EXHIBIT 99.2
FINAL TRANSCRIPT
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Jan. 25. 2007 / 5:00PM ET, CPWR - Q3 2007 Compuware Corporation Earnings
Conference Call
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FINAL TRANSCRIPT
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Thomson StreetEvents(SM)
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Conference Call Transcript
CPWR - Q3 2007 Compuware Corporation Earnings Conference Call
Event Date/Time: Jan. 25. 2007 / 5:00PM ET
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FINAL TRANSCRIPT
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Jan. 25. 2007 / 5:00PM ET, CPWR - Q3 2007 Compuware Corporation Earnings
Conference Call
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CORPORATE PARTICIPANTS
Lisa Elkin
Compuware Corporation - VP Compuware Communications and IR
Laura Fournier,
Compuware Corporation - CFO, CAO, Treasurer and SVP
Hank Jallos
Compuware Corporation - President and COO of Compuware Products
Andy Trestrail
Compuware Corporation - President and COO, Services
Bob Paul
Compuware Corporation - President and COO, Covisint Division
CONFERENCE CALL PARTICIPANTS
Kirk Materne
Bank of America Securities - Analyst
Aaron Schwartz
J.P. Morgan - Analyst
Kevin Buttigieg
A.G. Edwards & Sons, Inc - Analyst
PRESENTATION
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Operator
Hello, and welcome to the Compuware Corporation third 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.
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Lisa Elkin - Compuware Corporation - VP Compuware Communications and IR
Thank you very much, Doug, and good afternoon, ladies and gentlemen. With me
this afternoon are Laura Fournier, Senior Vice President and Chief Financial
Officer; Hank Jallos, President and Chief Operating Officer of Products; Andy
Trestrail, President and Chief Operating Officer of Professional Services; Bob
Paul, President and Chief Operating Officer of Covisint; and Tom Costello,
Senior Vice President of Human Resources, General Counsel and Secretary.
Certain statements made during this 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 made are reasonable,
actual results could differ materially since the statements are based on our
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 by applicable law.
For those of you who do not have a copy, I will begin by summarizing the press
release. Laura, Hank, Andy and Bob will then provide details about the quarter
and other Compuware business activities. We will then open the call to your
questions. Compuware earns $0.11 per share in Q3; Distributed products license
fees increased 10.5% year over year.
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Jan. 25. 2007 / 5:00PM ET, CPWR - Q3 2007 Compuware Corporation Earnings
Conference Call
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Compuware today announced financial results for its third quarter, which ended
December 31, 2006. Compuware reports third quarter revenues of $315.1 million,
compared to $305.9 million in the third quarter of the previous fiscal year. In
the quarter, Compuware produced net income of $36.5 million, Compuware earned
$0.11 per share of diluted computation in Q3, compared to $0.10 per share in Q3
of fiscal 2006, based upon 343.1 million and 388.3 million shares respectively.
During the Company's third quarter, software license fees were $86 million,
compared to $83.3 million in the same quarter of fiscal 2006. Maintenance fees
were $114.4 million, compared to $107.6 million in Q3 of the previous fiscal
year. Professional services fees were $114.7 million, compared to $115 million
in the third quarter last year. I would now like to turn the call over to Laura.
Laura?
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Laura Fournier, - Compuware Corporation - CFO, CAO, Treasurer and SVP
Thank you, Lisa. The third quarter saw strong results across Compuware's key
lines of business. We are encouraged by the continued double digit growth in
distributed products license revenue and by the rebound in mainframe license
fees. Further emphasizing the quality of this increase in software license
revenue, Compuware deferred more license revenue than it recognized in the
quarter. Maintenance revenue was also very strong this quarter. While
professional services results were modestly lower year over year, we remain
optimistic about the pipeline and about the long-term potential of that
business.
The Company's cash flow and balance sheet remains strong. Operating cash flow
for the third quarter came in at $20.8 million. For the year, we continue to
expect cash flow from operations to be around $200 million. As of December 31,
our cash and investments totaled approximately $590 million.
As with last quarter, the reduction in the Company's cash and investments is
primarily related to Compuware's aggressive stock buyback program. During Q3,
Compuware purchased approximately $215 million of Compuware stock or 25.5
million shares. Year to date for fiscal year '07, we have purchased
approximately $405 million of Compuware stock or 51.8 million shares. We will
continue to repurchase shares for the remainder of the fiscal year.
You may notice an increase in the Company's G&A expense line. The primary reason
for this increase is a one-time contribution of $5 million from Compuware to the
Detroit Riverfront Conservancy. We believe this donation will not only support a
worthy cause but also further strengthen Compuware's relationships and business
partnerships with key municipal and business organizations based in Detroit.
In terms of guidance, we expect the Company will generate EPS for the fiscal
year just below the low end of our previously provided range. Our distributed
license numbers continue to show growth momentum. We expect the revenue growth
percentage to trend toward the high teens or low 20's for the fiscal year.
Compuware's mainframe license revenue continues to track to our guidance, which
was flat for Q3 and Q4, compared to the last six months of fiscal year '06.
Please keep in mind that as historically been the case, the mainframe software
business remains somewhat unpredictable.
We continue to expect professional services revenue for the year to be
relatively flat, with margins in the 10% to 11% range. In terms of Compuware's
overall margin and expense structure, the Company is taking a hard look at
expenses across the board as we move forward with planning for fiscal year '08.
We expect that you will start to see improvements in overall margins in the next
fiscal year. I will now turn the call over to Hank.
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Hank Jallos - Compuware Corporation - President and COO of Compuware Products
Thanks, Laura. Highlighted by year over year, as well as significant sequential
growth in distributed license sales, we are pleased with the overall performance
of the products division in the third quarter. Even more encouraging is the fact
that this growth was led by Compuware's two primary distributed
products--Vantage and Changepoint. Vantage continues to perform well and we see
no reason why this trend should not continue going forward. In fact, we're
confident that Vantage growth with strengthen, particularly in light of the
recent acquisition of Proxima Technology.
With this acquisition, Compuware added business service management capabilities
to our already-powerful Vantage solution, opening up a new capability for a very
large worldwide customer base. We are very excited that the Proxima technology
assets and the organization are now a part of Compuware. This acquisition is
very important as we grow and transition our products business to be more
focused on higher value solutions.
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Jan. 25. 2007 / 5:00PM ET, CPWR - Q3 2007 Compuware Corporation Earnings
Conference Call
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We're equally encouraged by the performance of our Changepoint solution, which
experienced strong sequential growth and outstanding year-over-year growth.
During the quarter we added several new enterprise clients to our growing list
of Changepoint customers and the pipeline remains strong. As you can see from
the numbers, mainframe license performance was flat year over year at $47.9
million, while growing nearly 71% sequentially. North America did well, due in
large part to the strength of our relationship with our customers and the
renewals of our ELAs. Central Europe and our international business also
performed very well. Competition in the mainframe market remains intense but we
continue to be successful by promoting the value of our solutions that we
deliver.
We've experienced success and are seeing a great deal of opportunity with our
data privacy solution. And we are already seeing significant interest in our
recently announced application audit offering. For the fourth quarter, we
anticipate mainframe license sales coming in relatively flat year over year. But
as always, we remain cautious in our forecast due to the inherent choppiness of
this business. Maintenance renewals continue to be a source of strength for the
Company, as our clients regularly renew their maintenance contracts for both
mainframe and distributed products. Our maintenance revenue increased 6.3% for
the quarter.
Our third party channel partners also remain a very important part of the
Company's strategy. During the quarter, partners contributed or influenced
approximately 34% of the total distributed revenue. During the quarter, we made
significant progress with our test factory solution in closing a partnership
agreement with ATOS Origin. The agreement enables ATOS Origin to execute their
strategic initiatives to industrialize their QA delivery facilities by
implementing the Compuware test factory. This multi-million, multi-year
agreement enables ATOS to deploy the test factory solution throughout their
global organization, with the first deployments beginning in the UK and France.
And now, I'd like to turn it over to Andy.
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Andy Trestrail - Compuware Corporation - President and COO, Services
Thanks, Hank. The Compuware professional services revenue and contribution
margin for the quarter were relatively flat both sequentially and year over year
as the business continues to stabilize. We remain focused on executing our
growth strategy both in terms of revenue and margin. As I've previously
discussed, this strategy revolves around delivering higher margin value-added
and product-related services. And we are making progress on this front.
For example, in Q3, we signed an agreement with a large airline in the
Asia-Pacific region to deliver our CARS offering, which will instill visibility,
traceability and process control into our client's application quality efforts.
This win is a tremendous example of how Compuware can provide a complete
solution, which includes products, services and partner collaboration. I want to
mention that we beat out two large providers both with which bid with a key QA
competitor.
We also are extremely optimistic about how our test factory solution will help
deliver our service's growth strategy. Hank already mentioned, from a partner
perspective, that ATOS Origin has invested in a Compuware test factory solution
but there's a services side to this story, as well. Compuware will also provide
ATOS with significant services support to help them implement the solution.
Again, another example of the complete solution Compuware can provide and the
synergy of our products and services business.
We are also seeing increasing interest in our data privacy and legacy
modernization solutions, which have the potential to become substantial growth
drivers for us. Many customers are faced with significant risks from these
fronts and our unique solutions ensure both quality and security while reducing
their total cost of ownership. Finally, across the spectrum of our services
portfolio, the sales pipeline is strong and growing and we fully expect to see
stronger results from this progress. Thank you. Bob?
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Bob Paul - Compuware Corporation - President and COO, Covisint Division
Thanks, Andy. Compuware Covisint achieved 83.8% year over year revenue growth
this quarter. These impressive results were supported by the accomplishment of
some major delivery milestones. These included completing the GM global supply
communications systems. We went live on the GMAC employee portal system. And
successfully launching the Blue Cross/Blue Shield in Michigan and Delphi
security platforms. Furthermore, Covisint went live on the global JCI supplier
portal platform and successfully initiated the first phase of a strategic
security program with the United States Department of Justice. All of these
projects will drive future subscription revenue.
As new customers Covisint gained some additional strategic accounts in the
automotive and logistics vertical markets this quarter. These new customers
include household names such as Volkswagen of America, Penske and Cooper
Standard, as well as a number of smaller suppliers. Covisint's penetration of
the health care vertical continues to increase. This market shows great promise
for our business. On the heels of winning the best Demonstration of Value and
Return On Investment Award at the Gartner Healthcare Summit, we signed a number
of new strategic
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Jan. 25. 2007 / 5:00PM ET, CPWR - Q3 2007 Compuware Corporation Earnings
Conference Call
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customers. Among these are the largest physician practice in the state of
Michigan, the biggest health system in Houston, Memorial Hermann, and the first
health information exchange in Minnesota, which represents the largest payers
and providers in Minneapolis.
In addition to these substantial regional successes, Covisint signed a national
contract with CIGNA and also expanded a number of uses with some existing
customers such as Blue Cross/Blue Shield of South Carolina, which now has more
than 1,000 registered users on the Covisint platform. All of these initiatives
will continue to grow in scope and in revenue and in profit contributions. I
believe that Covisint is uniquely well positioned for what I expect to be a
revolution in the delivery of health care over the next five to 10 years. Given
these successes and the strong pipeline of opportunities, I expect continued
strong growth for Covisint in Q4. Lisa? Thank you very much, Bob. Ladies and
gentlemen, we will be now be happy to take your questions.
QUESTION AND ANSWER
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Operator
[OPERATOR INSTRUCTIONS] Our first question of the day comes from the line of
Kirk Materne with Bank of America Securities. Please go ahead.
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Kirk Materne - Bank of America Securities - Analyst
Thanks very much. Laura, could you just give -- I know you probably can't give
the exact timing, but could you give us some qualitative ideas about when you
might be coming back to the Street to discuss some of the expense structure
thoughts that you guys might be thinking about right now? And any plans around
that for fiscal '08? Would this be not until May or could it be before then I
guess would be my question?
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Laura Fournier, - Compuware Corporation - CFO, CAO, Treasurer and SVP
Well, we haven't considered a special conference call before then but we could
talk about it. But by May, we certainly will have our plan in place for fiscal
'08. We have a committee going right now that is working -- looking at processes
across the Company and where we can do some cost cutting, both on a short and
long term. And by that time, once we get this plan in place, those will be more
defined and we can talk to you about them.
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Kirk Materne - Bank of America Securities - Analyst
Okay. And maybe Andy, you've talked about getting the contribution margin up on
the services side. It's clearly, I think behind where you guys would like it
right now. How far are you from seeing that turn? Because I think previously you
guys have been guiding -- not guiding, but hoping to get towards that 18% to 20%
range. Is this still a year out or do you expect to see some turn as we get sort
of right into the beginning of '08?
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Andy Trestrail - Compuware Corporation - President and COO, Services
I think it's -- we'll start to see some progress on this, as you can expect.
It's a large chunk of revenue and seeing the amount or the percentage of it
change significantly requires a lot of change in the revenue and the margin of
business. But we are confident that the types of business that we're pursuing
and the types of transaction that our sales organizations are bringing in are
all positive indicators that we'll begin to make progress on this front.
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Kirk Materne - Bank of America Securities - Analyst
Okay. And then just finally, I don't who would best to answer this, Bob or Laura
I guess. But at what point in time does it make sense for you guys to start
showing some of the growth, Covisint on its own in terms of the revenue
contribution just because it seems that that versus -- I imagine it's still not
profitable yet? And Bob you can correct me but it seems as if that might be also
holding down a little bit of the -- I imagine the profitability at Covisint and
the professional services group should be looked at perhaps separately.
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FINAL TRANSCRIPT
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Jan. 25. 2007 / 5:00PM ET, CPWR - Q3 2007 Compuware Corporation Earnings
Conference Call
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Bob Paul - Compuware Corporation - President and COO, Covisint Division
Well, it's a discussion that we continue to have. And the issue is not the
profitability one versus not profitable. The issue is; is it a substantive piece
of the -- a substantial enough piece of the business where it warrants breaking
out? I suspect that we'll have a very real look at this again as we start to
enter the next fiscal year. And it will be a discussion at the next planning
session that we have at Compuware. So, no indications yet but I'm hopeful that
it's not far away.
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Kirk Materne - Bank of America Securities - Analyst
Okay. Thanks very much.
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Operator
Thank you. [OPERATOR INSTRUCTIONS] Our next question is from the line of Aaron
Schwartz, representing J.P. Morgan.
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Aaron Schwartz - J.P. Morgan - Analyst
Good afternoon. Congratulations on the nice results.
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Lisa Elkin - Compuware Corporation - VP Compuware Communications and IR
Thank you, Aaron.
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Aaron Schwartz - J.P. Morgan - Analyst
Just a quick question the nice results. It seems like you had a lower tax rate.
How should we look at that going forward? Do you expect that to rebound at the
31% level, or should we sort of look at this lower rate going forward?
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Laura Fournier, - Compuware Corporation - CFO, CAO, Treasurer and SVP
The primary reason for the lower rate this quarter was the reinstatement of the
R&D tax credits. So, yes, next quarter the rate should go back up to the 31%,
32%.
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Aaron Schwartz - J.P. Morgan - Analyst
Okay. Terrific. And then on the maintenance side, can you talk about sort of the
seasonality with renewals? It seems like December, a few years ago, you saw a
better performance in terms of the deferred revenue. It seems like now it's more
isolated to the March period. And I'm wondering if there's just a shift in how
you see the renewals throughout your year?
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Laura Fournier, - Compuware Corporation - CFO, CAO, Treasurer and SVP
Well, definitely, the Q4 coming up is the high renewal quarter which -- it shows
up in the -- in Q1. And then Q3 was a high billing quarter, which shows up in
Q4. So, these are the higher quarters for maintenance.
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Aaron Schwartz - J.P. Morgan - Analyst
Okay. And then in terms of deferred, was there any currency impact on that in
the quarter?
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Laura Fournier, - Compuware Corporation - CFO, CAO, Treasurer and SVP
I don't -- there was some currency impact on the deferred license fees. It was
$2 million. I don't have it on the maintenance, though, the total.
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Jan. 25. 2007 / 5:00PM ET, CPWR - Q3 2007 Compuware Corporation Earnings
Conference Call
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Aaron Schwartz - J.P. Morgan - Analyst
Okay. On the Covisint business, maybe I could just follow up on that. Now that
you have a couple initiatives live, should we look for any sort of change in the
leverage you're getting out of that business in terms of the trajectory?
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Bob Paul - Compuware Corporation - President and COO, Covisint Division
Yes. I believe that as soon as you get some strong referenceable, nationally
recognizable accounts that can serve as a test bed for the value proposition
that we're trying to demonstrate, then things should turn. But there's another
dynamic here, too. And that is, this is really an early market category for
something new that's just starting now to sweep the health care industry. And it
has to do with all of the national issues around security and in
interoperability. So, we think we've got two things going for us. Number one is,
we're one of the early market leaders with some great, great national partners
but we've got some reference-based accounts to point toward. And the second
thing is the category in the market itself is growing very, very rapidly. So, I
would agree with your assessment that we should start to see some trajectories
in that business.
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Aaron Schwartz - J.P. Morgan - Analyst
Okay. And then I had a question on Europe. It seems like from the results on the
mainframe side, the sales execution improved in that region in the quarter. How
much is attributable to maybe seasonality relative to just an actual improvement
in the sales execution? Did that sort of live up to your expectations?
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Hank Jallos - Compuware Corporation - President and COO, Products
It's improving. But not where we want it. Central Europe did very well and our
international business had some really good spots but it improved. It had
nothing to do about with seasonality but there's a lot of room for improvement.
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Aaron Schwartz - J.P. Morgan - Analyst
Okay. And the last question I have is on the repurchase in the quarter, can you
help us out with how much was done on your discretionary plan relative to the
10b5-1 plan?
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Andy Trestrail - Compuware Corporation - President and COO, Services
Our 10b5-1 we did 4.7 million--approximately--shares or $40.8 million. On our
discretionary we did 49 million shares, $381.6 million.
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Aaron Schwartz - J.P. Morgan - Analyst
Terrific. Thanks for taking my questions.
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Operator
Thank you. And our next question is from the line of [Ryan Kane] with AG
Edwards. Please go ahead.
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Kevin Buttigieg - A.G. Edwards & Sons, Inc - Analyst
Hi, it's Kevin Buttigieg from AG Edwards. I was just wondering if you could talk
a little about whether or not you received any contribution from the IBM
settlement agreement in either license revenues or in professional services
revenues this period?
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Jan. 25. 2007 / 5:00PM ET, CPWR - Q3 2007 Compuware Corporation Earnings
Conference Call
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Laura Fournier, - Compuware Corporation - CFO, CAO, Treasurer and SVP
We did some business with IBM in the normal course of business and with the
global services group. I don't recall the exact number. I would say it totaled
around $5 million, somewhere in there.
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Kevin Buttigieg - A.G. Edwards & Sons, Inc - Analyst
$5 million just on the services line?
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Laura Fournier, - Compuware Corporation - CFO, CAO, Treasurer and SVP
No, that's in the products side. And the same thing on the services side, we
continue to do our -- some normal services engagements there but nothing new or
significant on the services side.
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Kevin Buttigieg - A.G. Edwards & Sons, Inc - Analyst
And both of those would really fall under the purview of the settlement
agreement or is it different from that? When you described it as being in the
normal course of business, I'm a little bit confused as to whether or not that's
distinct from the IBM settlement agreement or not?
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Laura Fournier, - Compuware Corporation - CFO, CAO, Treasurer and SVP
On the products side, it's going to be included in the settlement agreement.
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Kevin Buttigieg - A.G. Edwards & Sons, Inc - Analyst
Okay.
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Laura Fournier, - Compuware Corporation - CFO, CAO, Treasurer and SVP
On the services side, there's really nothing to include. There's -- they offer a
business on the services side and we choose whether or not to take it.
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Kevin Buttigieg - A.G. Edwards & Sons, Inc - Analyst
Right.
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Laura Fournier, - Compuware Corporation - CFO, CAO, Treasurer and SVP
So, it's just a normal course. There's no settlement amount to apply it to.
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Kevin Buttigieg - A.G. Edwards & Sons, Inc - Analyst
Okay. All right. I understand. I was wondering if you could break out for me
what the percentage of the services business and the percentage of the total
business is attributable to the automotive industry?
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Laura Fournier, - Compuware Corporation - CFO, CAO, Treasurer and SVP
I'm sorry. We don't have that information right here. And that's not something
we normally give out.
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Jan. 25. 2007 / 5:00PM ET, CPWR - Q3 2007 Compuware Corporation Earnings
Conference Call
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Kevin Buttigieg - A.G. Edwards & Sons, Inc - Analyst
Okay. Finally, I don't know if you can comment on this now but is there anything
that you can provide us an update as far as the succession planning that was
talked about a year ago or so now? I believe that there are some dates coming up
for that.
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Laura Fournier, - Compuware Corporation - CFO, CAO, Treasurer and SVP
I think everything is going along as it has been for the last few quarters. Pete
remains involved in the business. We -- as we look, the OOC is still intact. We
are pretty much going along as we have for the last few quarters.
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Kevin Buttigieg - A.G. Edwards & Sons, Inc - Analyst
Okay. And are there external candidates under consideration, as well, or is it
still mostly an internal candidate pool?
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Laura Fournier, - Compuware Corporation - CFO, CAO, Treasurer and SVP
There's no external candidate at this point.
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Kevin Buttigieg - A.G. Edwards & Sons, Inc - Analyst
Okay. Thank you very much.
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Operator
Thank you. Our next question is a follow-up from the line of Kirk Materne with
Bank of America Securities. Please go ahead.
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Kirk Materne - Bank of America Securities - Analyst
Laura, could you remind me under the IBM settlement on the products side, I
think it was $40 million was due you all this fiscal year. Could you just tell
us where you guys are and what's left to be recognized in the fourth quarter?
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Laura Fournier, - Compuware Corporation - CFO, CAO, Treasurer and SVP
Kirk, actually when we did the amendment, it was extended a year. So, this year
we have $30 million.
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Kirk Materne - Bank of America Securities - Analyst
Okay.
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Laura Fournier, - Compuware Corporation - CFO, CAO, Treasurer and SVP
And we're at about $20 million right now.
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Kirk Materne - Bank of America Securities - Analyst
Okay. And that can come in either through the top line or through the other
income line, correct?
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Laura Fournier, - Compuware Corporation - CFO, CAO, Treasurer and SVP
Exactly.
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FINAL TRANSCRIPT
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Jan. 25. 2007 / 5:00PM ET, CPWR - Q3 2007 Compuware Corporation Earnings
Conference Call
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Kirk Materne - Bank of America Securities - Analyst
Okay. Thanks.
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Operator
Ladies and gentlemen, we will now conclude the question-and-answer session
portion of today's conference call. I'd like to turn the call back over to Lisa
Elkin.
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Lisa Elkin - Compuware Corporation - VP Compuware Communications and IR
At this time, ladies and gentlemen, we will adjourn this conference call. Thank
you very much for your time and interest in Compuware. And we hope you have a
pleasant evening.
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Operator
And ladies and gentlemen, that does conclude our conference for this afternoon.
Thank you for your participation. You may now disconnect.
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underlying the forward-looking statements are reasonable, any of the assumptions
could prove inaccurate or incorrect and, therefore, there can be no assurance
that the results contemplated in the forward-looking statements will be
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THE APPLICABLE COMPANY'S CONFERENCE CALL AND WHILE EFFORTS ARE MADE TO PROVIDE
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