Compuware Corp (CPWR) reported second quarter fiscal 2014 earnings of 9 cents per share, which beat the Zacks Consensus Estimate by 3 cents.
Earnings (including stock-based compensation and related tax effect) jumped 49.6% from the year-ago quarter and 31.8% from the previous quarter. The strong earnings growth was primarily driven by lower cost and improving margins.
Revenues
Revenues increased 3.4% from the year-ago quarter but remained almost flat sequentially at $228.1 million. However, revenues missed the Zacks Consensus Estimate of $231.0 million.
The year-over-year growth was primarily driven by strong performance from APM (up 12.4%), Covisint (up 19.4%), professional services (up 6.3%) and Uniface (up 3.2%), which offset weak growth in Mainframe (down 7.7%) and Changepoint (down 9.8%).
In the quarter, APM earned software license fees of $24.3 million, up 35.0% from the year-ago quarter. Management stated that dynaTrace continues to be the fastest growing APM product in the market, with revenues expected to cross $100.0 million this year.
dynaTrace continues to provide significant competition to the products from companies such as CA Technologies (CA) and Hewlett-Packard (HPQ). Compuware’s top-line growth also gained from robust performance of other APM products namely Gomez Performance Network and Data Center Real-User Monitoring solution.
Although the Mainframe business reported year-over-year decline in the second quarter, management believes it is stabilizing and has significant growth opportunities going forward. Mainframe renewal rate remained strong in the low-to-mid 90% range.
Changepoint’s year-over-year decline in sales was primarily attributed to the postponement of some sizeable deals to the third quarter. However, Compuware believes that the solid pipeline of opportunities and steady increase in its Software-as-a-Service (SaaS) offerings will boost the segment’s top-line growth going forward.
Regarding Professional services, the company remains cautious due to macro-economic headwinds in the market. However, the strong result in the Uniface segment driven by solid revenue growth in Latin America and Asia is expected to offset weakness in Europe going forward.
During the quarter, Compuware completed the initial public offering (IPO) of 7.36 million shares of its subsidiary Covisint Corp. Management stated that it remains committed to the distribution of the remaining 80.0% of its holdings to shareholders within the next 6 to 12 months.
Margins
Operating expenses as a percentage of revenues declined 180 basis points (bps) from the year-ago quarter and 230 bps from the previous quarter. Operating expenses exclude restructuring expenses, amortization of purchased software, and amortization of acquired intangible assets but include stock based compensation.
APM and Changepoint’s contribution margins were 8.8% and 3.3% respectively in the quarter. Mainframe’s contribution margin improved 190 bps, while Uniface’s contribution margin inched up 10 bps from the year-ago quarter. Professional services contribution margin surged 320 bps from the year-ago quarter.
Operating margin (including stock based compensation expense) improved 180 bps from the year-ago quarter and 230 bps from the previous quarter due to lower-than-expected rise in operating expenses. Net income margin increased 380 bps from the year-ago quarter and 150 bps sequentially.
Balance Sheet
At the end of the second quarter of fiscal 2014, cash and cash equivalents amounted to $50.4 million, down from $81.3 million in the previous quarter. Long-term debt stood at $14.0 million compared with $15.0 million in the previous quarter.
Outlook
Compuware expects revenues in the range of $965.0 million to $985.0 million (down from $1.004 billion to $1.012 billion). However, management reiterated its non-GAAP earnings outlook, which is expected to be in the range of 47 cents – 49 cents per share.
The company expects to save $40.0-$45.0 million in costs in fiscal 2014. Management expects to save $80.0 to $100.0 million in costs by fiscal 2016.
Compuware expects APM to grow 9.0% in the fiscal year instead of 15.0% projected earlier. However, revenues from Mainframe are expected to decline 7% instead of 5.0% in fiscal 2014.
Recommendation
Compuware reported mixed second quarter results. Management also provided lower revenue guidance primarily due to sluggish IT spending and challenges in Europe. Compuware operates in an intensely competitive landscape and competes with the likes of International Business Machines Corp (IBM) with respect to one or more offerings.
Nevertheless, we believe that Compuware’s innovative product pipeline, initiatives to reduce costs and new program wins will boost profitability going forward.
Currently, Compuware has a Zacks Rank #3 (Hold).
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