November 29, 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 November 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
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CONSOLIDATED STATEMENTS OF OPERATIONS, PAGE 44
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1. WE NOTE YOUR RESPONSE TO COMMENT 2 IN YOUR LETTER DATED JULY 20, 2007
REGARDING INCOME STATEMENT PRESENTATION FOR ARRANGEMENTS THAT INCLUDE
SOFTWARE AND PROFESSIONAL SERVICES WHERE YOU HAVE DETERMINED THAT VSOE OF
FAIR VALUE FOR THE PROFESSIONAL SERVICES DOES NOT EXIST. YOUR RESPONSE
INDICATES THAT THE COMPANY ALLOCATES REVENUES TO PROFESSIONAL SERVICES BASED
ON HOURLY RATES AND THE REMAINDER GOES TO LICENSE REVENUE. IN YOUR CURRENT
RESPONSE TO OUR PRIOR COMMENT 3 TO OUR LETTER DATED AUGUST 16, 2007, THE
COMPANY NOW ACKNOWLEDGES THAT IN ADDITION TO THE LICENSE AND PROFESSIONAL
SERVICES ELEMENT, THESE CONTRACTS ALSO INCLUDE PCS. IT IS NOT CLEAR FROM
YOUR ORIGINAL RESPONSE, HOWEVER, WHERE OR HOW YOU ALLOCATE THE REVENUES FOR
SUCH ARRANGEMENTS TO EACH ELEMENT (LICENSE, PROFESSIONAL SERVICES AND PCS).
As indicated in our previous letters, we occasionally enter into software
arrangements combined with professional services where it is not possible to
reasonably estimate the hours to complete the professional services portion
of the arrangement. While the contracts governing these arrangements
typically provide for time and materials billing, we had a history of only
charging the estimated fee provided to the customer (i.e. in substance,
these are fixed fee arrangements). In situations where we can not reasonably
estimate the professional services hours, we have concluded that VSOE of
fair value of the professional services does not exist. Therefore, as
mentioned in our previous response, we can not separate the various elements
into separate units of accounting. Accordingly, we recognize all arrangement
consideration as a single unit of accounting. We do not recognize any
revenue up-front for such arrangements. All revenue is recognized over time.
Even though we recognize revenues related to these arrangements as a single
unit of accounting, for presentation purposes we allocate revenues to the
various elements (license, professional services and PCS) that comprise the
single unit of accounting. The revenue recognizable in each reporting period
is allocated between the various elements as follows:
o We first allocate a portion of the revenue that is recognizable in the
period to the undelivered elements (professional services and PCS) for
income statements classification purposes as follows:
o Since we have established VSOE of fair value for professional
services on an hourly or daily rate basis, we use this VSOE of
fair value for professional services (hourly or daily rates when
sold separately) multiplied by the actual hours incurred during
the period as our best estimate of fair value for classifying
revenue as professional services.
o Since we have established VSOE of fair value for PCS an amount
equal to the VSOE of fair value of PCS is classified as PCS
revenues.
o The remaining portion of the revenue that is recognizable during the
period is classified as license revenue.
2 WE NOTE YOUR RESPONSE TO OUR PRIOR COMMENT 2 WHERE YOU EXPLAIN WHY YOU ARE
UNABLE TO DETERMINE VSOE OF PCS FOR ARRANGEMENTS THAT INCLUDE PRODUCTS WITH
DIFFERENCE PCS RATES. IN YOUR RESPONSE TO COMMENT 2 IN YOUR LETTER DATED
JULY 20, 2007, THE COMPANY PROVIDED AN EXAMPLE OF THE CALCULATIONS USED TO
ALLOCATE REVENUE FROM THESE ARRANGEMENTS AMONGST PRODUCT AND SERVICES FOR
INCOME STATEMENT PRESENTATION PURPOSES. WHILE WE NOTE THAT THE COMPANY
ALLOCATES ANY DISCOUNT PERCENTAGE PROPORTIONATELY TO THE LICENSE FEE LIST
PRICES AND THEN APPLIES THE APPLICABLE PCS RATES, IT APPEARS, THAT THE
DISCOUNT FROM THE LIST PRICE IS CALCULATED AS A PERCENTAGE OF THE LICENSE
FEE LIST PRICE TO THE TOTAL CONTRACT PRICE AND DOES NOT FACTOR IN THE PCS
FEES IN DETERMINING SUCH DISCOUNT. PLEASE CONFIRM. IF THIS IS TRUE THEN IT
WOULD SEEM THAT THE PROPER CALCULATIONS WOULD BE TO FIRST CALCULATE THE PCS
APPLICABLE TO THE LIST PRICE OF EACH LICENSE TO COME UP WITH A TOTAL GROSS
CONTRACT VALUE AND THEN DETERMINE THE DISCOUNT FROM THE TOTAL GROSS VALUE
(LICENSE AND PCS INCLUDED). THE DISCOUNT RATE WOULD THEN BE APPLIED THE LIST
PRICE OF THE LICENSES AND THEN THE PCS RATES WOULD BE APPLIED TO THE
DISCOUNTED LIST PRICE. IF YOU AGREE WITH THE STAFF'S CALCULATIONS, THEN
PLEASE EXPLAIN HOW YOU CONSIDERED INCLUDING THE PCS FEES IN YOUR
CALCULATIONS OR TELL US IF YOU PLAN TO REVISE YOUR CALCULATIONS ACCORDINGLY.
We believe our current approach is consistent with the Staff's calculations.
Our VSOE of fair value for PCS is based on a fixed percentage of the gross
license fee. The gross license fee represents what a customer is charged for
the license and the first year of PCS, net of any discounts. Our definition
of the gross license fee is the same as what you have characterized as gross
contract value less any discounts. As such, the discount percentage in our
calculations does factor in the PCS fees in the arrangement.
To illustrate, please refer to the example in our letter dated September 19,
2007 and repeated below:
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 your comment you indicate that "...the proper calculations would be to
first calculate the PCS applicable to the list price of each license to come
up with a total gross contract value and then determine the discount from
the total gross value (license and PCS included)".
Our methodology is consistent with this approach. The list prices of $390
for Product A and $910 for Product B relates to both the license fee and the
first year of PCS. Therefore the gross contract value (before any discounts)
is $1,300. The amount charged the customer is $1,000 for both the license
and first year PCS rights, representing a discount of 23.08% (the same as in
our example).
Your comment further indicates that "The discount rate would then be applied
to the list price of the licenses and then the PCS rates would be applied to
the discounted list price."
Consistent with your comment, once we have determined the discount rate we
would then apply it against the list price of licenses (which list price
includes the first year of PCS) and then the PCS rates would be applied to
the discounted list price.
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
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Laura L. Fournier
Senior Vice President, Treasurer and
Chief Financial Officer