allow your signal to reach us.  Also, please make sure that your
view function is turned off.  Once again, that's *1 if you have a
question.  We'll pause for just a moment to give everyone a chance
to respond.

Once again, that's *1 if you have a question.

[19:02]

We'll take our first question from Steven Vaughn Nichols with Ziff-Davis.

SJVN: Hello Darl, Blake.

Darl McBride: Hey Steve

SJVN: My question concerns what you will be turning in to the courts
today.  Could you give me any kind of color or characterization if
this is just going to be an expansion on the 217 areas or is this
going to be digging into new ground?

Darl McBride: Well, it will be out there and when it is fully filed
they'll have some official comment that will surround that.  I think
that as we see this going in its basically taking the 217 that were
there before and it will be expanded beyond that and it's going to
be deeper and it will be broader but it's basically homing in and
polishing the submission that was done in October, so it will be
joined in later today and look forward to it, again that information
will be put in front of the courts as well as being sent to IBM and
I don't know what will be said about that publicly.  Obviously the
submission itself won't be public but whether anything else will
be flavored around that I don't know we'll just have to wait and
see how the attorneys deal with that.

SJVN: Thank you

Darl McBride: Thank you Steven

Announcer:  And once again everyone, that's *1 if you have a question.

And once again everyone, please press *1 if you have a question.

[20:50]

And our next question is Tim Rushing, a private investor.

Tim Rushing:  Hi, my question is for Burt Young.  I'm looking at
the S1 that was filed today, the common stock warrant...

Burt Young: Yep

Tim Rushing: In Section 6, Representations and Warrants of the Company,
it says that the Representations and Warrants are as follows except
as attached Exhibit B but there was no Exhibit B with the filing.
I was wondering is that available somewhere or if you can give me
some sense of what's in Exhibit B?

Burt Young: Well, I haven't got that right in front of me, but if
you could send me an email I'll follow up with that, we must have
just had a typo there.

Tim Rushing: OK, I can certainly do that.  One other question too,
I was wondering what the status of the stock rescission offer is
and what kind of effect that is going to have on the company?

Burt Young:  Yeah, the stock rescission was made effective by the
SEC.  We've now mailed to our affected employees the offer. They
have thirty days to respond to that so it will be the middle, 20th
of January, something like that, that will conclude.  We expect that
the impact will not be significant from a cash point-of-view.  We
probably will put in our 10K filing at the end of January, we'll
put include in that filing the results of the offer, so once that
10K is filed that'll be the place to look because we'll give it whatever
the latest information is before we make that filing.

Tim Rushing:  OK, thank you very much.

Burt Young:  OK, and if you email me I'll get you that, I'll clarify
what you see in the S1.

Tim Rushing:  Thanks.

[22:38]

It looks like our next question will come from from Al Petrofsky,
a private investor.

Al Petrofsky:  Hello

Darl McBride:  How you doing, Al?

Al Petrofsky:  Good thanks. I had a question for Burt Young.  I was
just wondering about that $5,700,000 in restricted cash.  Could you
talk about what's in that?  I mean I understand that half of it is
that legal escrow account, but what's the other half?

Burt Young:  OK Al, you'll recall that every quarter we collect royalties
for Novell from the Novell Purchase Agreement.  We collect for them,
we get a a little small percentage for doing that and then pass it
on to them for the next quarter.  So, that's what that is, mostly
collecting royalties, SVRX royalties from Japan.

Al Petrofsky: Oh, OK.

Burt Young:  So, you see that there's $5,600,000 there, $2,900,000
of it is our escrow, so the remaining amount is collections on behalf
of Novell.

Al Petrofsky: OK.  Thank you.

Burt Young: You bet.

Announcer:  Once again everyone, please press *1 if you have a question
or a comment today.  Our next question will come from Steven Vaughn
Nichols of Ziff-Davis.

SJVN:  Actually, I hadn't expected to get back in again. OK...

Darl McBride: Welcome back.

SJVN:  Just to clarify, it sounds to me that once the litigation costs
are out not only would the Unix cash flow would make the cash flow
positive in that area but the company itself, independent of the
litigation, would actually except for the litigation costs would
have been profitable this quarter.  Is that correct?

Burt Young:  Yes, this is Burt. It is correct and not only this quarter
but throughout the year.

SJVN: OK

Burt Young:  If there was no litigation here, the operating company
would have shown an operating profit and generated positive cash
flow.

SJVN: OK -- go ahead

Burt Young: No, that's just it.

Darl McBride: That's the key point you picked up there Steve...

Burt Young: Our strategy is that obviously the revenue is being impacted
by our IP being in Linux and the competition that is out there, but
we want to run a good business, trying to run a good business, grow
our revenues, put good products out there until the claims are finalized
in the courtroom.  So, we think we've got a good little core piece
of business here.

SJVN:  Clearly so.  That being the case, with the expectation...do
you have any information that you can share with the audience on
the future of the Linux business, rather the Unix business, in regards
to the MySQL partnership?  Do you have any expectation that you can
share at this time about how this will actually affect the Unix business?
Or, is that too forward looking?

Darl McBride:  I'll take a shot at that, Steven.  Obviously, when
you're in an operating system business, the surrounding certifications
that go with that, especially the database level, are crucial to
the health of your OS business.  Because we have suffered this competition
from Linux and there's obviously a lot more people interested in
doing Linux because of the free nature of it and a variety of other
reasons, that has put a damper in some of the certification ability
we've had -- by having MySQL in there and the popularity of MySQL,
we believe that going forward we're going to have some solidifying
and strengthening of our core business.  Being able to dial that
into a level of what percent uptick or being able to give you some
guidance as to what that means from a quantitative standpoint is
a bit premature; but there's not doubt that from a gut feel that
this is a good move for us, and quite frankly a good move for MySQL
and at the end of the day the reason it's good for both of us is
that it's good for customers.

SJVN: Thank you

[26:56]

Announcer:  Our next question is from private investor Cal Thompson

Cal Thompson:  Hi guys.  Can you talk a little bit about -- I guess
it's probably in your OpenServer platform -- your various messaging
products and the opportunity potentially that might come up from
Microsoft elimination of support for certain versions of it older
Windows 95 and such?

Darl McBride:  Did you say "messaging products?"

Cal Thompson: Yes

Darl McBride: You're talking about mail servers, specifically?

Cal Thompson: Yes, exactly

Darl McBride: OK.  I think that as we look at forward prospects,
I think that when we talk about mail server opportunities it's probably
historically been tied to our base and to the extent that they needed
a mail server -- we have some things there, we've been developing
them there, and they're still there and available -- the things that
may be going on with Microsoft could present some opportunities but
I think, to be honest with you, our biggest going forward opportunities
will be around Me Inc. at how we're doing a new level, a new array
-- if you will -- of messaging services, and when we talk about messaging
down into smart hand-held devices we're not talking about the hand-held
devices themselves, we're very focused on how the back end interacts
with these mobile devices.  So, I think that most of the energy that
you're going to see coming from us as it relates to messaging, in
the messaging space, is probably going to come more from the Me Inc.
space than the direct mail server environment.

Cal Thompson:  Great.  Thanks.

Darl McBride:  Yep.

[28:44]

Announcer: Gentlemen, there are no more questions in the queue.
I'll turn things back over to you for any further closing comments
you may have today.

Darl McBride.  Appreciate you joining us here today.  In summary,
during Q4 we remained solidly focused on executing our business strategies
around our Unix business and introducing of new and innovative technology
with the introduction of Me Inc.  mobile digital services and while
our legal teams continue their efforts to protect our intellectual
property through the court system, as a company we remain solidly
focused on succeeding through the marketplace.  The company's Unix
business is continuing to generate solid cash flow, legal fees are
in line with expectations, and we have made solid progress with regard
to our litigation efforts and are looking forward to having our day
in court.  So as we wrap this call up, I have two messages here.
The first one is to Al Petrofsky -- who if I'm not mistaken graduated
from the University of California...I believe that our alma mater's
are about ready to kick off here in a few minutes, Al, and I'd like
to make a small bet with you that depending on who wins this game
I will challenge you to whoever loses it will have to sing the other
person's alma mater's fight song on a public forum web site sometime
in the next 90 days.  If you can meet my challenge there, please
send me a communique however it would be best for you.  I go into
this with greatly handicapped, we're a seven point underdog but I'm
going to play you straight up.

The second message I would like to leave for all of you is that with
the holiday season upon us we'd like to with you all a happy holiday
season and we look forward to seeing you all in 2006.

Thanks for joining us today.

Announcer:  Once again, everyone this will conclude today's program.
Thanks for joining us today, you may now disconnect the line.

I'm actually quite struck by the irony ...  this analysis (and your matching Young's number suggests its pretty close to "correct" as per accounting standards) could theoretically help SCOX in that it shows that there is a "real company" there to protect.   One capable of being (and having been) damaged if ever there were any real tortuous actions against it or going forward by expeditious actions by the courts.    But at the same time it gives Novell cause to say that there is real value there from which to extract the monies owed it and likewise that there is some value in the company that real stockholders (if there are any!) owned as equity value and the current management destroyed utterly with Lanham violations.

The demonstration of real value is quite the two edged sword.