Compuware (CPWR)

Q2 2012 Earnings Call

October 20, 2011 5:00 pm ET

Executives

Laura L. Fournier - Chief Financial Officer, Chief Accounting Officer, Executive Vice President and Treasurer

Lisa Elkin - Investor Relations

Joseph Angileri - President and Chief Operating Officer

Robert C. Paul - Chief Executive Officer and Director

Analysts

James Derrick Wood - Susquehanna Financial Group, LLLP, Research Division

Gary Spivak - Noble Financial Group, Inc., Research Division

Rob D. Owens - Pacific Crest Securities, Inc., Research Division

Mike Latimore - Northland Securities Inc., Research Division

Aaron Schwartz - Jefferies & Company, Inc., Research Division

S. Kirk Materne - Evercore Partners Inc., Research Division

Presentation

Operator

Hello, and welcome to the Compuware Corporation Second Quarter Results Teleconference. At the request of Compuware, this conference is being recorded for instant replay purposes. At this time, I'd like to turn the conference over to Ms. Lisa Elkin, Vice President of Communications and Investor Relations for Compuware Corporation. Ms. Elkin, you may begin.

Lisa Elkin

They very much, Carey, and good afternoon, ladies and gentlemen. With me today are Bob Paul, Chief Executive Officer; Joe Angileri, President and Chief Operating Officer; Laura Fournier, Executive Vice President and Chief Financial Officer; and Pat Stayer, Executive Vice President, Worldwide Solutions.

Certain statements made during this conference call that are not historical facts, including those regarding the company's future plans, objectives and expected performance are forward-looking statements within the meaning of the federal securities laws. These forward-looking statements represent our outlook only as of the date of this conference call. While we believe any forward-looking statements we have are reasonable, actual results could differ materially since the statements are based on current expectations and are subject to risks and uncertainties. These risks and uncertainties are discussed in the company's reports filed with the Securities and Exchange Commission. You should refer to and consider these factors when relying on such forward-looking information. The company does not undertake and expressly disclaims any obligation to update or alter its forward-looking statements, whether as a result of new information, future events or otherwise, except as required applicable law.

I will now turn the call over to Bob, Joe and Laura who will provide details about the quarter and other Compuware business activities. Following the remarks, we will then open the call to your questions. Bob?

Robert C. Paul

Thanks, Lisa. Compuware posted a solid Q2 featuring year-over-year revenue growth of more than 15% to $261 million, reaching strong momentum in all top line revenue categories. Software license fees increased more than 35% year-over-year to $62 million, maintenance and subscription fees grew 5% year-over-year to $128 million, driven by our ongoing commitment to deliver exceptional customer value at every level of business.

Professional services revenue increased nearly 16% year-over-year to $53 million as our offerings in high demand areas like mobility, virtualization and cloud-based technologies drive new business. At $0.10 per share, we're pleased with this level of earnings and we have the opportunity to do much better.

To more effective leverage our positive operating results, we're applying a laser focus to improving margins, a topic on which Joe will provide more color later in the call. Our recently completed 3-year planning process gives me great optimism that we can substantially improve company margins by fiscal year '14. We'll provide additional details around our margin and revenue plans for next 3 years at our financial analyst and investor day on December 8 in New York City.

As with the last quarter, I will share details with you on the performance of these business units. The mainframe business unit produced future revenues of $119 million and 80% contribution margin, revenues were up 16% year-over-year. Looking forward, 2 of our top 15 mainframe renewals have closed with 4 more expected this quarter. Given these business and market conditions, we're revising our guidance for this fiscal year to show a slight growth in total mainframe revenue. We also believe that soon with dynaTrace's unique pure path capability extending into the mainframe, we have the potential to help the world's largest mainframe organizations understand the specific load impact of Web, mobile and cloud-based applications on their mainframe systems. The dynaTrace team is collaborating with the original core Abend-AID team on doing -- bringing this solution to market. We hope to have the solution in the field by the end of the calendar year.

The Compuware APM business unit including dynaTrace produced $63 million of revenue in Q2, with a margin comparable to Q1 at minus 27%. Total revenues, including dynaTrace, grew 11% year-over-year. As we have now integrated and sell the dynaTrace and on-premise solutions together, we have combined them in our financial statements. With dynaTrace on-premise license revenues were essentially flat compared to a strong Q2 last year at $18 million. Subscription revenues increased about 5% year-over-year from Q2 last year to $19 million. With consistent win rates and a clear lead over the competition, our APM business has seen a remarkable uptick in overall pipeline, particularly related to dynaTrace. The overall dynaTrace pipeline forecast at the close of fiscal year has grown 128% since the acquisition date. In the last few weeks, the Compuware sales team has added 103 new dynaTrace opportunities to the pipeline.

We're still evaluating when this activity will result in close agreements, but we are working hard to optimize our results. We provide a complete dynaTrace training to the entire APM sales team, and we will continue to monitor pipeline growth weekly. For the fiscal year, including dynaTrace, we expect to deliver a nearly 35% increase in combined APM new license.

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