Margins Improve at Compuware

Compuware Corp. (CPWR - Analyst Report) yesterday reported revenues of $217.9 million in its fiscal second quarter, down 19.2% year over year but up 1.6% sequentially.

Software license fees grew 18.7% year over year to $50.1 million. Maintenance fees declined 12.0% year over year to $109.7 million. Revenues from professional services came in at $58.1 million compared to $102.9 million in the same quarter last year. Compuware plans to have a smaller but more profitable Professional Services Business going forward.

Operating margin improved to 19% from 10% in the year-ago quarter due to a 27% decrease in operating expenses. The company has divested a few of its peripheral products and services (Quality family of products and DevPartner software) thereby reducing unprofitable revenue streams and increasing margins. The company plans to concentrate on its software business and deliver superior end-to-end application performance, which the company calls Business Service Delivery. 

These divestitures have reduced the top-line by $60 million when compared to the second quarter of last year. Net income came in at $28.0 million, up 29.7% year over year.  Earnings per share came in at 12 cents, which was in line with the Zacks Consensus Estimate.

During the quarter, the company repurchased approximately 7.3 million shares for about $53.5 million. The company expects to draw between $25 million and $35 million from its credit facility to fund its Gomez acquisition. Earlier this month, Compuware announced that it would acquire the privately-held Gomez Inc. for $295 million in cash.

Gomez is a leader in web application experience management and its clients include Google (GOOG - Analyst Report) and Facebook. Gomez employs 272 people around the world. Compuware plans to retain all of them after the close of the transaction. The acquisition is expected to be completed by November 2009 and dilute fiscal 2010 EPS due to an amortization charge of $5 million per quarter.

Management expects to generate cash flow of $200 million from its operating activities in fiscal 2010 and targets an operating margin in the range of 25% – 30%. Management reiterated its EPS guidance between $0.60 and $0.70 (which includes the gain from the sale of quality solutions).
The company expects overall cost cutting activities along with 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 impetus before 2010.

Headquartered in Detroit, Michigan, Compuware provides software products and professional services to many of the largest users of information systems in the world.