Tuesday’s announcement that struggling Canadian graphics and business software supplier Corel Corp sees its way back to profitability in fiscal 1998 in working cooperatively with Microsoft Corp marks the real end of what may be the second-last attempt we ever see by a competitor of the Redmond Rampager to take it on directly. The last attempt will of course be whatever happens ultimately between Microsoft and Netscape Communications Corp. And let us be frank: the example of Corel is not a happy precedent for Barksdale et al. For here was a company that only ten months ago, in January, held a rival announcement in New York, at the same time as the launch of Office 97, to tell anyone interested that the future of desktop productivity lay not in such alleged bloatware, but in nimbler Java applets, and that soon Corel would be the first to release widely-available product built in the network language, its own Corel Office For Java. But it only took until August (CI No 3,229) for the whole house of cards around vaporish Office For Java to collapse, and here we are in late October with Don Sylvester, Corel’s senior vice-president of sales, telling the Wall Street Journal that Java would at best give the Ottowa company incremental opportunities and that Corel intends instead to increase the compatibility between its WordPerfect suite and, yes, Office 97, at the same time as Corel declares that it will not try to compete with Microsoft in business software at all.
Ears burning
It makes sense for us to say Microsoft is not our competition; it is our environment, according to Sylvester. If we didn’t know him better, we would think Corel president and chief executive Michael Cowpland’s ears would be burning as a result of that statement, given his colorful string of competitive statements in 1997 about his new found business opportunity called Office 97 – but since we do know that the guy is something of, shall we say, an eternal optimist, who does tend to look on the upside as much as possible, we know this is a tad unlikely. This was the gentleman, after all, who predicted in January 1996, as he was buying WordPerfect practically from the garage sale going on at Bob Frankenberg’s Novell Inc, that his company, which from its 1985 founding had focused mainly on graphics with its CorelDraw line, was set to become a $500m company, closing fiscal 1997 as a $770m monster, purely from WordPerfect’s strength in the PC suite market. That was not to be. Corel closed its fiscal 1996 on November 30th of last year with sales of $334.2m, up an impressive 70% over 1995’s $196.4m, but still way off the half- billion mark, and it had to report its first ever net loss, of $2.8m, compared to net profit of $14.4m the previous year. (Though Corel is proudly Canadian, all figures are reported in US dollars, and the company is cross-listed on both the Toronto market and Nasdaq.)
Cowpland’s hubris
In the past, Corel’s financial year followed a predictable, and profitable. path: a sluggish first half followed by a sharp pick up in the second half as a new version of CorelDraw hit the streets. But fiscal 1997 smashed that nice pattern to pieces, along with Cowpland’s hubris that he could tame the Gates’ 800 pound gorilla. For the first nine months, Corel has had to post numbers in red to the value of $136.1m, dramatically up from $9.3m for the same period last year, on sales up 19.7% to $249.9m. This encompassed both the final digestion of WordPerfect and the pain involved in giving up competing with Microsoft at the retail level and trying to refocus on the corporate, Windows NT-centric market instead. In its first quarter all seemed on track – it showed slight net profit ($1m compared to losses of $6.6m) on revenue up 157% to $93.7m. Cowpland took the cue to boast of possible growth rates of 30% for the year on this track, which would have put the company on a final score for the year of around $435m. In the second, however, even after the successful launch of WordPerfect 8.0 in May (CI No 3,165), the company took the choice of writing off the hangover of the complex paper-cash- earnout purchase of WordPerfect. The numbers, reported in June, showed the effect of that $114m charge, showing net losses of $105.7m on sales of $100.4m. Though that revenue figure was still up 14.8% year on year, and the company continued to report lack of debt and a solid cashbase, and Corel was actually doing the right thing by amortizing the debt, the hit was interpreted as negative by Wall Street, which even in January had decided Cowpland was mad to try and sell against Microsoft in the first place and had knocked his stock down from 1995’s $18 to $6.50 (it is now $4.90, up from low of $4.45, but well off its 52-week high of $12.95). But the third quarter’s bad news eloquently showed that the company was fundamentally in trouble. Following the August back-track on Office For Java, the company told the world last month it had lost $31.4m on sales down a disastrous 34.3%, to $55.8m. Again, irritatingly perhaps for Cowpland’s pride, the softness was mainly down to a change in revenue recognition (no longer is it appropriate for the company to book sales product sitting in the channel, rather it must only recorded when an end user signs a check for it). But the knock on effect means for the fourth quarter, ending next month, Corel will sell only about $70-75m worth of software, and therefore lose somewhere between $15m and $20m. This translates to 1997 sales of perhaps $324m, compared to $334m last time, and a net minus of perhaps $156m, against that $2.8m 1996 loss.
Compatible alternative
Hence Sylvester’s spin that we are likely hear a lot more from Corel about WordPerfect and CorelDraw (which, ironically enough, finally had a new version 8 announced on Tuesday, optimised, surprise, for Windows NT) than Java. The idea is to position WordPerfect as a compatible alternative to Microsoft offerings, and kind of wait for Microsoft to falter, sometime. So Corel limps into 1998 with its credibility seriously bent and its investors shaking their heads sadly. Verdict time. Was Cowpland right to buy WordPerfect? Yes – he still managed to more or less double the size of his company, with the thumbnail sketch being that CorelDraw will be about a $100m business and business software another $200m. Was Cowpland right to try and take on Microsoft? Not in a million years, though in some ways it wasn’t so much his fault as a Mr. S. McNealy’s, who convinced him. and some of the rest of us, that Java 1997 was ready for prime time, and that, just because it isn’t Microsoft that means it’s a better alternative. Will Corel survive? Probably, yes, though anyone who invested their retirement nest-egg in Cowpland’s anti- Microsoft-Java tilting at windmills need their heads examining.
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