Compuwares Earnings Fall Short; Major Changes Planned

The company's CEP says demand was not as strong as anticipated, and that major changes are in the works.

Compuware Corp. on Wednesday announced that it will not meet Wall Street earnings expectations for its third fiscal quarter and that major changes in the companys business were in the offing.

In announcing preliminary financial results for the quarter that ended Dec. 31, the management software and professional service provider said it will earn 9 cents a share, compared to the 11 cents a share expected by financial analysts surveyed by Thomson First Call.

Revenue for the quarter is now expected to be $305 million, rather than the $323 million projected by Thomson First Call.

Company officials were not available for comment, but in a statement, CEO Peter Karmanos said, "Third-quarter demand was not as strong as anticipated, and the business underperformed. During the fourth quarter, we will announce and implement major changes designed to ensure Compuwares short- and long-term business success."

Some Compuware watchers speculated that such changes could include layoffs at the Detroit, Mich., company.

"That means layoffs. If youre not making earnings, thats the first thing everybody cuts," said Rich Ptak, principal at Ptak, Noel and Associates in Amherst, N.H.

No explanation was given for the shortfall, and Compuware plans to provide full results for the quarter on Jan. 26.

Compuware has faced increasing competitive pressure as the market for management and testing software continues to consolidate as the Big Four enterprise management software providers-IBM, Hewlett-Packard Co., BMC Software Inc. and CA continue to snap up smaller players.

"The market is consolidating and theyre getting squeezed in the middle," said Jasmine Noel, principal analyst at Ptak, Noel and Associates in New York.

As a second-tier management software provider, it is unclear what growth options are available to Compuware, according to Ray Paquet, a vice president at Gartner Inc. in Lowell, Mass.

"If the market is consolidating—are they a consolidator or consolidatee? Its not clear who theyd buy or whod buy them. The midsize, publicly traded software companies are a vanishing breed," he said.

/zimages/6/28571.gifClick here to read more about Compuwares enhancements to its application quality solutions.

Compuware also issued a similar warning for its second fiscal quarter last fall when its results did not meet expectations.

But a sense of urgency has been lacking at the more conservative company, said Stephen Elliott, an industry analyst with International Data Corp. in Framingham, Mass.

"Compuwares culture is extremely conservative and bureaucratic. In technology you need an agile culture and have some level of urgency—even if you are a $1 billion company," he said.

Whatever changes Compuware management has in mind, it is important that the company move quickly, as the trend toward taking companies private gains steam.

"In this type of situation, change is good. If youre not making changes and you feel like youre struggling now more than ever, you could become a private equity deal and that will force change," Elliott said.

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