A sombre statement from SCO yesterday said that its third quarter's results would be "significantly below expectations" as the company warned it expects to lose between 49 cents and 59 cents a share in the third quarter on revenues between $25 million and $29 million.
Poor sales to the channels forced an inventory reduction of $3 million and SCO is taking a hit between $13 million and $16 million for its existing inventories.
The news comes only days after Novell announced that it wants to dump its 6.1 million SCO shares, acquired when SCO bought Unix from Novell in 1995. Novell is also dumping its shares in Corel, saying that the combined holding resulted in "unrealised losses of $56 million as of April 30, 1998."
The upshot of the poor recent sales performance is that SCO's sales channels are being remodelled and the company is moving to an electronic, Web-enabled model called CyberSource. Distributors will no longer hold vast quantities of software stock, but order and receive software electronically.
Ray Anderson, SCO's senior vice president of marketing said: "Nothing went wrong in the last quarter at SCO, but operating stacked channels is a stupid model for a software company."
"It seems to work for Microsoft," commented Isham Research analyst, Phil Payne.
Anderson is not convinced, adamant that, "within two, two and a half years, we'll see Novell and Microsoft take the same inventory hits and move to the model we're implementing today."
SCO claims earnings would have been two cents to five cents a share on $46.5 million revenues, "without the inventory issues and anomalous events in India."
Anderson explained the Indian connection, saying that the subcontinent, "generates several million a year, but since it exploded the nuclear bombs we've had trouble getting money out of the country."
"Getting money out of India, or not, doesn't stop a company booking and recording it," observed Payne.
On future strategy, Anderson maintains that Compaq will support 64-bit Unixware: "When the machines arrive in 2002, along with high end DEC Unix, people will have a choice of Merced under Digital Unix or Unixware."
"Not true. Compaq's statement of direction on 64-bit is DEC," said the analyst.
Despite Anderson's claims, Compaq's publicly available statements about its backing for SCO only specify support for the 32-bit developments and has conspicuously failed to state its intentions on whether to support SCO's 64-bit software. And what of Novell trying to cash in its SCO chips? Is that an indication that it has lost faith in SCO and SCO's future strategy?
Anderson again: "We paid a high price for Unix and part of the deal was Novell getting a 14 per cent share. The shares were worth about $10 a share and they're about $5 now. That says the market has lost faith in us."
"But many people perceive Microsoft NT as an unstoppable monster that will destroy Unix. That, and the perceived risk that SCO won't make it at the high-end. They are not valuing us on our future potential," he continued.
He added: "Microsoft's shareholding in SCO is down from 30 per cent to around 12 per cent, and if Novell wants to get out, it's great they're doing it while the share price is low. We could buy back but we want to do other things with our cash."
"We expect to be profitable next quarter and if we hadn't taken action on the channels and inventories we would have been profitable this quarter. The new model will work and we'll see new revenues feeding through from Unixware and Tarantello," Anderson concluded.
Payne remains sceptical.
"The squeeze on SCO is from NT, HP-UX, Sun and even IBM AIX, which is defending its territory better than before. Unix is a commodity market now and SCO is just another Unix. We don't see them in the market nearly as much as HP, IBM and Sun. SCO isn't perceived as a corporate decision vendor."
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