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Compuware Corporation (NASDAQ:CPWR)

F3Q10 (Qtr End 12/31/09) Earnings Call Transcript

January 28, 2010 5:00 pm ET

Executives

Lisa Elkin – VP, Communications and IR

Bob Paul – President and COO

Laura Fournier – EVP, CFO and Treasurer

Analysts

Kirk Materne – Rafferty Capital Markets

Gabe Lowy – Noble Research

David Rudow – Thrivent Financial

Operator

Hello and welcome to the Compuware Corporation’s 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.

Lisa Elkin

Thank you very much, Kerry, and good afternoon, ladies and gentlemen. With me this afternoon are Bob Paul, 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. For those of you who do not have a copy, I will begin by summarizing the press release. Bob and Laura will then provide details about the quarter and other Compuware business activities. We will then open the call to your questions.

Compuware reported strong third quarter results. Total products revenue excluding divested products increases sequentially and year-over-year. Earnings per share reach $0.11 per share GAAP, $0.12 per share non-GAAP. Momentum of key growth drivers accelerates as Vantage license fees increase 9.5% year-over-year, 65.6% sequentially. Covisint revenues increase 22.6% year-over-year. Professional services margins reach 12% excluding Covisint; revenues increase sequentially. Gomez Web Performance Division reaches record bookings of $21.8 million between October and December of 2009.

Compuware Corporation today announced final financial results for its third quarter ended December 31, 2009. During the company's third quarter, software license fees were $52 million compared to $53.1 million, excluding divested products, and $60.5 million as reported in the third quarter last year. Maintenance and subscription fees were $117.6 million in the third quarter compared to $108.5 million excluding divested products and $116.6 million as reported in the third quarter last year. Revenue from professional services in the third quarter was $60.3 million, compared to $91.5 million in the same quarter last year.

I would now like to turn the call over to Bob. Bob?

Bob Paul

Thanks, Lisa. Compuware’s strong results this quarter showed continued momentum and greater consistency in the company’s performance. The strategy and operational discipline that we announced over 18 months ago has led to a much simpler and healthier business, with strong differentiated opportunities for continued growth.

All of our core growth drivers showed sequential and year-on-year growth in Q3, and as of the last three quarters, we continue to see consistent improvement in our operational metrics. To provide apples-to-apples view on the progress of our business, we have excluded divested products from these Q3 comparison. Overall Compuware posted nearly 30% year-over-year increase in total product commitment. Total products revenue increased 5% compared with same quarter last year.

Additionally, professional services revenue excluding Covisint is up sequentially to $49.4 million along with improved margins. The great news is that these positive results were not based on one-time events, but on the successful execution of the longer-term strategy. In particular, our unique capability to optimize application performance in the data center, in the cloud, or on a mobile device is gaining momentum in the application performance marketplace. In this space, only Compuware can deliver a unified view with immediate deep dive resolution across the entire application delivery chain. This is a new disruptive change to the market made possible through the Gomez acquisition.

Right out of the gate in the third quarter, we released a joint solution that’s already been sold and implemented to a number of customers, number of new customers. More importantly, we are seeing very strong interest in this joint solution. We have scheduled subsequent releases that will further integrate and differentiate our capabilities.

Operationally, we have kept the Gomez division intact so that they can continue to drive market share growth in the Web performance area and operate with extreme agility. In fact, I want to congratulate the Gomez team achieving their best quarter ever, to put it simply, they are on fire. Gomez total bookings from October through December were $21.8 million, which represents an increase of 46% sequentially and 35% year-over-year. This includes 133 net new customers through direct sales and an additional 21 through channels. Keep in mind that these customers represent immediate upsell opportunities for Vantage.

Our expectation going into Q4 and fiscal year ’11 is that we will continue to support Gomez, so they can continue to do what they do best. We will invest in further product integration, grow the benchmarking ecosystem and support a rigorous lead-sharing process to drive joint market share. Starting in February, we expect to introduce some very exciting solutions addressing private, public, and hybrid cloud performance. We are also rapidly extending our penetration of vertical industries including retail, media and publishing and fast users and providers.

On the Vantage side, we posted nearly 10% year-over-year growth in license fees and a 95% sequential increase in license bookings. Vantage license bookings for the quarter were up nearly 20% year-over-year. Total Vantage revenues for the quarter increased 7.8% to $36 million. So, we remain very excited about our outlook for our distributed products and expect the individual and combined momentum for the Gomez and Vantage in particular to lead to strong future growth.

Covisint also delivered excellent results this quarter, and we continue to see strong macro drivers of this business. In Q3, Covisint added 71 new customers including global players like Shell, OnStar, and AT&T. Revenues increased more than 22% year-over-year to $10.8 million. The most exciting news however is the guaranteed revenue that we are coming or that we see coming in future quarters from backlog of $75.1 million [ph]. Changes in manufacturing vertical are driving organizations to Covisint’s cloud-based solutions for their speed, innovation and value.

We capitalized on this dynamic to achieve an 11% growth year-over-year in Covisint’s manufacturing vertical this year. Covisint’s healthcare business is accelerating even faster, with 52% year-over-year revenue increase. The federal stimulus program for healthcare IT is generating a wave of opportunities and RFPs and we expect many large health information exchange initiatives, we will make purchasing decisions over the next 12 months.

With great customer reference stories already in place, including the states of Tennessee, Minnesota, and Michigan, we are very well positioned for explosive growth in this marketplace. Additionally, our relationship with the American Medical Association continues to grow. We expect at least an additional 19,000 providers to be on the Covisint platform by late summer. Between Covisint and Gomez, we have two of the fastest growing SaaS solutions in the industry.

Changepoint licenses increased to $3 million this quarter, up more than 80% sequentially and up slightly year-on-year. This is due to our refocused strategy in some sub segments within the IT portfolio of management marketplace. We are also seeing our pipelines build in this area. Our ability to provide strong references in a market that has struggled with failed implementations remains a key differentiator in the ITP and IT government space. Our Mainframe business also remains very, very healthy. We saw a 0.4% year-over-year growth in overall Mainframe revenue, and 2.6% year-over-year growth in the Mainframe maintenance.

Our investment in client managers who work directly with our customers to achieve greater ROI is paying off. This is also a great testament to the work of our Mainframe professionals. Professional services revenue excluding Covisint is also up sequentially, $49.4 million, and more importantly so are the margins. Excluding Covisint, the services business achieved 12.1% margin. We have stabilized our services business, which is substantially healthier than it has been in years. We expect to see slight revenue growth based upon improved product-related services numbers and building on specialized differentiated competencies.

In addition, we are capitalizing on greater interest from more and more strategic partners, which is helping us drive our revenue growth and expand our market presence. I am very pleased with the work of a challenge group, which as rebuilt this program from scratch. You should expect to see, or to continue to see additional announcements on global alliances in the near future. So, we have streamlined our product portfolio and investment and strategic growth areas, all while improving profitability, expanding market leadership and positioning the company for sustainable growth and improving the consistency of the results. As such, we remain comfortable with the lower-end of our prior guidance. Obviously we are very pleased with the momentum, but I believe that Compuware can do much more.

In talking with our field teams and our customers, I can feel the immense momentum building behind our business. I am hopeful that in your research you are hearing and seeing the same thing. As you can tell, I am optimistic for the next year, Compuware will harness and build on these business drivers, excluding the effect of this year’s divestitures, we are now consistently growing revenues with increasing earnings, and I know we haven’t been able to say that for quite a while.

Laura?

Laura Fournier

Thanks, Bob. Compuware’s performance in Q3 is yet another example and a growing list of successes that clearly indicates the soundness of our strategic direction and the effectiveness of our efforts. Q3 also represents a very positive trend, not only was it another solid quarter, but for the second consecutive period, we beat street license, maintenance, total revenue and EPS expectation.

We have made significant progress in our plan to focus the business on end-to-end application performance, including the divestiture of our QA products and the acquisition of Gomez. Because of these changes, we believe additional insight into our GAAP income statement numbers is necessary to communicate the true health of our business.

For instance, by looking at the GAAP numbers, one would conclude that license revenue for the quarter was down year-over-year. However if you conducted apples-to-apples comparison by eliminating QA license revenue from last year’s Q3 license number, you see that license revenue for the quarter is essentially flat year-over-year. But more importantly, by diving deeper, you will note that Vantage revenue for the quarter was up approximately 10% year-over-year, and nearly 66% sequentially.

Now, those are compelling numbers. I don’t have to remind you that our distributed systems business is a primary growth driver and these numbers clearly indicate there are efforts to growth this business by working. In terms of maintenance revenue, it is also important to look beyond the GAAP income statement to gain a more accurate understanding of the performance of this business. When you examine the factors impacting maintenance revenue during the third quarter, what you find is that on an apples-to-apples to basis, maintenance revenue grew 3.1% year-over-year. Again, this excludes the divested QA maintenance from Q3 of last year as well as the addition of Gomez this quarter, which is now being recognized within the maintenance line item. We think this 3.1% improvement is very solid, and we are very pleased with the growth.

But even more impressive than this overall 3.1% increase is the fact that Vantage maintenance revenue was up nearly 6% year-over-year and approximately 5% sequentially. This is an important metric and that it both validates the business growth as well as the value being delivered. Like we have said many times before, people don’t pay maintenance for solutions that don’t deliver value. That has never been more true than it is today in this challenging economic environment.

Let’s spend a moment on Gomez. As I just mentioned, we have included Gomez’s revenue in the maintenance line, because Gomez’s fast model is more closely aligned with maintenance attributes, ratable recognition, repeatable, renewable etcetera. For the quarter, Gomez GAAP revenue was $5.8 million. However, GAAP requires that we take a write-down of any deferred revenue acquired as part of an acquisition. We have to restate that fair value. Without this mandated write-down, this revenue would have come in at $8.5 million for the two months in Q3 that Gomez was actually a part of Compuware. This write-down will have an impact on Gomez revenue for the next several quarters on a declining basis.

But keep in mind that SaaS revenue is recognized ratably and as Bob mentioned, Gomez bookings grew at a record pace during the quarter, and these new bookings are not subject to a GAAP haircut. Another indicator of the effectiveness of our strategy and execution is the performance of our professional services business. For the first time in nearly two years, we experienced revenue growth from this business, as services revenue excluding Covisint grew nearly 2% over the second quarter.

And I want to point out that an increase in product-related services played a key role in these results. But this growth always tells half of the story, as the quality of our services revenue continues to increase as well. For the quarter, the services contribution margin again excluding Covisint was 12.1%, up from 5.6% last Q3 and up from 11.7% in Q2. Here’s another way to look at it. While professional services revenue is down 40% year-over-year, the contribution margin percentage is up 116% year-over-year. Our strategy to turn our services unit into a profitable, strategically important, and long-term business is working.

Now, I would like to spend a few minutes discussing operating expenses and provide some insight into the sequential increase in total operating expenses. And looking at these numbers, you have to factor in the Gomez effect, as Gomez accounted for approximately $8 million of direct operating expenses this quarter. Additionally, there is approximately $1.6 million of acquisition costs included in G&A that we are required to expect. Prior to this fiscal year, these expenses would have been capitalized as part of the cost of the acquisition.

So, in doing an apples-to-apples comparison, by eliminating the Gomez-related expense items, the sequential increase in operating expenses for the quarter was $7.7 million or 4.4%. The majority of this increase is concentrated in sales and marketing expense related to annual bonuses as well as marketing investments intended to drive demand in support of our growth objective.

I would also like to point out that from a year-over-year perspective, operating expenses net of Gomez, are down 16.1%. So, you can clearly see our operating efficiency programs are working. Going into Q4, the run rate for total operating expenses is expected to be approximately $200 million, once a full quarter of the Gomez expenses are factored in. In terms of cash, given the $33.4 million of Q3 operating cash flow, we continue to expect operating cash for the year to come in at $200 million. This month, the $35 million borrowed under our line of credit to partially finance the Gomez acquisition was repaid and once again, we are debt free.

With regard to the stock buyback, in Q3, we repurchased approximately 3.5 million shares for about $25.4 million. That brings our total for the year to approximately 15.1 million shares for nearly $111.2 million. As always, we will continue to evaluate business and economic conditions and buy back stock when it is fiscally prudent to do so.

Overall, we are energized by the strides we have made both in terms of our performance as well as the foundational changes we have made to our operating structure, and we believe that progress will continue. Because of this continued success and the measures we have put and are putting in place to promote continued growth, we believe the company has truly entered a period of renaissance. The next flight of our journey that will lead to the type of sustained success that has defined Compuware for the greater part of 40 years, of this, I have no doubt.

Lisa?

Lisa Elkin

Thank you very much, Laura. Ladies and gentlemen, at this time, we will be very happy to take your questions.

Question-and-Answer Session

Operator

(Operator instructions) And our first question comes from Rafferty Capital Markets, and Mr. Kirk Materne, please go ahead sir.

Kirk Materne – Rafferty Capital Markets

Thanks very much and congrats on the quarter. Maybe Bob just like to talk a little bit about sort of the uptick in product commitments, can you talk a little bit about what, you know, that’s not on the balance or on the income statement right now in terms of what’s getting deferred, is that or are you seeing that across all business lines? Obviously Gomez seemed like it had a very good quarter, but should we expect – Mainframe was maybe a little weaker and I thought this quarter did you have some deals on Mainframe that potentially are getting recognized more ratably as well?

Bob Paul

Yes, we are definitely seeing a lot more ratable deals. We are seeing more multi-year deals also. And then certainly, in the subscription base revenue, which is becoming a larger percentage of our business, that also adds to the ratable nature of the revenue. So, all those things involve and then obviously as we start to get some joint solution deals that are, as I mentioned, showing strong interest, we will continue to see that ratable number, the deferred number go up.

Kirk Materne – Rafferty Capital Markets

Okay. And then, Covisint obviously first sort of pop up year-over-year, we have seen a while, are we sort of through a lot of rev rec issues that we are sort of holding that revenue in place, should we expect to see more continued growth going forward? I know it could be a little bit lumpy, but should we expect to see more sort of what you have seen on a bookings basis flow into the income statement?

Bob Paul

Yes, a couple of things. We have been over a year now with, I think we agreed to standards for rev rec for the Covisint model, and so we are very comfortable in the stability of the numbers, and that moving forward. The couple of other things is where we have seen a pretty decent rebound in the auto/manufacturing numbers, and as you can imagine, that was stable or declining a little bit, and that’s behind us. And certainly, the healthcare revenue is exploding. So, you know, you say there might be a little bit of lumpiness, I may go out and limp here and say we don’t expect to see any lumpiness in the Covisint number for quite some time, that number is going to continue to go up.

Kirk Materne – Rafferty Capital Markets

Okay. And maybe circling back to Gomez obviously, it sounds like it’s obviously a great quarter from a bookings standpoint, how much should we expect that to continue into the first quarter? I know, I believe they are on a December fiscal year-end, so was there some end-of-year activity around that, you know, is that 21.8 number that you expect to sort of go up sequentially, I don’t know how much guidance you want to give on that, but you know, has the pipeline I guess gotten even bigger heading into 2010, or is there some end-of-year activity that you know, maybe made that a little bit larger than you would have expected?

Bob Paul

Yes. We see the pipeline growing, and certainly the demand growing, and the secret software is making sure that we can leverage without slowing them down, leverage the opportunities for joint value proposition. There is some seasonality to their business, so they do tend to have a stronger Q4, but as we go into this next fiscal year, the plans that we are looking at right now have continued strong growth, and there is no reason to expect that, that also won’t drive some incremental Vantage business as we sort of, so as (inaudible) ways to grow a larger life of deals.

Kirk Materne – Rafferty Capital Markets

Okay. And then just one last housekeeping, I will get back into queue, Laura, just on the 8 million or so that was from Gomez from an OpEx standpoint, was there much of an impact from Gomez on a COGS basis?

Laura Fournier

Included in that 8 million is about 1.3 million of amortization. So, the rest of it is basically direct costs.

Kirk Materne – Rafferty Capital Markets

Direct costs, okay. Great, thanks very much.

Bob Paul

Thanks, Kirk.

Operator

(Operator instructions) I would now like to go to the line from Noble Research, Gabe Lowy. Please go ahead.

Gabe Lowy – Noble Research

Thank you and good afternoon, also my congratulations on a solid execution. Just a couple of questions, I mean, the numbers sequentially would suggest that there might have been some year-end budget flush coming through in the December quarter. So, first for Vantage, I guess to an extent for Changepoint as well, is that something you saw, or do you think it’s just solid execution, better messaging, better sales force execution?

Bob Paul

On the Vantage and the rest of the serial products, we didn’t see that. We are actually continuing to see strong demand for those solutions, and the pipeline is stable and growing, based on which solution you are talking about. I think there probably was some of that relative to the Mainframe business, you know, for their operating budgets making sure that some of the budget flush did occur. But certainly, for the couple of characteristics you just mentioned, we are receiving better sales execution. As you know, (inaudible) in training and sharpening the value proposition message. We are investing, continuing to invest now pretty heavily in what we are calling sort of frictionless deployment of the solution, so making it easier and easier for our customers to deploy our application performance solutions, and that’s a great lesson to learn there from the Gomez stuff. So, while we are seeing demand increase because of the differentiation, we are also starting to see an ease of achievement of economic value for our customers, and with both of those things going, and also with the starting to see some demand around this cloud computing environment and the need to measure performance in that area, we are looking very much forward to what the next several quarters hold.

Gabe Lowy – Noble Research

Great, thank you. In terms of the ATM and now with Gomez integrated, are you seeing, even though it’s early days, are you seeing the demand coming from the existing installed base of Vantage and then to an extent as you get your arms around the Gomez customers, or do you see more Greenfield hits coming into the Website, activity coming up, you know, the inside sales reps would see that just in terms of the excitement level about a fully integrated solution?

Bob Paul

Right. So, we are seeing both of those. As you saw from some of my comments earlier, Gomez actually had 154 net new accounts, which is a fantastic number because it obviously shows great growth in their business model, but immediately at least to a good conversation around, okay, I have some Web performance issues, and I can see what’s going out there beyond my Firewall, what happens to the cause of that problem is actually inside my datacenter behind the Firewall, and that’s when the Vantage solution comes in. I don’t know of a single conversation that I have had with an existing customer that hasn’t shown interest in looking at, at the very least the Gomez solution because it’s so easily deployed and utilized as an extension of the Vantage solution of the existing customers also. So, we are going to continue to work that hard, and I think the success of moving forward is basically to drive as much of this new joint value proposition solutions for the marketplace as we can, creating very little, if no distraction for the Gomez team, because they really are growing their market very, very well, and leveraging the synergies with the Compuware folks.

Gabe Lowy – Noble Research

Just out of curiosity, one last one about Gomez, they had I think about 2,500 total customers at the time you bought them, would it be fair to characterize it as an 80-20 rule, so in another words, you know, 20% of their customer base was generating about 80% of their business, or was it more diversified than that?

Bob Paul

Yes, it was a lot more diversified than that. So, you have got, you do have some, you know, you have got a couple of nameplate accounts, so the big named accounts that are using the measurements substantially and globally, but there is a wide variety of customers across all major industry standards, particularly those that are using the Web, obviously to grow market share, brand recognition and topline revenue growth, and even now, what we are starting to see is not just a leading-edge Web-based retail companies but almost any company right now is investing to leverage the Internet to change the way in which they are delivery their business value and it could be a car company, an appliance company, a software company, what have you, as you can imagine. So, the market really is wide open, so that’s driving the demand. And obviously the second one is, you know, the promise of the cloud environment is moving forward, you know, we will not see mainstream adoption of cloud computing until performance is resolved and until security issues are resolved, and we have some great opportunities to own those basis.

Gabe Lowy – Noble Research

Okay, that’s great. Last one for Laura, so I am not hogging the queue, the 200 million OpEx run rate now with Gomez integrated, should we see further efficiencies from that, also by the way, how much of Gomez’s headcount? I think they had about 270 people, how much came over? So, the 200 million, is that something that were sort of stable on and there is puts and takes in terms of some areas growing like SNM, maybe some like G&A shrinking or do we see a continuation of the downward trend in the aggregate OpEx?

Laura Fournier

Well, as we go into our planning session for next year, we are certainly going to be looking at up various, but I believe at this point, there isn’t that many cross-savings that we will achieve as we integrate the Gomez folks because we are for all intents and purposes leaving their operating structure intact. We will have some slight increases with respect to some of the finance in HR, administrative type groups, but nothing significant. So, going into the next, I think for the next couple of quarters, you aren’t going to see that operating expense line around 200 million, and it will be mostly towards the sales and marketing category. G&A is still going to be stable right around, it’s the same numbers we are seeing 42 million or so, 40 million a quarter, and keep in mind one thing too, from this quarter, as you look back as we have our, all of our bonus accruals are reflected in these numbers, and last year, when you look at those numbers, we had reversed most of it. So, that’s one of the reasons you are seeing a little bit of an uptick, but I think the 200 million is a good number right now. You need to look at it, but how we would use it for right now.

Bob Paul

The other thing I could add on to that, you know, where we are deciding where we are going to be the best in the world, we are also deciding what we are not doing. And so, there may be as you expect some reallocation of resources as we start to even get more finally cleared. As an example, the leverage that we can help give Gomez in other geographies is going to be substantial, and at some places, we have well, in all the geographies where they should be, we certainly have offices and leadership team and everything else, but we will look to expand their sales and marketing capabilities in those geographies, because we truly believe and we are seeing in the marketplace and the analysts are agreeing we have a differentiated capability that we believe is going to change the way in which companies are looking at solving their application performance problems. And so, now is the time to leverage that, and make sure that we have got people globally that can help us out to grow and support that business.

Gabe Lowy – Noble Research

And the majority of that Gomez team is staying onboard as far as you expect?

Bob Paul

Yes, I mean, they are flying. So, you know, all of this Gomez sales and operations team, marketing teams are in place and going, and they are running as they have done before. Obviously the leadership team is working very carefully with us on product integration and sales leverage of joint opportunities which is a big, sort of one plus one equals three opportunity for us. So, we really try and get the best of both worlds there and so far so good. They have been a great team to work with, and they are doing fantastic things and staying a lot of time here, helping us figure out how to grow it most successfully.

Gabe Lowy – Noble Research

Thanks very much. That’s it for me. Thank you. Congrats.

Bob Paul

Thank you.

Laura Fournier

Thank you.

Operator

(Operator instructions) And now to the line of David Rudow of Thrivent Financial. Please go ahead.

David Rudow – Thrivent Financial

Good afternoon everybody.

Laura Fournier

Hi, David.

Bob Paul

Hi, David.

David Rudow – Thrivent Financial

I don’t know if you disclosed this already, but can you talk about the jump in deferred, kind of where that came from, I don’t know what type of details you can provide but Mainframe versus distributed maybe, you know Covisint and Gomez, whatever you could give us, that would be great.

Bob Paul

Yes, I don’t have the specifics. I know Laura is leaving to find it right now, to get the specifics, but it really was across the board, one, we can get you the percentages pretty quickly, but obviously we are doing, we are seeing more and more multi-year contracts on the Mainframe side, but certainly, the Gomez business grew greater deferred revenue, the Covisint business grew substantially deferred revenue, and then just based upon how some of the deals are structured that we are seeing just more ratable business even on the distributed side.

David Rudow – Thrivent Financial

Do you think that, is that change in deferred, is it mainly around the distributed and the Gomez/Covisint rather than Mainframe?

Laura Fournier

It’s primarily around the distributed. Gomez added, in the current deferred, they added $37.8 million of that. In long-term, it’s closer to $12 million, but most of it, it would be in the distributed.

David Rudow – Thrivent Financial

Okay. So, that $37.8 million, was the total change in deferred or the short term?

Laura Fournier

That was just the difference in current deferred, that was contributed to by Gomez.

David Rudow – Thrivent Financial

Okay. And then the 12 million is in the long-term deferred?

Laura Fournier

It’s long-term and that’s –

David Rudow – Thrivent Financial

Okay. So, the total is what 50ish million?

Laura Fournier

Right.

David Rudow – Thrivent Financial

For Gomez, okay.

Laura Fournier

For Gomez, yes.

David Rudow – Thrivent Financial

Okay, and on the Mainframe side, are you seeing any change in behavior in how customers are renewing contracts at this point, and what I mean by that is looking at – is there any big changes, I mean mixed assumption, mixed growth?

Bob Paul

Yes, I think for the last, a little over last year since the debt in last September, we just haven’t seen a lot of capacity growth. So, the numbers that we are showing right now, you know, purely based upon good relationships with very well documented return on investment case studies, that we have been proactively working out for almost two years now. So, you know, I will say it’s a tough marketplace, and there was no easy win in retaining and growing the Mainframe business. We believe in this marketplace, you know, you got to earn it through the ROI stuff, and then we have been very successful in some of these value propositions that can be driven from our products including data privacy and MIPS management, meaning the overall reduction of your operating costs using our tools in a Mainframe environment. So, those are working well for us, and they are helping greatly with customer retention, and obviously every renewal becomes an opportunity for an increased license fee. So, you know, that’s what we are focused.

David Rudow – Thrivent Financial

And any guess, any idea on what MIPS are growing then in general for your Mainframe market?

Bob Paul

I don’t have numbers, David, but very little. I mean, there is very little capacity growth in the Mainframe space right now, and I don’t expect that to change. There is a new product cycle coming up in the summertime that will probably drive new activity, maybe even new capacity activity, new license opportunity, software license going from the Mainframe force, but right now, we are very thankful that we did sort of the hard work in making sure that we were publishing exactly what’s going on with our Mainframe customers from a value perspective.

David Rudow – Thrivent Financial

Okay, so that whatever the number comes out to you for the year then, that would be the Mainframe MIPS growth for the year, let’s say if it’s down 5% for the year and is there pricing pressure too on top of slow is no story?

Bob Paul

Sure, there’s absolutely pricing pressure.

David Rudow – Thrivent Financial

Okay, okay.

Bob Paul

I mean, we are seeing considerable pricing pressure, and don’t expect that to change which is why, you know, we have just spent enormous amounts of time training our folks around differentiated capabilities and the productivity tools that we are offering. And you know, so far so good.

David Rudow – Thrivent Financial

Any update or news on some of the new partners, you recently signed up, any activity within the quarter?

Bob Paul

Yes, there is a ton of activity. You know, that’s progressing very well, we are getting – we had very nice uptick in revenue numbers this year so far. We just had a major Cisco partner conference in Europe and it was remarkable. I think we had over 110 or so Vantage presentations that we did, and close to 600 or just under 600 new qualified leads on a single conference, because the work that again differentiated work we are doing with Cisco as one example. We are also seeing some nice synergies for the extensive relationship, and we are looking forward to announcements, growth announcements with both of those organizations, but also you would expect to see some new global life is coming to play here soon.

David Rudow – Thrivent Financial

When do you think that we will start seeing some meaningful revenue contribution from these new partnership relationship? Thanks.

Bob Paul

Well, I mean, we had a goal because we started from scratch to get between 5% and 10% of our revenue this year, the partners and we are on track to do that. And it’s just going to go up from there. So, we can certainly start breaking that out in the future if it makes sense, but we will see.

David Rudow – Thrivent Financial

Okay, and then on the guidance you said the low-end of the range, which the original range is $0.60 to $0.70 if I remember correctly.

Bob Paul

Right.

David Rudow – Thrivent Financial

What was the contribution from the sale of assets in Q1, was it $0.12?

Laura Fournier

It was $0.13.

Bob Paul

$0.13.

David Rudow – Thrivent Financial

$0.13, okay. So, whatever the Street number is that’s out there, because they don’t include that in there, add $0.13 to that and then we should get around that $0.60 range for the year.

Bob Paul

Okay.

David Rudow – Thrivent Financial

Okay. All right. That’s everything from me. Thank you very much for your time.

Bob Paul

Thank you.

Laura Fournier

Thank you.

Operator

Thank you. And now to the line of Kirk Materne of Rafferty Capital Markets. Please go ahead.

Kirk Materne – Rafferty Capital Markets

Thanks. Just a couple of quick follow-ups really to Laura. As I look out to your fourth quarter, we shouldn’t be thinking about in terms of the IBM server relationship contribution to the other income line?

Laura Fournier

We are expecting it to be right around $18 million.

Kirk Materne – Rafferty Capital Markets

$18 million, okay. And then in terms of Gomez, is there any – I know that, a small professional services group, is that meaningful at all in terms of what was added to your services line this quarter, I assume that’s being just incorporated into your broader top service line?

Bob Paul

Yes. I don’t think there is any real services, incremental services from Gomez.

Laura Fournier

I think it’s all included in the Gomez, we included in the Gomez line probably.

Kirk Materne – Rafferty Capital Markets

Okay, so it’s being recognized basically ratably?

Laura Fournier

Yes, it’s minimal.

Kirk Materne – Rafferty Capital Markets

Okay, okay. That was it, thanks.

Bob Paul

Thanks, Kirk.

Laura Fournier

Thank you.

Operator

Thank you, and ladies and gentlemen, we will now conclude the question-and-answer portion of today’s conference. I would like to turn the conference back over to Ms. Elkin.

Lisa Elkin

Thank you very much. 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, that does conclude our conference for today. Today’s conference will be available for replay after 7 PM Eastern Time today through midnight February 4th 2010. You may access the replay system at any time by dialing 1-800-475-6701, and entering the access code 125114. International participants may dial 320-365-3844. Again those numbers are 1-800-475-6701, and 320-365-3844, access code 125114. And it does conclude our conference for today. Thank you for your participation. You may now disconnect.

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Source: Compuware Corporation F3Q10 (Qtr End 12/31/09) Earnings Call Transcript
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