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Compuware Corporation (CPWR)

December 08, 2011 12:20 pm ET


Lisa Elkin -

David McGuffie - President of Compuware Covisint

Laura L. Fournier - Chief Financial Officer, Chief Accounting Officer, Executive Vice President and Treasurer

Peter Karmanos - Founder, Executive Chairman and Member of Executive Committee

Unknown Executive -

Joseph Angileri - President and Chief Operating Officer

John Van Siclen - Chief Executive Officer, President and Director

Robert C. Paul - Chief Executive Officer and Director


Unknown Analyst

S. Kirk Materne - Evercore Partners Inc., Research Division


Robert C. Paul

[Video Presentation] Well, good afternoon, everybody. My name is Bob Paul. I'm CEO of Compuware and I'm absolutely thrilled that you took the time out today to come visit us. This is an exciting day for us as we get to talk about a little bit about where we've been and more importantly, about where we're going. One thing I was just talking to a few of our guests about is, by the end of the day, you'll have an opinion. You'll have an opinion because we're going to share so much information with you that you can't not have an opinion, right wrong or indifferent. You'll know where we're going, you'll understand our strategy, you'll understand our numbers and we think this creates a level of transparency that you need and that you want. Does anybody have these memorized? I was going to have Lisa read this off. It's her 5 minutes claim to fame. But we're not going to do that. We're going to keep ongoing.

Today's agenda is as follows: I'm going to talk a little bit about the backdrop market conditions that helps us form a strategy about 3 years ago. We're then going to get into, very specifically, 2 of our growth drivers in some level of detail to give you a better appreciation for what the opportunity is, where we see ourselves in the marketplace and certainly what the numbers are around the growth opportunities. We're then going to ask Joe to come on up here and talk more specifically about some of the other business units, the remaining 4 business units. And then give you a sort of a summary information about the business plan moving forward and then I'm going to finish it up with some closing comments. After that, we're going to have everybody available that was part of the -- as part of the presentations. We also have Laura Fournier here, who's our Chief Financial Officer, to make sure we're honest, keeping it real. And Mark Hillman is here also, runs our Strategy and Product Line Management Group, if we wanted to get into any next level of detail in technology and trends that you might want to see.

Before we do all that however, I want to introduce our Executive Chairman and I'll tell you, we could spend a lot of time going over his accomplishments whether they'd be specifically business-related or not business-related. But one of the most important things that I think defines Pete Karmanos is the fact that he had a vision, 39 years ago, to start a little services company and his ambition was to get it to 20 to 25 people and since then has been at the helm of this organization, which is very rare through the growth, turning it into a products and mainframe company, continue to expand on the services side and then also getting into the whole distributive platform where we find ourselves today poised for even stronger growth. The other thing that he's done, which I personally appreciate a lot, is that he's actually architected a very, very smooth succession plan, which we're in the middle of and I'm thrilled about it. And so is the rest of the leadership team.

So without further ado, the microphone is all set to go, I'd like to introduce you to Peter Karmanos, Jr.

Peter Karmanos

I have my notes. I'm supposed to highlight 38 years in 2 minutes. So I'll say it's been an interesting 38 years. I plan to retire full-time from the business, March 31, 2013. Right now, I'm Executive Chairman. I watch over Bob and Joe carefully. They enjoy it a lot. They like my comments, especially my hindsight. I got 20-20 hindsight.

Compuware started in 1973. As Bob said, we're small services business and we got into selling software because of the peaks and valleys in the services business. We wanted something to smooth that out. We ended up with at least 2 of the most successful products in the history of the mainframe business, that by the way, we still sell, all right? The Abend-AID and File-AID.

We went public in December of 1992. The day after we closed on the offering, the day after, IBM announced a disastrous quarter and the mainframe was pronounced dead. However, it didn't really die. It just stopped growing 20% a year, site wise. So we fought that battle for a few years, but because of the year 2000, by December of 1999, we had grown from 700 employees on December of 1992 to 14,000 employees in December of 1999. We grew in value from $650 million market cap that Morgan Stanley was kind enough to allow us to have to $16 billion market cap on December of 1999. And we went from $250 million in revenue to $2.2 billion in revenue. It was quite a ride. It was a lot of fun, but it was uncontrolled growth. We added $1 billion of revenue in the final 2 years of that decade, '98, '99, all right? And it changed the company. It morphed our services business into a staffing type of business. It changed the relationship with our customers because we had them by the throat and we overcharged. That's why we had a lot of very angry costumers. And somehow, we survived as a company, all right?

And today, we're standing on the precipice of a lot more growth, but we've learned some really great lessons. We think we're going to grow this company significantly. You'll see that in Joe's numbers over the next 3 years. But we understand that you have to grow it, you have to increase your margin simultaneously while you're doing that and one of my jobs for the next year is to help people understand how to do that from the mistakes that I made in the past.

Anyhow, you're all here to hear about what we're going to do, so I will let Bob and the crew get up and do their thing. Thank you.

Robert C. Paul

Thank you, Pete. Okay, so the theme of the event today is laser focus. And it's not just a tag line, it's something that we started out with a few years ago for sure. What I mean by laser focus is this, I don't think business or running a business has to be complicated. Now you'll see sort of this focused theme run throughout each of the presentations today. We started out with the belief that we had to be best in class in those areas that we wanted to compete. And that all starts with a focus on the target market. So what were the target markets that we were going to address given the assets that we had in place at the time? And what was the growth potential by being best in class inside those target markets? That was the first conversation. The second conversation we had was what was the compelling business problem that we were going to solve in each one of those target markets? It's pretty simple stuff. The third discussion that we had was, how are we positioned in the market against our competition moving forward to give us an opportunity to be best in class?

Now, the challenge isn't coming up with a strategy, a desire to be best in class, therefore, deciding what we're not going to be also. A desire to get very focused around an addressable market that we think we can own and the desire to be better than anybody else at what we did from a differentiated positioning. The challenge is on an operational basis, how do you align and keep the organization such that everybody else in the company is focused along those same goals? And that is a lot of work. It's a lot of work to make sure our salespeople are only selling we want them to sell and only in the markets that we want them to sell in. And that we have pricing, packaging, R&D, innovation, development and everything aligned around achieving those goals. If you get it right the first time and you create a discipline in-house to achieve those goals, good things will happen.

So that's our fundamental belief. We started out with that focus on the market leadership. Now from there, good things should start to happen. With those differentiated value propositions, you'll start to see an opportunity for revenue growth. You're winning more market share. We've got a 3-year plan, we're going to show you actually a little bit more than 3 years, 3.25 and then some. That takes us out to our fiscal year '15 that shows slightly greater than 40% growth. We think we can do it, the plan was built from a bottoms-up perspective. We then went through many, many, many iterations based upon the market conditions we saw, the opportunities, the competitive strengths, et cetera and our global positioning.

The next piece, which is just as important and Pete alluded to this, is focused on profitability. One of the reasons that Joe's onboard now is to help us build best-in-class processes and discipline throughout the organization, which is already starting to have an impact on to make sure that we have our expenses under control as we improve our top-line revenue growth. Now, as we start to build market share, as I'll get into in a few minutes. And as we start to get a name for ourselves as the leader in certain categories, you get invited to every opportunity. Because you have to be. Because you're the leader. Your sales cycles go down, your cost of sales go down, right? Certain things happen around efficiencies along with running the rest of the business that allow you to increase the velocity of your customer acquisition. So that's all good. Now, one of the nice byproducts of all of that is with top-line revenue growth and a profitability and operating margin that we think we can actually get to 26.5% of fiscal year '15. We then believe that the share price is going to react properly.

Now, a lot of you don't know about Compuware yet and this is part of the big issue that we have. They don't know about the new things that have been going on, about our position, positioning in certain marketplaces and how we think about the assets inside the organization. Hopefully today, you'll get all of that and then some, so you'll be able to have a much more detailed dialogue if needed to evaluate our strategy and our position moving forward.

So I'm going to start out with a little bit of focus on market leadership and I can tell you there's never been a more exciting time. I've not been around quite as long as Pete, but I've been around many decades. There's never been a more exciting time to be a part of IT. And that's because of the revolution that's going on right now. The disruptive changes that are going on in information technology and when there are that many disruptive changes, there's going to be a whole class of winners, and a whole another class of losers. And the winners are those that are focused on delivering that differentiated value against or better than the competition as it's been laid out. Not just as it sits today but based upon where those trends are going already.

For the last 10 years, we've been dealing in a virtualized disruptive force in the marketplace. A couple of lessons here, what virtualization did for us and you've seen -- I'm sure you've seen many IT presentations on this stuff, which is why I'm just glossing over it. But virtualization allows us to move compute resources around the data center, virtually obviously, to improve our agility and then also absolutely lower the operating costs of delivering that information technology. Now one of the other things that came out of this, is that you saw a company that was laser focused on becoming best in class, on a very well defined value proposition and target market that they were differentiated on and they created a disruption in the marketplace.

From virtualization, we move to the cloud. And with the cloud, because virtualization was already in place for most companies, and I know it varies a little bit by geography but for the most part, we now see the opportunity to move compute resources outside the firewall. And with that ability, we see new burgeoning industry start to crop up. You see the big guys building these massive outsourced virtualized data centers, where I can create burstable cloud opportunities, move compute at a lower cost point and with higher flexibility. You also see a whole new set of tiered companies cropping up as cloud service providers and managed service providers, creating more and more levels of complexity in between you and your end-user. And now, we're starting to see many different classes of those cloud service providers and as important as any of that, it allowed us to move our compute capability closer to our end consumer, mobility and web.

So now, the opportunity which is from a data point, we all know about it, the proliferation of mobile devices, webpages, right? All the things that are going on, changing the way in which consumers behave, but over the next 5 to 10 years, it will fundamentally change the way in which business behaves moving forward. And so with the revolution going on of virtualization; cloud; moving to compute closer to the end consumer, so my mobile devices, my iPads are all working, the most important change is the impact it has to the business. And I think this is the most exciting part. More than ever, IT is more relevant than it's ever been before to the top and bottom line of business performance. It started out with just your usual retail web organizations. It's now moved to almost every brick-and-mortar company in the world, thinking about how can I innovate, how can I change using this new attack to marketplace, to build brand awareness, market share and top-line revenue growth? It is unbelievable.

And with that, we start to see the innovative companies think of changing their business models, having different investment strategies in order to take advantage of this new world. This is an example of Chrysler, actually, changing the way in which they operate with a very, very highly profitable aftermarket. Realtime alert information, speeding up supply chain, delivering both iPad and web-based apps. Obviously, we're measuring the performance of those apps because they're critical to the bottom line, all right? We're also deploying that in an authenticated, highly secured cloud so other constituents can't get access this information.

Travel services, second-largest travel services company in the world, Dave will talk more about it. Aspiring to become the largest travel services company in the world and their biggest point of attack is how they changed the way in which they deal with the consumer. If their applications or their notification systems go down, people stop using their system. It's that simple. They go elsewhere. They lose the opportunity to be #1.

I love this one, we don't actually do this for them but it's a great story. Tesco, major UK-based supermarket chain, couldn't get access to the South Korean marketplace. Really having a hard time, right? By providing, in train stations, basically visual grocery stores where I can now scan, do my ordering, have it delivered, they're now 130% growth and the #1 online shopping site in South Korea for groceries. They innovated. They changed the game. They created their new business model in emerging marketplaces. And I could go on and on and on about how it's not changing the opportunity for business growth but in this case, fundamentally changing how an industry would work.

This is an example of a dashboard, where the point of care as a patient, I can get access to all of my information throughout the community or throughout the state. Lab records, blood tests, radiology reports. So at the point of care, I'm not running redundant tests and I'm a much better informed physician. Reducing the amount of hospitalization time, the amount of time at the ER, the amount of time in second-guessing, et cetera. Direct cost at the bottom-line and saving are astronomical growth in the cost of healthcare.

These are just a few examples of how these IT revolutionary trends are impacting business, the fact that business now is relying more heavily, more than ever on IT and therefore, the design that we got into, many, many years ago or a few years ago in designing our go-to-market strategies are predicated upon these trends. It wasn't an issue of should we do it? It was an issue of survival and now are we going to thrive in this new environment. And I steal this slide -- I should have put it up there from the Chasm group and Geoffrey Moore, I love it right. Because whether they're still around today or not, right? There's a lot of question whether these companies are taking advantage or innovating in a focused enough way to change their business model to be a player in this new environment.

So 2008, we started with a decision. We're only going to compete where we can be best in class. Now that best in class doesn't have to be global, remember we start with the target market. It has to be best in a given category inside a target market. So, for example, at mainframe, we are already there, easy decision, right? Strategies built to extend our competitive advantage period, 53%, 52% market share and progressing in the same direction. Very mature marketplace.

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