Compuware Plunges After Announcement It Will Miss Estimates

Compuware (CPWR) stunned investors Wednesday, warning it will miss earnings expectations for the fourth quarter ended March 31 by at least 57% due to unexpected problems selling its software.

Wall Street retaliated, sending Compuware's stock into a nosedive. By late Wednesday morning, the company was recently down 7 9/16, or 38%, at 12 1/2. (Compuware closed down 8 1/8, or 41%, to 11 15/16.)

Analysts said Compuware's stock has performed poorly recently because investors have been skeptical about the company's services business.

"This is the first quarter where we've seen a material shortfall in the products sector," said Anne Meisner, an analyst for Goldman Sachs. The firm rates the stock outperform based on valuation and has not done recent underwriting for Compuware. "Clearly the magnitude of this miss was a surprise for everyone."

For the fourth quarter ended March 31, the company now expects to report earnings of 13 to 15 cents a diluted share on revenues of $566 million to $581 million. Christopher Norris, a company spokesman, said Compuware has not compiled an estimate for the total amount it will report as earnings. Analysts polled by First Call/Thomson Financial had predicted earnings of 35 cents a diluted share. The company said it would issue a complete report on May 1.

"We're obviously quite disappointed with our performance during the fourth quarter," said Beth Chappell, the company's executive vice president, in a statement.

The company said when it finishes its accounting, software license fee revenues will total $193 million to $198 million, maintenance revenues will total $113 million to $118 million and professional services revenues will total $260 million to $265 million.

The Farmington Hills, Mich.-based company divides its business between two main segments: selling software for testing, managing mainframe computers and computer networks, and systems analysis and consulting. Customers include Microsoft (MSFT)and Bank One (ONE).

Analysts said the services sector has suffered for several quarters, and, to some degree, investors had expected a soft quarter. Since reaching a 52-week high of 40 in late December, the stock has slid to the 20s, where it sat for much of the last three months.

Still, the warning came as a shock on Wall Street. Analysts said company officials themselves sounded surprised software sales had slumped at the end of the quarter and were unwilling or unable to say whether poor execution or slumping demand had caused deals to fall through.

"The company has clearly lost the ability to predict its quarterly business," said Charles E. Phillips, an analyst for Morgan Stanley Dean Witter. The firm rates the stock neutral. It has done underwriting for Compuware in the last 10 years, but not recently. "They just have basic execution and forecasting problems.

The problem may stem solely from slumping demand for mainframes as businesses shift to using open platforms, including the networks used to facilitate electronic commerce, analysts said. But even if Compuware is plagued by industrywide changes and not by poor execution, the consequences may be less dire for competitors like Oracle (ORCL)and Computer Associates, analysts said.

For Compuware, "the greater answer is to focus on higher growth markets, not just mainframe markets," Phillips said.

In the consulting business, growth has been difficult to attain as the company works to retrain its staff members for work on open platforms.

"Demand has been falling off for mainframe professionals and it seems logical that demand for mainframe products would fall as well," said Meisner, the Goldman Sachs analyst.

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