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| CPWR > SEC Filings for CPWR > Form 10-K on 28-May-2009 | All Recent SEC Filings |
28-May-2009
Annual Report
FORWARD-LOOKING STATEMENTS
The following discussion contains certain forward-looking statements within the
meaning of the federal securities laws. When we use words such as "may",
"might", "will", "should", "believe", "expect", "anticipate", "estimate",
"continue", "predict", "forecast", "projected", "intend" or similar expressions,
or make statements regarding our future plans, objectives or expectations, we
are making forward-looking statements. Numerous important factors, risks and
uncertainties affect our operating results, including, without limitation, those
discussed in Item 1A. Risk Factors and elsewhere in this report, could cause
actual results to differ materially from the results implied by these or any
other forward-looking statements made by us, or on our behalf. There can be no
assurance that future results will meet expectations. While we believe that our
forward-looking statements are reasonable, you should not place undue reliance
on any such forward-looking statements, which speak only as of the date made.
Except as required by applicable law, we do not undertake any obligation to
publicly release any revisions which may be made to any forward-looking
statements to reflect events or circumstances occurring after the date of this
report.
OVERVIEW
In this section, we discuss our results of operations on a segment basis. We
operate in three business segments in the technology industry: products,
professional services and application services. We evaluate segment performance
based primarily on segment contribution before corporate expenses. References to
years are to fiscal years ended March 31. This discussion and analysis should be
read in conjunction with the audited consolidated financial statements and notes
included in Item 8 of this report.
We deliver value to businesses worldwide by providing software products,
professional services and application services that improve the performance of
IT organizations. Originally founded in 1973 as a professional services company,
in the late 1970's we began to offer mainframe productivity tools for fault
diagnosis, file and data management, and application debugging.
In the 1990's, IT moved toward distributed and web-based platforms. Our
solutions portfolio grew in response, and we now market a comprehensive
portfolio of IT solutions across the full range of enterprise computing
platforms that help:
• Develop and deliver high quality, high performance enterprise business
applications in a timely and cost-effective manner.
• Measure, manage and communicate application service in business terms, and maintain consistent, high levels of service delivery.
• Provide executive visibility, decision support and process automation across the entire IT organization to enable all available resources to be harnessed in alignment with business priorities.
Additionally, to be competitive in today's global economy, enterprises must securely share applications, information and business processes. We address this market need through our application services, which are marketed under the brand name "Covisint". Our application services offerings provide a software-as-a-service platform that enables industries and business communities to securely integrate vital information and processes across users, business partners, customers, vendors and suppliers.
Annual Update
The following occurred during fiscal 2009:
• Achieved an increase in product contribution margin to 45.8% in fiscal
2009 from 42.4% in fiscal 2008.
• Experienced a decrease in professional services segment contribution margin to 7.1% in fiscal 2009 from 10.5% in fiscal 2008.
• Repurchased approximately 20.3 million shares of our common stock during fiscal 2009 at an average price of $9.49 per share.
• Initiated restructuring actions that resulted in a charge of $10 million, described below under "Restructuring Charges" and in Note 7 of the Notes to Consolidated Financial Statements, included in Item 8 of this report.
• Released 17 mainframe and 29 distributed product enhancements.
We also advanced our Compuware 2.0 initiative in fiscal 2009 as follows:
• Refined our software business strategy to focus on delivering superior
end-to-end application performance, which we call Business Service
Delivery.
• Entered into a Letter of Intent to sell our Quality and DevPartner distributed product families to an affiliate of Micro Focus International PLC ("Micro Focus"), and executed the related asset purchase agreement in May 2009. The sale price in the transaction is $80 million, less certain adjustments relating to cash collected or invoiced for certain deferred maintenance obligations assumed by Micro Focus. We expect to record a gain of approximately $50 million when this transaction closes which is anticipated to be in the first quarter of fiscal 2010 (see Note 3 of the Notes to Consolidated Financial Statements, included in Item 8 of this report).
• Advanced our application services segment business strategy with a focus on the healthcare market while maintaining customer satisfaction in the automotive industry.
• Implemented a strategy and began executing a plan to have a smaller, more profitable professional services segment.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain operational
data from the consolidated statements of operations as a percentage of total
revenues and the percentage change in such items compared to the prior period:
Percentage of Period-to-Period
Total Revenues Change
Fiscal Year Ended 2008 2007
March 31, to to
2009 2008 2007 2009 2008
REVENUE:
Software license fees 20.1 % 24.2 % 23.4 % (26.2 )% 5.0 %
Maintenance fees 44.0 38.7 37.7 0.7 4.1
Professional services segment
revenue 32.7 34.1 36.4 (14.9 ) (5.3 )
Application services segment
revenue 3.2 3.0 2.5 (5.2 ) 24.3
Total revenues 100.0 100.0 100.0 (11.3 ) 1.4
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OPERATING EXPENSES: Cost of software license fees 2.2 2.5 2.4 (19.6 ) 6.6 Cost of maintenance fees 3.8 3.7 3.4 (9.6 ) 11.5 Professional services segment expenses 30.4 30.5 31.7 (11.6 ) (2.5 ) Application services segment expenses 3.4 3.2 3.0 (5.8 ) 7.5 Technology development and support 7.9 8.2 9.4 (14.5 ) (11.3 ) Sales and marketing 20.8 21.8 23.2 (15.5 ) (4.9 ) Administrative and general 13.6 14.8 16.0 (18.9 ) (5.7 ) Restructuring costs 0.9 3.5 (76.5 ) n/a Total operating expenses 83.0 88.2 89.1 (16.5 ) 0.4 Income from operations 17.0 11.8 10.9 27.8 9.1 Other income, net 2.5 2.9 5.0 (22.4 ) (41.0 ) Income before income taxes 19.5 14.7 15.9 17.9 (6.6 ) Income tax provision 6.7 3.8 2.9 58.9 31.6 Net income 12.8 % 10.9 % 13.0 % 3.9 (15.0 ) |
PRODUCTS SEGMENT
Financial information for the product segment is as follows (in thousands):
Year Ended March 31,
2009 2008 2007
Revenue $ 699,114 $ 773,880 $ 741,006
Expenses 379,229 445,707 465,915
Product segment contribution $ 319,885 $ 328,173 $ 275,091
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The product segment generated contribution margins of 45.8%, 42.4%, and 37.1%
during 2009, 2008, and 2007, respectively.
The improvement in the contribution margin in 2009 compared to 2008 was due to
product expenses decreasing at a faster rate than product revenue. Expenses
decreased primarily due to the cost reduction initiatives implemented as part of
the 2008 and 2009 restructuring programs that affected the technology and sales
divisions.
The improvement in the contribution margin in 2008 compared to 2007 was due to
an increase in product revenue and a decrease in sales and marketing expense and
technology development and support costs.
Products Segment Revenue
Revenue for the products segment is as follows (in thousands):
Fiscal Year Ended Period-to-Period Change
March 31, 2008 to 2007 to
2009 2008 2007 2009 2008
Software License Fees
Mainframe $ 113,014 $ 151,278 $ 146,612 (25.3 )% 3.2 %
Distributed 106,620 146,228 136,800 (27.1 ) 6.9
Total Software License Fees 219,634 297,506 283,412 (26.2 ) 5.0
Maintenance Fees
Mainframe 337,387 335,409 338,195 0.6 (0.8 )
Distributed 142,093 140,965 119,399 0.8 18.1
Total Maintenance Fees 479,480 476,374 457,594 0.7 4.1
Total Product Revenue
Mainframe 450,401 486,687 484,807 (7.5 ) 0.4
Distributed 248,713 287,193 256,199 (13.4 ) 12.1
Total Product Revenue $ 699,114 $ 773,880 $ 741,006 (9.7 ) 4.4
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Product revenue by geographic location is presented in the table below (in thousands):
Year Ended March 31,
2009 2008 2007
United States $ 361,354 $ 395,029 $ 403,820
Europe and Africa 233,938 258,467 234,079
Other international operations 103,822 120,384 103,107
Total product segment revenue $ 699,114 $ 773,880 $ 741,006
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Our products are designed to enhance the effectiveness of key disciplines
throughout the IT organization from application delivery to service management
and IT portfolio management supporting all major enterprise computing platforms.
Product revenue, which consists of software license fees and maintenance fees,
comprised 64.1%, 62.9%, and 61.1% of total revenue during 2009, 2008 and 2007,
respectively.
Software license fees decreased $77.9 million or 26.2% during 2009, which
included a negative impact from foreign currency fluctuations of $10.6 million,
and increased $14.1 million or 5.0% during 2008, which included a positive
impact from foreign currency fluctuations of $13.1 million.
The decline in software license fees in 2009 was a result of the economic
slowdown experienced since the end of the second quarter of 2009 affecting the
closure of license transaction deals across all product lines. Vantage, Quality
and mainframe products accounted for the decline in software license fees.
The increase in software license fees in 2008 primarily occurred within our
Vantage and Changepoint products, which together accounted for $9.4 million of
the increase. The increase in mainframe product sales, primarily Strobe and
Abend-AID, accounted for $4.7 million of the remaining increase in software
license fees.
During 2009 and 2008, for software license transactions that are required to be
recognized ratably, we deferred $80.0 million and $107.7 million, respectively,
of license revenue relating to such transactions that closed during the year,
and recognized as license revenue $84.7 million and $102.7 million,
respectively, relating to such transactions that closed and had been previously
deferred.
Maintenance fees increased $3.1 million or 0.7% during 2009, which included a
negative impact from foreign currency fluctuations of $8.0 million, and
increased $18.8 million or 4.1% during 2008, which included a positive impact
from foreign currency fluctuations of $18.3 million.
We continue to experience a high renewal rate associated with current customer
maintenance contracts and continue to expand our maintenance base through the
sale of new maintenance contracts associated with license deals entered into
during the respective periods.
Mainframe products, primarily Strobe, and distributed products, primarily
Vantage, accounted for $2.0 million and $1.1 million of the increase in
maintenance fees during 2009, respectively.
Distributed products, primarily Vantage and Changepoint, together accounted for
$21.6 million of the increase in maintenance fees during 2008. This increase was
partially offset by a $2.8 million decline in maintenance fees associated with
our mainframe products.
Product Segment Expenses
Product expenses include cost of software license fees, cost of maintenance
fees, technology development and support costs, and sales and marketing
expenses.
Cost of software license fees includes amortization of capitalized software, the
cost of duplicating and disseminating products to customers, including
associated hardware costs, and the cost of author royalties. Cost of software
license fees decreased $6.0 million or 19.6% during 2009 to $24.5 million from
$30.5 million in 2008 and increased $1.9 million or 6.6% during 2008 from
$28.6 million in 2007.
The decrease in cost for 2009 was due to a $3.9 million capitalized software
impairment charge recorded during the first quarter of 2008 associated with the
2008 restructuring initiative. The remaining decline was primarily due to a
decline in costs associated with hardware sold with our Vantage product line.
The increase in cost for 2008 was primarily due to a $3.9 million capitalized
software impairment charge recorded during the first quarter of 2008, offset in
part by a decline in hardware costs and lower capitalized software amortization
costs incurred subsequent to the impairment charge.
As a percentage of software license fees, cost of software license fees were
11.2%, 10.2%, and 10.1% in 2009, 2008, and 2007, respectively.
Cost of maintenance fees consists of the direct costs allocated to maintenance
and product support such as helpdesk and technical support. Customers who
subscribe to maintenance are also eligible to receive the benefit of new
releases as well as technical support. Cost of maintenance fees decreased
$4.4 million or 9.6% during 2009 to $41.9 million from $46.3 million in 2008 and
increased $4.8 million or 11.5% during 2008 from $41.5 million in 2007.
The decrease in cost for 2009 was primarily due to lower compensation and
benefit costs resulting from employee headcount reductions as part of the
restructuring actions taken during 2008 and 2009.
The increase in cost for 2008 was primarily due to higher compensation and
benefit costs associated with the transfer of technical personnel from sales
support to customer support in order to meet product development and maintenance
initiatives and to provide increased customer support in our international
operations consistent with the revenue growth in those markets.
As a percentage of maintenance fees, cost of maintenance fees were 8.7%, 9.7%,
and 9.1% in 2009, 2008 and 2007, respectively.
Technology development and support includes, primarily, the costs of programming
personnel associated with product development and support less the amount of
software development costs capitalized during the period. Also included are
personnel costs associated with developing and maintaining internal systems and
hardware/software costs required to support all technology initiatives. As a
percentage of product revenue, costs of technology development and support were
12.4%, 13.1%, and 15.4% in 2009, 2008 and 2007, respectively.
Capitalization of internally developed software products begins when
technological feasibility of the product is established. Total technology
development and support costs incurred internally and capitalized for the years
ended March 31, 2009, 2008 and 2007 were as follows (in thousands):
Year Ended March 31,
2009 2008 2007
Technology development and support costs incurred $ 98,829 $ 113,693 $ 135,455
Capitalized technology development and support costs (12,376 ) (12,561 ) (21,384 )
Technology development and support costs expensed $ 86,453 $ 101,132 $ 114,071
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Before the capitalization of internally developed software products, total
technology development and support expenditures decreased $14.9 million or
13.1%, to $98.8 million during 2009 from $113.7 million in 2008 and deceased
$21.8 million or 16.1% during 2008 from $135.5 million in 2007.
The decreases in cost for 2009 and 2008 were primarily due to lower compensation
and benefit costs resulting from employee headcount reductions as part of the
restructuring actions taken during 2008 and 2009.
Sales and marketing costs consist primarily of personnel related costs
associated with product sales, sales support and marketing for all our product
offerings. Sales and marketing costs decreased $41.4 million or 15.5% during
2009 to $226.4 million from $267.8 million in 2008 and decreased $13.9 million
or 4.9% during 2008 from $281.7 million in 2007. As a percentage of product
revenue, sales and marketing costs were 32.4%, 34.6%, and 38.0% in 2009, 2008
and 2007, respectively.
The decrease in costs for 2009 was a result of lower compensation and benefit
costs of $21.7 million resulting primarily from employee headcount reductions as
part of the restructuring actions taken during 2008 and 2009 and decreases in
bonus and commission costs of $25.4 million due to the decline in software
license sales in 2009. The decreases in costs were partially offset by an
increase in advertising costs of $5.1 million primarily associated with our
Compuware 2.0 marketing campaign.
The decrease in costs for 2008 was primarily attributable to lower compensation,
benefit and travel expenses due to headcount reductions as a result of the sales
reorganization undertaken as part of the Company's restructuring efforts in 2008
and lower costs associated with marketing and promotional programs, partially
offset by higher bonus and commission expense primarily resulting from the
growth in distributed sales compared to the prior year.
Quality and DevPartner Divestiture - The product revenue recorded in 2009, 2008
and 2007 associated with products included in the Quality and DevPartner
divestiture was approximately $60.0 million, $74.0 million and $73.0 million,
respectively. In addition, the terms of the arrangement allow Micro Focus the
right to offer employment to 249 employees in our products segment.
PROFESSIONAL SERVICES SEGMENT
Financial information for the professional services segment is as follows (in
thousands):
Year Ended March 31, *
2009 2008 2007
Revenue $ 356,111 $ 418,559 $ 442,082
Expenses 331,001 374,626 384,189
Professional services segment contribution $ 25,110 $ 43,933 $ 57,893
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* The professional services segment and the application services segments are combined and reported as professional services on the consolidated statement of operations, included in Item 8 of this report.
Professional services segment revenue by geographic location is presented in the table below (in thousands):
Year Ended March 31,
2009 2008 2007
United States $ 288,439 $ 342,519 $ 371,448
Europe and Africa 58,419 68,170 65,050
Other international operations 9,253 7,870 5,584
Total professional services segment revenue $ 356,111 $ 418,559 $ 442,082
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During 2009, the professional services segment generated a contribution margin
of 7.1%, compared to 10.5% and 13.1% during 2008 and 2007, respectively.
The decrease in contribution margin for 2009 compared to 2008 was due to higher
costs in 2009 associated with the investment in personnel for our Solutions
Delivery Group, which focuses on providing professional services associated with
our product solutions, and to a lesser extent, the completion and transitioning
of certain higher-margin contracts during 2008 and 2009 (see the "Professional
Services Segment Revenue" section for more details).
The decrease in contribution margin for 2008 compared to 2007 was due to a
disproportionate percentage decline in revenue compared to costs. The percentage
decline in revenue exceeded the percentage decline in costs due to annual salary
increases and higher costs associated with certain fixed price projects
partially offsetting the reductions in compensation costs associated with
headcount reductions in 2008.
2009 Restructuring
During the second half of 2009, management focused on improving the segment's
margins by initiating a plan to exit engagements that were considered low-margin
or unprofitable and reducing headcount and operating costs resulting in
restructuring charges. Our professional services segment contribution margin
increased to 9.5% during the fourth quarter of 2009 compared to a 6.4%
contribution margin for the first nine months of 2009. The fourth quarter 2009
results included a $2.2 million increase to revenue due to an adjustment
associated with the completion of a fixed price project.
Professional services revenues are expected to decline in the range of 35% to
40% in 2010 compared to 2009 but we expect improvement in the operating margin
percentage of the segment. Actions initiated to date have included exiting low
margin accounts, including our largest professional services client in the
automotive industry. We expect 20% to 25% of our professional services segment
revenue in 2010 to be concentrated in the automotive industry.
If these actions do not improve the operating profit percentage of the
professional services segment as currently projected, an impairment of some or
all of the $140.4 million of goodwill related to the professional services
segment at March 31, 2009 may be recorded in the future as a non-cash charge to
earnings in the period in which the carrying value exceeds fair value.
Professional Services Segment Revenue
We offer a broad range of IT services to help businesses make the most of their
IT assets. Some of these services include outsourcing and co-sourcing,
application management, product solutions, project management, enterprise
resource planning and customer relationship management services. Revenue from
professional services decreased $62.4 million or 14.9%, which included a
negative impact from foreign currency fluctuations of $6.1 million, during 2009
to $356.1 million from $418.5 million in 2008 and decreased $23.6 million or
5.3%, which included a positive impact from foreign currency fluctuations of
$6.6 million, during 2008 from $442.1 million in 2007.
During the first quarter of 2009, we transitioned the employment of 170 of our
professional services staff to a customer (see "Administrative and General
Expenses" within this section for more details). This resulted in a $17 million
decline in our professional services segment revenue during 2009.
The remaining decrease in revenue for 2009 compared to 2008 was primarily due to
two government contracts expiring that were not renewed, reductions in spending
from a client within the automotive industry, our election not to renew low
margin contracts in certain locations and the general slowdown in the economy
that has resulted in companies not renewing or delaying IT projects.
The decrease in revenue for 2008 compared to 2007 was primarily due to a general
slow down in customer spending on certain IT programs and on staff
supplementation services within our U.S. operations.
Professional Services Segment Expenses
Professional services segment expenses consist primarily of personnel-related
costs of providing services, including billable staff, subcontractors and sales
personnel. Professional services segment expense decreased $43.6 million or
11.6% during 2009 to $331.0 million from $374.6 million in 2008 and decreased
$9.6 million or 2.5% during 2008 from $384.2 million in 2007. The decreases in
cost for 2009 and 2008 were primarily attributable to lower compensation and
benefit costs due to a reduction in employee headcount as management continues
to restructure the segment in order to align operating costs with the decline in
revenue as part of the 2009 restructuring efforts.
Quality and DevPartner Divestiture - Professional service fees were
$11.0 million in 2009 for solutions associated with the divested Quality and
. . .
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