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Compuware Corp reported first quarter 2014 earnings of 7 cents per share, which beat the Zacks Consensus Estimate by a penny.

Earnings (including stock based compensation and related tax effect) jumped 16.7% from the year-ago quarter and 75.0% from the previous quarter. The strong earnings growth was primarily driven by lower cost and improving margins.

Quarter Details

Revenues inched up a modest 0.6% from the year-ago quarter but declined 5.2% from the previous quarter to $227.5 million. Revenues were slightly ahead of the Zacks Consensus Estimate of $225.0 million.

The modest year-over-year growth was primarily driven by strong performance from Changepoint (up 17.2%), Covisint (up 17.1%), professional services (up 5.5%) and APM (up 3.2%), which offset weak growth in Mainframe (down 8.3%) and Uniface (down 6.2%).

The sequential decline was primarily attributed to weak results from APM (down 4.9%), Mainframe (down 10.1%), Uniface (down 22.4%) and Covisint (down 6.3%), which were partially offset by strong performance in changepoint (up 5.1%) and professional services (up 12.8%).

Operating expenses (excluding restructuring expenses) as a percentage of revenues declined 10 basis points (bps) from the year-ago and 20 bps from the previous quarter. This was primarily attributed to lower sales & marketing expense, which as a percentage of revenues contracted 140 bps from the year-ago quarter and 200 bps from the previous quarter.

Operating margin (excluding restructuring expenses) improved 10 bps from the year-ago quarter and 20 bps from the previous quarter due to lower-than-expected rise in expenses. Net income as percentage of revenues increased 150 bps from the year-ago quarter but declined 200 bps sequentially.

At the end of the first quarter of 2014, cash and cash equivalents amounted to $81.3 million, down from $89.8 million in the previous quarter. Long-term debt stood at $15.0 million as compared to $18.0 million in the previous quarter.

Compuware declared and paid its first quarterly dividend of $0.125 per share during the quarter. The company bought back 300K shares for approximately $3.5 million.

Outlook

Compuware reiterated its fiscal 2014 outlook. Management continues to expect revenues in the range of $1.004 to $1.012 billion (up 7% year over year) while non-GAAP earnings are expected to be in the range of 47 cents - 49 cents per share. The company expects to save $45 million in costs in fiscal 2014. Management expects to save $80.0 to $100.0 million in costs by fiscal 2016.

Compuware expects both the APM and Changepoint segment to grow 15% from the year-ago period. Management expects revenues from Uniface to grow 2%, while professional services are expected to increase 6.0% from 2013. However, revenues from Mainframe are expected to decline 5% in fiscal 2014.

Recommendation

We believe that Compuware’s innovative product pipeline, initiatives to reduce costs and gain new programs will boost profitability going forward.

However, Compuware operates in an intensely competitive landscape and competes with the likes of BMC Software Inc. , CA Technologies (CA - Analyst Report) and International Business Machines Corp (IBM - Analyst Report) with respect to one or more offerings.

Moreover, execution challenges (related to acquisition, geography and people) are the major headwinds going forward.

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

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