September 19, 2007
Ms. Kathleen Collins
Accounting Branch Chief
Division of Corporation Finance
Securities and Exchange Commission
100 F Street, N.E.
Washington, D.C. 20549
Re: Compuware Corporation
Form 10-K for the fiscal year ended March 31, 2007
File No. 000-20900
Dear Ms. Collins:
On behalf of Compuware Corporation, a Michigan corporation (the "Company" or
"Compuware"), I am responding to the Staff's comment letter dated August 16,
2007 with respect to Compuware's Form 10-K for the fiscal year ended March 31,
2007. I have set forth below each question contained in the Staff's comment
letter, followed by our response thereto.
FORM 10-K FOR THE FISCAL YEAR ENDED MARCH 31, 2007
CONSOLIDATED STATEMENTS OF OPERATIONS, PAGE 44
1. WE NOTE YOUR RESPONSE TO PRIOR COMMENT 2 AND THE VARIOUS METHODS USED TO
ALLOCATE REVENUE AMONGST PRODUCTS AND SERVICES FOR INCOME STATEMENT
PRESENTATION PURPOSES WHEN GAAP DOES NOT ALLOW SUCH ALLOCATION FOR REVENUE
RECOGNITION PURPOSES. WITH REGARDS TO SUCH INFORMATION, WE HAVE THE
FOLLOWING ADDITIONAL COMMENTS:
- WHERE YOU SEPARATE PCS FOR TERM LICENSES BASED ON VSOE OF PCS AS
ESTABLISHED FOR YOUR PERPETUAL LICENSES, PLEASE TELL US WHETHER
THESE ALLOCATIONS ARE FOR THE SAME PRODUCT, WHICH MAY BE SOLD AS
EITHER A PERPETUAL OR TERM LICENSE. IF THE PRODUCTS DIFFER, THEN
PLEASE EXPLAIN HOW YOU DETERMINED THAT VSOE OF PCS FOR ONE
PRODUCT CAN BE USED AS EVIDENCE OF VSOE OF PCS FOR ANOTHER
PRODUCT EVEN IF ONLY FOR PRESENTATION PURPOSES.
These allocations are for the same product which may be sold as
either a perpetual or term license.
- FOR ARRANGEMENTS THAT INCLUDE SOFTWARE AND PROFESSIONAL SERVICES
WHERE YOU HAVE DETERMINED THAT VSOE OF FAIR VALUE FOR THE
PROFESSIONAL SERVICES
DOES NOT EXIST, PLEASE EXPLAIN HOW THE SERVICES PROVIDED UNDER
THESE ARRANGEMENTS ARE SIMILAR TO THE SERVICES PROVIDED UNDER
ARRANGEMENTS WHERE YOU WERE ABLE TO ESTIMATE THE NUMBER OF HOURS
TO COMPLETE AND ACCORDINGLY WHERE YOU WERE ABLE TO ESTABLISH
VSOE. IN THIS REGARD, DESCRIBE THE NATURE OF THE SERVICES
PROVIDED IN BOTH ARRANGEMENTS. EXPLAIN, IN DETAIL, THE ACTIVITIES
PERFORMED FOR EACH TYPE OF ARRANGEMENT THAT DISTINGUISHES THEM
SUCH THAT ONE RESULTS IN ARRANGEMENT WHERE YOU ARE ABLE TO
REASONABLY ESTIMATE THE NUMBER OF HOURS TO COMPLETE SUCH SERVICES
AND THE OTHER RESULTS IN ARRANGEMENTS WHERE YOU CANNOT.
Most of our professional services are offered separately with no
software or related PCS. However in some cases we do offer
software with PCS and professional services. In these
arrangements, the professional services provided are for
implementation and training related to the software purchased;
such as, implementation planning, loading of software, training
of customer personnel, data conversion, running test data and
assisting in the development and documentation of procedures.
The general nature of our implementation and training services is
the same for all of our software products: we install and
configure the software and provide training to the customer on
how to use it. However, the scope of the projects may differ
based upon the use of each software product and customer
preferences. To date none of our implementation and training
services have involved significant production, modification or
customization of the software. As further evidence that these
professional services do not involve significant production,
modification or customization of the software, we have third
party providers that provide these services for some customer
arrangements.
We have VSOE for implementation and training services for the
majority of our license arrangements. The implementation and
training services are generally short term and for a specified
number of days (e.g. 5-20 days). However, there are a limited
number of arrangements,isolated to one of our software products,
where we determined, effective October 1, 2005, that VSOE of fair
value for the professional services does not exist. The
professional services provided, while still implementation and
training tend to be longer term (generally delivered within a
year), and typically provide for billing as hours are worked,
based on hourly or daily rates, where the total amount or number
of days are not specified in the arrangement. In these
arrangements, we had not established a history of accurately
estimating how many hours/days we will spend to complete these
projects. While the contracts governing these arrangements
typically provide for time and materials billing, we have had
several instances where we only charged the estimated fees
provided to the customer (i.e. in substance, these were fixed fee
arrangements).
The reason we are unable to estimate total hours to deliver these
projects is because our implementation of these services are
dependent upon customer preferences that involve customer
business processes. When customer business processes are
involved, our ability to lead the customer to an efficient
implementation may impact the hours to deliver the project.
Delays and changes to scope based on changing customer
preferences as they learn more about their business processes
have limited our ability to deliver implementations within a
defined number of hours, not the nature of the implementation and
training services.
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REVENUE RECOGNITION, PAGE 47
2. YOUR RESPONSE TO PRIOR COMMENT NUMBER 2 DESCRIBES ARRANGEMENTS THAT INCLUDE
A PRODUCT WHICH HAS A DIFFERENT VSOE OF FAIR VALUE FOR PCS THAN YOUR OTHER
PRODUCTS. IT IS UNCLEAR TO US WHY YOU ARE UNABLE TO ESTABLISH VSOE OF THE
PCS FOR THESE PRODUCTS WHEN THEY ARE BUNDLED WITH OTHER PRODUCTS. PLEASE
DESCRIBE THESE ARRANGEMENTS IN GREATER DETAIL, EXPLAIN WHY VSOE IS NOT
ESTABLISHED FOR PCS FOR THIS PRODUCT AND REFER TO THE AUTHORITATIVE
GUIDANCE YOU RELIED UPON WHEN DETERMINING YOUR ACCOUNTING.
We recognize revenue using the residual method as described in paragraph 12
of SOP 97-2 (as amended by SOP 98-9) under which the fair value, based on
VSOE, of undelivered elements are deferred and the remaining consideration
is allocated to the license portion and is recognized as revenue upon
delivery. Our VSOE of fair value for PCS is based on a fixed percentage
(currently 18% of the gross license fee, which represents the list price
net of discounts but includes PCS fees) for all of our products except one
particular product for which VSOE of fair value of PCS is a higher
percentage of the gross license fee (currently 25% of the gross license
fee). In situations where this product is licensed with other products, the
arrangement fee should be allocated between the products for which VSOE of
fair value of PCS is 18 percent and the product for which VSOE of fair
value of PCS is 25 percent to determine the amount of PCS revenue to defer.
Since we do not have VSOE of fair value for the license fee portion of any
of our software products because we always sell our products with PCS we do
not have the ability to allocate the gross license fee between the various
software products. We don't think it is allowable, for purposes of revenue
recognition, to allocate based on the list price or stated arrangement
price as such amounts do not represent VSOE of fair value in accordance
with paragraph 10 of SOP 97-2. The following example illustrates an
arrangement in which we are not able to establish the VSOE of fair value of
the PCS element in the arrangement.
Assume we license Product A (list price $390) and Product B (list price
$910) to a customer who agrees to pay us $1,000 for the perpetual license
rights to both products and one year of PCS on both products. The
transaction represents a 23.08% discount
from our list price of $1,300. Assume the VSOE of fair value of PCS on
Products A and B are 25 percent and 18 percent of gross license fees,
respectively.
In order to determine the VSOE of fair value for PCS, the arrangement fee
of $1,000 should be first allocated between products A and B. Then the
appropriate VSOE of fair value rates (i.e. 25 percent for product A and 18
percent for product B) should be applied to the amount allocated to each
product. Since we do not have VSOE of fair value for the license fees for
our software products we do not have an objectively verifiable basis for
allocating the total arrangement fee between the various software products.
Accordingly, we concluded that we can not establish VSOE of fair value of
PCS for arrangements that include our product that has a higher VSOE rate
for PCS.
3. YOUR RESPONSE TO PRIOR COMMENT NUMBER 2 INDICATES THAT WHEN YOU ARE UNABLE
TO ESTABLISH VSOE OF PROFESSIONAL SERVICES, REVENUE FROM THE ARRANGEMENT IS
RECOGNIZED RATABLY OVER THE SERVICE PERIOD. PLEASE INDICATE WHETHER THESE
SERVICES ARE THE ONLY UNDELIVERED ELEMENT OR TELL US WHETHER SUCH
ARRANGEMENTS INCLUDE OTHER SERVICES (I.E. PCS). IF THESE ARRANGEMENTS
INCLUDE OTHER UNDELIVERED ELEMENTS, THEN PLEASE EXPLAIN HOW YOUR POLICY
COMPLIES WITH PARAGRAPH 12 OF SOP 97-2. ALSO, CONSIDERING YOU ARE UNABLE TO
REASONABLY ESTIMATE THE NUMBER OF HOURS REQUIRED TO COMPLETE THE
PROFESSIONAL SERVICES IN THESE ARRANGEMENTS, TELL US HOW YOU DETERMINE THE
ESTIMATED SERVICE PERIOD OVER WHICH TO RECOGNIZE REVENUE.
For transactions we are unable to establish VSOE of professional services,
we have both professional services and PCS as undelivered elements in the
arrangement (these type of arrangements are described in more detail in the
response to question number one, above). These arrangements which include
both products and professional services and where we are unable to
establish VSOE of professional services, relate to one of our product
offerings, and are an insignificant percentage of our business. In FY08
(April - June), FY07 and FY06 (October - March), we recognized
approximately $1.4, $4.6 and $1.0 million in license fees, $0.4, $1.0 and
$0.1 million in maintenance fees and $0.6, $4.0 and $0.7 million in
professional services fees, respectively, related to such transactions
(representing 0.9%, 0.8% and 0.3% of total revenues in the periods captured
for FY08, FY07 and FY06, respectively).
We do not recognize any revenue up-front for such arrangements. All revenue
is recognized over time, once the software has been delivered. License fees
are generally recognized over the PCS term; PCS over the PCS term in the
arrangement (generally longer than the services period); and professional
services based on our VSOE rates multiplied by the actual hours worked
during that period. As further discussed below we acknowledge that we did
not recognize revenues appropriately.
A literal read of SOP 97-2 paragraph 12 indicates that when VSOE does not
exist for the allocation of revenue to the various elements of the
arrangement, all revenue from the arrangement should be deferred until the
earlier of the point at which (a) such
sufficient vendor-specific objective evidence does exist or (b) all
elements of the arrangement have been delivered. However, we believe (as
supported by Ernst & Young's Software Revenue Recognition, an
Interpretation ) that acceptable alternatives exist related to this issue.
Following is an excerpt from Q&A 12-2 of E&Y's software manual which
describes the "Combined Services" approach.
A literal read of paragraph 12 would indicate that if VSOE of fair
value does not exist for both undelivered elements, no revenue should
be recognized for an arrangement including a software license, PCS and
services that are not essential to the licensed software until either
VSOE of fair value is developed, all elements have been delivered, or
only one undelivered element (either PCS or services) remains.
However we believe when arrangements include both PCS and services
that otherwise qualify for separate accounting under SOP 97-2 but for
which VSOE of fair value does not exist, the following accounting
policies are acceptable alternatives. Because the following represents
an accounting policy election, the policy selected by a vendor should
be consistently applied and, if material, disclosed in the footnotes
to the financial statements.
- The "Combined Services" approach. Using this approach, the entire
arrangement fee is recognized ratably over the period during
which the services are expected to be performed or the PCS
period, whichever is longer, once the software has been delivered
and the provision of both services has commenced, if all of the
other basic revenue recognition criteria of SOP 97-2 have been
met.
In such situations, the remaining undelivered elements of PCS and
non-essential services are all services in the broader usage of
that term. Accordingly, we believe that recognizing the revenue
over the longest period that services will be provided to the
customer is consistent with the provisions of paragraphs 58 and
67 of SOP 97-2.
Paragraph 58 addresses the accounting for arrangements when
sufficient VSOE of fair value does not exist to allocate
consideration to the elements included in the arrangement and the
only undelivered element is PCS, concluding that the entire
arrangement fee should be recognized ratably over the period that
PCS services will be provided to the customer.
Similarly, paragraph 67 addresses the accounting for arrangements
when sufficient VSOE of fair value does not exist to allocate
consideration to the elements included in the arrangement and the
only undelivered element is services that are not essential to
licensed software, concluding that the entire arrangement fee
should be recognized as the services are performed. If no pattern
of performance is discernible, the entire arrangement fee should
be
recognized on a straight-line basis over the period during which
the services are performed.
We believe the guidance in these paragraphs clearly indicates
that AcSEC's intent was that if VSOE of fair value does not exist
such that the multiple elements included in an arrangement cannot
be accounted for separately, and the remaining undelivered items
are services, revenue should be recognized over the period the
services will be delivered.
In addition to the E&Y guidance noted above, we also considered paragraph
6.021 (excerpt below) of KPMG's Software Revenue Recognition manual which
provides additional support for the "Combined Services" approach.
Paragraph 12 of SOP 97-2 indicates that, if VSOE of fair value does
not exist for PCS and, if the only undelivered element is PCS, the
entire fee should be recognized ratably over the term of the PCS
arrangement. Paragraph 12 of SOP 97-2 further indicates that, if VSOE
of fair value does not exist for services that do not involve
significant production, modification, or customization of software
and, if the only undelivered element is services, the entire fee
should be recognized over the period during which the services are
expected to be performed. When VSOE of fair value does not exist for
PCS and services that otherwise qualify for separate accounting under
SOP 97-2, we believe the following accounting policies are acceptable
alternatives:
1. Because the remaining undelivered elements are both
services, recognize the entire arrangement fee ratably
over the period during which the services are expected
to be performed or the PCS period, whichever is longer,
beginning with delivery of the software, provided that
all other revenue recognition criteria in SOP 97-2 are
met.
2. Defer all revenue until either the services or the PCS
is the only undelivered element. If the PCS term
expires before the services are completed, the entire
arrangement fee would be recognized over the remaining
period during which the services are completed
(beginning upon expiration of the PCS term), provided
that all other revenue recognition criteria in SOP 97-2
are met. If the services are completed before the PCS
term expires, the entire arrangement fee would be
recognized ratably over the remaining PCS term
(beginning upon completion of the services), provided
that all other revenue recognition criteria in SOP 97-2
are met.
Because this is a policy election, the policy selected by the vendor
should be consistently applied and disclosed in the accounting policy
note if material to the financial statements.
We acknowledge that our revenue recognition methodology is not consistent
with the "Combined Services" approach but as discussed below did not result
in material differences. In our arrangements, the total professional
services fees are not generally stated in the arrangement but rather are
based on an hourly or daily billing rate which is stated in the contract,
with an estimate of the total hours to complete the project. We have been
recognizing professional services revenue, based on the VSOE rates
multiplied by the actual hours worked during that period rather than
ratably over the longer of the service period or PCS period. With respect
to license fee recognition we generally reflected such revenue ratably over
the longer of the services or PCS term.
We have quantified the impact on our financial statements had we applied
the "Combined Services" approach according to the E&Y and KPMG guidance
which indicates all elements of the arrangement should be recognized
ratably over the longer of the PCS or services period, or until all
undelivered elements have VSOE. We have performed a comprehensive analysis
of the difference between the "Combined Services" approach and the
methodology we followed. Our analysis indicated that revenue for the
periods reviewed was understated by $363,000 in the first quarter of FY08,
overstated by $1,331,000 in FY07 and understated by $249,000 in FY06
(attached as Exhibit A is a schedule that presents the difference by
quarter and financial statement line item). We will record a cumulative
catch-up adjustment of $719,000 to correct this error. This adjustment will
increase license fees by $107,000, reduce maintenance fees by $34,000,
and reduce professional services fees by $792,000 in the second
quarter of FY08. Based on Staff Accounting Bulletin No. 99, Materiality,
and APB Opinion No. 28, Interim Financial Reporting, we have considered
both the qualitative and quantitative effects of this error on the
financial statements for the fiscal years ended March 31, 2007 and March
31, 2006, and for the quarter ended June 30, 2007, as well as the effects
of including the error correction in the quarter ended September 30, 2007,
and have concluded that the effects on the financial statements are not
material.
We acknowledge that we are responsible for the adequacy and accuracy of the
disclosure in all Company filings. We understand that neither the staff's
comments nor changes we make to our disclosure in response to staff comments
foreclose the Commission from taking any action with respect to our filings and
that the Company may not assert staff comments as a defense in any proceedings
initiated by the Commission or any person under the federal securities laws of
the United States.
Please feel free to call me at (313) 227-7372 with any questions or if we can be
of any assistance.
Very truly yours,
By: /s/ Laura L. Fournier
---------------------------------
Laura L. Fournier
Senior Vice President, Treasurer and
Chief Financial Officer
EXHIBIT A
COMPUWARE CORPORATION
SUMMARY OF IMPACT ON REVENUE SUBJECT TO THE "COMBINED SERVICES" APPROACH
(IN THOUSANDS OF USD)
FY06 FY07
---------------------- ------------------------------------------
FY FY FY08 CUMULATIVE
Q3 Q4 Total Q1 Q2 Q3 Q4 Total Q1 EFFECT
---- ------ ------ ------ ------ ------ ------ ------ ----------- ----------
AS REPORTED AS REPORTED AS REPORTED
SOFTWARE LICENSE FEES $366 $ 682 $1,048 $ 628 $1,484 $ 913 $1,559 $4,584 $1,390 $ 7,022
MAINTENANCE FEES 26 62 88 167 237 267 330 1,001 396 1,485
PROFESSIONAL SERVICES
FEES 377 355 732 565 1,119 1,414 864 3,962 639 5,333
---- ------ ------ ------ ------ ------ ------ ------ ------ -------
TOTAL 769 1,099 1,868 1,380 2,840 2,594 2,753 9,547 2,425 13,840
AS ADJUSTED AS ADJUSTED AS ADJUSTED
SOFTWARE LICENSE FEES 232 1,221 1,453 411 847 1,321 1,701 4,280 1,396 7,129
MAINTENANCE FEES 26 62 88 169 236 259 317 981 382 1,451
PROFESSIONAL SERVICES
FEES 200 376 576 222 643 1,143 947 2,955 1,010 4,541
---- ------ ------ ------ ------ ------ ------ ------ ------ -------
TOTAL 458 1,659 2,117 802 1,726 2,723 2,965 8,216 2,788 13,121
DIFFERENCE DIFFERENCE DIFFERENCE
SOFTWARE LICENSE FEES 134 (539) (405) 217 637 (408) (142) 304 (6) (107)
MAINTENACE FEES -- -- -- (2) 1 8 13 20 14 34
PROFESSIONAL SERVICES
FEES 177 (21) 156 343 476 271 (83) 1,007 (371) 792
---- ------ ------ ------ ------ ------ ------ ------ ------ -------
TOTAL $311 $ (560) $ (249) $ 558 $1,114 $ (129) $ (212) $1,331 $ (363) $ 719
==== ====== ====== ====== ====== ====== ====== ====== ====== =======
EFFECT AS A PERCENTAGE
OF TOTAL REVENUE 0.1% -0.2% 0.0% 0.2% 0.4% 0.0% -0.1% 0.1% -0.1%
==== ====== ====== ====== ====== ====== ====== ====== ======