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Executives

Lisa Elkin – Vice President of Communications

Peter J. Karmanos, Jr. – Chairman of the Board & Chief Executive Officer

Robert C. Paul – President, Chief Operating Officer & Director

Laura Lawson Fournier – Executive Vice President Administration & Chief Financial Officer

Analysts

Kirk Materne – Rafferty Capital Markets

Gary Spivak – Noble Financial

David Rudow – Thrivent Financial

Mike Latimore – Northland Securities

Gabe Lowy – Mizuho Securities

Compuware Corporation (CPWR) F4Q10 Earnings Call May 20, 2010 5:00 PM ET

Operator

Welcome to Compuware Corporation’s fourth 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 Lisa Elkin, Vice President of Communications and Investor Relations for Compuware Corporation.

Lisa Elkin

With me this afternoon are Peter Karmanos, Jr., Chairman and Chief Executive Officer; 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 law.

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 risk and uncertainties. These risks and uncertainties are discussed in the company’s reports filed with the Securities & 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 fiscal year and other Compuware Business. We will then open the call to your questions.

Compuware growth drivers gained velocity as the company delivers solid Q4. FY ’10 earnings per share reached $0.60 GAAP. Q4 earnings per share are $0.16 GAAP. Compared to Q4 last year, Vantage license fees up 22%, Covisint revenues grew 15%, Changepoint license fees rise 7%, Gomez Web Performance division delivered strong commitments of $20.9 million in Q4. Total products revenue excluding divested products increased to 10% compared to Q4 last year, increased 2% including divested products.

Professional services margins reached 14.7% excluding Covisint. Services revenue increased sequentially. Currently FY ’11 guidance assumes revenue growth, strong EPS and cash flow. Compuware Corporation today announced financial results for its fourth quarter and fiscal year ended March 31, 2010. During the fiscal year revenues were $892.2 million compared to $1.09 billion in the previous fiscal year. Net income was $140.8 million compared to $139.6 million in fiscal 2009.

Earnings per share were $0.60, an increase of 9% from $0.55 in fiscal 2009 based upon 234.6 million and 252.4 million shares outstanding respectively. During fiscal 2010, software license fees were $194.5 million and maintenance and subscription fees were $456.4 million. Professional services fees for fiscal 2010 were $241.3 million. During the fourth quarter revenues were $230 million compared to $253.4 million in the fourth quarter last year. Net income was $37.4 million compared to $48.4 million in Q4 last year.

Earnings per share were $0.16 compared to $0.20 last year based upon 228.7 million and 246 million shares outstanding respectively. During the company’s fourth quarter software license fees were $51.8 million compared to $50.3 million excluding divested products and $55.5 million as reported in the fourth quarter last year. Maintenance and subscription fees were $117.9 million in the fourth quarter compared to $104 million excluding divested products and $111.6 million as recorded in the fourth quarter last year. Revenue from professional services in the fourth quarter was $60.3 million compared to $86.3 million in the same quarter last year.

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

Robert C. Paul

During a year of significant transition Compuware produced strong financial results. We increased revenue in our key growth drivers and generated more than $200 million in cash flow from operations. At the same time, we’ve sharpened the fundamental structure of the company, we divested solutions where we were not best in class and invested in our growth businesses. We’ve also increased our competitive advantage and profitability in our mature lines of business. Bottom line, Compuware is positioned for success and to deliver consistent long term earnings and revenue growth.

Among our growth drivers Gomez and Vantage performed well in the fiscal year 2010 and also showed major promise in the year ahead. Everyday applications on the web and the complex applications delivery chain behind them become more critical to our customers’ brand awareness, revenue growth and overall market share. The markets for solutions to ensure the optimal performance of these applications is large and its growing rapidly. Compuware has an unmatched solution for optimizing the performance of these applications across the enterprise, the Internet and the cloud. We know and the industry analysts agree that none of our competitors can match these capabilities.

This quarter alone we closed 15 agreements with enterprise Internet customers, some in the seven figure range. Given that we’ve just recently acquired Gomez we’re just scratching the potential of this joint offering driven by the increasingly complex and multisource nature of delivering mission critical applications. Cloud computing in particular remains one of the top issues for CIOs today. The two greatest concerns regarding cloud are security and performance.

Compuware as you can see from our recent launch of www.CloudSleuth.net has the best cloud performance management story in the industry. CloudSleuth.net dynamically displays the performance of all major public clouds across the global while providing a complete ecosystem for thought leadership. This platform was built on Covisint, driven by Gomez analytics and allows companies to put in their own URL to measure the performance of their cloud applications.

To maximize the revenue and market penetration opportunity for both solutions, we will largely continue to operate the Vantage and Gomez sales teams independently. However, both teams have financial incentives to gross and co-sell eliminating the possibility of channel conflict. We will establish targeted and integrated teams around specific verticals and value propositions to quickly take advantage of opportunities where a combined sales effort makes the most sense.

We saw the benefits of this operating model already in Q4. Vantage increased license fees more than 22% compared to the same quarter last year. The Compuware Gomez team also continues to post outstanding results with139 new product orders and for the first time ever multiple seven figure deals with Fortune 1,000 companies. Gomez delivered nearly $21 million in commitments in the quarter and launched a major platform wide upgrade featuring a number of industry first including multi browser performance testing as well as unified web and mobile testing.

In the year ahead we will accelerate our investment in both solutions to maximize their growth potential. For Vantage our focus remains on ease of use, simplified pricing and rapid return on investment. For Gomez we’re expanding the geographic reach of the sales team as well as delivering continued production innovation. Propelled by the increasing number and business importance of web applications, for fiscal year ’11 we expect a greater than 20% increase in Vantage license fees and Gomez subscription revenue of $65 to $75 million.

Another of Compuware’s key growth drivers Covisint had a great quarter with a 15% year-over-year increase in revenue to $10.4 million. More importantly Q4 billings grew 39.5% year-over-year to $16.9 million. Backlog, the signed agreements that are being delivered over the next five years grew 13% sequentially to $85.2 million. These billings and backlog numbers will drive incremental revenue in the quarters ahead as large implementations roll out.

For the coming year, we expect 30% to 35% increase in total Covisint revenue as we continue to establish ourselves as a category leader in secure healthcare collaboration. Healthcare is the fastest expanding part of the Covisint business at 42% year-over-year growth.

We expect this growth trend will continue driven by the federal stimulus program for healthcare IT as large health information exchange purchasing decisions are made over the next 12 months. We are well positioned to win a number of these HIEs, health information exchanges, and continue to focus on many statewide initiatives along with key partners such as AT&T and the American Medical Association. This quarter Covisint surpassed 15,000 healthcare professionals using IDs to collaborate on this platform. In June we will boost this number when we launch to an additional 15,000 AMA users in the state of Michigan.

Covisint is also growing in the manufacturing sector and we see opportunities to extend our solutions in to new verticals. With growth like this we will continue to evaluate the right timing for a carve out IPO of Covisint. Our partners’ organization continues to increase momentum also and delivered meaningful revenue gains to the company. This year we successfully launched three CISCO enabled service offerings. Additionally, Compuware technology is embedded in the CISCO network analysis module, an initiative that has sparked great customer interest and notable revenue.

Our partnership also Accenture is increasing in velocity. Working with a performance engineering practice we continue to generate customer wins and the pipeline is building. We’ve initiated relationships with Accenture’s staff and performance engineering business units that will pay additional dividends in the year ahead. We also plan to launch some specific offerings around our mainframe solutions with Accenture this year.

Changepoint’s more focused market strategy of health and technology companies drive improved revenues for their services offerings is bearing fruit. Changepoint is capitalizing on the growth opportunity by leveraging its capabilities for product planning, product development and services delivery have ensured reliable release delivery and successful services engagements. With these compelling capabilities Changepoint produced almost 7% growth in license fees compared to the same quarter last year. For the year ahead we expect Changepoint to produce a greater than 30% increase in license revenues.

Compuware’s mainframe business continues to deliver strong profits and cash flow. In a very competitive market we will maintain our market leadership and deliver roughly flat total mainframe revenues in fiscal 2011. We will continue to provide our customers with unique capabilities for our industry leading solutions and focus on the specific compelling value propositions. We have not factored in any pent up demand due to new mainframe cycles coming later this year.

IT organizations today face every increasing pressure to reduce costs and do more with existing resources. Our mainframe campaigns around operational cost savings and MIPs management are achieving excellent results because they solve exactly these problems. Additionally our test data privacy offering is showing great traction in the marketplace particularly in the financial services area as tighter regulations cause more and more customers to address this risk.

The Compuware professional services business had an excellent quarter also with margins at 14.7%. The focus on repeatable methodologies and profitability is paying dividends. Our discipline around selling the value of the solution delivery group has also increased dramatically. For fiscal year 2011 the overall services business will continue to expand upon this profitability. Compuware is structured for financial success. We have the solutions, the people and the strategy to dominate in our categories now, it’s simply a matter of executing effectively.

In fiscal year ’10 Compuware’s total revenue excluding divested products was $877.6 million. In fiscal year 2011 I expect that we will deliver revenues between $950 and $1 billion which is the increase in revenue excluding divested products between 8% and 14%. On this revenue figure I expect we will earn between $0.48 and $0.56 per share. In Q1 we expect to earn $0.05 to $0.07 per share as our business experiences it normal seasonality. The third and fourth quarters will produce the lion’s share of our EPS for the fiscal year as our growth drivers gain momentum and market penetration.

Fiscal year ’10 was a unique year for Compuware with the culmination of the IBM settlement and the QA divestiture in particular. As Laura will detail more fully, remove any affects like the settlement of IBM and the QA sale from fiscal ’10 results, Compuware’s performing EPS this year was $0.38. Building on this foundation we expect to grow EPS at least 25% in the year. Removing the onetime items from fiscal 2010 you can see that Compuware is growing business with differentiated offerings in hot markets. We’re increasing revenues and our margins are up.

This company is experiencing a remarkable reinvigoration. We recently completed our second annual worldwide sales kick off. The optimism and competitive determination that I saw at this event tells me that our operational teams are energized, armed and prepared to execute on our fiscal year 2011 and long term goals. I look forward to reporting to you on these results in the coming year.

Laura Lawson Fournier

Overall fiscal 2010 was transitional year for the company as we materially redefined our market strategy and corporate focus. As Bob pointed out, this shift has already had numerous positive effects on our top and bottom line and we are positioned for growth in the quarters to come. In fact, with the QA divestiture behind us now and the Gomez integration fundamentally complete, we are convinced that we have the focus and the differentiated best in class solutions necessary to win big in the marketplace in fiscal 2011 and beyond.

To reach our potential we will continue to invest in our key growth drivers while working diligently to hold the line on our overall expense structure. The approximately 4.2% sequential increase in operating expenses during the fourth quarter is reflective of this philosophy. This increase basically reflects a full quarter of the direct operating expenses of Gomez, definitely one of our key growth drivers. For the year, total operating expenses net of Gomez and the gain associated with the divestiture, our expenses were down over 18%.

As we move forward in fiscal 2011 we do not anticipate any material changes in our quarterly operating expenses from the fourth quarter of fiscal 2010. We expect quarterly expenses will be approximately $195 to $200 million in the first and second quarters and closer to $210 million towards the third and fourth quarters. The old maxim is true, you can’t cut your way to growth and we are absolutely committed to growth. Therefore we will continue to invest wisely in those areas of our business that provide the greatest upside while thoughtfully rightsizing investments in other areas without compromising the value we deliver to our customers.

This commitment to customer success is directly reflected in our continued solid maintenance results, particularly Vantage one of our strongest performers in Q4 with the 12% increase in maintenance revenue. This metric remains a primary indicator of the quantifiable value our customers receive from our preeminent application performance solutions. In fiscal year ’11 we expect to see additional growth in our distributed maintenance while mainframe maintenance will be flat or experience a modest decline.

Currency can have a significant influence on our international results and if the US dollar continues to strengthen we could see a decline in our maintenance revenue. But, at this time we believe total maintenance revenue for fiscal 2011 will be between $425 and $430 million. As I mentioned last quarter, the subscription component of the maintenance line is Gomez revenue. We have included the subscription revenue with maintenance because the Gomez SAS model is more closely aligned with maintenance attributes ratable, repeatable and renewable.

For the quarter Gomez revenue came in at $11.1 million which reflects a deferred revenue write down of $2.8 million. If you recall, last quarter I explained that GAAP requires that we take a write down of any deferred revenue acquired as part of an acquisition. Without this write down, Gomez revenues for the quarter would have come in at $13.9 million. This write down effect will continue to slightly impact Gomez revenues for the next several quarters on a continually declining basis. For fiscal 2011, we expect Gomez subscription revenue to be approximately $65 to $75 million for the year.

As for professional services, we continue to be very encouraged by the performance of this business unit. We have nearly a 15% services margin excluding Covisint for the quarter. I did want to point out that this quarter’s margin was positively impacted by certain onetime items. Excluding these adjustments, the services margin for the quarter would have been approximately 11%. But, regardless of the onetime items, this quarter’s professional service margin shows that our strategy is working and that our goal of obtaining an annual 15% services margin is more than achievable.

As we look at the first two quarters of fiscal 2011, we expect the services margin to be between 11% and 13% ramping up to 15% by the fourth quarter as we continue to gain greater efficiencies in this business. In terms of cash, operating cash flow for the quarter came in at a very strong $122.9 million and we finished the year with $226.3 million. For fiscal ’11 we expect operating cash flow to be approximately the same as fiscal 2010, around $225 million.

With regard to the stock buyback, in Q4 we repurchased approximately 2.9 million shares for about $21.8 million and that brings our total repurchases for fiscal year ’10 to approximately 18 million shares for nearly $133 million. As is our often stated policy we will continue to evaluate business and economic conditions and buy that stock when it is fiscally prudent to do so. But, I’m sure we’ll be in the market on Monday.

Lastly, our effective tax rate for fiscal year ’10 was approximately 33% while the effective tax rate for Q4 was approximately 25%. This artificially low rate in Q4 was primarily the result of certain adjustments associated with the Michigan business tax. For the coming year we expect the effective tax rate to normalize at approximately 36%.

We have given you a considerable amount of detail related to our expectations for next year all of which cumulate in our current guidance of revenue in an expected range of $950 million to $1 billion and an expected EPS range of $0.48 to $0.56. Given the many changes over the past year I would like to take a minute to remind you of the items that impacted fiscal year 2010 EPS and how to think about them in fiscal year 2011.

First, the Gomez acquisition impacted operating results for the last five months of fiscal ’10. For this time period Gomez results were basically breakeven as their profitability was impacted by acquisition costs, deferred revenue write downs and amortization of intangibles acquired. As we move forward in fiscal year ’11, Gomez operations will continue at a breakeven to slightly profitable contribution margin as we continue to invest in this business for growth.

Secondly, we sold our QA operations in the first quarter of fiscal 2010. QA had a significant impact on the first quarter operating results as the $52 million gain on the sale was included in operating income. Third, the fourth quarter results for the past five fiscal years have been positively impacted by the settlement with IBM in March of 2005. As reflected in other income on the income statement the 2010 settlement amount was $20.7 million. The terms of the agreement are complete and there will be no settlement income in 2011.

These are the major issues when comparing fiscal 2010 to the EPS projection for fiscal 2011 and if we subtract the effects of QA and IBM from the fiscal 2010 results, remember Gomez was breakeven, the fiscal 2010 EPS on this pro forma basis is $0.38. The low end of the fiscal 2011 guidance compared to 2010 on this basis reflects a 25% increase year-over-year. Clearly, you can see we are expecting growth.

Fiscal ’10 was a successful year of change for Compuware. We are emboldened by our ability to implement the foundational changes and withstand the global recession. This bodes well for our future as we capitalize on the changes we’ve made and on the investments we are making.

Lisa Elkin

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

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Kirk Materne – Rafferty Capital Markets.

Kirk Materne – Rafferty Capital Markets

I guess Bob, maybe on Gomez can you just talk to us a little bit because we don’t have an idea sort of what they’re running at before you all bought them, just talk a little bit about sort of the growth rates in terms of what that bookings number looked like and sort of what your implied guidance would be on sort of an apples-to-apples growth rate basis if we’re talking about $65 to $75 million next year?

Robert C. Paul

Several years ago before the economic downturn they had gone upwards of 30% to 35% growth. In the downturn they went – I’m going from memory now, went down to in the high teens from their fiscal year which was calendar based. So now they’re on a run rate of greater than 25% growth and they’re bookings would be slightly higher than that. What we’re seeing in the marketplace Kirk is most new IT spend discretionary and other are going towards the development of web based apps and how that impacts market share, increased revenue, brand awareness and things like that.

We also know that the complexity in that web environment, in the entire applications delivery chain beyond the firewall and then back to the datacenter is becoming much more complex. You add the cloud complexity on top of that and companies are absolutely have to know how they’re applications are performing at the end user level and what’s causing performance issues if there are any. So that’s driving a great increase in market share. We actually expect that to even improve upon those numbers as we invest in expanding their reach globally and as we also start to get the synergies from the Vantage Compuware sales folks with the Gomez folks. It’s all good.

Kirk Materne – Rafferty Capital Markets

I guess along those lines with Vantage, obviously the growth rate in licenses has picked up. How much of that is just the Vantage business unit just doing a better job from an execution standpoint and how much of it is really the addition of having the Gomez products as part of a broader portfolio? I’m sure maybe it’s a little of each but I don’t know is one greater than the other?

Robert C. Paul

I think operationally the Vantage folks have improved their game, the value proposition, how they’re selling, who they’re selling too. We’ve just sharpened the edge of their capabilities through a full year of solutions selling, value proposition and competitive analysis. I will say however that just the market notoriety of having Gomez in the portfolio drives more companies to include the Vantage solution on their need to talk to list.

So we’re getting up to bat much more. We’re winning a higher percentage of these deals and now with the joint solution which is really where very, very strong differentiation is coming in and some very exciting things that we’ll be announcing here in the next quarter we think will fundamentally change the ABM game as has traditionally been seen and bought in the market to this date. I think it’s a combination of things and to be honest with you Kirk I don’t know percentages on each one but as you suggest it’s a little bit of both.

Kirk Materne – Rafferty Capital Markets

Last question for me and I’ll turn it over to others, just in the full year guidance, what are you expecting, professional service margins jumped up nicely at the end of the year, just sort of what’s your expectation for that business in terms of revenue? I know you’re running it more for margin at this point but is that sort of flat, down a little, up a little, I’m just trying to get a sense on how that melds in with your broader guidance?

Robert C. Paul

I think our expectation has changed a little bit after this quarter for a couple of reason in the marketplace and the fact that the competency programs that the groups developed seem to be gaining traction. So we are actually seeing and expecting a slight increase so a few percentage points increase in overall revenue in the PS business. But, the margin, as you said is going to be the key driver there.

Operator

Your next question comes from Gary Spivak – Noble Financial.

Gary Spivak – Noble Financial

First, I want to ask the obligatory question about the tone in Europe what you saw in March, how did that do as part of your international revenues? Then, what are your expectations built in to your 2011 guidance for that geography?

Robert C. Paul

Actually, Europe continues to operate as they have in the past for us so we’ve seen little if no impact so far. We have seen a little bit of an impact towards the end on the mainframe business in Europe just because of the tightening of the build around operating costs but very, very minor changes in the overall European operations and certainly in the European forecasts and the pipeline doesn’t look like there are any market changes really from the past. We have been watching it closely for the obvious reasons so, so far so good.

If there is a decline, we’re buoyant a little bit from expanding very rapidly the Gomez abilities in to southern Europe and eastern Europe where there hasn’t been a strong Gomez presence in the past so we’re expecting that to pick up a little bit.

Gary Spivak – Noble Financial

Just remind me, if the sales force of Vantage and Gomez are going to remain separate who’s responsible for Advantage?

Robert C. Paul

The Vantage folks are selling the Gomez Advantage joint value proposition. Obviously, it’s a much larger sales force, it’s a slightly more complex sale with a direct sales force in place globally it made the most sense. There’s some things coming out here in the following quarter which we believe are going to be very, very exciting opportunities for both sales force to take advantage of the joint capabilities. The naming will change, the solution might change but right now Gomez the strategy is they are focused on instead of just being the market leader, to really become the market standard for web performance and the Compuware folks will leverage that to make sure that we’re delivering this differentiated value proposition.

Gary Spivak – Noble Financial

I guess I have a question for Laura. I noticed that license fees recognized from deferred were actually more than what was put in to deferred. Can you walk me through that a little bit?

Laura Lawson Fournier

Yes they were, for this quarter we were approximately $18 million I believe on what we took out of deferred and let me get the exact number you, it’s a net $10 million out of deferred.

Gary Spivak – Noble Financial

Right, so is that a seasonal thing? Was there something that happened over the past year that would help me explain why that would be in this quarter?

Laura Lawson Fournier

It’s really not a seasonal thing. It depends on what deals that we do during the quarter. A lot of our mainframe deals are the big drivers there. Most of the deferred license fees are in mainframe. It just depends on the customer and the terms of the deal whether or not it goes in to deferred but there’s not really any major driver there.

Operator

Your next question comes from David Rudow – Thrivent Financial.

David Rudow – Thrivent Financial

Just a question, and I probably missed it but Covisint revenues in the quarter?

Robert C. Paul

Yes, they were $10.4 so flat but the bookings went up pretty significantly.

David Rudow – Thrivent Financial

And you expect that segment to generate 30% growth?

Robert C. Paul

They were up 15% in revenue growth this past year and we expect to double that. There were three primary reasons for that David. Number one is we were treading water in the automotive and the manufacturing space at the beginning of the year and that has picked up and the pipeline has picked up and we have a lot more predictability in to that revenue as an entity so we’re fairly confident in that number.

The second thing is there are an accelerated catalyst from the federal stimulus funds coming in to the healthcare world which is going to drive some pretty great deals over the next fiscal year for Covisint. Then finally, we established a brand new referenceable account in a new industry vertical and that existing customer is going to drive more revenues, more bookings but not only that, the bell weather for that industry it doesn’t have anything like it to date and we’re expecting to be able to announce sort of more formally entrance in to that industry sector moving forward.

David Rudow – Thrivent Financial

Then your comment on professional services being up a couple of percentage points does that include Covisint in there or does that exclude it?

Robert C. Paul

No, it excludes it. So ex Covisint the professional services business we’re expecting to see slight increases this fiscal year.

Laura Lawson Fournier

David, those increases will come in the second half of the year primarily though.

David Rudow – Thrivent Financial

On the professional services side?

Laura Lawson Fournier

Right.

David Rudow – Thrivent Financial

Then your number on maintenance revenues for the year $425 to $430 I’m assuming that does not include Gomez?

Laura Lawson Fournier

No, that $425 to $430 is maintenance, Gomez will be an additional $65 to $75 million.

David Rudow – Thrivent Financial

Any new investments planned for the year? Is there a ramp in sales force or a ramp in R&D during the year? And, how do expenses look for Q1 just in terms of total op ex? Flat you said from Q4?

Laura Lawson Fournier

They will be essentially flat from Q4 in Q1 and Q2.

David Rudow – Thrivent Financial

On the APM side, any change of the competition or who you’re seeing in the field? I mean, it’s a fragmented industry and who do you see coming up behind you as kind of the challenger?

Robert C. Paul

Really, nothing has changed. In the web space obviously Gomez has done very, very well. The traditional competitors that we’ve had are still there, we’re not seeing anything different. There’s been no market reaction to the move that we’ve made. Our expectations are because we’re investing now for further differentiation in the next six months even if something does happen here shortly that we don’t know about we think we’re in pretty good shape to keep that differentiation moving for at least the balance of this year and beyond. We just go through our global sales kick off as I alluded to. We’re not really seeing any difference in the traditional competitors that we’ve seen out there before.

David Rudow – Thrivent Financial

Is Peter on the call?

Peter J. Karmanos, Jr.

I’m sitting here.

David Rudow – Thrivent Financial

Any comments on what you think about the year and kind of the changes that you see that have happened and kind of recovery in the company?

Peter J. Karmanos, Jr.

Well, I’m very pleased with the work everybody has done. I think we’re really, as they said, positioned to have a bang up year even with the kind of stuff that’s going on in the market and the economy. There was a question about Europe and I think we just spent some time with all the European sales people and their forecasts are exactly where they were when we started to plan the year so they haven’t seen any substantial change in their business. Our guys are giving very conservative numbers. Covisint, Vantage, Gomez, are going to be real drivers of growth and I think they’re going to be even better than the numbers they’ve been giving you.

David Rudow – Thrivent Financial

Laura, what was the currency impact for the quarter? And given the what 5% to 8% growth in revenues for fiscal ’11 what is your assumption around the Euro and the Pound?

Laura Lawson Fournier

I wish I had a crystal ball for the last part but for the quarter it was about a $10 million positive impact from currency and we’re just all crossing our fingers as we go through this quarter.

David Rudow – Thrivent Financial

But you’re not making some assumption on 1.20 for the Euro or 1.50 for the Pound or anything like that at this point or are you just taking where they’re at today?

Laura Lawson Fournier

Exactly.

Operator

Your next question comes from Mike Latimore – Northland Securities.

Mike Latimore – Northland Securities

Just on Gomez, I guess a couple of things there, for the pricing environment for the Gomez products and services, any change there over the last couple of quarters that you’ve seen?

Robert C. Paul

No. In fact, there have been some improvements from the pricing in the Gomez area just because of the newer capabilities that they’ve brought out and the additional ability now to populate the Gomez dashboard with behind the firewall performance measurements from our Vantage solution also continues a positive trend in the pricing structures for us. So as you know differentiation will drive the opportunity to add more value to the marketplace and we’re able to reflect that in the pricing.

Mike Latimore – Northland Securities

Of the $20.9 million in bookings, roughly how much do you recognize over the next 12 months?

Laura Lawson Fournier

The $20.9 [inaudible] Gomez. It’s going to be reflected in the $65 to $75 million of revenue. I couldn’t tell you exactly – it’s recognized over the next 12 months, the whole $20.9.

Robert C. Paul

That bookings number, the way they think about that and calculate that, the commitments number, is it’s anything that’s schedule to come in in the next year. All that will be put in.

Mike Latimore – Northland Securities

On Covisint, you mentioned a number of the divers this year, I guess of those three categories is the biggest one the new healthcare funding that’s coming through here? Then if so, what kind of visibility do you have in terms of timing of those as well as implementation time frames on those?

Robert C. Paul

That’s a wonderful question because in early market some of these happen very quickly and some of them take time and then you add state government in all those equations and every state seems to have a slightly different strategy as it relates to healthcare IT. What we do know is that the funds coming in are going to force decision number one, but they’re also going to force spending. If you don’t spend the money you lose it and then based upon how fast you spend it you then have to match it.

There are some accelerants in there that the federal government has put in place for state based initiatives and the first largest tranche of that will happen over the next 12 months. The implementation time frame, I mean we got the state of Minnesota up and running in about three to four weeks with their first case. In some states they’ll want to get a substantial infrastructure build out which could take many, many months before the subscription revenue starts coming in. So it really is going to vary and it’s hard to model but nonetheless it’s all good news.

Mike Latimore – Northland Securities

Your view in to the June quarter here, are you assuming kind of normal seasonality or is there extraneous factors that make it better or worse from a seasonal standpoint?

Robert C. Paul

No, we’re thinking normal seasonality. We typically ramp up as the year goes. Most of our customers’ fiscal year ends towards the end of our calendar year and so we do obviously very well in Q3. I think however, that the changes that we’ve made in the strategy and the overall health of the solutions that we have right now and their positions in the marketplace, as you’ve seen this past year, has led to much more consistency in our performance and that’s one of the big things that we’re trying to accomplish here is a much greater consistency and predictability in the business model moving forward.

Mike Latimore – Northland Securities

I think you gave an international percent of revenue, do you have a percent from Europe in the quarter?

Laura Lawson Fournier

I can give you from a booking perspective or from a revenue perspective, I can give you that. we’re about 50/50 in terms of North America versus international.

Mike Latimore – Northland Securities

What about Europe specifically?

Laura Lawson Fournier

Europe of that 50% would be about 80%.

Mike Latimore – Northland Securities

Last question, restructuring costs, you had about $3 million this quarter, do they go away, do they go down a little bit? What should restructuring costs be going forward?

Laura Lawson Fournier

Going forward we really don’t anticipate any additional restructuring charges or any significant plans going forward. That’s kind of the runoff from the plan we had the previous year and you shouldn’t see many restructuring charges going forward at all.

Operator

Your next question comes from Gabe Lowy – Mizuho Securities.

Gabe Lowy – Mizuho Securities

A couple of questions here, you’re going to see where I’m diving here, I don’t know if you want to swim with me but, Bob I’d be interested in fleshing out a little bit more let’s say 18 to 24 months out. How do you see the APM business looking as opposed to how it’s looked today and the last 18 to 24 months?

Robert C. Paul

I don’t want to get in to too much of the strategy for obvious reasons, competitive reasons primarily but I will say this. The traditional buying behavior in APM has been around point specific solutions. If I’ve had a network problem I buy a networking monitoring tool, server problem, mainframe problem, client problem, web problem, end user problem, you can just go on and that is because that has been the extent of the tools available.

When you walk in to an organization and you’re able to say, “Listen, you have a business issue where an application has to perform and that application delivers value at the end user. Wouldn’t it be great if you had a single dashboard that gave you full visibility across the entire spectrum of the application delivery chain?” So what’s going to happen first in the next six to 12 months is that we’re going to build up enough referenceability in enough industry sectors, in enough geographies so the leading bell weather account across the world are going to accomplish things that are going to give them a competitive advantage in the marketplace.

Once those reference accounts are in place we then 12 to 18 months out believe that we’ll be in a position to drive the rest of the world, the pragmatists out there a low risk solution that gives them that capability. While all that’s going on we’re investing heavily in the ability to take the time and some of the science work that goes in to making this solution happen so it’s as we say frictionless as possible.

So to get to the point where you get to that inflection point you need enough critical mass of references which is a absolute critical goal this year. Then, you need to have the ability to scale very, very quickly which if we’re doing everything right the competition will not be able to go. So how do I get the solution in the market quickly as soon as the contract is signed deliver immediate value and go, go, go.

With that expect the overall category of APM, I don’t have the exact numbers, I should have because we go to conferences and talk about this all the time, but it is substantial growth expected because of cloud drivers, web drivers and the complexity going in to the marketplace. More complexity means more risk, you’ve got to solve the problem somehow. Number two, if you have a differentiated solution that you can scale very quickly with low risk that’s a perfect [inaudible] which we think are great companies that can plug in to our backbone and then you’re not going to move to far without Perot have some initiatives, Dell Perot have some initiatives and certainly IBM markets some specific projects that they have going on.

So over the next year what will happen, and actually it’s more like the next two to three years, what will happen is as you’re seeing in the cloud market, these categories will get much better definition so you will have backbone capabilities, you’ll have specific use case solutions, all being partially funded by federal initiatives and then sustainable projects from major health systems, state governments and major physician groups and also the administrators.

As that occurs, as the categories get better defined, the buying will then pick up. So the big projects will start early because of the federal stimulus funding, those will get going, categories and the players will be much better defined in the next 12 to 24 months and then once various constituents in the healthcare continuum understand those categories they can then pick and choose from the available contenders and that’s when you’ll see the real ramp in IT spend in the healthcare marketplace. I’m not sure if that answered your question but that’s basically what’s going on.

Gabe Lowy – Mizuho Securities

Two easy ones for Laura, one is I didn’t catch how much Gomez contributed to deferred this past quarter? And, if you have Laura the breakdown on the stock compensation component?

Laura Lawson Fournier

Stock compensation?

Gabe Lowy – Mizuho Securities

Yes.

Laura Lawson Fournier

We do have that for you. In Q4 we had $4.8 million of stock option expense. For the year it was $17.4 million. Then your first question was on?

Gabe Lowy – Mizuho Securities

Gomez to deferred?

Laura Lawson Fournier

We have not given out that number but I can get that for you. I’ll get that for you tonight.

Operator

Your next question comes from Kirk Materne – Rafferty Capital Markets.

Kirk Materne – Rafferty Capital Markets

Just one last quick follow up, Bob can you talk about sort of your expectations for mainframe in fiscal ’11? It seems like it’s bottomed out over the last couple of quarters and stabilized. I know IBM will be launching their new platform in the back half of this calendar year. I’m just trying to get a sense on your general expectations more sort of stabilization, possibility for growth? I’m just trying to figure out how you guys are sort of baking that part in to your thought process.

Robert C. Paul

A very, very good question Kirk. I’m actually fairly pleased with the mainframe performance because more and more there are not a lot, if any, sort of the capacity deals that use to come in. The work that has been going on over the last two years has really helped to stave off competitive pressures because of the requirement to build ROI use cases, value proposition studies with our customers.

So as operating budgets were basically locked down during the recession, the mainframe numbers that you’re seeing have really been driven from I think better salesmanship from our group overall, not just sales but the supporting mechanism in place. That really means competitors coming in, are we providing value, how we differentiate it and making sure that we have a strong relationship and a seat at the table. Those things have gone well and obviously could have gone a lot worse if we hadn’t done those things over the last 24 months.

Having said that, the recession did occur and as we saw I think there was a 19% decline in MIPs shipments this last quarter from IBM, there has been a cooling off a little bit of the mainframe marketplace. I don’t know enough to predict whether the new mainframe series coming out we think in September time frame is going to release some of this pent up demand. Because we’re being somewhat conservative we didn’t build that in to our model, that would all be very positive news for us.

Then, also potential upside of some of these new partner relationships that we’ve established in the mainframe business that we have not traditionally had, those kinds of things will make us I think a little higher presence in the marketplace. So basically flat is the guidance. If there is new demand coming through these new mainframe series that’s going to be a positive trend for us.

Operator

Ladies and gentlemen we’ll now conclude the question and answer portion of today’s conference call. I’d like to turn the call back over to Lisa Elkin.

Lisa Elkin

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

Ladies and gentlemen today’s conference is being made available for replay starting today at seven pm in the Eastern time zone. It will run for one week until Thursday, May 27, 2010. You can access our service by dialing 800-475-6701 or internationally at 320-365-3844 and at the voice prompt enter the access code for today’s conference 147899. Those numbers once again, 800-475-6701 or 320-365-3844 and again the access code is 147899. That does then conclude our conference call for this afternoon. Thank you for your participation. You may now disconnect.

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Source: Compuware Corporation F4Q10 (Qtr End 03/30/10) Earnings Call Transcript
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