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August 14, 2005

Borland outlines path back to black

Centrica's recent acquisition of stakes in four North Sea gas fields is very much in line with its strategy of reducing wholesale market exposure. The significant exposure mitigation resulting from the deal will be a key facet of the company's attempt to win back some of the 1.4 million customers lost since early 2004 and highlights the need for other utilities to do likewise.

By CBR Staff Writer

He reiterated the message issued with the Q2 earnings that Borland continued to see positive signs in the ALM [application lifecycle management] segment of our business, and addressed a call from a dissident shareholder to break up the company.

To recap, CEO Dale Fuller stepped down after the company issued profit warnings back in July, and was succeeded on an interim basis by Mr Arnold, former chief operating officer.

ALM includes products covering the management of the software life cycle, including requirements, configuration management, design, architecture, and process.

Although ALM, which is part of the company’s Software Delivery Optimization strategy, is Borland’s main focus going forward, it still operates two other businesses. They include programming tools and middleware, which Mr Arnold calls deployment products.

Several weeks ago, shareholder Bob Coates raised a stir with a call for Borland to divest the two non-ALM divisions, which he termed a distraction. However, according to Mr Arnold, those two divisions feed the profits, however small, that help subsidize ALM product development.

Mr Arnold points to the acquisition earlier this year of Teraquest, a consulting firm specializing in software process, as the linchpin of their strategy going forward. According to him, the Teraquest acquisition helped make the difference in a recent ALM win with a major healthcare provider, worth an estimated $3-5 million.

Mr Coates recently alluded to constant turnover in the sales force as one of Borland’s biggest obstacles in transitioning from a seller of programming tools to a provider of life cycle solutions.

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Ironically, Mr Arnold also highlighted that, when it comes to sales, Borland is starting with a blank slate this time around. According to Mr Arnold, 40% of the sales force was recruited within the past year and trained to sell more strategic, consultative solutions.

Mr Arnold pointed to the recent multi-million dollar healthcare client win as vindication. We talked to them about a combination of services and technology supporting process improvement. That would not have existed [at Borland] two years ago, he said.

Nonetheless, there is still the question of whether the other product lines, which for the most part offer little synergy with life cycle tools, are boon or distraction.

Mr Arnold maintains they are both profitable, although they are not huge cash cows. He terms the middleware business mature and lumpy, meaning that the product is low maintenance and occasionally brings in significant deals.

As for the tools business, it’s a tale of two cities. Delphi is a nice little cash cow. Delphi developers remain incredibly loyal, and it offers Borland a window into the Microsoft .NET market. For Java IDEs, it’s a different story. Java tools are dead, long live the Java developer, Mr Arnold said.

Borland will leverage capabilities from its ALM products to differentiate its Java IDEs. And, given the overlap of JBuilder and what was the developer portion of the former Together Control Center, Borland is focusing IDE development on the forthcoming Eclipse version of JBuilder, while deemphasizing the development tool aspects of Together. Instead, Together will add support of Business Process Modeling Notation (BPMN). Nonetheless, this part of the business is never likely to contribute much to the bottom line.

Going forward, Borland hopes to build the software process consulting business, while finally forging effective partnerships with the EDSs and Accentures of the world.

Borland may also add the project portfolio management capabilities (PPM) that most of its rivals are building or acquiring, to provide feedback on the value of a development project and whether it should be pursued. IT may also move some of the deployment tools that track application performance that are now grouped with middleware offerings.

On the other hand, Borland may add some opportunistic integration between the core ALM products, including Together, StarTeam configuration management, and CaliberRM requirements.

But Mr Arnold says the company will focus more on process, rather than technology integration. Aside from rival MKS, which is gradually piecing together a Java-based life cycle suite based around its configuration management engine, no vendor has managed to integrate modeling, requirements, and source code control. Rational, which has revamped its client tools, has yet to tackle ClearCase and RequisitePro, the crown jewels.

Admittedly, the idea of focus on ALM is nothing new for Borland. It has been talking up various forms of software development optimization since it acquired the core ALM tools three years ago. Teraquest has the potential to become the pivot point around which Borland energizes its core business, and given the benefit of the doubt, maybe the sales force this time around might avoid the old mistakes. The words sound right, but as always, Borland needs to execute.

But there remains little if any synergy between the other divisions. Yet Mr Coates, the shareholder who proposed to break up the company, has yet to offer a concrete alternative plan. Obviously, divestment is not part of Borland’s script, unless. We reserve right to change our mind if we get compelling offers, said Mr Arnold.

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