Corel Screws Down Costs to Produce Surprise Stellar Quarter >By Stephen Phillips

Computergram International, Sept 21, 1999

Corel Corp, the mercurial Canadian graphics and office applications vendor which is now pushing Linux products, posted third-quarter earnings of 17 cents a share beating analysts' consensus by a full 5 cents. The results for the three months ended August 31 turned around a 12 month-ago net loss of $7.8m or 13 cents a share, and including a one-off gain, added up to Ottawa-based Corel's best-ever quarter. The firm posted net revenue of $17.6m or 26 cents a share - including a $6.3m credit from the Canadian government for discrimination suffered in a federal software contract awarded to Microsoft Corp, last year.

Michael O'Reilly, chief financial officer said the results made good a pledge the company made two years ago to return the volatile company to profitability. But other executives admitted that the profit margin owed everything to screwing down expenses and nothing to increased sales - planting doubt that the performance can be sustained. Revenue was flat over the last year - $71.3m for the latest quarter against $71.1m last year - despite the Spring release of the firm's two new flagship software applications Word Perfect 2000 and CorelDraw 9. Research and development costs plummeted more than 37% from almost $17m to around $10.7m, due to reduced contractor fees, O'Reilly said. And this year's bottom line was without the $15.9m restructuring charge incurred in 1998 after moving the firm's Utah operation to Ottawa.

"This company continues to track at a flat revenue - they're managing to bring down costs, Alex Batula, an analyst at Merrill Lynch told the Reuters News Agency. "Where's the growth going to come from?" Batula added.

Corel is looking to its Linux operating system, dubbed Corel Linux, developed for the desktop with a Windows-based interface, to generate future revenue atop stagnant sales of its staple offerings. The product goes into beta verification testing with users today ahead of being launched commercially in early 2000.

Borrowing from other Linux vendors, Corel will let the product go for free to personal users but look to draw revenue from corporate licenses and support and maintenance contracts with corporate users. It is also in talks with OEMs about pre- installing Linux products on PCs. The firm said that the Linux version of its WordPerfect software, dubbed WordPerfect 8 for Linux, had claimed 1.5 million orders in free downloads from the web and is ranked the most popular Linux program on CNET's popular Download.com site.

For the quarter Corel's graphic software products claimed $32.4bn of sales - $21.8bn in new sales and $10.6bn in upgrades - with WordPerfect accounting for $38.9m of sales, of which $21.8bn were new licenses and $17bn upgrades. Dr Michael Cowpland, president and chief executive officer admitted to uneasiness over sluggish upgrade sales. "With more than 30 million users there is still some ground to make up," Cowpland admitted.

Corel's latest earnings do not include the firm's stake 20% in Graphon, a Campbell, California-based firm specializing in inter- operating system connectivity software, now capitalized at $20m following a recent initial public offering. Corel's shares added 9.9% yesterday to close at $6.94.