Montgomery Tech Week: Compuware Seeks a Second Chance

In the wake of damaging downgrades, the software company promises strong revenue growth.
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SAN FRANCISCO - When Joseph Nathan, president of Compuware (CPWR) , came to speak at the annual NationsBank Montgomery Tech Week conference Monday, he had a tough sell.

On Jan. 19, Compuware posted earnings of 49 cents a share for the quarter ended Dec. 31, beating estimates by four cents a share. In the next two days,

SoundView Technology's

Jim Mendelson and

Morgan Stanley Dean Witter's

Chuck Phillips downgraded the stock, citing concerns about slower revenue growth. The downgrades pushed the stock down 11% in one day to 62 3/8, a level from which it hasn't recovered. The stock closed at 62 7/8 today.

As Compuware's cheerleader, Nathan came out rooting for his company with gusto. He assured investors that the company intends to boost its top-line revenue with a top-notch strategy. Compuware aims to close "one big-ticket" contract for accelerated maintenance centers, or AMCs, for every quarter in 1999, a feat that should boost revenues by 30% to 40% a year for the next few years, Nathan said.

"Our calendar year 1999 objectives include closing four flagship AMC deals, extending our dominant testing-tool position and taking advantage of consolidation opportunities to deploy services worldwide," Nathan said.

In downgrading Compuware, analysts said revenue growth could slow because of the uncertainties of Y2K-related software. Most companies should be done with testing for Y2K problems later this year, which would decrease demand for Compuware's testing systems. Phillips also said he expects "the degree of margin improvement to abate to more sustainable levels" and that the company's 32.6% operating margin came from "higher billing rates in the consulting business and a better mix of services." (Neither SoundView nor Morgan Stanley has underwritten for Compuware in the past three years.)

The downgrades ignited dissent that continues to burn, both on message boards and among other analysts. Asked about the downgrades, a

Warburg Dillon Read

analyst responded, "Maybe it's poor analytic skills or double digit IQs." Moody's maintains a strong buy on the stock and forecasts Compuware to earn $2.38 per share in the fiscal year ending March 2000. Warburg isn't an underwriter for Compuware.

As if addressing this rift in views, Nathan tried to reassure investors at the conference, saying, "We see higher margin potential." The company had been guiding analysts for mid-20% revenue growth but "for the fiscal year ending March 31, that should be 30% or so, and 32% to 33% going forward." In the first nine months of Compuware's fiscal year, revenues grew 46% on the year.

So what to believe? Well, according to some fund managers here, Compuware is still a good company -- but for a longer-term investment of 18 months or so. In the short term,

Jurika & Voyles

fund manager Nick Moore prefers competitor

BMC Software

(BMCS)

because its growth has been less dependent on Y2K business and should fare better when that business dries up.

"And

BMC will have some new business from its acquisition of

BGS

and

Boole & Babbage

(BOOL)

," he says. BMC recently acquired computer analysis software developer BGS and is expected to close its acquisition of Boole & Babbage this spring to become the third-largest provider of systems management software.

Nathan says Compuware's future growth could be boosted by possible acquisitions in North America and in Europe to help grow the company's services business. He emphasizes that any acquisitions would be accretive immediately.

"That's what Compuware needs to do," Moore says. "If they can find some good acquisitions, it could become interesting again."