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Compuware (CPWR)

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Johnny Hu

Compuware Corporation (NASDAQ:CPWR) sells software to the IT department of large companies. These software products do everything from automatically managing requests for IT resources and services to monitoring the application response times for every user of an application. Compuware charges its customers licensing fees and offers maintenance contracts for technical support of their products. The company also offers a broad range of IT services such as outsourcing, project management, resource planning, and customer relationship management. With over 23,000 customers, Compuware's clients include over 70% of Fortune 500 companies.

The company began offering products and professional services for mainframe computers in the 1970's and expanded its offering to distributed systems, which consist of a network of computers running simultaneously, in the 1990's. However, in 2007, around forty percent of its revenue still comes from the mainframe market, which has been declining since the 1990s.^[1] The company's 2007 revenue was also lower than expected primarily due to a shortfall in mainframe software product revenue, which decreased $18.1 million or 3.6% from the previous year.^[2] While the increasing complexity of IT departments offers opportunities for Compuware to grow, competition in the distributed systems market is greater than in the mainframe market due to the large number of vendors.^[3] Large IT companies such as IBM and HP also offer bundled services such as both hardware and software products that compete directly with Compuware's software offerings.

1 Business Financials
2 Trends and Forces
3 Competition
4 References

[edit] Business Financials

For fiscal year 2007, revenue for Compuware increased slightly from $1.205 billion to $1.213 billion while net income increased from $142 million to $158 million.^[4] Compuware's revenue comes from license fees, maintenance costs, and professional services:

License Fess - Compuware sells its software through licenses that customers buy to use their products for a period of time. These contracts are often multi-year and are very lucrative. Compuware also offers trial periods to customers after which customers must buy licenses if they wish to continue using the software.

Maintenance Costs - Compuware's customers may decide to buy support services for the products they use. These agreements can be renewed each year for an annual fee based on the license price of the product and gives customers access to technical support and advice as well as any product updates.

Professional Services - Compuware offers professional services in three primary areas: application delivery, service management, and IT portfolio management. Application delivery services allow companies to develop applications to meet business needs, service management services allows companies to measure and manage infrastructure performance from a business perspective, and IT portfolio management allows IT executives to make better investment decisions by measuring the value of IT products.

The largest portion of Compuware's revenue comes from maintenance fees and professional services fees at 37.7% and 38.9% respectively for fiscal year 2007 while software license fees make up the rest of its revenue.^[5]

Compuware's software revenue come from two markets, distributed computing systems and mainframes. Distributed software product revenue increased 12.7% to $256.2 million due to increases in licence and maintenance revenue from performance-related software.^[6] Mainframe software product revenue decreased 3.5% to $484.8 million due to lower license revenue. Overall, license fees decreased 4.5% to $283.4 million while maintenance fees increased 5.5% to $457.6 million.^[7]

Revenue from Compuware's IT services decreased 0.7% in 2007 to $472.0 million as companies in the US cut costs. Budget reductions in IT departments in local and state governments and in the automotive industry especially affected Compuware's revenue.^[8] Revenue from Europe and Africa increased in 2007 but still only made up 14.3% of total revenue.

Compuware's revenue and net income for the past five years. Compuware's revenue has fluctuated only slight during the past five years while net income has generally been increasing due to cost-cutting measures and higher profit margins from their products and professional services.^[9]

Breakdown of revenue for Compuware in 2007 by division. Revenue's from their professional services has decreased due to reduced spending at many US companies.^[10]

Breakdown of product revenue for Compuware by region for the past three years. Compuware has direct sales staffs and independent distributors in over 60 countries.^[11]

[edit] Trends and Forces

[edit] Compuware Relies on Their Customers' Continued Use of IBM and IBM-Compatible Hardware

The majority of Compuware's software products rely on the use of IBM and IBM-compatible mainframe computers.^[12] In addition, their products operate in conjunction with IBM systems software. Drastic changes in IBM's hardware or software would break compatibility with Compuware's products, causing both lost revenue and potentially expensive research and development costs. Shifts in hardware usage by its customers to other mainframe vendors would also break compatibility with Compuware's products since IBM uses many proprietary hardware components.

[edit] Compuware is Dependent on its Mainframe Business, which is Being Replaced by Distributed Computing Technologies

Approximately 40 percent of Compuware's 2007 revenue is related to the mainframe market, which has been declining since the 1990s.^[13] Mainframes are being replaced by distributed computing networks, and Compuware's revenue from its mainframe division has been declining for the last couple of years from $526 million to $503 million to $485 million during 2005 to 2007. Compuware also competes with companies such as CA and BMC, both of which also rely on the mainframe market for over 40% of their revenue.

[edit] Compuware Will Face More Competition from Hardware Manufactures Bundling in Their Own Software

Companies such as IBM and HP sell both hardware and IT management software. These companies have been aggressively promoting bundled offerings to their clients while Compuware relies on other companies to provide the hardware to implement its products. IBM, especially, has been using its mainframe installation base to offer clients software and consulting services. Compuware's software also relies on IBM's hardware and software, which puts it in a tough position as some of its products overlap with IBM's own IT management offerings.

[edit] Decline in the U.S. Automotive Industry Will Hurt Compuware's Revenue

Approximately 33% of Compuware's worldwide professional services revenue comes from customers in the automotive industry, with a large part of that related to U.S. domestic automotive manufacturers.^[14] Many of these companies such as Ford Motor Company (F) and General Motors (GM) are currently engaged in restructuring and cost-cutting efforts, leading to decreasing IT expenditures. Demand for Compuware's services, therefore, has decreased and may decrease further as increasing oil prices continue to hurt demand for automotive purchases.

[edit] Competition

Compuware faces competition from large, diversified technology companies such as IBM and HP, other IT management companies such as CA, BMC Software (BMC), Accenture, and niche companies such as EMC and Symantec. The IT services sector is also becoming more consolidated as larger companies acquire smaller ones, which would be favorable for large companies like IBM and HP with large cash reserves.

International Business Machines (IBM) - One of the most influential and oldest technology companies, IBM is also one of the largest technology consulting companies in the world. In the last couple of years, it has refocused its business on higher-value, more profitable segments of the industry and and 77% of its sales come from it software and services divisions.^[15] IBM also offers a complete set of IT products from servers and storage to application management services that Compuware cannot. IBM, however, is not as specialized as Compuware in helping clients realize the business potential of IT. IBM's Global Business Services, which provides IT management services, made up 18.4% of its revenue while its software division made up 20.4% of its revenue.

Hewlett-Packard Company (HPQ) - Like IBM, HP has been expanding their software and services offerings in order to boost profit margins. HP also acquired Mercury Interactive Corporation for $4.5 billion in 2006 to increase their product offerings. Like IBM, HP bundles its software with its enterprise hardware. However, HP still earns the largest portion of its revenue from selling personal computer systems, which account for nearly a quarter of its revenue. In 2007, HP's services division only accounted for 12% of revenue while its software division only accounted for 2% of revenue.

CA (CA) - One of the four largest IT management companies, CA competes directly with Compuware in a number of markets. The company provides security, storage, and business service management products to over 99% of Fortune 1000 companies and other governmental, educational, and corporate customers. With over 1,400 software offerings, CA also has business division in both the mainframe and distributed computing sectors. Approximately 47% of CA's revenue comes from their offerings for mainframes while the rest comes from their offerings for distributed computing systems.

BMC Software (BMC) - Another enterprise IT management company, BMC heavily promotes its Business Service Management (BSM) strategy, which automates many IT processes to reduce costs. Their software can perform many of the same monitoring and management tasks such as organizing and analyzing databases. However, Compuware has more offerings in the appliance management market that helps companies develop and test new software. BMC also once focused exclusively on the mainframe market before entering the distributed computing market and still depends on the mainframe market for 43% of its revenue in 2007. Compuware has a much larger professional services division, however, as 38.9% of its revenue came from that while only 6.30% of BMC's revenue came from its professional services division.

Compuware

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Company	Data From	Research and Development	Licensing and Development Fees	Maintenance and Other Recurring Fees
BMC Software (BMC)	2007	$211M [16]	$570M [16]	$919M [16]
CA (CA)	2006	$712M [17]	$108M [17]	$391M [17]
Compuware (CPWR)	2007	$114M [18]	$283M [18]	$458M [18]
Hewlett-Packard Company (HPQ)	2007	$3.61B [19]	N/A	N/A

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