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Article by DailyStocks_admin    (10-28-08 05:35 AM)

The Daily Magic Formula Stock for 10/28/2008 is Compuware Corp. According to the Magic Formula Investing Web Site, the ebit yield is 17% and the EBIT ROIC is 50-75 %.

Dailystocks.com only deals with facts, not biased journalism. What is a better way than to go to the SEC Filings? It's not exciting reading, but it makes you money. We cut and paste the important information from SEC filings for you to get started on your research on a specific company.


Dailystocks.com makes NO RECOMMENDATIONS whatsoever, and provides this for informational purpose only.

BUSINESS OVERVIEW

BUSINESS

We deliver value to businesses worldwide by providing software products, professional services and application services that improve the performance of information technology ("IT") organizations. Originally founded in 1973 as a professional services company, we began to offer mainframe productivity tools for fault diagnosis, file and data management, and application debugging in the late 1970's.

In the 1990's, IT moved toward distributed and web-based platforms. Our solutions portfolio grew in response, and we now market a comprehensive portfolio of IT solutions across the full range of enterprise computing platforms that help:

- Develop and deliver high quality, high performance enterprise business applications in a timely and cost-effective manner.

- Measure, manage and communicate application service in business terms, and maintain consistent, high levels of service delivery.

- Provide executive visibility, decision support and process automation across the entire IT organization to enable all available resources to be harnessed in alignment with business priorities.

Additionally, to be competitive in today's global economy, enterprises must securely share applications, information and business processes. We address this market need through our Covisint offerings, which use business to business ("B2B") applications to integrate vital business information and processes between partners, customers and vendors.

We operate in three business segments in the software and technology services industries: products, professional services and application services (see Note 13 of the Notes to Consolidated Financial Statements, included in Item 8 of this report).

For a discussion of developments in our business during fiscal 2008, see Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations.

We were incorporated in Michigan in 1973. Our executive offices are located at One Campus Martius, Detroit, Michigan 48226-5099, and our telephone number is
(313) 227-7300. Our Internet address is www.compuware.com. We make available, free of charge on our web site, copies of reports we file with the Securities and Exchange Commission as soon as reasonably practicable after we electronically file such reports. The information contained on our web site should not be considered part of this report.

This report contains certain forward-looking statements within the meaning of the federal securities laws. When we use words such as "may", "might", "will", "should", "believe", "expect", "anticipate", "estimate", "continue", "predict", "forecast", "projected", "intend" or similar expressions, or make statements regarding our future plans, objectives or expectations, we are making forward-looking statements. Numerous important factors, risks and uncertainties affect our operating results, including, without limitation, those discussed in Item 1A. Risk Factors and elsewhere in this report, and could cause actual results to differ materially from the results implied by these or any other forward-looking statements made by us, or on our behalf. There can be no assurance that future results will meet expectations. While we believe that our forward-looking statements are reasonable, you should not place undue reliance on any such forward-looking statements, which speak only as of the date made. Except as required by applicable law, we do not undertake any obligation to publicly release any revisions which may be made to any forward-looking statements to reflect events or circumstances occurring after the date of this report.

OUR BUSINESS STRATEGY

Our business strategy is to focus on providing software, professional services and application services that deliver value to the largest users of information technology in the world. Our enterprise IT solutions are focused on providing a real return on investment for our clients by increasing the performance of the entire IT organization and enabling IT management to deliver maximum business impact in support of the organization's strategic objectives.

On May 15, 2008, we officially launched Compuware 2.0 which is a rebirth based on the principles Compuware has always stood for and is based on the following definable, actionable and measurable objectives:

- Instituting a strategic vision for the Company that positions us as best-in-class for the businesses in which we choose to compete.

- Going to market with solutions that possess straightforward and compelling value propositions.

- Establishing a corporate brand identity our customers can identify with and trust while extending our current brand equity outside our current client base.

- Aligning the organization in a manner that best allows us to focus on our target markets and deliver value to our customers.

- Deploying a global recruiting, training and career development function to attract and retain the highest quality professionals.

- Creating a culture in which employees are energized and empowered, and that rewards people for their achievements in a consistent and equitable manner.

- Implementing effective go-to-market programs and delivering high-value, consistent sales tools to the field that will help our sales team communicate our value to customers in a consistent and transparent manner.

PRODUCTS

COMPUWARE SOFTWARE PRODUCTS

Our software products consist of six major families - all of which are primarily intended for use by IT organizations and IT service providers. These solutions enhance the effectiveness of key disciplines throughout the IT organization and support all major enterprise computing platforms.

MAINFRAME -- Our File-AID, Xpediter, Hiperstation, Abend-AID and Strobe products help IT organizations to consistently and efficiently develop, deliver and manage applications in the IBM mainframe (z/Series) environment.

VANTAGE -- Our Vantage products are used to manage IT service delivery - providing IT organizations with the ability to measure, manage and communicate service in business terms based on the end user experience, and enabling delivery of consistently high levels of service through systematic analysis of application and infrastructure performance.

CHANGEPOINT -- Our Changepoint solution provides IT executives with visibility into all aspects of IT activity, supports effective investment decision-making driven by business strategy, enables IT resources to be effectively aligned with business priorities through management of IT supply and demand, provides timely and accurate financial budgeting, tracking and reporting, and enables and enforces organizational best practices through process automation.

QUALITY -- Our Optimal Trace, File-AID/CS, QA Director, TestPartner, and QA Load products help IT organizations deliver high quality, high performance applications by automating business requirements management, functional testing, test management, performance testing and test data management.

UNIFACE -- Our Uniface products provide a 4GL development and deployment environment for enterprise applications targeted at a variety of computing platforms.

DEVPARTNER -- Our DevPartner products are used by application developers to analyze and measure application code quality, memory usage and performance in the .NET and Java environments.

MAINFRAME MARKET

The market for mainframe products is well-defined and the drive to extend legacy applications into distributed environments continues to underscore the need for reliable, high-volume mainframe processing.

We intend to remain focused on developing, marketing and supporting high-quality software products, both to support traditional uses of the mainframe and to enable IT organizations to rationalize, modernize and extend their legacy application portfolios. We believe that our longstanding customer relationships and brand equity in this arena will help us continue to improve the benefits our customers receive from our mainframe products. In addition, we continue to pursue product integration opportunities to increase the value that our customers obtain from the use of our products, to enhance the synergy among the functional groups working on key business applications and to make IT processes more streamlined, automated and repeatable.

MAINFRAME SOFTWARE PRODUCTS

Our mainframe software products ("mainframe products") focus on improving the productivity of development, maintenance and support teams in application analysis, testing, defect detection and remediation, fault management, file and data management and application service management in the IBM OS/390 and z/Series environments. We believe that these products will remain among the industry's leading solutions for this platform.

Our mainframe products are functionally rich, focused on customer needs and easy to install, while requiring minimal user training. We strive to ensure a common look and feel across our products and emphasize ease of use in all aspects of product design and functionality. Most products can be used immediately without modification of customer development practices and standards. These products can be quickly integrated into day-to-day testing, debugging and maintenance activities.

Our mainframe products are grouped into five product lines: File-AID, Xpediter, Hiperstation, Abend-AID and Strobe.

FILE-AID

File-AID products provide a consistent, familiar and secure method for IT professionals to access, analyze, edit, compare, move and transform data across all strategic environments. File-AID products are used to quickly resolve production data problems and manage ongoing changes to data and databases at any stage of the application life cycle, including building test data environments to provide the right data in the shortest time. The File-AID product family can also be used to address data privacy requirements in preproduction test environments.

XPEDITER

Xpediter interactive debugging products help developers integrate enterprise applications, build new applications and modernize and extend their legacy applications, satisfying corporate scalability, reliability and security requirements. Xpediter products deliver powerful analysis and testing capabilities across multiple environments, helping developers test more accurately and reliably, in less time.

HIPERSTATION

Hiperstation products deliver complete preproduction testing functionality for automating test creation and execution, test results analysis and documentation. Hiperstation also provides application auditing capabilities to address regulatory compliance and other business requirements. The products simulate the on-line systems environment, allowing programmers to test applications under production conditions without requiring actual users at terminals. The products' powerful functions and features enhance unit, concurrency, integration, migration, capacity and stress testing. When deployed in production, Hiperstation products allow scalable logging of application transactions and provides audit reporting to aid in problem resolution and to support other uses of the captured transaction information such as analysis of security breaches.

ABEND-AID

Abend-AID products enable IT professionals to quickly diagnose and resolve application and system failures. The products automatically collect program and environmental information, analyze the information and present diagnostic and supporting data in a way that can be easily understood by all levels of IT staff. Automated failure notification helps speed problem resolution and reduce downtime.

STROBE

Strobe and iStrobe products work together to help customers locate and eliminate sources of excessive resource demands during every phase of an application's life cycle. Strobe products measure the activity of z/OS-based online and batch applications, providing reports on where and how time is spent during execution. Strobe products support an extensive array of subsystems, databases and languages. These products can be applied via a systematic program to reduce the consumption of mainframe resources and reduce associated costs and/or make resources available for additional business workloads.

DISTRIBUTED MARKET

In contrast to the mainframe market, the distributed market is characterized by multiple hardware, software and network configurations. Combined with the more recent push to provide enhanced versatility through service-oriented architectures, IT organizations are challenged to combine agility, cost effectiveness and control in developing and delivering reliable, scalable and high quality enterprise applications that meet business needs, while facing an exponential increase in environment complexity. We believe our distributed products address these challenges and that we are emerging as a premier provider of application delivery, service management and IT portfolio management solutions to enterprise IT organizations.

DISTRIBUTED SOFTWARE PRODUCTS

Our distributed software products ("distributed products") focus on maximizing the performance of the entire IT organization, including applications and operations organizations, as well as enabling top-level IT management decision-making. These products provide for an effective application delivery discipline from requirements definition and management, through application development and quality and performance assurance. They support service delivery through comprehensive service management capabilities encompassing business service management, end-user experience monitoring, and application performance management. They also support business-centric IT management through comprehensive IT portfolio management; enabling investment prioritization driven by business strategy, portfolio-driven management decision making, effective visibility and control over IT supply and demand, and value transparency back to line-of-business management.

Our distributed products are grouped into five product lines: Vantage, Changepoint, Quality, Uniface and DevPartner.

VANTAGE

The Vantage family of IT service management products enables business-driven service delivery by combining End User Experience Monitoring, Business Service Management and Application Performance Management with infrastructure and service desk metrics. This unique combination provides customers with a real-time, comprehensive perspective on service delivery allowing IT organizations to operate more effectively.

End User Experience Monitoring ("EUEM") - Provides visibility into application service from the end user perspective. This enables proactive IT service management by allowing IT organizations to monitor all applications all the time. EUEM also puts application performance in context of key business entities: applications, users and locations. With this perspective, EUEM helps IT organizations assess the scope of a performance problem and isolate it to the client, network, server or application tier in order to assign the right expert to the job.

Business Service Management ("BSM") - Provides real-time views of IT service delivery so that Chief Information Officers ("CIOs"), IT managers and line-of-business counterparts can understand the impact that IT services have on business operations. As a result, BSM helps the customer communicate service delivery more effectively, meet service level agreements, improve operational efficiency, reduce costs and increase satisfaction with the IT organization. BSM also enhances collaboration both within the IT organization as well as between the IT organization and the business by centralizing and correlating technical and business key performance indicators.

Application Performance Management ("APM") - Provides detailed application insight that identifies and helps correct the causes of poor application performance within client workstations, the network, a server or the application itself, reducing time-consuming guesswork. In addition, APM helps ensure successful application rollouts and provides crucial information for establishing and meeting service requirements.

CHANGEPOINT

Changepoint provides business management capabilities for CIOs and IT organizations as well as for the IT professional services organizations that serve them. Accordingly, there are two versions of the Changepoint solution - Changepoint and Changepoint PSA (Professional Services Automation).

Changepoint provides CIOs and IT managers with critical insight into IT project and non-project activity, strategic and operational demand and resource allocation and availability, enabling portfolio-driven decision-making aligned with business strategy. Changepoint automates core IT business processes to reduce costs and increase efficiency and quality. It provides a sound financial framework which enables IT leadership to communicate value delivered to the business for every dollar of IT expenditure.

Portfolio management capabilities enable integrated management of all IT investments and resources. Changepoint supports project, application and investment planning portfolios, so that organizations can prioritize and manage the investments that best support business goals, even as business conditions and market requirements change.

Changepoint PSA provides total visibility into the performance of an IT professional services organization from detailed analyses of the performance of engagements, projects and customers to higher level views of workgroups, the sales pipeline, engagements, project portfolios and financial projections. A configurable management portal enables the consolidation of business-critical information from Changepoint PSA, as well as other critical business systems.

QUALITY

Our Quality products deliver a full spectrum of automated testing capabilities designed to validate applications running across various distributed environments, isolate and correct problems and ensure that applications will meet performance requirements before they are deployed in production.

Optimal Trace is our business requirements management product. Optimal Trace enables the effective capture of business intent into a set of structured application requirements which can then be used to drive the rest of the application delivery process.

File-AID/Client Server is a comprehensive test data management product that allows quality assurance teams to more efficiently reuse test cases with different test data enabling repeatable and consistent testing.

QADirector provides the framework for managing the entire testing process, allowing users to track test requirements and associated test cases and scripts, to analyze and manage risk and improve efficiency with test management and analysis that aligns quality assurance with business goals to maximize application quality.

TestPartner provides functional test automation that allows organizations to validate business-critical applications including web-based, client/server and packaged applications.

QALoad provides automated load testing to identify bottlenecks and to optimize performance for internally developed, outsourced and packaged applications running in distributed environments.

CEO BACKGROUND

Peter Karmanos, Jr., is a founder of the Company and has served as Chairman of the Board since November 1978, as Chief Executive Officer since July 1987 and as President from January 1992 through October 1994 and October 2003 through March 2008.

Robert C. Paul has served as President and Chief Operating Officer of Compuware since April 2008. Prior to that time, Mr. Paul was President and Chief Operating Officer of Compuware Covisint since its acquisition by Compuware in March 2004. Mr. Paul had spent nearly three years at Covisint prior to the acquisition.

Laura L. Fournier has served as Executive Vice President since April 2008 and continues to serve as Chief Financial Officer and Treasurer since April 1998. Ms. Fournier was Corporate Controller from June 1995 through March 1998. From February 1990 through May 1995, Ms. Fournier was Director of Internal Audit.

Christian J. Bockhausen has served as Executive Vice President and Chief Technology Officer since April 2008. From April 1998 through March 2008, he served as Senior Vice President and Chief Information Officer over corporate information systems and assumed leadership over product technologies in April 2001. Mr. Bockhausen joined Compuware in October 1996 as Vice President of the North American Testing and Implementation Product Lab.

Denise A. Knobblock Starr has served as Executive Vice President of Administration since April 2002 and as Chief Administrative Officer since April 2007. Ms. Knobblock Starr was Executive Vice President of Human Resources and Administration from April 1998 through March 2002. From April 1995 through March 1998, she was Senior Vice President of Purchasing, Facilities, Administration and Travel. Ms. Knobblock Starr served as the Director of Administration and Facilities from April 1991 to March 1995. She joined Compuware in January 1989 as Manager of Administration and Facilities.

Daniel S. Follis, Jr. has served as Vice President, General Counsel and Secretary since March 2008. From January 2006 through February 2008, he served as Vice President, Associate General Counsel. Mr. Follis joined Compuware in March 1998 as Senior Counsel.

MANAGEMENT DISCUSSION FROM LATEST 10K

OVERVIEW

In this section, we discuss our results of operations on a segment basis. We operate in three business segments in the technology industry: products, professional services and application services. We evaluate segment performance based primarily on segment contribution before corporate expenses. References to years are to fiscal years ended March 31. This discussion and analysis should be read in conjunction with the audited consolidated financial statements and notes included in Item 8 of this report.

We deliver value to businesses worldwide by providing software products and professional services that improve the performance of IT organizations. Originally founded in 1973 as a professional services company, in the late 1970's we began to offer mainframe productivity tools for fault diagnosis, file and data management, and application debugging.

In the 1990's, IT moved toward distributed and web-based platforms. Our solutions portfolio grew in response, and we now market a comprehensive portfolio of IT solutions across the full range of enterprise computing platforms that help:

- Develop and deliver high quality, high performance enterprise business applications in a timely and cost-effective manner.

- Measure, manage and communicate application service in business terms, and maintain consistent, high levels of service delivery.

- Provide executive visibility, decision support and process automation across the entire IT organization to enable all available resources to be harnessed in alignment with business priorities.

Additionally, to be competitive in today's global economy, enterprises must securely share applications, information and business processes. We address this market need through our application services, which are marketed under the brand name "Covisint". Our application services offerings use B2B applications to integrate vital business information and processes between partners, customers and vendors.

ANNUAL UPDATE

We focus on growing revenue and profit margins by enhancing and promoting our current product lines and solutions, expanding our product and service offerings through key acquisitions, developing strategic partnerships and managing our costs.

The following occurred during fiscal 2008:

- Achieved an increase in product contribution margin to 42.4% in fiscal 2008 from 37.1% in fiscal 2007 due to an increase in product revenue and a decrease in product expenses; primarily sales and marketing expense and technology development and support costs.

- Achieved a 12.1% increase in distributed product revenue in fiscal 2008 compared to fiscal 2007 driven by the continued growth within our Vantage and Changepoint product lines.

- Experienced a decrease in professional services segment contribution margin to 10.5% in fiscal 2008 from 13.1% in fiscal 2007 due to a greater percentage decline in revenue compared to the decline in costs.

- Repurchased approximately 49 million shares of our common stock during fiscal 2008 at an average price of $8.86 per share.

- Initiated restructuring actions that resulted in a charge of $42.6 million.

- Entered into a new revolving credit facility with Comerica Bank and other lenders. The new credit facility expanded our revolving line of credit availability from $100 million to $150 million and expires on November 1, 2012.

- Released 24 mainframe and 27 distributed product enhancements.

- Acquired Hilgraeve, Inc. ("Hilgraeve"), a privately held company which developed an on-demand collaboration platform for lab and prescription data sharing.

- Announced that the Company promoted Robert C. Paul to the position of President and Chief Operating Officer, effective April 1, 2008, leading the Company's product and service operations, Compuware 2.0 efforts and other key functions.

Our ability to achieve our strategies and objectives is subject to a number of factors some of which we may not be able to control. See "Forward-Looking Statements".

RESULTS OF OPERATIONS

SOFTWARE PRODUCTS SEGMENT

The product segment generated contribution margins of 42.4%, 37.1%, and 38.4% during 2008, 2007, and 2006, respectively. The improvement in the contribution margin in 2008 compared to 2007 was due to an increase in product revenue and a decrease in product expenses; primarily sales and marketing expense and technology development and support costs. The decrease in the contribution margin in 2007 compared to 2006 was due to the increase in product expenses, primarily technology development and support costs, exceeding the increase in product revenue.

SOFTWARE PRODUCTS SEGMENT REVENUE

Our products are designed to enhance the effectiveness of key disciplines throughout the IT organization from application delivery to service management and IT portfolio management supporting all major enterprise computing platforms. Product revenue which consists of software license fees and maintenance fees, comprised 62.9%, 61.1%, and 60.6% of total revenue during 2008, 2007 and 2006, respectively.

Distributed software product revenue increased $31.0 million or 12.1% during 2008 to $287.2 million from $256.2 million in 2007 and increased $28.8 million or 12.7% during 2007 from $227.4 million in 2006. The increases during 2008 and 2007 were primarily due to license and maintenance revenue growth related to the Vantage product line, primarily agentless monitoring, and to a lesser extent license and maintenance revenue growth in the Changepoint product line.

Mainframe software product revenue increased $1.9 million or 0.4% during 2008 to $486.7 million from $484.8 million in 2007 and decreased $18.1 million or 3.6% during 2007 from $502.9 million in 2006. The increase during 2008 was due to a slight increase in license revenue led by the Strobe product line partially offset by a slight decline in maintenance revenue caused by the Abend-AID product line. The decrease in 2007 was primarily a result of lower license revenue due to decreased demand for software on additional computing capacity in our European operations partially offset by continued growth in maintenance revenue due to strong renewal rates on maintenance contracts.

License fees increased $14.1 million or 5.0%, which included a positive impact from foreign currency fluctuations of $13.1 million, during 2008 to $297.5 million from $283.4 million in 2007 and decreased $13.3 million or 4.5%, which included a positive impact from foreign currency fluctuations of $6.1 million, during 2007 from $296.7 million in 2006. Distributed license fees represented $9.4 million of the $14.1 million increase in license fees during 2008 led by the Vantage and Changepoint product lines. The remaining increase of $4.7 million related to mainframe license fees led by the Strobe and Abend-AID product lines. The $13.3 million decrease in license fees during 2007 was due to a $28.8 million reduction in mainframe license fees, partially offset by an increase in distributed license fees related to the Vantage product line.

Maintenance fees increased $18.8 million or 4.1%, which included a positive impact from foreign currency fluctuations of $18.3 million, during 2008 to $476.4 million from $457.6 million in 2007 and increased $24.0 million or 5.5%, which included a positive impact from foreign currency fluctuations of $9.6 million, during 2007 from $433.6 million in 2006. The $18.8 million increase in maintenance fees during 2008 was due to a $21.6 million increase in distributed maintenance fees led by the Vantage and Changepoint product lines, partially offset by a slight decline in mainframe maintenance fees. The $24.0 million increase in maintenance fees during 2007 was a result of a $13.3 million increase in distributed maintenance fees primarily due to strong growth within the Vantage product line with the remaining increase resulting from growth in our mainframe maintenance revenue led by the Abend-AID, File-AID and Strobe product lines.

SOFTWARE PRODUCT SEGMENT EXPENSES

Product expenses include cost of software license fees, cost of maintenance fees, technology development and support costs, and sales and marketing expenses.

Cost of software license fees includes amortization of capitalized software, the cost of duplicating and disseminating products to customers (including associated hardware costs) and the cost of author royalties. Cost of software license fees increased $1.9 million or 6.6% during 2008 to $30.5 million from $28.6 million in 2007 and increased $5.3 million or 22.9% during 2007 from $23.3 million in 2006. The increase in cost for 2008 was primarily due to a $3.9 million capitalized software impairment charge recorded during the first quarter of 2008 (see Note 1 of the Notes to Consolidated Financial Statements, included in Item 8 of this report) offset in part by a decline in hardware costs and lower capitalized software amortization costs incurred subsequent to the impairment charge. The increase in costs for 2007 was primarily due to an increase in amortization of capitalized software and an increase in hardware costs resulting from increased demand in our Vantage product line. As a percentage of software license fees, cost of software license fees were 10.2%, 10.1%, and 7.8% in 2008, 2007, and 2006, respectively.

Cost of maintenance fees consists of the direct costs allocated to maintenance and product support such as helpdesk and technical support. Customers who subscribe to maintenance are also eligible to receive the benefit of new releases as well as technical support. Cost of maintenance fees increased $4.8 million or 11.5% during 2008 to $46.3 million from $41.5 million in 2007 and decreased $200,000 or 0.4% during 2007 from $41.7 million in 2006. The increase for 2008 was primarily due to higher compensation and benefit costs associated with the transfer of technical personnel from sales support to customer support in order to meet product development and maintenance initiatives and to provide increased customer support in our international operations consistent with the revenue growth in those markets. As a percentage of maintenance fees, cost of maintenance fees were 9.7%, 9.1%, and 9.6% in 2008, 2007 and 2006, respectively.

Technology development and support includes, primarily, the costs of programming personnel associated with product development and support less the amount of software development costs capitalized during the period. Also included are personnel costs associated with developing and maintaining internal systems and hardware/software costs required to support all technology initiatives. As a percentage of product revenue, costs of technology development and support were 13.1%, 15.4%, and 13.3% in 2008, 2007 and 2006, respectively.

Capitalization of internally developed software products begins when technological feasibility of the product is established.

Before the capitalization of internally developed software products, total technology development and support expenditures decreased $21.8 million or 16.1%, to $113.7 million during 2008 from $135.5 million in 2007 and increased $18.4 million or 15.7% during 2007 from $117.1 million in 2006. The decrease in cost for 2008 was primarily attributable to lower compensation and benefit costs due to headcount reductions as a result of the restructuring program initiated during 2008 (see Note 7 of the Notes to Consolidated Financial Statements, included in Item 8 of this report). The increase in costs for

2007 was primarily due to higher compensation and benefit costs resulting from increased employee headcount, primarily programming personnel, in order to meet new product initiatives.

Sales and marketing costs consist primarily of personnel related costs associated with product sales and sales support and marketing for all our product offerings. Sales and marketing costs decreased $13.9 million or 4.9% during 2008 to $267.8 million from $281.7 million in 2007 and decreased $6.5 million or 2.2% during 2007 from $288.2 million in 2006. As a percentage of product revenue, sales and marketing costs were 34.6%, 38.0%, and 39.5% in 2008, 2007 and 2006, respectively. The decrease in costs for 2008 was primarily attributable to lower compensation, benefit and travel expenses due to headcount reductions as a result of the sales reorganization undertaken as part of the Company's restructuring efforts in 2008 (see Note 7 of the Notes to Consolidated Financial Statements, included in Item 8 of this report) and lower costs associated with marketing and promotional programs, partially offset by higher bonus and commission expense primarily resulting from the growth in distributed sales compared to the prior year. The decrease in costs for 2007 was primarily attributable to lower bonus and commission costs in 2007 due to the decline in mainframe license revenue, partially offset by an increase in stock option expense related to the adoption of SFAS 123(R) effective April 1, 2006.

MANAGEMENT DISCUSSION FOR LATEST QUARTER

RESULTS OF OPERATIONS

Products Segment Revenue
Our software products are designed to enhance the effectiveness of key disciplines throughout the IT organization from application development and delivery to service management and IT portfolio management supporting all major enterprise computing platforms. Product revenue, which consists of software license fees and maintenance fees, comprised 63.0% and 57.6% of total revenue during the first quarter of 2009 and 2008, respectively.
Distributed product revenue increased $7.7 million or 13.4% during the first quarter of 2009 to $65.5 million from $57.8 million during the first quarter of 2008. The increase was due to a $2.4 million increase in software license fees and a $5.3 million increase in maintenance fees.
Mainframe product revenue increased $19.3 million or 18.6% during the first quarter of 2009 to $122.5 million from $103.2 million during the first quarter of 2008. The increase was due to an $11.8 million increase in software license fees and a $7.5 million increase in maintenance fees.
Software license fees increased $14.2 million or 30.0%, which included a positive impact from foreign currency fluctuations of $2.8 million, during the first quarter of 2009 to $61.5 million from $47.3 million during the first quarter of 2008. The increase was primarily due to an increase in mainframe products resulting from existing customer capacity increases within our United States operations and to a lesser extent an increasing acceptance of our more flexible licensing options. During the first quarter of 2009, for transactions that are required to be recognized ratably, we deferred $16.7 million of revenue relating to transactions that closed during the quarter, and recognized $23.9 million of revenue relating to transactions that closed and had been deferred prior to April 1, 2008.
Maintenance fees increased $12.8 million or 11.2%, which included a positive impact from foreign currency fluctuations of $5.9 million, during the first quarter of 2009 to $126.5 million from $113.7 million during the first quarter of 2008. The increase relates primarily to the continued growth of our mainframe and distributed product base and maintaining a high rate of maintenance renewals

Products Segment Expenses
Products segment expenses include cost of software license fees, cost of maintenance fees, technology development and support costs and sales and marketing expenses. These expenses are discussed below.
Cost of software license fees includes amortization of capitalized software, the cost of duplicating and disseminating products to customers (including associated hardware costs) and the cost of author royalties. Cost of software license fees decreased $4.3 million or 41.2% during the first quarter of 2009 to $6.1 million from $10.4 million in the first quarter of 2008. The decrease in cost of software license fees was due to a $3.9 million capitalized software impairment charge recorded during the first quarter of 2008 associated with the 2008 restructuring initiative and a decrease in hardware costs. As a percentage of software license fees, cost of software license fees was 9.9% in the first quarter of 2009 compared to 21.9% in the first quarter of 2008. The decline was primarily due to the decrease in costs as discussed above.
Cost of maintenance fees consists of the direct costs allocated to maintenance and product support such as helpdesk and technical support. Customers who subscribe to maintenance are also eligible to receive the benefit of new releases as well as technical support. Cost of maintenance fees increased $500,000 or 4.7% during the first quarter of 2009 to $12.0 million from $11.5 million in the first quarter of 2008. The increase was primarily due to higher compensation and benefit costs associated with the increased customer support required for the growth in our international operations. As a percentage of maintenance fees, cost of maintenance fees were 9.5% and 10.1% in the first quarter of 2009 and 2008, respectively.
Technology development and support includes, primarily, the costs of programming personnel associated with product development and support less the amount of software development costs capitalized during the period. Also included are personnel costs associated with developing and maintaining internal systems and hardware/software costs required to support all technology initiatives. As a percentage of product revenue, costs of technology development and support were 12.0% and 18.2% in the first quarter of 2009 and 2008, respectively.

Before the capitalization of internally developed software products, total technology development and support costs decreased $7.9 million or 24.2% during the first quarter of 2009 to $25.1 million from $33.0 million in the first quarter of 2008. The decrease in expense was primarily due to lower compensation and benefit costs resulting from employee headcount reductions as part of the restructuring program initiated during the first quarter of 2008 (see Note 7 to the Condensed Consolidated Financial Statements).

Sales and marketing costs consist primarily of personnel related costs associated with product sales, sales support and marketing for all our product offerings. Sales and marketing costs decreased $3.4 million or 5.3% during the first quarter of 2009 to $61.3 million from $64.7 million in the first quarter of 2008. The decrease in sales and marketing costs was primarily attributable to a decrease in compensation and benefit costs resulting from employee headcount reductions as part of the restructuring program initiated during the first quarter of 2008 (see Note 7 to the Condensed Consolidated Financial Statements), partially offset by an increase in bonus and commission costs associated with the stronger financial results in the first quarter of 2009 compared to the first quarter of 2008.
As a percentage of product revenue, sales and marketing costs were 32.6% and 40.2% in the first quarter of 2009 and 2008, respectively.
PROFESSIONAL SERVICES SEGMENT

During the first quarter of 2009, the professional services segment generated a contribution margin of 8.2%, compared to 12.8% during the first quarter of 2008. The decline in contribution margin was primarily due to higher costs associated with the investment in personnel for our Solutions Delivery Group (“SDG”) during the first quarter of 2009. SDG focuses on providing professional services associated with our product solutions. Our strategy going forward will be to reduce our reliance on low margin professional service contracts in certain locations and increase the professional services projects within the SDG with the intent of improving our contribution margin.
Professional Services Segment Revenue
We offer a broad range of IT services to help businesses make the most of their IT assets. Some of these services include outsourcing and co-sourcing, application management, product solutions, project management, enterprise resource planning and customer relationship management services. Professional services segment revenue decreased $7.0 million or 6.4% during the first quarter of 2009 to $101.8 million compared to $108.8 million in the first quarter of 2008.

CONF CALL

Lisa Elkin

Thank you very much, Terry, and good afternoon, ladies and gentlemen. With me this afternoon are Peter Karmanos, Jr., Chairman and CEO; Bob Paul, President and Chief Operating Officer; Laura Fournier, Executive Vice President and Chief Financial Officer; and Jason Vines, Senior Vice President and Chief Communications Officer.

Certain statements made during this conference call that are not historical facts, including those regarding the company’s future plans, objectives, and expected performance are forward-looking statements within the meaning of the federal securities laws. These forward-looking statements represent our outlook only as of the date of this conference call.

While we believe any forward-looking statements we have made are reasonable, actual results could differ materially since the statements are based on our current expectations and are subject to risks and uncertainties. These risks and uncertainties are discussed in the company’s reports filed with the Securities and Exchange Commission.

You should refer to and consider these factors when relying on such forward-looking information. The company does not undertake and expressly disclaims any obligation to update or alter its forward-looking statements, whether as a result of new information, future events or otherwise except as required by applicable law.

For those of you who do not have a copy, I will begin by summarizing the press release. Pete, Bob and Laura will then provide details about the quarter and other Compuware business activities. We will then open the call to your questions.

Compuware final financial results for Q2 showed strength in product commitments and maintenance fees. Company to continue increasing focus reducing expenses. Compuware Corporation today announced financial results for the second quarter ended September 30, 2008.

Compuware reports second quarter revenues of $269.8 million compared to $302 million in the same quarter last year. Earnings were $0.08 per share in Q2 compared to $0.13 per share in the same quarter last year based upon 257.6 million and 295.4 million shares outstanding respectively. Compuware’s net income in the quarter was $21.6 million compared to $37.4 million in the same quarter last year.

During the company’s second quarter software license fees were $42.3 million compared to $70.0 million in the same quarter last year. Maintenance fees recognized in the quarter were $124.7 million compared to $116.3 million in Q2 last year. Revenue from professional services in the quarter was $102.8 million compared to $115.7 million in the same quarter last year.

I would now like to turn the call over to Pete. Pete?

Peter Karmanos, Jr.

Thanks, Lisa. As Compuware investors, I want you to know that the company is in excellent shape. Our second quarter performance simply reflects a two-week period when the worldwide purchasing environment came to a complete standstill. Bob and his team continue to monitor the deals that slipped out of quarter two every day. Our fundamentals remain sound. And maintenance, our most important revenue numbers, showed the most year-over-year growth that it has had in several years. Our maintenance commitments for the first six months reflect a 44% increase over the same period last year. That’s a very, very important number because maintenance is extremely plausible and repeatable.

I’m comfortable that services business will improve soon, in particular, the high margin work [ph] we do in services to install and maximize the value of our products appears to be growing. As Laura will tell you, we have cash and a solid line of credit up to a $150 million available and an additional $150 million that the bank has committed to us, but we’re discounting that even though we think we could get that, giving us ability to buy more of our stock should the price drop even further. And that’s an interesting statement. If it drops further, the faster we’ll buy it.

The company has done a first wave of cost cutting in addition to the $100 million we took out of the business last year. If the economy worsens, we even have further contingency plan that would allow us to adapt quickly to a changing environment. At this point in time, I believe we will finish the fiscal year with earnings in the range that we predicted. I feel very comfortable with that. We will continue to execute on our strategic transformation that Bob is leading and look forward to reporting our progress in the future. Bobby?

Bob Paul

Thanks, Pete. Compuware delivered the second quarter with some considerable core strength despite unprecedented help in worldwide commerce at the end of Q2. Compared with strong Q2 last year, the total product commitments were basically even. We had a particular strength in maintenance commitments, a figure that includes maintenance agreements and it ensue [ph] but not recognized as revenue in the quarter, which increased by nearly $19 million. Maintenance revenue recognized this quarter increased by more than 7%.

In addition, total operating expenses were significantly down year-over-year. The pipeline for the second half of the year remains robust. Approximately $32 million of product commitments left from Q2 as a direct result of the macroeconomic conditions. An additional $5 million was delayed in the normal course of business, but the financial lack out at the end of Q2 was the real culprit this quarter.

Many of these deals continue to track toward the Q3 or Q4 close. In fact, of the $6 million of the $32 million have come in already in Q3. I continue to monitor every opportunity in this category on a daily basis. We also continue to improve our overall sales discipline and are putting a conservative effort to close more deals in advance over the last few weeks of the quarter.

Given the strength of our existing pipeline, I believe that Compuware can deliver full year results in the range of our previously stated guidance. I’m fully aware, however, that financial conditions are volatile and could impact our performance. Having said that, at this time, we feel comfortable with current analysts’ estimates for the company.

I see great strength in our business today and I believe we are also taking the right steps to ensure our future success. As part of the Compuware 2.0 initiative, we are starting to see improved operations across the board. Just a few examples include the disciplined attack on maintenance programs has driven maintenance commitments up; a reference return on investment program that has led to a 137 new references and 22 ROI case studies that are or will shortly be completed. This is a significant accomplishment in an economy like today’s because demonstrating ROI to customers is more important than ever.

Concentration on customer user groups that will drive content for new initiatives or acquisitions and overall thought leadership in our target markets; a global new employee orientation program that should improve and play retention and job satisfaction; a new global image campaign that messages specific values to our target customers to create a pull in our chosen markets, a new lead generation program that is already delivering improved pipelines; a new target market initiative for our product solutions groups that will drive incremental revenue in the future quarters and margins; an introduction of new operating guidelines for the professional services division specifically aimed at improved margins.

From this strong foundation based on a tremendous amount of work done over the last six months, Compuware will at the end of November detail our long-term strategy as promised. This strategy will focus Compuware’s business on the market categories where we can be and will be best in the world, positioning the company for improved growth while reducing its expenses. While I can’t discuss details tonight, I expect this transformation to be significant and to benefit our customers, our employees, and you, our shareholders.

In the meantime, Compuware is evaluating further near-term measures to manage the company’s expenses. In addition to the $100 million reduction in the company’s operating expense run rate last year, we have identified new annualized reductions of $55 million and are working toward a goal of up to $80 million for the fiscal year.

On the revenue side of the equation, the increasing complexity of our customers’ computing environments and the growing impact of IT and revenue generating initiatives is creating strong opportunity for Compuware solutions. Compuware is positioning itself for breakout growth in business service delivery, a market that consults and predicts will be a $10 billion category by 2013.

The Compuware professional services organization will play a critical role in attacking this market. With our solutions delivery group’s ability to provide structure engagements around Compuware Vantage and other products, Compuware offers our customers everything they need to deliver immediate economic value for the business.

Furthermore, Compuware’s professional services organization has the people, the products, and the best practices to help customers around the world gain competitive and cost advantages in this difficult environment. Overall, I expect Compuware services business to leverage these opportunities to become more focused, more nimble, and especially more profitable.

Compuware Covisint continues to increase its momentum, especially in healthcare, completing new agreements with Michigan State Medical Society, Community Health of Washington, and several others. As written in the Wall Street Journal this week, the healthcare industry is about to undergo a global revolution driven by a force they can no longer resist, the information technology.

Covisint has a secure platform, the thought leadership, and the relationships it needs to achieve growth in this area. This group is working very hard to achieve a first mover advantage [ph] position in this marketplace. Overall, Covisint increased its commitments by 21% in the quarter, with a backlog increase of 22% and a deferred revenue increase of 11%. Quarter-over-quarter, given major revenue recognition, total Covisint revenues were basically flat. Due to that same reason, we should start to see revenue growth as these subscription-based contracts turn into recognized revenue.

The technology industry and Compuware in particular have a great advantage in tough times. We have a highly repeatable and profitable business, as you can see from our maintenance numbers. We will remain a highly profitable and fundamentally sound business as we move forward with our plan to transforming the company. Laura?

Laura Fournier

Thanks, Bob. Despite the debilitating economic prices currently impacting the global business community, Compuware’s balance sheet remained strong, which will enable us to endure the challenging times. This quarter we are especially encouraged with total product commitment, the sum of all software sales activity in the quarter, which were essentially flat year-over-year despite business virtually shutting down at the end of the quarter.

As for professional services, revenue was down year-over-year. However, as mentioned on last quarter’s call, such a decline was anticipated as we continue to transition this business to a more product focused model. As Bob said, the services organization is on the road to becoming a more focused, nimble, and profitable organization.

Due to the economic uncertainties plaguing the global business community, we have decided to temporarily suspend our share buyback program. With that said, we remain committed to buying back shares and to our goal of reducing our share count to 200 million shares outstanding. We will resume our buyback program when the credit markets settle down. And we could go significantly lower than the 200 million shares outstanding if it makes sense to do so. During Q2 we purchased 10.7 million shares of the company’s stock for approximately $118 million. We have approximately $566 million remaining under the current authorization for future buyback.

I would like to end with cash flow because liquidity is, although sometimes people like to forget this truism, the life blood of any organization. Cash is king. Currently we have $160 million in cash in addition to a solid $150 million line of credit available should we have the need to use it. Furthermore, our agreement includes an accordion feature for an additional $150 million under the same terms.

For Q2, operating cash flow was in line with expectations at $18.6 million. We anticipate operating cash flow to come in around $40 million in Q3, as we head into our biggest cash collection period for the year in the last quarter. Our cash collection efforts remain strong and effective. And we believe we will see $200 million in operating cash flow for the year.

As for the current credit crunch and our customers’ ability to obtain credit in order to purchase our solutions, this really is a non-concern for us. Besides, as I mentioned and as proven by the numbers, our cash collection efforts are highly effective. Like everyone else, we are uncertain of and remain cautious about what the immediate future holds. And being the prudent company we are, we are taking steps internally to best ensure we weather this impending storm. And we will weather the storm.

We estimate that customers will understand the value they get from Compuware and will agreeably pay to continue to receive that value. Long-term we are as bullish as ever about our future. The steps we are taking will allow Compuware to focus its resources on opportunities where we can be the absolute best in the world, which will, we are certain, lead to the type of breakout growth that will benefit all Compuware stakeholders. Most notably, our valued investors and employees. Lisa?

Lisa Elkin

Thanks very much, Laura. Ladies and gentlemen, we will now be happy to take your questions.

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