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COMPUWARE CORP - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations
[November 06, 2014]

COMPUWARE CORP - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations


(Edgar Glimpses Via Acquire Media NewsEdge) This "Management's Discussion and Analysis of Financial Condition and Results of Operations" ("MD&A") is intended to provide an understanding of our financial condition, changes in financial condition, cash flow, liquidity and results of operations. The MD&A should be read in conjunction with the unaudited condensed consolidated financial statements and notes included in item 1 of this report and our annual report on Form 10-K for the fiscal year ended March 31, 2014, particularly "Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations". References to years are to fiscal years ended March 31 unless otherwise specified.



In this section, we discuss our results of operations on a segment basis. We have two software segments, Dynatrace and Mainframe. We also had a platform-as-a-service ("PaaS") offering called Covisint or Application Services through October 31, 2014. Following the segment discussion, we then provide a separate discussion of the material period-to-period changes in our operating expenses, other income and income taxes as reflected on our statements of operations.

Forward-Looking Statements The following discussion 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 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.


The material risks and uncertainties that we believe affect us are summarized below. These risks and uncertainties are not the only ones we face. Additional risks and uncertainties discussed elsewhere in this report and the other reports we file with the Securities and Exchange Commission (see for example Item 1A Risk Factors in our 2014 Form 10-K), as well as other risks and uncertainties that we are not aware of or focused on or that we currently deem immaterial, may also impair business operations. This report is qualified in its entirety by these risk factors and those listed below. If any of the following risks actually occur, our financial condition and results of operations could be materially and adversely affected. If this were to happen, the value of our common stock could decline significantly, and shareholders could lose all or part of their investment.

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.

30-------------------------------------------------------------------------------- Table of Contents COMPUWARE CORPORATION AND SUBSIDIARIESSummary of Risk Factors · If we are not able to grow our Dynatrace revenue at anticipated levels, we may fail to achieve our forecasted financial results and we may fail to meet the expectations of analysts or investors which could cause our stock price to decline.

· A substantial portion of our Mainframe segment revenue is dependent on our customers' continued use of IBM and IBM-compatible products.

· Our product revenue is dependent on the acceptance of our pricing structure for our software solutions.

· Maintenance revenue could continue to decline.

· Our primary source of profitability is from our Mainframe segment. As revenues in this segment decline, our profitability will decline unless we are able to significantly increase margins in our Dynatrace segment.

· Our intended acquisition by Thoma Bravo may not be consummated and our stock price may decline.

· If the merger with Thoma Bravo is completed, our distribution of Covisint shares to our shareholders will subject us to tax liability which reduces the cash price to be paid to shareholders in the merger, and the distribution may be taxable to us even if the merger does not occur.

· If the merger with Thoma Bravo is not completed, we may be required to pay a termination fee, we may not resume our stock repurchase plan or dividend payments and our plans to undertake a return of capital transaction may change, any of which may result in a decrease in our stock price.

· Changes in the financial services industry could have a negative impact on our revenue and margins.

· We may fail to achieve our forecasted financial results due to inaccurate sales forecasts or other unpredictable factors. If we fail to meet the expectations of analysts or investors, our stock price could decline substantially.

· Our business could be negatively affected as a result of actions of shareholders or others.

· If the merger with Thoma Bravo is not completed, our previously announced evaluation of a strategic separation of our Dynatrace and Mainframe businesses may take multiple forms, may not produce the intended benefits to shareholders or may not result in a separation of the businesses.

· Substantial changes in our operations, including business segregations and divestitures, may disrupt our business, divert the attention of our management or cause us to incur additional costs and may result in financial results that are worse than expected.

· The loss of certain key employees and technical personnel or our inability to hire additional qualified personnel could have a material adverse effect on our business.

31-------------------------------------------------------------------------------- Table of Contents COMPUWARE CORPORATION AND SUBSIDIARIES · We may not achieve the results we expect from our expense reduction program, the timing could be delayed, or the restructuring charges necessary to achieve the targeted expense reductions could be higher than expected, any of which could materially and adversely affect our results of operations and financial condition.

· Economic uncertainties or slowdowns may reduce demand for our offerings, which may have a material adverse effect on our revenues and operating results.

· If the fair value of our long-lived assets deteriorated below the carrying value of these assets, recognition of an impairment loss would be required, which could materially and adversely affect our financial results.

· Our software technology may infringe the proprietary rights of others.

· Our results could be adversely affected by increased competition, pricing pressures and technological changes within the software products market.

· We must develop or acquire product enhancements and new products to succeed.

· Acquisitions may be difficult to integrate, disrupt our business or divert the attention of our management and may result in financial results that are different than expected.

· We are exposed to exchange rate risks on foreign currencies and to other international risks that may adversely affect our business and results of operations.

· Current laws may not adequately protect our proprietary rights.

· Unanticipated changes in our effective tax rates, or exposure to additional income tax liabilities, could affect our profitability.

· Acts of terrorism, acts of war, cyber-attacks and other unforeseen events may cause damage or disruption to us or our customers, which could materially and adversely affect our business, financial condition and operating results.

· Our articles of incorporation, bylaws and rights agreement as well as certain provisions of Michigan law may have an anti-takeover effect.

OVERVIEW We deliver value to businesses by providing software solutions (both on-premises and SaaS models), software related services and application services that improve the performance of information technology organizations.

Our primary source of profitability and cash flow is the sale of our Mainframe productivity tools that are used within our customers' mainframe computing environments for fault diagnosis, file and data management, application performance monitoring and application debugging. We have generally experienced lower volumes of software license transactions for our Mainframe solutions in recent years causing an overall downward trend in our Mainframe product revenues which we expect to continue. Changes in our current customer IT computing environments and spending habits have impacted their need for additional mainframe computing capacity. In addition, increased competition and pricing pressures have had a negative impact on our revenues. Customers utilize our products to reduce operating costs, increase programmer productivity and create a smooth transition to the next generation of mainframe environment programmers.

We will continue to make strategic enhancements to our Mainframe solutions through research and development investments with the goal of meeting customer needs and maintaining a high maintenance renewal rate. The cash flow generated from our Mainframe business helps to support our Dynatrace business segment.

32-------------------------------------------------------------------------------- Table of Contents COMPUWARE CORPORATION AND SUBSIDIARIES Our Dynatrace products serve the Application Performance Management ("APM") market which is a key source of future revenue growth. Web, mobile and cloud applications and the complex distributed applications delivery chain supporting them have become increasingly critical to a company's brand awareness, revenue growth and overall market share. Because of this development, the market for APM solutions is significant and growing rapidly. Our Dynatrace solutions provide our customers with on-premises software and SaaS platform based hosted software.

These solutions are designed to ensure the optimal performance of each customer's enterprise, web, streaming, mobile and cloud applications. We are investing in our Dynatrace solutions with the goal of providing solutions that are best-in-class within the APM market. Specifically, our investments include: (1) enhancements to our global hosted software network with specific focus on ease of use, time-to-value and data analytics in mobile and cloud application performance capabilities and in video streaming performance; (2) enhancements to our solutions that are focused on optimizing application performance and accelerating time to market; and (3) enhancements which combine our on-premises software and SaaS solution into a single platform that provides performance metrics for mobile, web, non-web, streaming and cloud applications in a single solution.

The secure collaboration services market was served by our Covisint application services business, which we distributed to our shareholders on October 31, 2014.

Technology has allowed business communities, organizations and systems to globally connect and share vital information, applications and processes across their internal and extended enterprises. Covisint services, which are provided on a PaaS basis to customers primarily in the automotive, healthcare and energy industries, create an environment that simplifies and secures this collaboration atmosphere. Covisint's focus in the automotive and manufacturing industries is on enabling customers to connect, engage and collaborate on mission-critical business processes with their suppliers, customers and business partners.

Covisint's focus in the healthcare industry is on enabling hospitals, physicians and government entities to share electronic patient health and medical records.

Quarterly Update The following occurred during the second quarter of 2015: · On September 2, 2014, we entered into an Agreement and Plan of Merger, which we refer to as the Merger Agreement, with affiliates of Thoma Bravo, LLC. We refer to these entities collectively as Thoma Bravo. Upon completion of the merger contemplated by the Merger Agreement, we will become a wholly owned subsidiary of Thoma Bravo.

· Dynatrace revenue increased 8.9% driven by increases in maintenance revenue.

· Mainframe revenue decreased 8.1% with decreases in both license and maintenance revenue.

· Covisint revenue decreased 11.4% primarily due to declines in its services revenue.

· Operating margin increased to 8.5% during the second quarter of 2015 as compared to 6.3% during the second quarter of 2014 due primarily to the impact of our cost reduction efforts.

33-------------------------------------------------------------------------------- Table of Contents COMPUWARE CORPORATION AND SUBSIDIARIES · Net income of $9.2 million was comparable to $9.1 million of income from continuing operations during the second quarter of last year. On a non-GAAP basis, excluding stock compensation expense, amortization of purchased software and other acquired intangibles, restructuring charges and certain advisory fees, net income decreased $1.3 million in the second quarter of 2015 as compared to the second quarter of 2014. See the "GAAP to non-GAAP Reconciliation" section below for a complete reconciliation of net income and earnings per share.

On October 31, 2014, we completed the previously announced spin-off of the remaining shares of Covisint Corporation we owned on that date to our shareholders and restricted stock unit holders of record as of October 20, 2014 so that Covisint is no longer our subsidiary.

Our ability to execute our strategies and achieve our objectives is subject to a number of risks and uncertainties. See "Forward-Looking Statements".

GAAP TO NON-GAAP RECONCILIATION In an effort to provide investors with additional information regarding the Company's results as determined by U.S. generally accepted accounting principles ("GAAP"), the Company has provided non-GAAP net income and non-GAAP diluted earnings per share. These financial measures exclude the impact of certain items and, therefore, have not been calculated in accordance with GAAP. These non-GAAP financial measures exclude stock compensation expense; amortization of purchased software and acquired intangible assets; restructuring charges; advisory fees associated with certain shareholder actions and business transformation; and the related tax impacts of these items. Each of the non-GAAP adjustments is described in more detail below. The table below provides a reconciliation of each of these non-GAAP measures to its most comparable GAAP financial measure.

We believe that inclusion of these non-GAAP financial measures provides better comparability with our historical financial results and with the results of many of our competitors. In addition, we believe these non-GAAP financial measures are useful to investors because they allow investors to review supplemental information used internally by management to evaluate our financial results.

These non-GAAP measures also represent the means by which we communicate our earnings guidance to investors.

While we believe that these non-GAAP financial measures provide useful supplemental information, there are limitations associated with the use of these non-GAAP financial measures. These non-GAAP financial measures are not prepared in accordance with GAAP, are not audited, do not reflect a comprehensive system of accounting and may not be completely comparable to similarly titled measures of other companies due to potential differences in the exact method of calculation between companies. Items such as stock compensation expense; amortization of purchased software and acquired intangible assets; restructuring charges; advisory fees associated with certain shareholder actions and business transformation; and the related tax impacts of these items that are excluded from our non-GAAP financial measures can have a material impact on net income.

As a result, these non-GAAP financial measures have limitations and should not be considered in isolation from, or as a substitute for, net income or loss, cash flow from operations or other measures of performance prepared in accordance with GAAP. We compensate for these limitations by using these non-GAAP financial measures as supplements to GAAP financial measures and by reconciling the non-GAAP financial measures to their most comparable GAAP financial measure. We have procedures in place to ensure that these measures are calculated using the appropriate GAAP components in their entirety and to ensure that our performance is properly reflected to facilitate consistent period-to-period comparisons. Management reviews the non-GAAP adjustments on a net-of-tax basis when evaluating our performance. Therefore, we exclude the tax impact of these charges when presenting non-GAAP financial measures.

34-------------------------------------------------------------------------------- Table of Contents COMPUWARE CORPORATION AND SUBSIDIARIESThe following discusses the reconciling items from our non-GAAP financial measures to the most comparable GAAP financial measures: · Stock compensation expense. Our non-GAAP financial measures exclude the compensation charges required to be recorded by GAAP for equity awards to employees and directors. Although this is a normal recurring expense for us, we believe it is useful in evaluating corporate performance during a particular time period to review the supplemental non-GAAP financial measures excluding this expense because these costs are generally fixed at the time an award is granted, are then expensed over several years and generally cannot be changed or influenced by management in the current period.

· Amortization of purchased software and acquired intangibles. Our non-GAAP financial measures exclude costs associated with the amortization of purchased software and acquired intangible assets. Although this is a normal recurring expense for us, we believe it is useful in evaluating corporate performance during a particular time period to review the supplemental non-GAAP financial measures excluding this expense because these costs are fixed at the time of acquisition, are then amortized over a period of several years after the acquisition and generally cannot be changed or influenced by management in the current period.

· Restructuring charges. Our non-GAAP financial measures exclude restructuring charges, and any subsequent changes in estimates as they relate to our ongoing corporate restructuring activities. We believe it is useful in evaluating corporate performance during a particular time period to review the supplemental non-GAAP financial measures excluding restructuring charges in order to provide comparability and consistency with historical operating results.

· Advisory fees associated with certain shareholder actions and our business transformation initiative. In response to certain shareholder actions dating back to fiscal 2013, we have taken various actions to drive shareholder value.

These actions have resulted in significant consultant fees to investigate business alternatives and implement business transformation plans. We believe it is useful in evaluating corporate performance during a particular time period to review the supplemental non-GAAP financial measures excluding such costs in order to provide comparability and consistency with historical operating results.

· Provision for income taxes on above pre-tax non-GAAP adjustments. Our non-GAAP financial measures exclude the tax impact of the above pre-tax non-GAAP adjustments. This amount is calculated using the tax rates of each country to which these pre-tax non-GAAP adjustments relate. Management excludes the non-GAAP adjustments on a net-of-tax basis in evaluating our performance.

Therefore, we exclude the tax impact of these charges when presenting non-GAAP financial measures.

35-------------------------------------------------------------------------------- Table of Contents COMPUWARE CORPORATION AND SUBSIDIARIES Following is a reconciliation of GAAP to non-GAAP financial information based on net income from continuing operations (in thousands, except for per share data): Three Months Ended September 30, Six Months Ended September 30, 2014 2013 2014 2013 NET INCOME FROM CONTINUING OPERATIONS ATTRIBUTABLE TO COMPUWARE CORPORATION $ 9,151 $ 9,128 $ 9,203 $ 13,390 ADJUSTMENTS EXCLUDING IMPACT OF NON-CONTROLLING INTEREST Stock compensation (excluding restructuring stock compensation) 6,260 12,905 14,564 21,479 Amortization of purchased software 1,648 2,389 3,344 4,759 Amortization of acquired intangibles 1,019 1,801 2,819 3,594 Restructuring expenses 2,255 219 5,230 5,022 Advisory fees 5,351 1,977 8,095 3,133 Income tax effect of above adjustments (5,811 ) (7,245 ) (12,083 ) (13,738 ) Total adjustments 10,722 12,046 21,969 24,249 NON-GAAP NET INCOME FROM CONTINUING OPERATIONS $ 19,873 $ 21,174 $ 31,172 $ 37,639 DILUTED EARNINGS PER SHARE FROM CONTINUING OPERATIONS - GAAP $ 0.04 $ 0.04 $ 0.04 $ 0.06 ADJUSTMENTS EXCLUDING IMPACT OF NON-CONTROLLING INTEREST Stock compensation (excluding restructuring) 0.03 0.06 0.07 0.10 Amortization of purchased software 0.01 0.01 0.01 0.02 Amortization of acquired intangibles 0.00 0.01 0.01 0.02 Restructuring expenses 0.01 0.00 0.02 0.02 Advisory fees 0.02 0.01 0.04 0.01 Income tax effect of above adjustments (0.03 ) (0.03 ) (0.05 ) (0.06 ) Total adjustments 0.05 0.05 0.10 0.11 NON-GAAP EPS FROM CONTINUING OPERATIONS $ 0.09 $ 0.10 $ 0.14 $ 0.17 Diluted shares outstanding 223,670 220,429 223,489 220,007 EPS amounts may not add to the total due to rounding 36-------------------------------------------------------------------------------- Table of Contents COMPUWARE CORPORATION AND SUBSIDIARIESBUSINESS SEGMENT ANALYSIS The following table sets forth, for the periods indicated, certain business segment operational data. We evaluate the performance of our segments based primarily on contribution margin which is operating profit before certain charges such as restructuring, internal information system support, finance, human resources, legal, administration and other corporate charges ("unallocated expenses"). Transactions between segments are eliminated. The allocation of income taxes is not evaluated at the segment level. Comparisons are to the comparable period of the prior year. Financial results for our business segments, including the portion allocated to non-controlling interest, were as follows (in thousands): 37-------------------------------------------------------------------------------- Table of Contents COMPUWARE CORPORATION AND SUBSIDIARIES Total Unallocated Three Months Ended: Dynatrace MF Software AS Expenses (1) Total September 30, 2014 Total revenues $ 83,155 $ 66,003 $ 149,158 $ 21,735 $ - $ 170,893 Operating expenses 73,285 15,907 89,192 28,899 38,215 156,306 Income (loss) from continuing operations $ 9,870 $ 50,096 $ 59,966 $ (7,164 ) $ (38,215 ) $ 14,587 Margin % 11.9 % 75.9 % 40.2 % (33.0 %) N/A 8.5 % September 30, 2013 (2) Total revenues $ 76,350 $ 71,818 $ 148,168 $ 24,525 $ - $ 172,693 Operating expenses 69,260 16,821 86,081 34,362 41,453 161,896 Income (loss) from continuing operations $ 7,090 $ 54,997 $ 62,087 $ (9,837 ) $ (41,453 ) $ 10,797 Margin % 9.3 % 76.6 % 41.9 % (40.1 %) N/A 6.3 % (1) Unallocated expenses for the three months ended September 30, 2014 and 2013 include $2.3 million and $219,000, respectively, in restructuring expenses.

See note 9 for additional information.

(2) September 30, 2013 amounts have been reclassified to reflect the transition of the Dynatrace for Mainframe product from our Mainframe business segment to our Dynatrace business segment.

Total Unallocated Six Months Ended: Dynatrace MF Software AS Expenses (1) Total September 30, 2014 Total revenues $ 160,531 $ 131,550 $ 292,081 $ 43,322 $ - $ 335,403 Operating expenses 148,918 33,023 181,941 62,291 79,870 324,102 Income (loss) from continuing operations $ 11,613 $ 98,527 $ 110,140 $ (18,969 ) $ (79,870 ) $ 11,301 Margin % 7.2 % 74.9 % 37.7 % (43.8 %) N/A 3.4 % September 30, 2013 (2) Total revenues $ 151,415 $ 143,461 $ 294,876 $ 48,626 $ - $ 343,502 Operating expenses 143,671 35,632 179,303 59,785 90,628 329,716 Income (loss) from continuing operations $ 7,744 $ 107,829 $ 115,573 $ (11,159 ) $ (90,628 ) $ 13,786 Margin % 5.1 % 75.2 % 39.2 % (22.9 %) N/A 4.0 % (1) Unallocated expenses for the six months ended September 30, 2014 and 2013 include $5.2 million and $5.0 million, respectively, in restructuring expenses. See note 9 for additional information.

(2) September 30, 2013 amounts have been reclassified to reflect the transition of the Dynatrace for Mainframe product from our Mainframe business segment to our Dynatrace business segment.

38-------------------------------------------------------------------------------- Table of Contents COMPUWARE CORPORATION AND SUBSIDIARIES Software Segments Revenue associated with our software solutions consists of software license fees, maintenance fees, subscription fees and services fees (software related services).

Dynatrace The financial results of operations for our Dynatrace segment were as follows (in thousands): Three Months Ended Six Months Ended September 30, September 30, 2014 2013 % Change 2014 2013 % Change Revenue Software license fees $ 25,883 $ 25,027 3.4 % $ 47,270 $ 48,557 (2.7 )% Maintenance fees 29,400 24,596 19.5 57,695 48,397 19.2 Subscription fees 19,949 19,931 0.1 39,311 40,063 (1.9 ) Services Fees 7,923 6,796 16.6 16,255 14,398 12.9 Total revenue 83,155 76,350 8.9 160,531 151,415 6.0 Operating expenses 73,285 69,260 5.8 148,918 143,671 3.7 Contribution margin $ 9,870 $ 7,090 39.2 % $ 11,613 $ 7,744 50.0 % Contribution margin % 11.9 % 9.3 % 7.2 % 5.1 % Dynatrace segment revenue increased during both the three months and six months ended September 30, 2014 due primarily to an increase in maintenance and services fees. The increase in maintenance and service fees was related to our growing customer base and a focus on higher margin professional services.

Operating expenses increased during both the three months and six months ended September 30, 2014 due primarily to an increase in salary and benefits expense related to headcount increases and increases in bonus and commissions expense.

The improvements in contribution margin resulted from the proportionately larger increase in revenue than expenses during both the three months and six months ended September 30, 2014.

Dynatrace revenue by geographic location is presented in the table below (in thousands): Three Months Ended Six Months Ended September 30, September 30, 2014 2013 2014 2013 United States $ 45,850 $ 43,957 $ 86,174 $ 85,042 Europe and Africa 22,611 20,002 45,146 39,839Other international operations 14,694 12,391 29,211 26,534 Total Dynatrace segment revenue $ 83,155 $ 76,350 $ 160,531 $ 151,415 39 -------------------------------------------------------------------------------- Table of Contents COMPUWARE CORPORATION AND SUBSIDIARIES Mainframe The financial results of operations for our Mainframe segment were as follows (in thousands): Three Months Ended Six Months Ended September 30, September 30, 2014 2013 % Change 2014 2013 % Change Revenue Software license fees $ 6,306 $ 7,564 (16.6 )% $ 11,606 $ 15,777 (26.4 )% Maintenance fees 59,623 64,223 (7.2 ) 119,788 127,584 (6.1 ) Services Fees 74 31 138.7 156 100 56.0 Total revenue 66,003 71,818 (8.1 ) 131,550 143,461 (8.3 ) Operating expenses 15,907 16,821 (5.4 ) 33,023 35,632 (7.3 ) Contribution margin $ 50,096 $ 54,997 (8.9 )% $ 98,527 $ 107,829 (8.6 )% Contribution margin % 75.9 % 76.6 % 74.9 % 75.2 % Mainframe segment revenue decreased during both the three months and six months ended September 30, 2014 due to reductions in both license and maintenance fees, which was consistent with the general downward trend in our Mainframe product revenues we have experienced throughout the past several years. Changes in our current customers' IT computing environments and spending habits have reduced their demand for additional mainframe computing capacity. In addition, increased pricing pressures, competition and the effects of foreign exchange rate changes have had a negative impact on our revenues. We intend to continue to make strategic enhancements to our Mainframe solutions through research and development investments. Some of the decline in license fees was a result of a greater percentage of customer license agreements during the period being term licenses. Because term licenses are recognized ratably, a greater portion of license revenue associated with current customer agreements was deferred and will be recognized over the term of the agreement.

The decrease in contribution margin resulted primarily from the decline in revenue during the first two quarters of 2015.

Mainframe revenue by geographic location is presented in the table below (in thousands): Three Months Ended Six Months Ended September 30, September 30, 2014 2013 2014 2013 United States $ 35,076 $ 39,183 $ 70,740 $ 76,581 Europe and Africa 19,003 18,381 37,187 38,875Other international operations 11,924 14,254 23,623 28,005 Total Mainframe segment revenue $ 66,003 $ 71,818 $ 131,550 $ 143,461 40 -------------------------------------------------------------------------------- Table of Contents COMPUWARE CORPORATION AND SUBSIDIARIESSoftware Revenue Combined Software revenue includes both Dynatrace and Mainframe.

Software revenue consists of software license fees, maintenance fees, subscription fees and software related services. Software solutions revenues are presented in the table below (in thousands): Three Months Ended Six Months Ended September 30, September 30, 2014 2013 % Change 2014 2013 % Change Software license fees $ 32,189 $ 32,591 (1.2 )% $ 58,876 $ 64,334 (8.5 )% Maintenance fees 89,023 88,819 0.2 177,483 175,981 0.9 Subscription fees 19,949 19,931 0.1 39,311 40,063 (1.9 ) Services fees 7,997 6,827 17.1 16,411 14,498 13.2 Total software solutions revenue $ 149,158 $ 148,168 0.7 % $ 292,081 $ 294,876 (0.9 )% Software revenue by geographic location is presented in the table below (in thousands): Three Months Ended Six Months Ended September 30, September 30, 2014 2013 2014 2013 United States $ 80,926 $ 83,140 $ 156,914 $ 161,623 Europe and Africa 41,614 38,383 82,333 78,714Other international operations 26,618 26,645 52,834 54,539 Total software solutions revenue $ 149,158 $ 148,168 $ 292,081 $ 294,876 Changes in the various revenue line items are discussed previously in the "Dynatrace" and "Mainframe" sections.

41-------------------------------------------------------------------------------- Table of Contents COMPUWARE CORPORATION AND SUBSIDIARIESApplication Services The financial results of operations for our Covisint application services segment were as follows (in thousands): Three Months Ended Six Months Ended September 30, September 30, 2014 2013 % Change 2014 2013 % Change Application services fees $ 21,735 $ 24,525 (11.4 )% $ 43,322 $ 48,626 (10.9 )% Operating expenses 28,899 34,362 (15.9 ) 62,291 59,785 4.2 Contribution margin $ (7,164 ) $ (9,837 ) 27.2 % $ (18,969 ) $ (11,159 ) (70.0 )% Contribution margin % (33.0 %) (40.1 %) (43.8 %) (22.9 %) Covisint application services are provided to customers primarily in the automotive and healthcare industries. Application services segment fees decreased during both the three months and six months ended September 30, 2014 due primarily to declines in services performed for customers. The services revenue decline can be attributed to: 1) a natural reduction in the deferred revenue recognized in the current period versus last year due to a diminished balance remaining from the establishment of stand-alone value for many of Covisint's services, 2) a reduction in ad hoc services projects with major subscription customers, 3) an improvement in the ease of implementation of the Covisint platform that results in quicker/less costly installations, 4) improvements in the platform that allow customers to perform portions of the implementation themselves, and, to a lesser extent, 5) relatively low subscription bookings in fiscal 2014.

Operating expenses decreased $5.5 million during the second quarter of 2015 due primarily to lower salaries and benefits expense and stock compensation expense resulting from a reduction in the size of our Covisint workforce including our delivery, sales and marketing and research and development personnel, as well as a cumulative catch-up of stock compensation expense which was incurred in the second quarter of 2014 due to Covisint's IPO. Operating expenses increased for the six months ended September 30, 2014 due primarily to an increase in headcount during fiscal 2014 to support the expected growth and separation of the business, following the planned spin-off of Covisint.

Application services segment revenue by geographic location is presented in the table below (in thousands): Three Months Ended Six Months Ended September 30, September 30, 2014 2013 2014 2013 United States $ 20,233 $ 21,016 $ 40,368 $ 41,850 Europe and Africa 460 1,868 988 3,656 Other international operations 1,042 1,641 1,966 3,120 Total application services segment revenue $ 21,735 $ 24,525 $ 43,322 $ 48,626 42-------------------------------------------------------------------------------- Table of Contents COMPUWARE CORPORATION AND SUBSIDIARIESUnallocated Expenses Unallocated expenses include costs associated with internal technology and the corporate executive, finance, human resources, administrative, legal, communications and investor relations departments. In addition, unallocated expenses include all facility-related costs, such as rent, building depreciation, maintenance and utilities associated with our worldwide offices.

Significant changes in these areas are discussed in "Operating Expenses" under "Technology Development and Support" and "Administrative and General".

OPERATING EXPENSES Our operating expenses include costs from continuing operations for software license fees; cost of maintenance fees; cost of subscription fees; cost of services; cost of application services; technology development and support costs; sales and marketing expenses; administrative and general expenses; and restructuring. These expenses are described below without regard to the relevant segment(s) to which they are allocated.

Cost of Software License Fees Cost of software license fees includes amortization of capitalized software related to our licensed software products, the cost of duplicating and disseminating products to customers, including associated hardware costs, and the cost of author royalties.

Cost of software license fees is presented in the table below (in thousands): Three Months Ended Six Months Ended September 30, September 30, 2014 2013 % Change 2014 2013 % Change Cost of software license fees $ 4,300 $ 5,227 (17.7 )% $ 9,295 $ 10,156 (8.5 )% Percentage of software license fees 13.4 % 16.0 % 15.8 % 15.8 % During both the three months and six months ended September 30, 2014, cost of license fees decreased due primarily to a decline in amortization of tradenames and a decline in hardware costs associated with certain offerings.

Cost of Maintenance Fees Cost of maintenance fees consists of the costs directly attributable to maintenance and product support such as helpdesk and technical support.

43-------------------------------------------------------------------------------- Table of Contents COMPUWARE CORPORATION AND SUBSIDIARIESCost of maintenance fees is presented in the table below (in thousands): Three Months Ended Six Months Ended September 30, September 30, 2014 2013 % Change 2014 2013 % Change Cost of maintenance fees $ 5,942 $ 6,846 (13.2 )% $ 12,864 $ 14,185 (9.3 )% Percentage of maintenance fees 6.7 % 7.7 % 7.2 % 8.1 % Cost of maintenance fees declined during both the three months and six months ended September 30, 2014, primarily resulting from a reduction in customer support costs.

Cost of Subscription Fees Cost of subscription fees consists of the amortization of capitalized software related to our Dynatrace hosted software, depreciation and maintenance expense associated with our hosted software network related computer equipment; data center costs; and payments to individuals for tests conducted from their Internet-connected personal computers ("peer").

Cost of subscription fees is presented in the table below (in thousands): Three Months Ended Six Months Ended September 30, September 30, 2014 2013 % Change 2014 2013 % ChangeCost of subscription fees $ 8,506 $ 8,450 0.7 % $ 16,708 $ 16,290 2.6 % Percentage of subscription fees 42.6 % 42.4 % 42.5 % 40.7 % Cost of subscription fees increased slightly during the three months and six months ended September 30, 2014, primarily due to increased amortization of capitalized research and development costs. We continued to invest in research and development throughout 2014 and the first half of 2015 which increased the amortizable base.

Cost of Services Cost of services consists primarily of the personnel-related costs of providing our software related services.

Cost of services is presented in the table below (in thousands): Three Months Ended Six Months Ended September 30, September 30, 2014 2013 % Change 2014 2013 % Change Cost of services $ 6,901 $ 5,892 17.1 % $ 13,633 $ 12,534 8.8 % Percentage of services fees 86.3 % 86.3 % 83.1 % 86.5 % 44-------------------------------------------------------------------------------- Table of Contents COMPUWARE CORPORATION AND SUBSIDIARIES Cost of services increased $1.0 million during both the three months and six months ended September 30, 2014 due primarily to an increase in revenue from certain Dynatrace services.

Cost of Application Services Cost of application services consists primarily of personnel-related costs of providing application services, including billable and technical staff, subcontractors and sales personnel net of the amounts capitalized for development of internal use software. As Covisint continued to prepare for their separation from us, additional administrative and general costs directly attributable to the Covisint business have been incurred and are included here.

Cost of application services is presented in the table below (in thousands): Three Months Ended Six Months Ended September 30, September 30, 2014 2013 % Change 2014 2013 % Change Cost of application services $ 27,870 $ 35,080 (20.6 )% $ 59,562 $ 61,291 (2.8 )% Capitalized internal software costs (639 ) (1,391 ) (54.1 ) (1,429 ) (3,341 ) (57.2 ) Cost of application services expensed $ 27,231 $ 33,689 (19.2 )% $ 58,133 $ 57,950 0.3 % Percentage of application services fees 125.3 % 137.4 % 134.2 % 119.2 % See "Application Services" for a discussion of the associated costs.

Capitalization of internally developed software costs decreased $752,000 and $1.9 million during the three months and six months ended September 30, 2014, respectively, due to the timing and stage of our software development initiatives. During the first two quarters of 2015, there was an increase of projects in the planning stage which were not capitalized.

Technology Development and Support Technology development and support includes, primarily, the costs of programming personnel associated with software technology development and support of our products and our hosted software network less the amount of capitalized internal software costs during the reporting period. Also included are personnel costs associated with developing and maintaining internal systems and hardware/software costs required to support all technology initiatives.

45-------------------------------------------------------------------------------- Table of Contents COMPUWARE CORPORATION AND SUBSIDIARIESTechnology development and support costs incurred internally and capitalized are presented in the table below (in thousands): Three Months Ended Six Months Ended September 30, September 30, 2014 2013 % Change 2014 2013 %Change Technology development and support costs incurred $ 26,635 $ 25,867 3.0 % $ 52,785 $ 53,309 (1.0 )% Capitalized software costs (7,020 ) (4,488 ) 56.4 (13,218 ) (8,239 ) 60.4 Technology development and support costs expensed $ 19,615 $ 21,379 (8.3 )% $ 39,567 $ 45,070 (12.2 )% Technology development and support costs expensed as a percentage of software revenue 13.2 % 14.4 % 13.5 % 15.3 % Technology development and support as a percentage of software solutions revenues decreased in the three and six months ended September 30, 2014 primarily due to the increase in capitalized software costs which reduced the net amount expensed.

The increase in capitalized internal software costs from the prior year relates primarily to the increase in projects that are in the capitalization phase of development. During the six months ended September 30, 2014, several additional Dynatrace products were in the capitalization phase of development as compared to the six months ended September 30, 2013, resulting in the increase in capitalization.

Sales and Marketing Sales and marketing costs consist primarily of personnel related costs associated with product sales, sales support and marketing for our product offerings.

Sales and marketing costs are presented in the table below (in thousands): Three Months Ended Six Months Ended September 30, September 30, 2014 2013 % Change 2014 2013 % ChangeSales and marketing costs $ 50,976 $ 47,356 7.6 % $ 104,079 $ 99,623 4.5 % Percentage of software revenue 34.2 % 32.0 % 35.6 % 33.8 % Sales and marketing costs increased $3.6 million and $4.5 million during the three months and six months ended September 30, 2014, respectively. The increases were primarily due to an increase in salaries and benefits expense resulting from headcount increases in the Dynatrace segment, additional management personnel in the Mainframe segment as we further pursue a possible separation of the Mainframe and Dynatrace businesses and additional marketing costs.

46-------------------------------------------------------------------------------- Table of Contents COMPUWARE CORPORATION AND SUBSIDIARIESAdministrative and General Administrative and general expenses consist primarily of costs associated with the corporate executive, finance, human resources, administrative, legal, communications and investor relations departments. In addition, administrative and general expenses include all facility-related costs, such as rent, building depreciation, maintenance and utilities, associated with our worldwide offices.

Administrative and general expenses are presented in the table below (in thousands): September 30, September 30, 2014 2013 % Change 2014 2013 % Change Administrative and general expenses $ 30,580 $ 32,838 (6.9 )% $ 64,593 $ 68,886 (6.2 )% Administrative and general costs decreased $2.3 million and $4.3 million during the three months and six months ended September 30, 2014, respectively, due primarily to a decrease in salaries and benefits expense related to headcount reductions associated with our restructuring initiatives.

RESTRUCTURING CHARGE As part of our announced plan to increase shareholder value, we are implementing significant cost reduction actions with the intention to eliminate approximately $110 million to $120 million of administrative and general and non-core operational costs over two years. In February 2013, the Company approved the initial phase of the restructuring plan designed to achieve cost savings. In January 2014, the Company announced the final phase of this cost reduction plan which includes additional reductions in the global workforce across all general, administrative and shared services divisions of the Company, along with the early termination of certain operating leases and the closing or reductions in size of office facilities worldwide. These cost reduction efforts, which are expected to be substantially completed by the end of fiscal 2015, are expected to result in cumulative restructuring charges of $50 million to $60 million.

Substantially all of the remaining estimated charges will result in future cash expenditures.

As part of the final phase of these efforts, the Company recorded a restructuring charge in continuing operations of approximately $2.3 million and $5.2 million during the three and six months ended September 30, 2014, respectively, for costs associated with these reductions.

INCOME TAXES Income taxes are accounted for using the asset and liability approach. Deferred income taxes are provided for the differences between the tax bases of assets or liabilities and their reported amounts in the financial statements and net operating loss and credit carryforwards.

47-------------------------------------------------------------------------------- Table of Contents COMPUWARE CORPORATION AND SUBSIDIARIES The income tax provision and effective tax rate are presented in the table below (in thousands): Three Months Ended Six Months Ended September 30, September 30, 2014 2013 % Change 2014 2013 % Change Income tax provision $ 5,275 $ 3,008 75.4 % $ 3,568 $ 1,937 84.2 % Effective tax rate 38.6 % 27.4 % 33.7 % 13.7 % Our effective tax rate for the six months ended September 30, 2014 was 33.7% compared to 13.7% for the six months ended September 30, 2013. The effective rate was lower during fiscal 2014 primarily due to the recording of a benefit related to stock compensation as a result of a change in our expectation regarding the tax deductibility of compensation for a certain officer during the first six months of 2014. The tax deductibility of this officer's compensation is no longer subject to the tax deduction threshold for officer compensation.

Accordingly, a deferred tax asset was recorded related to the stock compensation that was previously expected to be disallowed for tax purposes.

MANAGEMENT'S DISCUSSION OF CRITICAL ACCOUNTING POLICIES AND ESTIMATES Our condensed consolidated financial statements are prepared in accordance with U.S. GAAP. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities and shareholders' equity and the disclosure of contingencies at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Assumptions and estimates were based on the facts and circumstances known at September 30, 2014. However, future events rarely develop exactly as forecast, and the best estimates routinely require adjustment. The accounting policies discussed in Item 7 of our annual report on Form 10-K for the year ended March 31, 2014 are considered by management to be the most important to an understanding of the financial statements, because their application places the most significant demands on management's judgment and estimates about the effect of matters that are inherently uncertain. These policies are also discussed in note 1 of the condensed consolidated financial statements included in Item 8 of that report. There have been no material changes to that information since the end of 2014.

Long-lived assets We follow the guidance of ASC 360-10, "Property, Plant and Equipment" to assess potential impairment losses on long-lived assets used in operations. A long-lived asset, or group of assets, to be held and used in the business are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset group may not be recoverable. A long-lived asset group that is not held for sale is considered to be impaired when the asset group is not recoverable, that is when the undiscounted net cash flows expected to be generated by the asset group is less than its carrying amount and the carrying amount of the asset group exceeds its fair value. We review long-lived assets for impairment at the lowest level for which identifiable cash flows are largely independent of the cash flows of the other assets and liabilities. Certain long-lived assets do not have identifiable cash flows that are largely independent, and in those circumstances, the asset group for that long-lived asset includes all assets and liabilities of the company.

48-------------------------------------------------------------------------------- Table of Contents COMPUWARE CORPORATION AND SUBSIDIARIES As part of our announced transformation plan, during the fourth quarter of 2014, we began to consider various strategic alternatives for certain long-lived assets, including the potential disposition of real estate assets, which indicated the carrying amount of the real estate may not be recoverable. We, therefore, performed a recoverability test for the long-lived asset group which was held and used as of March 31, 2014. As our real estate assets do not have identifiable cash flows that are largely independent of the cash flows of assets and liabilities of other asset groups, our evaluation included all assets and liabilities of the Company. The recoverability test indicated that the associated long-lived asset group was not impaired. While we believe our judgments and assumptions are reasonable, a change in facts or assumptions underlying certain estimates and judgments made as part of our recoverability test, including the decision to divest real estate within the asset group, could result in a substantial impairment and would have a negative effect on our results of operations. Since March 31, 2014 management has continued to consider a disposition of this real estate, which if undertaken would require approval by the Company's Board of Directors and would be expected to result in a non-cash impairment charge of $100-120 million before income taxes. As of September 30 2014, management had not committed to a plan, therefore, no impairment loss has been recognized.

Goodwill Impairment Evaluation The goodwill balance by reporting unit as of September 30, 2014 is presented as follows (in thousands): Dynatrace MF AS Total Goodwill as of March 31, 2014 $ 482,857 $ 140,304 $ 25,385 $ 648,546 Effect of foreign currency translation (16,440 ) - - (16,440 ) Goodwill as of September 30, 2014 $ 466,417 $ 140,304 $ 25,385 $ 632,106 We are required to assess the impairment of goodwill and other intangible assets annually, or more frequently if events or changes in circumstances indicate that the carrying value may exceed the fair value.

The performance test involves a two-step process. Step 1 of the impairment test involves comparing the fair values of the applicable reporting units with their aggregate carrying values, including goodwill. We measure the fair value of our Dynatrace and Mainframe reporting units and other intangible assets using an estimate of the related discounted cash flow and market comparable valuations, where appropriate. We measure the fair value of our Covisint reporting unit based on the market value for the Covisint shares as of March 31, 2014. The discounted cash flow model uses significant assumptions, including projected future cash flows, the discount rate reflecting the risk inherent in future cash flows, and a terminal growth rate. The key assumptions in the market comparable value analysis are peer group and comparable transaction selection and application of this information to the respective reporting unit. If the carrying amount of a reporting unit exceeds the reporting unit's fair value, we perform Step 2 of the goodwill impairment test to determine the amount of impairment loss by comparing the implied fair value of the respective reporting unit's goodwill with the carrying amount of that goodwill. Under such evaluation, if the carrying amount of the reporting unit's goodwill exceeds the implied fair value of the goodwill, the impairment loss is recognized as an operating expense in an amount equal to that excess. There is a high degree of judgment regarding management's forecast for the reporting units as market developments for both customers and competitors can affect actual results. There can also be uncertainty regarding management's selection of peer companies and comparable transactions as an exact match is unlikely to exist.

49-------------------------------------------------------------------------------- Table of Contents COMPUWARE CORPORATION AND SUBSIDIARIES Application of the goodwill and other intangibles impairment test requires judgment, including the assignment of assets and liabilities to reporting units and determination of the fair value of each reporting unit. The fair value of each reporting unit is estimated using a discounted cash flow model in combination with a market approach. This analysis requires significant judgments, including estimation of future cash flows, which is dependent on internal forecasts, estimation of the long-term rate of growth for our business, estimation of the useful life over which cash flows will occur, estimation of market interest rates, determination of our weighted average cost of capital and selection and application of peer group information.

The estimates used to calculate the fair value of a reporting unit change from year to year based on operating results, market conditions and estimated future cash flows. While we believe that the assumptions and estimates used to determine the estimated fair values of each of our reporting units are reasonable, a change in assumptions underlying these estimates could materially affect the determination of fair value and goodwill impairment for each reporting unit.

The events and circumstances that could affect our key assumptions in the analysis of fair value in the future include the following: · Our ability to achieve sales productivity at a level to achieve the profitability in the forecast period.

· Our ability to hire and retain sales, technology and management personnel.

· Future negative changes in the global economy.

· Increased competition and pricing pressures.

We evaluated our goodwill for impairment on a reporting unit basis at March 31, 2014, and the fair value of our Dynatrace, Mainframe and Covisint reporting units were substantially in excess of each unit's respective carrying value as of March 31, 2014. Since March 31, 2014, there have been no events or changes in circumstances that would require the completion of an interim impairment analysis.

LIQUIDITY AND CAPITAL RESOURCES As of September 30, 2014, cash and cash equivalents totaled $255.3 million, compared to $300.1 million at March 31, 2014.

Net cash provided by operating activities Net cash provided by operating activities during the first six months of 2015 was $11.8 million, which represents a $15.3 million decrease from the first six months of 2014.

The condensed consolidated statements of cash flows compute net cash from operating activities using the indirect cash flow method. Therefore non-cash adjustments and net changes in assets and liabilities (net of effects from currency fluctuations) are adjusted from net income to derive net cash from operating activities.

50-------------------------------------------------------------------------------- Table of Contents COMPUWARE CORPORATION AND SUBSIDIARIES Changes in accounts receivable and deferred revenue have typically represented the most significant adjustments to net income to arrive at operating cash flow as we allow for deferred payment terms on multi-year products contracts. The impact of the net decrease in accounts receivable as compared to the prior year was $29.8 million and was primarily related to the cyclical nature of our Mainframe business which has higher sales and maintenance renewals during the third and fourth quarters of our fiscal year. The impact of the net decrease in deferred revenue was $13.9 million and was primarily related to our normal cycle of maintenance renewals which is cyclically higher in our third and fourth quarters. Operating cash flows for the first half of fiscal 2015 were negatively impacted by cash paid for income taxes. This cash payment related to the fiscal 2014 gain on divestiture of our Changepoint, Professional Services and Uniface business segments.

We believe our existing cash resources, including our line of credit and its expansion provision, and cash flow from operations will be sufficient to meet our short-term and long-term liquidity requirements, including the additional liquidity needed to fund the anticipated restructuring and business transformation.

Net cash used in investing activities Net cash used in investing activities during the first six months of 2015 was $28.6 million, which represented a $10.7 million increase in cash used as compared to the first six months of 2014 due primarily to the payment of a purchase price adjustment to Marlin of $8.0 million. The adjustment relates to accounts receivable which we retained in excess of a contractually specified amount.

We will continue to evaluate business acquisition opportunities that fit our strategic plans. If the cash consideration for a future acquisition or combination of acquisitions were to exceed our operating cash balance resources, we would likely further utilize our credit facility and may need to seek additional financing.

Net cash used in financing activities Net cash used in financing activities during the first six months of 2015 was $24.6 million compared to $48.1 million during the first six months of 2014.

Cash flows from financing activities consist primarily of cash dividends paid.

Additionally, during the first quarter of 2015, we purchased approximately 1.4 million Covisint shares in the market and in private transactions for $5.6 million. These purchases were made to maintain our 80% or greater ownership of Covisint common stock, a condition to a tax-free spin-off, in anticipation of the expiration of lock-up agreements applicable to holders of non-qualified stock options to acquire Covisint common stock and the subsequent exercise of those options.

The decrease in net cash used in financing activities was primarily due to a decrease in dividends paid during the first six months of 2015 as a result of the suspension of the Compuware quarterly dividend required by the Merger Agreement with Thoma Bravo.

Since May 2003, the Board of Directors has authorized the Company to repurchase a total of $1.7 billion of our common stock under a discretionary stock repurchase plan ("Discretionary Plan"). As of September 30, 2014, approximately $139.5 million remains authorized for future purchases under the Discretionary Plan. The Merger Agreement with Thoma Bravo prohibits repurchases of common stock prior to completion of the merger without its written consent. Our credit facility also limits stock repurchases without approval of the lenders.

51-------------------------------------------------------------------------------- Table of Contents COMPUWARE CORPORATION AND SUBSIDIARIES The Company has an unsecured $300 million revolving credit facility (the "credit facility") with Comerica Bank and other lenders to provide leverage for the Company if needed. As of September 30, 2014, there were no outstanding borrowings under the credit facility and we were in compliance with all covenants in the agreement. We have received consent from the participants in our credit facility to allow the spin-off of Covisint without negatively impacting our credit facility.

Recently Issued Accounting Pronouncements See note 1 of the condensed consolidated financial statements included in this report for recently issued accounting pronouncements that may affect the Company.

CONTRACTUAL OBLIGATIONS Our contractual obligations are described in "Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations" contained in our annual report on Form 10-K for the year ended March 31, 2014. Except as described elsewhere in this report on Form 10-Q, there have been no material changes to those obligations or arrangements outside of the ordinary course of business since the end of 2014.

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