Compuware Earnings Call Insights: Lower ASPs, Higher Sales Velocity and Mainframe

Compuware Corporation (NASDAQ:CPWR) recently reported its third quarter earnings and discussed the following topics in its earnings conference call.

Lower ASPs and Higher Sales Velocity

Kirk Materne – Evercore Partners: I guess first on the APM side. Can you guys just talk a little bit about Europe and was that just a snap back or do you think this is a region that now is sort of taking hold of some of the processes you guys have put in place in terms of lower ASPs and higher sales velocity, I guess I’m just trying to make sure this isn’t sort of a one quarter bounce back, do you feel like that business is heading in the right direction more broadly now?

Markets are at 5-year highs! Discover the best stocks to own. Click here for our fresh Feature Stock Pick now!

Joseph Angileri – President and COO: Yeah, I’ll admit there was a little bit of buoyancy from Q2 deals that did not close that came over, but for the most part it is a very close attention to detailed execution. Obviously, we’ve made some changes over there on a number of fronts and we got those done in Q2 and as a result of that, Q3 performance is strong. But the reason I feel more comfortable in saying it wasn’t just a one-time bounce back is because of the numbers that we’re seeing progress in the Q4 with the pipelines and forecast activity. So, we think the issues are behind us and we expect strong presence from EMEA in upcoming quarters.

Kirk Materne – Evercore Partners: Joe you guys have talked about better efficiency I guess really there is no silver bullet, bu5t could you just talk about some general areas where you all think you can get a little bit more efficiency I realize there is probably some natural leverage on the AOM business, but I guess other parts of the business that you guys think can potentially be trimmed or just made more efficient?

Joseph Angileri – President and COO: Kirk, it’s Joe. Certainly in the business units we’re looking at still continuing to look at sales productivity. We don’t think we’ve reached our peak period at all, on the mainframe side, that scenario that we’re really focused on as well. So I think there’s clearly that continued effort. We’re looking at all the costs for our – kind of infrastructure cost around Covisint, making sure that the cost that we’re utilizing to support the platform are accurate and correct and also looking at the labs as well and making sure that all the R&D we’re spending is appropriate with respect to the product development that we’ve got underway. So that being said, I think those are the key areas in the business units that we’re looking at and making sure that we’re really efficient and effective.

Kirk Materne – Evercore Partners: Just maybe one last one on the PurePath, on the Mainframe side. Do you guys have an opportunity to upside of just upselling that into existing popular customers, you talked about some wins, can you actually extend that into some customers that aren’t already on existing Compuware Mainframe products? I’m trying to get a sense of does that help to stabilize the Mainframe business and maybe keep a little bit more flattish than a little bit declining or can that potentially get Mainframe a little bit back to even growth especially given I guess next year, given you have a pretty easy comp in the first couple of quarters?

Bob Paul – CEO: There are a couple of leverage points with the PurePath software. The first leverage point is obviously selling the value proposition itself leads to a lot of conversations around the other Mainframe products. With the existing companies, existing customers it creates more opportunities around renewals and up ticking those renewals and just gives us a lot more leverage there. The other thing it provides for us is exposure to our APM platform, because it is essentially the APM platform that’s leveraging for its dashboard, etc. into the rest of the disturbed environments. So where we might not have a presence it gives us a leg into the distributed organization and actually showcase what is the potential of our APM capabilities. So the importance that we’re putting on process related to sharing that information and maximizing the sales opportunity, whether it be more into the mainframe environment and/or leveraging of the APM distributed environment is absolutely critical. We are measuring our pipeline and activity very tightly, and as you know, we’ve got a lot of excitement internally around this product given where the pipeline is shot to since this November 30th release. We’ve obviously done a lot of work on our next fiscal year plan, which we’ll be talking more about later, but based upon the results that we start to see in Q4 will have an impact on how we guide in fiscal year ’14, and it is going to have a significant effect on the trends that we’ve been seeing in Mainframe lately.

Mainframe

Aaron Schwartz – Jefferies: Just had a follow-up question on Mainframe but on the maintenance side. Can you sort of walk through why the metrics are trending the way they are? Is there sort of outliers or more, sort of pricing or capacity or what is affecting sort of that (drawdown) on the maintenance side?

Bob Paul – CEO: Yeah, there are quite a few trends. As you know, Aaron, we actually grew Mainframe revenues last year. It’s a very cyclical business for us. We expected a downturn this year because of our renewal opportunity. Renewal opportunities were lower and that’s simply because our contracts are every three to five years and so we go through these cycles. That does pick up again a little bit next year and then obviously with the new product introductions we are looking forward to talking about the Mainframe business in much more detail for fiscal year ’14. Other variables are obviously there are some companies that are moving off the mainframe platform, so that has an impact. The competitive environment really hasn’t changed, except for pricing expectations around capacity, not a lot of incremental capacity hitting the floor as we used to see it for the last three to five years or three to five years ago, and that’s had obviously a dramatic impact on software license billings that would come into the organization. So, all those trends kind of work together. We think we can sustain the Mainframe business moving forward with very exciting new product introductions, obviously starting with the PurePath for z/OS and we are going to be expanding that environment to cover more environments on the mainframe platform and we know it’s a one-of-a-kind solution, and so because of the leverage, it does give us another (indiscernible) organization, right. It’s important that we maximize that.

Aaron Schwartz – Jefferies: Then maybe a follow-up for Laura. I don’t know if you mentioned this, but did you call out sort of a one-time expense on the G&A line. I know that jumped up quite a bit? And then also could you just give us an update on sort of the purchase accounting expenses within the APM business?

Laura Fournier – EVP, CFO and Treasurer: We did have a one-time expected charge for Pete’s retirement contract. That contract includes a retirement provision, as well as for consulting services going forward and capital requires us to record that when the contract is entered into. So we did see a one-time hit there for about $4 million. On the purchase accounting, I’m sorry, your question was how long does that go forward?

Aaron Schwartz – Jefferies: Well, certainly the margin improvement there on APM side was a big milestone. I’m just wondering sort of where you are or sort of how long the (deal) is here.

Laura Fournier – EVP, CFO and Treasurer: That was really due to efficiencies in the operating costs. Their amortizations on purchase accounting actually extends out for quite a few years and so these were real cost ratings.

Bob Paul – CEO: We’re not going to talk about top line.

Laura Fournier – EVP, CFO and Treasurer: Top line growth, absolutely.

Bob Paul – CEO: Yeah, we’re not going to see the purchase accounting drop off, probably in another three years.

A Closer Look: Compuware Earnings Cheat Sheet>>