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Borland International 4Q 1997 Conference Call - April 29, 1997


Del:Good afternoon and thank you for joining us on this call. With me is Paul Emory, Borlandís Vice President and Chief Financial Officer.

Earlier today, we issued an announcement for our year-end and fiscal fourth quarter financial results and during this call we will review todayís announcement and then answer your questions.

At this point I would like to turn this call over to Paul Emory, who will review the financial results outlined in todayís announcement.


Paul:Thank you Del.

Before we begin, I need to note that as we talk about results for the fourth quarter and the fiscal year 1997, we may be making some forward looking statements. Actual results may differ materially from those projected or suggested in any forward looking statement. Additional information concerning factors that could cause actual results to differ is included in our form 10-K for the year ended March 31, 1996 and also in the 10-Qís for the quarters ending in June, September, and December. All forward looking statements should be interpreted in light of the risks, trends, and uncertainties addressed in these disclosure documents, copies of which are available at our web site at or through our investor relations department.

Now I would like to read the financial results for the fourth quarter and for fiscal 1997 from the first page of our financial release.

As we previously announced, we did not expect to return to profitability in the fourth quarter of fiscal 1997, however during that quarter we took definitive steps toward returning to profitability in fiscal 1998 which began on April 1.

And now for the press release.

Borland today announced results for its fiscal fourth quarter ending March 31, 1997. Fourth quarter revenues were $37.2 million, compared with $70.5 million for the fourth quarter of the previous fiscal year. The fourth quarter revenues were up $400,000 over the third quarter of our fiscal 1997.

The company reported a loss for the fourth quarter of $42.5 million or $1.15 per share, compared with net income of $7.0 million or $0.18 per share for the fourth quarter of fiscal 1996. Borland's financial results for the quarter include a $23.1 million charge associated with a worldwide restructuring and reserves for other non-recurring expenses aimed at returning the company to profitability in fiscal 1998. This restructuring included a 30 percent reduction in the company's worldwide workforce.

Revenues for fiscal 1997 full year were $151.4 million compared with revenues of $245.1 million for the prior fiscal year. The company reported a net loss for fiscal 1997 of $108 million or $2.96 per share compared with a net income of $14.7 million or $0.40 per share for fiscal 1996. Revenues were impacted in fiscal 1997 by slowing sales of existing, mature products as customers anticipated revisions and new products not yet shipped. In the third quarter, Borland licensed its Paradox product line to Corel after determining that Paradox was no longer strategic to the company's product direction.

Additionally, the net loss for fiscal 1997 is due, in part, to the acquisition of Open Environment. As part of the acquisition, Borland assumed net losses of $12.2 million incurred by Open Environment in their first and second quarters of 1996.

As I mentioned earlier, we previously announced that we did not expect to return to profitability in the fourth quarter of our fiscal 1997, however during that quarter we took definitive steps toward returning to profitability in fiscal 1998 which we recently began on April 1.

As we announced in February we expect our restructuring actions to produce annual operating savings in excess of $30 million and annual product restructuring savings also in excess of $30 million. The majority of the restructuring costs were covered in the fourth quarter of our fiscal 1997 so that we can start fresh in fiscal 1998.

Del will now review some of the progress we have made in the fourth quarter and the steps we are taking as part of our business plan for achieving profitability in fiscal 1998.


Del:Thank you Paul. Todayís announcement should not be a surprise to anyone, as we have been saying that this quarterís results would be much like the third quarterís and that we would incur several one-time charges as a result of Februaryís restructuring. This past year, overall, has been a very difficult time, and are glad to now have it behind us as we look forward to our new fiscal year.

The key areas that have hurt Borlandís success in the past have been the lack of predictable and consistent growth, ineffective marketing and sales, and a lack of strong management. I believe that the steps that we have taken in the past several months, and those outlined in our FY98 business plan are already enabling us to address these issues.

There are four areas where I feel we have made progress in the fourth quarter, and where we will continue to make progress as we move forward. These four areas are: New Product Development, Building a Strong Executive Management Team, Partnering with Other IT Leaders, and Financial Planning.

First, let me talk about the products. Soon after I came to Borland in December, I pledged that as part of our return to profitability, that we would release a new product or a revision of an existing product each quarter. In the third quarter, we began to fulfill that promise with the release of IntraBuilder Client/Server. In February, we released a new product line called Borland C++Builder, which is a powerful tool for building business critical C++ applications on Windows. Iím pleased to report that sales of the new product line are meeting our expectations. As todayís announcement stated, C++Builder exceed our initial sales forecasts on all continents. Also in the fourth quarter, we shipped Delphi AS/400. We will continue to release new products and revisions of our existing products each quarter.

... in the Corporate Client/Server development market

We have just introduced a new product for the corporate market called MIDAS, which stands for Multi-tiered Distributed Application Services. MIDAS is a series of middleware technologies designed to ... applications with Borlandís C++Builder, Delphi, and JBuilder.

It is important to note that some of the MIDAS technology comes from OPEN Environment, and as a result is upwardly compatible with Entera for larger enterprise scalability across other platforms.

This fiscal year, we are planning a new release of Entera, which is the middleware product we acquired through OPEN Environment. The new release is called Entera 4.0, and will extend the productís abilities for cross-platform and Internet development. While the cost of the OPEN acquisition impacted our bottom-line for fiscal year 1997, we hope to see proceeds in fiscal year 1998 from Entera.

This quarter we will ship Delphi 3, an update of our highly successful tool for building Windows Client/Server applications. In the second quarter, we plan to ship JBuilder, our new tool for Sun Microsystems Java platform. We have already completed the second beta release of JBuilder , which is now available on our web site.

We are also investigating new products that we can introduce as ancillary development tools to ... management products for large scale development efforts.

We are also pleased to report that C++Builder, IntraBuilder, and Delphi 3 are all receiving extremely high remarks in the press for their ease of use and quality. For example, C++Builder won the VAR Business Editorís Choice Award and made the Windows Magazine Recommended List, outplacing Microsoft Visual C++.

Also, IntraBuilder Client/Server, a new product in this category that we introduced in fiscal year 97, is doing extremely well, with sales on par with those of other new Internet products.

As part of our turnaround plan, we are closely monitoring our customersí needs and new market directions. It is our objective to stay on top of new market directions, so that we can build products with high growth potential. To this end, we recently implemented a new automated customer interaction system. It will provide much faster support for our customers and will enable us to closely track communications with each customer.

Also, just last week, we announced a new developer support program that will unify our support programs in the US and provide our customers with faster and easier access to developer assistance. The new program will also enable us to increase revenues generated from support services.

On the subject of our new Executive Management Team, we have made significant progress in the fourth quarter and in this past month with attracting highly experienced and talented individuals. I believe that a strong management team is integral to our plans for returning to profitability this fiscal year.

Just today we announced that we have hired Rick LeFaivre as Borlandís new chief technology officer. Rick has more than 20 years experience in computer and software technology research and management at companies such as ViaCom, Silicon Graphics, Sun Microsystems, ... vision and leadership that will enable us to grow through new product development that takes advantage of high-growth market opportunities.

Also this month, we announced that John Floisand joined the company as vice president of US Sales. John has over 25 years of sales experience, most recently with Apple Computers, where he was responsible for worldwide sales. John has extensive experience with sales, customer service, operations and support, which he plans to leverage to build our direct support business. Also, John plans to increase our relationships with VARís, ... systems integrators to expand our support for corporate customers. Additionally, he is looking at ways to improve the segmentation of our product range, packaging, prices, distribution, and support, in order to better address the full range of customersí development needs.

In February we named Hobart Birmingham vice president and general counsel and in March I promoted Zack Urlocker to vice president of product management. In December after I joined Borland, Jim Schmidt came on board as vice president of human resources. Iím continuing to build our team, with the addition of highly experienced and talented individuals.

As we are all well aware, we canít do it alone. Our future success depends on strong partnerships with the industryís IT leaders, and during the fourth quarter of 1997 we entered into an agreement with Oracle Corporation. Oracle licensed our Java and C++ development technologies for use in its database systems and application development tools.

In January we announced a new Client/Server development tool for the IBM AS/400 hardware platform, which opens our technology to the 400,000 IBM AS/400 systems world-wide.

We are continuing to build other new partnerships this fiscal year. Just this month, we announced we will deliver OLEnterprise distributed object middleware for Digital Equipment Corporation's AlphaServer platform.. This agreement further extends our research to corporate and enterprise developers.

In the area of Business Planning and Operations, we have made progress in streamlining the organization so that it runs more efficiently and will allow us to reach our profitability goals in FY98.

During the fourth quarter, we completed integrating the teams and technology from OPEN Environment. The OPEN Environment sales employees and now merged with the Borland sales team so that we can leverage the talent and experience of this group for selling into large corporate accounts. We also relocated key engineers from OPEN Environment to join our development team here in Scotts Valley.

Last week we announced that the consulting arm of OPEN Environment has been spun off to form NetNumina. NetNumina, which comprises about 17 employees, will provide consulting services on behalf of Borland to OPEN Environment and Borland customers while servicing new customers.

And then today we announced that we have formed an InterBase subsidiary. By forming a separate InterBase company, Borland will be able to increase its focus on delivering application development tools, while allowing the InterBase team to increase its business opportunities with OEMís and application developers.

Now that fiscal year 1997 is behind us, we can look forward to seeing the results of our FY98 business plan. As we previously have stated, the next major step is to build a strategic business plan.

We are taking a serious look at new opportunities in the marketplace and at the future needs of our customers. It is our goal that the strategic plan will outline a path that will make Borland a high growth software company once again. This plan will be unveiled at the 8th annual Borland Conference which runs from July 12th through the 16th in Nashville, TN.

I would now like to turn the call over for questions.


Hank:I was wondering in terms of product development time cycle, it sounds like things are speeding up. Are you using component software at all in the development, ala, what Netscape is doing with some of their programs? Is there anything in the R&D side that is making it more rapid to develop products?
Del:I think that there are several aspects to the answer. Obviously we are focusing since my arrival on a much more definitive process that says that we will deliver to market when we have indicated that we will and also to more evenly distribute the revenue quarter by quarter. We use all of our products and component technologies in building our products. For example, Delphi is written in Delphi, JBuilder is written in Java, and so on. So, what we are hoping happens with an increased focus on delivering products at regular intervals and the utilization of our own component technology in the development of our products, that weíre able to speed and more rapidly develop new releases or new products.


Mike:Now that the restructuring is done, can we still expect the operating expenses somewhere in the low $30 million range and will that happen this quarter, the first quarter? And second, it looks like youíre divesting most of the non-strategic businesses. What is the future of dBASE?
Del:Let me answer part of that and then Iíll turn it over to Paul for the rest of it. We obviously took into account all that we could in the restructuring that was in the fourth quarter. Remember that our first quarter is the quarter that weíre in that started April 1. So certainly the operating expenses that took place in February, half of the quarter had much higher level of operating expenses on an ongoing basis than did the second half of the quarter. Paul do you want to add anything to that?
Paul:The only other thing that I would like add, Mike, is that when youíre focused on returning to profitability in fiscal 1998 I believe what youíll see will be our cost coming down over a period of a couple of quarters. In example, there are certain contractual regulations in Europe and other international countries wherein you canít just terminate employees and start the reduced rate right away. It takes a gradual period of time. In some cases employees may get six months notice and stay on the payroll before you can then terminate them and pay them severance. So itís not an instantaneous cost reduction that the corporation gets right away.
Del:Mike, with regards to dBASE, we have a new 32 bit version going into beta soon. So we are obviously continuing with the product. We remain committed to dBASE. We have a lot of users that are very vocal about us remaining committed.


Tom:A couple questions, if you can help us try to get some kind of feel for parameters here. Iím looking over this fourth quarter, which I know is the big restructuring, end of the year, charge-off quarter. Iím trying to use some of the recurring expenses to try to model out something so that we have something to kind of measure going forward. And Iím wondering if you can help me? Iím seeing cost of revenue of $6 million, SG&A $37 million, and R&D $13 million. Now can I use some of those or should I reduce some of those just to kind of go out kind of simplistically for the next couple quarters? I think you just mentioned that earlier in the quarter you had more expenses as you were starting to taper those off. Whatís a run rate for SG&A? Whatís a run rate for R&D? Whatís a run rate for cost of goods?
Paul:Look for the $51 million to continue to come down. One factor is the reduction in force that we achieved was achieved only in the latter part of February, so we only got part of the quarterís effect. Another factor is the longer notice that we have to give in many of the international countries, so we donít see the effect for some number of months. So the $50.7 comes down on a reasonably steep slope, but over the course of a couple of quarters.
Del:I would add to that, what we have stated is that FY98 is a return to stability, to profitability, and even some revenue growth. If I were to model the company, which I did in our FY98 plans, I looked very much to the financial models of Adobe and Oracle and other companies, to where it is reasonable to have between 20-22% in R&D, 7-9% in Tech Support, 34-36% in Sales & Marketing, and 8-10% in G&A. We canít achieve that overnight, but certainly by the end of FY98, those are the targets weíre looking to achieve.
Tom:How sticky is this? Whatís break-even revenues? Should we start with your $50 million for your continuing expenses and look for that to come down quarter by quarter?
Paul:Itíll come down quarter by quarter, but weíre not prepared to be that precise with guidance just yet.
Tom:Okay, letís flip it over to the other side, the revenue. Of the $37 million, does that have any of your three new products, the C++, the Delphi, or the JBuilder in it?
Del:C++Builder got out there in the March time-frame, so there not that much of the C++Builder revenue was in last quarter, and as I stated in the release and also commented on, we have seen a dramatic pickup in C++Builder and are now on track. Perhaps we should have seen it a little earlier. It took a little longer, but it has picked up speed so far this quarter. Thereís no JBuilder or Delphi 3.0 revenue in that.
Paul:If I can add to that, Del, what that really says I believe is that weíll see C++Builder ramping up in Q1, Delphi ramping up in Q2, and so on as we move through the year.
Tom:Are you selling your product over the web?
Del:Not yet, but itís certainly one of our intentions perhaps as early as a quarter or two out to be doing so.
Tom:That sounds like a pretty economical way to me to distribute what, by early measures is a very good technical product. Iím sure youíre thinking about that. Could that help your economics appreciably this year?
Del:We have a lot of web plans. Weíre not ready to announce anything, but we have an awful lot of work going on with regards to the web. One thing to remember is that weíre among the top fifty web sites from a standpoint of our new technology. We are advertising on the web this quarter.
Tom:Where are you relative to your plan? What has been harder and what has been easier?
Del:January, February, and March we put together the FY98 business plan. We are going to meet that business plan. It is one that returns us to stability, profitability, and even has some revenue growth in it. We are on track to doing that. Surprises have really, other than losing employees, have really been very positive. We spend a lot of time with the employee base, wanting them to understand the new directions and their importance to Borland. Weíve brought on key executives in the functional areas to make sure that they a closer relationship with the employees in their areas. You know, I think everything is on track. Weíre working this quarter, April, May and June, to get ready with our longer-term strategy that we will deliver in Nashville in July. We also have great product technology and we have recently introduced MIDAS that I talked about. We have Delphi 3 coming. C++Builder has certainly picked up speed. We were excited to have it replace Visual C++ in Windows Magazine. We thought that was a major statement. Itís even better that I had hoped. Weíve had great press as a result. Back to the employee base, the new execs that weíve hired have helped to raise morale, and so we hope that we turn this around so that we keep all the employees with us and we move forward together in this turnaround. Weíre all absolutely committed to make this happen.
Tom:One other question, please. Whatís pretty exciting is the three products and the level of expertise in terms of your hiring. Iíve been watching the press releases on the guys youíre hiring. Itís pretty impressive the guys youíre attracting, the guy today too. Do you feel like youíre under any near-term financial pressure with respect to cash flow that would hurt you in terms of getting back to the business of rolling out products, or are you okay with respect to running the business in terms of your cash flow needs?
Del:No, I think from a cash flow standpoint, weíre fine. Weíre in good shape with over $50 million cash at the end of the fiscal year. Iím excited about the new hires. I think that they bring a level of experience and expertise that Borland has not seen before. They certainly have extensive experience that they are able to bring in to show Borland new ways of doing business. Iím excited with Rick joining us. Obviously to get a chief technology officer, to make that commitment, he had to see for himself the caliber of the people and the company, the level of technology expertise, the capability of delivering new products, the sense of the management team to be able to go in new directions, and perhaps to make acquisitions to support those directions so that we get into the markets faster. Itís extremely exciting for us to have attracted Rick. And of course John Floisand brings over 20 years of experience in sales and marketing, has had a very successful career, and even in just three weeks has already made significant impact with the US sales team.
Tom:Yeah, I agree. These guys aren't joining the company thinking itís not going to make it. How much cash do you think youíll grow through in the next quarter? I know you have $54 million, but that was down pretty significantly, wasnít it?
Del:That was because of the restructuring efforts that it was down significantly. If I can minimize the losses going forward, thatís less cash thatís going to be impacted and of course somewhere down the line in fiscal year 1998, if I can get profitable, then weíve turned that around.
Tom:Are you still going to sell some of that real estate?
Del:Our intent is to lease out up to half of the campus. There is obviously right now a glut of space on the market, especially with Apple Computer scaling back so significantly. Weíre not sure how quickly weíll be able to lease any or all of the space we want to lease. The intention would be and is to do so. In fact, weíve had a realtor open house as recently as two weeks ago. There was interest, but at the same time over across the hill in Silicon Valley thereís a lot of space available right now.


Hank:Could you give us a little flavor of geographic breakdown and product composition?
Paul:Geographically, Q4 came in much like the entire year, and therefore very consistent with our plan, with about 60% of our business coming from overseas and the remaining 40% of that coming from the United States. Japan and Western Europe are the major sales contributors internationally. From a product standpoint, Delphi continues to be a major product. C++, we saw a nice uptick. C++Builder was released late in the quarter, but as stated previously actually exceeded expectations and forecasts for the product. Those two were the major products contributors throughout all the territories. Product by product, the mix is relatively constant within the various geographies. OEC had a nice uptick in the fourth quarter--their best quarter in the past four quarters.
Del:Let me just pick up on that. What we have seen is a shift towards higher end products which is obviously good for us. For example, Entera was very strong in Q4, much stronger than we had anticipated. After having stumbled with that acquisition for six to nine months prior to my arriving, Iím pretty impressed with the technology that weíve acquired and the fact that we have many large corporations that are working with Entera. We have recommitted ourselves, that we talked about a little bit in the press release, in establishing a regular team here in Scotts Valley around the Entera middleware product. Weíll have Entera 4.0 out by the end of the fiscal year. It fits well with our direction. The MIDAS announcement has become a much larger announcement than we originally thought it could be because of the hooks that we were able to put into Entera to begin to utilize the middleware technology that we received from the acquisition.


Paul:Entera posted better than expected earnings for the fourth quarter. I was wondering if you could elaborate on some of the customers which purchased the technology, and could you compare Entera to the principal competitors which I believe are Forte and Dynasty?
Del:We really donít get into that level of detail. What we can say, Paul, is that there is a lot of new interest in Entera with clients all over the place, US, Europe, and Asia. You can specifically find out from those involved the customer base, but we do not delineate that for the outside.
Paul:And could you comment on what kind of competition you are encountering from other companies in that field such as Forte and Dynasty?
Del:Itís interesting that both of those companies are having difficulties and have had so for the last six to nine to twelve months. I think itís fair to say that itís a stronger situation for OPEN Environment having merged with Borland and in fact the Entera product, because of that, is being looked at differently than if they were a standalone company. We do run into Forte when weíre out there, and our product is evaluated against them, and we more often than not when weíre up directly with them win. We see ourselves moving forward with Entera in ways that we had not even envisioned when we made the acquisition.


Del:I would like to thank you all for joining us on the call today. Iím looking forward to providing you with more details of our longer term strategy in July. In the meantime, we will continue to announce the progress that weíre making towards our goal of achieving profitability in fiscal year 1998. Thank you very much.

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