Search the web
Welcome, Guest
[Sign Out, My Account]
EDGAR_Online

Quotes & Info
Enter Symbol(s):
e.g. YHOO, ^DJI
Symbol Lookup | Financial Search
CPWR > SEC Filings for CPWR > Form 10-Q on 7-Feb-2014All Recent SEC Filings

Show all filings for COMPUWARE CORP

Form 10-Q for COMPUWARE CORP


7-Feb-2014

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

This "Management's Discussion and Analysis of Financial Condition and Results of Operations" ("MD&A") is intended to provide an understanding of our financial condition, changes in financial condition, cash flow, liquidity and results of operations. The MD&A should be read in conjunction with the unaudited condensed consolidated financial statements and notes included in item 8 of this report and our annual report on Form 10-K for the fiscal year ended March 31, 2013, particularly "Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations". References to years are to fiscal years ended March 31 unless otherwise specified.

We evaluate the performance of our segments based primarily on revenue growth and contribution margin which represents operating profit before certain charges such as internal information system support, finance, human resources, legal, facilities, administration and other corporate charges. Following the segment discussion, we then provide a separate discussion of the material period-to-period changes in our operating expenses, other income and income taxes as reflected on our statements of operations.

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 and 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.

The material risks and uncertainties that we believe affect us are summarized below. These risks and uncertainties are not the only ones we face. Additional risks and uncertainties discussed elsewhere in this report and the other reports we file with the Securities and Exchange Commission (see for example Item 1A Risk Factors in our 2013 Form 10-K), as well as other risks and uncertainties that we are not aware of or focused on or that we currently deem immaterial, may also impair business operations. This report is qualified in its entirety by these risk factors and those listed below. If any of the following risks actually occur, our financial condition and results of operations could be materially and adversely affected. If this were to happen, the value of our common stock could decline significantly, and shareholders could lose all or part of their investment.

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.


Table of Contents
COMPUWARE CORPORATION AND SUBSIDIARIES

Summary of Risk Factors

A substantial portion of our mainframe segment revenue is dependent on our customers' continued use of International Business Machines Corporation and IBM-compatible products.

Our product revenue is dependent on the acceptance of our pricing structure for our software solutions.

Maintenance revenue could continue to decline.

Our primary source of profitability is from our mainframe segment. As revenues in this segment decline, our profitability will decline unless we are able to significantly increase margins in other operating segments.

If we are not able to grow our APM revenue, we may fail to achieve our forecasted financial results and we may fail to meet the expectations of analysts or investors which could cause our stock price to decline.

Changes in the financial services industry could have a negative impact on our revenue and margins.

We may fail to achieve our forecasted financial results due to inaccurate sales forecasts or other unpredictable factors. If we fail to meet the expectations of analysts or investors, our stock price could decline substantially.

Our business could be negatively affected as a result of actions of shareholders or others.

We may not achieve the results we expect from our expense reduction program, the timing could be delayed, or the restructuring charges necessary to achieve the targeted expense reductions could be higher than expected, any of which could materially and adversely affect our results of operations and financial condition.

Our planned distribution of our remaining shares of common stock in Covisint Corporation, which we refer to as the Tax-Free Distribution, could subject us and our shareholders to significant tax liability and could affect our ability to enter into certain transactions in the future.

The market for application services is highly competitive with emerging competitors. As the market matures, competition may increase and could have a material negative impact on our results of operations.

If we are not successful in maintaining our professional services strategy, our revenue and margins may further decline.

Economic uncertainties or slowdowns may reduce demand for our products and services, which may have a material adverse effect on our revenues and operating results.


Table of Contents
COMPUWARE CORPORATION AND SUBSIDIARIES

Defects or disruptions in our hosted software or application services networks or interruptions or delays in service would impair the delivery of our on-demand service and could diminish demand for our services and subject us to substantial liability.

Future changes in the U.S. domestic automotive manufacturing business could reduce demand for our professional services and Covisint application services, which may have a material negative effect on our revenues and operating results.

If the fair value of our long-lived assets deteriorated below the carrying value of these assets, recognition of an impairment loss would be required, which could materially and adversely affect our financial results.

Our software technology may infringe the proprietary rights of others.

Our results could be adversely affected by increased competition, pricing pressures and technological changes within the software products market.

The market for professional services is highly competitive, fragmented and characterized by low barriers to entry.

We must develop or acquire product enhancements and new products to succeed.

Acquisitions may be difficult to integrate, disrupt our business or divert the attention of our management and may result in financial results that are different than expected.

We are exposed to exchange rate risks on foreign currencies and to other international risks that may adversely affect our business and results of operations.

Current laws may not adequately protect our proprietary rights.

The loss of certain key employees and technical personnel or our inability to hire additional qualified personnel could have a material adverse effect on our business.

Unanticipated changes in our effective tax rates, or exposure to additional income tax liabilities, could affect our profitability.

Our stock repurchase plan and future dividend payments may be suspended or terminated at any time, which may result in a decrease in our stock price.

Acts of terrorism, acts of war and other unforeseen events may cause damage or disruption to us or our customers, which could materially and adversely affect our business, financial condition and operating results.

Our articles of incorporation, bylaws and rights agreement as well as certain provisions of Michigan law may have an anti-takeover effect.


Table of Contents
COMPUWARE CORPORATION AND SUBSIDIARIES

OVERVIEW

We deliver value to businesses by providing software solutions (both on-premises and SaaS models), professional services and application services that improve the performance of information technology organizations.

Our primary source of profitability and cash flow is the sale of our mainframe productivity tools ("mainframe") that are used within our customers' mainframe computing environments for fault diagnosis, file and data management, application performance monitoring and application debugging. We have experienced lower volumes of software license transactions for our mainframe solutions in recent years causing an overall downward trend in our mainframe product revenues which we expect to continue. Changes in our current customer IT computing environments and spending habits have impacted their need for additional mainframe computing capacity. In addition, increased competition and pricing pressures have had a negative impact on our revenues. Customers utilize our products to reduce operating costs, increase programmer productivity and create a smooth transition to the next generation of mainframe environment programmers. We will continue to make strategic enhancements to our mainframe solutions through research and development investments with the goal of meeting customer needs and maintaining a maintenance renewal rate of approximately 90%. The cash flow generated from our mainframe business supports our growth segments.

We have identified the APM market as a key source of future revenue growth. Mobile, web, big data and cloud applications and the complex distributed applications delivery chain supporting them have become increasingly critical to a company's brand awareness, revenue growth and overall market share. Because of this, the market for APM solutions is significant and growing rapidly. APM includes both software licensed for use on the customer's premises and hosted software delivered through a SaaS model. The SaaS solutions are designed to test and monitor the performance, availability and quality of companies' mobile and web applications. SaaS solutions are delivered to customers entirely through on-demand, hosted technology. The on-premises licensed solutions provide detailed application insight that identifies and helps correct the causes of poor application performance within client devices, network, server, Java, .NET, PHP, big data, mainframe and other environments, and enable continuous tracking of transactions and provide exact identification of performance problems. We are investing in our APM solutions with the goal of providing solutions that are best-in-class within the APM market. Specifically, our investments include: (1) enhancements to our global hosted APMaaS (APM as a service) offering with specific focus on ease of use, time-to-value and data analytics in mobile and cloud application performance capabilities; (2) enhancements to our on-premises solutions that are focused on optimizing application performance and accelerating time to market; and (3) enhancements which combine our on-premises software and SaaS solution into a single platform that provides performance metrics for mobile, web, non-web, and cloud applications in a single solution.

We have also identified the secure collaboration services market, served by our Covisint application services, as a key source of revenue growth. Technology has allowed business communities, organizations and systems to globally connect and share vital information, applications and processes across their internal and extended enterprises. Our Covisint services, which are provided on a platform-as-a-service ("PaaS") basis to customers primarily in the automotive and U.S. healthcare industries, create an environment that simplifies and secures this collaboration atmosphere. The need for these services is growing across all business segments. Our focus in the manufacturing industry is on enabling automakers to connect, engage and collaborate on mission critical business processes with their suppliers, customers and business partners. Our focus in the healthcare industry is on enabling hospitals, physicians and government entities to share electronic patient health and medical records.


Table of Contents
COMPUWARE CORPORATION AND SUBSIDIARIES

As described further in note 12 of the condensed consolidated financial statements, substantially all of the assets and certain liabilities relating to our Changepoint, Uniface and Professional Services segments were sold on January 31, 2014. The results of operations from these segments were included in our consolidated results of operations and financial position as of and for the three and nine months ended December 31, 2013 since we had not committed to the plan to sell as of December 31, 2013. See the Form 8-K filed February 6, 2014 for pro forma financial results related to this disposition.

Changepoint provides a single automated solution for professional services organizations to forecast and plan, as well as manage resources, projects and client engagements. In addition, for project-centric organizations, Changepoint also provides a cohesive and consolidated view of projects, investments, resources and applications to help manage the entire business portfolio.

Uniface is a rapid application development environment for building, renewing and integrating the latest complex enterprise applications.

The professional services segment delivers high quality solutions and resources to our customers that meet their needs from application development through project management.

Quarterly Update

The following occurred during the third quarter of 2014:

Completed the initial public offering of 7.36 million shares of the common stock of our subsidiary Covisint Corporation on October 1, 2013 (the "Covisint IPO"). The shares sold represented 19.7% of Covisint's outstanding shares immediately after the Covisint IPO. The shares began trading on the NASDAQ Global Select Market on September 26, 2013, under the symbol "COVS." Compuware currently owns 80.03 percent of Covisint's outstanding shares.

Total revenue declined $7.4 million during the third quarter of 2014 as compared to the third quarter of 2013 due to an $8.1 million decrease in software license fees and a $741,000 decrease in maintenance fees, partially offset by a $940,000 increase in subscription fees.

Operating margin decreased to 11.9% during the third quarter of 2014 as compared to 15.4% during the third quarter of 2013 due primarily to a decrease in Covisint contribution margins from 9.2% in the third quarter of 2013 to a negative 21.6% in the current quarter, offset in part, by increases in the contribution margins of APM, Mainframe, Changepoint and Professional Services.

Net income attributable to Compuware decreased to $25.0 million during the third quarter of 2014 as compared to $25.3 million during the third quarter of last year. On a non-GAAP basis, excluding stock compensation expense, amortization of purchased software and other acquired intangibles, restructuring charges and certain advisory fees, earnings increased 17.9% in the third quarter of 2014 as compared to the third quarter of 2013. See the "GAAP to non-GAAP Reconciliation" section below for a discussion and reconciliation of net income and earnings per share.

APM segment revenue increased $9.5 million or 11.2% during the third quarter of 2014 as compared to the third quarter of 2013. Contribution margin increased 123% from $8.3 million in the third quarter of 2013 to $18.5 million in the third quarter of 2014. See "Business Segment Analysis" for additional information.


Table of Contents
COMPUWARE CORPORATION AND SUBSIDIARIES

Professional services segment revenue increased $1.4 million or 4.3% during the third quarter of 2014 as compared to the third quarter of 2013. Contribution margin increased from 14.9% to 17.9%. See "Professional Services" for additional information.

Covisint revenue increased $257,000 or 1.1% from the third quarter of 2013. Covisint subscription revenue increased 21.0% primarily due to growth in the customer subscription base, offset in part, by a 30.0% decline in Covisint one-time services. Contribution margin declined to negative 21.6% in the third quarter of 2014 from positive 9.2% during the third quarter of 2013 primarily due to additional stock compensation costs and additional investments made to support the business as it transitions to a stand alone public company. See "Business Segment Analysis" for additional information.

Declared and paid the Company's third quarterly cash dividend of $0.125 per share.

Reached a settlement agreement with Elliott Associates and its affiliates.

Our ability to execute our strategies and achieve our objectives is subject to a number of risks and uncertainties. See "Forward-Looking Statements".

GAAP TO NON-GAAP RECONCILIATION

In an effort to provide investors with additional information regarding the Company's results as determined by U.S. generally accepted accounting principles ("GAAP"), the Company has provided non-GAAP net income and non-GAAP diluted earnings per share. These financial measures exclude the impact of certain items and, therefore, have not been calculated in accordance with GAAP. These non-GAAP financial measures exclude stock compensation expense; amortization of acquired software and intangible assets; restructuring charges; advisory fees associated with certain shareholder actions and business transformation; and the related tax impacts of these items. Each of the non-GAAP adjustments is described in more detail below. The table below provides a reconciliation of each of these non-GAAP measures to its most comparable GAAP financial measure.

We believe that inclusion of these non-GAAP financial measures provides better comparability with our historical financial results and with the results of many of our competitors. In addition, we believe these non-GAAP financial measures are useful to investors because they allow investors to review supplemental information used internally by management to evaluate our financial results. These non-GAAP measures also represent the means by which we communicate our earnings guidance to investors.

While we believe that these non-GAAP financial measures provide useful supplemental information, there are limitations associated with the use of these non-GAAP financial measures. These non-GAAP financial measures are not prepared in accordance with GAAP, are not audited, do not reflect a comprehensive system of accounting and may not be completely comparable to similarly titled measures of other companies due to potential differences in the exact method of calculation between companies. Items such as stock compensation expense; amortization of acquired software and intangible assets; restructuring charges; advisory fees associated with certain shareholder actions and business transformation; and the related tax impacts of these items that are excluded from our non-GAAP financial measures can have a material impact on net income. As a result, these non-GAAP financial measures have limitations and should not be considered in isolation from, or as a substitute for, net income or loss, cash flow from operations or other measures of performance prepared in accordance with GAAP. We compensate for these limitations by using these non-GAAP financial measures as supplements to GAAP financial measures and by reconciling the non-GAAP financial measures to their most comparable GAAP financial measure. We have procedures in place to ensure that these measures are calculated using the appropriate GAAP components in their entirety and to ensure that our performance is properly reflected to facilitate consistent period-to-period comparisons. Management reviews the non-GAAP adjustments on a net-of-tax basis when evaluating our performance. Therefore, we exclude the tax impact of these charges when presenting non-GAAP financial measures.


Table of Contents
COMPUWARE CORPORATION AND SUBSIDIARIES

The following discusses the reconciling items from our non-GAAP financial measures to the most comparable GAAP financial measures:

Stock compensation expense. Our non-GAAP financial measures exclude the compensation expenses required to be recorded by GAAP for equity awards to employees and directors. Although this is a normal recurring expense for us, we believe it is useful in evaluating corporate performance during a particular time period to review the supplemental non-GAAP financial measures excluding this expense because these costs are generally fixed at the time an award is granted, are then expensed over several years and generally cannot be changed or influenced by management in the current period.

Amortization of acquired software and intangible assets. Our non-GAAP financial measures exclude costs associated with the amortization of acquired software and intangible assets. Although this is a normal recurring expense for us, we believe it is useful in evaluating corporate performance during a particular time period to review the supplemental non-GAAP financial measures excluding this expense because these costs are fixed at the time of acquisition, are then amortized over a period of several years after the acquisition and generally cannot be changed or influenced by management in the current period.

Restructuring charges. Our non-GAAP financial measures exclude restructuring charges, and any subsequent changes in estimates as they relate to our ongoing corporate restructuring activities. We believe it is useful in evaluating corporate performance during a particular time period to review the supplemental non-GAAP financial measures excluding restructuring charges in order to provide comparability and consistency with historical operating results.

Advisory fees associated with certain shareholder actions and our business transformation initiative. During the fourth quarter of fiscal 2013, in response to an unsolicited, nonbinding offer from an affiliate of Elliott Associates to purchase the outstanding shares of the Company from a shareholder, the Board of Directors announced its willingness to consider other viable offers. We continue to incur consultant fees to analyze the business, review additional requests for information from other interested parties and to implement business transformation plans. We believe it is useful in evaluating corporate performance during a particular time period to review the supplemental non-GAAP financial measures excluding such costs in order to provide comparability and consistency with historical operating results.


Table of Contents
                     COMPUWARE CORPORATION AND SUBSIDIARIES

Our reconciliation of GAAP to non-GAAP financial information is presented below
(in thousands, except for per share data):

                                                   Three Months Ended December 31,            Nine Months Ended December 31,
                                                     2013                   2012                2013                  2012

Net income                                     $         25,022       $         25,340     $        51,329       $        46,402

Stock compensation (excl. restructuring &
impact of non-controlling interest)                       6,021                  5,484              27,652                20,663
Amortization of purchased software (excl.
impact of non-controlling interest)                       1,970                  2,420               6,729                 7,199
Amortization of acquired intangibles (excl.
impact of non-controlling interest)                       1,789                  1,871               5,383                 5,773
Restructuring expenses (excl. impact of
non-controlling interest)                                 3,681                      -               9,026
Advisory fees                                             7,305                    146              10,438                   146

Total adjustments                                        20,766                  9,921              59,228                33,781

Income tax effect of adjustments                         (7,745 )               (3,002 )           (21,652 )             (10,533 )

Net income before items                        $         38,043       $         32,259     $        88,905       $        69,650


Diluted earnings per share - GAAP              $           0.11       $           0.12     $          0.23       $          0.21

Stock compensation (excl. restructuring &
impact of non-controlling interest)                        0.03                   0.03                0.13                  0.09
Amortization of purchased software (excl.
impact of non-controlling interest)                        0.01                   0.01                0.03                  0.03
Amortization of acquired intangibles (excl.
impact of non-controlling interest)                        0.01                   0.01                0.02                  0.03
Restructuring expenses (excl. impact of
non-controlling interest)                                  0.02                      -                0.04
Advisory fees                                              0.03                      -                0.05

Total adjustments                                          0.10                   0.05                0.27                  0.15

Income tax effect of adjustments                          (0.03 )                (0.01 )             (0.10 )               (0.05 )

Diluted earnings per share before items        $           0.17       $           0.15     $          0.40       $          0.31

Diluted shares outstanding                              221,561                216,872             220,676               219,471


Table of Contents
COMPUWARE CORPORATION AND SUBSIDIARIES

BUSINESS SEGMENT ANALYSIS

The following table sets forth, for the periods indicated, certain business segment operational data. We evaluate the performance of our segments based primarily on contribution margin which is operating profit before certain charges such as restructuring, internal information system support, finance, human resources, legal, facilities, administration and other corporate charges ("unallocated expenses"). Transactions between segments are eliminated. The allocation of income taxes is not evaluated at the segment level. Comparisons are to the comparable period of the prior year. Financial information for our business segments, which includes the portion allocated to non-controlling interest, was as follows (in thousands):

. . .

  Add CPWR to Portfolio     Set Alert         Email to a Friend  
Get SEC Filings for Another Symbol: Symbol Lookup
Quotes & Info for CPWR - All Recent SEC Filings
Copyright © 2014 Yahoo! Inc. All rights reserved. Privacy Policy - Terms of Service
SEC Filing data and information provided by EDGAR Online, Inc. (1-800-416-6651). All information provided "as is" for informational purposes only, not intended for trading purposes or advice. Neither Yahoo! nor any of independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. By accessing the Yahoo! site, you agree not to redistribute the information found therein.