To all, and particularly the "incarcerated" (??) Vanni who thinks missives to Corel fall on deaf ears, the following is another E-Mail exchange I had a week or so ago with Corel management:
"Dear Mr Cowpland and Mr. Norris:
As a small business owner and individual investor with a significant investment in Corel (I hold 42k shares in a combination of company pension fund and personal investment accounts), I was greatly concerned when I heard the news a couple of days ago that Corel would write down its 3Q revenues by $42 million to account for product inventory booked as sales but not actual sold. While I am aware that this is a common accounting practice in the software industry (except of course for MSFT, which defers significant revenue until the $$$ are in the bank), I was taken aback by the size of the write down. I am also concerned about the conflicting reports in the news media of statements attributed to Corel management, such as the one in the 9/11 edition of the Ottawa Sun attributed to Mr. Cowpland which said that henceforth "Corel will primarily report sales to end users instead of sales into the distribution channels", which conflicts with a statement attributed to Mr. Norris in the Financial Post, also on 9/11, which said that "there is no change in accounting policy at all, it's a sale when it leaves our warehouse on its way to the distributor." The published press releases and news reports raise a number of questions about Corel's accounting practices and specifically about this $42 million write down, to which as a shareholder in the company I would like some answers:
(1) Is the $42 million going to be written off against the 3Q revenue, or is Corel going to restate prior earnings for the 2Q to reflect actual sales of WP8 instead of shipments to the distribution channel?
(2) Is the $42 million write down entirely attributable to unsold inventory of the WP8 product, for which almost $40 million revenue was already booked in the 2Q, or is a portion of the $42 million write down due to unsold inventory of WP7/WIN 95 (standard and professional versions) that is still being offered for sale (with significant Corel discounts of $20 to $100 per unit)? I find it hard to understand how Corel expects any of this unsold WP7/WIN 95 inventory to sell when the WP8 product is superior and only marginally higher in price.
(3) If some of the $42 million write down is attributable to unsold WP7/WIN 95 inventory, to which prior quarters do the write downs for WP7/WIN 95 apply, and what is the $$$ amount attributable to each prior quarter? Further, do these amounts cover all of the unsold WP7/WIN 95?
(4) If none of the 3Q $42 million write down is attributable to unsold WP7/WIN 95 product, how much unsold WP7/WIN 95 is still in the distribution channel? Further, how much $$$ revenue has been booked in prior quarters for this unsold inventory, does Corel have sufficient reserves set aside to cover this unsold inventory, and when and how is Corel going to account for this unsold product?
My concern as a shareholder here is that the present write down may not cover the entire unsold inventory, particularly for the obsolete WP7 product, and more bad news along these lines may well be in store for either the 3Q or the 4Q. I would appreciate receiving some answers to these questions.
Sincerely, David E. Taylor, President, Taylor Associates Inc."
In response to this, Chuck Norris (or one of his assistants) obligingly wrote back pretty promptly (and I assume from the first sentence that his reply was for "public" consumption):
"Dear Sir: Some of your questions and requests are for information which Corel does not release publically and therefore I will not be able to answer all of your questions. Corel's accounting policy concerning sales recognition has always been and will continue to be that shipments to our distributors are F.O.B. one of our warehouses and are recognized as a sale at that time. Because of this policy we maintain reserves for product returns from our distributors. Comparisons of Corel's reserves and subsequent product returns have shown that the reserves as provide been more than adequate in Corel's history. This is the common accounting practice in the software industry. Deferred revenues which appear on various companies balance sheets (including Microsoft's) relate primarily to corporate licensing agreements which usually include a payment for maintenance and support over the term of the contract for which revenue is deferred and recognized proportionately over the term of the contract.
The $42 million difference between the $96 million ordered and shipped in Q397 and the $54 million which Corel will recognize as revenue for the quarter represents excess product at the distributor level as at August 31, 1997 as well as additional reserves for returns of WordPerfect Suite 7 and CorelDRAW 7 (CorelDRAW 8 will ship in November 1997). The $42 million is not a write-down of Q397 revenues but rather, in the case of the excess inventory problem, a decision, based on sell-through of the products to our distributors resellers, to not recognize such excess channel inventory as revenue in Q397. Revenue recognition will be in Q497 and again will be dependant on sell-through from our distributors to resellers. As the problem at the end of Q397 relates entirely to product shipments occurring in Q397, there is no effect on previously reported quarters.
Yours truly, Chuck Norris, C.A. VP Finance & CFO"
While this would seem to confirm pretty categorically that it will be "accounting as usual" at Corel, it dodged the issue of how much WP7/WIN95 is still out there unsold (Corel is offering up to $100 rebates on this product), so I wrote Mr. Norris again as follows:
"Dear Mr. Norris: Thank you for your prompt 9/15 response to my E-Mail of 9/12. I appreciated the fact that you took the time to respond at all in light of what I am sure has been a hectic couple of weeks. While I can guess at and appreciate the reasons for your reluctance to answer some of the questions I posed in detail, the most important question that prompted my original E-Mail remains unanswered, and I believe that you can at least provide a qualitative answer without giving away any commercial information that Corel deems too sensitive for public airing.
Your response indicated that at least some of the $42 million "unrecognized revenue" was to provide "additional reserves for returns of WP7 (WIN95)". The key question was and still is, does this additional reserve cover all of the WP7 product still out in the distribution pipeline, or is there more of this obsolete product still to be accounted for or simply written off? This is a key question that needs to be answered before small investors like myself can be assured that Corel will be starting with a "clean slate" in the 4Q as far as revenues from WP8 and other current generation products are concerned, and I would appreciate your answer.
If there is still significant WP7/WIN95 product out there that the present "additional reserve" does not cover, instead of having it returned unsold with the resultant dampening effect on the 4Q revenues, why not simply give all the WP&/WIN95 product away, or maybe sell it at a fire sale price like $10 or $15 US, like you would for an OEM sale? Once people try it, at least a percentage of them would be future upgrade customers for WP8 or WP9, in the same way that people who are getting WP7 as OEM software are. Such an approach would not take much advertising, and would at least provide some positive instead of negative revenue.
Sincerely, David E. Taylor, President, Taylor Associates Inc."
To date, I have not received a reply to this follow-up E-Mail, though in all fairness, Norris & Co. may be busy preparing for the conference call. Maybe one of the smarter analysts will have the insight to ask the same question. If there is a ton of WP7/WIN95 still unsold, IMO better Corel get rid of it now rather than waiting to see if good 4Q earnings can absorb the additional hit.
Apologies for the long post, hope it adds to everyone's understanding of the situation.
David T. |
