Corel stock hammered
Shares lose 12% as chief executive Michael Cowpland surprises the market
with warning of huge shortfall in sales of company's WordPerfect software
By JILL VARDY
Technology Reporter The Financial Post
OTTAWA -- Shares of Corel Corp. plummeted by 12% yesterday as the
company warned of a huge shortfall in sales of its WordPerfect software --
a shortfall that will result in a US$32-million loss for the third quarter.
President and chief executive Michael Cowpland said sales will rebound in
the fall, after falling 40% short of expectations in the third quarter, ended
Aug. 31.
Asked if Corel will report a profit in the fourth quarter, he replied, "We
don't make predictions."
The news, which took the market by surprise, prompted a halt in trading
of the stock on the Toronto and Nasdaq exchanges. When trading
resumed, the shares (COS/TSE, COSFF/NASDAQ) fell $1.05 to $7.85
in Toronto, and 53/64 to US$5 5/8 in New York.
Corel said it will report third-quarter revenue of US$54 million, although it shipped
US$96-million-worth of software to distributors and retailers.
That means US$44 million of WordPerfect software Corel had expected to sell, stayed on the shelf.
The company said it will report a loss of US$32 million for the third quarter, although final numbers
won't be out until Sept. 24. Analysts' consensus estimates had put revenue at US$93 million and the
loss at $2 million.
Cowpland said Corel still has about US$20 million in cash, the same amount as at the end of the
second quarter.
Sluggish sales of WordPerfect version 8, released with much fanfare in June, are a blow to Corel's
image. Analysts are scrambling to rework their forecasts and few would speak to reporters
yesterday.
Those who were talking said the problem is simple: Corel has been caught with too much of its
inventory in distributors' warehouses, said David Wright, director of research at Marleau Lemire
Securities Inc. That inventory backup is one reason he's been recommending investors to reduce
their Corel holdings.
Revenue surprises are an operating hazard for software companies like Corel, which report sales
according to how much product is shipped to distributors -- not what is actually sold to final
customers.
"The system is fine as long as the wheel keeps turning and your
expectations are met with respect to emptying the channel," said
Michael DeLavergne, an analyst at Dlouhy Investments Inc.
"You could almost call this quarter a charge against excess
inventory for Corel."
Cowpland had predicted strong sales of the new version of
WordPerfect, although it was sent to market before some
important features were added.
Those new features, including one that makes it work with the
Netscape Communicator Internet browser, are included in
Corel's WordPerfect Office suite of software, released last
week.
With the new WordPerfect Office suite on store shelves,
Cowpland said, sales will pick up again.
"We've been pulling all the [WordPerfect 8] product out of the channel and putting the new product
in. And that has caused a little bit of a delay in temporary sales. But we expect a surge in sales in the
fourth quarter," he said.
Wright said Corel could rack up US$100 million in sales during its fourth quarter, thanks to
WordPerfect Office and new CorelDraw graphics software, due out in October.
That would give the company revenue of US$350 million for fiscal 1997, which ends Nov. 30, and,
depending on its tax recoveries, a net loss of US$13 million to US$23 million.
The third-quarter hit comes two weeks after revelations Corel has revamped its strategy for
incorporating the universal programming language, Java, into its software. Its shares fell sharply as
analysts, investors and the media interpreted the move as an abandonment of the company's
commitment to Java. Corel spent two days on damage control, explaining it was just changing the
way it will use Java in its software products.
Cowpland was characteristically upbeat about yesterday's market reaction.
"We don't think this is going to have much of an impact because people are interested in the
high-tech future and where we're going and we have one of the most positive stories around," he
said.
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