Compuware Management Discusses Q4 2013 Results - Earnings Call Transcript

May.21.13 | About: Compuware Corporation (CPWR)

Compuware (NASDAQ:CPWR)

Q4 2013 Earnings Call

May 21, 2013 5:00 pm ET

Executives

Lisa Elkin

Robert C. Paul - Chief Executive Officer and Director

Joseph R. Angileri - President and Chief Operating Officer

Laura L. Fournier - Chief Financial Officer, Chief Accounting Officer, Executive Vice President and Treasurer

Analysts

Aaron Schwartz - Jefferies & Company, Inc., Research Division

Ginette Rowe - Evercore Partners Inc., Research Division

Ryan Macdonald

James Derrick Wood - Susquehanna Financial Group, LLLP, Research Division

Operator

Hello, and welcome to the Compuware Corporation Fourth Quarter and Year-End Earnings 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 our host, Lisa Elkin, Senior Vice President of Communications and Investor Relations for Compuware Corporation. Ms. Elkin, you may begin.

Lisa Elkin

Thank you, and good afternoon, ladies and gentlemen. With me this afternoon are Bob Paul, Chief Executive Officer; Joe Angileri, President and Chief Operating Officer; and Laura Fournier, Executive Vice President and Chief Financial Officer.

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 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.

I will now turn the call over to Bob, who will provide a summary of the quarter's results. Joe will then highlight business unit operating results, followed by Laura, who will close with key financial information. We will then open the call to your questions.

Before I hand the call over to Bob, however, I want to inform you that as an additional resource, we have made a brief slide deck available on our Investor Relations website. Bob?

Robert C. Paul

Thanks, Lisa, and thanks to everyone for joining us this afternoon. Today, we will discuss Compuware's full fourth quarter and fiscal year 2013 financial results. Fiscal year '13 and Q4 total revenue came in at $944.5 million and $239.9 million, respectively. On the basis of and consistent with our April preannouncement, our fourth quarter 2013 earnings per share were $0.05. For the full year 2013, our earnings were $0.27. Laura will discuss the details later in the call.

Although we made significant progress in some of our strategic initiatives, overall, the quarter was a disappointment. As I discussed on the call in April, the shortfall was primarily due to contracts that we expected in our APM and Mainframe businesses that were delayed and did not close in the quarter. The main factors for not closing these details were unsolidified IT budgets and continued weakness in the European market that resulted in broad-based delays in purchasing decisions. After further analysis of these delayed deals, we estimate that 60% of those deals, with a total value of approximately $8.5 million, were closed this quarter, Q1 fiscal year '14. The remaining 40% or approximately $6 million are expected to close during the final 3 quarters of the fiscal year. In a moment, Joe will discuss key business unit operating results, and Laura will provide the details of how we are progressing in our margin improvement initiatives.

What I want to focus on is our business strategy and our plan for optimizing operating performance and delivering value to shareholders. We've made good progress in all the shareholder value creation actions we previously announced. In fact, last week, we completed a number of significant steps. First, last Tuesday, we filed a public S-1 registration statement with the SEC regarding the Covisint IPO. Second, on Thursday, we declared our first quarterly dividend of $0.125 per share. Third, we are making good progress on our expense reduction initiatives, and as we discussed in April, have raised our cost reduction expectation to at least $80 million to $100 million over the next 2 years, of which we have already accounted for $45 million in this fiscal year. Lastly, we continue to remain open to reviewing credible offers and have extended our standstill agreement with Elliot.

So let's put this in the context as it relates to our strategic plan, and then we can dive into the numbers. 4 years ago, it was unclear exactly where Compuware was heading. Could we ever transform the company from a mainframe and services company into one that would compete in the next generation of IT? Were there categories in which we could once again be best in the world? How do we adapt as fast enough to take advantage of mobile, cloud and SaaS-based environments? These are the questions that we started to answer with a plan we developed back then and have subsequently been executing against.

It is based upon the following fundamental principles: number one, execute a solution strategy that transforms Compuware into a market share leader in a few high-growth categories, in essence, get focused really quickly where we can win; number two, simplify the business, making it easy for investors to understand and the company to execute; number three, make asymmetrical investments in these high-growth solutions prioritized around customer value, further differentiating Compuware from the competition, so invest in fewer high-growth categories at levels that our competition is unwilling or unable to do; number four, restructure the business around these solutions, establishing a business unit model of creating accountability, transparency and overall alignment; and finally, number five, incrementally improve our cost structure and simplify business processes as necessary.

As a result, in fiscal year '14, our largest business unit will be application performance management, or APM, where we are considered best in class and where large solution components are cloud-focused and SaaS-based, with major releases this year rapidly expanding that footprint.

Our fastest-growing business, Covisint, is 100% cloud-based, where we are considered an early market leader. Also, Changepoint is now recognized as the top right in the Gartner Magic Quadrant with both on-prem and SaaS-based offerings. In fact, in fiscal year '14, our high-growth assets will represent 50% of our expected revenue. So the prognosis looks very good, and the transformation is working. But we can't just ignore the challenges we have historically had in execution.

We recognize that our performance against guidance hasn't been consistent, and we are working hard to rectify that. One important factor is that we have full-bore support of our plan and complete governance alignment in our strategy. In retrospect, although we should have started earlier, we also are making great progress in aggressively improving our operating margins. Admittedly, we haven't had consistent field execution. However, there are many things that have been improved, including people, refinement of sales strategy and significant product upgrades. Joe will comment on some of these by business unit.

I commit to you that the guidance we are about to provide is realistic and is our best estimate on what we can achieve in the coming quarters and years. Due to the work that has already been done and further progress we will make in the balance of fiscal year '14, we will look to deliver in fiscal year '15 double-digit revenue growth and a 20% operating margin. The majority of this revenue will be coming from leading solutions in high-growth categories, which should mean even better margins and sustainable growth in the coming years. The theme across our entire organization this year is consistent improvement and execution and taking the excess costs out of the business. Until we achieve excellence in both of these areas, we know you will be guarded in your expectations.

So looking at fiscal year '14, this is what we are expecting. Total revenue is projected to be $1,004,000,000 to $1,012,000,000, an approximate 7% increase over fiscal year '13. Earnings per share before restructuring charges to be between $0.35 and $0.37 for fiscal year '14. Consistent with prior years where the second half is stronger than the first half, we expect Q1 EPS before restructuring charges to be approximately 8% to 14% of our annual earnings. These results will be primarily driven by continued strength in the North American market, stabilization of the European market and the continued focus on sales effectiveness and continued investment in technologies that will further differentiate our solutions and widen the gap between us and the competition.

In summary, we have a credible plan in place and are making substantial and demonstrable progress towards our goals. As a result, we are confident that we will be well positioned to improve profitability, create shareholder value and put Compuware on a trajectory of sustained, long-term growth. Regardless of our ownership status, we are very confident that we will overcome our past execution challenges and seize the significant opportunities in front of us. Joe?

Joseph R. Angileri

Thanks, Bob. I'll now provide a deeper look into the business unit results. Let me start with APM. Total APM revenue for the fourth quarter came in at $77.2 million, down 3.5% year-over-year and 9.2% sequentially. For the year, however, APM produced total revenues of $300.5 million, up 11.1% year-over-year. APM's software license fees for the quarter were $26.3 million, down 15.9% year-over-year and 22.4% sequentially. But for the year, software license fees were $100.6 million, up 17.7% year-over-year. APM's subscription fees for the quarter were $20.3 million, essentially flat year-over-year and sequentially. For the year, subscription fees were $79.9 million, up 4.7% year-over-year. APM's subscription fees are primarily synthetic monitoring via our Gomez offering. Synthetic monitoring is a vital component to any enterprise web app management strategy. It provides clean room service level agreements and availability management in a very easy-to-use cloud-based manner. That said, traditional synthetic monitoring is today being augmented with real user monitoring, and we're on top of it.

Recently, we announced an expanded APM as a service offering that brings the dynaTrace best-in-class real user monitoring to the cloud by integrating it tightly with the Gomez synthetic offering. We also just announced the freemium native mobile app real user program, seeding new mobile subscription opportunities that offers to the market the first crash performance user and business analytics solutions for native mobile applications. We're convinced that these offerings, combined with our strong synthetic backbone, will invigorate our subscriber growth going forward.

And we've done a great job with APM operating expenses. For the quarter, expenses were $77.9 million, down 9.5% year-over-year and up 1.5% sequentially. For the year, APM operating expenses were $304.8 million, down 4% year-over-year. As a result, APM's contribution margin for the quarter was negative 0.9% compared to a negative 0.76% during the same period last year and 9.7% last quarter. For the year, APM contribution margin was negative 1.4% compared to a negative 17.4% last year. This is a dramatic $42.9 million improvement over fiscal '12. Now as we said before, there is a transformational shift occurring in the APM market as the traditional larger players lose ground to a new breed of providers whose platforms better fit modern, dynamic application environments like cloud, mobile and Big Data. And Compuware APM is hands down the best of this new breed of APM providers. With this shift in the APM environment, a market vacuum has resulted, and we are gaining the lion's share of the new opportunities. At $300 million in pure APM revenues and 400 -- or 4,000-plus customers, Compuware is clearly the leader in new-generation APM. Now for fiscal '14, we expect APM total revenue growth of 15%.

Moving to Mainframe. As we expected a challenging year, total Mainframe revenues for the quarter was $81.5 million, down 19.1% year-over-year and 11.9% sequentially. For the year, Mainframe produced total revenues of $332.7 million, down 20.7% year-over-year. Mainframe software license fees for the quarter were approximately $15 million, down 43.4% year-over-year and 39.5% sequentially. For the year, mainframe software license fees were $58.5 million, down 46.9% year-over-year. Mainframe operating expenses for the quarter were $23.5 million, down 11% year-over-year and 5.1% sequentially. For the year, operating expenses were 93. -- $91.3 million, down 8% year-over-year. Mainframe contribution margin for the quarter was 71.2% compared to 73.8% during the same period last year and 73.3% last quarter. For the year, contribution margin was 72.5% compared to 76.3% last year.

Notwithstanding the challenging year, Mainframe Solutions remain an integral part of our portfolio strategy going forward. Not only is it a substantial business for us with very healthy margins, but according to Gartner, we are also the market share leader in the app dev test tool space with 53% market share. This is key because it provides us with a large installed base into which we can sell our new APM for Mainframe offering. I continue to be excited about the prospects of APM for Mainframe. Combining the power both our APM for Mainframe and our traditional productivity tools will allow customers to quickly find and then fix the problems they encounter, saving countless hours and dollars in the process. This find-and-fix functionality is a significant development in the mainframe market, and only Compuware has the ability to provide this solution. Balancing the growth of our APM for Mainframe with the stabilization of our traditional productivity tools, for fiscal '14, we expect Mainframe total revenue to decline 5%.

Changepoint. We closed the largest Changepoint deal in the solutions history in the last quarter -- last year in Q4, which made for a tough compare this year. The Changepoint business unit produced total revenues of $10 million, down 31.1% year-over-year and 5.5% sequentially. For the year, Changepoint produced total revenues of $39.8 million, down 69.9% year-over-year. Changepoint software license fees for the quarter were $2.9 million, down 52.6% year-over-year, again, due to the tough year-over-year compare, but up 8.9% sequentially. For the year, software license fees were $8.5 million, down 38.7% year-over-year. Changepoint operating expenses for the quarter were $9.8 million, down 10.9% year-over-year and 10.2% sequentially.

For the year, operating expenses were $41.2 million, down 16.9% year-over-year. Changepoint's contribution margin for the quarter was 2% compared to 24.3% during the same period last year but improved from the negative 3.1% last quarter. For the year, the contribution margin was negative 3.6% compared to 5.9% last year. Now due to the upward trend in Q3 and Q4 and the growth in our pipeline, we expect Changepoint total revenue to grow 19% in fiscal '14.

In Q4, the Uniface business unit produced total revenues of $12.7 million, down 1.5% year-over-year and essentially flat sequentially. For the year, Uniface produced total revenues of $46.2 million, down 1.6% year-over-year. Uniface software license fees were very strong in the quarter at $4.2 million, up 4.7% year-over-year and 21.5% sequentially. For the year, software license fees were $11.4 million, flat year-over-year. Uniface's operating expenses for the quarter were $6.6 million, up 6.6% year-over-year and 24.7% sequentially. For the year, Uniface's operating expenses were $21.8 million, flat year-over-year. And Uniface's contribution margin for the quarter was 48% compared to 52% during the same period last year and 59% last quarter. For the year, contribution margin was 53% compared to 54% last year. For fiscal '14, we expect Uniface total revenue growth of 2%.

Now the Covisint business unit had a solid quarter, producing total revenues of $25.7 million, up 20% year-over-year and 7.8% sequentially. Covisint had a strong year as well, producing total revenues of $90.7 million, up 23% year-over-year. Covisint's operating expenses for the quarter were $26.4 million, up 40.3% year-over-year and 21.6% sequentially. For the year, operating expenses were $86.1 million, up 18.4% year-over-year. Covisint's contribution margin for the quarter was a negative 2.5% compared to 12.3% during the same period last year and 9.2% last quarter. This margin impact was due to Covisint's significantly increased investment in sales and marketing in addition to an operational change in going from a waterfall methodology to an agile development methodology, resulting in less research and development cost being capitalized. However, for the year, contribution margin improved to 5.1% compared to 1.4% last year. For fiscal '14, we expect Covisint's total revenue growth to be 20%.

The Professional Services business unit produced total revenues in the quarter of $32.8 million, down 10.1% year-over-year and 1.3% sequentially. For the year, Professional Services produced total revenues of $134.7 million, down 11.1% year-over-year. During the quarter, our Professional Services division was impacted by a large goodwill impairment charge. Before the goodwill impairment charge, Professional Services operating expenses for the quarter were $30.3 million, down 5.7% year-over-year and up 7.2% sequentially. The sequential increase in expenses was due to additional reserves against certain accounts receivable. For the year, operating expenses were $115.6 million, down 9.1% year-over-year. Also before the impairment charge, professional services contribution margin for the quarter would have been 7.5% compared to 11.9% during the same period last year and 49.9% last quarter. For the year, the contribution margin before the impairment charge would have been 14.2% compared to 16.1% last year.

Overall, Professional Services continues to progress in its transformation from a primarily staff supplementation business to a value-added strategic solution provider. This is evident by the 24% year-over-year revenue growth and 4% sequential revenue growth we experienced this quarter in our strategic solutions businesses. For fiscal '14, we expect Professional Services total revenue growth to be 6%. We remain convinced that the strategy we have implemented and are executing, combined with the operational actions we are taking across the company, will deliver substantial value to our shareholders, our customers and our employees. Laura?

Laura L. Fournier

Thanks, Joe. To begin, I wanted to give you some details on 2 income statement items that were not originally forecasted for this quarter. At year end, it was determined, due to company's annual goodwill impairment analysis, that the carrying value of the goodwill associated with our Professional Services division exceeded the implied fair value by approximately $71.8 million, resulting in an impairment charge for this amount. The estimated fair value of all other business units exceeded their respective carrying value, including goodwill by a significant margin, and therefore, no impairment was needed. I believe it is important to remember that the $71.8 million charge is not a cash expense.

The second expense item relates to our margin improvement initiatives. For the fourth quarter, we have recognized $16 million in restructuring expense related to identified cost reduction activities. Approximately $11 million of this expense relates to employee severance costs, and the remaining $5 million to the closing or reduction in size of certain sales offices and the termination of certain contracts. As we continue our cost rationalization, we anticipate additional restructuring expense in fiscal 2014. These and other actions taken to date will reduce our operating cost in fiscal '14 by over $45 million.

In the deck Lisa referenced earlier, we have included a summary of our cost reductions and the effect on our total allocated shared services costs and unallocated general and administrative costs. These cost reductions have been specifically identified, and all actions necessary to realize these savings have been or are in process of being taken. On an annualized basis, these reductions total $53 million.

That said, there are 2 cost items for fiscal 2014 that will obfuscate the general and administrative cost savings. The first item is an estimate for management bonuses for targeted results in fiscal 2014 as no management bonuses were earned in fiscal 2013. Second, we also have included an estimate for advisory costs related to the activist activities and implementation costs for certain of our margin improvement activities. We believe we are on track to deliver $80 million to $100 million of cost savings over a 2-year time frame, as Bob mentioned earlier.

Now beginning with this announcement, we are providing our earnings number on a GAAP and non-GAAP basis. Actually, for this quarter, we are presenting 2 non-GAAP numbers to ensure we have clarity around our fourth quarter results. The significant expenses related to goodwill, restructuring and certain advisory fees had a negative $0.35 impact on our fourth quarter earnings per share. Without the impact of these special items, our earnings per share would have been $0.05 for the quarter and $0.26 for fiscal 2013, consistent with what we communicated in our conference call in April 3, 2013.

Next, we have provided our non-GAAP earnings exclusive of stock compensation expense and amortization of purchased intangibles and the related tax impact. Without these noncash expense items, as well as the unusual items noted above, non-GAAP earnings per share was $0.08 for the quarter compared to $0.16 for the fourth quarter in fiscal 2012.

Okay, now that the easy part is over, our effective tax rate for the quarter was certainly impacted by all of the activities at year end. The effective rates before goodwill, restructuring and advisory expenses was approximately 43%, which was still higher than forecasted. The primary reason for the higher rate was the valuation allowance recorded against certain state tax credits and an increase in certain foreign taxes, offset by the federal R&D credit for fiscal 2013, which we were able to recognize after Congress approved extension of the credit in January 2013.

On a cash basis, our non-GAAP tax rate was approximately 14%. For fiscal 2014, we expect our GAAP effective tax rate to be approximately 37%, which includes the R&D credit through December 2013. Operating cash flow for the fourth quarter was $83.4 million, bringing us to $132.4 million for fiscal '13. The decline from our original estimate reflects the shortfall in our fourth quarter sales, as well as a slight impact from our restructuring activities. For fiscal '14, we expect operating cash flow to be approximately $150 million to $160 million.

During the quarter, we paid down our outstanding debt to $18 million as of March 31. As of today, we have repaid the remaining balance. We anticipate using the line of credit as needed for operating cash purposes. With regard to the stock buyback in Q4, we repurchased approximately 417,000 shares for $4.7 million, bringing the fiscal '13 total purchases to 8.6 million shares or $80.7 million. On May 16, Compuware's Board of Directors declared the company's first quarterly cash dividend of $0.125 per common share to be paid on June 19, 2013, to shareholders of record at the close of business on June 5, 2013. The implementation of quarterly dividend substantiates Compuware's commitment to delivering shareholder value, this time through the direct return of capital to shareholders. Add to this the $1.85 billion we spent since 2004 in repurchasing more than 214 million shares of stock and our complete focus on growing the business while rationalizing costs and expanding margins. It becomes clear that maximizing shareholder value is something Compuware's board and management take very seriously. Lisa?

Lisa Elkin

Thanks, Laura. Ladies and gentlemen, we will now be happy to take your questions.

Question-and-Answer Session

Operator

[Operator Instructions] And our first question comes from Aaron Schwartz from Jefferies.

Aaron Schwartz - Jefferies & Company, Inc., Research Division

I just have a follow-up question on the 60% of the slipped deals, I think you said expect to close here in Q1. I was wondering if you could sort of update us on sort of how you get there and given at what point it is in the quarter right now if majority of that has already closed?

Robert C. Paul

Sure. To go back in the pre-earnings call, we stated that about 75% to 80% of the deals that were in commit in the last 2 weeks of the quarter had pushed out. And we talked about the reasons for that. So 60% of those are coming in at -- got a little feedback here -- 60% of those are coming at Q1. A number of those deals have already closed. And overall, we're feeling quite positive about Q1 right now. I will tell you that obviously, as in with any software company, particularly software enterprise companies, a fair amount of our revenue does get booked in the last month, and in particular, the last 2 to 3 weeks. So there's still some work to do. But I don't have the exact percentages of the 60%, but I can tell you that several of the deals have closed. And the other ones are looking, obviously, quite strong.

Aaron Schwartz - Jefferies & Company, Inc., Research Division

Okay, great. And then second question, if I could. It was great to see the dividend announcement last week. I think a lot of people are sort of interested in sort of the commitment and the funding around that. It seems like from the cash flow guidance, that you can get there on your own, but is the dividend sort of dependent on the outcome of some of the cost reduction activities? And that's it for me.

Robert C. Paul

Yes. No, we can get there in our own. And obviously, we have no long-term debt to speak of. It is not dependent upon the -- on the cost rationalization program. But nonetheless, we're obviously very, very committed to that cost rationalization program. And we'll keep you updated as we progress through the quarters in the next couple of years on how that goes. A lot of that, by the way, is just simply major programs, major contracts that we're not doing and just improving our business processes or IT infrastructure and things like that. So we're very confident that all of that work that has to get done is in our control and pretty readily achievable. So that dividend is committed and well within the grasp of the cash flow that we have.

Operator

And now to the line of Kirk Materne from Evercore Partners.

Ginette Rowe - Evercore Partners Inc., Research Division

This is Ginette Rowe speaking for Kirk. Can you talk about the sales kickoff process for this year? And have the cost reduction efforts impacted that process?

Robert C. Paul

Actually, we invested a little bit more in our sales kickoff meetings this year than we have done in prior years, and the reason for that is, obviously, we've got a great new product rollout that's recently occurred in Q4 and Q1 in many of our business units. We wanted to make sure that we have everybody in a single environment to make sure that the programs that we have rolled out, that we do so with discipline across the world, not just in certain regions. So the cost rationalization program had no impact on the sales kickoff events. The sales kickoff events have already occurred. They actually occurred in -- throughout the few weeks, middle of the April time frame. And the energy coming out of those meetings and the crispness of what we have to get done and the showing of the leadership around the company was, from my perspective, very, very impressive. So a lot of positive energy coming out of those kickoff meetings, and we're all excited to start achieving these results.

Ginette Rowe - Evercore Partners Inc., Research Division

And on another topic, for APM, can you discuss the competitive dynamics in this market? And has anything changed over the last 6 months?

Robert C. Paul

Yes, really, nothing really has changed. There has been a C [ph] change in the requirements to solve performance management issues. The complexity goes up as IT environment goes up in the delivery chain. It requires a different way of solving the performance management problem. We're the only company that can do that in a very meaningful and detailed way across the delivery chain and all elements of the delivery chain, and so therefore, we're taking significant market share away from the traditional players. As it relates to some of the newer players, we're competing very effectively against those. We've had some new releases in the freemium environment and also updating the Gomez SaaS platform with real user monitoring as a small example of some of the things that we've done. And then obviously, the dynaTrace platform now working in the cloud seamlessly and solving Big Data problems. They've all been having an impact on both sides of the equation, the smaller players and the larger players. And to put it in perspective, having an enterprise solution for this problem, we believe, is the only viable way of solving it moving forward because it is an enterprise infrastructure. And right now, if you combine the revenues from the 2 of the upcoming smaller vendors, I think we were 4x that amount. So we continue to invest much more meaningfully in that environment to make sure the competitive difference is still there also.

Ginette Rowe - Evercore Partners Inc., Research Division

And lastly, for Mainframe, can you talk about this business and how you see it trending in fiscal year '14 after a tough fiscal year '13?

Robert C. Paul

Yes, it was a tough fiscal year '13. And we knew it was going to be tough. We just didn't realize it was going to be that tough. And there are a bunch of variables that we've already talked about. Our maintenance renewal opportunities at the end of the year were down, which means that the number of contracts that were up for renewal in typical 3- or 5-year cycle was down. That stabilizes this year. We have a brand-new product that's just come out, which is game -- we believe game-changing, and the pipeline is starting finally to show that. So we're very excited about deploying performance management, providing complete visibility on the Mainframe, on the same platform that we do so in non-Mainframe environments. And we also had a little bit of a buying cycle change when the -- last year, when the new IBM hardware was announced that created a little bit pent-up demand. But we're not seeing any obstacles this year, and we're very confident that the -- we're going to meet the numbers that we outlined in our forecast, which is, overall, a slight a decline in the total Mainframe revenue.

Operator

And now to the line of Mike Latimore from Northland Securities.

Ryan Macdonald

This is Ryan MacDonald on for Michael Latimore. In the preannouncement, you kind of cited the IT budgeting and Europe as some reasons for some issues. How has that been looking, that environment, now and since you preannounced and are into the new quarter? Is there any solidification around the budgeting and any stabilization in Europe?

Robert C. Paul

Yes, there is some solidification in the budgets. The deals took a little bit longer than we expected. And I can't point to anything explicitly generally in the marketplace. I know that there are quite a few tougher quarters across the IT landscape in calendar Q1, our Q4. But the budgetary cycles seemed to be more solid, and the deals that were pushed, many of them have now since closed. We still have work to do, as you can imagine, in our Q1. As it relates to Europe, we have very obviously no impact on the overall market landscape in Europe. But I can tell you, we're doing a lot of work right now on the European operations, our sales processes, our sales methodologies to make sure that we have the discipline that we had in North America and some of the other regions. Both Joe and myself have spent some time in Europe. Actually, Joe is going over there again this week with the APM leadership team. I'll be there in another 3 weeks. And obviously, we've got the other business units spending quite a bit of time over there also. So it's a full core press to make sure that we continue to fix the execution challenges that we've had over in Europe, and I hope that we will see that success -- or that change in the coming quarters.

Ryan Macdonald

Okay. And then did you expect -- I know the contribution margin in your APM business is getting close to being positive. I mean, is this something that you expect that you can maintain? And I mean, do you think you can reach a positive contribution margin in this fiscal year?

Robert C. Paul

Emphatically, yes. We'll reach a positive contribution margin. We've talked about the top line revenue growth. We're being very careful, although still investing considerably in R&D and sales capacity in that business unit. And we're also being able to relieve the cost allocations from our typical G&A and shared services that we do allocate to that business. We've done some of that, and we'll continue to do that throughout the year. So we're feeling very good about the positive contribution that the APM business will be making throughout this fiscal year. And the nice thing is we talked about the transformation of the business. And unfortunately, it hasn't gone seamlessly. We've had some execution challenges, some of those related to acquisitions, some of them just geography based and people based. But with the amount of work that we're doing in fixing those issues, having a company now that has 50% of its revenue coming from high-growth assets and the importance of the Mainframe and stabilization of that business, it does bode well for the future and the health of the company moving forward. And so we're just really excited to get that done.

Operator

[Operator Instructions] And now to the line of Derrick Wood from Susquehanna Financial Group.

James Derrick Wood - Susquehanna Financial Group, LLLP, Research Division

In the Covisint S-1, you mentioned there were some material weaknesses in your financial controls. Was that just with Covisint or is that applied to Compuware Corp. as well?

Robert C. Paul

No, that was just Covisint. The reason for that was what is material to Covisint -- what's material to Compuware is remarkably -- how do I put this correctly -- let me try again. Because of the size of Covisint, what is material to Covisint is not as material to Compuware. So when we went through the audits at the end of last calendar year, there were a number of things that were uncovered that came out in the S-1. Both our Audit Committee, the leadership team of Compuware and Covisint and certainly our independent auditors have been tracking this very closely. And we've made tremendous progress there, and we're hopeful at the conclusion of this audit that subsequent S-1 filings, you'll see that -- you see that change, hopefully, in a very positive direction.

James Derrick Wood - Susquehanna Financial Group, LLLP, Research Division

Does this weigh on the timing of the carve-out? And do you have any update on the timing?

Robert C. Paul

It doesn't weigh on the timing of the carve-out at all. I can't speak to the timing. As you know, we now -- we're now in sort of the -- in the time frame after publicly filing the S-1. There are some opportunities for us in the near term. We're working with our underwriters to determine exactly what the timing is that makes sense. We have not finalized that explicitly yet. But we're in a position that we can take advantage of that here pretty soon at any time. Most of the material weakness issues were really worked on in the balance of last calendar year and the beginning of this calendar year. And as we said, we made great progress of that, and we're hoping that subsequent S-1 filings will be able to articulate that.

James Derrick Wood - Susquehanna Financial Group, LLLP, Research Division

Okay. And then on the EPS guidance, I guess I'm a little surprised where it landed given the $45 million reduction in expenses. And I guess if I look at my model and $1 billion in revenue, even when you're taking out that $16 million in kind of onetime cost that, Laura, you talked about, I mean, it would look like your total cost structure is going to be relatively flat. So I mean, I guess that $45 million is a gross number. Are you investing elsewhere where the kind of the net number is going to be kind of flat expense year-over-year?

Robert C. Paul

Yes, it is a gross number. And we had a couple -- as you mentioned, we had a couple offsetting numbers that we've identified in that table. But we are also continuing to invest in the business units themselves and even more so in the areas where we want to make sure that we're capitalizing on leadership positions. So we're trying to be quite reasonable and accurate with the EPS numbers. And hopefully, with good execution, we'll be able to overachieve.

James Derrick Wood - Susquehanna Financial Group, LLLP, Research Division

Okay. Just last question on the restructuring. Could you quantify how much the -- if it's -- if you're restructuring on the sales side and the distribution capacity, if that's being impacted at all?

Robert C. Paul

We did so in the first round. There was some restructuring associated with sales. But there's nothing that we've identified in any of the business units moving forward that would require further restructuring in the sales organization. So in fact, in some of the business -- a couple of the business units, we're actually increasing our capacity because of the opportunity that we see in those categories.

Operator

And ladies and gentlemen, that does conclude our question-and-answer portion of today's conference. I would now like to turn the conference back over to Lisa Elkin.

Lisa Elkin

Thank you. 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.

Operator

Thank you. And ladies and gentlemen, this conference will be available for replay after 7 p.m. Eastern Time today through midnight at May 28, 2013. You may access the AT&T replay system at any time by dialing 1 (800) 475-6701 and entering the access code of 287033. International participants may dial (320) 365-3844. And that does conclude our conference for today. Thank you for your participation and for using the AT&T Executive Teleconference service. You may now disconnect.

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Compuware (CPWR): Q1 EPS of $0.26 beats by $0.21. Revenue of $239.9M beats by $0.22M. Shares +3.2% AH. (PR)