Corel Could Steal Some of the Linux Limelight

While many investors eagerly await Red Hat's IPO, others are eyeing Corel as a good buy.
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SAN FRANCISCO -- This could be a big week for the open source Linux operating system.

Red Hat

, a company that offers its own distribution and support services for the software, is slated to go public in the next few days -- just in time for the Linux World user conference, which kicks off in San Jose, Calif., Tuesday.

But players keen on investment opportunities in Linux should take a peek at Ottawa, Canada-based

Corel

(CORL)

.

Corel, which sells word processing, graphics and business software programs, saw its flagship WordPerfect program get tossed aside by

Microsoft's

(MSFT) - Get Report

Word. Now Corel is making a big play for the Linux market.

Unlike most Linux-related companies like Red Hat that have thus far targeted the high-end enterprise market, Corel is aiming to bring Linux to the low-end consumer market. It already has WordPerfect 8 for Linux available and plans to release a beta version of WordPerfect Office for Linux at the end of this year and to ship the final version in early 2000, with its graphics program CorelDraw 9 for Linux expected shortly afterward, the company says.

These efforts have suddenly made Corel, which started to look dire as the stock steadily fell from a high of 19 1/2 in July 1995 to nearly 1 a year ago, look like a great buy to some investors.

"I went to the Red Hat road show, and they mentioned Corel as a driver for the acceptance of the Linux operating system," says Lenny Schuster, fund manager at

Gemina Capital

, who says he bought shares of Corel a few weeks ago.

At Linux World tomorrow, Corel is due to present the first public preview of Corel Linux, which is aimed at the desktop market for nontechnical users. Corel Linux's beta version will be available in September and in final release by the end of the year.

Schuster says these offerings, along with the trend towards sub-$500 PCs, should add up for Corel. "Corel's suite of products is like Microsoft Office except that Corel can bundle their products and sell them at a much lower price" because Linux is basically free, he says.

Just by using Corel's products instead of Microsoft's, "low-end PC manufacturers could increase their profit margins about threefold per machine," Schuster adds. He estimates that Corel's products cost about half as much as Microsoft's products.

Some players already have jumped on the Corel bandwagon as seen by the recent surge in Corel's daily trading volume since June. Red Hat's initial public offering, filed June 4, named Corel as a distributor.

Red Hat's filing states that "there are a number of companies with large customer bases and greater financial resources and name recognition, such as

Sun Microsystems

(SUNW) - Get Report

, Corel and

Cygnus Solutions

, that have indicated a growing interest in the market for Linux-based operating systems. These companies may be able to undertake more extensive promotional activities, adopt more aggressive pricing policies and offer more attractive terms to their customers than we can."

Corel executives aren't yet ready to forecast huge revenue from the Linux market.

"We expect revenues from the Linux-based products next year, but my guess is that next year, it won't be at a significant level," says Corel Chief Financial Officer Michael O'Reilly, who defines "significant" as at least 10% of revenue. "Next year, we'll be dipping our toes in the water and testing acceptance

of Linux and seeing if we can ride the wave."

Instead, O'Reilly says most of Corel's revenue will continue to come from its products for the Windows market. He notes that in the most recent quarter, Corel reported its best performance since the third quarter of 1995 without much help from Linux products. Corel earned 14 cents per diluted share in the second quarter ended May 31, compared with a net loss of 14 cents a year ago. O'Reilly predicts Corel will remain profitable this year -- something shareholders will likely welcome since the company has only seen two profitable quarters in the past nine quarters.

Some analysts, however, remain cautious.

David Wright, analyst at

Nesbitt Burns

, notes that although Corel's products are receiving favorable reviews, "so did Beta VCRs when compared with VHS" at the start. His firm has no underwriting relationship with Corel.

But all that seems to just be telling investors that whatever revenue Corel does manage to garner from Linux will then just be an added pleasant surprise. Investors pushed Corel shares up to a 52-week high of 5 15/16 July 15, and Institutional investors now own 10% of the company, up from a mere 2% at the end of 1998, according to company data.

At midafternoon Monday, Corel shares were trading up 13/32, or 10.3%, at 4 11/32.