Compuware's (CPWR) CEO Robert Paul on Q4 2014 Results - Earnings Call Transcript

| About: Compuware Corporation (CPWR)

Start Time: 17:37

End Time: 18:20

Compuware Corporation (NASDAQ:CPWR)

Q4 2014 Earnings Conference Call

May 22, 2014 05:30 PM ET


Robert C. Paul - CEO, President and Director

Joseph R. Angileri - CFO and Treasurer

Lisa Elkin - VP of Investor Relations and Communications


Aaron Schwartz - Jefferies LLC, Research Division

Kirk Materne - Evercore Partners Inc.

Rakesh Kumar - Susquehanna Financial Group

Mark Jordan - Noble Financial Capital Markets


Hello and welcome to Compuware Corporation Q4 Fiscal Year 2014 Earnings Call. 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, Senior Vice President of Communications and Investor Relations for Compuware Corporation. Ms. Elkin, you may begin.

Lisa Elkin

Thanks you, and good afternoon, ladies and gentlemen. With me today are Bob Paul, President and Chief Executive Officer; and Joe Angileri, 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’ve 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. The presentation today includes various non-GAAP financial measures. The earnings release contains a reconciliation of each of these to the comparable GAAP numbers, and we refer you to those reconciliations for further information. The earnings release has been posted on the Compuware Investor Relations website at under press releases, and the slides management will refer to have been posted under Presentations and Events.

I’ll now turn the call over to Bob and Joe, who will discuss Q4 and fiscal 2014 operating results, our outlook for fiscal year ’15 and ’16 and other pertinent business items. We will then open the call to your questions. Bob?

Robert C. Paul

Thanks, Lisa, and thank you, everyone, for joining us. We’ve a good deal of information to share with you this afternoon, so we will dig right in.

On Slide 4, you will see the key themes for today’s discussions. These include, one, the APM and Mainframe businesses have both strengthened this year. We expect this to continue in fiscal year ’15 and beyond.

Two, we’re ahead of our remaining cost rationalization initiatives, which will help drive the tripling of operating income and margin from fiscal year ’14 to fiscal year ’16. Three, I will discuss additional fiscal year ’15 shareholder value opportunities in the form of the complete spin off of Covisint and the furthering of our capital return program. And four, I will end by reviewing the merits of a possible strategic separation of our APM and Mainframe businesses.

Slide 6; list our Q4 and fiscal 2014 high level results. For the full-year, Compuware non-GAAP earnings per share were $0.50, representing year-over-year growth of 25%. On a GAAP basis, we earned $0.32 per share for fiscal 2014 compared to a negative $0.08 last year. Total revenue for the year from continuing operations came in at approximately $721 million.

Slide 7 shows a reconciliation of our non-GAAP income and EPS to their comparable GAAP numbers. This information is also available on our issued press release. Slide 8, lists key fiscal 2014 operational highlights, including 16% APM license growth and 9% APM total revenue growth year-over-year.

The APM business unit also dramatically improved its profitability posting a contribution margin of $28 million compared to a $4 million loss last fiscal year. Execution in this business remains strong. In fiscal 2014, our Mainframe operations made significant strides in stabilizing revenue. Mainframe also continues to deliver superior profitability posting a contribution margin in the 75% range.

During the year, we were also able to eliminate approximately $56 million in corporate and shared services expenses, a total that is nearly 25% higher than what we’ve projected for fiscal 2014.

Let’s dive a little deeper into the business units. Turning to Slide 9 and APM. Q4 closed out a transcendent year for APM, which turned the corner in achieving its operational objective of delivering profitable growth evident through a nearly 761% year-over-year improvement in contribution margin. This is especially impressive given the increased investment innovation over the last year.

On the product front, our dynaTrace solution featuring best-in-class real user transaction tracing capabilities, again led the portfolio in license growth. With a win rate of greater than 70% against all competitors new and old alike, we anticipate dynaTrace continuing its Compuware’s flagship APM solution in fiscal year ’15 and beyond.

DCRUM has been retooled to strongly compete in the growing network performance market. And with DCRUM 12 we’ve a product that will drive greater value in less time for our customers. DCRUM 12’s tight integration with dynaTrace will also deliver more expansion deals. With a new sale specialist team being implemented to support the solution and growing channel strength, DCRUM is well positioned to capture additional market share going forward.

Our APM is a service platform which now combines the Gomez synthetic network with dynaTrace PurePath and mobile real use technologies has also been significantly enhanced. We expect that continued momentum in the mobile and real user monitoring segments will promote renewed growth in the solution.

Additionally for the first time all quota-carrying reps in North America are now aggressively selling APM’s service and we believe this new value driver will begin to payoff as early as the second half of the fiscal year.

In terms of geographical performance, EMEA showing continued signs of operational improvement posted solid year-over-year bookings growth of 27% for the quarter. In fact all four of our geographic locations, North America, EMEA, APAC and Latin America, experienced year-over-year bookings growth for the quarter and the entire year.

Moving on to Slide 10, and our Mainframe business. Mainframe continues to execute against this objective of stabilizing revenue decline, while maintaining a strong contribution margin. While total Mainframe revenue declined 11% year-over-year, the decline represented a meaningful improvement over prior periods.

We expect this decline to continue to decrease in the coming years and congruent with the potential category consolidation strategy we’re developing, future Mainframe top line revenue growth is a longer term possibility. Our fiscal 2014 Mainframe maintenance renewal rate was approximately 94%, which is the business units’ highest renewal rate in the past five years.

We also have a solid pipeline of new business opportunities for APM for Mainframe and developer productivity solutions. APM for Mainframe continues to gain steam in the marketplace. Since launching the solution 15 months ago, we’ve closed 25 APM deals, APM for Mainframe deals with 21 of those closing in this last fiscal year.

As Covisint has just concluded its call, my comments on the subject will be brief. We’ve essentially gone through a reset of the Covisint business. I’m thrilled to announce that Sam Inman, who had been acting as Interim CEO will be staying on permanently in this role.

Sam is already making significant operational improvements in this business including the recent hiring of a new sales SVP to refocus sales efforts and to drive improved execution, actively searching for an SVP of marketing to bridge the gap between product and the market, and the right sizing of the businesses for fiscal year ’15 top line revenue growth and margin expansion.

These actions combined with other meaningful strategic adjustments, he is implementing will no doubt have a positive impact on the future financial results. And that said, we’re advising for patience here, while the changes and direction that Sam is leading have a chance to take hold.

Referencing Slide 11, key financial highlights for the fiscal year include solid operating cash flow of $162 million, a $250 million cash balance excluding Covisint. No long-term debt with a $300 million available credit facility and a total return to shareholders of $118 million through our annual cash dividend and shares repurchased. In fiscal year ’14, we also generated $112 million in cash associated with our business divestitures.

Compuware’s fundamentals remain very strong. To sum up, as referenced on Slide 12, we’re pleased with our fiscal 2014 results, led by a double-digit increase in earnings, continued APM revenue and margin growth and further Mainframe stabilization and maintain strong profitability. And we were able to accomplish all this in the midst of substantial corporate structural change.

Let’s move on to Slide 13, on our business outlook for fiscal years 2015 and 2016. There is a good amount of detail in this section, so I want to start with the key points we’d like you to walk away with.

We are projecting top line revenue growth for the Company, a tripling of operating income from continued operations and its corresponding margin percentage for fiscal year ’14 to fiscal year ’16, double-digit APM license and total revenue growth, continued strong APM margin expansion, further stabilization of Mainframe revenues with an exceptional contribution margins in the 70% plus range, and the completion of our extensive cost rationalization program.

At this point, I’ll turn the call over to Joe, who will provide more details about our outlook for fiscal year ’15 and ’16. After Joe concludes, I will return to discuss future shareholder value creation items. Joe?

Joseph R. Angileri

Thanks, Bob. Before delving deeper into these numbers, I want to point out some important considerations inherent in our planning. These items are listed on Slide 14. Over the last year our APM business has witnessed this shift in buying behaviors away from enterprise purchases to more consumption based approach. This coupled with our enhanced footprint in the cloud-based solutions will increase the percentage of ratable based revenue in our APM business unit.

While this purchasing trend has no fundamental impact on the economics of our APM business, it will put downward pressure on the revenue for fiscal ’15 and ’16. As more of our license sales will have to be recognized over their terms. We therefore are modeling a higher percentage of deals going ratable with more revenue being deferred into future years.

The ratable table at the top of the slide shows the impact this market shift has in our projected revenue. Secondly, we remain committed to fully spinning Covisint off to Compuware shareholders within the stated 12-month window following the IPO. With this in mind, our outlook includes APM, Mainframe, and Covisint in fiscal year ’15, but only APM and Mainframe in fiscal year ’16.

Finally, as of April 1st, we transitioned our APM for Mainframe solution from our Mainframe business unit to our APM business unit. The pro forma financial impact of each business unit is shown in the table at the bottom of the slide.

This is a natural transition that we anticipated when we introduced this solution. This solution more often than not would be an extension of the distributed transaction tracing product offered by dynaTrace, rather than a Mainframe centric offering. However, we initially wanted to give reference sales in a smaller, more controlled environment. Our Mainframe sales organization provided that benefit.

Now that we’ve seeded the market, we can move to the solution to our much larger APM sales force. The APM sales team is already up to speed on this product and is currently building on the existing pipeline.

Slide 15 shows our high-level APM and Mainframe business outlooks for fiscal years ’15 and ’16. For APM, we’re projecting more than 12% compound annual growth from fiscal ’14 to ’16, while significantly expanding contribution margins in line with our market leadership position.

We expect to accomplish this while continuing to invest in sales and product development, which I will discuss further in a bit. Even with increased investment, we expect APM’s contribution margin to double and its contribution margin percentage to expand a healthy 600 basis points from fiscal ’14 to fiscal ’16.

Turning to our Mainframe outlook, although we project a decline in Mainframe revenue, we see it lessening significantly and stabilizing at around the 7% range in fiscal year ’16. We think there are opportunities to minimize this further through focused execution and market consolidation opportunities.

We also expect Mainframe’s contribution margin to stay strong in the mid 70% range over this period. In addition to stabilizing our revenue, our primary focus in the Mainframe business includes maintaining solid customer relationships, driving continued strength at our maintenance renewal rates, and maximizing profitability.

The table on Slide 16 shows key financial projections for ’15 and ’16. The key takeaways from this slide are as follows. First, we chose to show ’15 and ’16 as oppose to just ’15 because ’15 is the final year of our transformational journey and ’16 is more representative of our undistributed undisturbed operations.

Secondly, a combined compound annual growth rate for our core businesses APM and Mainframe is projected to be around 3.4% from fiscal ’14 to fiscal ’16. Third, massive improvements in GAAP operating income from continuing operations from $48 million in fiscal ’14 to a projected $150 million in fiscal year-end ’16, more than a 200% improvement.

Fourth, our GAAP operating margin percentage from continuing operation more than triples going from 7% to a projected 22% from fiscal year-end ’14 to fiscal year-end ’16. Fifth, as you know because of all the transformation we’ve been focused both on GAAP and non-GAAP metrics, as a way of cleansing the effect of all the transformational implications. As such, GAAP and non-GAAP income are projected to improve 36% and 6% from $72 million and $111 million in fiscal year-end ’14 to a projected $98 million and $118 million in fiscal year-end ’16 respectively.

Lastly, I want to focus on EPS. Non-GAAP EPS improved to $0.50 in fiscal year-end ’14 and is projected to be $0.55 in fiscal year-end ’16, a 10% increase. Now you may have noticed that fiscal year 2015 non-GAAP EPS declines from fiscal 2014. This decline is primarily due to taxes, Covisint and the impact of ratable recognition that you can see on Slide 17.

Slide 18 shows the change in cash flow from fiscal ’14 to fiscal ’15, which is predominantly related to run off of accounts receivable as part of the purchase agreement from our discontinued operations and payment of taxes related to the taxable gain from that transaction.

Now let me turn to cost rationalization on Slide 20, where we’ve reduced our corporate and shared service costs by $56 million from fiscal year ’13 totals, on our way to over a $120 million by fiscal year ’16. It’s not obvious to see the impact of our cost reductions in our standard financial statements.

There are three important clarifications. First, investments we make, such as sales and R&D, [ph] [skewer] some of the expense reductions. Secondly, from a management reporting standpoint, the reductions don’t always directly translate into any one line item on our financial statements. And lastly, due to the divestitures in Q4, these costs are now allocated between continuing and discontinued operations. Recognizing these challenges, we’ve created the following four slides as a road map between our management view and the segment information, which is included in our issued press release.

Now let me start by saying when it comes to our cost reduction program we break our costs into three categories. Category one costs are business unit expenses in our direct operations including sales and marketing, network operations, cost of services and research and development.

These costs are not part of our overall cost rationalization program and are fact -- in fact are increasing as we make strategic investment in sales capacity and product innovation. Examples of this include an increase in APM sales and marketing by $20 million or 18% and innovation investments in our APM network operations and R&D by $10 million or 10%.

Slide 20 depicts these category one costs for our continued businesses, APM, Mainframe and Covisint, and the actual and projected changes from fiscal year-end ’13 to fiscal year-end ’16.

Moving to Slide 21, category two costs are these costs referred to as shared service costs. These costs are indirect market facing investments that benefit all of our businesses. These costs include things like corporate branding, advertising, sponsorships and programs amongst others. These costs are a focus of our cost rationalization effort and compromise -- and comprise $27 million of our $56 million fiscal 2014 expense reduction total.

Slide 21 depicts these costs which are allocated to both continuing and discontinued operations. As the note on Slide 21 indicates, category one costs in addition to category two costs from continuing operations equaled a total business unit expenses in the segment information in the press release.

Now referring to Slide 22, category three costs are those we refer to as corporate. These are costs that are typically general and administrative in nature. Expense examples in this category include administrative support, real estate, finance, human resources and internal IT. These costs are also the focus of our cost rationalization effort. The remaining $29 million of our $56 million fiscal ’14 cost reductions came from the corporate category.

Slide 22 depicts these costs, which two are allocated between continuing and discontinued operations. You will also note on Slide 22, a fourth category of costs that we refer to as transitory costs. These transitory costs include advisory fees to assist us with activist activities in our cost rationalization effort. They also include restructuring costs. These costs will increase our -- in restructuring period, over our restructuring period as you can see, but they conclude at the end of the fiscal year when all of our activities are completed.

Additionally noted on this slide, category three corporate costs from continued operations combined with transitory costs equal the unallocated expense column in the segment information in the press release.

In fiscal ’15 we expect to further reduce corporate expenses by $43 million and shared service expenses by $7 million. Many of the plant corporate expense reductions are associated with actions that are transformational in nature and will require most of fiscal year end ’15 to fully execute.

Slide 23 provides a more visual representation of the cost reductions by category of cost. The transformational cost in fiscal ’15 include our finance operations going to more of a shared service approach, our IT organization moving from homegrown applications to SaaS-based platforms for ERP and HR, and we’re continuing to optimize our entire global real-estate footprint to a more virtual environment.

Now we do expect most of these actions to be completed during fiscal ’15 although some associated trailing expense reductions will flow into the first half of fiscal ’16. When we began our expense reduction program, our total corporate and shared service expenses totaled approximately $235 million. We expect that coming out of fiscal 2015, the normalized run rate for corporate and shared service expenses will be approximately $24 million and $2 million per quarter respectively. So, on a normalized annual run rate fiscal 2016 corporate expenses are projected to be reduced to $97 million and fiscal ’16 shared service expenses are projected to be reduced to $8 million.

I’ll close this section with fiscal ’15 guidance which is listed on Slide 24. For fiscal year ’15 we expect to achieve $720 million to $735 million in total revenue. $0.41 to $0.45 in non-GAAP EPS and $105 million to $110 million in operating cash flow.

I’ll now turn the call back over to Bob to discuss the remaining items.

Robert C. Paul

Thanks Joe. Let me turn now to additional shareholder value opportunities in fiscal year ’15 related to the completion of our Covisint spin-off and our capital return program.

Starting with Slide 26 in our Covisint spin, again we remain absolutely committed to executing this action. We expect to keep our commitment of completing this within the 12 month period following the IPO. From a process perspective we are now in position to execute the full spin. We received a favorable private letter ruling from the IRS. There are no other commercial restrictions preventing this action, and the majority of Covisint day-to-day operational components have been migrated to Covisint requiring only limited transition services from Compuware post to complete separation. The only remaining item is to allow Sam a little more time to get up to full speed. Obviously this time period is shortened from our prior expectations with Sam moving into the permanent CEO role as opposed to bringing in an outside candidate brand new to the business.

The final point regarding Covisint and the completion of the spin is this. In order to protect the tax free nature of the separation, Covisint has entered into tandem stock appreciation rights with all employee option holders. This allows option holders the ability to exercise those rights without diluting Compuware’s required ownership interest to execute a tax free spin.

Turning to Slide 27, on our capital return program. First we intend to implement the significant capital return program after the full Covisint spin. Although the program will be meaningful, it would be inappropriate to specify the exact amount until closest to the execution date. The size of the program will be subject to some degree by our ability to improve and optimize our balance sheet between now and then. We expect the timing of this to occur in fiscal year ’15 most likely during the third quarter. Also it is important to keep in mind that it will likely be problematic to access the debt markets until the potential separation of the APM and Mainframe businesses that we’re exploring has been resolved which I will discuss in a minute. The other key capital return component is a planned continuation of our annual $0.50 dividend which offers the most lucrative yield in the sector. That brings us back to our strategic transformation and a recap of where we currently stand.

Slide 29, depicts the high level of visual representation of just how far we’ve come in transforming Compuware. A few years back we were facing consistently declining revenues, a dilutive solution portfolio and an extremely bloated cost structure. We were also facing massive disruptions in our market place including cloud and consumption based computing, mobile device proliferation and big data and performance analytics opportunities. Along with the obvious financial benefits of our transformation we’ve also been able to dramatically speed up the execution and speed of our business, and increase our investment in innovation to successfully compete in these new IT categories. Additional key transformational items are listed in Slide 29. We have changed the company’s DNA taking a massive step forward in turning Compuware into a focus and lean company that underpins our entire strategic plan. The fact that we did this while continuing to achieve solid operating results is a testament for the validity of the plan as well as the resiliency and professionalism of Compuware’s employees.

I will close by discussing the next logical and the final step in this transformational journey, which we have not discussed in prior communications. That is exploring the strategic separation of our APM and Mainframe businesses.

Slide 30, highlights our initial thoughts regarding the high level of value and next steps to separation. The rational for the separation is straight forward. First these two businesses have very different characteristics and compete in fundamentally different market segments. APM plays in the highly dynamic and growing market category. Mainframe conventionally plays in the space that is very mature and stable. These two businesses are different in just about every respect including cash flow and capital return profiles, capital need, management and operational characteristics and even in fundamentally how we go to market.

These two businesses also attract different types of investors, with different investment profiles. This event is now feasible as APM can now standalone as a growing and profitable business. We believe the potential high level benefits of the separation are equally straightforward. Some of these benefits include allowing each management team to focus fully on its operations, providing two distinct investment opportunities to attract appropriate investors and permitting each business to align talent acquisition with incentives appropriate for their market categories.

We have also identified the set of next steps which are also listed on Slide 30 regarding a potential separation. The good news is that these businesses are already operationally separated and set for our back office systems and as already discussed we are well underway in getting that part done too. If our expectations are met, the strategic separation should be completed during this fiscal year. We will keep you posted as this initiative develops.

I want to thank you for your support and interest in Compuware. As we continue along this journey of fundamental change to improve our business outlook and to drive maximum return for our shareholders. Lisa?

Lisa Elkin

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

Question-and-Answer Session


Thank you. (Operator Instructions) And our first question comes from the line of Aaron Schwartz. Please go ahead.

Aaron Schwartz - Jefferies LLC, Research Division

Good afternoon, thank you. The first question I had was on the APM business. I know you talked quite a bit about the profitability improvement during the year, but I know the margin did sort of directionally move down into Q4 here, and I guess my question isn't necessarily quarter-to-quarter on the margin, but are there things that you need to see either from a new product standpoint or top line growth standpoint or more so on the margin that would give you a 100% comfort that that business can stand on it's own as a single entity or what are the things you would like to see in that business?

Robert C. Paul

Thanks Aaron. There’s nothing dramatic that has to change in that business. I mean the financial elements around the business have been improving and certainly on an annualized basis we’re seeing that. We have had some areas of work and improvement that we had to take care of over the last year, year and a half. And as I have announced in prior quarters, we are actually very happy with some of the things that have improved in our operations. The product is more competitive. We’re now sort of clicking on all cylinders across all geographies that are improving. And as the level of integration between the historic silos of the Gomez synthetic platform, dynaTrace and DCRUM have been sort of brought together. We are finding that or win rates are going up, and this will turn into an increased -- an improvement in our top line revenue. So, our feeling here internally is actually no reason for caution at all. We are very confident about the progress we’re making in market share growth, top line revenue and improve profitability on the APM side. And as you can see from our outlook certainly in ’15 and what we’re seeing so far in Q1 we’re very optimistic about it, and its ability to standalone.

Aaron Schwartz - Jefferies LLC, Research Division

Okay. And then, two quick questions probably for Joe if I could. In the slide deck you show there was much more improvement in the cash flow into fiscal ’16 and we can sort of get to your organic if you will top line revenue growth assumptions and so I just wanted to know what the levers were to see that cash flow, it seems like it's more on the cost side but what specifically would fall off to get to that cash flow number in ’16? And then secondly within the APM business specific to Q4, was there any change in the ratable recognition different than your expectations going to the quarter, did that sort of contribute to the results here in Q4 for APM? Thank you.

Joseph R. Angileri

Sure. Let me take the cash flow first. The most significant different really comes in two places. One, simply because we’re going to be improving the operations in ’16 so that will drive higher cash flow. And second, we will be through all of the restructuring cost and all the advisory cost, whatever we call the transitory cost will be out and that obviously will have a vast impact on cash flow since that’s all predominantly cash. With respect to APM, we actually right now on the ratable recognition rates, we are tracking really, really where we thought we would be and where we planned. I think the biggest change -- we’ll always see a higher margin in Q3 because APM still does have that big climb in Q3, and so they get a big delta from the large revenue there. So I think that’s really what I would say is the big difference in terms of the margin situation.

Aaron Schwartz - Jefferies LLC, Research Division

Perfect. Thank you.


Next question comes from the line of Kirk Materne. Please go ahead.

Kirk Materne - Evercore Partners Inc.

Hi, thanks very much and thanks for those additional detail on the presentation this quarter. I guess maybe my first one is for Joe, I assume the guidance for fiscal ’15 doesn’t, I guess take into account if you spin Covisint in the middle of the year, I assume it would need to be adjusted both top and bottom line, and I assume it also doesn’t assume any kind of accelerated buyback I guess on the bottom line numbers?

Joseph R. Angileri

Yes, the fiscal ’15 -- good question Kirk, we're looking at, we put Covisint in for the full-year and obviously at the point in time we do spin it we would have to adjust that. And at the bottom line we have anticipated some buyback, but nothing and to the extent that it would be significant at this point.

Kirk Materne - Evercore Partners Inc.

Okay, thanks. And then maybe Bob, just on APM, can you give us a sense on how much of the business these days is, I guess from a license or a product perspective is related to dynaTrace versus some of the older products. And I guess can you also just comment a little bit on Gomez and what's sort of embedded in your expectations for that business as it continues to be a little bit choppier of lower growth and perhaps you guys would like.

Robert C. Paul

Yes, the dynaTrace is we’ll have to get to the exact percentages. I think it's about two-thirds or a little over 66% of revenue moving forward or it has been so far and the projections are pretty much in line with that. We have done some fairly significant improvements as I mentioned in the script regarding the DCRUM innovations as it made around performance, network performance and its integration with dynaTrace, and on the same thing on the Gomez side. So on the Gomez we’ve worked hard on a couple of things there. Number one is the quality of service, and that is starting to show some improvement there in market response and that was basically a rebuild of the infrastructure from the ground up over the last year or so. The second thing is the level of integration, really is monitoring including graphics kind of value from the dynaTrace is part of the APM as a service platform has really stepped up as competitive value proposition. And so for that reason we are expecting to return to growth. And I’ll have to get you the exact numbers as far as the percentage growth -- as far as APM as a service, but certainly changed over prior-years for sure.

Kirk Materne - Evercore Partners Inc.

Okay. And then just last question for you, on Mainframe it seems to have found a little bit more stabilization. In your out year number, sort of high single digit declines, do you feel like you’re being pretty I guess aggressive in terms of potential loose customer. I mean do you feel like there was a fairly conservative assumptions based on what trends you’re seeing in terms of new workloads, either going off it or customer retention steps.

Robert C. Paul

Yes, I mean we put a lot of work into this one Kirk in trying to understand; number one, competitive threats, number two, category conditions. And we really -- although we have lumpiness in the Mainframe business, the progression in improvement in that Mainframe business from two years ago is meaningful and we expect that to continue. Some of those changes include improved capabilities in the product. Some of those changes include I would say internal processes about how we’re engaging with our renewal customers and our aggressiveness around competitive win backs. And quite frankly what we’re seeing is perhaps less of an edge from some of the competitive threats that we’ve seen in the past. And so, if we can continue to turn the crank on improved process and some of the very focused innovations we’re making, particularly in the workbench area which are coming back now in returns for us, we think that these numbers are very realistic. The other consideration that I talked briefly about is, obviously we believe that in a very mature and stable market place we could see some market consolidation. And there maybe some opportunities there that we not reflect in our numbers to do some consolidation that actually would improve obviously on the top line revenue results.

Kirk Materne - Evercore Partners Inc.

Okay. Thanks very much.

Robert C. Paul

Thank you.


(Operator Instructions) Our next question comes from the line of Derrick Wood. Please go ahead.

Rakesh Kumar - Susquehanna Financial Group

Hi, this is Rakesh Kumar for Derrick Wood, and thanks for taking my question. I just wanted to dig a little deeper on the APM business. What are you seeing from new SaaS competitors in the space, and how are you ruling out functionality in the cloud especially your APM as a service comp business.

Robert C. Paul

Yes, with dynaTrace now obviously persisting very strongly in the cloud, and then its combined integration with the mobile performance offering and the prior Gomez synthetic offering, we’re feeling very, very good about our competitive positioning there. Obviously moving forward, we have always believed that you can’t solve the performance problem in silos, and that as more cloud deployments occur, number one. And number two, as those cloud deployments are also tied across multiple infrastructures and internal data centers you see the application delivery chain covering many different IT topologies and even just delivering a single mobile web App now is obviously a much more complex problem than it ever has been. And so we’re starting to see an increase in interest in strategic platforms and enterprise wide solutions as well as expanding beyond just the silo specific point products. And so in order to solve those obviously you need a broader platform, and that’s obviously playing very much into our hands. Certainly we have done some quite a bit of innovation around small and medium business market opportunities, and also for those organizations that allow individuals to download point specific products. And we’re competing more effectively in those spaces too against the smaller competitors and we see there obviously is an opportunity to take market share moving forward. So, it's a combination of breadth of capability as our solutions are now becoming much more integrated and then obviously more focused on the downside of the market place of viral downloadable opportunities that we’re seeing some uptick also.

Rakesh Kumar - Susquehanna Financial Group

Great, and if I may add one more. I mean you had talked extensively about cost reduction initiatives. What are you specifically doing in APM in terms of sales capacity?

Robert C. Paul

Well actually inside the business we mentioned $20 million of investments -- additional investments in sales capacity and that is obviously going into the APM business unit, so especially in areas where we’re seeing substantial sales growth. So we believe that we have room, we’re watching productivity by reps very carefully, by region. Even inside the individual regions, and everything points towards in some areas increased capacity leading to great returns on that investment in top line revenue growth. So, that’s our plan for this year and it's basically taking advantage of the -- I would say greater opportunities that are now coming into our pipeline as a result of the greater reference market that we have and obviously look at the category growth in general.

Rakesh Kumar - Susquehanna Financial Group

Great. Thank you.

Robert C. Paul

Thank you.


Our next question comes from the line of Mark Jordan. Please go ahead.

Mark Jordan - Noble Financial Capital Markets

Thank you. Good afternoon. I just wanted to confirm that you, in your expectations for fiscal 2015 you’re using the same numbers in terms of first quarter loss and full-year loss on a non-GAAP basis that was presented in the Covisint call earlier today?

Robert C. Paul

For Covisint, yes.

Mark Jordan - Noble Financial Capital Markets

Okay. Second question, relative to the Mainframe business, as you mentioned it is lumpy in fiscal ’14 it was weaker in the first half, stronger in the second half. Do you have a sense of how the quarters will play out in terms of strength and weakness as we move through fiscal ’15?

Robert C. Paul

Yes, that will be very similar. I mean we have had this, it's just a -- some is just a nature of our renewal timeframes. But for a very long time we have always had this trend of more Mainframe business coming up for renewals, and more decisions being made in the second half of the year, and that obviously spikes or leads to a growth in our Mainframe revenue. I am not sure Joe if you have anymore specifics.

Mark Jordan - Noble Financial Capital Markets

So there for the quarterly revenue pattern and for fiscal ’14 would be applicable for ’15?

Robert C. Paul

Correct, yes.

Mark Jordan - Noble Financial Capital Markets

Thank you very much.


Ladies and gentlemen, we will now conclude the question and answer portion of today's conference call. I would like to turn the call 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’ve a pleasant evening.


That does conclude our conference for today. Thank you for your participation and for using AT&T Teleconference service. You may now disconnect.

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