Corel: Splicing Growth

Consumer software developer Corel (Nasdaq: CREL  ) , long saddled with the venerable but mature WordPerfect and CorelDraw programs, wants to show that it can grow again. It's broadening its focus to include the DVD and online video market through its acquisition of InterVideo. However, this shift in strategy will likely take a few quarters to get results.

In the fiscal fourth quarter, Corel's sales increased 4% to $47.4 million and net income increased from a loss of $3.4 million, or $0.17 per share, to a gain of $9.4 million, or $0.37 per share.

WordPerfect -- first developed in 1982 -- and CorelDraw faces fierce competition from the likes of Microsoft (Nasdaq: MSFT  ) and Adobe (Nasdaq: ADBE  ) . Google (Nasdaq: GOOG  ) is also entering these markets with online word processor and spreadsheet programs.

Nonetheless, Corel has an extensive distribution platform, including 40 million customers across 75 countries, and major reseller deals with companies like Dell (Nasdaq: DELL  ) and Hewlett-Packard (NYSE: HPQ  ) . The company boasts more than 25,000 arrangements with resellers and retailers. So Corel's been seeking growth through acquisition, buying applications such as Paint Shop Pro and the WinZip file-compression program.

But the key deal is its purchase of InterVideo, which develops multimedia software for DVD production, online video, and photo sharing. The $198.6 million buyout represents about 57% of Corel's market cap.

Corel should be positioned nicely to capitalize on the growth in online video, since InterVideo's tools allow users to process high-definition video and make Blu-ray discs. The company also has a strong presence in China, Taiwan, and Japan.

Corel's revenues may also revive with the launch of the Windows Vista operating system, since new versionf of Windows generally lead to an increase in upgrades. But again, this is unlikely to have an impact until the second half of 2007.

Corel is definitely making critical strategic changes. Once the InterVideo deal is complete, more than half of its revenues will come from digital imaging, a proportion that should continue to grow for some time.

However, for the next six months, there are no foreseeable catalysts for the stock, as the company focuses on integrating its new purchase. In other words, interested investors don't need to rush to buy in.

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Fool contributor Tom Taulli does not own shares mentioned in this article. He is currently ranked 1,623 out of 19,864 in CAPS. The Fool has a disclosure policy.


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