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2HRS2GO: Doubts return about Corel management

Management matters.

Close your eyes. Breathe deeply. Good.

Now say it again: management matters.

The market might finally be catching onto that again, at least in the case of Corel (Nasdaq: CORL), whose recent stock slide continued today after the company warned of disappointing fourth quarter results. Shares of Corel were down almost 24 percent for the session by late morning. The stock has tumbled nearly 64 percent since Dec. 9.



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Corel shares rose in recent months because of the hype -- largely driven by news outlets like Ziff-Davis -- about the freely available, grassroots-developed, Penguin-promoting operating system called Linux. Corel executives have been promoting their Linux kernel distribution, a Linux office suite and other apps.

This is a company that still gets the overwhelming majority of its revenue from Windows products. Yet the front page of Corel's website highlights not WordPerfect 9, but a large billboard screaming "Corel Linux OS". Beneath the graphic, under the heading "In the Spotlight", the top row of headlines features Linux-related press releases. Including today's offerings, five of the last nine Corel PR announcements have been tied to Linux.

Occasionally you'll see a Talkback or message board posting from some Corel adherent insisting that the company's stock increase isn't Linux-fueled. But even Cowpland ties the share price gains to Linux.

"I'm optimistic that once this settles down, people will start looking at the Linux technology again and (our stock) will be back up," Corel CEO Michael Cowpland told analysts and media.

During today's news conference, Corel executives declined to provide specific reasons for the sales disappointment. In fact, they declined to provide details on anything at all, raising the question: Why have a news conference if you have nothing to say?

Cowpland did take the time to whine about being undervalued because Corel carries a market cap just 5 percent of Red Hat (Nasdaq: RHAT).

Red Hat isn't weighed down a slow- to no-growth software business. Red Hat isn't a company with a long history of missing analyst estimates. Red Hat isn't an organization trying to find a new CFO and a new head of sales and marketing. Red Hat's CEO isn't facing a government investigation.

Most important, neither Red Hat nor any other Linux company deserves the huge market caps currently conferred on them. Traders are driving them higher for as long as possible, but at some point, truth sets in.

And the reality of Corel's managerial history looks ugly. Cowpland believes "no one component" can be blamed for the recent stock price slump, but the company has given shareholders at least three components.

The head of sales and marketing left early this month. CFO Michael O'Reilly soon after said he would be leaving next year. The CEO is being investigated by Canadian securities regulators.

That last one is problematic in and of itself. Viewed in conjunction with the departures announced this month, it should raise eyebrows even among the most ardent of Corel defenders, particularly in light of Corel's shaky record of meeting Wall Street's targets. It's been years since Corel has seen more than two good quarters in a row.

Even when the company does well it sometimes screws up -- witness its failure to advise Wall Street analysts of a huge second quarter boon, resulting in analyst estimates wildly out-of-whack with actual results.

Cowpland thinks Linux hype will carry Corel stock forward again. But technology, whether it's good or not, means nothing in the face of sloppy management. From UNIVAC in the 1950s to Xerox PARC in the ྂs to the MacOS in the ྌs to OS/2 and Compuserve in the early ྖs, the last 45 years are rife with examples of quality tech offerings punished by corporate ineptitude.

Two strong quarters in a row nearly had me thinking Corel might be out of trouble. Today's warning now renews questions about Cowpland's grasp of Corel's daily operations. Not only did the company fail to realize its sales channel was grossly overstuffed until more than two weeks after the quarter ended -- as recently as last week, Cowpland said the quarter looked to be on-track -- but costs also rose faster than anticipated.

Don't expect Wall Street's visibility to improve, because Corel doesn't care.

"We don't telegraph any messages to anyone," outgoing CFO Michael O'Reilly said today. "The results we're announcing today ... Whether it's in line with analyst expectations or not really is not a concern for us."

Not a recommended attitude for a publicly-owned company.

Other issues:

  • 3Com
  • (Nasdaq: COMS) Is there anything drearier than a 3Com conference call? "It's only on my coverage list for the sake of completeness," Robertson Stephens analyst Paul Johnson told me several months ago. "I don't spend a lot of time on it."

    He doesn't seem to be the only one. Analyst boredom was almost palpable during yesterday's conference call, with few follow-up questions and a general sense of going through the motions with questions, especially since 3Com can't comment on Palm beyond what's contained in the the unit's IPO prospectus.

    To say that the network hardware giant's interest lies entirely with Palm isn't true. But even 3Com's hopes for high-growth -- cable and DSL modems, LAN telephony and voice-over-IP products, and home networking items -- sound more like commodity businesses rather than juicy, fat margin profit generators.

  • MapQuest
  • (Nasdaq: MQST) Being acquired was inevitable. MapQuest shareholders might not like the deal, but is not MapQuest's fault that the market chose to go crazy with hyping the price. And face it, $1.1 billion isn't a bad price for a niche operation that had no way of ever justifying its market cap on its own. 22GO>