Following a profit warning earlier this month (CI 3,180), Corel Corp’s second quarter results have buckled under the weight of a $114m charge to write off capitalized software costs, sending the earnings figure deeply into the red. Corel has just released second quarter figures showing net losses of $105.7m down from profits last time of $506,000 on sales up 14.8% at $100.4m. The write-off represents a downgrade in the carrying value of WordPerfect (purchased from Novel Inc 18 months ago) on Corel’s balance sheet and it makes a mockery of accounting best practice. Capitalized intangible assets are meant to be written off over their estimated useful lives and in this way the impact upon earnings is spread over the periods in which the benefit is gained from the asset. Ignoring this one-off charge, the underlying trend shows an increase in Corel’s operating profits together with a continuing cash inflow. Corel is poised for a potentially excellent third quarter with the initial reviews of Corel’s WordPerfect Suite 8.0, released just last week, giving the new product an all-around thumbs up. The main improvements seem to be better integration between the applications and broader support for the web. Corel chief executive Michael Cowpland was justifiably upbeat about the new release which seems to be every bit as good as Microsoft Office 97 is bad. This, more than anything, is the likely reason for the timing of the write- off. Corel is clearing out the closet for a period of growth, and it doesn’t want amortization costs dragging down its earnings. In the past few quarters, Corel’s earnings have soared to $0.29 per share and then plummeted to a loss of $0.13 per share. The stock has dwindled to $6.30 from nearly double that amount 12 months ago and a period of steady earnings growth could do the company no harm at all.
