Conference Call, 01/31/97: Corel Systems Corporation

FOOL CONFERENCE CALL SYNOPSIS*
By Debora Tidwell (MF Debit)

Corel Systems Corporation <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: COSFF)") else Response.Write("(Nasdaq: COSFF)") end if %>
The Corel Building 1800 Carling Avenue
Ottawa, Ontario K1Z 8R7 Canada
(613) 726-8200

http://www.corel.com

UNION CITY, CA. (January 31, 1997)/FOOLWIRE/ --- Corel Corporation released 1996 fourth quarter and year end results on January 15th after the market close. Revenues for the quarter were $125.4 million, compared to $84.9 million in Q3 and $62.1 million in Q4 1995. Net income for Q4 was $6.5 million or 5% of revenues and $0.09 per share compared to a net loss of $1 million or 2% of revenues and $(0.02) per share for Q4 1995.

REVENUES FOR THE QUARTER BY DIVISION. Graphics software was $76.2 million or 61% of sales compared to $20.7 million or 24% of sales in Q3 and $57 million or 92% of sales in Q4 1995. Of the $72 million in graphics software revenue for Q4 1996, DRAW 7 accounted for 42%, DRAW 6 accounted for 20%, Print and Photo House accounted for 10%, Gallery and MegaGallery accounted for 6%, and DRAW 5 accounted for 5%. Other products including DRAW 3 and 4, Photo Paint, Internet products, Ventura 7, and CAD accounted for the balance of 17%. Productivity applications which include the WordPerfect Suite, the Office Professional Suite, and the standalone versions of Quattro Pro and Presentation, totalled $44.5 million or 36% of sales in Q4 compared to $62.9 million or 74% of sales in Q3 1996. Of this amount, WordPerfect Suite 7 accounted for 44%, Office Professional 7 accounted for 20%, and corporate licensing programs accounted for 33%. WordPerfect Suite for Windows 3.1, Office Professional for Windows 3.1, DOS and Mac versions of WordPerfect, and the standalone versions of Quattro Pro and Presentation accounted for the balance of 3%. Multimedia which includes Corel's Photo CD titles and the CD Home series totalled $4.3 million or 3% of sales compared to $1.1 million or 1% of sales in Q3 1996 and $5.1 million or 8% of sales in Q4 1995. The decrease from Q4 1995 reflects the sale of CD Creator at the end of June 1996.

OTHER REVENUE BREAKDOWNS. Geographically, revenues were 71% from North America, 23% from Europe, 3% from the Pacific Rim, and 3% from the rest of the world. Average revenues per employee during the last four quarters were over $230,000.

GROSS MARGIN. Gross margin was $88.5 million or 71% of revenues compared with $51.9 million or 61% of revenues in Q3 1996 and $45.8 million or 74% of revenues in Q4 1995. Gross margin as a percent of sales increased sequentially in Q4 1996 primarily due to the change in product mix to higher margin graphics products with the launch of DRAW 7. Gross margins as a percentage of sales decline in Q4 1996 compared to Q4 1995 primarily due to the additional amortization costs associated with the acquisition of the WordPerfect product line. They think going forward that, on an annual basis, they are still expecting similar percentages for gross margins to what they've talked about before, which is in the mid-to-high 60s. Quarterly, the gross margins will differ depending on what launches in a specific quarter. Q2 will probably be a little bit lower than that average with WordPerfect launching and the sales being skewed more toward productivity applications than graphics. It will probably be the other way around next year in Q4 with DRAW 8 launching.

ADVERTISING EXPENSES. Advertising expenses were $31.7 million or 25% of revenues compared to $22.9 million or 27% of revenues in Q3 1996 and $18 million or 29% of revenues in Q4 1995. Advertising programs and marketing events for Q4 1996 promoted mainly the WordPerfect family of software programs and the launch of CorelDRAW 7 and Ventura 7, as well as CorelDRAW 6 Graphics Pack, Internet products, and Print and Photo House. Going forward, they expect advertising expenses to go down for Q1 and Q2 to around $25 million.

SELLING, GENERAL & ADMINISTRATIVE EXPENSES. SG&A expenses were $20.9 million or 17% of revenues compared to $19.4 million or 23% of revenues in Q3 and $14.8 million or 24% of revenues in Q4 1995. SG&A expenses increased sequentially by $1.5 million in Q4 1996 as compared to Q3 primarily due to increased costs of consumer and technical support programs outside of North America and increased order fulfillment costs associated with increased order volumes.

RESEARCH AND DEVELOPMENT EXPENSES. R&D expenses were $20.7 million or 17% of revenues compared to $19.6 million or 23% of revenues in Q3 1996 and $9.5 million or 15% of revenues in Q4 1995. R&D expenses increased sequentially primarily due to increased translation costs related to the significant increase in the number of products for which they now ship language versions.

DEPRECIATION & AMORTIZATION. Depreciation and amortization expenses were $5 million or 4% of revenues compared to $5.5 million or 6% of revenues in Q3 1996 and $2.7 million or 4% of revenues in Q4 1995. Foreign exchange was a gain of $41,000 compared to a gain of $500,000 in Q3 1996 and a loss of $400,000 in Q4 1995.

TAXES. The net effective tax rate for Q4 1996 was approximately 34% compared to 22% from Q3 1996. The net effective tax rate for fiscal 1996 was approximately 24% compared to approximately 34% for fiscal 1995. As a preliminary figure for 1997, they are expecting approximately a 35% tax rate. That is without really including much of a contribution at this point from Java or Network Computer. If those items go on and the contribution is significant in the year, they believe it will have a positive effect on the tax rate.

BALANCE SHEET. Cash and short term investments totalled $6.9 million, an increase of $4.7 million from Q3 1996 and a decrease of $74.9 million from Q4 1995. The primary use of cash in Q4 1996 was the purchase of capital assets of $10 million of which approximately $6 million was for technology purchases. Trade accounts receivable totalled $135.3 million net of the following reserves: provision for doubtful accounts of $3.8 million, provision for sales returns of $30 million, and provisions for promotional rebates of $14.8 million. The company believes that, except for those accounts which have been provided for, its accounts receivable are of excellent quality and losses to-date from nonpayment have been minimal. These allowances are not significantly different than what the company has allowed for in the past. The amounts are primarily related to the sales in the quarter and the number will fluctuate with the volume of sales each quarter.

PRODUCT ACCOMPLISHMENTS IN Q4. The fourth quarter of 1996 included the launch of CorelDRAW 7 with the English language version shipping during the first week of November and the German language version shipping during the last week of November. Other products launched in Q4 included Ventura 7, Print and Photo House, Corel Chem Lab, and several additional foreign language versions of WordPerfect Suite and Office Professional. Ventura 7 sales are encouraging and they are getting good reviews. They will have a Macintosh version out by the end of Summer.

PLANS FOR Q1. Scheduled major new product launches in the upcoming quarter include additional foreign language versions of DRAW 7 (French, German, Dutch, and one or two other languages in Q1), a WordPerfect Legal Suite, a WordPerfect Medical Suite, 9 new titles in their CD Home series, and Corel Lumiere Suite which is a linear digital editing program that will compete with Adobe Premiere.

FINANCIAL MODELS. They expect that, following the release of these results all analysts following the company will be revising their 1997 models for the next four quarters and Corel makes no comment on their estimates. They have a goal of at least 30-40% growth this year. Some of the products are being developed now, but they think the strength is there to give them that kind of potential or even more. They think Q2 and Q4 will be higher than Q1 and Q3. They are investigating different options with regard to the large depreciation item on the balance sheet because with it they have to constantly remind people that they have a depreciation burden that is not really reflective of the ongoing earnings until they finish depreciating it.

BUSINESS CONDITIONS OVERVIEW. During Q4 they are very happy to have strong results. They think it verifies that the plans they have for being a strong player in the office productivity area as well as retaining their lead in the world graphics market are on track.

CORELDRAW 7 LAUNCH AND PLANS. The launch of DRAW 7 was the best they've ever had, both in quality and the reviews they've had in terms of the technology improvements. They have also had the benefit of launching a version on the Macintosh which has also been very well received and has encouraged them to proceed further with future developments to be in parallel for both Macintosh and Windows. They expect Macintosh and PC versions of DRAW 8 to come out simultaneously or close to simultaneously. In terms of shipments, they have been among the strongest ever of any of the DRAW products and they expect them to be very strong during Q1 and during the balance of this year thanks to the snowball effect they're getting because of the excellent word of mouth. The property bar that they introduced in DRAW 7 has been extremely well received as a breakthrough in user interface design and this will be ported over to their next version of the Office Suites in the Versions 8 coming out in April.

NETSCAPE ALLIANCE. Another big highlight was the joint announcement with Netscape of a strategic alliance whereby Corel will be integrating the new Netscape Communicator in their Version 8 product. That will give them GroupWare that will work on every platform worldwide and be way ahead of the limited capabilities that Microsoft Outlook device that only works on the Win95 and WinNT platforms. Today, only 19% of corporate users have either Win95 or WinNT, the other 80% do not have access to GroupWare through Outlook. With Corel's software, the GroupWare will work anywhere browser works, and that is virtually everywhere on every system. So they think the alliance with Netscape gives them very strong positioning in terms of the GroupWare and they are very happy with the development efforts they have underway in every other aspect of the suite.

COMPETING AGAINST MICROSOFT. Having looked at the Office '97 features, Corel thinks they can meet and exceed all those features in every case and will have a very strong offering when they introduce their new products in April. Meantime, sales are continuing to be brisk despite the entry of Office '97. And, although Microsoft started offering a free upgrade as early as November, Corel has continued to maintain over 40% market share. They had maintained 50% for over four months and considering this is Microsoft's newest option, they think maintaining 40% share is excellent while they go through to their new version.

JAVA. In parallel with this, they are very excited to be in the lead in the tidal wave that is developing for Java products. There is now over 300,000 developers for Java and while 1996 showed a tremendous amount of interest with all kinds of articles on Java, we didn't see too many products. During 1997, Corel feels this is when the products will emerge and also feels that they are the leader in application development right now with the major applications with their Office for Java which went live recently and is now being downloaded through Corel's own home page and also through Netscape's home page.

WORDPERFECT TO ADDRESS NICHE MARKETS. Other activity is to attack major niche markets of the Office Suite market, which Microsoft is not directly going for, such as the specialized Legal Version they are introducing shortly and the specialized Medical Version. They have always been strong in the legal market and still maintain over 70% market share in that market. They think the Legal Version will enhance their strength in that. The Legal Version has the Black's Legal Dictionary, lots of case management tools, and other useful tools for anyone in legal practice. There are roughly 2 million legal workers in North America.

MEDICAL MARKET. They feel the medical market could be equally attractive and that's why they've developed a specialized Medical Version with medical spell-checkers that normally cost around $400 integrated in and other specialized medical features. The product has the leading medical dictionary with 100,000 specialized medical terms plus the medical spell-checker that has 300,000 medical and pharmaceutical terms. They also have a Quick Tasks extension for the Medical Version with 20 specialized Quick Tasks for everything from medical forms to patient care records. Quick Tasks is also useful for people who write and submit papers to medical journals because it includes over 600 medical journal templates. There are 12 million medical workers in North America, so they think this could become a highly attractive growth market for them as well.

OEM DEALS. Overall they feel very happy with their momentum. On the OEM side, the Packard Bell shipments are now in full force and they expect several million of those to be taking place during the next several months and in addition they have secured several other major OEM deals to increase their installed base which they will be announcing shortly.

CORPORATE SALES. Although their main strength to-date has been in retail, they now have 33% of WordPerfect sales from the corporate licensing market and these are growing stronger every quarter. They recommend moving this target up toward 50% as they are increasing the direct sales force which will help push up the percentage. This is going to be enhanced by a recent offering for Office Pro for NT 4 which for the first time allows customers to install the software on the server and not have to pay for every individual client. They think all of these innovations show how a fast moving, dynamic company with excellent engineering like Corel can compete very effectively against Microsoft. Even though Microsoft is larger, Corel feels they can move faster and can be focused in key areas Microsoft is not covering such as the Medical and Legal Suites and the Office for Java.

LOOKING AHEAD. Looking ahead they think the two key product lines they have -- the graphics area where they have market leadership worldwide and the office productivity market where they have a clear second place now and can increase their market share against Microsoft during the coming 12 months -- will provide excellent growth opportunities for the company. In addition, they have the brand new emerging areas of Office for Java, the Java utilities and their corporate video system which they are in the process of transforming in its next version to an all-digital version incorporating Java clients. They feel the timing is right for that because of the fact that bandwidth to the desktop is now increasing rapidly and that will be ideal for the next version of CorelVIDEO.

* A Fool conference call synopsis represents an effort to highlight the salient points of a conference call and should not be taken as an authoritative accounting or transcription of the entire event. Note: Statements made by a company other than historical information may constitute forward-looking statements for which the company can claim protection under the Safe Harbor Act. Please consult the company's filings with the SEC for information on risk factors which might cause actual results to differ materially from the information contained in these forward-looking statements.