Corel sinks deeper in the red

Corel CEO Michael Cowpland attributed the shortfall to problems with shipments of its Windows software and maintained that the software company should be given a valuation similar to Linux star Red Hat.

The company sees 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 Dec. 15.

On a conference call, Cowpland blamed the company's problems on its "old" business of making Windows software. Investors should view Corel (Nasdaq: CORL) as a Linux stock, he said.

"Valuewise we're at 5 percent of Red Hat (Nasdaq: RHAT)," he said. "In many respects we're the company with the most Linux technology."

Checkered history
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 checkered history and, yeah, hopefully this time it's going to be different," Stewart said.

Wrong.

In the latest earnings miss, Corel said it expects to report revenue of $61 million, down from $67.2 million 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.

Blame it on Windows software
Corel officials said the problems in the fourth quarter were related to its Windows business and emphasized there were no problems in its Linux business. Corel's latest Linux products launched at the tail of the quarter.

Cowpland and company also seemed to be reaching for reasons for the profit warning on a conference call.

Cowpland said there could be a slowdown because of Year 2000 concerns. He said PC and software sales have been slowing and that may have affected the quarter.

When pressed for specifics on slowing PC sales and Windows software, Cowpland couldn't offer details. He said the Y2K consumer slowdown may be "emotional factors" and couldn't "really tell."

"While we are disappointed by the preliminary results, we are pleased that we are still able to deliver a profitable year," said Cowpland. "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."

Cowpland flip flops
But in recent weeks, Cowpland emphasized that the fourth quarter was on track with the fourth quarter. Just days ago, a Red Herring reporter noted, Cowpland told an audience that the quarter looked fine.

In a Reuters story Dec. 14, Cowpland had this to say:

"There'll be some significant Linux sales," Cowpland said, adding that results for the quarter, which are expected to be reported January 18, are "on track". "We can't actually go into numbers because we're in a quiet period. But the initial enthusiasm is really strong."

For his part, Cowpland did little to curb the Linux hype, citing Corel's "upside potential" and the company's Linux dreams.

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's conference call, Cowpland said he believed at the time the quarter looked good. Corel was surprised after external audits revealed a revenue shortfall.

Corel said it was surprised by the shortfall after strong sales of $77 million 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.

O'Reilly said Corel was undergoing an auditing process and couldn't comment more until January. The outgoing CFO also said Corel doesn't telegraph projections to Wall Street. "The results we're announcing today ... whether it's in line with analyst expectations or not really is not a concern for us," he said.

Linux: Corel's life line
The latest profit warning is bad news to investors that bought into Corel at the peak of its Linux hype. On November 12, Corel closed just under $9 a share. Less than a month later, Corel closed above $39.

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

Cowpland said Corel has more distribution than Red Hat and should be valued accordingly.

Corel also said that it would acquire a one-third stake of LinuxForce, a Philadelphia-based Linux support company. Corel 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 about whatever technology was popular at the time. Recent incarnations of Corel had it trying to capitalize on Java and handheld computing.

For now, Corel is chasing Linux and Cowpland is beating the drum to run with the Red Hats of the world.

"We continue to believe Linux is the operating system of the next decade."