TALES OF THE TAPE: At Last, Borland Has Found Its Way
By MARCELO PRINCE Of DOW JONES NEWSWIRES
December 6, 2001
NEW YORK -- Borland Software Corp. (BORL) took its name from an ancient Celtic word meaning "land of the deep forest." And for much of its 18-year history that's exactly where it has been - lost in the woods.
But in the past two years the Scotts Valley, Calif., concern, remade in the wake of a busted merger and a failed bid to compete against Microsoft Corp. (MSFT), seems to have found its way out.
The company has posted seven consecutive profitable quarters, despite the economic downturn that has hampered most software companies. It has cleaned up its balance sheet, leaving it with no long-term debt and $280 million in cash. And it has promising new products for a loyal customer base that will drive 15% to 20% growth, its supporters contend.
"We've spent three years retooling, retrenching and refocusing and now we are starting to expand," says Dale Fuller, Borland's chief executive. "And people are starting to take notice."
Indeed, the small company, which wasn't covered by any brokerage analyst a year ago, is now followed by four Wall Street firms. Each of them recommend clients own the long spurned stock. "Actually, I'm a little late," admits Damian Rinaldi of First Albany, who initiated coverage on Nov. 9 with a buy rating and $18 price target.
Borland's shares, which started the year at $5.53, have soared about 150% to $14.25 recently. Despite the run-up, some big Borland investors aren't looking to cash out yet.
"It may have run its course as a left-for-dead turnaround candidate, but as a potential growth story I don't think it's run its course at all," says James Hansel, senior portfolio manager at Brinson Partners, a unit of UBS Asset Management that owns 2.7 million Borland shares.
Another institutional investor puts it this way: Borland sports a market value of about $900 million. That's roughly 2.5 times this year's revenue target, excluding its cash balance. The average small-cap software stock trades at 4 times revenue.
"When we look at Borland we see a nice return in twelve months," says this large Borland shareholder, who requested anonymity. "It's not extremely cheap, but we believe the valuation is supported."
From Boom Times To Busted Merger
But to consider where Borland may be heading, it's worth recalling where it's been.
Founded in 1983 as Borland International Inc. by French programmer Phillipe Kahn, the company started out making tools to help software developers' work easier. Initially business boomed.
In the late 1980s, Kahn decided to challenge Microsoft in the market for desktop programs, such as databases, word processors and spreadsheets. Its most notable product was WordPerfect. Microsoft responded with aggressive pricing and bundling arrangements that left Borland reeling. Borland's annual sales, which peaked at $482 million in 1991, steadily fell to $151 million by 1997.
Kahn left in 1996 and Borland hired new executives to refocus the company on development tools and server software. The company changed its name to Inprise Corp. in 1998 but its restructuring foundered. A year later, Inprise was under pressure to sell itself. "We're not looking to turn around this firm," one former director told the Wall Street Journal in early 1999. "We are tired of turnarounds."
Fuller, former CEO of Internet startup WhoWhere Inc., took the helm of Inprise amid a management upheaval in April 1999. The company was put on the auction block and by early 2000 he brokered a deal to sell the company for $1.1 billion in stock to Corel Corp. (CORL), a cash strapped Canadian software vendor that had also been humbled by Microsoft.
But the deal was opposed by some Inprise holders and was terminated in May 2000 after Corel reported a surprise quarterly loss and its tumbling stock sliced the value of the deal by two-thirds.
Determined to go it alone, Fuller returned the company to its roots and its original name. He shored up its financial condition and reestablished Borland as an independent company with tools that help programmers develop, deploy and manage applications in Windows, Java and Linux environments.
Java And New Products Drive Rebound
Its recent success has been driven largely by strong demand for its Java development toolset, JBuilder. In the first nine months of 2001, JBuilder revenue soared 45% and now accounts for nearly 40% of software licenses.
Borland's traditional Windows application tools, which are about 30% of software sales, have also enjoyed renewed interest recently as Borland has added Web services extensions, analysts say.
The company has also expanded its product lineup. It has introduced a Linux development tool, dubbed Kylix, and has partnered with mobile phone makers to create wireless development tools. Borland has entered the fast-growing but crowded application server software market with its own offerings, including a low-priced appserver unveiled earlier this month.
Borland bulls contend that few investors realize the company remained popular among software programmers in the 1990s even as it fell out of favor on Wall Street for its poor financial performance and foundering stock.
"It never lost its reputation as a company with tools that really worked and served the interest of programmers and developers," says Hansel, who was a programmer before becoming a money manager.
Borland seems to have regained its footing, but it hasn't been immune to the economic downturn. Its third quarter results, while meeting analysts revised estimates, fell short of the company's original outlook. The company relied heavily on a surge in overseas sales to offset a 20% decline in U.S. revenue and weak services revenue. Total sales rose 16% to $55 million as profits fell 59% to $4.7 million, or 6 cents, in the quarter.
Borland executives have tempered expectations for the fourth quarter. They predict sales will rise 13% to 17% from $50.3 million a year ago. Earnings will be 6 cents to 8 cents a share, down from last year's 12-cent profit.
Some analysts and investors are confident the company can continue to reach its targets. Its supporters contend that purchases of Borland's low-priced products are less likely to be postponed than pricier software deals. And Borland, which counts tens of thousands of individual developers as customers, has been adding sales people to better target corporations.
CEO Fuller says the company, which is on pace to collect about $240 million in revenue this year, could reach $500 million "over the next couple years." That growth would come from internal growth as well as acquisitions, but Fuller cautions he's in no rush to "buy to get big."
Fred Ball, Borland's finance chief, predicts continued improvement in profit margins as revenue grows and the company benefits from economies of scale. He sees operating margins, which are forecast to be about 7% in 2001, exceeding 15% by 2003.
In its quest to recapture some of its past glory, Borland faces some familiar foes, including tech titans like International Business Machines Corp. (IBM), Sun Microsystems Inc. (SUNW) and Microsoft.
In an industry that gives few second chances, Borland has had more than its share - and finally seems intent to make the most of it. "We're still turning around," Ball says. "We're just getting started."
-By Marcelo Prince, Dow Jones Newswires; 201-938-5244
marcelo.prince@dowjones.com |
