2HRS2GO: Corel out of trouble, but growth still needed

So maybe Corel Corp. (Nasdaq: CORL) really has come back.

The latest Corel quarterly report offers little reason for complaint. Profits were up. Expenses were down. Revenues were flat, but considering that the latest version Corel's flagship products have been around for awhile, that's not bad. Most important, the good quarter wasn't just a one-timer; it marked the second straight better-than-expected period for the maker of office productivity and graphics software.

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Corel for years had been unable to put together six months of improvement; now we may actually see signs of a trend. Perhaps longtime Corel doubters (like me) ought to rethink their position.

Perhaps. But the most important question has never been, "Can Corel return to sustained profitability?" Corel management deserves credit for their ability to get the company out of the hospital in the last six months, but any reasonably well-run company can make money, especially in a field as large as desktop software.

No, profitability was never the core issue. Ultimately, a successful tech company is always about growth.

On yesterday's quarterly conference call, Corel executives were happy to note their share percentage of the office productivity software market remains in the teens. That's stable, which isn't bad considering Corel's main rival happens to be the largest and most aggressive software company in the world.

But Corel managers know they won't gain much more in the market for Windows-based office suites, which is why the company has continually tried to find other markets for growth. The latest expansion hopes revolve around Linux.

If Corel had merely basked in the positive quarter, the stock would have risen today, but probably not as the most active Nasdaq stock. But the company made sure to follow up yesterday's news by going back to the Linux hot button that's been igniting stock buyers' interest over the last few weeks.

WordPerfect for Linux has already seen more than 1.5 million downloads, so clearly Corel has established itself as a force in that small but growing market. The company added to its momentum today by formally unveiling its own implementation of the Linux operating system itself, albeit in beta version; production of the final release is expected in mid-November. That announcement helped pushed Corel to the top of the Nasdaq volume charts this morning.

Linux remains a young field. Even Corel doesn't know how much money it's going to make from it. "Corporations will be prepared to pay for maintenance and support, and we see being able to charge the same price on Linux as we do on Windows," Corel CEO Michael Cowpland said during yesterday's conference call. "But at this point it's not really a corporate market."

The OS offering itself won't make much money -- after all, one of the driving forces behind the entire open source movement has been the concept of a free operating system; besides, Red Hat and others already have a head start. Still, it's another way of establishing Corel as a Linux resource. "The key thing is, it provides a new base for our applications to come into," Corel CEO Michael Cowpland noted, during yesterday's conference call.

Corel has always been a desktop applications company at heart, which could be the biggest problem in the long run. The movement toward Web-based productivity applications could squash the entire field of traditional office suites, especially with Microsoft gradually throwing more resources into the fray against Sun Microsystems' StarOffice. Corel has said little so far about it.

You might see all this as just another dose of the Fear, Uncertainty and Doubt that online news readers associate with bad propaganda. But Corel's operating history has earned the company a lot of FUD.

Two good quarters may demonstrate that Corel isn't in trouble anymore, but the company has a long way to go to regain the once promising position it enjoyed prior to its destruction at the hands of Microsoft Office. Two good quarters may be a good start, but they're not enough to justify today's trading multiple of 41 times next year's estimated earnings; that's a price-to-earnings ratio carried by major software players, a level that remains far away from Corel and its not-quite-solid growth outlook.

Other issues:

Pixar Animation Studios Inc.

(Nasdaq: PIXR) Apple may be taking a beating today, but at least Steve Jobs doesn't have to worry about market perceptions of the company in which he actually owns a lot of stock. Shares of this computer animation company are up more than 6.5 percent today following an upgrade by Prudential Securities analyst Katherine Styponias, who raised the stock to "strong buy" from a "neutral" rating. The eight analysts surveyed by First Call expect Pixar's earnings to shoot higher as Pixar releases Toy Story 2, with First Call predicting a profit of 30 cents a share in the third quarter, a gain of more than 130 percent on a sequential basis. Wall Street expects $1.17 a share next year, compared to 72 cents estimated for this year.

Motorola Inc.

(Nasdaq: MOT), Apple Inc. (Nasdaq: AAPL) The company actually to blame for G4 delays isn't taking as much of a hit as Apple, but that's because PC chips aren't the main source of Motorola's revenue. Still, although Motorola is at fault, Apple has a history of failing to accurately gauge its own ability to fill demand. Apple has to bear at least some of the blame for being too aggressive in its Wall Street guidance; it could have played it safe to give itself some wiggle room.

Market indices stayed negative in the afternoon. With two hours left in regular trading, the Nasdaq Composite Index was down 44.25 to 2841.90, the S&P 500 lower by 22.33 to 1313.20, and the Dow Jones Industrial Average down 187.43. 22GO>