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Corel warns of poor earnings

A one-time charge for the purchase of new technologies may push Corel's second-quarter earnings into the red.

Charges of $113.7 million may push Corel's (COSFF) second-quarter results into the red.

Corel announced today that the one-time charge will be included in its results for the second quarter ending May 31. The charge consists of the write-down of costs associated with Corel's purchase of technologies including WordPerfect software from Novell and $8.8 million of deferred development costs.

Analysts were expecting the software maker to report a profit of 6 cents a share, according to First Call. But the charges, which total more than the revenue generated in its strongest quarter last year, are likely to push away any chance of reporting a profit.

Thomas Astle, an analyst with Midland Walwyn Capital said that not everyone is discouraged by the loss because it will finally put old acquisition charges to rest.

"I actually think it is good news for the company and the value of the stock," said Astle. He explained that under Canadian accounting principles, a company can't write off acquisition charges, like U.S. companies do; those numbers sit on the balance sheet indefinitely. "But by writing the charge off [in the form of a one-time charge], it will make Corel's bottom line stronger by about 8 to10 cents a quarter," he said.

Investors have not yet showed their support for the charges: The company's stock is level with yesterday's close of 6-1/8.

Corel bought Novell's business applications group, which includes WordPerfect word-processing software, in early 1996. Under terms of the deal, Corel paid Novell about $11 million in cash along with approximately 10 million shares of common stock. Corel also agreed to pay about $70 million in royalty payments over the next two years to license GroupWise, Envoy, and other technologies from Novell.

The company expects to release second-quarter results after the close of markets on Monday, June 23.

Corel announced yesterday that it would push off the release of Office for Java until later this year. It was scheduled to be available early last month. But analysts are not yet concerned with the delays impact on revenue.

Astle said it may push back profits by a few pennies for the second quarter, but he added that analysts aren't expecting the suite to produce sizable revenue until sometime next year.

A report released yesterday by analyst firm Piper Jaffray agreed, saying that new products outside the company's traditional market of consumer software aren't expected to bring in huge revenues in the near term.

Astle added that Corel's earnings are mostly generated from its CorelDraw and WordPerfect products. Market research firm Dataquest said that the company currently has about 5.1 percent of the suite market. But Astle says that even a 1 percent market share increase can mean an increase of 10 to 20 percent in revenue.

Corel could not be reached for comment.