Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message| ()  

Executives

Lisa Elkin -

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

Joseph Angileri - President and Chief Operating Officer

Robert C. Paul - Chief Executive Officer and Director

Analysts

Stewart Materne - Evercore Partners Inc., Research Division

Gary Spivak - Noble Financial Group, Inc., Research Division

Mike Latimore - Northland Securities Inc., Research Division

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

Compuware (CPWR) Q3 2012 Earnings Call January 26, 2012 5:00 PM ET

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

Certain statements made during this conference call that are not historical facts, including those regarding the company's future plans, objectives and expected performance, are forward-looking statements within the meaning of the federal securities laws. These forward-looking statements represent our outlook only as of the date of this conference call. While we believe any forward-looking statements we have made are reasonable, actual results could differ materially since the statements are based on our current expectations and are subject to risks and uncertainties. These risks and uncertainties are discussed in the company's reports filed with the Securities and Exchange Commission. You should refer to and consider these factors when relying on such forward-looking information. The company does not undertake and expressly disclaims any obligation to update or alter its forward-looking statements, whether as a result of new information, future events or otherwise, except as required by applicable law.

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

Bob?

Robert C. Paul

Thanks, Lisa. The sole focus of tonight's call is to give our investors a clear and transparent understanding of Compuware's current business conditions and future expectations.

To begin, I will provide an overview of the progress of our business units. As we discussed last week, our total APM revenues increased 15% sequentially and 16% year-over-year in Q3. This is healthy growth but simply not as much as we expected.

Last quarter, we talked about a number of changes Compuware made to its APM organization. These changes, including multiple levels of leadership and process change, give us more focus around our individual solutions. This is already positively impacting our APM business where we will see steady improvement of our growth rates.

For Q3, our APM guidance was based upon a solid sales pipeline and commit. Up to the last few days in the quarter, we had enough committed to the sales activity to achieve our APM expectations. This end-of-quarter drop highlights a number of key opportunities for improvement. Our APM numbers carry very close to forecasts in all geographies other than Asia. This area remains an important emerging market for us. We will continue to invest here, but we will be more cautious and disciplined in understanding the makeup of our sales commit. We have also made changes in our Asia leadership.

Ultimately, we must improve our forecasting discipline and accountability. Following sales leadership meetings last week, this discipline has been refined and reinforced, which should improve the accuracy of our business outlook. One of the many changes we've implemented is to subdue the potential impact of our largest deals in the forecast. This means that if large deals push, we will have an opportunity to make up for them with other wins.

Another priority is stepping up our sales productivity. The team is working on a number of initiatives with particular focus on knowledge and enabling programs to help differentiate between our specific APM solutions. Each of our APM solutions, the Gomez SaaS, dynaTrace, an on-prem, presents best-in-class solutions for highly related but functionality different problems.

With growth opportunities in each category, a focused solution-specific sales team is a requirement for leveraging our competitive strengths today. And each of the APM solutions has an important role in our vision for a disruptive and seamless value proposition for managing performance from the end-user to the data center. We face no macro impediments to our APM success. For example, we've achieved consistent growth in partnered business from all geographies. More than half of the top 50 are under contract for our APM solutions, and global partners like Cisco and BT continue to contribute meaningfully to our results.

We've seen a modest increase in customer signature requirements, which is a slightly lengthened sale cycle. The competitive environment remains the same, but Compuware is the recognized leader for both current and next-generation APM.

So with the right structure, process and a sales toolkit in place and with no major macro headwinds, the key remaining driver of our AMP success is more activity, more pipelines and more diligence around closing. These are straightforward execution issues, and we've empowered our new APM leadership team to attack them.

In Q3, we introduced John Van Siclen as the new head of our APM business unit. John and our new worldwide leader for APM sales, Eric Fischer, are passionately focused on sales discipline, cost optimization and customer value. We believe that under their leadership, our Q4 year-over-year revenue in APM will grow from 20% to 25%.

For our Mainframe Solutions, despite a quarterly dip in revenue year-over-year, business is up from the first 9 months of last year and tracking to full year growth. The business continues to be sold by demands for security and operating margin improvement, especially in the banking and insurance industries.

Additionally, new load price on the mainframe by mobile and web transaction is creating some interesting opportunities for dynaTrace to drive you revenue in this category. dynaTrace's potential to follow individual transactions to the mainframe, which we expect to launch for general availability in Q1, has already been a positive factor in a couple of this year's renewals.

In terms of our largest renewal this year, a final significant deal is in negotiations and expected to close in Q4. This deal is particularly included in our guidance for this quarter -- partially included in our guidance for this quarter.

We see no change in the competitive or pricing environment for our Mainframe Solutions. We continue to face bundling and giveaways from lower value competitors. Customers want the superior functionality and value that Compuware offers, keeping our renewal rates strong and extending the average length of our agreements to nearly 3 years.

Our Covisint business leads the still-forming category of multi-enterprise collaborations. The competition in this category is fragmented by industry segment but includes a variety of niche players and system integrators. Of these we have, by far, the most secure and mature platform, strongest vertical functionality and most referenceable customers.

For Q3, Covisint continues its momentum, albeit with a slightly lower revenue growth than expected, by the 30% year-over-year increase. We don't typically recognize any revenue until projects are live. A couple of extensions and larger projects during Q3 pushed that revenue out in the future quarters.

In the healthcare category, we signed another statewide health information exchange that will go live in Q1. We also signed the nation's largest Beacon Community, which were targeted grants awarded by the Department of Health and Human Services. We've also reached agreement with 2 other leading health systems to implement the Covisint care coordination solution for their accountable care organization initiatives.

The auto sector continues to be strong, driven by the recovery of the worldwide industry and also by our subject matter expertise, with core revenue drivers like connected vehicle telematics.

With these factors in mind, we're now projecting $74 million in total revenue for Covisint this year. Large contracts continue to come in, but we expect to see 35% to 40% year-over-year revenue growth moving forward. As you evaluate Covisint's business, remember that our recurring revenue staff model offers a couple of critical leverage points. There is varied additional infrastructure cost needed to expand business. With data center cost decrease or remained stable, we had additional users and tremendous margin leverage.

We also begin each year with a significant backlog of business that we haven't yet recognized. Due to the strength of the business that unlocked the value of Covisint and the Compuware share price, following today's board meeting, we will progress plans to prepare for the Covisint IPO. There are preparatory items and market conditions that could impact timing. But under normal circumstances, we expect this to occur in fiscal year '13.

The Compuware Services business remain strong, particularly in our differentiated competencies like mobile and performance engineering. We expect to deliver small increases of revenue and margin in the Services segment this year. Joe will provide more details on the key services metrics and specifics on other business units.

So as far as the 3-year plan, our objectives have not changed. At the end of this fiscal year, we will update guidance for fiscal year '13. And on an annual basis, we will refresh the 3-year plan. Our market leadership position will still allow us to have substantial increases in revenue from our growth drivers. Putting our performance in perspective, Compuware has met or exceeded EPS expectations in 7 of the last quarters. On balance, our recent large acquisitions, dynaTrace and Gomez acquisitions, have created focus issues for this year, making it difficult to accurately predict top line growth.

We know that getting this right is an important part of progressively unlocking the value in our stock. The good news is that all 6 of our business units will grow this fiscal year. We also expect Compuware to have its highest revenue growth rate in a dozen years. For this fiscal year, we expect EPS to be between $0.40 and $0.42. We have established a strong basis for growth in earnings and revenue. To capitalize on its foundation, we will sharply focus on sales execution and expense management in the quarters ahead.

Joe?

Joseph Angileri

Thanks, Bob. Now as Lisa mentioned, I'll provided key Q3 business unit operating metrics and offer additional color on some of those metrics to help explain the numbers, as well as a look forward to Q4.

So let's start with APM. The APM business unit produced total revenues of $72.1 million, up 16% year-over-year and 15% sequentially. APM software license fees were $24.4 million, up 16% year-over-year and 33% sequentially. APM subscription fees were $19.4 million, up 9% year-over-year and 4% sequentially. As Bob said, the good news is APM is back to good growth, albeit not what we expected at the beginning of the year.

The positive impact of dynaTrace can be seen in our license fees, as their growth outpaces that of APM subscription fees. We expect this accelerated growth to continue into Q4 and thereafter. We're projecting 30% year-over-year in sequential license revenue growth in Q4. Now APM's operating expenses were $82.1 million, up 29% year-over-year and up 3% sequentially. Keep in mind, the year-over-year expense increase is due to 3 factors: purchase accounting for dynaTrace accounts for about 5% of the 29% increase; and dynaTrace's traditional operating expenses account for about 12% to 14%; with the remainder stemming from an increase in the sales organization.

We expect to see some expense improvement in Q4 as we focus on our cost components. We're forcing our cost components on cost of sales, cost of goods sold, cost of services, R&D and marketing to fall within percentages of revenue targets, notwithstanding no significant change will be apparent until fiscal year '13. APM's contribution margin was negative 14% compared to negative 2% during the same period last year and a negative 27% last quarter. We do expect to see margin expansion in APM in Q4 in the neighborhood of negative 3% to breakeven due to accelerated growth, as I mentioned, and expenses being relatively flat to slightly down.

The Mainframe business unit produced total revenues of $103.1 million, down 10% year-over-year and 13% sequentially. Mainframe software license fees were $26.7 million, down 23% year-over-year and 31% sequentially. And Mainframe's maintenance fees were $75.8 million, down 3% year-over-year and 3% sequentially. This decline in maintenance is the product of declining license revenue and not increased customer attrition. As Bob mentioned, our Mainframe maintenance renewal rates remain extremely healthy. Mainframe operating expenses were $24.7 million, down 6% year-over-year and up 3% sequentially, primarily due to higher commissions as a percent of revenue over Q2. Mainframe's contribution margin was 76% compared to 77% during the same period last year and 80% last quarter. We expect Mainframe to finish at approximately 77% contribution margin, very close to our December 8 estimates, with revenues finishing at approximately $417 million for the year, including the anticipated closing, as Bob mentioned, of one of our large deals. This will result in revenue growing over fiscal year '11.

Now the Covisint business unit produced revenues of $18.6 million, up 29% year-over-year and 6% sequentially. To reiterate, we now expect approximately $74 million in total Covisint revenue for the year, with expected growth just over 30%. Covisint's operating expenses were $17.3 million, up 36% year-over-year and down 13% sequentially. Covisint was back to a positive contribution margin this period at 7% compared to 12% during the same period last year and a negative 13% last quarter. We expect this positive margin to continue into Q4.

The Professional Services business unit produced total revenues of $35.6 million, up 2% year-over-year but down 10% sequentially. The year-on-year growth would have been 9%, but for reserve taken in the public sector space. We're optimistic as to recovery of this reserve but for prudency, we appropriately took the reserve this current period. The Professional Services operating expenses were $31.8 million, up 9% year-over-year and about breakeven sequentially, consistent with its revenue growth without regard to the aforementioned reserve. Professional Services contribution margin was 11% due to the impact of the reserve compared to 17% at the same period last year and 20% last quarter. We expect Professional Services margins to rebound in Q4 to the 17% to 19% levels.

Now the Changepoint business unit produced total revenues of $12.5 million, up 32% year-over-year and 15% sequentially, and showed a positive contribution margin of 6% compared to negative 24% during the same period last year and a negative 1% last quarter. We're extremely pleased with Changepoint's forward direction in both margin expansion and revenue growth, which is a testament to all the hard work the business unit is putting forth. We expect Changepoint to finish the year very close to the guidance we communicated on December 8.

The Uniface business unit produced total revenues of $11.2 million, down 3% year-over-year and 5% sequentially, and the contribution margin remained strong at 55%. We expect Uniface to close the year approximately $2 million down in revenue and contribution margins from what we communicated in December.

And that's a quick summary of Compuware's 6 business units. Laura?

Laura L. Fournier

Thanks, Joe. Operating cash flow for Q3 was approximately $41.9 million, bringing us to $73.1 million for the first 3 quarters of the year. We expect cash flow for the year to still come in between $165 million and $175 million. One income item to note regarding our maintenance revenue, our Q3 number dropped approximately $2.2 million due primarily to sequential currency adjustments that is from Q2. At this point, we expect Q4 maintenance to also be affected and expect that maintenance revenue for the year to be up roughly 2%.

Q3 operating expenses were approximately $220.5 million, down approximately $2 million sequentially. We continue to expect total operating expenses for the year to be between $880 million and $890 million. Again, we will continue to aggressively improve productivity and drive excess cost out of the business as we work towards reaching our margin goal.

With regard to the stock buyback, in the third quarter, we did not repurchase any shares as our focus was on repaying our long-term debt, which stood at $110 million at the end of the quarter. Our intention was to use a cash flow to repay this debt obligation by the end of the fiscal year. However, based on Compuware's recent share price, priorities have changed. We will now use a portion of our cash to aggressively begin repurchasing shares as market and business conditions allow.

Lastly, our effective tax rate for Q3 was 34.2%. Our effective tax rate for Q4 is expected to be also in this range of about 34%. This will result in a tax rate for the year of about 33.4%. The decrease in the tax rate for the last half of the year is due to the positive settlements with the taxing authorities on various audit issues.

Looking ahead, we are all focused on finishing the year on a strong note and heading into fiscal year '13 with a great deal of momentum as we strive to achieve our immediate and our longer-term goals.

Lisa?

Lisa Elkin

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

Question-and-Answer Session

Operator

[Operator Instructions] And our first question comes from Kirk Materne from Evercore Partners.

Stewart Materne - Evercore Partners Inc., Research Division

Yes, I guess, Bob, maybe my first question I'll start with is, on the APM side, I don't know if you guys can give us some idea of sort of what dynaTrace add to license this quarter. But if you look at it, it seems that the former Vantage product seems to be the real weak spot, I guess, I think, kind of throughout the full year. I guess, is there anything going on there in terms of dynaTrace potentially cannibalizing some of those opportunities, if the pipeline had to be adjusted because people were just mis-forecasting what it was? I guess, can you just walk through some of the details on that? And I guess given the fact that you're expecting to sort of reaccelerate in the fourth quarter, can you just walk through why that should be the case or why you feel confident that can happen, given the last few quarters have been a little bit choppy on that front?

Robert C. Paul

Sure. First off, your assessment that the on-prem traditional Vantage solutions are not performing as well as expected is correct. Basically, as you know, at the beginning of the fiscal year, we basically threw everything into one sales kit bag and had our sales reps going out to sell 2 products and then the 3 solutions, dynaTrace, on-prem and the subscription web performance monitoring systems. So what happened is because a lot of training went on, new education specifically around the dynaTrace solution, and quite frankly, it's a typically a shorter sales cycle, it distracted a lot of our on-prem sales representatives from moving forward in the on-prem opportunities. And so nothing has changed relative to the value that the on-prem and agent-less solutions offer. And the market potential, it is simply a sales distraction or a sales capacity issue, if you will. So back in October, we sought to correct that, seeing the trends, and we're building that pipeline back up. The pipeline is getting stronger. The reason that we have optimism in the current numbers that we're setting forth is because we've more diligently gone to the sales commit process we've had the entire leadership in to go through deal by deal. And the momentum, as a result of the changes made back in October, are starting to take more -- starting to take root. So those are sort of short-term impacts. On a longer-term basis, because of the work we're doing in enablement, much focus training on the value proposition and clarity between the solutions and the discipline around having solutions specific to a sales rep will get us back to the velocity that we saw in the traditional government solutions versus the data center solutions will return. And as a result of those things, right, we think that we're pretty positive going into fiscal year '13, that we'll move from the 20% to 25% growth rate and extend that in the fiscal year '13 moving forward.

Stewart Materne - Evercore Partners Inc., Research Division

And then just on Covisint. I know you went through some of the reasons why you sort of saw some of the decelerations at Covisint. Can you give a little bit more detail on that? I guess, were these deals simply the mechanics of the rev-rec around them was the reason we saw that? Was it the deals disclosed later and you didn't get anything in the quarter because they closed later in the quarter than you imagined? And I guess, how much visibility into the fourth quarter do you have to feel confident that we see some acceleration in this quarter?

Robert C. Paul

Yes, it's a good and fair question. To go back to Covisint's Q3, you almost have to go back to Q1, right? In order to get growth in 2 or 3 or 4 quarters from now, the -- we have to be signing contracts 3 quarters in advance typically or 2 quarters in advance minimally of when the revenue occurs. So a few quarters ago, the deals were getting signed but probably not as aggressively as we had hoped. But the backlog in the current quarter sales activity was actually quite strong. So in Q3, we had a strong number of large contracts sell, which is a good indicator of future revenue. And also, we had a couple of contracts. We take revenue as the deals go live. So as those deals extend because of that complexity or time to going live, the revenue gets pushed out. Unfortunately, you don't make that up because the subscription base is just everything pushes out from there on. So the good news is, we have very strong visibility into Q4, but we actually have very strong visibility in the fiscal year '13, which is why we have much more confidence in the progression of the IPO conversation that we just had. So in fiscal year -- in this quarter, we're feeling comfortable. Yes, there's still work to do, but we're very optimistic about the numbers we just presented.

Stewart Materne - Evercore Partners Inc., Research Division

And then just last question for me and I'll turn it over. Just, obviously, still some choppiness in the APM business last quarter. Hopefully, it gets better this quarter. I guess, when you guys look out, there's always a trade-off and some are coming between growth and margin. And I guess, what -- how are you guys balancing that out because there's clearly tons of room for you guys to expand margins if you wanted. So even if we got a lower growth number than you might have thought back at the Analyst Day, do you feel confident that you could still hit the margin targets even on a lower revenue base, if that made the most sense, I guess, given the pipeline?

Robert C. Paul

So the answer is yes, and we are as focused now on our operating expenses and margin as we are in the top line. They're both very important. We consider ourselves a growth organization. We have 2 -- in particular, 2, but obviously the other one is starting to grow too. But 2 strong growth business units and a very strong cloud and SaaS presence. Having said that, we have to make sure that we're not -- by not paying attention, letting excess capacity or fat work its way into the organization. And so our commitment is, right now and will continue to be, that we're going to work towards growing the top line without expanding any operating cost moving forward. And Joe is almost exclusively focused on making sure that, that happens in conjunction with the rest of the leadership team.

Operator

And now to the line of Aaron Schwartz of Jefferies.

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

Maybe I higher level question in terms of sort of the guidance methodology. But you mentioned, Bob, I think, some large deals that maybe you're not fully including in the guidance. I don't know if I heard you there correctly. But if you look out maybe to next year, given the last couple quarters here, is there anything changing in the methodology in terms of either how you think about revenue yield or close rates or just something that can give us a little more comfort going forward?

Robert C. Paul

Yes, there -- I mean, we could spend probably an hour on some of the mechanical things that we'd either put in place or are putting in place, in particular, with the APM team. And kudos to John Van Siclen and the rest of the organization, the work that they've done so far. But at a higher level, if you think about what tends to shift or create volatility into our quarterly guidance, it tends to be these larger deals. Right? And so a couple of things have to happen. We have to increase the run rate or the flow rate of the deals, the higher volume of the deals, and obviously the subscription revenue becoming a larger percentage of our business, the dynaTrace flow deals, which are very important to revenue growth, and getting back to the APM on-prem, the old Vantage solutions, getting those. We've done some pricing and packaging to make it easier to deploy and sell to create a better flow rate. So that activity and pipeline is picking up and has to continue to pick up in order to take some of the volatility away. The other thing that we're doing is that we will progressively get more aggressive in downsizing the larger deals impact on our commit. Now the uptake on that is the risk will be an upside. And I'd much rather that you guys are upset with us because we overachieved on a quarter than we missed it because of a couple of large deal slips. And as you're seeing over the last 2 to 3 years, the Mainframe revenue becomes a much -- or smaller percentage of the overall portfolio, and the distributed and specifically the subscription revenues become a much larger percentage, as well as the discipline that I just talked about, we should be able to manage those -- that commit in the forecast and the guidance much more successfully. And right now, as an example, there's no benefit to us in being aggressive, for instance, on Covisint, moving forward. As you know, we're not getting a lot of credit for Covisint in the -- well, I don't believe we are, in the share price. So there's really no upside, and we're going to get a much more conservative perspective moving into fiscal year '13. And I think with the -- I'd say the, I call it, accuracy and a governor that will put on the impact in the large deals, we'll get much more accurate moving forward in our guidance.

Joseph Angileri

Can I add something to that, Bob? This is Joe here. We do -- for Q4, we do still have some large deals in our forecast but that's -- what Bob is talking about is we need to start to move away from that, so that the upside is where we end up as opposed to the downside.

Robert C. Paul

Right.

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

Okay, that's helpful. And maybe just a follow-up, Bob. You sort of mentioned maybe an effort to downsize larger deals. So in the APM business when -- earlier in the year when the sales teams were sort of more generalists across the 3 product lines were, they're trying to sell all 3 in 1, and it just created much larger deals that couldn't close. And now you're going back to selling sort of Gomez, Vantage and dynaTrace individually so the deal sizes is are smaller. Is that what you're talking about?

Robert C. Paul

Yes, but that's not the reason we're doing it. So what you said is absolutely correct, but there's a methodology and a philosophy associated with the Gomez SaaS business, as an example. And it has to do with marketing and leads and focus value proposition, who you're selling to and all the rest, that we lost a little bit of focus along the way and the speed and the agility of which we were getting this done. And the same thing happened on the on-prem side when we introduced the dynaTrace solution to the -- with our on-premise reps. Right? It created a distraction and a capacity issue to continue the growth rates that we were seeing in both those solutions. So sharpening up the training, sharpening up the enablement programs in what's been going on. I think our leadership has a great grasp of what the issue has been, and we've come a long way in fixing it. We've still got some work to do, and I think what you just talked about will also occur. We'll start to see a larger flow rate and better execution moving forward and better sales productivity.

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

Okay. And one last one, if I could, on the Covisint side. Presumably -- and I may be correct, but presumably, that's going through a more thorough audit review as you get -- as you progress through the IPO phase. One, is that true? And then, two, does that sort of change anything operationally? Or -- I mean, did that cause some deals to maybe push out in terms of timing or anything around that mechanic?

Robert C. Paul

No. So the answer -- to answer both your questions, yes. We're now starting all the necessary activities required for our successful filing. Obviously, there's some variability in timing with each one of those activities. They've not had any impact on deals or completion of deals or revenue.

Operator

[Operator Instructions] And now to the line of Mike Latimore of Northland Capital.

Mike Latimore - Northland Securities Inc., Research Division

Just on the Gomez side, has there been any change in kind of the pricing environment around Gomez markets that you're in?

Robert C. Paul

No. We've not really seen any pricing adjustments. Typically, on the Gomez SaaS side, there's only a couple of people involved in that marketplace. And as you know, it's growing pretty well. So there really haven't been many changes in the market conditions. I will say, that we have some releases coming out that puts us in a -- I think, from everything that we can tell on the details, a superior position relative to value and time to value in coming quarters, but we'll talk about that closer to the release dates.

Mike Latimore - Northland Securities Inc., Research Division

Great. And then you talked about maybe slightly more signatures are required to get deals done. Is that sort of in every region or is it more pronounced in certain regions?

Robert C. Paul

Well, we saw it more in North America than anywhere else. We had a -- so that created some length in the sales cycles. And in total, to be totally candid, we have a couple of sales execution and commitment issues in Asia-Pac marketplace that created some surprises for us, which, I think, we've now corrected. But the additional signatures were more due to, I'd say, macro economic conditions than anything else, and so we're monitoring that closely. I don't think it will have any sort of material long-term impact to our business.

Mike Latimore - Northland Securities Inc., Research Division

Got it. And then, it sounds like you're looking for some pretty good sequential growth in APM license software in the fourth quarter. Is that sort of evenly mixed -- that growth evenly mixed between dynaTrace and Gomez on-prem or is it more skewed to one or the other product?

Robert C. Paul

Yes, it is evenly mixed. We're seeing -- we'll see an uptick in dynaTrace. We'll see an uptick in on-prem. Although, that shouldn't be hard to do. And we will also see an uptick in the subscription, the Gomez SaaS subscription revenues. And all that obviously is backed by what we're seeing as a scrubbed and healthy pipeline.

Mike Latimore - Northland Securities Inc., Research Division

Great. And just a last question, Bob. You mentioned -- like you said, you're going to try to not increase operating cost going forward. So is it a view that sort of this is we're at kind of a good run rate here and that's what you hope to hold for a while, for a few quarters at least?

Robert C. Paul

Absolutely, yes. So it's not like we're going to try and do it. We're going to do it. And there are a number of ways that we can get that done. A lot of it is making sure that we're investing in those areas that are going to make this more competitive. And so it's not just a matter of not spending money -- any more money, it's a matter of also prioritizing where the investment goes. But that is a -- we've been at this now as far as planning. And now getting in the execution mode of that model has already started. And so we feel very good that we're going to get that done.

Operator

And now to the line of Gary Spivak from Noble Financial Group.

Gary Spivak - Noble Financial Group, Inc., Research Division

I want to follow up on a comment Joe made relative to Q4. And now I want to ask how dependent is Q4 on large deals and are you giving the haircut that you talked about to that pipeline in the Q4 guidance?

Robert C. Paul

Yes, so there's one deal. This is Bob, and I'll let Joe follow. There's one deal in particular, and it's not committed in at the full amount. If it's something -- right now, we have great visibility to it, feeling very good about it. And hopefully, even in mid- to late February, we'll be in a position to not have to talk about it anymore. But yes, it's in a good spot. If it doesn't come in, if something crazy happens, it will put pressure on the rest of the business to get those guidance numbers for sure. But it is not in that is anywhere near its full commit also.

Gary Spivak - Noble Financial Group, Inc., Research Division

Okay. And then a little bit on the APM deals that slips towards the end. Can you comment on the current status? Are they still in play? Have they closed? Are you still seeing the extended signature requirements on those deals?

Robert C. Paul

Yes, they're all in play expect for one. The other one was a loss and the rest of them are either closed already or getting closed. But to be honest, I don't have any sort of up-to-date material information on extension of sales cycle to the signatures this quarter yet. But honestly, I'll have more color on that at the end of the quarter.

Gary Spivak - Noble Financial Group, Inc., Research Division

Okay. And then on dynaTrace, you talked about a pretty healthy pipeline and a lot of activity in the December quarter. Did you get the -- I mean, how close to the close rates you were looking did you get, particularly on dynaTrace? Is that translating into revenues or is it still more in the pilot phase?

Robert C. Paul

No, no. dynaTrace had a great quarter last quarter. A lot to do with -- well, somewhat to do with the synergies created with the larger Compuware sales force but also by a great execution by the core dynaTrace team. And the product is just differentiated and unparalleled in the marketplace. It also is -- it's frictionless. It's very easy to present. It's very easy to deploy, and it's very easy to get a very, very quick value from. And it gives visibility down at the transaction level. So you can get -- on any performance issue, you can get real-time absolute knowledge of where performance issues are. And over time, as you know, we have -- back to the December presentation, we have very specific plans to tie that together, not only with the Gomez SaaS solution, but also with the be on-premise capabilities to creating a very, very powerful end-to-end solution, which can be implemented one step at a time or enterprise wide.

Gary Spivak - Noble Financial Group, Inc., Research Division

And my final question is on the Covisint. As you start going through the process, I noticed you did not give a target valuation on that. I was wondering whether that was because you're closing in on the process or because something else changed?

Robert C. Paul

No. Nothing's changed on prior evaluations. We're getting into a sensitive period where we don't want to disclose too much. So what we've agreed is we're just going to talk about the fact that we're proceeding, and there are some variables associated with commitments that we have to make along the schedule in preparation for the IPO. And if everything goes as planned, we'll be in a much -- it will be clear, let's say, in the coming quarters how far we've progressed. The valuation has not changed from our prior expectations at this point.

Operator

Ladies and gentlemen, we will now conclude the question-and-answer portion of today's call. I would now like to turn the conference back over to Lisa Elkin.

Lisa Elkin

Thank you. At this time, ladies and gentlemen, we will adjourn this conference call. Thank you very much for your time and interest in Compuware, and we hope you have a pleasant evening.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Compuware's CEO Discusses Q3 2012 Results - Earnings Call Transcript
This Transcript
All Transcripts