Cost Cutting Boosts CPWR

Compuware Corporation (CPWR - Analyst Report) yesterday reported revenues of $214.4 million for the first quarter ended June 30, 2009, down 28% year over year and falling short of the consensus estimate of $217.8 million.

CPWR provides software products and professional services to many of the large users of information systems around the world. It serves more than 70% of the Fortune 500 companies and has over 23,000 customers spread across many industries worldwide.

GAAP EPS came in at $0.21 while non-GAAP EPS (excluding restructuring charges) came in at $0.22 beating consensus estimate of $0.13 due to strong performance by the business service delivery strategy. The divestiture of Quality Solutions fetched gains of $52.4 million.

Management stated that software license fees exceeded expectations. Software license fees came in at $40.5 million compared to $61.4 million in the year-ago quarter. Maintenance fees were $111.1 million compared to $126.5 million in the year-ago quarter. Revenue from professional services in the quarter was $62.7 million compared to $110.6 million in the year-ago quarter. Operating expenses were 44.8% down year over year. Consequently, operating margin improved to 36.3% from 17.0% in the year-ago quarter. Operating cash flow remained strong at $75 million.

The company continues to target cost savings of $200 million in operations over the next few years through improvements in business processes and increases in sales productivity. Most recently, CPWR reduced its workforce by approximately 250 employees (less than 5% of the company’s total workforce). The reduction primarily happened in its professional services.

Going forward, management expects overall cost cutting activities and operational momentum to drive significant margin expansion and EPS growth in the coming quarters.

However, the economic climate remains tough and IT spending is not expected to gain momentum before 2010. Compuware operates in an intensely competitive landscape. And rivals include big players like IBM - Analyst Report, Accenture (ACN - Snapshot Report), Electronic Data Systems, BMC Software (BMC - Snapshot Report) and Computer Associates. We maintain our HOLD on the stock.

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