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Corel's credibility challenge
'Think of us as a large, new startup company,' CEO Cowpland says of
corporate makeover
By JILL VARDY
Technology Reporter The Financial Post
OTTAWA -- Corel Corp. is missing one crucial thing its engineers can't design -- credibility.
As Corel stock floats around its 52-week low, investors and analysts wait to see how Corel will
explain its way out of another disappointing quarter ending Nov. 30.
And that's just the first hurdle. Restoring itself to profitability will be a feat of corporate
restructuring, intense marketing and focus that Corel has failed to demonstrate, analysts say.
In fact, "buy" recommendations on Corel stock are about as rare as sunburns these days.
Nearly all U.S. analysts have dropped coverage of the company. "No, we haven't done a report
for some time, nor do we plan to," says a spokesman for A.G. Edwards Inc., a U.S. investment firm
that was one of the most bullish on Corel last spring. "Frankly, it's a sad story."
Canadian analysts, meanwhile, fall into two camps -- the ones that turned sour on the stock months
ago and the more recently disappointed. They say Corel has a lot of work to do to restore its
credibility in the eyes of investors who have listened too long to chief executive Michael Cowpland's
grandiose visions of his company's future success.
Chuck Norris, Corel's chief financial officer, admits his
company "certainly" has a credibility problem with the
investment community. When asked about solutions to the
problem, he chuckles. "Meeting projected targets is
probably a good one. Or beating them."
This hasn't been a good summer for Corel, which began
the season with a lavish launch of its WordPerfect 8 word
processing software in June. Cowpland confidently said
the software would help bring in US$110 million in
revenue during its third quarter ended Aug. 31.
By mid-summer, Corel was cautioning analysts to revise down their revenue estimates to US$93
million, as the WordPerfect 8 product failed to make its way through the distribution channel.
Then on Sept. 10, Corel warned that it was likely revenue during the quarter would be closer to
US$53 million, because sales were 40% less than anticipated.
When the final third-quarter numbers were released last Wednesday, Cowpland admitted the
fourth quarter, too, would be hammered by slow sales.
"He's very difficult to believe," says one analyst, speaking on condition of anonymity. Three weeks
ago, Cowpland told analysts that sales would "surge" in the fourth quarter of fiscal 1997. Then last
Wednesday, he told analysts sales would amount to just US$70 million to US$75 million, giving the
company a net loss of US$15 million to US$20 million.
That over-promising and then under-delivering is characteristic of Cowpland's relationship with
analysts and the financial news media. It seems Cowpland can't resist a marketing opportunity.
Even during last Wednesday's conference call, as he fielded terse questions from disappointed
analysts, Cowpland told them he will make six major sales announcements in the next three months
as large companies buy into Corel's new server-based Java products.
"We're talking to some of the biggest corporations in the world ... and they're basically endorsing
our vision 100%," Cowpland says .
That, of course, sets him up for the inevitable questions on the next conference call. If he
hasn't announced six major sales, his marketing efforts will be considered a failure by analysts.
Corel was caught with too much of its inventory sitting on shelves in distributors' warehouses during
the third quarter, says David Wright, director of research at Marleau Lemire Securities Inc. That
inventory backup is one reason he's recommending investors sell Corel holdings.
And that recommendation hasn't been affected by Corel's plans to concentrate on selling into the
huge corporate market for word processing and other business software. On the surface, that
decision makes sense. Selling to companies costs less per sale and the market is bigger.
But the big competitor in that market is the mighty Microsoft Corp., an opponent that eats software
companies for breakfast.
Analysts say this full-out foray into the corporate market makes it hard to predict accurately Corel's
performance for the next few quarters, says Michel DeLavergne, technology analyst at Dlouhy
Investments Inc.
"It's difficult to get a solid grasp of what they're going to sell next year," says DeLavergne.
"I think this focus on corporate markets will be a challenge for them, to say the least."
DeLavergne, who counts himself in the camp of recently disappointed analysts, has reduced his
recommendation to a hold from a buy.
Cowpland says the new focus for Corel will involve a complete makeover of the company. He has
exhorted analysts to think of Corel as "a large new startup company."
Norris dourly adds that it's "a startup with a lot of baggage."
Wright says Corel has already made improvements. It has sold off some of its sideline products,
including its series of CD-ROMs for home use and its computer-aided design software.
It has begun to clean up inventory and shore up its cash position. And advertising costs will be cut
in half as Corel switches to direct selling of its products to corporations.
In addition, Corel has invited several public relations firms to submit bids to help the company
improve its media and investor relations.
All that will help, says Wright.
But Cowpland and company should forget about their relationship with analysts and fix the
problems plaguing Corel -- lack of focus, stagnant market share, too much inventory sitting on
distributors' shelves.
"It's not about next year's performance," says Wright. "It's about continuing to grow the company
for multiple years." |
