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| CREL > SEC Filings for CREL > Form 10-Q on 2-Apr-2009 | All Recent SEC Filings |
2-Apr-2009
Quarterly Report
• we face adverse effects to our business due to the recent disruption in the global economy and financial markets;
• we rely on relationships with a small number of OEM's and distributors for a significant percentage of our revenues, and if any of these companies terminates its relationship with us, our revenues could decline;
• many of our core products have been marketed for many years and the packaged software market in North America and Europe is relatively mature and characterized by modest growth, if any; accordingly, we must develop new products, successfully complete acquisitions, penetrate new markets or increase penetration of our installed base to achieve revenue growth;
• we face potential claims from third parties who may hold patent and other intellectual property rights which purport to cover various aspects of our products and from certain of our customers who may be entitled to indemnification from us in respect of potential claims they may receive from third parties related to their use or distribution of our products;
• we face competition from companies with significant competitive advantages, such as significantly greater market share and resources;
• as an increasing number of companies with advertising or subscriber-fee business models seek to offer competitive software products over the Internet at little or no cost to consumers, it may become more challenging for us to maintain our historical pricing policies and operating margins;
• we rely on relationships with a small number of strategic partners and these relationships can be modified or effectively terminated at any time without our approval;
• we face potential claims from third parties who may hold patent and other intellectual property rights which purport to cover various aspects of our products and from certain of our customers who may be entitled to indemnification from us in respect of potential claims they may receive from third parties related to their use or distribution of our products;
• our acquisition strategy may fail for various reasons, including our inability to find suitable acquisition candidates, complete acquisitions on acceptable terms or effectively integrate acquired businesses;
• we have significantly higher levels of indebtedness following the InterVideo acquisition, including term loan debt of $156.0 million as of February 28, 2009, which could have important consequences for our business such as limiting our ability to make further significant acquisitions;
• the manner in which packaged software is distributed is changing rapidly, which presents challenges to established software companies such as us and presents opportunities for potential competitors; and
• the proliferation of open source software and open standards may make us more vulnerable to competition because new market entrants and existing competitors could introduce similar products quickly and cheaply.
These risk factors should be considered carefully, and readers should not
place undue reliance on our forward-looking statements. Forward-looking
statements speak only as of the date of the document in which they are made. We
disclaim any intention or undertaking to provide any updates or revisions to any
forward-looking statement to reflect any change in our expectations or any
change in events, conditions or circumstances on which the forward-looking
statement is based, except as required by law.
Many factors could cause our actual results, performance or achievements to
differ materially from those expressed or implied by such forward-looking
statements, including, without limitation, the above factors.
These and other important factors are described in greater detail in the
section entitled "Risk Factors" in our annual report on Form 10-K dated
February 9, 2009 filed with the Securities and Exchange Commission and with
Canadian securities regulators. A copy of the 10-K can be obtained on our
website ( http://www.corel.com ), or at www.sec.gov
The following discussion and analysis should be read in conjunction with
our unaudited consolidated financial statements and accompanying notes for the
three month period ended February 28, 2009 included elsewhere in this quarterly
report on Form 10-Q. All amounts are in United States dollars, except as
otherwise noted.
BACKGROUND
We are a leading global packaged software company with an estimated
installed base of over 100 million active users in over 75 countries. We provide
high quality, affordable and easy-to-use Graphics and Productivity and Digital
Media software. Our products enjoy a favorable market position among
value-conscious consumers and small businesses benefiting from the widespread,
global adoption of personal computers, or PCs, and digital capture devices. The
functional departments within large companies and governmental organizations are
also attracted to the industry-specific features and technical capabilities of
our software. Our products are sold through a scalable distribution platform
comprised of original equipment manufacturer's (OEMs), our global e-Stores, and
our international network of resellers and retail vendors. We have broad
geographic representation with dedicated sales and marketing teams based in the
Americas, Europe Middle East and Africa (EMEA), and the Asia Pacific
(APAC) regions. Our product portfolio includes well-established, globally
recognized brands.
An important element of our business strategy is to grow revenues through
acquisitions of companies or product lines. We intend to focus our acquisition
activities on companies or product lines with proven and complementary products
and established user bases that we believe can be accretive to our earnings
shortly after completion of the acquisition. While we review acquisition
opportunities on an ongoing basis, we currently have no binding obligations with
respect to any particular acquisition. We are subject to certain debt covenants
which may restrict our ability to pursue certain acquisitions.
Graphics and Productivity
Our primary Graphics and Productivity products include: CorelDRAW® Graphics
Suite, Core®l Painter™, CorelDESIGNER® Technical Suite, WinZip®, iGrafx® and
WordPerfec®t Office. CorelDRAW Graphics Suite is a leading vector illustration,
page layout, image editing and bitmap conversion software suite used by design
professionals and non-professionals around the world. Corel Painteris a
Natural-Media® digital painting and drawing software that mirrors the look and
feel of their traditional counter parts. CorelDESIGNER Technical Suite offers
users a graphics application for creating or updating complex technical
illustrations. WinZip is the most widely used compression utility, with more
than 40 million licenses sold to date. Our iGrafx products allow enterprises to
analyze, streamline and optimize their business processes. WordPerfect Office is
the leading Microsoft-alternative productivity software and features
Microsoft-compatible word processing, spreadsheet and presentation applications.
Digital Media
Our Digital Media portfolio includes products for digital imaging, video
editing, optical disc authoring (Blu-ray, DVD, and CD), and video playback. Our
Digital Imaging products include Core®l Paint Shop Pro® Photo, Core®l MediaOne®,
Core®l Photo Album™, and
PhotoImpact®. Corel Paint Shop Pro Photo is a digital image editing and
management application used by novice and professional photographers and photo
editors. Corel MediaOne is a multimedia software program for organizing and
enhancing photos and video clips that are primarily taken with a point-and-shoot
camera. Corel Photo Album is an entry-level software program that allows users
to easily store, organize, share and manage their digital photo collections.
Photo Impact is an image editing software, which provides users with easy-to-use
photo editing tools, creative project templates and some digital art
capabilities. VideoStudio® is our consumer focused video editing and DVD
authoring software for users who want to produce professional-looking videos,
slideshows and DVDs. Our optical disc authoring software applications are DVD
Movie Factory® and DVD Movie Writer®. WinDVD® is the world's leading software
for DVD, video and Blu-ray Disc playback on PC's with over 200 million units
shipped worldwide.
OVERVIEW OF THE QUARTER
Operating Performance
Revenue was $56.2 million, down 14% year over year. The revenue decrease of
$9.3 million is largely as a result of weakness in the global economy which has
had an adverse impact on our operations. Within our Digital Media group, our
revenues decreased by $2.0 million or 7%, largely due to decreases in Instant
On, Corel Paint Shop Pro Photo, Corel Media One, and DVD Movie Factory,which
were offset by gains in WinDVD. Our Graphics and Productivity revenue decreased
by $7.3 million or 20%, due mainly to declines in revenues from our CorelDRAW,
WinZip, iGrafx, and Word Perfect products. Despite the decrease in revenues of
$9.3 million, overall cost of revenues remained consistent with the prior year,
due to the change in sales mix resulting from a decreased proportion of revenues
associated with products with lower royalty costs as compared to revenues
associated with products with higher royalty costs, such as WinDVD.
From an operating income perspective, we were able to mitigate the impact of
the decreased revenues and gross margins through a 24% year over year reduction
in our operating expenses of $9.6 million, which was driven by our prior
restructuring activities, a decrease in discretionary spending, and favorable
foreign exchange rate changes.
Our net loss for the first quarter of fiscal 2009 was $1.5 million, or $0.06
per share, compared to a net loss of $30,000, or $0.00 per share in the first
quarter of 2008. Non-GAAP Adjusted EBITDA was $11.0 million and cash used by
operations was $29,000 in the quarter compared to non-GAAP adjusted EBITDA of
$13.3 million and cash flow from operations of $6.4 million in the first quarter
of 2008. Adjusted EBITDA represents net income before interest, income taxes,
depreciation and amortization, further adjusted to eliminate items specifically
defined in our credit facility agreement. Refer to the Financial Condition
section within this MD&A, for a reconciliation of non-GAAP Adjusted EBITDA to
cash flow provided by operations.
RESULTS OF OPERATIONS
Three Months ended February 28, 2009 and February 29, 2008
Revenues
Three Months Ended
February 28 and 29, Percentage
2009 2008 Change
Product $ 50,075 $ 59,362 (15.6) %
As a percent of revenue 89.1 % 90.6 %
Maintenance and services 6,139 6,182 (0.7) %
As a percent of revenue 10.9 % 9.4 %
Total $ 56,214 $ 65,544 (14.2) %
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Total revenues for the three month period ended February 28, 2009 decreased
by 14.2% to $56.2 million from $65.5 million for the three months ended
February 29, 2008. On a global level, all of our products, product groups, and
distribution channels have been impacted by the weakening of the global economy
and the declining EURO in relation to the US Dollar. Of the decrease in total
revenues of $9.3 million, $7.3 million is attributable to the Graphics and
Productivity group of products and $2.0 million is attributable to the Digital
Media group of products. Revenues from the OEM distribution channel has remained
unchanged, compared to the prior period, as we have entered into two significant
deals with customers for WinDVD in the final quarter of fiscal 2008. Our
remaining distribution channels, including direct sale and resellers, have had
declining revenues compared to the first quarter of fiscal 2008. Our resellers
have been reducing inventory levels across all our products. Direct spending by
customers has also been reduced across all products.
Product revenues for the three months ended February 28, 2009 decreased by
15.6% to $50.1 million from $59.4 million for the three months ended
February 29, 2008. Product revenues have declined for the same reasons as
described above for total revenues.
Maintenance and services revenues for the three months ending February 28,
2009 remained unchanged as compared to the three months ending February 29,
2008. We have not experienced declines in maintenance revenues, as much of this
revenue is related to products sold in prior periods, in which we had growth in
revenues.
Total Revenues by Product Group
Three Months Ended
February 28 and 29, Percentage
2009 2008 Change
Graphics and Productivity $ 29,654 $ 36,947 (19.7) %
As a percent of revenue 52.8 % 56.4 %
Digital Media 26,560 28,597 (7.1) %
As a percent of revenue 47.2 % 43.6 %
Total $ 56,214 $ 65,544 (14.2) %
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Our products generally have release cycles between 12 and 24 months and we typically earn the largest portion of revenues for a particular product during the first half of its release cycle. In the past we have experienced declines in product revenues during the second half of product release cycles, with the sharpest declines occurring toward the end of the release cycle. The fiscal quarter of the most recent and prior release of each of our major products is set forth below:
Quarter of
Current Current Quarter of
Version Release Prior Release
Product
Graphics and Productivity:
CorelDRAW Graphics Suite 14 Q1 2008 Q12006
Corel Painter 11 Q1 2007 Q4 2004
Corel Designer Technical Suite 14 Q3 2008 Q3 2005
WinZip 12 Q4 2008 Q4 2006
iGrafx FlowCharter 12 Q2 2007 Q1 2006
WordPerfect Office Suite 14 Q2 2008 Q1 2006
Digital Media
Paint Shop Pro Photo (ultimate) 12 Q4 2008 Q4 2006
MediaOne 2 Q4 2007 Q4 2006
WinDVD 9 Q1 2008 Q4 2006
VideoStudio 12 Q4 2008 Q2 2007
DVD Movie Factory 6 Q1 2007 Q1 2006
PhotoImpact 13 Q1 2008 Q3 2006
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Graphics and Productivity revenues decreased by $7.3 million or 19.7% to
$29.7 million in the first quarter of fiscal 2009 compared to $36.9 million in
the first quarter of fiscal 2008. The revenue decline was primarily driven by
declines in CorelDRAW, WinZip, iGrafx and WordPerfect. CorelDRAW, which enjoyed
a sales peak in the first quarter of fiscal 2008 due the launch of CorelDRAW
Graphics Suite X4, experienced most of its decline in EMEA. WinZip revenues have
declined mostly in EMEA. iGrafx revenues have declined in EMEA and the Americas,
as some enterprise customers have postponed their orders in the first quarter of
fiscal 2009.
Digital Media revenues decreased by $2.0 million or 7.1% to $26.6 million in
the first quarter of fiscal 2009 compared to $28.6 million in the first quarter
of fiscal 2008. Our decline in these revenues were led by declines in Paint Shop
Pro Photo, Instant On, MediaOne and DVD Movie Factory. These decreases were
offset by an increase in WinDVD, which has enjoyed success in Taiwan and Japan
with existing and new OEM customers. The decline in Paint Shop Pro Photo was
mainly isolated in the EMEA market where they have faced economic adversity
across all distribution channels. The decline in Instant On is due to a
significant Japanese OEM customer that is not currently bundling this product
with their computers. However, we changed the specifications in the agreement
with this OEM customer in the first quarter of fiscal 2009, and expect to see
increases in revenues in future periods from Instant On to a limited scale of
those earned in fiscal 2008. MediaOne has incurred the majority of its losses in
the United States as there has been a large decrease in electronic downloads in
the current quarter. The majority of the decrease in DVD Movie Factory is in
North America, relating largely to OEM sales decreases for two significant
customers.
Total Revenues by Region
Three Months Ended
February February
28, 29, Percentage
2009 2008 Change
Americas $ 26,170 $ 30,896 (15.3) %
As a percent of revenue 46.6 % 47.1 %
Europe, Middle East, Africa 15,119 21,014 (28.1) %
As a percent of revenue 26.9 % 32.1 %
Asia Pacific 14,925 13,634 9.5 %
As a percent of revenue 26.5 % 20.8 %
Total $ 56,214 $ 65,544 14.2 %
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Revenues in the Americas decreased by $4.7 million or 15.3% in the first
quarter of fiscal 2009 to $26.2 million compared to $30.9 million in the first
quarter of fiscal 2008. The decline in revenue was led by WinDVD, CorelDRAW,
WordPerfect, MediaOne, DVD Movie Factory, WinZip and iGrafx. The WinDVD and DVD
Movie Factory decline in revenues are primarily due to lower OEM sales with two
large customers. The decrease in CorelDRAW revenues is primarily attributable to
the launch of CorelDRAW Graphics Suite X4 in the first quarter of fiscal 2008.
The decline in MediaOnerevenues is largely due to a reduction in electronic
downloads. WordPerfect, which is declining at slower rates then in prior years,
and iGrafx have received smaller orders from its largest customers, those being
distributors and enterprise businesses, respectively. WinZip has continued its
recent trend of lower internet license sales in the current quarter.
Revenues in EMEA decreased by $5.9 million or 28.1% to $15.1 million in the
first quarter of fiscal 2009 compared to $21.0 million in the first quarter of
fiscal 2008. One significant cause of the declining revenues in this region is
the drop in the value of the EURO relative to the US dollar. The average
exchange rate was 1.47 in the first quarter of fiscal 2008 and 1.32 in the first
quarter of fiscal 2009. The impact of the declining exchange rates is estimated
to have lowered revenues by $1.7 million. The most significant portion of the
decline in revenues was in CorelDRAW, which had significant growth in the first
quarter of fiscal 2008 due to the launch of CorelDRAW Graphics Suite X4. The
decrease in revenues in this region was also caused by declines in WinZip, Paint
Shop Pro Photo, and iGrafx. The decrease in WinZip is due to a slow down of
customer purchases from distributors and through internet license sales. The
decline in Paint Shop Pro Photo is largely due to declining orders from the
largest resellers of this product. iGrafx revenues have declined due to the
falloff of enterprise level orders across various customers who are postponing
purchases.
Asia Pacific revenues increased by $1.3 million or 9.5% to $14.9 million in
the first quarter of fiscal 2009. This revenue growth is caused by increasing
sales in our WinDVD product, which has been partially offset by decreasing sales
in Instant On, VideoStudio, and iGrafx. The growth in revenue in WinDVD is
attributable to significant agreements entered into with two OEM customers in
Taiwan, and growth in OEM sales in Japan. There was a significant sale of
Instant On with an OEM customer in the first quarter of fiscal 2008; this did
occur in the first quarter of fiscal 2009. However, we have had a change of
specifications with this OEM customer in the first quarter of fiscal 2009, such
that Instant On sales should increase in future periods to partially offset the
decrease in the current period. The decline in revenues of VideoStudio is mainly
due to the decreased sales through one OEM customer. The main consumer of iGrafx
in Japan has made declining orders in the current fiscal period.
Cost of Revenues
Three Months Ended
February February
28, 29, Percentage
2009 2008 Change
Cost of product $ 15,531 $ 15,227 2.0 %
As a percent of product revenue 31.0 % 25.7 %
Cost of maintenance and services 100 167 (40.1) %
As a percent of maintenance and service revenue 1.6 % 2.7 %
Amortization of intangible assets 6,165 6,414 (3.9) %
As a percent of revenue 11.0 % 9.8 %
Total $ 21,796 $ 21,808 (0.1) %
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Cost of Product Revenues. Cost of product revenues increased by 2.0% to $15.5 million in the first quarter of fiscal 2009 from $15.2 million in the first quarter of fiscal 2008. As a percentage of product revenues, cost of product revenues increased to 31.0% for the three months ended February 28, 2009 from 25.7% in the three month period ended February 29, 2008. The increase in the period is
largely attributable to the change in our product mix caused by the higher
proportion of Digital Media products sold, and in particular WinDVD. WinDVD
sales, which have been increasing relative to other products, carry a higher
royalty charges as a percentage of revenue than any of our other products.
Cost of Maintenance and Services Revenues. Cost of maintenance and services
revenues decreased to 1.6% of related revenues in the first three months of
fiscal 2009 from 2.7% in the first three months of fiscal 2008, and is primarily
attributable to WinZip's maintenance revenues and the limited incremental costs
to provide such revenue.
Amortization of Intangible Assets. Amortization of intangible assets
decreased by $249,000 to $6.2 million in the three months ended February 28,
2009, from $6.4 million in the three months ended February 29, 2008. The
decrease is due to the amortization pattern of certain customer relationships
obtained in the acquisition of InterVideo in fiscal 2007.
Operating Expenses
Three Months Ended
February February
28, 29, Percentage
2009 2008 Change
Sales and marketing $ 15,222 $ 19,684 (22.7) %
As a percent of revenue 27.1 % 30.0 %
Research and development 9,216 12,091 (23.8) %
As a percent of revenue 16.4 % 18.4 %
General and administration 6,479 8,811 (26.5) %
As a percent of revenue 11.5 % 13.4 %
Restructuring 209 178 17.4 %
As a percent of revenue 0.4 % 0.3 %
Total $ 31,126 $ 40,764 (23.6) %
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A significant portion of our total operating costs of $31.1 million relates to employee costs. Most of our employees are located in Canada, Taiwan and the United Kingdom and as a result a significant portion of our labour and other operating costs are incurred in jurisdictions outside of the United States. As . . .
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