Covisint IPO Is A No-Go

| About: Compuware Corporation (CPWR)
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Covisint Corporation (NASDAQ:COVS), a Detroit, Michigan based provider of a cloud-based platform that allows organizations to securely connect with large groups of clients, partners, and suppliers, announced its upcoming IPO this past Wednesday, September 11 and expects to go public on September 26th. The firm plans to raise $64 million in the IPO. The firm will offer 6.4 million shares at an expected price between $9 and $11. Assuming the shares hit the midpoint of that range at $10, COVS will command a market value of $395 million.

COVS filed confidentially on December 14, 2012.
Joint Managers: Credit Suisse, Evercore Partners, Pacific Crest

Covisint offers its cloud engagement platform in the platform-as-a-service model. The platform is designed to allow firms to streamline and automate business functions securely, as well as to provide secure communications between firms and their clients, partners, and suppliers.

Covisint relies heavily on two sectors of the economy for its customer base: healthcare and automotive. Though both of those sectors are stable and expanding now, this limited base means that a future downturn in either sector could be extremely costly for COVS. Approximately 32% of the firm's revenues for the year ending March 31, 2012 were generated through the healthcare industry, and approximately 57% of revenues for the same time period were generated through the automotive industry. Moreover, Covisint relies on only a handful of its customers to generate a large portion of its revenues, meaning that the failure of any one of those firms could have serious consequences.

Covisint's top ten customers accounted for 63% of its revenues for the year ending March 31, 2012, including a whopping 35% generated by General Motors (NYSE:GM) alone. Other critical customers include AT&T (NYSE:T), Blue Cross Blue Shield Association, Blue Cross Blue Shield of North Carolina, Daimler AG (OTCPK:DDAIF), Detroit Medical Center and the Vermont Blueprint for Health.

COVS offers the following figures in its S-1 balance sheets for the nine months ended December 31, 2012:
Revenue: $65,020,000
Net Loss: ($2,359,000)
Total Assets: $92,484,00
Shareholders' Equity: $44,692,000

Despite fairly robust revenue growth, COVS has yet to demonstrate an ability to turn profitable. For the years ended March 31 of 2010, 2011, and 2012, the company posted revenues of $40.5 million, $54.2 million, and $74.7 million, respectively. Over the same years, net losses totaled $4.4 million, $1.3 million, and $3.3 million, respectively.
The companies CEO David McGuffie has also averaged over $1,094,000 in compensation over the past two years which strikes us as on the high end for a company that consistently losses money for its owners.

Between the unsure future of COVS's parent, Compuware, which will remain a controlling shareholder after the IPO, and COVS's inability to produce a profit, this IPO is better left untouched. Over-reliance on a few customers in limited sectors also raises a red flag for us.


It should be noted that Covisint is a wholly owned subsidiary of Compuware Corporation (NASDAQ:CPWR). Following the IPO, Compuware will continue to hold an 82.4% stake in Covisint and will be the controlling shareholder. Compuware has been engaged in efforts to sell itself for some time, and a leading contender to make the purchase is a consortium that recently purchased BMC Software (NASDAQ:BMC), a similar cloud computing firm, and will likely seek to merge the two companies. The BMC purchase has been complicated by delays from Chinese authorities, and it's unclear what role China might play in Compuware's future should the merger succeed. The likelihood of an upcoming sale of Compuware certainly muddies the waters for an investment in Covisint.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Investors should read the S-! and consult with their financial adviser. This article was written for informational purposes.