Add
CREL to Portfolio
Set Alert
Email to a
Friend
| |||
|
|
Quotes & Info
|
| CREL > SEC Filings for CREL > Form 10-Q on 10-Jul-2009 | All Recent SEC Filings |
10-Jul-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;
• 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;
• 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
and six month period ended May 31, 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, 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, Corel®Painter™, CorelDESIGNER® Technical Suite, WinZip® , iGrafx® and
WordPerfect® 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 Corel®Paint Shop Pro® Photo, Corel® MediaOne®,
Corel® 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 for the three months ended May 31, 2009 was $50.4 million, down 25%
year over year. The revenue decrease of $16.7 million coincides with weakness in
the global economy which has had an adverse impact on our operations
particularly in Europe and North America. Within our Digital Media group, our
revenues for the second quarter of fiscal 2009 decreased by $5.8 million or 20%,
largely due to decreases in Instant On, Corel Paint Shop Pro Photo, DVD Movie
Factory, VideoStudio, and PhotoImpact. Our Graphics and Productivity revenues
decreased by $10.9 million or 28%, due mainly to declines in revenues from our
CorelDRAW, WinZip, iGrafx, and WordPerfect products. Despite the decrease in
revenues of $16.7 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 25% year over year reduction
in our operating expenses of $10.2 million, which was driven by our prior
restructuring activities, a decrease in discretionary spending, and favourable
changes in foreign exchange from the weakening of the US Dollar against the CDN
Dollar and the Pound Sterling.
Our net loss for the second quarter of fiscal 2009 was $4.1 million, or $0.16
per share, compared to net income of $930,000, or $0.04 per share in the second
quarter of 2008. Non-GAAP Adjusted EBITDA was $10.1 million and cash provided by
operations was $780,000 in the second quarter of fiscal 2009 compared to
non-GAAP Adjusted EBITDA of $14.9 million and cash flow from operations of
$6.9 million in the second quarter of fiscal 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 and Six Months ended May 31, 2009 and May 31, 2008
Revenues
Three Months Ended Six Months Ended
May 31, Percentage May 31, Percentage
2009 2008 Change 2009 2008 Change
(dollars in thousands)
(unaudited)
Product $ 44,280 $ 60,249 (26.5 )% $ 94,355 $ 119,611 (21.1 )%
As a percent of revenue 87.9 % 89.9 % 88.5 % 90.2 %
Maintenance and services 6,088 6,795 (10.4 )% 12,227 12,977 (5.8 )%
As a percent of revenue 12.1 % 10.1 % 11.5 % 9.8 %
Total 50,368 67,044 (24.9 )% 106,582 132,588 (19.6 )%
|
Total revenues for the three month period ended May 31, 2009 decreased by
24.9% to $50.4 million from $67.0 million for the three months ended May 31,
2008. Total revenues for the six month period ended May 31, 2009 decreased by
19.6% to $106.6 million from $132.6 million for the six months ended May 31,
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 current quarter decrease in
total revenues of $16.7 million, $10.9 million is attributable to the Graphics
and Productivity group of products and $5.8 million is attributable to the
Digital Media group of products. Revenues from the direct sales channel have
remained fairly flat, compared to the prior period. Our remaining distribution
channels, including OEM and resellers, have had declining revenues compared to
the three and six months ended May 31, 2008. Our resellers have been reducing
inventory levels across all our products.
Product revenues for the three and six months ended May 31, 2009 decreased by
26.5% and 21.1%, to $44.3 million and $94.4 million, respectively, from $60.2
and $119.6 million for the three and six months ended May 31, 2008. Product
revenues have declined for the same reasons as described above for total
revenues.
Maintenance and services revenues for the three and six months ending May 31, 2009 have been decreasing as compared to the three and six months ending May 31, 2008. We have not experienced declines in maintenance revenues similar to those with product 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 Six Months Ended
May 31, Percentage May 31, Percentage
2009 2008 Change 2009 2008 Change
(dollars in thousands)
(unaudited)
Graphics and Productivity $ 27,582 $ 38,497 (28.4 )% $ 57,236 $ 75,444 (24.1 )%
As a percent of revenue 54.8 % 57.4 % 53.7 % 56.9 %
Digital Media 22,786 28,547 (20.2 )% 49,346 57,144 (13.6 )%
As a percent of revenue 45.2 % 42.6 % 46.3 % 43.1 %
|
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 Q1 2006
Corel Painter 11 Q2 2009 Q1 2007
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
|
Graphics and Productivity revenues decreased by $10.9 million or 28.4% to
$27.6 million in the second quarter of fiscal 2009 from $38.5 million in the
second quarter of fiscal 2008, and decreased by $18.2 million or 24.1% to
$57.2 million for the six month period ending May 31, 2009 as compared to the
six month period ending May 31, 2008. The revenue decline was primarily driven
by declines in CorelDRAW, WinZip, iGrafx and WordPerfect. CorelDRAW, which
enjoyed a sales peak in the first two quarters of fiscal 2008 due the launch of
CorelDRAW Graphics Suite X4, experienced most of its decline in EMEA. WinZip
revenues have declined in both North America and EMEA as a decrease in license
sales continues from prior periods. iGrafx revenues have declined in both EMEA
and the Americas, as some enterprise customers have delayed or declined orders
of this product due to the current economy. The decline in WordPerfect revenues
has been isolated mainly to the United States, where there were large benefits
in the prior year due to the launch of X4 in the second quarter of fiscal 2008.
Digital Media revenues decreased by $5.8 million or 20.2% to $22.8 million in
the second quarter of fiscal 2009 from $28.5 million in the second quarter of
fiscal 2008, and decreased by $7.8 million or 13.6% to $49.3 million for the six
months ending May 31, 2009. Our decline in these revenues in the current quarter
were led by Paint Shop Pro Photo, Instant On, DVD Movie Factory,and VideoStudio.
Year to date, these decreases were partially offset by an increase in sales
WinDVD, which in the first quarter of fiscal 2009 enjoyed success in Taiwan and
Japan with existing and new OEM customers. The decline in Paint Shop Pro Photo,
a product towards the end of its life cycle, was largely in the
EMEA market where they have faced adverse economic factors which has decreased
sales to resellers. 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. The majority of the decrease in DVD Movie Factory is in North America,
relating largely to OEM sales decreases for two significant customers.
VideoStudio has had declines across varying distribution channels in both EMEA
and APAC.
Total Revenues by Region
Three Months Ended Six Months Ended
May 31, Percentage May 31, Percentage
2009 2008 Change 2009 2008 Change
(dollars in thousands)
(unaudited)
Americas $ 24,997 $ 32,793 (23.8 %) $ 51,166 $ 63,690 (19.7 %)
As a percent of revenue 49.6 % 48.9 % 48.0 % 48.0 %
EMEA 11,249 19,564 (42.5 %) 26,369 40,577 (35.0 %)
As a percent of revenue 22.3 % 29.2 % 24.7 % 30.6 %
APAC 14,122 14,687 (3.8 %) 29,047 28,321 2.6 %
As a percent of revenue 28.0 % 21.9 % 27.3 % 21.4 %
|
Revenues in the Americas decreased by 23.8% to $25.0 million in the second
quarter of fiscal 2009 compared to $32.8 million in the second quarter of fiscal
2008. For the six months ended May 31, 2009 revenues decreased by 19.7% to
$51.2 million as compared to revenues for the six month period ending May 31,
2008. The decline in revenue was led by WinDVD, WinZip, DVD Movie Factory
CorelDRAW, WordPerfect, 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 and WordPerfect revenues is primarily attributable to the
launch of products in the prior period, those being CorelDRAW Graphics Suite X4
in the first quarter of fiscal 2008 and WordPerfect Office Suite X4 in the
second quarter of 2008. iGrafx has received smaller orders from its largest
enterprise customers as they delay the purchases of this specialty product. The
WinZip decline is due to lower internet licenses and corporate license sales to
enterprise customers, due in part to delayed upgrade cycles.
Revenues in EMEA decreased by 42.5% to $11.2 million in the second quarter of
fiscal 2009 from $19.6 million in the second quarter of fiscal 2008, and
decreased by 35.0% to $26.4 million in the first six months of fiscal 2009 from
$40.6 million in the first six months of fiscal 2008. One significant cause of
the declining revenues in this region is the drop in the value of the EURO and
Pound Sterling relative to the US dollar. The average exchange rate for the EURO
and Pound Sterling was 1.51 and 1.98 in the first two quarters of fiscal 2008,
respectively, and 1.33 and 1.47 in the first two quarters of fiscal 2009. The
impact of the declining exchange rates is estimated to have lowered revenues by
approximately $4.5 million in the first six months of fiscal 2009 as compared to
the prior year. The largest portion of the declines in this region are in Russia
and Eastern Europe. The product with the most significant portion of the decline
in revenues was CorelDRAW,which had significant growth in the first two 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 Paint Shop Pro Photo,
WinDVD and iGrafx. The decline in Paint Shop Pro Photo is largely due to
declining orders from the largest resellers of this product as the product is
nearing the end of its life cycle that has been longer than normal. iGrafx
revenues have declined due to the falloff of enterprise level orders across
various customers who are delaying or declining purchases in this economy.
WinDVD revenues have decreased in the second quarter largely due to a decrease
in sales to resellers.
APAC revenues decreased by 3.8% to $14.1 million in the second quarter of
fiscal 2009 and increased by 2.6% to $29.0 million in the first six months of
fiscal 2009. While revenues in the current quarter did decrease, year to date
revenues have increased due to the revenues from WinDVDproduct in the first
quarter of fiscal 2009. The growth in revenue from WinDVD continued into the
second quarter of fiscal 2009 and is attributable to significant agreements
entered into with two OEM customers in Taiwan. Revenue growth from WinDVD and
DVD Movie Factory have been offset by decreasing sales in Instant On,
VideoStudio, and CorelDRAW. The growth in DVD Movie Factory is related to
additional OEM sales by one of our key suppliers who have bundled the product
into more of their systems. There was a significant sale of Instant On with an
OEM customer in the first two quarters of fiscal 2008; these sales did not occur
in 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 year.
The decline in revenues of VideoStudio is mainly due to the decreased sales
through one OEM customer. The decline in CorelDRAW in the second quarter is
attributable to a decline in sales by distributors.
Cost of Revenues
Three Months Ended Six Months Ended
May 31, Percentage May 31, Percentage
2009 2008 Change 2009 2008 Change
(dollars in thousands)
(unaudited)
Cost of product $ 14,366 $ 14,008 2.6 % $ 29,897 $ 29,235 2.3 %
As a percent of
product revenue 32.4 % 23.3 % 31.7 % 24.4 %
Cost of maintenance
and services 110 132 (16.7 %) 210 299 (29.8 %)
As a percent of
. . .
|
|
|