Compuware F4Q07 (Qtr End 3/31/07) Earnings Call Transcript

May.15.07 | About: Compuware Corporation (CPWR)
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Compuware Corporation (NASDAQ:CPWR)

F4Q07 Earnings Call

May 16, 2007 5:00 p.m. ET

Executives

Lisa Elkin - VP Communications and Investor Relations

Peter Karmanos - Chairman and CEO

Laura Fournier - SVP and CFO

Hank Jallos - President and COO, Products

Bob Paul - President and COO, Covisint

Tom Costello - General Counsel and Secretary

Ken Baldwin Jr. - Vice President, Professional Services

Analysts

Aaron Schwartz - J.P. Morgan

Kirk Materne - Banc of America Securities

Kevin Buttigieg - A.G. Edwards

Presentation

Operator

Hello and welcome at the Compuware Corporation Fourth Quarter Earnings and Year End Results Teleconference. At the request of Compuware, this conference is being recorded for instant replay purposes.

At this time, I would 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, Perry, and good afternoon ladies and gentlemen. With me this afternoon are Peter Karmanos, Jr., Chairman and CEO; Laura Fournier, Senior Vice President, and Chief Financial Officer; Hank Jallos, President, and Chief Operating Officer of Products; Bob Paul, President, and Chief Operating Officer of Covisint; and Tom Costello, General Counsel, and Secretary. Also joining us today is Vice President, Ken Baldwin, who is leading our Professional Services Organization.

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

For those of you who do not have a copy, I will begin by summarizing the press release. Pete, Laura, Hank, Ken and Bob will then provide details about the quarter and other Compuware business activities. We will then open the call to your questions.

Compuware earned $0.21 per share in Q4, $0.45 per share in FY '07. Compuware increased its EPS more than 20% year-over-year. Fiscal year total revenues grew for the first time in seven years. Compuware Corporation today announced final financial results for its fourth quarter and fiscal year ended March 31, 2007. The company also announced that the Compuware Board of Directors has authorized management to extend the Company’s 10b5-1 share repurchase plan for three months to purchase up to 16 million additional shares of common stock.

During the fiscal year ended March 31, 2007 revenues were $1.21 billion. Net income was $159.2 million for fiscal 2007 up more than 11% from $143 million in fiscal 2006. Earnings per share diluted computation were $0.45, an increase of more than 21% from $0.37 in fiscal 2006, based upon 351 million and 387.6 million shares outstanding respectively.

During fiscal 2007 software license fees was $283.4 million. Maintenance revenue was $457.6 million in fiscal 2007 up from $433.6 million in fiscal 2006. Professional services fees for fiscal year 2007 was $471.9 million. Compuware reports fourth quarter net income of $68.6 million on revenue of $313 million. Earnings per share diluted computation were $0.21 based upon 319.3 million shares outstanding.

During the Company's fourth quarter software license fees was $73.2 million, maintenance fees were $117.7 million during the quarter and fourth quarter revenue from professional services was $122.1 million. I would now like to turn over the call to over to Pete.

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Peter Karmanos

Thanks Lisa. Compuware delivered reasonable fiscal year results for 2007 highlighted by more than 20% year-over-year growth in EPS and by an increase in total revenues, our first revenue growth in seven years obvious miniscule. With powerful performances by Compuware's key growth drivers for example Vantage, Changepoint and Covisint leading to overall revenue growth, fiscal year '07 represented an important inflection point for the Company. I like that word inflection point; Andy Grove used it in his speech once and it was really cool.

Moving forward from this year of improved revenues and increased earnings, the key focus for Compuware in fiscal 2008 is to harness the Company's momentum and further strengthen results. To seize this opportunity in the year ahead I will continue to lead the Company in implementing its comprehensive plans for driving strong operational results, meaning growth and aligning cost with the business meaning business improvement and cost cuts.

Through these efforts I expect Compuware to deliver earnings of approximately $0.60 to $0.70 per share in fiscal '08. I also expect Compuware to increase overall revenues by approximately 5% to 10%; which is pretty good in our industry these days. We'll improve its operational results by continuing to market and invest in the solution with the greatest potential for growth.

The Company recently launched; its IT portfolio management and business service initiatives, which I expect will further strengthen the already robust performance of Compuware Changepoint and Vantage in the year ahead. The Company's test factory, application development, management and enterprise legacy management initiatives will also drive improved sales in the year ahead by offering Compuware customers greater visibility into their IT operations and more control over their IT resources.

Compuware will also maintain and hopefully increase the company's extremely valuable mainframe customer base in fiscal '08. The mainframe remains a critical platform in our industry and continues to render as a significant and lucrative market for Compuware. '08 will be an important year for Compuware's professional services organization. In the year ahead, I expect the company's plans for services to yield increases in utilization and billing rate, making the division once again an important contributor to Compuware's process.

Finally, I expect Compuware core business to continue its unbelievable growth in the automotive, healthcare and security market. Taken together, these sales drivers give me great optimism about the company's capacity for growing revenue.

I expect our sales team to take advantages of these drivers to win new customers and to expand relationships with existing customers; we will not have a sales execution problem anywhere. As the operation team propels these efforts forward in the year ahead, I will continue to lead the company's plan for aligning its cost and investments with market conditions.

To this end I even established a team of Compuware employees called Agents A Team. They are dedicated to working full time on increasing the company's efficiency and on improving its business processes. Each one of the people on the Agents A Team were hand selected, they represent our brightest, best people in this business and they will report directly to me. The team will expedite the transformation of Compuware's business and ensure that the company, its employers and its investors prosper.

As an initial step in this effort, Compuware has carefully evaluated expenses across the organization. We've already begun implementing a plan that will take a minimum of $50 million in operating expense out of business by the end of the fiscal year. Our long range goal will be to reduced expenses between $150 million to $250 million over the next 2.5 to 3 years. These reductions will be across the company.

Finally, Compuware will continue to buyback the company's stock, we are more interested to buyback as we improve our operating results. Laura will provide you with more detail on the buyback later in the call. I expect eventually to get the share countdown to somewhere between 200 million and 220 million share outstanding. I expect a signature year for Compuware in fiscal '08, by focusing on which return will be the greatest. Compuware will deliver enhanced operational results and by that means we're going to grow and by managing the company's cost that means we are going to cut costs.

Compuware improved its margins. Together these efforts, well one, increase the value of Compuware stock for investors; two, strengthen the company for its employees and three, increase the value we deliver to our customers. All shareholders, all stakeholders will benefit greatly. Hank.

Hank Jallos

Thanks, Pete. The fourth quarter was highlighted by another strong period for distributed license fees, which grows 15.4% for the quarter. Vantage and Changepoint continue to lead the way with year-over-year growth of 16.2% and 64.8%, respectively. On an annual basis, Vantage licenses grew 26% and Changepoint increased 23%. With good reason we remained extremely optimistic about the growth prospects of our distributed solutions business, heading into 2008, particularly regarding our key growth drivers as Pete mentioned Vantage and Changepoint.

This morning we announced the availability of Vantage Service Manager, the Business Service Management solution based on our Proxima acquisition in January. Proxima brings us one of the finest BSM solutions in the industry and our sales force is eager to begin selling the solutions to a large and what we believe will be a very receptive market.

As for Changepoint, this year we are delivering two major releases of the solution, one announced on May 1st and one scheduled for late June announcement. These releases increase the solutions competitive position and shorten our customer's time to value.

Regarding our mainframe business, as Pete discussed during our call earlier this month, there are more to the story than meet the eye. Again as our transactions become more complex and more of our deals go ratable, we believe our investors should evaluate total product sales activity instead of only license revenue for a given period to truly gauge the health of the business.

The large financial services deal to be highlighted on April 18th call is a perfect example of why a more inclusive metric is needed. That transaction which was signed in Q4 was for $16 million over a five-year period. However, due to revenue recognition roles, we are unable to recognize the single set of the deal in fourth quarter. Obviously, negatively impacting the license revenue number we reported. This kind of situation is becoming the norm and not the exception.

As we noted during the April 18th call, the company did approximately $225 million of total product commitments in the fourth quarter. Going forward, we will provide you on a quarterly basis a total product sales activity figure so you can get a more comprehensive view of our products performance.

To briefly reiterate, the total product sales figure contains all of business closed during a period, whether booked as license fees, maintenance revenue, deferred license fees and deferred maintenance. Of the total commitment amount of $225 million in Q4 more than 60% was related to mainframe.

In terms of mainframe license results, there is also a capacity issue to consider. For example, we previously discussed capacity remains and always will be virtually impossible to forecast. In fiscal year 2007 almost our entire decline in mainframe license revenue can be attributed to a shortfall in capacity. These overall fluctuations in capacity continue to make our mainframe business lumpy.

Looking forward, our goal remains to grow this business. We are focused on defending and sustaining our mainframe position and the maintenance base.

With that said however the potential remains, and due to the quality and value of our solutions to experience growth, even if slight in this business. We see healthy demand in the marketplace for our mainframe solutions, especially for quality, data privacy, application auditing, and performance management.

Now, we'd like to conclude with a brief update on our partner program. During the quarter, partners contributed and influenced approximately 41% of the total distributed revenue with a 179 partners having at least one transaction.

For fiscal year 2007 in total, partners contributed or influenced 37% of our distributed revenue compared with 32% last year. During the quarter, we also announced that one of our valued partners LogicaCMG, which is a 40,000 person European based services provider, developed the QA solution that combines the risk and requirement management based testing methodology with Compuware's QA solutions.

During the current quarter, Compuware will hold its third Annual Partner Summit here at our headquarters in Detroit June 5th to June 7th. At the event several hundred partners will learn about Compuware's strategic direction and about our new Vantage Service Manager Solution. Additionally, they will participate in various workshops and will hear success stories from the variety of Compuware partners.

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

Ken Baldwin Jr.

Thanks Hank. I would like to start off by saying that I am really looking forward to the opportunity to lead Compuware's services unit and that I am convinced the organization has a bright future.

In fiscal year 2007, we experienced revenue growth in many of our branch locations. For fiscal year 2008, we believe we could see upwards to 5% growth in aggregate across the business unit. This growth projection is based on three primary factors. First, we currently enjoy a healthy pipeline of qualified opportunities. In fact, we've seen a notable increase in our overall opportunities over the past 10 months. An increasing number of these opportunities are of the significant variety.

Secondly, our Enterprise Legacy Management Solution, which is being very well received in the marketplace, holds tremendous promise. We are already seeing some significant early interest in this solution as more and more IT organizations look to maximize the value of the investments that they have made in their legacy systems.

And thirdly, through additional training, corporate support and sales automation, we are making considerable progress towards improving our overall sales capabilities.

Services revenue growth is, however, only part of the equation. Margin expansion is of equal or even greater immediate importance. Our long-term goal is to achieve a 15% operating margin in our services business, in part by improving utilization and billing rates.

Our strong pipeline and our focus on improving sales efficiency will support us in our efforts to improve utilization and rate. Simultaneously, Compuware's tremendous, high value, high margin solutions, such as cars, enterprise legacy management and data privacy among others will drive the margin in the right direction.

Finally, to further support our growth and margin expansion objectives. We have redesigned our sales compensation plan to provide stronger incentives for the growing the business and more specifically for improving our margins. Bob?

Bob Paul

Thanks Ken. Compuware Covisint continues to show solid growth by forging new customers in three major lines of business automotive, healthcare and security.

The automotive operation continues to contribute positively to the bottom-line as Covisint invest in the healthcare and security markets. A variety of contract wins in Q4 demonstrate our progress in each of these verticals. We signed new long-term contracts with automotive company such as Volkswagen of America and Takada. We also expanded the scope of the existing contracts with Johnson Controls and General Motors.

In the healthcare arena, we landed business such as national contract with CIGNA, a statewide contract with the State of Michigan Medicaid Program and completed an agreement with the State of Minnesota's e-Health initiative. In Covisint's newly launched security initiative, our work with the federal government continues to go very well. We also expanded our security footprint with some innovative solution at GMAC.

As Covisint continues to grow through customer win such as these, Compuware will leverage one of the most powerful attributes of the Covisint business model, the ability of our contribution margin to grow at a faster rate than top-line revenues. This is due to our software and service model through which Covisint hosts in instance its collaboration platform, allowing customers to pay subscription fees for the use of its service. Most of our infrastructure cost occurred during the ramp up phase of these vertical market initiatives. As we add new customer accounts therefore top-line revenue can grow without a proportional growth in costs.

You will be able to track our progress more closely in the fiscal year ahead. As we will provide more detail on Covisint financials. For fiscal year ’07, Covisint increased its revenue by 65%. In the fourth quarter Covisint increased its revenue by a 105% compared to the same quarter last year.

For fiscal 2008, I expect Covisint again to deliver dramatic year-over-year growth at around 65%. This growth rate means revenues will be in the mid to low of $50 million range with expected $7 million contribution to the bottom-line.

In order to achieve that revenue in 2007, we booked contracts valued excess of $46 million. To achieve our targets for fiscal year '08 I expect to achieve more than $85 million in new contract bookings. The Covisint sales pipeline looks strong and I remain really optimistic about our prospects for the coming year. Laura?

Laura Fournier

Thanks Bob. Compuware management team takes great encouragement from the company’s overall result in fiscal '07. In terms of the bottom-line, Compuware produced its third consecutive year of EPS growth. EPS came in at $0.21 for the fourth quarter and $0.45 for the fiscal year, both significant increases compared to the same period last year. Please note that the increase in EPS to $0.45 from our April 18th preliminary announcement of $0.42 stems from a larger than expected reduction in the income tax reserves announced at that time.

One note regarding the company's effective tax rate for fiscal 2008, we now expect that rate to be closer to 35% due to several factors, including changes to the US tax law that decrease the benefits related to foreign operations, as well as the expiration of the R&D tax credit in December.

The company's cash flow remains strong in fiscal '07 at more then $200 million. I expect Compuware to again generate operating cash flow north of $200 million for fiscal year 2008 with some potential upside based on the timing of the company's cost cutting measures.

Compuware's cash and investments totaled approximately $439.1 million as of March 31st. The reduction in cash and investments continued to be driven by the company's aggressive stock buyback program. During the fourth quarter Compuware purchased 30.5 million shares of Compuware stock for approximately $278.7 million.

During the entire year of fiscal '07, Compuware purchased approximately 82.3 million shares of Compuware stock for approximately $683.9 million. The company will continue to repurchase shares moving forward in the fiscal '08 under its remaining authorization of $100 million for the discretionary buyback and additionally the Compuware board of directors has authorized management to extend the company's 10b5-1 share repurchase plan for three months to purchase up to 16 million additional shares. If we need additional authorization we will go back to the Board for that at the end of that quarter.

In terms of fiscal '08 guidance, Compuware expects to deliver a minimal of $0.60 in EPS for the year as Pete said. In the fiscal year ahead, Compuware will continue implementing its cost cutting measures in the first and second quarters, with the majority of the savings beginning to hit the bottom line in Q3 and Q4. We therefore expect modest Q1 and Q2 results with greater leverage in the last half of the fiscal year. Due to the size of some of the cost savings, the Company is evaluating the possibility of the restructuring charge, and we will provide more information on the size and nature of that charge if any, in the coming months,

The entire management team feels good about the result Compuware and its employees delivered in fiscal year 2007. We also appreciate that these results represent a great opportunity to move the Company forward with greater momentum in fiscal 2008.

I will now turn the call over to Lisa.

Lisa Elkin

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

Question-and-Answer Session

Operator

Thank you. (Operator Instruction). And our first question comes from Kirk Materne of Banc of America Securities. Please go ahead.

Kirk Materne - Banc of America Securities

Oh yeah, thanks very much. Pete or Laura, I guess could one of you just give me a little bit more specifics about the $50 million in cost reductions? Where are you -- What are you targeting exactly, maybe what lines on the income statement should we see most possibly impacted by these cuts, recognizing they are going to be a little bit more backend loaded?

Peter Karmanos

Like I just said in my talk Kirk, They're going to be all over the Company. And I'd really rather not at this point in time say exactly where certain things are going to happen, not because we are afraid to but I just don't want to make people nervous because everybody thinks immediately this is going to come through cutting people and that's not the case. There's plenty of room for us to do business improvement, forget about doing certain things we are currently doing, stopping investment in some of the huge investments we made in distributed products and reaping the benefits of the value we have created.

So it's a little scary to sit down and say what we are going to have to do this year. That's what the team's job is and hopefully as year goes on we can be very detailed about exactly where we save the money and keep a score card for everybody concerned on what we have done year to date and where we think we are going. But that team is just really started and I don't want to make exact predictions yet.

Kirk Materne - Banc of America Securities

Okay. May you'll turn to more the projection for growth then and I guess Pete you're looking for sort of 5% to 10% growth, top line. What's your assumption in terms of what goes on the mainframe side of the business within that kind of projection, I assume that you expect to distribute products to continue their growth, what's your thought process around mainframe and why?

Peter Karmanos

Well we think there's going to be slight growth, mainly because of our solutions business data privacy and those type of things. The other thing that's going is that's for years we had a huge growth in the outsourcing and which resulted in consolidation of lot of things. And so like the blossom is off the roads in that business, business first of all is not growing, and customers are pitting out sources against each other for the lower to lowest prices. And they are getting smarter about who makes software decisions. And so we think that we will see some slight growth in that marketplace.

Kirk Materne - Banc of America Securities

Okay. And just final question from me, I think you mentioned that you are looking for the op margin contributions, services business just have start to move towards 15%, I assume that was operating margin that wasn't gross margin and can you...

Peter Karmanos

It's operating margin.

Kirk Materne - Banc of America Securities

And I guess, can you give us an idea where operating margin for that business is today and may be just a little bit more specifics on how you expect to get billing rates up in sort of this kind of environment? Why do you feel like there is some leverage in on at least on that side of coin?

Peter Karmanos

Let me answer the question it may be coming from the different direction all right. Our biggest customer in last year lost $12 billion. And we have gone from $150 million in billing to that customer annually to somewhere between $40 million and $50 million.

Our next largest customer lost $7 billion last year. And we think that, that business is going to grow from about $40 million in billings to north of $60 million or $70 million. So, if we adjust that, it's been too heck of a lot. Things have been so bad that we are going to be better by comparison. We believe that we all have extremely strong growth at one of the automotive Company. We worked very hard on that, we think that our people finally understand the difference between supplemental staffing and running a technology business, and that we have a lot of value added work that we are bidding on, that helps us to increase the margins we have, a lot of projects that we are bidding that will help us increase utilization. So, we have a lot of things that in the past have been very negative. Now we have foot flop and are positive things that are pointing us forward.

Kirk Materne - Banc of America Securities

Okay, that's helpful. I'll turn it over to someone else for now. Thanks.

Operator

Thank you. Our next question comes from Aaron Schwartz of J.P. Morgan. Please go ahead.

Aaron Schwartz - J.P. Morgan

Good afternoon. I had a follow-on question to some of your growth targets and I was wondering if you could help out with whether you have changed anything operationally your sales could call forth with incentives on new license versus renewals or any change in pricing that helps you to get to those targets?

Peter Karmanos

One thing we have figured out as part of the hangover and it's been a long hangover. Now since the year 2000 and dot com things was we were forced in to a situation of paying higher and higher salaries and getting less and less leverage from our sales force when they sold something. We are going to reverse that a 180 degrees and they are going to make less and less salary and more and more when they sell something. And I think our entire industry now is poised to go back to a more realistic sales compensation plan. Did I answer your question?

Aaron Schwartz - J.P. Morgan

Yeah and then the last part was just for any views on pricing going forward?

Peter Karmanos

We are going to raise all of our prices significantly over the year because we delivered tremendous value with our distributed products and even our mainframe products. And we feel the marketplace will allow us to do that quite sometime until they finally say all change are cutting in on our return on investment.

Aaron Schwartz - J.P. Morgan

Okay. And then given your comments in the prior call, I'm just wondering if you could help us out with some of your assumptions for deferral rates. Just given that you talked about some of the mainframe is recognized more on a ratable basis now. Do you have a higher deferral rates in your assumption for your plan going forward, how do you manage that when you talk to The Street?

Peter Karmanos

Well, we have built it in all the reports. The only thing we can't predict to [NASDAQ] is the capacity stuff. But we have built in lower growth rates due to transition from perpetual licenses and recording all the revenue at once to a more subscription or ratable situation.

Aaron Schwartz - J.P. Morgan

Okay. And then given your comments around some of the cost coming up a little more aggressively in the back half of the year, what do you think about the linearity with revenue? And then as follow-on to that question how do you manage the potential distractions in the front half of the year as people are waiting to see that plan unfold?

Peter Karmanos

We managed the distraction by having a very, very confident team of people, that will be helping people with expectations along with getting all of the information they need to get about our different business processes. And that's about the only way you can do it. Everybody in this company understand that our shareholders board will demand a stronger operating results from the company, and thus far, there is more than enough equity money out there to take care of it if we should refuse to do it. So, it's sort of like would you rather have your management team and new folks participating in this, or would you like to get bought up like Chrysler did and let somebody else decide how to run the business more efficiently.

Aaron Schwartz - J.P. Morgan

I understood. And one last question if I could, with regards to your outlook on the buybacks, would you look to continue to finance that from your balance sheet, or would you look to some other alternatives there?

Peter Karmanos

Well, we are going to use whatever cash we have, and then we are going to borrow money. We still have to make a decision about whether or not we're going to mortgage the building and we've paid cash for the building. So we could get anywhere from $200 million to $400 million in addition from the building. So, we'll go into that as much as $300 million. If I had my brothers, we will get another $300 million mortgage. We'd just keep buying stock.

Aaron Schwartz - J.P. Morgan

Okay. Thanks for taking my questions.

Peter Karmanos

You're welcome.

Operator

Thank you. Our next question comes from Kevin Buttigieg of A.G. Edwards. Please go ahead.

Kevin Buttigieg - A.G. Edwards

Thank you. Just on the share buyback activity. Could you remind me again where you are in terms of the discretionary program and then the old 10b5 plan which you have left under those plans? In what timeframe does the new 10b5-1 plan run? I would assume that that might run from July 1st through September 30th.

Laura Fournier

That is right. Right now under the discretionary program, we have about $100 million remaining. So, we'll be able to start using that again once the window opens. And under the 10b5 program, we have about 13 million shares remaining under the first program because that was what we said it was extended for three months through September and an additional 15 million shares was authorized for that. And as we go through this and do our evaluations, we do plan to go back to the board for additional authorization.

Kevin Buttigieg - A.G. Edwards

Okay. Does the 13 million program, or does the new 16 million program begin exclusively July 1st or will these two programs run concurrently?

Laura Fournier

No, it will begin July 1st.

Kevin Buttigieg - A.G. Edwards

Okay. So you do the 13 and do the 16.

Laura Fournier

Right.

Kevin Buttigieg - A.G. Edwards

And then, question for you Peter. Obviously, you did the large share buyback several years ago and then hadn't purchased the stock for the several years and now there is the significant ramp up in buyback activity. Could you talk about your thought process and the change there?

Peter Karmanos

Well, you remember that first buyback?

Kevin Buttigieg - A.G. Edwards

I do, yes.

Peter Karmanos

You know it was ridiculous and we effectively wasted it. But, it was like a billion dollars worth of time and it was in 2001-2002 something like that, may be a little bit before that, okay. And everything was looking rosy in our business and we are all going to grow 20% to 30% into the future, “blady, blady blah”. That wasn't the right reason to buyback stock, all right. We probably should have used that money to expand the business or buy new businesses, but we didn't.

Today, the technology industry is not a growth industry, certainly not a 20% a year, 30% a year growth industry. The best thing you can do in that scenario is leverage your bottom-line by buying back stock. But, buying back stock without significantly improving operating results is sort of silly. So, we are going to try to buyback, like I said, down to 200 million to 255 million shares. I mean we have to average them out for the quarter, so for this quarter it says that we have 320 million shares and for the year we use 351, when in fact we are way below those numbers.

So, we will eventually get down between 200 million and 225 million. That might take all next year and prior year past that, right. But we are going to significantly reduce the expenses in running the business. So, when you take those two factors in the consideration buying back the stock today is much smarter than it was previously.

Kevin Buttigieg - A.G. Edwards

Okay. And just on the cost cut, you had mentioned before some distributed system investments or you might not be seeing some return as an example of something that you could do there. I thought I am bit curious given that you are also pointing to the distributed systems business as a good area of growth?

Peter Karmanos

Excuse me Kevin, when did we say anything about cutting distributed system investments.I talked about cutting the huge investments we have been making in distributed technology, which we've been making over the last six years.

Kevin Buttigieg - A.G. Edwards

Yeah. That's what I was referring to. I was just a little bit confused by that. Are you saying then that you have kind of made all the investments that you need to make as the reason why that investment level would be different in fiscal year '08?

Peter Karmanos

Yeah. Basically, we have three real winners that we need really to concentrate on selling in the area of Vantage, the Test Factory and Changepoint. I mean they are three solid, top, excellent products that we think we can grow significantly. We're certainly going to make sure that our customers get value for what we sell them, but we don't have to keep making huge investments, all right. And like anything else there's a time when you stop the investment, you start reaping the benefit of it. And we think we're well within that position.

Kevin Buttigieg - A.G. Edwards

Okay.

Laura Fournier

Kevin, those costs are going to come across the whole board. It's not just going to be the distributed technology area. It's going to be across the board.

Kevin Buttigieg - A.G. Edwards

Yeah. I know that was clear as well. Okay, thank you very much.

Peter Karmanos

You're welcome.

Operator

Thank you. Ladies and gentlemen, we will now conclude the question and answer portion of today's conference call. I'd like to turn the call back over to Lisa Elkin. Please go ahead.

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

Thank you. Ladies and gentlemen, this conference will be available for replay after 8:30 pm Eastern Time today through midnight May 22, 2007. You may access AT&T Teleconference Replay System at any time by dialing 1800-475-6701 and entering the access code 865-451. International participants may dial 320-365-3844. Those numbers again are 1800-475-6701 and 320-365-3844 access code 865-451.

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

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