Shortfall Saps Corel Stock as Linux Claims Take Back Seat to Performance

The stock, which rose sharply last month as investors plunged into Linux stocks, plummets as results weaken.
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In today's market, a rising tide lifts all boats -- at least until investors are confronted with the leaks.

That appears to be the story behind the speedy rise and fall of Canadian software company



. The company's stock, which quadrupled in about a month thanks to market frenzy over the prospects of the free Linux operating system, got pummeled Wednesday following Corel's disclosure that revenue for the fourth quarter ended Nov. 30 would fall well short of expectations, and that the company's expected quarterly profit would instead be a loss.

The company's move in recent weeks from below 10 to 44 1/2 and back down again (it closed at 13 3/16 on Wednesday, down 5 3/8) illustrates how obsessions with hot technologies like Linux and business-to-business infrastructure are causing return-happy, risk-dismissive investors to chase after any company affiliated with a sexy trend -- no matter what its prospects look like.

Security Blanket

"Pretty much everything that people have seen as a Linux play has gone to the moon," says Hadar Pedhazur, founder of venture capital firm

Opticality Ventures

, which invests in software-focused companies.

Like Linux market darling

Red Hat


and other companies, Corel is hoping investors will judge it on the potential revenue it can reap from products related to Linux, essentially a free operating system competing with


(MSFT) - Get Report

. But if investors are banking on future performance, companies like Corel force them to overlook a lot of past results.

Draw Your Own Conclusions
Corel's shares flagging after sharp run-up

Source: BigCharts

For starters, it appears that demand for Corel products just isn't what it used to be -- particularly after the company's WordPerfect and other programs got their clocks cleaned by Microsoft in the office software suite category. Corel says it expects to report fourth-quarter revenue of about $61 million, down from $67.2 million in the same period a year ago -- a shortfall related not to its new version of the Linux operating system, which shipped in the final days of the quarter, but to its pre-existing product line. Revenue was well below the $80 million forecast in late September by

Nesbitt Burns

analyst David Wright, one of the few analysts covering the Ottawa-based company. (Nesbitt Burns hasn't done recent underwriting for Corel.)

"In certain areas, the rate of consumption surprised us," said Chief Financial Officer Michael O'Reilly in a conference call Wednesday. O'Reilly announced his resignation from the company last week, a move that he wouldn't discuss in the call other than to say it was unrelated to today's news.

Coffee or Tea?

On the call, President and CEO Michael Cowpland put as positive a spin as he could on the shortfall. "This setback in the Windows market will encourage us even further to push hard to explore the potential of Linux," he said, as if the discouraging surprise in the current business was a good thing.

Corel's strategy is to make money off the free Linux platform by selling Linux versions of its WordPerfect Office suite and other software for use on desktop computers. But that won't be easy. As Wright has pointed out, Microsoft applications written for Windows may work just fine on Linux computers. It's unclear, moreover, when and if Linux will be accepted as a standard operating system on desktop machines, as opposed to behind-the-scenes servers.

And, unfortunately for Corel, this is not the first time the company has trumpeted new technology as a promising source of revenue for the company. In 1996, the company talked about how it was going to build a version of WordPerfect for Java, the hot computer language of the moment. But that experiment never paid off.

Derek Burney, executive vice president of engineering for Corel who is in charge of all its software development, says the two situations are different. "Linux, unlike Java, is a proven technology, and it's here today," Burney explains. "Java was forever a technology trying to catch up with the hype."

Well, that description of Java pretty much matches that for Linux these days, doesn't it? No, Burney says, the hype this time around centers on the revenue-generating potential of Linux; unlike Java, the technology is above question. "It's rock solid, and it's free and open," he says. "And it makes for an incredibly powerful combination."

The Long Haul

In any event, it looks like a long haul for Corel, which expects to release its first Linux-based office suite and graphics software next year. The company's strategy of using the Linux operating system to build market share for its applications -- sort of what Microsoft did with Windows and Office -- is a reasonable one, Pedhazur says. "Corel could enjoy the same kind of effect, but that may be five years from now, if it happens at all," he says.

Meanwhile, Cowpland spent part of the call wondering why the market was valuing his stock at only a fraction of that of Red Hat. "We definitely continue to believe ... that Linux will be the operating system for the next decade, and that Corel has huge potential within that growth opportunity."

Time will tell when Corel's ship comes in.