Corel plunges after profit warning

Drops from Linux-inspired heights, as investors take company to the woodshed after news of an anticipated fourth-quarter loss
Written by Larry Dignan, Contributor

Corel, which recently hit a 52-week high of 44 1/8 fuelled by Linux hype, fell 4 13/16 to 13 3/4, or 25 percent, after it shocked investors Wednesday with a profit warning.

The company expects a fourth-quarter loss of 14 cents a share. Wall Street was expecting a profit of 12 cents a share.

The loss was the second red flag for investors in recent weeks. Corel's chief financial officer, Michael O'Reilly, resigned 15 December.

Corel in recent quarters has delivered upside surprises but has a long history of disappointing Wall Street. Duncan Stewart, fund manager at Tera Capital, told Reuters recently that Corel's history and profit taking led to Corel's recent pullback. "This is a company which has a long and chequered history and, yeah, hopefully this time it's going to be different," Stewart said.


In the latest earnings miss, Corel said it expects to report revenue of $61m (£38m), down from $67.2m in the fourth quarter a year ago. For 1999, Corel expects to report a profit of a nickel a share. First Call was expecting a profit of 24 cents a share.

"While we are disappointed by the preliminary results, we are pleased that we are still able to deliver a profitable year," said Michael Cowpland, Corel CEO, in a press release. "We are confident that our leadership in the exciting, fast-growth Linux market and new Web-based initiatives will put us in good standing for the year ahead."

What a difference a few weeks makes.

In a Reuters story 14 December, Cowpland had this to say: "There'll be some significant Linux sales," adding that results for the quarter, which are expected to be reported 18 January, are "on track". "We can't actually go into numbers because we're in a quiet period. But the initial enthusiasm is really strong." Cowpland's bullishness echoed what he said on Corel's first-quarter conference call, when he added that the company's turnaround was complete.

On Wednesday, Corel said it was surprised by the shortfall after strong sales of $77m into the channel.

O'Reilly said the company had to take substantial reserves on "a number of products", which cut revenue. Translation: Corel stuffed the channel and didn't get the sell-through. The financial chief also said the company had higher expenses.

The latest profit warning is bad news for investors who bought into Corel at the peak of its Linux hype. On 12 November, Corel closed just under $9 a share. Less than a month later, the company closed above $39.

Corel, which does have some key Linux products, was riding the wave of Linux fever that drove Red Hat, VA Linux and others into the stratosphere. Corel recently launched versions of Linux and its WordPerfect Family Pack.

Corel also said Wednesday that it would acquire a one-third stake of LinuxForce, a Philadelphia-based Linux support company. The company said it has a three-year option to increase the ownership position to two-thirds.

A little history, however, can go a long way. Corel has tried to build businesses before around whatever technologies were hot at the time. Recent incarnations of Corel had it trying to capitalise on Java and handheld computing.

For his part, Cowpland did little to curb the Linux hype and will have to eat some of his words. "Virtually every company is under way with Linux development, with the exception of one," he said recently in a Reuters interview, referring to rival Microsoft "That's the benefit of being the early mover... We don't have to call people. They call us."

Cowpland wasn't finished. "We certainly have some good upside potential," he said. "People are looking at a 10-year scenario here and -- as they often do in Web plays, too -- they're not impatient for really early profits."

Corel better hope investors are really patient.

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