Here's the atricle:
BY PATRICK BRETHOUR
Technology Reporter MICHAEL Cowpland is not the kind of guy to let the worst year in his company's history get him down.
Last month, Corel Corp. - the onetime darling of the Canadian software scene - reported it lost $231.7-million (U.S.) in 1997, by far its deepest loss to date.
Sales in the fourth quarter fell to just $43.6-million from the high- water mark of $125.4-million a year earlier, as revenue from Corel's WordPerfect line virtually evaporated.
Then there was the exodus of Corel executives during the year, culminating in the December resignation of chief financial officer Chuck Norris.
More faint-hearted corporate chiefs might feel cowed, assuming they were still on the job.
But Corel's chairman, president and chief executive officer isn't worried. "Ultimately, good products get great sales," Mr. Cowpland says.
Perhaps stung by Corel's failure to match his previous performance predictions, Mr. Cowpland isn't providing many specifics. "Watch this space," he says.
There's little doubt that many will be watching to see whether Mr. Cowpland's promises and Corel's results will finally align in 1998.
Two years ago next month, Corel, having made its name in graphics software, completed its purchase of the WordPerfect office software line from Novell Inc. for $185-million (U.S.) in cash and stock. At the time, it seemed like a bargain - Novell had paid more than $1-billion for WordPerfect two years before.
Buoyed by past retail success, Ottawa-based Corel launched a full-scale attack on Microsoft Corp. in the office software market, slashing prices to gain market share.
But WordPerfect has proven more costly than Corel ever anticipated, as the dismal 1997 financial numbers attested. Corel's sales fell 22 per cent to $260.6-million for the year as WordPerfect revenue collapsed.
Even Mr. Cowpland, the perennial optimist, concedes his company turned in "majorly negative results."
He says, "It's true we don't have a lot of believers right now. But it won't take a heck of a lot of success before they come on board."
Mr. Cowpland and other top Corel executives say they remain convinced they have built a base for renewed growth. The company, founded in 1985, has $30.6-million in cash (garnered through reductions in inventory and accounts receivable), enough to prevent any liquidity problems in the short term, they say. They point to $100-million in fourth-quarter shipments as the best indicator of the demand for Corel's software.
The plan for 1998 goes like this: focus on the retail market, while building expertise in winning corporate sales. Corel will be releasing a batch of new products, including a network computer and bridging software that will allow Corel's office software to work with a variety of operating systems. Executives have - so far - ruled out any dramatic cost- cutting beyond a previously announced reduction in advertising expenses.
But outside observers hear those plans and conclude that Corel is taking yet another step along the path that led it to trouble in the first place. "I'm still not convinced that even today, they understand their role in the marketplace," says Michael Davidson, manager of Canadian software research at International Data Corp. (Canada) Ltd. in Toronto.
Other observers are even more blunt. "You just can't keep taking losses forever," says Michael Pinckney, a research director at Gartner Group Inc. in Seattle.
Michel Delavergne, a software analyst at Dlouhy Investments Inc. in Montreal, says Corel has enough cash to stay the course for another four months if it does not turn around the decline in sales.
Most analysts say some losses were inevitable once Corel bought WordPerfect, but many of the company's actions since then have deepened and prolonged the pain.
Part of the problem lay in the unbridled optimism that Mr. Cowpland and other managers felt when they acquired WordPerfect.
Mr. Cowpland realized that he and Corel were about to enter the major leagues of the software industry in head-to-head competition with Microsoft and International Business Machines Corp. "The first thing in my mind was - Wow!" he recalls.
Arlen Bartsch, Corel's former executive director of sales and marketing, says that same sense of excitement raced through the company in winter, 1996, as it embarked on an intensive effort to launch a new version of WordPerfect. "There were very few reservations. The company was very bullish on its ability to compete," says Mr. Bartsch, who says WordPerfect gave Corel an opportunity to leave "the graphics ghetto."
Indeed, the company had long been criticized for its heavy dependence on CorelDraw, the graphics software from which it derived the overwhelming majority of its revenue. That dependence ended in May, 1996, with the introduction of Corel WordPerfect. Sales of the first new WordPerfect release in four years soared, spurred by cut-rate pricing.
In June and July, Corel knocked Microsoft out of the top spot in the U.S. retail market for office software. Mr. Bartsch says those early successes were almost taken for granted at Corel, which was used to dominating graphics software.
But analysts say the early surge in retail sales distracted Corel from the more essential, but less glamourous, task of building up a sales force capable of tackling Microsoft in the corporate market, which accounts for at least 80 per cent of total sales.
Mr. Bartsch acknowledges that Corel didn't move quickly enough to build up its corporate sales infrastructure. It introduced an aggressive pricing scheme for companies in the fall of 1996, but could not repeat its retail success of the summer.
Mr. Delavergne, the analyst, says the summer sales surge led Corel to overestimate demand for WordPerfect, an attitude the company has yet to shake. "I think they set their sights very high."
Other mistakes piled up in 1997. The most notable, says Gartner's Mr. Pinckney, was Corel's sharp mid-summer change of course on its plans for the Java programming language.
Until August, Mr. Cowpland had been touting Java as an elixir for all of Corel's pains, since it threatened to obviate the need for Microsoft operating systems - the underpinning of the Redmond, Wash.-based giant's dominance of many software markets. Once demand for a Java office suite took off, Corel could romp through the market, while Microsoft was left behind, he preached.
In mid-August, Corel scrapped its efforts to develop full-fledged Java office software, redirecting its efforts to a bridging program that will allow its WordPerfect suite to run with different kinds of operating systems. Time was wasted and research dollars misdirected, but Corel's credibility and image of stability took the biggest hit, Mr. Pinckney says.
Corel's credibility suffered other serious blows in the fall. Although no one knew it in August, Mr. Cowpland was in the process of selling $20.5-million (Canadian) worth of Corel shares, nearly a quarter of his holdings. He says he needed the money to repay personal debts. The next month, shares plummeted when the company warned of deeper-than-expected losses in the third quarter.
The latest jab to the company's image came two weeks ago, when Corel auditors instructed it to rewrite 1997 financial statements to eliminate $33-million (U.S.) in revenue from several software barter deals.
So that was how 1998 began for Corel. For the rest of the year, a number of scenarios could unfold:
Corel stays the course and revenues rebound to ease the company out of the red. New technologies might give it some momentum. This is Corel's preferred version of events, but if sales continue at fourth-quarter levels for the first half of 1998, its preferences may have to bend to those of its bankers.
Continued losses force Corel into severe cost-cutting as revenues stabilize at between $150-million and $200-million; Mr. Cowpland resigns as president and CEO. No one at the company is publicly talking about this possibility, but analysts say Draconian cuts could come by June.
According to the analysts, the entrepreneurial Mr. Cowpland is unsuited for the role of penny-pincher. In this turn of events, he remains as a hands-off chairman, a repeat of his experience at Mitel Corp. in the 1980s. One hitch: despite a recent infusion of executive talent, there is no heir apparent to Mr. Cowpland.
Corel sells either its CorelDraw or WordPerfect program to raise cash and cut costs. Either sale is problematic - if CorelDraw is sold, the company is deprived of its cash cow. Attempting to sell WordPerfect would not only be difficult, but would compound perceptions of instability around the product.
Corel is taken over. With a market value hovering around $200-million (Canadian), the price would be pocket change for any large technology company. But any buyer would face the same difficulties with market demand as Corel does.
For Mr. Cowpland, there will be no cataclysm at Corel in 1998. Outside observers see a company whose optimism borders on denial.
But everyone agrees on two things: 1998 is a pivotal year for Corel - and it cannot be a repeat of 1997.
March 1, 1996: Novell Inc. formally hands over its WordPerfect unit to Corel.
Summer, 1996: Corel slashes prices on its office software; unit sales leap ahead of Microsoft's in the U.S. retail market.
September, 1996: Microsoft regains its lead.
December, 1996: Corel head Michael Cowpland says sales could hit $600- million (U.S.) in 1997.
January, 1997: Corel posts record revenue of $334.2-million in fiscal 1996, but also loses money for the first time in a decade.
August, 1997: Corel scraps a 13-month-old initiative to develop a full- fledged office suite in the Java programming language, instead focusing on creating Java "bridging software" that will allow its Windows-based suite to work with various operating systems.
Mr. Cowpland sells $20.5-million (Canadian) in Corel stock, nearly one- quarter of his holdings. When the sales are disclosed in October, Mr. Cowpland says he needed cash for personal debts.
September, 1997: Corel's stock tumbles as the company reveals it lost $32-million (U.S.) in the third quarter because its sales were just over half of the expected levels. Executives say fourth-quarter losses could reach $20-million.
Dec. 3, 1997: Chief financial officer Chuck Norris resigns, one of nine high-ranking Corel executives to leave the company in 1997.
Dec. 18, 1997: Mr. Norris's replacement, Michael O'Reilly, reveals fourth-quarter losses will approach $67-million, exclusive of onetime charges.
Jan. 20, 1998: Corel confirms a fourth-quarter loss of $66.9-million and a loss for the year of $231.7-million on revenue of $260.6-million. Mr. Cowpland tellsreporters and investors: "watch this space."
Peter |
