Compuware (CPWR) Q2 Earnings Fall on Lower Revenues

Compuware Corp. (CPWR) reported second-quarter fiscal 2015 earnings of 7 cents per share, down 22.2% from 9 cents in the year-ago quarter. Revenues also declined on a year-over-year basis.

During the quarter, Compuware entered into a definitive agreement to be acquired by a leading private equity investment firm Thoma Bravo, LLC, in a transaction valued at approximately $2.5 billion. The transaction is subject to approval from Compuware's shareholders, regulatory approvals and other customary closing conditions. The closing of the transaction is also subject to the completion of a distribution of Covisint.

Revenues

Revenues decreased 1.0% year over year to $170.9 million in the reported quarter, missing the Zacks Consensus Estimate of $171 million by a whisker.

Segment-wise, Dynatrace revenues increased 8.9% on a year-over-year basis to $83.2 million in the fiscal second quarter. Revenues from Mainframe and Covisint, on the other hand, decreased 8.1% and 11.4% from the year-ago quarter to $66.0 million and $71.8 million, respectively.

Management stated that Dynatrace continues to be the fastest growing application performance management (:APM) product in the market. It provides significant competition to similar solutions from the likes of CA Technologies (CA) and Hewlett-Packard (HPQ).

With a win rate of greater than 70% against all competitors, new and old alike, it is expected that Dynatrace will continue to be Compuware’s flagship APM solution in fiscal 2015 and beyond. Further, increased investment and go-to-market strategies are expected to drive DCRUM and APMaaS growth going forward.

Compuware’s top line also gained from robust performance of other APM products namely Gomez Performance Network and Data Center Real-User Monitoring solution.

Source-wise, software license fees (.8% of revenues) declined 1.2% on a year-over-year basis to $32.2 million in the fiscal second quarter. Maintenance fees (52.1% of revenues) and Service fees (4.7% of revenues) increased 0.2% and 17.1% on a year-over-year basis to $89.0 million and $8.0 million, respectively.

Subscription fees (11.7% of revenues) of $19.9 million remained flat over the prior year. Application Service fees (12.7% of revenues) declined 11.4% from the year-ago quarter to $21.7 million.

All four geographic regions where the company operates, namely, North America, EMEA, APAC and Latin America, experienced year-over-year bookings growth in the quarter.

During the quarter, Compuware’s Dynatrace unit teamed up with Rosetta, one of the largest customer engagement and e-commerce agencies in the U.S., for a live webcast to provide tips on how retailers can avoid the most common eCommerce mistakes during the holiday shopping season and deliver superior online experiences to their customers.

During the reported quarter, the company announced plans to operationally separate its mainframe and APM businesses and that the resulting mainframe-dedicated company will carry the Compuware name. Moreover, the announcement that its market-leading APM business will operate under the name Dynatrace was also made in the fiscal second quarter.

Margins

Operating expenses, as a percentage of revenues, expanded 160 basis points (bps) from the year-ago quarter to 60.5% in the reported quarter. Operating expenses exclude restructuring expenses, amortization of purchased software, and amortization of acquired intangible assets but include stock-based compensation.

The company reported an operating income of $14.6 million in the fiscal second quarter compared with an operating profit of $10.8 million in the year-ago quarter.

Adjusted net income (excluding all one-time items but including stock-based compensation) was $15.8 million or 7 cents per share compared with $20.3 million or 9 cents per share reported in the year-ago quarter.

Compuware Corporation - Earnings Surprise | FindTheBest

Balance Sheet

At the end of the second quarter of fiscal 2015, cash and cash equivalents amounted to $255.3 million, down from $275.5 million in the previous quarter. The company had no outstanding long-term debt in the reported quarter.

Recommendation

Compuware reported dismal fiscal second-quarter results. Compuware operates in an intensely competitive landscape with the likes of IBM Corp. (IBM).

Nevertheless, we believe that Compuware’s innovative product pipeline, initiatives to reduce costs and new program wins will boost profitability going forward. Moreover, the recent recognitions by analyst firms including Gartner and IDC for being a force to reckon with are a major positive.

We believe that the spin-off of Covisint will enhance shareholder value which, in turn, will drive bottom-line growth going forward.

Read the Full Research Report on CPWR
Read the Full Research Report on HPQ
Read the Full Research Report on CA
Read the Full Research Report on IBM


Zacks Investment Research