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Santa Cruz Operations is Betting the Ranch on UNIX
Director of Online Research: David Sterman
Score another one for Microsoft (NASDAQ: MSFT)? The company's Windows NT software is fast-becoming the dominant platform for high-end corporate networks, leapfrogging the once-ubiquitous Netware offered up by rival for Novell (NASDAQ: NOVL). Left in the dust is all-but-forgotten UNIX. Developed by Bell Labs decades ago, UNIX once served as the basis for virtually every computing system. These days, UNIX-based systems are used to run small networks at a bank branch or a fast-food restaurant. But one Silicon Valley outfit, for SCO (NASDAQ: SCOC), still hopes to secure a more important role for UNIX that will take it well into the 21st century.
When Bell Labs rolled out UNIX, software firms were encouraged to take the basic code and adapt it to their own needs. As a result, hundreds of UNIX versions soon appeared. Trying to develop software that would run well on all of the different versions of UNIX became a Herculean task. Most developers are no longer in the market, but 26 different versions still remain. SCO (formerly known as Santa Cruz Operations), which currently holds 41% of the UNIX market, expects more players to bail on the market. "We'd like to see less flavors," says Doug Michels, the firm's Chief Technology Officer.
SCO acquired the rights to the leading version of UNIX from Novell back in 1993. Novell shed the unit soon after showing ex-CEO Ray Noorda the door. UNIX, it seems, never had a place, as most Novell execs were squarely focused on the competing Netware platform.
Counting on Tarantella
Since then, SCO has remained off the investor radar screen, posting middling results in the mature UNIX market. But behind the scenes, the company has been cooking up an intriguing new software called Tarantella, which allows users to operate a computer program through their browser, without loading the whole program on their computer. When you imagine that many home appliances will eventually act like little computers, you can see that a program like Tarantella could be in hot demand.
Biggies Chose UNIXware 7
A series of recent press announcements really catches my eye. for Intel (NASDAQ: INTC) and for IBM (NYSE: IBM) have decided that SCO's new UNIXware 7 has the features to handle the more robust computing systems that are currently being designed. IBM, in particular, plans to re-jigger all of its key products including Lotus Notes, DB2 and Tivoli to run on UNIXware 7. And Intel will make sure that its upcoming cutting-edge chips run optimally on SCO's UNIXware platform. Those two partners are also expected to pony up tens of millions of dollars to help further develop UNIXware 7.
It's hard to get excited about SCO's performance over the last three years. Not only have revenues been flat, thanks to the low-growth UNIX market, but expenses have soared as the company spent wads of cash to develop Tarantella and UNIXware 7. "We've been in the deep invest mode to generate new products," says John Luhtala, the company's CFO. And the company shouldn't turn any heads over the next couple of quarters either, as Tarantella and UNIXware 7 are still being tested by major potential customers. (The company still posted an impressive 17.6% Return on Equity in Fiscal 1998, despite a hefty $41 R&D expense). But by the second half of 1999, SCO and UNIX may very well return to the spotlight.
Bottom Line
Trying to peg sales and earnings forecasts for 1999 and 2000 is nearly impossible. But when you figure SCO would have earned more than $1 a share in each of the last few years if it had not heavily invested in the new products, you can see that investors are paying just 5 times earnings for the UNIX cash cow. As burgeoning revenues start to offset the high expenses associated with the new products, SCO could conceivably earn $1 a share by Fiscal (September) 2000. And if investors put a reasonable growth multiple on the shares, a 300% or 400% gain may be in the offing for patient investors.
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FWIW, II has had it share of goofs in the past. Novell has some
stock and has been selling at regular intervals, could keep pressure on SCOC ?
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