InformationWeek
Defining The Business Value Of Technology
| September 22, 1997 |
Taking Stock: Corel Looks For Answers
Unsold inventory, slow product delivery, and lack of a cohesive growth strategy have hobbled the software vendor
Therefore, reviewing Corel Corp. is a must. Corel has declined more than 30% year-to-date, and has pre-announced dismal revenue and earni
ngs results for the third quarter, ended Aug. 31.
Corel, headquartered in Ottawa, develops, markets, and supports graphics and multimedia software as well as productivity software. Products are usually branded under CorelDraw, Corel WordPerfect Suite (including Paradox), Corel Office Professional, Corel WebMaster Suite, and CorelCAD. The company is the only significant competitor to Microsoft in the retail office-suite software category, and CorelDraw has become a dominant industry standard as well.
So what's wrong with this picture? Corel launched WordPerfect Suite 8.0 in the second quarter, which was supposed to boost sales in the third quarter. But third-quarter 1997 revenue is estimated at $54 million, compared with $85 million in third-quarter 1996, and $100 million in third-quarter 1995-not exactly the right direction.
It should not be a surprise that Corel's market share in the U.S. retail office-suite segment declined to below 25% at year-end 1996. The company shipped $96 million in produc
t in the third quarter, but $42 million is still unsold. WordPerfect Suite represents about $30 million and CorelDraw 7.0 makes up most of the balance of the unsold inventory. Sales of 7.0 have undoubtedly slowed because version 8.0 will be released in the fourth quarter. Overall, this will result in an estimated loss of $32 million in the third quarter. This comes on the heels of a miserable second quarter that saw a charge of $113.7 million due to the accelerated write-off of the WordPerfect acquisition costs in 1996. Corel attributed the acceleration to software improvements in research and development.
This would not be so disconcerting if the company would actually deliver its new products in a timely fashion. For example, Corel has been touting its upcoming offering-Corel Office for Java-throughout 1997. Unfortunately, it is unlikely to deliver the product before 1998. This even assumes that the product would have a material effect on Corel's future, which I doubt. I would not expect any significant
shift in Office Suite market share, as Microsoft will undoubtedly respond with an equivalent product.
So what else is new? Not much that is better. The company plans on setting up separate entities for CorelVideo and Corel Computer Corp., its network computer subsidiary. Why the company would choose this business path is beyond me. Not only is the hardware business extremely competitive but it is also very capital-intensive and low-margin.
Corel has some real problems. It's sitting on two mature software products that generate 98% of its revenue, with little potential for growth. And it's unlikely to earn much more than 35 cents per share for fiscal 1998, ending Nov. 30. So Corel doesn't justify more than $5.25 per share-very close to the current price.
Still, I fully expect Corel to survive, as the company remains in a position to generate positive cash flow. However, it is very unlikely that investors will be rewarded for owning Corel's stock. CEO Michael Cowpland is banking on a strong fourth
quarter to bail out the company this year.
He should. His job may depend on it.
William Schaff is chief investment officer at Bay Isle Financial Corp. in San Francisco, which manages the InformationWeek 100 list. Reach him at
bschaff@bayisle.com
.
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s an investor, you hate to hear pre-announcements of weak earnings from technology companies. There is usually some dry rationale to explain why the problem is a one-time occurrence, or some excuse about a delay in sales for a quarter. Value investors try to determine how much is truth or fiction, as subsequent share-price corrections can offer great opportunities.
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