EXHIBIT 99.2
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FINAL TRANSCRIPT
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Thomson StreetEvents (SM) > > >
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Conference Call Transcript
CPWR - Q1 2008 Compuware Corporation Earnings Conference Call
Event Date/Time: Jul. 26. 2007 / 5:00PM ET
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FINAL TRANSCRIPT
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Jul. 26. 2007 / 5:00PM ET, CPWR - Q1 2008 Compuware Corporation Earnings
Conference Call
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CORPORATE PARTICIPANTS
Lisa Elkin
Compuware Corporation - VP, Communications & Investor Relations
Peter Karmanos
Compuware Corporation - Chairman, CEO
Ken Baldwin
Compuware Corporation - President, COO, Services
Bob Paul
Compuware Corporation - President, COO, Covisint Division
Laura Fournier
Compuware Corporation - SVP, CFO
CONFERENCE CALL PARTICIPANTS
Aaron Schwartz
JPMorgan - Analyst
PRESENTATION
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Operator
Hello, and welcome to the Compuware Corporation first quarter earnings release.
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, Communications & Investor Relations
Thank you, very much, Doug, and good afternoon, ladies and gentlemen. With me
this afternoon are Peter Karmanos Jr., Chairman and CEO; Laura Fournier, Senior
Vice President and Chief Financial Officer; Bob Paul, President and Chief
Operating Officer of Covisint; Ken Baldwin, President and Chief Operating
Officer of Services; and Andrew Hittle, Vice President of Business
Transformation.
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 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 is
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. Pete, Laura, Ken and Bob will then provide details about the quarter
and other Compuware business activities. We will then open the call to your
questions.
Compuware Corporation announced today final financial results for its first
quarter ended June 30, 2007. Compuware reports first quarter revenues of $279.4
million, a net income of $189,000. Earnings per share, diluted computation, were
break even based on 305.6 million shares outstanding. During the Company's first
quarter, software license fees were $47.3 million, maintenance fees were $113.7
million, revenue from professional services in the quarter was $118.4 million.
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FINAL TRANSCRIPT
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Jul. 26. 2007 / 5:00PM ET, CPWR - Q1 2008 Compuware Corporation Earnings
Conference Call
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I would now like to turn the call over to Pete. Pete?
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Peter Karmanos - Compuware Corporation - Chairman, CEO
Thanks, Lisa. I'd like to begin by apologizing for this quarter's performance to
all Compuware stakeholders. I'm particularly disappointed in the way the
Company's performance fell short. It would have been more understandable if we
were getting beat by competitors, if our pricing was out of market, or we had
technically inferior or obsolete products. But, in fact, none of those things
are true.
Customers who bought our products this quarter did so because of our superior
technology and the rapid return on investment they received from it. They bought
because of the tremendous value and world class support. They bought because we
have great products in the right markets that meet critical business needs.
What this means is that the Company faces a serious sales execution problem. We
have taken immediate steps to rectify that problem. Immediately following the
quarter, Compuware made substantial changes to its sales management team. We had
a worldwide sales leadership meeting where we reached a consensus on the nature
of our problem and the model we will use to fix that problem.
The Company's products retained their tremendous growth potential. In fact, with
proper execution we have a couple vertical marketplace offerings that I expect
to grow rapidly in the coming quarters. We allowed ourselves to fall behind in
effort and focus over the past 18 months and we will not do that again.
We have also spent time thoroughly evaluating the services business and I'm
confident it will grow this year. I also have great expectations for Covisint's
growth.
For the fiscal year, I am still targeting 5% to 10% revenue growth and $0.60 to
$0.70 in EPS before restructuring costs. The Company is also negotiating
significant lines of credit for its buyback, which will continue...stock
buyback...which will continue into the foreseeable future.
Our cost cutting efforts continue. I fully expect to reduce operating costs by
$90 million to $100 million on an annualized basis by the end of the fiscal
year. Over the next few years, we plan to take another $100 million to $150
million more out of the cost of operations. While we will aggressively monitor
costs and buy back stock, I will not hesitate to make technology investments
where we can achieve a strong and short return.
As you may have gathered, I'm not at all happy with the start of our fiscal
year. I remain encouraged by the strength and determination of Compuware's
management team and its employees around the world. As a result, I fully expect
to report much better results in the coming quarters. Ken?
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Ken Baldwin - Compuware Corporation - President, COO, Services
Thanks, Pete. Compuware's Professional Services organization got off to a solid
start in fiscal year '08 by hitting 96% of our revenue target, and by increasing
our contribution margin on a year-over-year basis. Our optimistic outlook for
the remainder of the year is based on two factors. First, we continue to
maintain a healthy pipeline of significant opportunities.
In fact, the number of opportunities we currently have represents the most we
have seen over the past 12 months, not only in terms of total number of
opportunities, but also in the revenue associated with those opportunities. And,
second, we have right-sized our services sales force to align with our revenue
targets.
We are also encouraged by the quality of the offerings we are bringing to
market. For instance, our enterprise legacy modernization solution continues to
generate substantial interest from prospective customers. We recently conducted
a web cast in association with Gartner on enterprise legacy modernization which
generated more than 200 leads to date.
We also continue to focus on margin expansion in the services business, and the
1.2% year-over-year margin growth we experienced this quarter is certainly a
step in the right direction. As we continue to deliver more of our high value
solutions such as enterprise legacy modernization, test factory and data privacy
to name a few, both our revenue and utilization rates will increase, leading to
greater margin expansion going forward.
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Jul. 26. 2007 / 5:00PM ET, CPWR - Q1 2008 Compuware Corporation Earnings
Conference Call
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All in all, based on the continuing strength of our pipeline and the operational
changes we have made we remain optimistic about the fiscal year. Bob?
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Bob Paul - Compuware Corporation - President, COO, Covisint Division
Thanks, Ken. Compuware Covisint's core competency of secure collaboration has
placed it in the center of some compelling high growth IT trends.
First, to maintain competitive position automotive and manufacturing companies
continue to expand their global footprint which demands worldwide collaborative
IT platforms which Covisint is uniquely qualified to deliver. Second, in
healthcare to deliver dramatic cost reductions and improvements in overall
quality of care the healthcare industry continues to turn to interoperability.
As this revolution in healthcare takes place, Covisint is emerging as a major
participant and potential leader.
Third, competitive pressures continue to drive large businesses to share more
extended enterprise information on the Internet. Covisint's newly launched
security as a service will meet the resulting and rapidly growing demand for
security and privacy of that information through the only identity and access
management solution that is offered as a managed service.
Covisint offers its solutions for all these business challenges through a
software as a service subscription model. This model results in a faster time to
value and lower overall operating cost for our customers as the platform already
exists and the cost is shared across the business community.
In Q1, Covisint seized on these trends and grew in all of its key markets with
total revenue of $9.87 million. This figure represents an increase of 49.3% of
the Q1 of last fiscal year. Covisint's revenue this quarter features a profit
contribution of $630,000, and an under-contract backlog of $55 million. More
importantly I expect that Covisint's number of newly signed contracts, combined
with the growing sales forecast, will allow the organization to continue to
increase revenue, increase contribution margin and increase backlog in future
quarters.
Covisint's automotive business is growing with existing clients as those clients
increase the number of business processes that we support. In addition, Covisint
continues to add new automotive customers with more than a dozen new business
contracts in North America and the particular interest for new deals in China.
In healthcare, Covisint grew in all four of its target customer areas, state
government, payers, providers and physician groups. Additionally, our healthcare
revenue forecast grew dramatically during this quarter giving me great optimism
for this line of business in coming years. As healthcare interoperability is
becoming more accepted, I am seeing the size and scope of these deals grow.
In the security area, Covisint has launched a new trusted identity broker
service on the back of a successful project with the Department of Justice. We
formally introduced this offering at a major analyst conference and the initial
feedback has been extremely positive.
I look forward to sharing many successful return-on-investment case studies for
this growing service in future quarters. Overall, I continue to have very strong
expectations for Covisint this year. I will remain focused on applying the
organization's single and powerful value proposition across our targeted
industry sectors. Laura?
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Laura Fournier - Compuware Corporation - SVP, CFO
Thanks, Bob. As Pete discussed, the transformation of the business is going full
speed. We are making tremendous progress toward meeting our objectives to cut
costs and improve our overall operational execution. We feel extremely
encouraged about the changes we are making and about the positive impact we
believe these changes will have on our results for the second half of this year
and beyond.
During the first quarter, Compuware purchased 4.81 million shares of Compuware
stock for approximately $48 million. While our buyback activity for the first
quarter was less aggressive compared to the last few quarters, I want to assure
you that the Company remains committed to the buyback program. Going forward, we
plan to continue to repurchase shares under the remaining authorization and will
request additional authorization from the board when we need it. Currently, we
have approximately $98 million remaining under our discretionary program and 26
million shares under our 10b5-1plan.
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Jul. 26. 2007 / 5:00PM ET, CPWR - Q1 2008 Compuware Corporation Earnings
Conference Call
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Operating cash flow for the quarter came in weaker than expected at $37.8
million, due primarily to the weak quarter and severance payments associated
with our business transformation activities. We expect the second quarter, which
is normally a slower cash quarter to begin with, to also be lower than normal,
as well. Due to the acceleration of the restructuring activities we now expect
cash flow to be between $150 million and $175 million for fiscal 2008.
As Pete mentioned earlier, we will be finalizing the details for a new loan
package to enable us to continue to buy back stock throughout the coming year.
In the first quarter, our restructuring costs totaled approximately $19 million;
$16 million charged directly to the restructuring line on the statement and $3
million reflected in the cost of license fees. We will continue to incur
restructuring charges in the second quarter as our business transformation
project continues.
At this time, based on our current plans, we are estimating an additional $11
million of these costs in the second quarter. However, this amount may increase
as our restructuring activities progress.
As previously mentioned, our goal during this fiscal year is to streamline our
operation to eliminate approximately $90 million to $100 million of costs on an
annualized basis. The results of these restructuring activities will start to
become more visible in the second quarter and readily apparent in Q3 and Q4.
One other item to note is that our effective tax rate for this quarter is 95%.
Don't worry. This will not be the rate for the whole year. We had a $2 million
adjustment to interest on our income tax receivable which was recognized this
quarter. We continue to expect our effective tax rate to be approximately 35%
for the fiscal year. Thank you, and I will now turn the call over to Lisa.
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Lisa Elkin - Compuware Corporation - VP, Communications & Investor Relations
Ladies and gentlemen, we will now be happy to take your questions.
QUESTION AND ANSWER
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Operator
(OPERATOR INSTRUCTIONS) And our first question today is from Aaron Schwartz with
JPMorgan. Please go ahead.
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Aaron Schwartz - JPMorgan - Analyst
Good afternoon. I had a quick question on the margin structure of each of your
business groups. I was wondering if you could provide a little more color on how
you see the outlook for margins between the mainframe and distributive
businesses just so we can get a little more comfort on the cash flow outlook?
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Laura Fournier - Compuware Corporation - SVP, CFO
Well, as far as the margins for the business, we certainly expect with our
restructuring activities to see positive increases there in the margins. The
real impact on our cash this quarter, this year for that matter, is going to be
the restructuring costs, which would include severance costs, legal costs,
facilities, things like that that you would normally see as we downsize the
operations. So it should have a positive impact. I can't really quantify that at
this point.
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Aaron Schwartz - JPMorgan - Analyst
Okay, and for modeling purposes, do you think the mainframe maintenance business
can grow or at least sort of be flat for the year, or what are your assumptions
there?
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FINAL TRANSCRIPT
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Jul. 26. 2007 / 5:00PM ET, CPWR - Q1 2008 Compuware Corporation Earnings
Conference Call
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Peter Karmanos - Compuware Corporation - Chairman, CEO
I can answer that. The mainframe maintenance business is very, very stable and
we will have, overall maintenance will grow 1% or 2%, maybe 3%. If we actually
started selling new licenses, maintenance would grow significantly and we plan
to do that. But right now our plan, we are right on our plan for maintenance and
it's going to grow about 2%.
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Aaron Schwartz - JPMorgan - Analyst
Okay. And last question I have is I know, and I apologize if you covered this,
but I know you had talked about possibly taking on some debt to fund some of
your repurchase activity going forward. Can you just update us with the latest
thinking there?
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Laura Fournier - Compuware Corporation - SVP, CFO
We still plan to do that. We haven't had to use any of our line yet. We are
putting in place now a new package that will increase our line. Currently, we
have $100 million out there. We still have that. But we are planning to increase
that, and probably, though, we will not need to use that until the third
quarter.
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Aaron Schwartz - JPMorgan - Analyst
Okay. Thanks for taking my questions.
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Laura Fournier - Compuware Corporation - SVP, CFO
Thank you.
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Operator
Thank you. (OPERATOR INSTRUCTIONS) And allowing a few moments, we have no
additional questions. Ladies and gentlemen, we will now conclude the
question-and-answer portion of today's conference call. I would like to turn the
call back over to Lisa Elkin.
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Lisa Elkin - Compuware Corporation - VP, Communications & Investor Relations
At this time, ladies and gentlemen, we will adjourn this conference call. Thank
you very much for your time and interest in Compuware .
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Operator
Ladies and gentlemen, today's conference call is being made available for replay
starting today at 8:30 p.m. in the Eastern time zone and going for one week to
Thursday, August 2. You can access our service by dialing 1-800-475-6701, or
320-365-3844, and at the voice prompt entering today's conference access code of
875887. And that does conclude our conference call for today. Thank you for your
participation, and for using AT&T Executive Teleconference. You may now
disconnect.
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FINAL TRANSCRIPT
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Jul. 26. 2007 / 5:00PM ET, CPWR - Q1 2008 Compuware Corporation Earnings
Conference Call
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