Corel Reports Q3 Loss of $59.1 Million: Expects Profit in 2003
Press release from the issuing company
Net Income Impacted by Non-Cash Impairment Charge for the Write-off of Goodwill
OTTAWA--Sept. 25, 2002--Corel Corporation today announced results for the third quarter ended August 31, 2002. All figures are reported in U.S. currency.
Revenues for the third quarter of fiscal year 2002 were $31.3 million compared with revenues in the same period last year of $34.2 million. Without the write-off of goodwill, net loss in the third quarter of 2002 was $8.6 million, compared with a net loss of $6.3 million in the second quarter of this year and a gain of $500,000 for the same period last year. Excluding the goodwill write-off on a per share basis, the net loss was $(.09) for the third quarter of fiscal 2002, compared with $(.07) for the second quarter of this year and $.01 for the third quarter of last year.
Net loss in the third quarter of 2002 was $59.1 million, or $(.64) per share, which includes an impairment loss from the write-off of goodwill. During the quarter, given the Company's market capitalization and other factors, it completed an assessment of the value of its goodwill and, as a result of this assessment, recorded a $50.5 million non-cash charge representing the write-off of all of its goodwill.
Review of Operations
The Company's third-quarter 2002 revenues were two per cent, or $500,000, greater than results in the second quarter of fiscal 2002, due mainly to higher sales of WordPerfect and the introduction late in the quarter of CorelDRAW Graphics Suite 11. These two factors combined more than offset both the typical seasonal decline in sales in Europe and the decline in sales of the previous version of CorelDRAW graphics suite usually seen prior to the release of an upgrade. CorelDRAW Graphics Suite 11 started shipping in North America in August 2002, while localized versions of the product began shipment in Europe in early September 2002.
The Company's third-quarter fiscal 2002 revenues compares with revenues of $34.2 million for the same quarter last year, a decline of $2.9 million, or eight per cent. The difference in revenues on a year-to-year basis is primarily associated with the loss of sales this quarter of two creative product lines, procreate and Bryce, that had been launched during last year's third quarter. In addition, the year-to-year decline in revenues was somewhat offset by the sales of process management and content solutions products acquired with Micrografx, a developer of process management software, and SoftQuad, a leader in XML technology.
The increase in sales of WordPerfect both on a year-to-year comparison for the quarter and on a sequential basis is primarily due to successes with upgrade purchases by the government sector both in the U.S. and Canada. The government sector tends to allow for a period of maturity prior to upgrading and lags the commercial market. In addition, the successful implementation of a more enterprise-direct sales force is supporting business applications revenues.
The Company has historically included the amortization of technology acquired as a component of cost of goods sold. To make analysis of the Company's financial results more comparable with general industry practices, these costs have been reclassified for financial statement presentation to depreciation and amortization expense. After this change, gross margin for the third quarter of 2002 was 89 per cent, up from 86 per cent for the same period in the prior year. The increase in gross margin is primarily related to reduced royalty costs, in particular those associated with the procreate and Bryce product lines.
Included in the loss in the quarter were $1.5 million in amortization of technology acquired with SoftQuad in March 2002, $1 million of which is expected to be incurred on a go-forward basis. Results were also impacted by the initiation campaign for DaVE, a mobile, multimedia, hands-on software demonstration exhibit focused on the creative professional and academic markets and increased spending required for the significant launch efforts of CorelDRAW Graphics Suite 11.
Derek Burney, President and CEO, commented: "Although sales were in line with our expectations, expenses were somewhat higher as we continue to balance costs related to marketing and advertising required to support new product launches, to recapture market share, as well as to build new solutions and further develop a direct sales organization with a global reach."
Mr. Burney added: "We remain focused on our strategy to capitalize on our expertise in graphics innovation and design and open standards such as XML to feed the driving forces of the technology arena toward wireless and Web-based services. We will continue to leverage the strength of our core products while developing new solutions for enterprise customers which inject 'visual' intelligence to help them simplify and accelerate the exchange of information.
"Success is dependent upon our disciplined manner of balancing investment in sales, marketing and development with management of our cost structure. Today's economy is challenging for software sales, but not insurmountable if you have the technology and know-how. Our balanced approach with resources is devoted to improving our core products, the Company's overall market share and new product development. This should enable us to emerge as one of the leading service providers in the enterprise software arena when major industry shifts occur after this economic downturn."
During the quarter, several new arrangements with major computer manufacturers for providing core Corel products on their equipment were announced. The bundling arrangements included providing Corel WordPerfect and Quattro Pro as competitively-priced, fully-featured word processing and spreadsheet alternatives on select Hewlett Packard and Dell consumer brand computer models.
Supporting Balance Sheet
At August 31, 2002, cash, cash equivalents and marketable securities (excluding restricted cash) was $77.7 million, compared with $103.0 million at the end of fiscal 2001. The Company has no long-term debt. EBITDA for the quarter was $(2.6) million and capital expenditures were $1.6 million resulting in cash consumption of $4.2 million.
Corel's year-to-date revenues for fiscal 2002 were $93.2 million with year-to-date net loss of $68.6 million, or $(0.78) per share. Excluding the impairment charge for goodwill, the year-to date net loss was $18.1 million, or $(0.21) per share. By comparison, Corel reported revenues of $102.7 million for the first nine months of fiscal 2001, producing a net income of $3.7 million or $.03 per diluted share.
The decline in revenues for the nine-month period is primarily related to the lower sales of personal computers and a decline in information technology spending as a result of the persistently weak economy. The higher expenses for the nine-month period are a result of an 18 per cent increase in research and development costs associated with new enterprise product development integrating XML into text, graphics and process software for improving communications and capabilities within organizations. Year-to-date expenses were also impacted by other costs mentioned previously in the quarterly expense review.
Corel expects revenues in the fourth quarter of 2002 to be in the range of $34 million to $38 million. The anticipated increase in revenues is driven primarily by the introduction of CorelDRAW Graphics Suite 11 both in North America and Europe, the release in the fourth quarter of Ventura 10, a publishing solution that incorporates the leading standards-based technology XML, the release of new versions of the iGrafx family of solutions, interactive, graphically-detailed process management tools, and the typical seasonal increase in sales in Europe. Gross margins are expected to remain in the 89-91 per cent range, while operating margins improve from the growth in revenues and continued cost reduction actions.
For fiscal 2003, which begins December 1, 2002, Corel anticipates a moderate increase in revenues from the phased launch throughout the year of over a dozen new products or upgrades. The new software solution sets, specifically designed for enterprise use, will incorporate XML and smart graphics allowing its users more efficient means of content creation, exchange and interaction. These new product solutions, combined with incremental sales of the company's core products, should help to offset the persistent softness in technology spending due to the economy and the attrition of products no longer emphasized due to their lack of fit with the company's strategy. As they gain market acceptance, the new software solutions will have a more evenly paced build-up of revenues compared with a product upgrade or localized version launch from the core product line.
The Company is planning to reduce costs by $2.0 to $3.5 million per quarter, bringing total quarterly expenses to a range of between $35 and $37 million. This, combined with gradually improving revenues, should continue to drive the Company to a level of positive cash flow and profitability within the latter half of 2003.
Mr. Burney noted: "Over the next six to 18 months, we expect our new enterprise solutions will be part of a dynamic trend shift for the industry as a whole. The capabilities we gained through our acquisitions, combined with our own widely-recognized technological expertise, will enable us to address the developing needs of users and multi-modal equipment to propel the interchange of information on a real-time basis. Our solutions will assist enterprises of all sizes as they look for ways to reduce costs and increase productivity."
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