Compuware's 4Q Earnings Lag

Zacks

Compuware Corporation’s (CPWR) fourth-quarter 2013 earnings per share (including stock based compensation of 5 cents and its related tax effects) of 4 cents were lower than EPS of 12 cents reported in the year-ago quarter. Reported earnings also missed the Zacks Consensus Estimate by a penny.

Results were negatively impacted by lower number of deals closed in the Application Performance Management (:APM) and Mainframe businesses during the quarter. Most of the deals were pushed to fiscal 2014, primarily due to uncertain IT budgets and the slow recovery in the European IT spending environment.

Quarter Details

Total revenue for the quarter decreased 9.8% on a year-over-year basis to $239.9 million and lagged the Zacks Consensus Estimate of $247 million.

Revenues from the APM business unit decreased 3.5% from the year-ago quarter to $77.2 million and were within management’s range of $76 million - $78 million.

Though Mainframe revenues decreased 19.1% year over year to $81.5 million, it marginally exceeded management’s guided range of $79 million - $81 million. Moreover, revenues from Compuware’s Changepoint, Uniface and Professional Services were down 31.1%, 1.5% and 10.1%, respectively, on a year-over-year basis. However, the Covisint business unit reported a 20% year-over-year growth.

The company reported operating expenses (before restructuring, impairment and advisory fees) of $220 million, which were down 4.2% from the year-ago quarter. As a percentage of revenues, operating expenses expanded 530 basis points (bps).

Operating income (before restructuring, impairment and advisory fees) was down 45.2% year over year to $19.9 million. Operating margins contracted 530 bps year over year due to lower revenues and higher operating expenses as a percentage of revenues.

Net income (including stock based compensation) was $8.7 million, which was down from $27.1 million reported in the year-ago quarter.

Exiting the fourth quarter, cash and cash equivalents amounted to $89.8 million, up from $64.9 million in the previous quarter. Long-term debt stood at $18 million.

Guidance

For fiscal 2014, management expects revenues of $1 billion (up 7% year over year) while GAAP earnings per share are expected in the range of 35 cents - 37 cents. The company expects to save $45 million on costs in fiscal 2014.

Among the business units, Compuware expects the APM segment to grow 15% while Changepoint revenues are expected to increase 19%. Management also expects revenues from Uniface to grow 2% and Covisint by 20%.

However, revenues from Mainframe are expected to decline 5% in fiscal 2014.

Recommendation

Though the company reported a tepid quarter, Compuware’s product portfolio, which comprises mainframe software, project-management tools collaboration technology and performance-management services for cloud computing and mobile applications should see good growth.

Moreover, the company’s initiatives to reduce costs, gain new programs and introduce new products are expected to benefit the company, going forward.

However, Compuware operates in an intensely competitive landscape and competes with the likes of BMC Software Inc. (BMC), CA Technologies (CA) and International Business Machines Corp (IBM) with respect to one or more offerings. Moreover, execution challenges (related to acquisition, geography and people) are possible headwinds going forward.

Currently, Compuware has a Zacks Rank #4 (Sell).

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