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Analysts lukewarm about Corel's return

Fri Apr 21, 2006 11:43 AM ET

By Justin Grant

NEW YORK, April 21 (Reuters) -Three years after being taken private, computer software maker Corel Corp. is set for a public resurrection Tuesday; but powerful competition, a rugged financial past and possibly limited growth opportunities may scare investors off, analysts said this week.

"They're in a brutally competitive market," said Francis Gaskins, president of IPO Desktop, an independent research firm based in Marina del Rey, California. "I'm not going to buy anybody that's not a market leader. They say they're going to grow by acquisitions, but I don't know how many little niche companies are out there that they can grow."

The IPO would be the first of the year by a software company and is expected to raise as much as $174.8 million through the sale of 8 million shares, according to data provider Dealogic. Corel, which intends to trade on Nasdaq under the ticker symbol "CREL" (CREL.O: Quote, Profile, Research), plans to use the proceeds for acquisitions and to pay down debt.

The Ontario, Canada-based company was taken private in August 2003 after being bought by San Francisco-based investment firm Vector Capital Corp.

Vector's stake in the company would drop to 66 percent from 98 percent, according to a filing with the U.S. Securities and Exchange Commission. Corel would complete its purchase of WinZip, a file compression software utility, at the close of the offering.If the IPO priced at $19, the midpoint of its expected range of $18 to $20, Corel would have an initial public market capitalization of about $465 million, or nearly 12 times its earnings before interest, taxes, depreciation and amortization in fiscal 2005.

Despite rampant skepticism about the offering, at least one industry analyst thinks Corel can beat the odds and carve out a profitable niche for itself in a brand-dominated market.

"Corel has a very strategic focus right now around small business," said Joe Wilcox, senior analyst at Jupiter research. "That's a market nobody's cracked yet. Microsoft Office has huge dominance in their enterprise, but I would not say it's as entrenched among small businesses."

The glass is also half-full on the consumer market for Corel, Wilcox said, although its main products -- WordPerfect Office Suite, CorelDRAW Graphics Suite and Corel Paint Shop Pro -- are in direct competition with software from powerful rivals Microsoft Corp. (MSFT.O: Quote, Profile, Research) and Adobe Systems Inc.(ADBE.O: Quote, Profile, Research).

"In the U.S., only about 60 percent of consumers have Microsoft Office on their computers," Wilcox said. "That's a lot of opportunity for sales there. They have a pricing advantage. It offers comparable, or better functionality for less. For the consumer and small businesses, value and price will be major factors influencing buying decisions."

Corel's WordPerfect Office X3 Standard costs about $300, according to its Web site, while the Microsoft Office 2003 Standard sells for about $400 on microsoft.com.

The price disparity for the small business software is just as great.

Excluding third-party resale, the Microsoft Office Small Business Edition 2003 costs $449, while Corel's WordPerfect Office 12 Small Business Edition is $100 cheaper at $349.

"Microsoft's problem," said Wilcox, "is their money comes from big business. Many of them are satisfied with the version they have. While WordPerfect certainly trails behind Office, and it's a big gulf, it's No. 2 in every category we measure for usage."

In order to entice investors though, Corel will have to overcome its checkered past.

The company lost $8.8 million on revenue of $164 million in the year ended Nov. 2005, after earning $1.2 million on revenue of $111.7 million in 2004, according to the prospectus.

Corel tumbled from profit to loss because of interest expenses and amortization of deferred financing fees, statements included in the filing show.

Although Corel had recently returned to profitability, the company said it's experienced revenue declines since the mid-1990s, from a high of $334.2 million in 1996, to $164 million in 2005.

"I don't think coming public is necessarily going to change anything," said David Menlow, president of IPOFinancial.com, an independent research firm based in Millburn, New Jersey. "This is a stock that really needs to prove itself in the after-markets. Their losses have diminished, but is this really going to turn them around? Innovation is what's going to grab investor's confidence."