Corel Corporation Reports Second Quarter 2008 Financial Results

Corel Corporation (NASDAQ:CREL) (TSX:CRE) today reported financial results for its second quarter ended May 31, 2008. Revenues in the second quarter of fiscal 2008 were $67.0 million, compared to $65.0 million in the second quarter fiscal 2007. GAAP net income in the second quarter of fiscal 2008 was $930,000, or $0.04 per basic and diluted share, compared to GAAP net income of $2.3 million, or $0.09 per basic and diluted share, in the second quarter of fiscal 2007. Non-GAAP adjusted net income for the second quarter fiscal 2008 was $9.5 million, or $0.36 per diluted share, compared to non-GAAP adjusted net income for the second quarter of fiscal 2007 of $9.8 million, or $0.39 per diluted share. Non-GAAP adjusted EBITDA in the second quarter of 2008 was $14.9 million, compared to $15.2 million in the second quarter of 2007. "Corel performed well in the second quarter, reflecting the diversity of the Company’s products and distribution channels and the strength of its brand in key geographies,” said Kris Hagerman, Interim Chief Executive Officer, Corel Corporation. "We continue to successfully execute our core strategy which is to drive profitable growth by pursuing opportunities in faster growing markets, while delivering consistent growth and profits from our more established product lines and channels. As Corel’s results for the second quarter illustrate, we continue to benefit from our highly diversified business model.” Financial Guidance Third Quarter Fiscal 2008 Guidance Corel provided guidance for the third quarter ending August 30, 2008. The Company currently expects: -- Revenue in the range of $63 million to $65 million. -- GAAP net income in the range of break even to $1.6 million and non-GAAP adjusted net income in the range of $8.0 million to $9.5 million. -- GAAP earnings per share in the range of $0.00 to $0.06 and non-GAAP earnings per share in the range of $0.30 to $0.36. Fiscal 2008 Guidance Resulting guidance for the year ending November 30, 2008 is as follows: -- Revenue in the range of $263 million to $275 million. -- GAAP net income of $8.5 million to $13.5 million and non-GAAP adjusted net income of $40.5 million to $46.0 million. -- GAAP income per share of $0.30 to $0.50 and non-GAAP earnings per share of $1.50 to $1.70. Corel will host a conference call to discuss its financial results at 8:00 a.m. Eastern Time today. To access the conference call, please dial (877) 419-6600 or (719) 325-4860 approximately 5 minutes prior to the 8:00 a.m. ET start time. A live webcast will also be available through Corel's Investor Relations website at http://investor.corel.com/events.cfm. Following the call, an audio replay will be available between 11:00 a.m. ET July 3, 2008 and midnight ET July 16, 2008 from Corel's Investor Relations website or by calling (888) 203-1112 or (719) 457-0820, Passcode: 8074180. Forward-Looking Statements: This news release includes forward-looking statements that are based on certain assumptions and reflect our current expectations. Such forward-looking statements involve known and unknown risks, uncertainties and other important factors that could cause the actual results, performance or achievements to differ materially from any future results, performance, or achievements discussed or implied by such forward-looking statements. Such risks include the pending proposed offer from our majority shareholder Corel Holdings, L.P. (which is controlled by an affiliate of Vector Capital Corporation) ("CHLP") and the ongoing evaluation of the strategic alternatives by the Special Committee, which create additional expense for the company and cause uncertainty which could affect our ability to retain customers and employees. There can be no assurance that any transaction with CHLP or any other party will be consummated. Such risks also include competitive threats from well established software companies that have significantly greater market share and resources than us and from online services companies that are increasingly seeking to provide software products at little or no incremental cost to their customers to expand their Internet presence and build consumer loyalty. We rely on a small number of key strategic relationships for a significant percentage of our revenue and these relationships can be modified or terminated at any time. In addition, 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. Accordingly, we must successfully complete acquisitions, penetrate new markets or increase penetration of our installed base to achieve revenue growth. In addition, 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. These and other risks, uncertainties and other important factors are described in Corel's Annual Report dated February 8, 2008, and in Corel’s 10-Q dated April 7, 2008 filed with the Securities and Exchange Commission (SEC) and the Canadian Securities Administrators (CSA) under the caption "Risk Factors" and elsewhere. A copy of the Corel Annual Report and 10-Q can be obtained on Corel's website, on the SEC's website at http://www.sec.gov or on the CSA's website at http://www.sedar.com. Forward-looking statements speak only as of the date of the document in which they are made. We disclaim any obligation 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. Financial Presentation and Use of Non-GAAP Measures: Our financial statements have been prepared in accordance with U.S. generally accepted accounting principles, or GAAP, which differ in certain material respects from Canadian generally accepted accounting principles. In addition, our financial statements and information in this release are presented in U.S. Dollars, unless otherwise indicated. This news release includes certain non-GAAP financial measures, such as adjusted net income and adjusted EBITDA. We use these non-GAAP financial measures to confirm our compliance with covenants contained in our debt facilities, as supplemental indicators of our operating performance and to assist in evaluation of our liquidity. These measures do not have any standardized meanings prescribed by GAAP and therefore are not comparable to the calculation of similar measures used by other companies, and should not be viewed as alternatives to measures of financial performance or changes in cash flows calculated in accordance with GAAP. Reconciliations of these non-GAAP financial measures to the closest GAAP measures are set out in the notes to the financial statements attached to this news release. About Corel Corel is one of the world’s top software companies with more than 100 million active users in over 75 countries. We develop software that helps people express their ideas and share their stories in more exciting, creative and persuasive ways. Through the years we’ve built a reputation for delivering innovative, trusted products that are easy to learn and use, helping people achieve new levels of productivity. The industry has responded with hundreds of awards for software innovation, design and value. Our award-winning product portfolio includes some of the world's most widely recognized and popular software brands, including CorelDRAW® Graphics Suite, Corel® Paint Shop Pro® Photo, Corel® Painter™, VideoStudio®, WinDVD®, Corel® WordPerfect® Office and WinZip®. Our global headquarters are in Ottawa, Canada, with major offices in the United States, United Kingdom, Germany, China, Taiwan and Japan. © 2008 Corel Corporation. All rights reserved. Corel, CorelDRAW, Paint Shop Pro, Painter, Corel DESIGNER, VideoStudio, WordPerfect, WinDVD, WinZip, iGrafx, and the Corel logo are trademarks or registered trademarks of Corel Corporation and/or its subsidiaries. All other product, font and company names and logos are trademarks or registered trademarks of their respective companies. CRELF Corel Corporation Quarterly Financial results For the quarter ended May 31, 2008 (in thousands, except per share data; unaudited)                   Three Months ended Six Months ended May 31, May 31, May 31, May 31, Consolidated Condensed Statement of Operations   2008     2007     2008     2007     Revenues - Product $ 60,249 $ 59,553 $ 119,611 $ 106,857 Revenues - Maintenance and services   6,795     5,479     12,977     10,809   Total revenues   67,044     65,032     132,588     117,666     Cost of revenues - Product 14,008 14,026 29,235 22,523 Cost of revenues - Maintenance and services 132 221 299 419 Amortization of intangible assets   6,418     6,373     12,832     12,130   Total cost of revenues 20,558 20,620 42,366 35,072                 Gross margin   46,486     44,412     90,222     82,594     Operating expenses Sales and marketing 20,748 17,715 40,432 34,990 Research and development 11,716 11,070 23,807 22,666 General and administration 8,640 8,575 17,451 17,237 Acquired in-process research and development - - - 7,831 InterVideo integration expense - 860 - 1,645   Restructuring   447     -     625     -   Total operating expenses   41,551     38,220     82,315     84,369   Income (loss) from operations 4,935 6,192 7,907 (1,775 )   Other expenses (income) Interest Income (99 ) (518 ) (219 ) (882 ) Interest expense 3,032 4,236 7,440 8,521 Amortization of deferred financing fees 270 269 540 534 Expenses associated with Special Committee review 705 - 705 -   Other non-operating expense (income)   102     479     (1,362 )   (153 ) Income (loss) before income taxes 925 1,726 803 (9,795 ) Income tax (recovery)   (5 )   (587 )   (97 )   (232 ) Net income (loss) $ 930   $ 2,313   $ 900   $ (9,563 )   Net loss per share: Basic $ 0.04 $ 0.09 $ 0.04 $ (0.39 ) Fully diluted $ 0.04 $ 0.09 $ 0.03 $ (0.39 ) Weighted average number of shares: Basic 25,543 24,817 25,503 24,722 Fully diluted 26,238 25,284 26,165 24,722         Consolidated Condensed Balance Sheet       May 31, November 30,   2008     2007   Assets Current assets: Cash and cash equivalents $ 33,415 $ 24,615 Restricted cash 161 217 Accounts receivable Trade, net 28,775 41,092 Other 2,958 118 Inventory 932 729 Income taxes recoverable 1,649 1,470   Prepaids and other current assets   3,930     3,276   Total current assets 71,820 71,517   Capital assets 9,176 8,971 Intangible assets 79,471 92,010 Goodwill 88,643 88,643   Deferred financing and other long-term assets   5,641     5,696   Total assets $ 254,751   $ 266,837       Liabilities and shareholders' deficit Current liabilities: Accounts payable and accrued liabilities $ 58,089 $ 67,290 Income taxes payable 944 723 Deferred revenue 12,816 15,707 Current portion of long-term debt 18,952 2,249   Current portion of obligations under capital leases   728     767   Total current liabilities 91,529 86,736   Deferred revenue 2,179 2,365 Deferred income tax liability 18,287 20,754 Obligations under capital leases 1,600 2,114 Income taxes payable 13,201 11,693 Accrued pension benefit obligation 1,083 1,116   Long-term debt   138,561     156,359   Total liabilities   266,440     281,137     Shareholders' deficit Share capital 42,182 40,652 Additional paid-in capital 7,763 5,926 Accumulated other comprehensive loss (1,425 ) (721 )   Deficit   (60,209 )   (60,157 ) Total shareholders' deficit   (11,689 )   (14,300 )             Total liabilities and shareholders' deficit $ 254,751   $ 266,837             Consolidated Condensed Statement of Cash Flows           Three Months ended Six Months ended May 31, May 31, May 31, May 31,   2008     2007     2008     2007     Cash flows from operating activities Net income (loss) $ 930 $ 2,313 $ 900 $ (9,563 ) Depreciation and amortization 1,233 969 2,395 1,671 Amortization of deferred financing fees 270 269 540 534 Amortization of intangible assets 6,418 6,373 12,832 12,130 Stock-based compensation 1,977 1,290 3,115 2,298 Provision for bad debts 129 49 233 65 Deferred income taxes (1,233 ) (1,280 ) (2,467 ) (2,315 ) Acquired in-process research and development - - - 7,831 Unrealized loss on forward exchange contracts - - - 35 Loss on disposal of fixed assets 6 54 48 54 Loss (gain) on interest rate swap recorded at fair value (512 ) (391 ) 243 (582 ) Gain on sale of investment - - (822 ) -   Change in operating assets and liabilities   (2,308 )   (12,862 )   (3,700 )   3,066   Cash flows provided by (used in) operating activities   6,910     (3,216 )   13,317     15,224     Cash flows from financing activities Restricted cash - - 56 - Proceeds from operating line of credit - 5,000 - 48,000 Repayments on operating line of credit - (15,000 ) - (35,000 ) Proceeds from long-term debt - - - 70,000 Repayments of long-term debt (404 ) (399 ) (1,095 ) (1,080 ) Repayments of capital lease obligations (205 ) - (339 ) - Financing fees incurred - (5 ) - (1,677 ) Proceeds from exercise of stock options 203 1,387 254 2,689   Other financing activities   -     51     -     51   Cash flows provided by (used in) financing activities   (406 )   (8,966 )   (1,124 )   82,983     Cash flows from investing activities Purchase of InterVideo Inc, net of cash acquired - (786 ) - (121,154 )   Purchase of long lived assets   (1,865 )   (608 )   (3,299 )   (718 ) Cash flows used in investing activities   (1,865 )   (1,394 )   (3,299 )   (121,872 )   Effect of exchange rate changes on cash and cash equivalents (59 ) 80 (94 ) 45   Increase (decrease) in cash and cash equivalents 4,580 (13,496 ) 8,800 (23,620 ) Cash and cash equivalents, beginning of period   28,835     40,906     24,615     51,030   Cash and cash equivalents, end of period $ 33,415   $ 27,410   $ 33,415   $ 27,410             Non-GAAP Results (In thousands, except per share data)         Three Months ended Six Months ended May 31, May 31, May 31, May 31,   2008     2007     2008     2007     Non-GAAP Adjusted Net Income Calculation: Net income (loss) $ 930 $ 2,313 $ 900 $ (9,563 ) Amortization of intangible assets 6,418 6,373 12,832 12,130 Deferred income taxes (1,233 ) (1,280 ) (2,467 ) (2,315 ) Stock-based compensation 1,977 1,290 3,115 2,298 Restructuring 447 - 625 - InterVideo integration expense - 860 - 1,645 Expenses associated with Special Committee review 705 - 705 - Acquired in-process research and development - - - 7,831 Amortization of deferred financing fees   270     269     540     534   Non-GAAP Adjusted Net Income $ 9,514   $ 9,825   $ 16,250   $ 12,560   Percentage of revenue 14.2 % 15.1 % 12.3 % 10.7 %   Pro-forma diluted non-GAAP adjusted net income per share $ 0.36 $ 0.39 $ 0.62 $ 0.50   Shares used in computing proforma diluted non-GAAP adjusted net income per share 26,238 25,284 26,165 25,307   Non-GAAP Adjusted EBITDA Calculation: Cash flows provided by operating activities $ 6,910 $ (3,216 ) $ 13,317 $ 15,224 Change in operating assets and liabilities 2,308 12,862 3,700 (3,066 ) Interest expense, net 2,933 3,718 7,221 7,639 Income tax (recovery) (5 ) (587 ) (97 ) (232 ) Deferred income taxes 1,233 1,280 2,467 2,315 Provision for bad debts (129 ) (49 ) (233 ) (65 ) Unrealized loss on forward exchange contracts - - - (35 ) Gain (loss) on interest rate swap 512 391 (243 ) 582 Loss on disposal of fixed assets (6 ) (54 ) (48 ) (54 ) Gain on sale of investment - - 822 - Expenses associated with Special Committee review 705 - 705 - InterVideo integration expense - 860 - 1,645 Restructuring   447     -     625     -   Non-GAAP Adjusted EBITDA $ 14,908   $ 15,205   $ 28,236   $ 23,953   Percentage of revenue 22.2 % 23.4 % 21.3 % 20.4 %         Other Supplemental Information (In thousands)         Three Months ended Six Months ended May 31, May 31, May 31, May 31,   2008     2007     2008     2007     Revenue by Product Segment Graphics and Productivity $ 38,497 $ 34,517 $ 75,444 $ 68,582 Digital Media   28,547     30,515     57,144     49,084   Total $ 67,044   $ 65,032   $ 132,588   $ 117,666     As percentage of revenues Graphics and Productivity 57.4 % 53.1 % 56.9 % 58.3 % Digital Media   42.6 %   46.9 %   43.1 %   41.7 % Total   100.0 %   100.0 %   100.0 %   100.0 %     Revenue by Geography Americas $ 32,793 $ 33,015 $ 63,690 $ 60,208 EMEA 19,564 17,108 40,577 34,766 APAC   14,687     14,909     28,321     22,692   Total $ 67,044   $ 65,032   $ 132,588   $ 117,666     As percentage of revenues Americas 48.9 % 50.8 % 48.0 % 51.2 % EMEA 29.2 % 26.3 % 30.6 % 29.5 % APAC   21.9 %   22.9 %   21.4 %   19.3 % Total   100.0 %   100.0 %   100.0 %   100.0 %     Allocation of Stock-Based Compensation Expense Cost of revenues - Product $ 5 $ 9 $ 15 $ 18 Cost of revenues - Maintenance and service 2 2 4 4 Sales and marketing 504 311 899 581 Research and development 329 293 536 488 General and administration   1,137     675     1,661     1,207   Total $ 1,977   $ 1,290   $ 3,115   $ 2,298