Corel Corporation

Corel Corporation: 

Corel Corporation Debola Badejo Bill Taylor

Company Overview: 

Company Overview Leading global packaged software company Estimated installed base of 40 million users in over 75 countries Provide affordable productivity and graphics and digital imaging software Software products are targeted at value-conscious consumers and small businesses

Company History: 

Company History Founded in 1985; IPO in 1989 Acquired WordPerfect in 1996 Privatized by Vector Capital in 2003 Acquired WinZip in 2006 Second IPO in 2006 Acquired InterVideo and Ulead in 2006

Company Products: 

Company Products Productivity WordPerfect Office Suite WinZip iGrafx FlowCharter iGrafx Process Graphics CorelDRAW Graphics Suite Corel DESIGNER Suite Corel Painter Digital Imaging Corel Paint Shop Pro Corel Photo Album Corel Snapfire Plus

Best Sellers: 

Best Sellers These products account for about 80% of Corel’s revenue

Financials: 

Financials Share Price: $12.95 Market Cap: 319.36M P/E Ratio: 32.37 MSFT: 23.64; ADBE: 46.15; Industry: 43.33 EBITDA: $54.53M Profit Margin: 5.22% MSFT: 25.86%; ADBE: 21.20%

Investment Fundamental: 

Investment Fundamental Profit Margin A ratio of profitability: Profit margin allows investors to determine the percentage of revenues that result in a profits Net Income provides an absolute number and does not tell much about management’s efficiency However, profit margin provides a relative measure that can be compared among companies in similar industries A high profit margin indicates a more profitable company with better control over its expenses

Investment Thesis: 

Investment Thesis Competition: Microsoft, Adobe andamp; Google No organic growth; Acquisition-based growth Declining sales in the Packaged Software Industry Insecure relationships with OEMs Declining brand name exposure

Competition: Microsoft: 

Competition: Microsoft Microsoft Office is the standard in the productivity software industry Microsoft Office controls 97% of the productivity software market in North America Microsoft developed Microsoft Works to become its free alternative to MS Office MS Office 2007 will reduce the cost of earlier MS Office versions Vista introduces more media capabilities that reduce the need for some of Corel’s products

Competition: Adobe: 

Competition: Adobe Adobe controls 50% of the global packaged and digital imaging software market Photoshop is the clear industry standard for professional image editing Adobe caters to the high-end consumer market, while Corel identifies with small businesses and the low-end consumer market However, Adobe has begun releasing its low cost versions such as Adobe Photoshop Elements 5.0 And the low-end market is vulnerable to free alternatives

Competition: Google: 

Competition: Google Last year, Google launched Google Apps Package contains: Writely Word Processor, Google Spreadsheets, E-mail, Calendar, IM and Website Creation Software all for free Google will market product to small and midsized companies Online collaboration and storage will be the future of productivity software Google also launched Picasa, a digital photos manager Product is in direct competition with Corel SnapFire plus Will allow users to save their photos online

Competition: Internet Software Companies: 

Competition: Internet Software Companies Barriers to entry for software companies now deteriorating Regulators are enforcing the adoption of standards and software code sharing Microsoft is slowly but surely providing software information and adapting to open standards Consumers are increasingly purchasing and downloading software products online eliminating the need for physical distribution channels These developments are eroding the Corel advantage Internet software companies now able to market and sell products at reduced cost Software products are compatible with Adobe and Microsoft

Major Internet Competitors: 

Major Internet Competitors These companies are positioning themselves to become the low cost alternatives to Microsoft and Adobe. They represent a threat to Corel’s territory

Acquisition-based growth: 

Acquisition-based growth Corel maintained an average of 3% organic growth Management is not concerned with development of new product lines Current business strategy focuses on acquiring smaller companies Recent revenue increase based on WinZip and Jasc revenues Future company performance based on InterVideo revenues Corel will expand operations into Asia through InterVideo acquisition

InterVideo, WinZip and Jasc: 

InterVideo, WinZip and Jasc InterVideo Windows Vista includes all InterVideo’s product capabilities Windows DVD Maker, Media Center WinZip Industry standard, but revenue comes from one-time license purchases Jasc Paint Shop Pro does not offer the features that Photoshop does Adobe Elements offers similar features at the same price Adobe ready to release its new CS3 this year It will be difficult for Jasc to quickly integrate products to adapt to new CS3 formats

Relationship with Vector Capital: 

Relationship with Vector Capital Vector Capital acquired Corel in 2003 Restructuring process piled Corel’s debt from next to nothing to $140 million before IPO Vector seeks to use Corel as an acquisition engine By cutting cost, Corel secured more loans to payoff Vector’s $130 million issued dividend before IPO Vector Fund owns 72% stake in Corel

Debt: 

Debt Tech investors traditionally are growth-focused and debt-averse Vector Capital applying a standard private equity strategy to an industry that avoids it

Declining Sales in Packaged Software Industry: 

Declining Sales in Packaged Software Industry General trend away from packaged software spending and towards online distribution for consumers Businesses moving towards custom-made software Custom plug-ins and add-ons to graphics designers and publishers Packaged software sales growth: 80s to early 90s: ~25% annual 90s to present: ~13% annual

Insecure Relationship with OEMs: 

Insecure Relationship with OEMs Simplified versions of products are sold through OEMs Corel generates revenue from consumer upgrades Revenue is shared between OEM and Corel Dell accounted for about 12% of OEM sales Dell recently discontinued its packaging of WordPerfect InterVideo also lost its relationship with Dell and HP to Cyberlink Dell still continues to package Corel Paint Shop Pro, Snapfire Plus Maintaining relationships with OEMs presents numerous difficulties Revenue sharing agreement will also decrease overall recorded sales Any future setbacks from OEMs will adversely affect Corel

Declining Brand Name Exposure : 

Declining Brand Name Exposure In the late 1980s and early 90s, WordPerfect dominated the word-processing market CorelDRAW was the first professional-grade vector drawing program for the PC Microsoft released Windows and packaged Office WordPerfect sales fell drastically WP did not release a Windows version for 2 years Adobe’s image editing and desktop publishing branches are industry standards Adobe name makes Illustrator a serious alternative to CorelDRAW

VAR: 

VAR Susan Glinert CreativePro.com/CNET.com/ZDNet.com Sue Chastain, About Graphics Software Shelley, Utah.gov Legislative Webmaster Patrick, Best Buy Computer Sales Associate Matt, Digital Camcorder and Camera Sales Associate

Risks: 

Risks CorelDRAW is still a serious alternative in the vector drawing software market Customers loyal to the name Pace of expansion in emerging markets could offset decline in North American sales InterVideo and Ulead performance may offset WordPerfect sales decline

Short Strategy: 

Short Strategy Short the stock after its scheduled Q107 earnings release on April 12 First quarter earnings should reflect the hype of its new product releases and December 2006 acquisitions CREL will meet analyst expectations After the release, thesis points will begin to materialize in company performance

Questions: 

Questions Do not ask hard questions or I will eat your face!