Some excellent analysis from the Financial Post. WARNING TO PETE: THIS IS FROM VANNI. PLEASE CLICK THROUGH. DO NOT READ. REPEAT. DO NOT READ.
Another day, another drubbing for Corel Corp. stock.
The shares plunged Wednesday after the computer software company announced it expects to lose a stunning US$32 million in the third quarter ended Aug. 31 on revenue of just US$54 million -- 40% lower than expected. That translates to about US45 cents a fully diluted share and compares with a profit of US$3.2 million (5 cents) on revenue of $84.9 million in the third quarter of 1996. Corel shares (COS/TSE) tumbled $1.05 after the earnings were announced Wednesday. They fell $1.30 in intraday trade yesterday to a 52-week low of $6.55 before recovering to close at $7.05, down 80 cents on the day. The U.S-listed shares (COSFF/NASDAQ) closed off 9/16 at US$5 1/16 after hitting a 52-week low of US$4 3/4.
Now, analysts are scrambling to figure out what the drop means to Corel's long-term earnings potential. Michael Cowpland, the company's founder and chief executive, explained the revenue drop as ``an accounting change'' to deal with a surplus of Corel software in distributors' inventory.
``We're taking a conservative approach {to reporting revenue} because we've always had conservative accounting in this company and we're taking the difference in inventory during this transition period,'' Cowpland told reporters Wednesday.
Charles Norris, Corel's chief financial officer, said the company estimates its quarterly sales on ``historical run rate'' -- or the rate of sales in previous quarters. If the anticipated sales are less than the amount of inventory sitting on distributors' shelves, there's a problem.
That's what happened in the third quarter. Corel had sent US$96 million worth of software out to distributors. But at the end of the quarter, almost half of it was sitting in warehouses with little expectation of being sold, because new versions of the software were due to be released.
Norris said the third-quarter drop has been misinterpreted as a change in the way Corel accounts for sales. ``Contrary to what was mentioned {in some news media reports} there is no change in accounting policy at all. It's a sale when it leaves our warehouse on its way to the distributor.''
Some analysts see the third-quarter drop as a sign Corel's much-hyped WordPerfect 8 software, released in June, is not even close to matching Cowpland's high expectations. But details are scarce -- Corel management has spoken only to a few friendly analysts, postponing its official explanation to a telephone conference call Sept. 24, when it releases its final third-quarter numbers.
The bad news comes two weeks after another stock drop prompted by news Corel had shifted its strategy for Java, which was interpreted as an abandoning its commitment to the universal programming language. The company hurriedly explained it remained committed to Java, but the shares still fell $1.
This week's stock shock came after a roller-coaster summer for Corel, which is Canada's largest software company, producing and selling graphics, word processing and office applications. Yesterday's close puts the stock close to where it was around Corel's annual meeting in April, when a selloff in technology stocks pulled it down to around $7, just half its 52-week high of $14.25.
Back then, Corel told analysts it would sell US$105 million worth of software -- most of it WordPerfect 8 -- during the third quarter. Corel financial officials have since revised the sales figure downward to US$96 million, and analysts lowered their earnings estimates accordingly.
Wednesday's announcement has shaken the confidence of even the most supportive analysts. David Kramer of RBC Dominion Securities Inc. maintained a ``buy'' recommendation on Corel in his morning bulletin yesterday, noting that Corel management has taken significant steps in the past year to return to sustainable profitability. Kramer added that if sales remain slow, the company still has plenty of scope for cost reductions.
Other analysts say when extraordinary items are set aside, Corel has shown virtually no revenue growth during the past year.
The company's sales for the year ended Nov. 30, 1996, were US$84.9 million. By the halfway point of this year, sales had surpassed that level, but US$13 million of that US$100.4 million first-half total was the result of bartering Java-based products with other companies. Barter must be reported as revenue under federal tax rules.
Excluding the barter, revenue was US$87 million, up only marginally from the year-earlier total..
``The fact is, we have this company going at a US$83 million to US$87 million quarterly run rate for the past year,'' said Duncan Stewart, partner at Tera Capital Corp. and an analyst who has followed Corel for years. ``My best guess is that it is a company doing approximately US$330 million a year in sales, with no growth.''
With 60 million shares outstanding, Stewart added, one-year sales projections put the value of the stock 12 months down the road at about where it sits today: around $7.
Cowpland says he is confident sales will ``surge'' in the fourth quarter, as the company releases a new version of its flagship CorelDraw graphics software. Demand for WordPerfect should pick up too, he said, thanks to the recently released WordPerfect Office Suite, which includes features that were missing from WordPerfect 8. But he refused to say if Corel will report a fourth-quarter profit.
Meanwhile, Corel is plowing ahead with its assault on the corporate market, where most software is sold and money is made. Corporate sales have grown 35% in the past year, Corel claims, and the company is ``engaged in a number of pilot programs involving companies with 100,000-plus seats {or work stations}.''
The shift from a retail focus to one that concentrates on the corporate market holds a lot of potential, analysts say. Corel has hired Don Sylvester, former corporate sales head at Dell Computer Corp. Canada. And Cowpland recently announced a new Java-based server product called Remagen, aimed directly at companies that want to run the same software on different operating systems.
But a foray into the corporate market means treading directly on the giant toes of rival Microsoft Corp., which has a stranglehold on corporate software sales. Analysts say the market is big enough for Corel to do nicely in niches, such as the legal and medical professions, and in the small legion of corporate software users who see Microsoft as the evil empire.
But the current adage -- no one ever got fired for buying a Microsoft product -- makes it a tough market for Corel to crack. Add to that market another tough competitor, Lotus Corp., and it's easy to see why Corel has ranks a distant third in corporate sales.
Analysts are not factoring into their projections any revenue from Corel Computer Corp., a hardware spinoff that opened its doors in June. The new company, wholly owned by Corel, will unveil its first network personal computer system this fall.
COREL CORP.: Earnings (U.S.$): 2nd Qtr 1st Qtr 4th Qtr. 3rd Qtr. 2nd Qtr. 1st Qtr 4th Qtr. 3rd Qtr 5/31/97 2/28/97 11/30/96 8/31/96 5/31/96 2/29/96 11/30/95 8/31/95 Operating rev. $000s 100,413 93,718 125,406 84,942 87,474 36,423 62,083 61,920 Net income $000s (105,705) 1,024 6,544 (3,201) 506
(6,599) (956) 14,163 Earns. per sh. $ (1.76) 0.02 0.11
(0.05) 0.02 (0.13) (0.02) 0.29 Cash flow opers $000s
34,400 25,716 (11,546) (18,149) 36,518 (18,369) 6,131
5,060 Cash flow opers per sh. $ 0.573 0.428 (0.202) (0.322)
0.668 (0.370) 0.127 0.104
P/E ratio: n.m. Dividend yield: n.a. (at 9/10/97)
COREL CORP.: Ratios: Nov. 30 Nov. 30 Nov. 30 Nov. 30 Nov. 30 1996 1995
1994 1993 1992 Net profit margin (0.82) 7.38
19.78 19.85 13.63 Return on equity (1.13) 8.03 23.56 22.52 16.54 Return on assets (0.89) 7.02 20.11 19.75 14.92 Total debt/equity 0.17 n.a. n.a. n.a. n.a. Current ratio 2.63 7.50 6.35 5.50 13.26 Avg. price/book value 2.5 3.8 3.9 3.2 2.7
COREL CORP.:
Happy Investing!
Vanni |
