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Compuware (NASDAQ:CPWR)

Q2 2013 Earnings Call

October 23, 2012 5:00 pm ET

Executives

Lisa Elkin

Robert C. Paul - Chief Executive Officer and Director

Joseph R. Angileri - President and Chief Operating Officer

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

Analysts

Stewart Materne - Evercore Partners Inc., Research Division

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

James Derrick Wood - Susquehanna Financial Group, LLLP, Research Division

Mark C. Jordan - Noble Financial Group, Inc., Research Division

Michael Latimore - Northland Capital Markets, Research Division

Operator

Hello, and welcome to the Compuware Corporation Second Quarter Results Teleconference. By 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 Communication and Investor Relations for Compuware Corporation. Ms. Elkin, you may begin.

Lisa Elkin

Thank you very much, Carrie, 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 with key financial information. We will then open the call to your questions. Bob?

Robert C. Paul

Thanks, Lisa. We're pleased that we met our guidance -- EPS guidance for Q2. However, there were both positives and negatives for the quarter. At the macro level, the growth drivers are doing well and positioned for continued strength moving forward. We did have some significant challenges in Europe. We're also challenged with a lackluster mainframe market. And as discussed earlier, this year represents a smaller number of mainframe renewal opportunities.

I will provide some color on these issues, and Joe and Laura will review the operating metrics and financials.

Our APM business had some significant bright spots and one specific headwind. Our Gomez SaaS bookings growth was 16% year-over-year. This is evidence that we are fixing the prior operational challenges we had with this segment, and all of our predictive measures show a strong pipeline moving forward.

Next, we achieved a 63% growth year-over-year in APM North American on-premise bookings. Additionally, sales cycles for APM solutions are beginning to shorten. We now see an increasing number of deals, opening and closing in the same quarter. Unfortunately, we had some very disappointing results in EMEA. This was both execution-related and delayed decisions in a tough market backdrop.

We've made leadership changes and are making sure that the successful programs we put in place in other parts of the world are followed with more discipline in Europe. Although the EMEA issue cannot be fixed within 1 quarter, I expect consistent improvements moving forward.

A couple of other comments on APM. I just returned from our first-ever global APM user conference, Perform. We saw incredible enthusiasm from our customers and prospects for Compuware APM. In particular, there's eager anticipation for our recently introduced APM innovations, including mobile streaming and web capabilities in Gomez to handle all performance management challenges at the edge of the application delivery chain. This is where a lot of the complexity challenges are impacting performance.

Next, mainframe APM. We are introducing a "first of its kind" visibility into mainframe performance, which I'll discuss more in a minute. Collective intelligence to give our customers competitive advantage based on our 8 million Gomez measurements per day, this capability measures cloud environments all over the world and allows customers to correlate their own application degradation to external cloud influences. And finally, Big Data functionality and pricing that will extend our lead in this booming market. We allow our customers to track the performance of their Big Data projects through supporting Hadoop and Cassandra environments.

Also, the feedback we received is that customers are beginning to think differently about the application performance challenge. Today's application delivery chain demands a new generation approach to APM, one that offers a single dashboard spanning virtual and cloud environments, cloud and mobile networks inside and outside of the data center, all from the user's perspective. Our customers need simple setup, rapid return on investment and answers more than they need, another piece of tooling that simply proliferates data smog. We are convinced that we're delivering solutions where the market is going, proactive, easy answers.

We expect our APM business to follow its usual seasonality trends with strength in Q3 and Q4, overcoming a normally soft Q2. Our rep productivity, which we measure on a dollars per rep basis is on target in North America and Asia Pac. That means double the productivity from this time last year. However, given the dramatic shortfall we experienced in Europe this quarter, we now expect our APM growth rate for the year to be closer to 16% year-over-year.

What is confirmed with Gartner's last Magic Quadrant is the old guard and their outdated approaches continue to fall behind, but we continue to move ahead. This is due to focus in our APM solution capabilities. We continue to grow at double the overall category growth rate, and we'll continue to strive forward with next-generation capabilities in the coming months.

We don't need any acquisitions to compete and win. It's simply about optimizing our execution, and that's where we're focused. Right now, we have a full-court press going on in Europe and expect more of the same everywhere else.

Building Covisint is about achieving predictable, consistent growth and recurring revenue. This quarter, year-over-year, recurring revenue exceeded 23%, with solid performance in all industry segments. Covisint achieved 17% year-over-year total revenue growth. As you are aware, Covisint's revenue is derived from recurring revenue and revenue from services to implement the platform. As an example, health care recurring revenue grew 37% year-over-year. Automotive recurring revenue grew 21% year-over-year, and the energy and emerging vertical markets grew 36% year-over-year.

The quarterly shortfall on onetime professional services caused the depressed total revenue growth. In the health care segment, accountable care organizations continue to drive our health care business. ACOs have become critical not only in the Medicare programs, but also in the commercial, payor and state Medicaid space. This evolution is creating a strong demand for private health information exchanges, or HIEs, to facility the coordination of patient data across the community. This is a growing market for our secured cloud-based platform.

The state e-business has entered a second phase as many of these initiatives evolve towards ACOs. We do have 3 state HIE initiatives and 3 other regional HIE initiatives that are thriving, but I expect future growth in this area to be propelled by accountable care organizations. For those states that continue to have HIE models, whether they use Covisint or not, we'll continue to target contracts with providers and other organizations in the state.

The AMA partnership continues to produce dividends as they have now joined forces with another of our partners, AT&T. The AMA will continue to use Covisint solutions through AT&T to support the technology needs of their 250,000 members.

Covisint's automotive business continues to show strength in consumer-based initiatives. Automakers globally are all faced with the challenge of how they engage with a new digital owner. By 2015, there are projected to be 30 million vehicles on the road with network connectivity. Covisint is well positioned to be the provider of the platform necessary to manage the consumer expectations for security, connectivity and engagement of this growing market.

In Q2, we signed the largest automaker in China to a new connected vehicle agreement. We'll be providing the platform and the app store as they roll out to the new digital initiatives. In North America, we recently signed an engagement with Hyundai on a multiphase consumer and dealer strategy that will utilize the Covisint cloud-based platform.

At Ally Financial, we just rolled out a comprehensive dealer initiative that uses all elements of the Covisint platform, including identity management, portal and app cloud.

In energy, the adoption cycle continues as we continue to rollout new initiatives within our customers, the largest global energy companies. The initial focus in energy has been about enabling secured access to highly confidential applications and data. We are now working with our existing customers in expanding into collaborating with other external businesses, such as suppliers, dealers and distributors.

As we've discussed before, we don't see a lot of competitors in the space, with our most prevalent competition coming from strategic integrators or internal IT. That said, cloud-based enterprise collaboration is an emerging and rapidly growing category. Companies increasingly recognize the competitive imperative to engage with customers, business partners and suppliers. Covisint technology provides the leading enterprise collaboration platform, and we'll continue to move fast to build in our differentiated position.

There are not a lot of surprises in the mainframe business. The mainframe remains vital to transactions that remain major stability, reliability and performance. This overall footprint is under pressure from various cloud and distributor alternatives, as well as an aging workforce. In spite of this year's expected decrease in revenue for maintenance renewal opportunities and the delayed decisions due to the recent release of the new IBM platforms, we're still fortifying our mainframe revenue by focusing on a number of targeted initiatives.

We will continue to push forward with our market-leading productivity tools, but we're especially optimistic about our recently announced Compuware APM to mainframe offerings, which will be released this quarter. Combining Strobe and dynaTrace technology on the mainframe, Compuware APM to mainframe gives our customers the unprecedented insight they need into the growing demands that mobile and web transactions are placing on the mainframe. We have had great response from our prospects, and that gives us strong optimism for the solutions. We have very high expectations that this solution will have a significant impact on our current year performance.

Otherwise, there's been little to no change in the mainframe competitive and pricing environment. Our focus on specific offerings that give differentiated value, along with 4 decades of technical innovation, gives us a sound plan to maximize our revenue in this mature market.

For the remainder of this fiscal year, we expect EPS to be in the range of $0.36 to $0.40 and revenues to be in the range of $980 million and $995 million. Now the big upside potential is with the new APM to mainframe solution. If initial market demand is any indication of the potential for the rest of the fiscal year, we could hit and beat our original low-end guidance of $0.43.

In summary, for this quarter, we hit EPS expectations but have opportunity for execution improvement in Europe and expect some market help in the mainframe category. Our growth engines continue to build revenues rapidly with our increasing margins year-over-year.

Finally, in December of last year, we communicated our 3-year projections. Originally, we planned to update this in December. However, I believe it will make much more sense to fully complete our annual operating plan for fiscal year '14 and have the benefit of fiscal year '13 financials as a baseline for the updated 3-year projection. With that in mind, we will keep our focus on execution and share the updated 3-year operating plan in the spring. We will publish the data in the spring Analyst Briefing in the next couple of months. Joe?

Joseph R. Angileri

Thanks, Bob. Now I'll provide a deeper look into the business unit results. The APM business produced another quarter of growth, with total revenue of $67 million up 7% year-over-year. APM software license fees for the quarter were $17.9 million, down 2% year-over-year.

As Bob mentioned, Europe was a big challenge for APM. This, however, was preliminary -- was primarily an execution issue. The demand for our APM solution remained strong and is exemplified by the stark contrast to Europe and North America. In contrast to the 57% year-over-year drop in on-promise software bookings due to weak execution in Europe, North America posted a 63% growth for the quarter.

APM subscription fees for the quarter were $19.5 million, up 5% year-over-year, with our subscription bookings growing 16%. APM operating expenses for the quarter were $74 million, down approximately 7.3% year-over-year. APM contribution margin for the quarter was a negative 10% compared to a negative 27% during the same period last year.

Although growth was challenged in Q2 from significant execution headwinds in Europe, we feel strongly that our direction is correct. We see strong acceptance of our processes in North America and Asia Pac and need Europe to catch up. Our cost of sales is coming down, and our productivity is on the rise. APM's contribution margin for the first half of the year has improved by nearly $20 million year-over-year, and the business is on track to show a positive contribution margin in Q3.

The Covisint business unit produced total revenues of $20.5 million, up 17% year-over-year. Covisint's operating expenses for the quarter were $20 million, relatively flat year-over-year. Covisint's contribution margin was approximately $500,000 or 2.4% for the quarter compared to a $2.3 million loss or a negative 13% during the same period last year. As Bob mentioned, our Covisint business continues to progress nicely in key areas, and we are seeing both revenue growth and margin expansion.

So as previously projected, mainframe continues to be challenged year-over-year. Mainframe produced total revenues of $78.8 million, down 33% year-over-year. Although mainframe's operating expenses for the quarter were $20.3 million, down 16% year-over-year, this is not enough to overcome the softness in revenue. Mainframe's contribution margin for the quarter remained strong at 74% but was down from 80% during the same period last year. We knew this would be a challenging year for the mainframe. However, as Bob mentioned, we have positive factors coming our way the second half of this year, with IBM's refresh platform and the prelaunch of our APM to mainframe solution, PurePath for z/OS.

Now the professional service business unit produced total revenues of $33.7 million, down 15% year-over-year. Professional service operating expenses for the quarter were $28.1 million, down 11% year-over-year, and professional services contribution margin for the quarter was 17% compared to 20% during the same period last year. Although professional services have been trending down the last couple of quarters, we expect that trend to reverse in Q3, with growth coming from our solutions consulting set around mobile, machine-to-machine and technology performance services, as these higher-margin services become an increased percentage of our professional service portfolio.

In Q2, the Changepoint business unit produced total revenues of $10.1 million, down 7% year-over-year but up sequentially by 13%. Changepoint software license fees for the quarter were $2.1 million, down 3% year-over-year but recovering from a challenged Q1 and up sequentially by 261%. Changepoint's operating expenses for the quarter were $10.8 million, relatively flat year-over-year and up 11% sequentially. Changepoint had a contribution margin for the quarter of a negative 6% compared to negative 1% during the same period last year and a negative 8% sequentially.

Now the Uniface business unit produced Q2 revenues of $10.3 million, down 13% year-over-year and relatively flat sequentially. Uniface's operating expenses for the quarter were $4.6 million, down 11% year-over-year and down 15% sequentially. Uniface continues to have strong contribution margin for the quarter. It was 56% compared to 57% during the same period last year and 48% sequentially.

For nearly 40 years, Compuware has been making technology make a difference. It's what we do. It's what we've always done, and it's what we'll continue to do. Yes, Q2 was a challenged quarter, with European execution issues in APM and a continued slow mainframe market. We've addressed our execution issues in Europe and are excited about the market potential for our PurePath for z/OS solution. We remain optimistic about our overall position in the marketplace and about both our near-term and long-term prospects. Laura?

Laura L. Fournier

Thanks, Joe. Despite the challenging quarter, we still feel very good about the future prospects for our company, and we remain convinced that the strategic direction we have taken is absolutely the right one.

For the quarter, operating cash flow was approximately a negative $1.8 million. And for fiscal year '13, we now expect the operating cash flow to be approximately $150 million to $160 million. Our cash flow generation is being affected by the slowdown in Europe that Bob and Joe discussed, as well as by the back-end loaded nature of our business, with the greater portion of our revenue being generated in Q4, which impacts the timing of cash collections.

In terms of our debt, as of September 30 of this year, our long-term debt position stood at $59.3 million. The increase over Q1 is due to our stock buyback efforts. And as we look forward, we expect the balance to be up in Q3. However, as Q4 is our highest cash quarter, we expect to pay down our long-term debt to approximately $25 million by year end.

And with regard to stock buyback, in Q2 we've repurchased approximately 3.2 million shares for $30.5 million. Year-to-date, as of September 30, we have repurchased approximately 4.9 million shares for approximately $45.9 million. We will continue to repurchase stock as business and market conditions allow.

Our effective tax rate for Q2 was 38%, and we anticipate our tax rate to be approximately 39% for the remainder of the fiscal year.

Before I conclude, I would like to briefly touch on currency and its impact on maintenance. The currency effect on maintenance for Q2 on a year-over-year basis was a negative $4.5 million. And year-to-date, the currency impact on maintenance has totaled a negative $9 million. It is very important to note that the maintenance renewals remain robust at 90% plus. As is oftentimes the case, Q2 proved to be a challenging period for the company, and we especially saw that in Europe this quarter. That said, we have addressed the key issues that contributed to some of these challenges, and we remain convinced that we are on the right track to meeting our long-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

I guess, Bob, to start, can you just give us maybe a little bit more color on Europe? I mean it's a pretty eye-opening drop on a year-over-year basis. And could you just talk about are these deals being pushed out? Was the pipeline just inaccurately sized to begin with? Can you just maybe start there in terms of providing some more color?

Robert C. Paul

We've implemented a very robust, new operating model, and the leadership team has spent a fair amount in Europe at the beginning of the year and then sporadically throughout the first half of the year. And the indications were that those -- the processes and the metrics were being picked up. And in fact, the numbers coming through sales force and other things that we measure seem to be boding well for the European market. So the surprise came, which is obviously not acceptable, in the last sort of week as there was a progressive downturn in deals that were just not ready to close. Almost all of the deals did push. And in spite of the recognized delayed decision-making going on in that marketplace, I still see that as an execution problem, and we should be aware of those issues going on inside of our sales cycles. Now we had sort of an early glimpse of that in the -- a little bit of a glimpse of that in the first quarter, and so we took strides in the middle of the second quarter to make changes in the key leadership there. And we're very, very pleased with the progress that is starting to happen now, but the damage has been done. In North America, we did also have a couple of big opportunities that pushed. I didn't want to get into it in our formal remarks. One of those has closed already; the other one, verbal approvals. But nevertheless, right, we're winning where it counts, and we're gaining market share rapidly. And the capabilities that we've delivered into the marketplace, especially in APM, are just being received very, very well. So in spite of the financial backdrop with the numbers of Q2, I can tell you there's a lot of enthusiasm and momentum going on inside the business right now.

Stewart Materne - Evercore Partners Inc., Research Division

Okay. And then just maybe turning to Covisint. You mentioned the year-over-year growth and recurring revenue is around 23%. Can you maybe just help sort of reconcile this a little bit? Because you're talking about health care is up 30%. You're talking about auto, it's up 31%. I think the other big areas are up -- all up 30% and, clearly, you have had much higher aspirations in terms of recurring revenue this year. So I'm just trying to understand what's happened in terms of the cadence of signing new business in the first half of this year that's not already translating into recurring revenue. I understand the professional services onetime drop down, but that also happens because you don't have new deals coming onboard. So I'm just trying to get a sense on, is the pipeline of business being closed? I guess, what's impacting that? Because you guys, clearly, you aren't where you wanted to be at this point in time in that business.

Robert C. Paul

Yes, there were -- we're not far off. If you add -- if you get into the details of numbers and you take out the shortfall that we had expected in professional services, we'd be very, very close, if not on our quarterly expectations for the number. The -- almost the entire amount of drop in professional services did occur as a result of a freezing going on with one of larger clients because of some change in leaderships there. We had some -- and that's while they were sorting things out. We've had some great review sessions and a lot of optimism with that client moving forward. And we also have -- continue to sign some very important deals for us. And there are a couple more household name deals that we're hoping to be able to talk about here shortly, but we'll continue on the cycle. So in spite of the total revenue shortfall, the big contracts are still there. We're still getting them signed. A couple of projects, again, take a little bit longer to get implemented when we can start recognizing the revenue. We're still very robust on some great numbers for this fiscal year, and we also see a pickup in Q3 now moving forward in the professional services. So all should be healthy again here very quickly.

Operator

And now to the line of Aaron Schwartz from Jefferies.

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

You guys have sort of telegraphed in advance the dynamics in the mainframe business as your unexpected weakness and the tough comps there. It seems like the mainframe came in relatively close and almost maybe spot-on with your expectations in the first half. Given that generates potentially all that cash flow, can you provide a little more detail why the cash flow guidance is changing? I know you said it was partially Europe, but I wouldn't think the APM business in Europe is generating a whole lot of cash flow at this point.

Laura L. Fournier

Kirk, this is Laura. We -- I'm sorry, Aaron. We -- obviously, cash flow is based on all areas. And while the mainframe -- we had hoped for a little bit higher mainframe number in Q2, as Bob said, a couple of deals pushed and that was influencing some of our numbers at the end of Q1. We still hope to do and believe we're going to do the bigger deals and -- but the farther out they push, the longer out the payment cycles come, and so our cash flow is impacted. Europe still does a lot of mainframe and a lot of on-prem APM, and we didn't see that this quarter. So that, again, as it pushes out, it affects the cash flow. So that's really the primary driver there.

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

Okay, so the issues in Europe, is that broader than APM?

Robert C. Paul

I don't -- there wasn't really any as you saw in the mainframe. We obviously had a -- we did have a little bit of a slowdown as it relates to Changepoint in Europe, but it's not material. And we do expect the mainframe to hum along and actually improve quite a bit, so not really. The EMEA problem was really isolated almost exclusively on the APM business.

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

And then can you walk through sort of the leadership change there? I don't know how detailed you want to get, but was that sort of an internal change there? Was that somebody external? Can you just sort of exactly walk through the change you made?

Robert C. Paul

Yes. So without getting into too much specifics, we had a leader who we believed was executing against the model and turned out had some -- apparently some different ideas. And we have made that replacement with somebody who's been a long-term, extremely valuable, very, very well-respected professional in the business that was actually running our entire European marketplace, sort of the General Manager of Europe, so to speak. So he has taken on the helm of running specifically the APM business. And we've taken some of our other, I would call, top, top talent in that region and did a little bit of shuffling underneath. But there is no new outside leaders to speak of, an internal candidate.

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

Okay. And last question for me, if I could. On just the OpEx, it came down here sequentially. Is this a fair set of run rate to look at going forward? Or is that just largely from variable comp that was tied to some of the other issues you talked about that should come back in as the business recovers?

Laura L. Fournier

You understand our business well. So yes, the decline this quarter was primarily due to variable comps. And as revenue grows in Q3 and Q4, we would expect those expenses to grow as well, the total expenses.

Operator

And now to the line of Derrick Wood from Susquehanna International.

James Derrick Wood - Susquehanna Financial Group, LLLP, Research Division

I guess to follow up on the expense question. You did hit your EPS targets for the quarter despite having the revenue shortfall here, so it did look like you guys have tightened up expenses. I'm just trying to get a sense for -- you lowered guidance, the EPS guidance by about $0.07 and yet you were in line with kind of your EPS expectations. So what's the delta going on here?

Robert C. Paul

Well, a combination of things. Obviously, it's tough to make up for the shortfall that we saw in Europe from APM, so we've got that going on. I'm just going to talk about the top line business right now. We also are dealing with what we considered our hopefuls that could allow us to rebound. So we haven't talked about the IBM mainframe new hardware release. Right? If I listen to everything that IBM is saying, including their earnings call, they're expecting a pretty good bounce back in the second half. It would be irresponsible I think to include all of that potential bounce into our number. And so I think we're being as reasonable as we possibly can with expectations of the renewal and some capacity increases and some opportunity for new products sales. And then we have a -- we have hopes of some additional capabilities around the APM to mainframe solution. Again, we're being, some would say conservative, some would say realistic, but the opportunity on that business is significant. But we can't build that into guidance, so we're being actually quite conservative with that right now, again, leaving us some potential for upside. Joe, I don't know if you've got any other thoughts on the size of the....

Joseph R. Angileri

No. I think that's exactly right, Bob. I mean, just to -- Derrick, we did have a bit of a shortfall, both on the mainframe side and the APM side revenue. And it's something that we're going to have to really try to recover, so that's primarily why we've reduced guidance. As Bob said, with the new PurePath for z/OS, I mean, we think that there's a lot of potential there. But it's unproven and it doesn't go to market till this quarter so we actually built that into the guidance, and that is the upside.

Laura L. Fournier

One more comment, Derrick. On the expense side, we still have variable comp based on contribution margin as well, so there is a strong incentive out there to keep those expenses in line. So while variable comp will drive up in Q3 and Q4, we also are keeping our base expenses, they're steady, if not dropping.

Robert C. Paul

Derrick, if I could add one more thing. This is sort of on a very high-level strategic nature. Clearly, we're going through a classic transition that a lot of companies go through. The mainframe is very, very important to us, but we know the mainframe has been around for a long time. And we're looking to extend our competitive advantage positioning, and we're continuing to invest in that as you'll see from the APM to mainframe business. Having said that, 3.5 years ago, 4 years ago, I think we had -- the number was 16% of our revenue was considered high growth. We're close to passing the threshold. We won't -- I don't think we'll quite make it this year. We'll be close in 50% of our revenue actually being high growth. So we're making that transition. Right? The game is making sure that the margins stay intact as you bring these new great capabilities, leading market capabilities to the marketplace and simply the transition that we're going through. And fortunately, we're in a place where we can do that versus some of our peers that, I think, are going to struggle with this issue moving forward.

James Derrick Wood - Susquehanna Financial Group, LLLP, Research Division

Just wanted to drill down on the APM side. Could you give us some color as to percentage of revenue from North America? And then if I heard you right, I mean, sort of 60% growth in bookings, that doesn't give us a -- I mean, can you give us a sense kind of on revenue or license revenue, what it was in North America or APM?

Joseph R. Angileri

It was -- if I just go to on-prem software license for North America was about $14 million.

James Derrick Wood - Susquehanna Financial Group, LLLP, Research Division

And that includes the Changepoint and Uniface?

Joseph R. Angileri

That's a -- no,no -- oh, your total software license? Is that...

James Derrick Wood - Susquehanna Financial Group, LLLP, Research Division

Oh no, no, I'm sorry. Yes, just on-prem APM North America. Okay. And the growth there?

Joseph R. Angileri

That was about 67%.

Laura L. Fournier

The total FOB was 14%.

James Derrick Wood - Susquehanna Financial Group, LLLP, Research Division

Okay. So your assumptions on the, I think you said, 14% growth rate APM. I mean, you're basically assuming pretty hyper growth in the U.S. that's staying consistent and pretty negative growth in the Europe for the rest of the year.

Laura L. Fournier

Well, I think -- just to clarify a few things. We did have some positive -- very positive growth year-over-year in the APM space in North America on the on-prem side. So Joe, you want to jump...

Joseph R. Angileri

63% on the bookings.

Laura L. Fournier

The bookings side. And on the revenue side, maybe it was a little bit lower than that. So we are and we continue to forecast that, that will pick up even those increases as we go forward.

James Derrick Wood - Susquehanna Financial Group, LLLP, Research Division

Yes. I was just trying to get -- for the second half of the year, I mean, you're assuming similar negative growth rates in Europe and similar positive growth rates in North America.

Joseph R. Angileri

We expect Europe to catch back up in terms of getting back to a normal trajectory of growth but not having a 57% decline.

Robert C. Paul

The forecast for Q3 in EMEA actually looks pretty, pretty reasonable. They're back to a run rate that I would consider in the realm of respectability. We're going to have to go back to you as far as compares -- as far as run rates for the whole half of the year. But EMEA will rebound based on what we're seeing right now, but they're not going to make up -- they're not going to be able to make up for the first -- for this last quarter's decline.

Operator

And now to the line of Mark Jordan of Noble Financial.

Mark C. Jordan - Noble Financial Group, Inc., Research Division

I have a question about sort of the overall mainframe revenues. As you see it now in sort of your base case, excluding potential upside from APM and from higher-than-expected revenues driven by the new product cycle, what do you see is the decline in mainframe revenues you're looking for? And then secondly, if you were to get all these 2 incremental kickers that you said could drive you back to that $0.43 number, what kind of incremental revenue stream does that represent?

Robert C. Paul

Yes. I'll talk about the incremental revenue stream as they're pulling out the new year-on-year decline for mainframe. So we see 2 primary areas of bounce -- potential bounce to the mainframe. We have built into the numbers somewhat already, about a $13 million to $15 million increased opportunity as it relates to renewals and increasing capacity, things like that. Right now, we have an internal model that's driving our sales organization to an additional $25 million for the APM for mainframe solution. And to give some credibility to that, if I could, we have talked to a whole bunch of customers over the last 2 quarters that we've not had one say, this is not something that we're ready to move forward with. We've got a targeted list of about 130 accounts, well, exactly 130 accounts, that we are in the process of talking to or will have talked to by the end of this month, an early adopter program that closes out at the end of this calendar year with some special incentives and then hitting the ground full force in Q4. So there is -- and what we're seeing right now from the potential closes in this quarter and the next quarter is actually quite strong, stronger than I've ever seen since I've been here in the mainframe for a new product release by far. In fact, some of the mainframe guys who have been around here a long time are saying it's the most exciting thing that we've seen as far as the market response and since the early days of Abend-AID and the File-AID. So we're trying to keep the optimism in check to provide some proper guidance here, but those are the kind of numbers that we're thinking about relative to upside.

Joseph R. Angileri

So with respect to the traditional mainframe portfolio, when we started the year, we had kind of thought that, that would decline about 12%. And you may recall that's really a function of a couple of very large deals that occurred last year, one here and one in Asia Pac. Primarily, that's also a function of the fact that we've been moving from term to perm deals, and we had a detriment of about $60 million this year baked in. Right now, the way we see it, we're kind of looking at it and projecting that rather than 12% decline, it will probably be closer to about a 19% decline year-over-year without regard to the PurePath for z/OS that Bob was just talking about.

Mark C. Jordan - Noble Financial Group, Inc., Research Division

Another relative to the mainframe APM. Are you going to be booking that in the -- I take it, in the mainframe segments?

Robert C. Paul

Let me hold off on answering that question for you, and we will let you know.

Operator

And now to the line of Mike Latimore from Northland Capital.

Michael Latimore - Northland Capital Markets, Research Division

I guess, first, on the APM segment. I think part of the strategy there was to do a higher volume of smaller deals. So I guess, were there a lot of small deals that just did not close at the end of the September quarter? Or were there a few big ones you were expecting that didn't close?

Robert C. Paul

Yes. There were a couple of larger deals in North America that I can think of explicitly. One has since closed, and one we're very positive about for this quarter. In Europe, it was a bunch of the smaller -- just a whole cascading of smaller opportunities. There wasn't just one big deal. You don't get that kind of decline with that kind of numbers. So it's based -- a little bit based upon geography as it relates....

Joseph R. Angileri

It was both. And just to add a little color to Europe. Normally, if we can close about 40% of our business in the first 2 months, we feel pretty good. And even though those 2 months were summer months in Europe, which are really tough months to get business closed, we actually closed more in those first 2 months than the last month of the quarter. So that just, I guess, impresses upon you guys that I don't believe that was market driven. That's really more execution driven because the market was pretty strong for us the first 2 months. But that last month in the quarter, we just saw things falling out at a very rapid pace.

Michael Latimore - Northland Capital Markets, Research Division

On these several small deals, what gets them moving again? Or do you have to come up with new deals in Europe?

Robert C. Paul

No, I -- yes. I mean, all of the above. Right? We've got a pipeline in the commit right now that looks pretty decent, Q3. We're making sure that, that is not -- that, that is, in fact, real. So the level of scrutiny and diligence that's going on in those deals is much, much more than anybody would expect to make sure we don't have a problem again. And most of these were delayed decisions. Right? So we do get some quite a bit that were bounced out, but we should know that. We should know the closing process. We should know the closing stats. We should know the signatories on the deals as they get done. So -- and then we also need to build up the pipeline, so we don't have that kind of challenge again. So it's a combination of both.

Michael Latimore - Northland Capital Markets, Research Division

So within APM, you gave new guidance for the APM segment for this year. Do you still expect a similar kind of license growth rate in North America going forward, so that fairly rapid growth rate? Do you assume that continues? Or do you assume a little more moderate growth rate in North America?

Robert C. Paul

No. We see that continues. We're actually ahead of where we thought we'd be in North America. I'm actually very, very pleased with our execution, both in North America and Asia Pac. And Latin America is still doing pretty decent but very, very pleased in those 2 regions. And our expectation is more of the same, and the numbers that we can see right now are more of the same moving forward.

Michael Latimore - Northland Capital Markets, Research Division

Do you have a bookings growth rate number for Covisint or a backlog growth rate number?

Laura L. Fournier

We don't. We don't have that with us, but the backlog will be in the Q when we publish that.

Michael Latimore - Northland Capital Markets, Research Division

Okay. Got it. And then the corporate expense line came down sequentially. There's not much in the way of variable expenses in there, is there?

Laura L. Fournier

So all of the executives -- the senior executive team is in that number. And so yes, our variable comp is -- has very high goals that -- so we took that down, not the goals, the amount. The accruals came down this quarter.

Operator

And now to the line of Aaron Schwartz from Jefferies.

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

I just had 2 quick follow-up questions. If we look at the total APM figure in the quarter here, I think it was $67 million. What percent of that is EMEA? Or what's just the geographic split for the total APM business?

Joseph R. Angileri

It's about 30%. Well, this quarter, it was way down because the -- but EMEA usually runs about 30%, 35%.

Robert C. Paul

We'll get it for you for this quarter. That's generally what happens, but it's different for this quarter.

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

Okay. So I mean your total split, I guess is, if I'm looking at it correctly here, about 24%, 25% EMEA. So APM typically has greater exposure to EMEA than the Europe business?

Robert C. Paul

Yes.

Laura L. Fournier

Definitely.

Robert C. Paul

Professional services isn't in Europe at all.

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

And then secondly, didn't hear any sort of update on Covisint. Can you just kind of walk through where you are in the process? Any update on that front?

Robert C. Paul

Yes. I can do that. We're not changing any expectations that we've set prior on Covisint, so we're just in a quiet period right now.

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

Right. I know that you've got your hands tied, but there's no change to previous comments?

Robert C. Paul

No. None.

Joseph R. Angileri

No comment.

Operator

And now to the line of Kirk Materne from Evercore Partners.

Stewart Materne - Evercore Partners Inc., Research Division

Just one follow-up. I know you guys want to sort of take a full year and sort of review the initial plan you laid out last December. But clearly, revenue isn't where you're hoping it would be. I guess how have you guys sort of thought about managing costs? I mean, things have gotten better contribution, margins have gotten better. But with mainframe going from down 12%, down 19%, that's a pretty big hit. So I guess, has there been anything incremental you guys have been putting in place or thinking about to continue to try to get the leverage you're looking for?

Robert C. Paul

Yes. It is a very important factor in our business planning. As a result for the quarter, obviously, we're looking at all discretionary costs and things that we have to do and things that will support the business in the core versus context, and that will continue. We will be very much focused on opportunities moving into next fiscal year. And I think what the Street deserves moving into next fiscal year is we're going to get -- not only we're going to get the projections identified, but we're going to be much more transparent with those things, the detailed line items that we think that we can impact our margin moving forward. The -- it is -- in spite of the quarter, right, if you think of where we're heading long term, we've got Covisint several quarters ago pass into positive contribution margin territory. We have every reason to believe that this quarter, APM is passing very quickly through in the positive contribution margin and will help, hopefully, set that as an annual positive number for the year. And you're right, we are in a down -- a little bit of a down renewal cycle for the mainframe this year, which we expect some bounce back for next year as we talked about a year ago. So with all those things being said, it's -- there are things that are pointing in the right direction, and we're going to be quite realistic and conservative and transparent about what we believe those opportunities are to explicitly move the margin even faster.

Joseph R. Angileri

And I would also add, too, Kirk, is that the 19% is the traditional. I mean, we still are very optimistic about the PurePath for z/OS. That will be very high margin for us as well, and that's not included in that 19%. As Bob said, it's still early days on that, so we'll have better information on that Q3, Q4.

Operator

And ladies and gentlemen, we will now conclude today's question-and-answer portion. I would now like to turn the conference 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.

Operator

Thank you. Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation and for using the AT&T Executive Teleconference Service. You may now disconnect.

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