XNAS:CPWR Compuware Corp Annual Report 10-K Filing - 3/31/2012

Effective Date 3/31/2012

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

x   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED MARCH 31, 2012
 
Commission File Number: 000-20900

COMPUWARE CORPORATION
(Exact name of registrant as specified in its charter)

Michigan
 
38-2007430
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)

One Campus Martius, Detroit, MI 48226-5099
(Address of principal executive offices including zip code)

Registrant’s telephone number, including area code: (313) 227-7300

Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class
Name of Each Exchange on Which Registered
Common Stock, par value $.01 per share
Nasdaq Global Select Market
Preferred Stock Purchase Rights
Nasdaq Global Select Market

Securities registered pursuant to Section 12(g) of the Act:  None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act of 1933.  Yes x  No o

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Securities Exchange Act of 1934.  Yes o No x
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.       Yes x     No o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).      Yes x    No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):  Large accelerated filer x  Accelerated filer  o  Non-accelerated filer  o   (Do not check if a smaller reporting company)  Smaller reporting company o
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o  No x
 
The aggregate market value of the voting stock held by non-affiliates of the registrant as of September 30, 2011, the last business day of the registrant’s most recently completed second fiscal quarter, was $1,240,663,604 based upon the closing sales price of the common stock on that date of $7.66 as reported on The NASDAQ Global Select Market. For purposes of this computation, all executive officers, directors and 10% beneficial owners of the registrant are assumed to be affiliates. Such determination should not be deemed an admission that such officers, directors and beneficial owners are, in fact, affiliates of the registrant.

There were 217,803,814 shares of $.01 par value common stock outstanding as of May 22, 2012.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the definitive Proxy Statement for the Registrant's 2012 Annual Meeting of Shareholders (the “Proxy Statement”) filed pursuant to Regulation 14A are incorporated by reference in Part III.
 


 
 

 
 
COMPUWARE CORPORATION AND SUBSIDIARIES
FORM 10-K
 
Item
Number
Page
PART I
 
1.
3
     
1A.
17
     
1B.
24
     
2.
25
     
3.
25
     
4.
25
     
PART II
 
     
5.
25
     
6.
27
     
7.
29
     
7A.
56
     
8.
59
     
9.
103
     
9A.
103
     
9B.
107
   
PART III
 
     
10.
108
     
11.
108
     
12.
108
     
13.
109
     
14.
109
     
PART IV
 
     
15.
110
 
ITEM 1.

We deliver services, software and best practices that enable our customers’ most important technologies to perform at their peak. Originally founded in 1973 as a professional services company, we began to offer mainframe productivity tools that information technology organizations (“IT”) used for fault diagnosis, file and data management, and application debugging in the late 1970's.

In the 1990's and 2000’s, our customers moved toward distributed and web-based platforms and more recently hosted services via the Internet (“cloud computing”). Our solutions portfolio grew in response, and we now market a focused portfolio of solutions across the full range of enterprise computing platforms that help:

Optimize the user experience, performance, availability and quality of web, non-web, mobile and cloud-based applications.

Securely share and integrate vital information and processes across users, business partners, customers, vendors and suppliers.

Maximize the profitability and efficiency of professional services engagements.

Provide executive visibility, decision support and process automation to align IT resources with business priorities.

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

Increase productivity and reduce operational costs on the mainframe platform.

We deliver these solutions through software that is installed and run on our customers’ owned hardware and applications (“on-premises”) and through a Software as a Service (“SaaS”) model accessed via our hosted networks (see Technology and Operations section). We also continue to offer professional technical services in areas such as mobile application development, performance engineering and legacy system modernization.

In previous fiscal years, we operated in four business segments in the technology industry: products, web application performance management services, professional services and application services. Effective April 1, 2011, we realigned to a business unit structure to provide better visibility and control over the operations of our businesses and to increase our market agility.

This business unit structure impacts our business segments as follows: (1) the former products segment split into four new segments: Application Performance Management (“APM”), Mainframe, Changepoint and Uniface; (2) the former web performance services segment (“Gomez SaaS” solution) and the former Vantage software products are now in the APM segment along with the recently acquired dynaTrace software products; and (3) the operating results of our software related professional services (“software related services”) are reported in the APM, Mainframe, Changepoint and Uniface business units, as applicable (previously reported in the Professional Services segment).

We now have six business segments: APM, Mainframe, Changepoint, Uniface, Professional Services and Covisint Application Services (“Covisint”). These segments are described in detail in note 1 to the consolidated financial statements.

The segment presentation in the prior periods has been revised to conform to the current presentation of our reportable segments. The change in reporting segments had no impact on previously reported consolidated financial results.
 
 
We collectively refer to the solutions offered within our APM, Mainframe, Changepoint and Uniface segments as “software solutions”. To provide a supplementary view of this business, aggregated financial data for our software solutions is presented herein.

For a discussion of developments in our business during fiscal 2012, 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. Our Codes of Conduct and our Board committee charters, as well as copies of reports we file with the Securities and Exchange Commission are available in the investor relations section of our external web site 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 enable our customers’ most important technologies to perform at their peak by delivering best-in-class on-premises software, software as a service (“SaaS”) and professional technical services. Our solutions empower customers to drive revenue, brand equity and customer satisfaction by harnessing disruptive technologies like cloud computing, virtualization and mobile computing.

During fiscal 2009, we launched our Compuware 2.0 initiative with a primary goal of delivering long-term, steady growth in revenues and earnings. We planned to achieve this goal by becoming best in the world in select market categories, while maximizing profitability in our more mature businesses. Our best in the world target categories include application performance management (“APM”) and secure collaboration.

This strategy and focus led us to divest our Quality and Testing business in fiscal 2010 and to acquire Gomez, Inc. (“Gomez”) and dynaTrace software, Inc. (“dynaTrace”) in fiscal 2010 and fiscal 2012, respectively. With these solutions, we provide our customers with on-premises software (“dynaTrace Enterprise”) and SaaS platform-based web application performance services (“Gomez SaaS”). These solutions monitor the performance of each customer’s web, non-web, streaming, mobile and cloud applications.

Early in fiscal 2012, Compuware announced its 3.0 initiative. The Compuware 3.0 organizational model features a business unit structure for our APM, Changepoint, Mainframe, Uniface, Covisint and Professional Services lines of business. We believe this structure will maximize our market agility and responsiveness, enabling us to capitalize on market conditions and competitive advantages for maximum growth and profitability.
 
 
Our APM solutions offer a complete view of the performance of applications – as well as deep-dive problem resolution – across the enterprise and through the Internet for every end user, all from a single dashboard. With the addition of dynaTrace, our APM solutions now provide visibility into the performance of every transaction, enabling optimal management of key applications throughout the application life cycle.

Our secure collaboration solution, Covisint application services, gives users the ability to easily and securely share key communications, applications and information with employees, customers and partners. Covisint is growing through a targeted focus on industries such as healthcare, automotive and energy that require the secure sharing of complex and distributed data and applications.

While we continue to maintain customer satisfaction in the automotive segment, Covisint is also focused on expanding its healthcare business, which led to the acquisition of certain assets and liabilities of DocSite, LLC during fiscal 2011. We expect that the increasing need for healthcare organizations to share and access patient data, particularly around outcomes-based care and electronic medical records, will be a factor in the growth of this segment of our business.

Changepoint provides a single, automated offering to help professional services organizations forecast and plan, as well as manage resources, projects and client engagements. In addition, for project-centric organizations, Changepoint provides a cohesive and consolidated view of projects, investments, resources and applications to help manage the entire business portfolio.

Uniface is a rapid application development environment for building, renewing and integrating the latest complex enterprise applications. Our strategy with the Uniface solution is to enhance the product with additional features most in demand for developing enterprise applciations, with a recent focus on Rich Internet and mobile applications.

We focus our most mature businesses, mainframe productivity solutions and professional technical services, around sustained profitability, customer retention and targeted growth.

Our mainframe solutions optimize developer productivity, reduce costs and improve service quality throughout the application life cycle. Specifically, we help customers: understand code, optimize test data, test and debug, pinpoint problems, validate quality, and tune applications and performance. To maximize productivity and better enable the next generation of mainframe developers, our solutions work in both a traditional “green screen” environment and a “point and click” environment.

Our professional services solutions offer a broad range of IT services for mainframe, distributed and mobile environments. We believe that the market for professional services will continue to be driven by our customers’ need to grow revenue, support business expansion, adopt the latest technology to meet business demands, manage IT services, and for increased technical staffing for ongoing maintenance. Our business approach to professional services delivery emphasizes hiring highly skilled and experienced staff, ongoing training, high staff utilization and immediate, productive deployment of new personnel at client locations.


BUSINESS SEGMENTS

The following table sets forth, for the periods indicated, a breakdown of total revenue by business segment and the percentage of total revenues for each segment (dollars in thousands):

   
Year Ended March 31,
   
Percentage of Total Revenues
 
Business Segment Revenue
 
2012
   
2011
   
2010
   
2012
   
2011
   
2010
 
                                     
APM
  $ 270,443     $ 231,999     $ 153,973       26.8 %     25.0 %     17.3 %
Mainframe
    419,317       413,332       447,075       41.6       44.5       50.0  
Changepoint
    47,867       39,423       40,000       4.7       4.2       4.5  
Uniface
    46,908       46,307       43,682       4.6       5.0       4.9  
Total software solutions revenue
    784,535       731,061       684,730       77.7       78.7       76.7  
Professional services
    151,506       142,844       153,419       15.0       15.4       17.2  
Application services
    73,731       55,025       40,467       7.3       5.9       4.5  
Total revenue from continuing operations
    1,009,772       928,930       878,616       100.0       100.0       98.4  
                                                 
Divested products revenue*
                    13,563                       1.6  
                                                 
Total revenue
  $ 1,009,772     $ 928,930     $ 892,179       100.0 %     100.0 %     100.0 %
 
*
Divested products relate to our Quality and DevPartner product lines that were sold during fiscal 2010. See note 3 of the consolidated financial statements included in this report for more information on the divestiture.
 
SOFTWARE SOLUTIONS

Our software solutions are comprised of the following business segments: (1) Application Performance Management; (2) Mainframe; (3) Changepoint; and (4) Uniface. Revenue associated with our software solutions consists of software license fees, maintenance fees, subscription fees and professional services fees (software related services). Users of our products include executive management, line of business leadership, IT leadership and staff, IT service providers and professional services organizations. Our solutions support these users in achieving key business and technology goals across all major platforms.

Application Performance Management

Compuware Application Performance Management (“Compuware APM”) consists of our solutions for optimizing the performance of web, non-web, mobile, streaming and cloud applications. Driven by end-user experience, this new generation of application performance management provides coverage of the entire application delivery chain – from the user, through the cloud, to the data center – with deep application visibility by tracing every transaction in production from user-click to code-line. We believe it is one of the most comprehensive APM cloud solutions available, and uniquely provides APM for mobile web and native applications. It provides a common system for production personnel, application developers and test engineers.

dynaTrace Enterprise

Compuware dynaTrace is the on-premises suite of solutions in Compuware APM. It transforms how web and non-web business-critical applications are monitored, managed and optimized throughout the life cycle. dynaTrace monitors all transactions to quickly isolate performance problems down to the exact line of code in order to satisfy end users and maximize business results.
 
 
Our patented PurePath Technology® provides an in-depth view of application behavior and our agentless, network-based capabilities deliver a full breadth of end-user experience monitoring for web and non-web applications across all tiers of complex data center environments.

Gomez Software as a Service

Compuware Gomez is the software as a service (“SaaS”) suite of solutions in Compuware APM. Gomez SaaS helps companies optimize the performance and availability of web, mobile, streaming and cloud applications. Gomez SaaS integrates real-user and synthetic monitoring, providing insight into end user experience. Combined with our 360-degree web load testing, Gomez proactively detects performance issues, quantifies the impact performance has on end-user experience and business results and isolates performance problems down to the exact line of code.

The Gomez Network monitors web sites from more than 150,000 global locations, delivering comprehensive, accurate, and actionable web application performance insight across multiple browsers. Our network extends over:

 
more than 168 countries and more than 2,500 local Internet service providers;
 
more than 150,000 consumer-grade desktops on the Gomez Last Mile; and
 
more than 150 commercial-grade locations and data centers on the Internet backbone.

Software related services

We offer a full range of software related services designed to accelerate the results of customers’ web, non-web and mobile application initiatives which include implementation services, consulting services, web load testing services and managed services. We combine product knowledge with extensive hands-on experience to help clients improve application performance and business results. Compuware APM services provide the education, advice and hands-on support needed to maximize the benefits of the Compuware APM platform.

For fiscal 2012, 2011 and 2010, APM business segment revenue represented approximately 26.8%, 25.0% and 17.3%, respectively, of our total revenues.

Mainframe Software Products and Solutions

Our strategy for mainframe products is 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. In addition, we have enhanced product integration and built new graphical user interfaces to increase the value that 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.

Our mainframe software products improve the productivity of development, maintenance and support teams in application analysis, testing, defect detection and remediation, fault management, file and data management, data compliance and application performance management in the IBM z/OS environment. We believe these products are and will continue to be among the industry’s leading solutions for this platform.

Our mainframe products are functionally rich, focused on customer needs and easy to install, with 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 development, testing, debugging and maintenance activities.

Our mainframe products consist of the following:
 

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 compliance requirements in pre-production test environments.

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. Abend-AID’s automated failure notification speeds problem resolution and reduces downtime.

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 products deliver complete pre-production testing functionality for automating test creation and execution, test results analysis and documentation. Hiperstation also provides application auditing capabilities to address regulatory compliance, security breach analysis and other business requirements. The products simulate the online 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, regression and stress testing.

Strobe products help customers locate and eliminate sources of performance issues and 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. They 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.

The Compuware Workbench is an open source, interactive developer environment that leverages Eclipse. It provides a common framework and single launch-point from which to initiate our mainframe products, as well as the capability to launch other products from one platform. The graphical user interface is familiar to users who are accustomed to developing in a modern development environment, making common mainframe tasks faster and simpler to perform for both experienced developers and those who are new to the mainframe.

Software Related Services

We offer a wide range of services to help organizations ensure high-quality, high-performing mainframe applications, including implementation, consulting, training and managed services. These offerings are designed for maximum value realization and include the following solutions:

Developer Productivity solutions help both experienced and new developers be more efficient as they analyze code, manipulate data, test and debug and resolve application failures.

Test Data Optimization helps to ensure test data sets are right-sized, secure and test out all aspects of an application. We have a team of data privacy specialists that apply best practices to help customers derive maximum benefits from their investment.
 
 
Application Performance Management helps customers control mainframe operational costs with automated, repeatable monitoring processes that measure performance and identify failures. The solution identifies coding inefficiencies causing poor performance and chronic application failures that use too much CPU time.
 
For fiscal 2012, 2011 and 2010, Mainframe business segment revenue represented approximately 41.6%, 44.5% and 51.6%, respectively, of our total revenues.
 
Business Portfolio Management and Professional Services Automation (Changepoint)

Changepoint combines professional services automation with project portfolio management  capabilities to give customers complete visibility into projects, investments and resources for informed business planning and financial control.

Changepoint helps businesses gain competitive advantage and increase profitability through portfolio visibility, planning insight, process automation and improved resource utilization throughout a customer’s life cycle. Changepoint’s business portfolio management services, comprised of professional services automation and project portfolio management help businesses maximize return on investment.

Changepoint SaaS

Changepoint’s SaaS solution has been built with enterprise organizations in mind and is used by professional services organizations and IT departments worldwide. Our solution provides a high degree of security, as well as flexibility and control, while reducing costs. We do all of this while ensuring that the resulting system adheres to the customer’s business model. We manage the installation, administration and maintenance of the solution, and our consultants oversee the process to ensure successful implementation and adoption.

Software Related Services

We provide a wide range of services to help organizations effectively align and manage project, application and infrastructure portfolios, including implementation, consulting, training and managed services. These offerings are designed for maximum value realization and are delivered by world-class services professionals.

For fiscal 2012, 2011 and 2010, Changepoint business segment revenue represented approximately 4.7%, 4.2% and 4.5%, respectively, of our total revenues.
 
Enterprise Application Development (Uniface)

Uniface is Compuware's Rapid Application Development environment for building, renewing and integrating some of the largest and most complex enterprise applications. Uniface helps IT organizations reduce the cost of ownership for business-critical applications and increase the return on investment for the IT budget.

Uniface enables enterprises to meet increasing demand for productively developing complex, secure, global Web 2.0 applications, deployable on any platform including the cloud.

Uniface also offers full technology independence over a wide range of operating systems, databases and third-party technologies. Customers can migrate from one environment to another without changing the Uniface applications.
 
 
Uniface manages upward compatibility so customers can migrate their Uniface applications to higher levels of technology without major investments in re-development.

Software Related Services

We offer a wide range of services to help organizations obtain the most value from their investments in our Uniface products. Our Uniface services are designed to alleviate many of the pressures typically encountered by IT departments. Our solutions include consulting services for both business and technical issues, additional training on the use of our Uniface products, development process optimization and application modernization.

For fiscal 2012, 2011 and 2010, Uniface business segment revenue represented approximately 4.6%, 5.0% and 4.9%, respectively, of our total revenues.

Divested Products

Our Quality and DevPartner products were divested in May 2009 as discussed in note 3 of the consolidated financial statements included in this report. The Quality family of products delivered a full spectrum of automated testing capabilities designed to validate applications running across various distributed environments, isolate and correct problems and ensure that applications would meet performance requirements before they were deployed in production. The DevPartner Studio family of products provided analysis, automation and metrics to help application delivery teams build reliable, high-performance applications and components for Microsoft.NET. These products provided code, memory and performance analysis and measured testing code coverage.

PROFESSIONAL SERVICES

Over the past few years, we have transformed our professional services organization to be more profitable by better aligning our solutions with the pressing needs of our customers. We focused on improving the financial results of the professional service segment, which included exiting low-margin engagements and focusing our resources on more profitable engagements. This improved the segment’s contribution margin but resulted in a significant revenue decline. This transformation was completed in fiscal 2011, and during fiscal 2012, we have experienced year-over-year revenue growth while maintaining higher margins than our historical professional services business. For these more traditional Professional Services engagements, we were employed to plan, design, develop, implement and maintain technology-based solutions that achieved customer business goals. We will continue to provide these solutions as the customer needs them; however, we will focus on growing professional services through our Centers of Excellence.

Our Centers of Excellence are highly specialized groups of talented consultants serving customers looking for flexible, cost-effective, yet high-quality services. These groups are specialized and centralized, yet scalable to meet the unique needs of each customer and the growing needs of many customers. These specialized pools of talent have enabled us to provide differentiated value for customers throughout the United States. As we go forward, we plan to expand the depth and breadth of our specialized solutions to drive both revenue and margin growth.

For fiscal 2012, 2011 and 2010, Professional Services segment revenue represented approximately 15.0%, 15.4% and 17.2%, respectively, of our total revenues.

APPLICATION SERVICES

Our Covisint application services provide a SaaS platform, referred to as the Covisint ExchangeLink, which offers industry-specific solutions for organizations in the automotive, healthcare, and energy markets, and offers support services in seven languages in emerging markets.
 
 
Covisint streamlines and automates business processes, globally connecting business communities, organizations and systems. Companies of all sizes, locations and technical capacities rely on Covisint to enable the secure sharing of vital business information, applications and business processes across their internal and extended enterprise to deliver innovative approaches in solving their business problems.

Covisint uses an industry-centric approach that leverages deep expertise and state-of-the-art technology to address industry specific needs. With this approach, Covisint bridges the gap created by dissimilar business systems, and allows businesses to work with the myriad of processes and technologies used by its partners.

The Covisint ExchangeLink network allows us to provide four types of services: (1) Collaboration Portal Services; (2) Identity Services; (3) Data Exchange Services; and (4) AppCloud:

Collaboration Portal Services are based on a highly scalable, reliable, and secure service-oriented architecture solution that is deployed using a SaaS model to provide a secure, modular framework that supports sharing information and applications with entities outside the organization.

Identity Services allow organizations to securely share information and provide access to internal and external applications to all users (employees, supplier, business partner, etc.).  Identity Services provide a broad range of identity management features that can be utilized to implement industry standard and custom identity management solutions.

Data Exchange Services (“DES”) support mission critical processes for companies worldwide by offering industry compliant electronic data interchange (“EDI”) solutions for companies of any size or complexity. Supporting a broad range of system interfaces, document types and protocols, DES provide the flexibility and power for a secure global EDI and business-to-business messaging solution.

AppCloud provides a self-service environment that allows a single point of integration for application providers who want to share their applications and/or data with Covisint user communities. It also provides sponsoring organizations with a single location to obtain business relevant third-party applications for their users.

In addition, through the acquisition of certain assets and liabilities of DocSite in September 2010, Covisint offers clinical decision support, quality performance management and health information exchange focused on making better patient care easier for physicians across all specialties.

For fiscal 2012, 2011 and 2010, Covisint application services segment fees represented approximately 7.3%, 5.9% and 4.5%, respectively, of our total revenue.

SEASONALITY

Although revenues in the second quarter of fiscal 2012 exceeded those in the third quarter, we generally experience a higher volume of product transactions and associated license revenue in the quarter ended December 31, which is our third fiscal quarter, and the quarter ended March 31, which is our fourth fiscal quarter, as a result of customer spending patterns.


SOFTWARE LICENSING, PRODUCT MAINTENANCE AND CUSTOMER SUPPORT

We license software to customers using two types of software licenses, perpetual and time-based. Generally, perpetual software licenses allow customers a perpetual right to run our software on hardware up to a licensed aggregate MIPS (Millions of Instructions Per Second) capacity or to run our distributed software for a specified number of users, servers or operating system instances (“OSIs”). Time-based licenses allow customers a right to run our software for a limited period of time on hardware up to a licensed aggregate MIPS capacity or for a specific number of users, servers or OSIs. We also offer perpetual or time-based licenses that allow our customers a right to run our mainframe software with an unlimited MIPS capacity.

Our customers purchase maintenance and support services that provide technical support and advice, including problem resolution services and assistance in product installation, error corrections and any product enhancements released during the maintenance period. Maintenance and support services are provided online, through our FrontLine technical support web site, by telephone access to technical personnel located in our development labs and by support personnel in the offices of our foreign subsidiaries and distributors.

Licensees have the option of renewing their maintenance agreements on an annual or multi-year basis for an annual fee based on the price of the licensed product. We also enter into agreements with our customers that allow them to license software and purchase multiple years of maintenance in a single transaction (“multi-year transactions”). In support of these multi-year transactions, we allow extended payment terms to qualifying customers.

We believe that effective support of our customers and products for the maintenance term is a substantial factor in product satisfaction and incremental product sales. We believe our installed base is a significant asset and intend to continue to provide customer support and product enhancements to ensure a continuing high level of customer satisfaction. In fiscal 2012, 2011 and 2010, we experienced high customer maintenance renewal rates.

For fiscal 2012, 2011 and 2010, software license fees represented approximately 21.9%, 21.0% and 21.8%, respectively, and maintenance fees represented approximately 42.3%, 45.1% and 49.3%, respectively, of our total revenues.

BACKLOG

We consider backlog orders for our software solutions segments to be contractually committed arrangements with a customer for which the associated revenue has not been recognized.  For these segments, we record the unrecognized amount of each contractually committed arrangement as deferred revenue in our consolidated balance sheet; therefore the deferred revenue balances are equal to the segment’s backlog balance. We tend to experience a higher volume of product transactions including maintenance renewals in our third and fourth fiscal quarters. For our software solutions segments, the deferred revenue or backlog balance was $778.4 million and $820.6 million as of March 31, 2012 and 2011, respectively. The amount of the March 31, 2012 backlog not expected to be recognized in fiscal 2013 is $348.3 million which is recorded as non-current deferred revenue in our consolidated balance sheet.

For our professional services segment, the majority of our services contracts are terminable by the client. Therefore, there is substantially no backlog for these arrangements.

For our Covisint application services segment, we consider the backlog balance to be future years of contractually committed arrangements. As of March 31, 2012 and 2011, the backlog balance associated with our Covisint application services segment was $106.0 million and $63.4 million, respectively, of which $42.0 million and $35.5 million, respectively, was billed and included in deferred revenue. During fiscal 2012, we renewed two application services agreements with our largest customer. These renewals committed this customer for three and five years and represent $12.8 million and $16.1 million, respectively, of the backlog as of March 31, 2012. The amount of the March 31, 2012 backlog not expected to be recognized in fiscal 2013 is $60.9 million.


CUSTOMERS

Our products and services are used by the IT departments and lines of business of a wide variety of commercial and government organizations.

We did not have a single customer that accounted for greater than 10% of total revenue during fiscal 2012, 2011 or 2010, or greater than 10% of accounts receivable at March 31, 2012 and 2011.
 
RESEARCH AND DEVELOPMENT
 
We have been successful in developing acquired products and technologies into marketable software. Our research and development organization is primarily focused on enhancing and strengthening the capabilities of our current software solutions, web performance services network and application services network along with designing and developing new application services.

We believe that our future growth lies in part in continuing to identify promising technologies from all potential sources, including independent software developers, customers, other companies and internal research and development.
 
As of March 31, 2012, development and support activities associated with our software solutions and application services are performed primarily at our headquarters in Detroit, Michigan (Mainframe, APM and Covisint) and at our development labs in Amsterdam, The Netherlands (Uniface); Gdansk, Poland (APM); Linz, Austria (APM); Toronto, Canada (Changepoint); Lexington, Massachusetts (APM); and Beijing, China (APM).

Total research and development (“R&D”) cost was $87.2 million, $69.2 million and $65.8 million, respectively, during fiscal 2012, 2011 and 2010, of which $23.2 million, $15.5 million and $9.8 million, respectively, was capitalized for internally developed software technology. The R&D costs relating to our software solutions are reported as “technology development and support” in the consolidated statements of comprehensive income, and the portion related to our application services is reported as “cost of application services”.
 
TECHNOLOGY AND NETWORK OPERATIONS

Web Performance Subscription Services

We designed our web performance services as multi-tenant networked computing applications and deliver those services entirely through an on-demand, hosted model. As such, we provide customer provisioning, application installation, application configuration, server maintenance, server co-location, data center maintenance, short-term data backup and data security.

Our web performance services enable a customer to test and monitor the web experience from outside its firewall using the Gomez Performance Network, which encompasses the following:

 
over 160 backbone nodes located in more than 33 countries, and 32 mobile carriers in 10 countries.

 
our central data warehouse and five other third-party data center facilities.

 
our portal to our customer data warehouse.
 
 
Our backbone nodes are measurement computers, or sets of multiple computers, co-located at the data center facilities of major telecommunication providers. In addition, backbone nodes can be configured for use exclusively by a single customer as part of our Private Network XF service.
 
In order to establish our last mile measurement points, we engage individuals, or peers, located in more than 120 countries to provide bandwidth and computing resources on personal computers connected via local Internet service providers.

Our backbone nodes and last mile measurement points emulate a user accessing a web application from a web browser. As the software accesses the web application and executes transactions as a user would, it performs timing and availability measurements for the objects that comprise the web pages it traverses. When a customer measures the web experience using our backbone nodes or last mile measurement points, the test results and other measurement data are collected and stored in near-real-time at our data warehouses. Customers can access our Gomez portal in order to reach the measurement data that have been captured in our data warehouses.

We service customers from six third-party data center facilities, including our central data warehouse. Three of these facilities are located in Massachusetts, one in Texas, one in Virginia and one in China. Our data centers are designed to be scalable and to support control and data replication for large numbers of measurement nodes. Each of the facilities has multiple high bandwidth interconnects to the Internet.

Covisint Application Services Network

Our application services are delivered through an on-demand, hosted model providing access across the globe referred to as the Covisint ExchangeLink Network. The network’s primary data center is hosted by a Savvis Communications Generation 5 facility located in Elk Grove, Illinois and is connected globally through a federated network that interconnects to Network Access Points (“NAP”) located in Shanghai, China; Frankfurt, Germany; and Tokyo, Japan. These NAPs are used to support local network protocols and reduce network latency and are hosted by a major telecommunications provider. The network connections between our primary data center and the NAPs are fully redundant, high speed Internet connections using content caching to reduce network latency. Covisint’s disaster recovery center is located in our headquarters building in Detroit, Michigan.

SALES AND MARKETING

We market software solutions including web performance services and software related professional services primarily through a direct sales force in the United States, Canada, Europe, Japan, Asia-Pacific, Brazil and Mexico; an inside sales force in Detroit, Michigan, Lexington, Massachusetts and Maidenhead, England for our web performance services; and through independent distributors and partners, giving us a presence in approximately 60 countries. We market our professional and application services primarily through account managers located in offices throughout North America. This marketing structure enables us to keep abreast of, and respond quickly to, the changing needs of our customers and to call on the actual users of our products and services on a regular basis.

COMPETITION
 
The markets for our software solutions are highly competitive and characterized by continual change and improvement in technology. We consider more than 40 firms to be directly competitive with one or more of our products. These competitors include BMC Software Inc., CA, Inc., International Business Machines (“IBM”) and Hewlett-Packard Company. Some of these competitors have substantially greater financial, marketing, recruiting and training resources than we do. The principal competitive factors affecting the market for our software products include: responsiveness to customer needs; functionality, performance and reliability of our software products; ease of use; quality of customer support; vendor reputation; distribution channels; and price.
 
 
The distributed software market in which we operate has many more competitors than our traditional mainframe market. Our ability to compete effectively and our growth prospects depend upon many factors, including the success of our existing distributed products, the timely introduction and success of future software products, the ability of our products to interoperate and perform well with applications in a customer’s environment and our ability to bring products to market that meet ever-changing customer requirements.

The market for our web performance services is competitive and rapidly changing. Our competitors currently include Keynote Systems, Inc., Hewlett-Packard Company, NeuStar, Inc. and a number of smaller, privately held companies. The principal competitive factors affecting the market for our web performance services include real-time availability of data and reporting; the proven performance, security, scalability, flexibility and reliability of services offered; the usability of services offered, including ease of implementation and use; number of measurement points; and pricing.

The market for professional services is highly competitive, fragmented and characterized by low barriers to entry. Our principal competitors include Accenture, Computer Sciences Corporation, HP Enterprise Services (a Hewlett-Packard Company), IBM Global Services, Analysts International Corporation, Infosys Technologies and numerous other regional and local firms in the markets in which we have professional services offices. Several of these competitors have substantially greater financial, marketing, recruiting and training resources than we do. The principal competitive factors affecting the market for our professional services include responsiveness to customer needs, breadth and depth of technical skills offered, availability and productivity of personnel, the ability to demonstrate achievement of results and price.

The market for application services includes communication and collaboration services, user identity and access management services and system-to-system communications provided in a SaaS model. We provide application services primarily in the automotive, healthcare and energy vertical markets (“verticals”). The application services market is highly competitive. Our principal competitors within the automotive and healthcare verticals include HP Enterprise Services, IBM Global Services, WiPro, SAP, Optum and other regional and local firms in the markets in which we have customers or potential customers. Some key competitive factors are speed of implementation, reduced capital investment, reduced risk related to regulatory compliance and implementation problems, inclusion of state of the art technology features, solution performance, ability to meet customer service level requirements and price.

A variety of external and internal events and circumstances could adversely affect our competitive capacity. Our ability to remain competitive will depend, to a great extent, upon our performance in product development and customer support, effective sales execution and our ability to acquire and integrate new technologies. To be successful in the future, we must respond promptly and effectively to the challenges of technological change and our competitors' innovations by continually enhancing our own software solutions, professional services and application services.
 
PROPRIETARY RIGHTS

We regard our intellectual property and technology as proprietary trade secrets and confidential information. We rely largely upon a combination of trade secret, copyright and trademark laws together with our license and service agreements with customers and our internal security systems, confidentiality procedures and employee agreements to maintain the trade secrecy of our intellectual property and technology. We typically provide our products to users under nonexclusive, nontransferable, perpetual licenses. We protect our proprietary rights under license agreements which define how our customers use our products. Under certain limited circumstances, we may be required to make source code for our products available to our customers under an escrow agreement, which restricts access to and use of the source code. Although we take steps to protect our trade secrets, there can be no assurance that misappropriation will not occur. In addition, the laws of some foreign countries do not protect our proprietary rights to the same extent as the laws of the United States.
 
 
In addition to trade secret protection, we seek to protect our software technology, documentation and other written materials under copyright law, which affords only limited protection. We also assert registered trademark rights in our product names. As of March 31, 2012, we have been granted 48 patents issued primarily in the United States and have 32 patent applications pending primarily with the United States Patent and Trademark Office for certain product technology and have plans to seek additional patents in the future. Once granted, we expect the duration of each patent will be up to 20 years from the effective date of filing of an application. Our earliest issued patent date is in 1992. In addition, we are a party to a patent cross license agreement with IBM under which each party is granted a perpetual, irrevocable, nonexclusive license to certain of each other's patents issued or pending prior to March 21, 2009.

Because the industry is characterized by rapid technological change, we believe that factors such as the technological and creative skills of our personnel, new technology developments, frequent software enhancements, name recognition and reliable product maintenance are more important to establishing and maintaining a technology leadership position than legal protection of our technology.

There can be no assurance that third parties will not assert infringement claims against us with respect to current and future products and technology or that any such assertion will not require us to enter into royalty arrangements that could require a payment to the third party upon sale of the product, or result in costly litigation.

EMPLOYEES

As of March 31, 2012, we employed 4,564 people worldwide, with 1,047 in software solution sales, sales support and marketing; 1,202 in technology development and support, maintenance and network operations; 1,426 in professional services (including 296 personnel dedicated to software related services), 338 in Covisint application services and 551 in other general and administrative functions. Only a small number of our international employees are represented by labor unions. We have experienced no work stoppages and believe that our relations with our employees are good. Our success will depend in part on our continued ability to attract and retain highly qualified, experienced and talented personnel.

Executive Officers of the Registrant

Our current executive officers, which serve at the discretion of our Board of Directors, are listed below:

Name
 
Age
 
Position
         
Peter Karmanos, Jr.
 
69
 
Executive Chairman of the Board
         
Robert C. Paul
 
49
 
Chief Executive Officer and member of the Board of Directors
         
Joseph R. Angileri
 
54
 
President and Chief Operating Officer
         
Laura L. Fournier
 
59
 
Executive Vice President and Chief Financial Officer
         
Denise A. Knobblock Starr
 
57
 
Executive Vice President and Chief Administrative Officer
         
Daniel S. Follis, Jr.
 
46
 
Vice President, General Counsel and Secretary
         
Patrick A. Stayer
 
48
 
Chief Sales Officer and Mainframe General Manager
 
 
Peter Karmanos, Jr., is a founder of the Company and currently serves as Executive Chairman of the Board of Directors. Mr. Karmanos served as Chairman of the Board from November 1978 until June 2011, as Chief Executive Officer from July 1987 until June 2011 and as President from January 1992 through October 1994 and October 2003 through March 2008.
 
Robert C. Paul was appointed as Chief Executive Officer in June 2011. Mr. Paul served as President and Chief Operating Officer of Compuware from April 2008 until June 2011 and was appointed a member of the Board of Directors in March 2010. Prior to that time, Mr. Paul was President and Chief Operating Officer of Covisint since its acquisition by Compuware in March 2004.

Joseph R. Angileri joined Compuware in June 2011 as President and Chief Operating Officer. Prior to joining Compuware, Mr. Angileri had more than 26 years of professional experience with Deloitte LLP, including more than 20 years as a partner there, most recently as Managing Partner of the Michigan region.

Laura L. Fournier has served as Executive Vice President since April 2008 and as Chief Financial Officer 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.

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.

Patrick A. Stayer served as Senior Vice President, Worldwide Product Sales from March 2009 to April 2012 and as a Regional Vice President in our Dallas office from March 1992 to December 2000. Effective April 2012, Mr. Stayer serves as the Chief Sales Officer and Mainframe General Manager.
 
SEGMENT INFORMATION, PAYMENT TERMS AND FOREIGN REVENUES

For a description of revenues and operating profit by segment and for financial information regarding geographic operations for each of the last three fiscal years, see note 1 of the consolidated financial statements included in this report. Customer revenue is allocated to geographic operations based on the country in which the products were sold or the services were performed. For a description of extended payment terms offered to some customers, see note 1 of the consolidated financial statements included in this report. The Company’s foreign operations are subject to risks related to foreign exchange rates and other risks. For a discussion of risks associated with our foreign operations, see Item 1A. Risk Factors and Item 7A. Quantitative and Qualitative Disclosure about Market Risk.
 
ITEM 1A.

An investment in our common stock is subject to risks inherent to our business. The material risks and uncertainties that we believe may affect us are described below. The risks and uncertainties described below are not the only ones we face. Additional 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. 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.
 
 
A substantial portion of our mainframe segment revenue is dependent on our customers’ continued use of International Business Machines Corporation and IBM-compatible products.
A substantial portion of our revenue from software solutions is generated from products designed for use with IBM and IBM-compatible mainframe operating systems. As a result, much of our revenue from software solutions is dependent on our customers’ continued use of these systems. In addition, because our products operate in conjunction with IBM operating systems software, changes to IBM’s mainframe operating systems may require us to adapt our products to these changes. IBM also provides competing products designed for use with their mainframe operating systems. Due to the maturity of this market, we do not anticipate organic growth in this segment during the coming years. A decline in our customers’ use of IBM and IBM-compatible mainframe operating systems, our inability to keep our products current with changes to IBM’s mainframe operating systems on a timely basis, or the loss of market share to IBM’s competing products could have a material adverse effect on our license and maintenance revenue in this segment, negatively impacting our results of operations and cash flow.

Changes in the financial services industry could have a negative impact on our revenue and margins.
Approximately 20% of our mainframe revenue and 15% of our professional services revenue is generated from customers in the financial services industry.  Future changes in the financial services industry, including mergers, restructurings or failures, could have a material adverse effect on our mainframe license and maintenance revenue and on our professional services revenue, negatively impacting our results of operations and cash flow.

Our product revenue is dependent on the acceptance of our pricing structure for software licenses, maintenance services and web performance services.
The pricing of our software licenses, maintenance services and web performance services is under constant pressure from customers and competitive vendors that can negatively impact our product revenue. These competitive pressures could have a material adverse effect on our results of operations and cash flow.

Maintenance revenue could decline.
Our maintenance revenue from time to time has been negatively affected by reduced pricing for mainframe maintenance renewals and the decline in new mainframe maintenance arrangements. If we are unable to increase new product sales and maintenance contract renewals to outpace the combined impact of maintenance cancellations, reduced pricing for maintenance renewals and currency fluctuations, our maintenance revenues will decline, which could have a material adverse effect on our results of operations and cash flow.

Our primary source of profitability is from our mainframe segment. If revenues in this segment decline before we significantly increase margins in other operating segments, our profitability may decline.
Our mainframe segment generates significantly higher contribution margins than our other segments some of which are currently generating losses.  We expect our future revenue growth to come primarily from our APM and application services segments.  A significant decline in mainframe revenue prior to these segments obtaining significant improvements in their respective contribution margins could have a material negative impact on our results of operations and cash flow.

The markets for web performance services are at an early stage of development with emerging competitors. If these markets do not develop or develop more slowly than we expect, or if there is an increase in competition, our revenue may decline or fail to grow.
 
 
We derive revenue from providing on-demand web performance services. While web applications have become increasingly significant for a growing number of companies, the market for web performance services is in an early stage of development, and it is uncertain whether these services will achieve and sustain high levels of demand and market acceptance. Growth in revenue generated from these services will depend on the willingness of organizations to increase their use of web performance services. Some businesses may be reluctant or unwilling to use these services for a number of reasons, including failure to perceive the need for improved testing and monitoring of web applications and lack of knowledge about the potential benefits these services may provide. This market is also competitive and rapidly changing, and several of our competitors have greater financial and marketing resources than we do. As a result, our competitors may be more efficient and effective at achieving the following principal competitive factors affecting the market for web performance services: real-time availability of data and reporting, the proven performance, security, scalability, flexibility and reliability of services offered; the usability of services offered, including ease of implementation and use; number of measurement points; and pricing. If we are less successful at achieving one or more of these factors than our competitors or the demand for web performance services declines or does not grow, we may lose market share which could have a material adverse effect on our business, financial condition and operating results.

The success of our combined dynaTrace enterprise and Gomez SaaS solutions is dependent on customer acceptance of these offerings.
Our on-premises and web performance services solutions are currently sold within the APM market. We have begun to market solutions that combine on-premises solutions with our web performance services, integrating components of our on-premises and our web performance services solutions into a single solution that measures the performance of our customer’s web application delivery chain. The level of customer acceptance regarding this and other combined solutions is difficult to estimate since we believe there are no comparable solutions in the APM market and because the APM market is relatively new and rapidly changing. The level of acceptance of our APM solutions as value added by current and potential customers will impact sales volume and pricing of the APM solutions and can be negatively impacted by competition, our customers’ ability to effectively implement the solutions and the perceived value customers receive from the performance information provided by the solutions. We consider our combined APM solutions to be an integral part of our revenue growth in the future. If these combined solutions are not perceived as value added by customers within the APM market, we may not meet our future revenue projections for our on-premises solutions and web performance services and our results of operations could be negatively impacted.

The market for application services is in its early stages of development with emerging competitors. As the market matures, competition may increase and could have a material negative impact on our results of operations.
Several of our competitors in the application services market have substantially greater financial, marketing, recruiting and training resources than we do. As a result, our competitors may be more efficient and effective at achieving the following principal competitive factors affecting the market for application services: speed of implementation, reduced risk related to regulatory compliance and implementation problems, inclusion of state of the art technology features, solution performance, ability to meet customer service level requirements and price. If we are less successful at achieving one or more of these factors than our competitors, we may lose market share which could have a material adverse effect on our business, financial condition and operating results.

If we are not successful in maintaining our professional services strategy, our margins may decline materially.
Our business strategy for the professional services segment is to sustain the segment’s contribution margin by requiring certain margin thresholds for all new business and managing the segment operating expenses accordingly. If our customers do not accept the billing rates necessary to achieve these minimum thresholds, our revenues and margins may be negatively impacted which could have a material adverse effect on our results of operations and cash flow.
 
 
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 revenues, particularly our software license revenues, are difficult to forecast. Software license revenues in any quarter are substantially dependent on orders booked in the quarter. Our sales personnel monitor the status of all proposals and estimate when a customer will make a purchase decision and the dollar amount of the sale. These estimates are aggregated periodically to generate the sales forecast. Our sales forecast estimates could prove to be unreliable both in a particular quarter and over a longer period of time as a significant amount of our transactions are completed during the final weeks and days of the quarter. Therefore, we generally do not know whether revenues or earnings will have met expectations until after the end of the quarter. Also, the manner in which our customers license our products can cause revenues to be deferred or recognized ratably over time.  These changes in the mix of customer agreements could adversely affect our revenues. As a result, our actual financial results can vary substantially from our forecasted results.

In addition, investors should not rely on the results of prior periods or on historical seasonality in license revenue as an indication of our future performance. Our operating expense levels are relatively fixed in the short-term and are based, in part, on our expectations of future revenue. If we have unanticipated lower sales in any given quarter, we will not be able to reduce our operating expenses for that quarter proportionately in response. Therefore, net income may be disproportionately affected by a fluctuation in revenue.

Any significant shortfall in revenues or earnings, or lowered expectations could cause our common stock price to decline.

Economic uncertainties or slowdowns may reduce demand for our products and services, which may have a material adverse effect on our revenues and operating results.
Our revenues and profitability depend on the overall demand for our software products, web performance services, professional services and application services. Economic uncertainties over the last few years have resulted in companies reassessing their spending for technology projects. If the economies within the United States and/or other geographic regions in which we operate experience a slowdown or recession, it could have a material adverse effect on our results of operations and cash flow.

Defects or disruptions in our web performance services or application services networks or interruptions or delays in service would impair the delivery of our on-demand service and could diminish demand for our services and subject us to substantial liability.
Defects in our web performance services or application services networks could result in service disruptions for our customers. Our network performance and service levels could be disrupted by numerous events, including natural disasters and power losses. We might inadvertently operate or misuse the system in ways that could cause a service disruption for some or all of our customers. We might have insufficient redundancy or server capacity to address any such disruption, which could result in interruptions in our services or degradations of our service levels. Our customers might use our web performance services in ways that cause a service disruption for other customers. These defects or disruptions could undermine confidence in our services and cause us to lose customers or make it more difficult to attract new ones, either of which could have a material adverse effect on our results of operations and cash flow.

Future changes in the U.S. domestic automotive manufacturing business could reduce demand for our professional services and Covisint application services, which may have a material negative effect on our revenues and operating results.
A substantial portion of our worldwide professional services revenue and the Covisint application services revenue has been generated from customers in the automotive industry, with General Motors Company currently our largest customer.
 
 
Negative developments in this industry, including restructuring, cost reduction efforts and bankruptcies, could reduce the demand for our services and increase the collection risk of accounts receivable from these customers, which could have a material adverse effect on our professional and application services results of operations and margins in these business segments.

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.
We evaluate our long-lived assets, including property and equipment, goodwill, acquired product rights and other intangible assets, whenever events or circumstances occur that may indicate these assets are impaired or periodically as required by generally accepted accounting principles. In the continuing process of evaluating the recoverability of the carrying amount of our long-lived assets, there is the possibility that we could identify a substantial impairment, which could have a material adverse effect on our results of operations.

Our software technology may infringe the proprietary rights of others.
Our software technology is developed or enhanced internally or acquired through acquisitions.

All employees sign an agreement that states the employee was hired for his or her talent and skill rather than for any trade secrets or proprietary information of others of which he or she may have knowledge. Further, our employees execute an agreement stating that work developed for us or our clients belongs to us or our clients, respectively.

During the due diligence stage of any software technology acquisition, we research and investigate the title to the software technology we would be acquiring from the seller. This investigation generally includes without limitation, litigation searches, copyright and trademark searches, review of development documents and interviews with key employees of the seller regarding development, title and ownership of the software technology being acquired. The acquisition agreement itself generally contains representations, warranties and covenants concerning the title and ownership of the software technology as well as indemnification and remedy provisions in the event the representations, warranties and covenants are breached by the seller.

Although we use all reasonable efforts to ensure we do not infringe on third party intellectual property rights, there can be no assurance that third parties will not assert infringement claims against us with respect to our current and future software technology or that any such assertion will not require us to enter into royalty arrangements or result in costly litigation.

Our results could be adversely affected by increased competition, pricing pressures and technological changes within the software products market.
The markets for our software products are highly competitive. We consider over 40 firms to be directly competitive with one or more of our products and several of these have greater financial and marketing resources than we do.  The principal competitive factors affecting the market for our software products include: responsiveness to customer needs, functionality, performance, reliability, ease of use, quality of customer support, sales channels, vendor reputation and price. A variety of external and internal events and circumstances could adversely affect our competitive capacity. Our ability to remain competitive will depend, to a great extent, upon our performance in sales, product development and customer support. To be successful in the future, we must respond promptly and effectively to our customers’ purchasing methodologies, challenges of technological change and our competitors' innovations by continually enhancing our product offerings.

We operate in an industry characterized by rapid technological change, evolving industry standards, changes in customer requirements and frequent new product introductions and enhancements. If we fail to keep pace with technological change in our industry, such failure would have an adverse effect on our revenues. During the past several years, many new technological advancements and competing products entered the marketplace. To the extent that our current product portfolio does not meet such changing requirements, our revenues will suffer. Delays in new product introductions or less-than-anticipated market acceptance of these new products are possible and could have a material adverse effect on our revenues.
 
 
Developers of third party products, including operating systems, databases, systems software, applications, networks, servers and computer hardware, frequently introduce new or modified products. These new or modified third party products could incorporate features which perform functions currently performed by our products or could require substantial modification of our products to maintain compatibility with these companies’ hardware or software. While we have generally been able to adapt our products and our business to changes introduced by new or modified third party product offerings, there can be no assurance that we will be able to do so in the future. Failure to adapt our products in a timely manner to such changes or customer decisions to forego the use of our products in favor of those with comparable functionality contained either in the hardware or other software could have a material adverse effect on our results of operations and cash flow.

The market for professional services is highly competitive, fragmented and characterized by low barriers to entry.
We have numerous competitors in the professional services markets in which we operate. Several of these competitors have substantially greater financial, marketing, recruiting and training resources than we do. The principal competitive factors affecting the market for our professional services include responsiveness to customer needs, breadth and depth of technical skills offered, availability and productivity of personnel, the ability to demonstrate achievement of results and price. There is no assurance that we will be able to compete successfully in the future.

We must develop or acquire product enhancements and new products to succeed.
Our success depends in part on our ability to develop product enhancements and new products that keep pace with continuing changes in technology and customer preferences. The majority of our products have been developed from acquired technology and products. We believe that our future growth lies, in part, in continuing to identify, acquire and then develop promising technologies and products. While we are continually searching for acquisition opportunities, there can be no assurance that we will continue to be successful in identifying, acquiring and developing products and technology. If any potential acquisition opportunities are identified, there can be no assurance that we will consummate and successfully integrate any such acquisitions and there can be no assurance as to the timing or effect on our business of any such acquisitions. Our failure to develop technological improvements or to adapt our products to technological change may, over time, have a material adverse effect on our business.

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.
As part of our overall strategy, we have acquired or invested in, and plan to continue to acquire or invest in, complementary companies, products, and technologies and may enter into joint ventures and strategic alliances with other companies. Risks commonly encountered in such transactions include: the difficulty of assimilating the operations and personnel of the combined companies; the risk that we may not be able to integrate the acquired technologies or products with our current products and technologies; the potential disruption of our ongoing business; the inability to retain key technical, sales and managerial personnel; the inability of management to maximize our financial and strategic position through the successful integration of acquired businesses; the risk that revenues from acquired companies, products and technologies do not meet our expectations; and decreases in reported earnings as a result of charges for in-process research and development and amortization of acquired intangible assets.

For us to maximize the return on our investments in acquired companies, the products of these entities must be integrated with our existing products. These integrations can be difficult and unpredictable, especially given the complexity of software and that acquired technology is typically developed independently and designed with no regard to integration. The difficulties are compounded when the products involved are well-established because compatibility with the existing base of installed products must be preserved. Successful integration also requires coordination of different development and engineering teams. This too can be difficult and unpredictable because of possible cultural conflicts and different opinions on technical decisions and product roadmaps. There can be no assurance that we will be successful in our product integration efforts or that we will realize the expected benefits.
 
 
With each of our acquisitions, we have initiated efforts to integrate the disparate cultures, employees, systems and products of these companies. Retention of key employees is critical to ensure the continued development, support, sales and marketing efforts pertaining to the acquired products. We have implemented retention programs to keep many of the key technical and sales employees of acquired companies. Nonetheless, we have lost some key employees and may lose others in the future.

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.
Over one-third of our total revenues are derived from foreign operations and we expect that foreign operations will continue to generate a significant percentage of our total revenues. Products and services are generally priced in the currency of the country in which they are sold. Changes in the exchange rates of foreign currencies or exchange controls may adversely affect our results of operations. The international business environment is also subject to other risks, including the need to comply with foreign and U.S. laws and the greater difficulty of managing business operations overseas. In addition, our foreign operations are affected by general economic conditions in the international markets in which we do business. A worsening of economic conditions in these markets could cause customers to delay or forego decisions to license new products or to reduce their requirements for professional and application services.

Current laws may not adequately protect our proprietary rights.
We regard our software as proprietary and attempt to protect it with copyrights, trademarks, trade secret laws and/or restrictions on disclosure, copying and transferring title. Despite these precautions, it may be possible for unauthorized third parties to copy certain portions of our products or to obtain and use information that we regard as proprietary. We have many patents and many patent applications pending. However, existing patent and copyright laws afford only limited practical protection. In addition, the laws of some foreign countries do not protect our proprietary rights to the same extent as the laws of the United States. Any claims against those who infringe on our proprietary rights can be time consuming and expensive to prosecute, and there can be no assurance that we would be successful in protecting our rights despite significant expenditures.

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.
Our success depends in part upon the continued service of our key senior management and technical personnel. Such personnel are employed at-will and may leave Compuware at any time. Our success also depends on our continuing ability to attract and retain highly qualified technical, managerial and sales personnel. The market for professional services and software products personnel has historically been, and we expect that it will continue to be, intensely competitive. There can be no assurance that we will continue to be successful in attracting or retaining such personnel. The loss of certain key employees or our inability to attract and retain other qualified employees could have a material adverse effect on our business.

Unanticipated changes in our effective tax rates, or exposure to additional income tax liabilities, could affect our profitability.
We are subject to income taxes in both the United States and numerous foreign jurisdictions. Significant judgment is required in determining our worldwide provision for income taxes. One of the components that needs to be evaluated is the realization of our deferred tax assets. We must assess the likelihood that our deferred tax assets will be recovered from future taxable income and, to the extent we believe that recovery is not likely, we must establish a valuation allowance. Changes in estimates of projected future operating results or in assumptions regarding our ability to generate future taxable income could result in significant increases to our total valuation allowance and tax expense that would reduce net income.
 
 
In addition, we recognize reserves for uncertain tax positions through tax expense for estimated exposures related to our current and historical tax positions. We evaluate the need for reserves for uncertain tax positions on a quarterly basis and any change in the amount will be recorded in our results of operations, as appropriate. It could take several years to resolve certain of these reserves for uncertain tax positions.

We are also subject to routine corporate income tax audits in the jurisdictions in which we operate. Our provision for income taxes includes amounts intended to satisfy income tax assessments that are likely to result from the examination of our corporate tax returns that have been filed in these jurisdictions. The amounts ultimately paid upon resolution of these examinations could be materially different from the amounts included in the provision for income taxes and result in increases to tax expense.

Our stock repurchase plan may be suspended or terminated at any time, which may result in a decrease in our stock price.
We have repurchased shares of our common stock in the market during the past several years and currently repurchase shares under an arrangement pursuant to which management is permitted to determine the amount and timing of repurchases in its discretion subject to an overall limit. Our ability and willingness to repurchase shares is subject to, among other things, the availability of cash resources and credit at rates and upon terms we believe are prudent. Stock market conditions, the market value of our common stock and other factors may also make it imprudent for us from time to time to engage in repurchase activity. There can be no assurance that we will continue to repurchase shares at historic levels or at all. If our repurchase program is curtailed, our stock price may be negatively affected.

Acts of terrorism, acts of war 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.
Natural disasters, acts of war, cyber attacks, terrorist attacks and the escalation of military activity in response to such attacks or otherwise may have negative and significant effects, such as imposition of increased security measures, changes in applicable laws, market disruptions and job losses. Such events may have an adverse effect on the economy in general. Moreover, the potential for future terrorist or cyber attacks and the national and international responses to such threats could affect the business in ways that cannot be predicted. The effect of any of these events or threats could have a material adverse effect on our business, financial condition and results of operations.

Our articles of incorporation, bylaws and rights agreement as well as certain provisions of Michigan law may have an anti-takeover effect.
Provisions of our articles of incorporation and bylaws, Michigan law and the Rights Agreement, dated October 25, 2000, as amended, between Compuware Corporation and Computershare Trust Company, N.A., as rights agent, could make it more difficult for a third party to acquire Compuware, even if doing so would be perceived to be beneficial to shareholders. The combination of these provisions inhibits a non-negotiated acquisition, merger or other business combination involving Compuware, which, in turn, could adversely affect the market price of our common stock.
 

None
 
 
ITEM 2.

Our executive offices, our Mainframe and some of our APM research and development labs, principal marketing department, primary professional and application services office, customer service and  support teams for mainframe and APM are located in our corporate headquarters building in Detroit, Michigan. We own the facility, which is approximately 1.1 million square feet, including approximately 291,000 square feet designated for lease to third parties for office, retail and related amenities and approximately 3,200 square feet donated for use by local not-for-profit organizations. In addition, we lease approximately 217,000 square feet of land on which the facility resides.

We lease approximately 81 sales offices (all supporting software solutions) and professional services offices in 29 countries, including 6 remote product research and development facilities (see “Research and Development” section in Item 1 of this report for additional information).
 

We are subject to various legal proceedings and claims that arise in the ordinary course of business. We do not believe that the outcome of any of these legal matters will have a material effect on our consolidated financial position, results of operations or cash flows.
 
 
Not applicable.
 
PART II
 

Our common stock is traded on The NASDAQ Global Select Market (“NASDAQ”) under the symbol CPWR. As of May 22, 2012, there were 3,727 shareholders of record of our common stock. We have not paid any cash dividends on our common stock since fiscal 1986 and have no current intention to pay dividends. The following table sets forth the range of high and low sale prices for our common stock for the periods indicated, all as reported by NASDAQ.

Fiscal Year Ended March 31, 2012
 
High
   
Low
 
Fourth quarter
  $ 9.60     $ 7.35  
Third quarter
    9.01       6.97  
Second quarter
    10.32       7.43  
First quarter
    11.71       9.05  

Fiscal Year Ended March 31, 2011
 
High
   
Low
 
Fourth quarter
  $ 12.25     $ 10.39  
Third quarter
    11.99       8.49  
Second quarter
    8.82       6.99  
First quarter
    8.94       7.23  
 
Our revolving credit agreement contains a restriction requiring us to maintain at least a 0.25 to 1.0 cushion below our consolidated total leverage ratio maximum of 2.5 to 1.0 (at March 31, 2012, our ratio was 0.24 to 1.0) on a pro forma basis in the case of any stock repurchases, acquisitions or dividends in excess of $50 million in any fiscal year. See note 10 of the consolidated financial statements included in this report for more details regarding our credit agreement.
 
 
Common Share Repurchases

The following table sets forth the repurchases of common stock for the quarter ended March 31, 2012:

Period  
Total number of
shares purchased
   
Average
price paid
per share
   
Total number of
shares purchased
as part of publicly
announced plans
   
Approximate dollar
value of shares
that may yet be
purchased under
the plan or
program (1)
 
                         
For the month ended January 31, 2012
    -     $ -       -     $ 239,402,000  
                                 
For the month ended February 29, 2012
    1,456,000       8.45       1,456,000       227,099,000  
                                 
For the month ended March 31, 2012
    373,300       9.15       373,300       223,682,000  
                                 
Total
    1,829,300       8.59       1,829,300          

 
(1)
Our purchases of common stock may occur on the open market or in negotiated or block transactions based upon market and business conditions. These repurchases are being made pursuant to the Board’s February 7, 2008 authorization of the repurchase of up to $750.0 million of our common stock under our discretionary share repurchase program. Unless terminated earlier by resolution of our Board of Directors, the discretionary share repurchase plan will expire when we have repurchased all shares authorized for repurchase thereunder. The maximum amount of repurchase activity under the repurchase plan continues to be limited on a daily basis to 25% of the average trading volume of our common stock for the previous four week period. In addition, no purchases are made during our self-imposed trading black-out periods in which the Company and our insiders are prohibited from trading in our common shares. Our standard quarterly black-out period commences 10 business days prior to the end of each quarter and terminates one full market day following the public release of our operating results for the period. We reserve the right to change the timing and volume of our repurchases at any time without notice.
 
In May 2012, the Board of Directors authorized a Rule 10b5-1 repurchase program to be implemented during the first quarter of fiscal 2013 which will allow us to repurchase shares pursuant to a predetermined formula without regard to the quarterly black-out periods.  This plan will utilize funds under the previous authorization described above and will expire in November 2012.
 
Comparison of Cumulative Five Year Total Return

The following line graph compares the yearly percentage change in the cumulative total shareholder return on our common shares with the cumulative total return of each of the following indices: the S&P 500 Index, the NASDAQ Market Index and the NASDAQ Computer and Data Processing Index for the period from April 1, 2007 through March 31, 2012. The graph includes a comparison to the S&P 500 Index in accordance with SEC rules, as the Company's common stock is part of such index. The graph assumes the investment of $100 in our common shares, the S&P 500 Index and each of the two NASDAQ indices on March 31, 2007 and the reinvestment of all dividends.

The comparisons in the graph are required by applicable SEC rules. You should be careful about drawing any conclusions from the data contained in the graph, because past results do not necessarily indicate future performance. The information contained in this graph shall not be deemed to be "soliciting material" or "filed" with the SEC or subject to the liabilities of Section 18 of the Exchange Act, except to the extent that we specifically incorporate it by reference into a document filed under the Securities Act or the Exchange Act.
 
 
Image 1
 
Total Return To Shareholders
(Includes reinvestment of dividends)

   
Base
   
Indexed Returns
 
   
Period
   
Fiscal Years Ending
 
   
March 31,
   
March 31,
 
Company / Index
 
2007
   
2008
   
2009
   
2010
   
2011
   
2012
 
Compuware Corporation
  $ 100       77.34       69.44       88.51       121.71       96.84  
S&P 500 Index
    100       94.92       58.77       88.02       101.79       110.48  
NASDAQ Market Index
    100       89.92       64.23       99.43       118.58       128.96  
NASDAQ Computer & Data Processing Index
    100       97.32       70.22       109.28       125.33       135.39  

The additional information required in this section is contained in Item 12 – Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters of this report and is incorporated herein by reference.
 

The selected statement of comprehensive income and balance sheet data presented below are derived from our audited consolidated financial statements and should be read in conjunction with our audited consolidated financial statements and notes thereto and Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations included in this report.
 
 
   
Year Ended March 31,
 
   
2012
   
2011
   
2010
   
2009
   
2008
 
   
(In thousands, except earnings per share data)
       
Statement of Comprehensive Income Data:
                             
Revenues:
                             
Software license fees
  $ 220,885     $ 194,745     $ 194,504     $ 219,634     $ 297,506  
Maintenance fees
    427,534       419,240       439,491       479,480       476,374  
Subscription fees
    78,438       67,718       16,852                  
Professional services fees
    209,184       192,202       200,865       356,111       419,857  
Application services fees
    73,731       55,025       40,467       35,230       35,874  
Total revenues
    1,009,772       928,930       892,179       1,090,455       1,229,611  
Operating expenses:
                                       
Cost of software license fees
    17,572       14,216       15,430       24,491       30,475  
Cost of maintenance fees
    38,670       32,975       33,266       41,877       46,300  
Cost of subscription fees
    29,669       24,974       9,289                  
Cost of professional services
    182,625       165,939       178,938       331,001       374,982  
Cost of application services
    72,384       51,011       37,923       37,029       38,939  
Technology development and support
    104,968       90,330       91,245       86,453       101,132  
Sales and marketing
    273,520       243,771       222,447       226,408       267,800  
Administrative and general
    163,723       155,400       164,633       148,019       182,488  
Restructuring costs (1)
                    7,960       10,037       42,645  
Gain on divestiture of product lines
                    (52,351 )                
Total operating expenses
    883,131       778,616       708,780       905,315       1,084,761  
Income from operations
    126,641       150,314       183,399       185,140       144,850  
Other income, net
    1,633       4,462       25,721       27,581       35,542  
Income before income tax provision
    128,274       154,776       209,120       212,721       180,392  
Income tax provision
    39,903       47,335       68,314       73,074       45,998  
Net income
  $ 88,371     $ 107,441     $ 140,806     $ 139,647     $ 134,394  
                                         
Basic earnings per share (2)
  $ 0.40     $ 0.49     $ 0.61     $ 0.56     $ 0.47  
Diluted earnings per share (2)
    0.40       0.48       0.60       0.55       0.47  
                                         
Shares used in computing net income per share:
                                       
Basic earnings computation
    218,344       220,616       232,634       250,916       286,402  
Diluted earnings computation
    222,378       226,095       234,565       252,402       287,628  
                                         
Balance Sheet Data (at period end):
                                       
Working capital
  $ 54,386     $ 143,905     $ 92,688     $ 297,237     $ 274,036  
Total assets
    2,167,538       2,038,377       2,013,325       1,874,850       2,018,557  
Long term debt (3)
    45,000       -       -       -       -  
Total shareholders' equity (4)
    1,049,937       952,612       913,813       880,648       927,031  

(1)
During fiscal 2010, 2009 and 2008, the Company undertook various restructuring activities to improve the effectiveness and efficiency of a number of the Company’s critical business processes, primarily within the products and professional services segments. These activities resulted in a restructuring charge of $8.0 million, $10.0 million and $42.6 million, respectively. See note 9 of the consolidated financial statements included in this report for more details regarding our restructuring plan.
 
(2)
See note 13 of the consolidated financial statements included in this report for the basis of computing earnings per share.
 
(3)
See note 10 of the consolidated financial statements included in this report for additional information on debt.
 
(4)
No dividends were paid or declared during the periods presented.
 
See notes 2 and 3 of the consolidated financial statements for additional information on acquisition and divestiture activity, including the Gomez acquisition during fiscal 2010 which is the primary source of our subscription fees and associated costs.
 
 
 
In this section, we discuss our results of operations on a segment basis. In previous fiscal years, we operated in four business segments in the technology industry: products, web application performance management services, professional services and application services. Effective April 1, 2011, we realigned our business unit structure which had the following effect on our segments: (1) the former products segment split into four new segments: Application Performance Management (“APM”), Mainframe, Changepoint and Uniface; (2) the former web performance services segment (“Gomez SaaS” solution) and APM on-premises software (formerly Vantage) are combined within the APM segment; and (3) the operating results of our software related professional services (“software related services”) are reported within APM, Mainframe, Changepoint and Uniface, as applicable (previously reported in the Professional Services segment).

As a result of these changes, we now have six business segments: APM, Mainframe (“MF”), Changepoint (“CP”), Uniface (“UF”), Professional Services (“PS”) and Covisint Application Services (“AS” or “Covisint”). These segments are described in detail in note 1 to the consolidated financial statements.

This business unit structure is intended to provide better visibility and control over the operations of our business and to increase our market agility, enabling us to more effectively capitalize on market conditions and competitive advantages to maximize revenue growth and profitability. The segment presentation in the prior periods has been revised to conform to the current presentation of our reportable segments. The change in reporting segments had no impact on previously reported consolidated financial results.

We collectively refer to the solutions offered within our APM, Mainframe, Changepoint and Uniface segments as “software solutions”. In order to provide a supplementary view of this business, aggregated financial data for our software solutions is presented herein.

We evaluate the performance of our segments based primarily on revenue growth and contribution margin which represents operating profit before certain charges such as internal information system support, finance, human resources, legal, administration and other corporate charges. References to years are to fiscal years ended March 31 unless otherwise specified. This discussion and analysis should be read in conjunction with the audited consolidated financial statements and notes included in Item 8 of this report.

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, including, without limitation, those discussed in Item 1A. Risk Factors and elsewhere in this report, 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.
 
 
OVERVIEW

We deliver value to businesses by providing software solutions (both on-premises and SaaS models), professional 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 (“mainframe”) that are used within our customers’ mainframe computing environments for fault diagnosis, file and data management, application performance monitoring and application debugging. Although mainframe license fees increased in fiscal 2012, we have experienced lower volumes of software license transactions for our mainframe solutions in preceding 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 maintenance renewal rate of approximately 90%. The cash flow generated from our mainframe business supports our growth segments.

We have identified the APM market as 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, the market for APM solutions is significant and growing rapidly. Our APM solutions are marketed under the brand names “Gomez” and “dynaTrace”.  These solutions provide our customers with on-premises software (“dynaTrace Enterprise” which includes our former Vantage products) and SaaS platform based web application performance services (“Gomez SaaS”). These solutions ensure the optimal performance of each customer’s enterprise, web, streaming, mobile and cloud applications. We are investing in our APM 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 web performance services network with specific focus on ease of use, time-to-value and data analytics in mobile application performance capabilities and in video streaming performance; (2) enhancements which combine our on-premises software and SaaS solution into a single platform that provides performance metrics for cloud, web and data center applications in a consolidated dashboard; and (3) the acquisition of dynaTrace in July 2011.  The dynaTrace software solution enables companies to continuously track transactions and provides exact identification of performance problems, enhancing our APM software solutions.

We have also identified the secured collaboration services market, served by our Covisint application services, as a key source of revenue growth. Technology has allowed business communities, organizations and systems to globally connect and share vital information, applications and processes across their internal and extended enterprises. Our Covisint services, which are provided on a SaaS platform to customers primarily in the automotive and healthcare industries, create an environment that simplifies and secures this collaboration atmosphere. The need for these services is growing, particularly in the healthcare industry as hospitals, physicians and the United States government move towards establishing electronic patient health and medical records that will require secured computerized databases and environments for storing and sharing of information.

We also continue to enhance our Changepoint and Uniface solutions primarily through research and development expenditures.

Our Changepoint solution provides a single automated solution for professional services organizations to forecast and plan, as well as, manage resources, projects and client engagements. In addition, for project-centric organizations, Changepoint provides a cohesive and consolidated view of projects, investments, resources and applications to help manage the entire business portfolio.


Our Uniface solution is mature with over 25 years on the market. Uniface is a rapid application development environment for building, renewing and integrating the latest complex enterprise applications. Our strategy with the Uniface solution is to enhance the product with additional features making it more effective for enterprise applications and to expand the capabilities of the product to other technology applications.

The professional services reporting segment recently went through a business transformation and is now focused on achieving modest revenue growth and improved margins by delivering high quality solutions and resources to our customers that meet their needs from application development through project management. Our goal is to provide the expertise, best practices and agility needed to meet our customers’ critical technology challenges. Areas of growth that we have identified are cloud and mobile application development services. Enhancing our competencies in these areas will provide an opportunity to continue growing the segment’s revenue and operating margin.

During fiscal 2012, we have invested additional resources in supporting anticipated growth in our APM and application services markets.  We expect margins to increase in the future.

In May 2009, we exited the Quality and Testing business by selling our Quality and DevPartner distributed product lines (“divested products”) to Micro Focus International PLC (“Micro Focus”).

Annual Update

The following occurred during fiscal 2012:

 
Realigned our business segments into six reportable segments.

 
Acquired dynaTrace for $255.8 million in cash, plus approximately $300,000 of direct acquisition costs (see note 2 of the consolidated financial statements included in this report for additional information). We borrowed $129.5 million on our credit facility to partially fund this acquisition, of which $45.0 million remains outstanding as of the end of fiscal 2012.

 
Realized an increase of $80.8 million or 8.7% in revenue for fiscal 2012 as compared to fiscal 2011 due to a $26.1 million increase in software license fees, an $18.7 million increase in application services fees, a $17.0 million increase in professional services fees, a $10.7 million increase in subscription fees and an $8.3 million increase in maintenance fees.

 
Experienced a decline in operating margin to 12.5% during fiscal 2012 compared to 16.2% during fiscal 2011. The decrease was primarily due to our continued investments in the APM and application services businesses (see “Business Segment Analysis” for additional information).

 
Realized an increase in software solutions revenue of $53.5 million or 7.3% as compared to the prior year but experienced a decrease in contribution margin to 38.3% during fiscal 2012 as compared to 43.4% during fiscal 2011 primarily due to increased investments within our APM business.

 
Realized an increase in professional services segment revenue of $8.7 million or 6.1% during fiscal 2012 as compared to the prior year. Contribution margin declined to 16.1% during fiscal 2012 from 16.7% during fiscal 2011 due to a revenue reserve on a government contract (see “Professional Services” for additional information).

 
Realized an increase in Covisint segment revenue of $18.7 million or 34.0% during fiscal 2012 as compared to fiscal 2011. Contribution margin declined to 1.4% during fiscal 2012 from 7.3% during fiscal 2011 as a result of hiring additional personnel to prepare for anticipated growth in the market.
 
 
 
Repurchased approximately 2.3 million shares of our common stock at an average price of $8.45 per share as part of our discretionary stock repurchase plan.

 
Released 28 product updates designed to increase the productivity of the IT departments of our customers, including 12 within the APM business segment, 15 within the Mainframe business segment and 1 within the Uniface business segment.
 
RESULTS OF OPERATIONS

The following table sets forth, for the periods indicated, certain operational data from the consolidated statements of comprehensive income as a percentage of total revenues and the percentage change in such items compared to the prior period:

   
Percentage of
   
Period-to-Period
 
   
Total Revenues
   
Change
 
   
Fiscal Year Ended
   
2011
   
2010
 
   
March 31,
   
to
   
to
 
   
2012
   
2011
   
2010
   
2012
   
2011
 
REVENUE:
                             
Software license fees
    21.9 %     21.0 %     21.8 %     13.4 %     0.1 %
Maintenance fees
    42.3       45.1       49.3       2.0       (4.6 )
Subscription fees
    7.8       7.3       1.9       15.8       301.8  
Professional services fees
    20.7       20.7       22.5       8.8       (4.3 )
Application services fees
    7.3       5.9       4.5       34.0       36.0  
Total revenues
    100.0       100.0       100.0       8.7       4.1  
                                         
OPERATING EXPENSES:
                                       
Cost of software license fees
    1.8       1.5       1.7       23.6       (7.9 )
Cost of maintenance fees
    3.8       3.5       3.8       17.3       (0.9 )
Cost of subscription fees
    2.9       2.7       1.0       18.8       168.9  
Cost of professional services
    18.1       17.9       20.1       10.1       (7.3 )
Cost of application services
    7.2       5.5       4.3       41.9       34.5  
Technology development and support
    10.4       9.8       10.2       16.2       (1.0 )
Sales and marketing
    27.1       26.2       24.9       12.2       9.6  
Administrative and general
    16.2       16.7       18.4       5.4       (5.6 )
Restructuring costs
                    0.9               (100.0 )
Gain on sale of assets
                    (5.9 )             100.0  
Total operating expenses
    87.5       83.8       79.4       13.4       9.9  
Income from operations
    12.5       16.2       20.6       (15.7 )     (18.0 )
Other income, net
    0.2       0.5       2.9       (63.4 )     (82.7 )
Income before income tax provision
    12.7       16.7       23.5       (17.1 )     (26.0 )
Income tax provision
    3.9       5.1       7.7       (15.7 )     (30.7 )
Net income
    8.8 %     11.6 %     15.8 %     (17.7 ) %     (23.7 ) %
 
BUSINESS 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 operating profit before certain charges such as internal information system support, finance, human resources, legal, administration and other corporate charges (“unallocated expenses”). Financial information for our business segments was as follows (in thousands):
 
 
   
Software Solutions
   
 
   
 
   
Unallocated
   
 
 
Year Ended:
 
APM
   
MF (1)
   
CP
   
UF
   
Total
   
PS
   
AS
   
Expenses (2)
   
Total
 
                                                       
March 31, 2012
                                                     
                                                       
Total revenues
  $ 270,443     $ 419,317     $ 47,867     $ 46,908     $ 784,535     $ 151,506     $ 73,731     $ -     $ 1,009,772  
                                                                         
Operating expenses
    317,621       99,310       45,027       21,740       483,698       127,178       72,717       199,538       883,131  
                                                                         
Contribution / operating margin
  $ (47,178 )   $ 320,007     $ 2,840     $ 25,168     $ 300,837     $ 24,328     $ 1,014     $ (199,538 )   $ 126,641  
                                                                         
Operating margin %
    (17.4 %)     76.3 %     5.9 %     53.7 %     38.3 %     16.1 %     1.4 %     N/A       12.5 %
                                                                         
March 31, 2011
                                                                       
                                                                         
Total revenues
  $ 231,999     $ 413,332     $ 39,423     $ 46,307     $ 731,061     $ 142,844     $ 55,025     $ -     $ 928,930  
                                                                         
Operating expenses
    246,212       99,659       47,514       20,149       413,534       118,937       51,011       195,134       778,616  
                                                                         
Contribution / operating margin
  $ (14,213 )   $ 313,673     $ (8,091 )   $ 26,158     $ 317,527     $ 23,907     $ 4,014     $ (195,134 )   $ 150,314  
                                                                         
Operating margin %
    (6.1 %)     75.9 %     (20.5 %)     56.5 %     43.4 %     16.7 %     7.3 %     N/A       16.2 %
                                                                         
March 31, 2010
                                                                       
                                                                         
Total revenues
  $ 153,973     $ 460,638     $ 40,000     $ 43,682     $ 698,293     $ 153,419     $ 40,467     $ -     $ 892,179  
                                                                         
Operating expenses
    186,849       114,474       52,239       17,347     $ 370,909       138,068       37,923       161,880       708,780  
                                                                         
Contribution / operating margin
  $ (32,876 )   $ 346,164     $ (12,239 )   $ 26,335     $ 327,384     $ 15,351     $ 2,544     $ (161,880 )   $ 183,399  
                                                                         
Operating margin %
    (21.4 %)     75.1 %     (30.6 %)     60.3 %     46.9 %     10.0 %     6.3 %     N/A       20.6 %
 
(1)
The Mainframe business unit for fiscal 2010 includes $13.6 million in revenue related to products that were divested during fiscal 2010. See note 3 of the consolidated financial statements included in this report for additional information.
 
(2)
Unallocated expenses for fiscal 2010 includes a gain of $52.4 million related to the sale of our divested product line and restructuring expenses of $8.0 million. See notes 3 and 9 of the consolidated financial statements included in this report for additional information.
 
SOFTWARE SOLUTIONS AS A GROUP

Our software solutions are comprised of the following business segments: (1) Application Performance Management; (2) Mainframe; (3) Changepoint; and (4) Uniface.

Revenue associated with our software solutions consists of software license fees, maintenance fees, subscription fees and professional services fees (software related services). Software solutions revenues are presented in the table below (in thousands):

 
                     
Period-to-Period Change
 
   
Year Ended March 31,
   
2011 to
   
2010 to
 
   
2012
   
2011
   
2010
   
2012
   
2011
 
Software license fees
  $ 220,885     $ 194,745     $ 194,504       13.4 %     0.1 %
Maintenance fees
    427,534       419,240       439,491       2.0       (4.6 )
Subscription fees
    78,438       67,718       16,852       15.8       301.8  
Professional services fees
    57,678       49,358       47,446       16.9       4.0  
Total software solutions revenue
  $ 784,535     $ 731,061     $ 698,293       7.3 %     4.7 %

Software license fees (“license fees”) increased $26.1 million during fiscal 2012 as compared to fiscal 2011, which included a positive impact from foreign currency fluctuations of $4.3 million, and increased $241,000 during fiscal 2011 as compared to fiscal 2010, which included a positive impact of foreign currency fluctuations of $1.6 million. Fiscal 2010 also included $8.7 million of license fees from divested products (see note 3 for additional information). Excluding the impact from foreign currency fluctuations and divested product revenue, license fees increased $21.8 million for fiscal 2012 as compared to fiscal 2011 and increased $7.3 million for fiscal 2011 as compared to fiscal 2010. The increase for fiscal 2012 was due largely to an increase in Mainframe license fees and, to a lesser extent, increases in APM and Changepoint license fees. The increase for fiscal 2011 was due primarily to increased industry demand for our APM and Uniface solutions, but was partially offset by a decline in Mainframe license fees (see the discussion within “Software Solutions by Business Segment” for more details).

During fiscal 2012, fiscal 2011 and fiscal 2010, for software license transactions that were required to be recognized ratably, we deferred $15.8 million, $29.9 million and $55.6 million, respectively, of license fees relating to such transactions that closed during the period. We recognized as license fees $48.5 million, $61.2 million and $80.2 million of previously deferred license revenue during fiscal 2012, fiscal 2011 and fiscal 2010, respectively, relating to such transactions that closed and had been deferred prior to the beginning of the period.

Maintenance fees increased $8.3 million during fiscal 2012 as compared to fiscal 2011, which included a positive impact from foreign currency fluctuations of $9.9 million, and decreased $20.3 million during fiscal 2011 as compared to fiscal 2010, which included a positive impact from foreign currency fluctuations of $230,000. Fiscal 2010 also included $4.8 million of revenue from divested products (see note 3 for additional information). Excluding the impact from foreign currency fluctuations and divested product revenue, maintenance fees declined $1.6 million for fiscal 2012 as compared to fiscal 2011 and declined $15.3 million for fiscal 2011 as compared to fiscal 2010. The decreases were due to a decline in maintenance fees associated with our mainframe product lines. Although we continue to experience a high maintenance renewal rate with our current mainframe customers, the decline in mainframe license deals during prior years is impacting mainframe maintenance revenue as new or growth customers are not entirely replacing the maintenance revenue loss from the non-renewed or reduced capacity mainframe maintenance arrangements. The decline was partially offset by an increase in APM maintenance fees primarily due to sales growth in our APM product line during fiscal 2011 and fiscal 2012 including additional maintenance related to the dynaTrace acquisition.

Subscription fees increased $10.7 million during fiscal 2012 as compared to fiscal 2011 primarily as a result of new SaaS solution sales exceeding customer cancellations. Subscription fees increased $50.9 million during fiscal 2011 as compared to fiscal 2010 as fiscal 2010 included only five months of web performance services revenue. In November 2009, through the acquisition of Gomez, we began to offer web performance services on a subscription basis that are used to test and monitor web and mobile applications. See note 2 of the consolidated financial statements included in this report for historical pro forma financial results of Compuware and Gomez.

Professional services fees within our software solutions business segments increased $8.3 million during fiscal 2012 as compared to fiscal 2011 and increased $1.9 million during fiscal 2011 as compared to fiscal 2010. The improvement in professional services fees during fiscal 2012 and fiscal 2011 primarily occurred within our APM business unit due to increased implementation fees associated with new APM solution sales and increases in demand for our managed service offerings.


Software solutions revenue by geographic location is presented in the table below (in thousands):

   
Year Ended March 31,
 
   
2012
   
2011
   
2010
 
United States
  $ 423,522     $ 394,632     $ 366,596  
Europe and Africa
    234,909       222,538       228,712  
Other international operations
    126,104       113,891       102,985  
Total software solutions revenue
  $ 784,535     $ 731,061     $ 698,293  
 
SOFTWARE SOLUTIONS BY BUSINESS SEGMENT

Application Performance Management

The financial results of operations for our APM segment were as follows (in thousands):

                     
Period-to-Period Change
 
   
Year Ended March 31,
   
2011 to
   
2010 to
 
   
2012
   
2011
   
2010
   
2012
   
2011
 
Revenue
                             
Software license fees
  $ 85,462     $ 77,823     $ 59,030       9.8 %     31.8 %
Maintenance fees
    77,329       64,283       60,307       20.3       6.6  
Subscription fees
    76,246       67,718       16,852       12.6       301.8  
Professional services fees
    31,406       22,175       17,784       41.6       24.7  
Total revenue
    270,443       231,999       153,973       16.6       50.7  
                                         
Operating expenses
    317,621       246,212       186,849       29.0       31.8  
                                         
Contribution margin
  $ (47,178 )   $ (14,213 )   $ (32,876 )     (231.9 )%     56.8 %
                                         
Contribution margin %
    (17.4 %)     (6.1 %)     (21.4 %)                

APM segment revenue increased $38.4 million during fiscal 2012 as compared to fiscal 2011. The increase in software license fees during fiscal 2012 can be attributed to additional revenue related to the acquisition of dynaTrace (see note 2 of the consolidated financial statements included in this report for additional information), partially offset by the effects of integrating our on-premises and SaaS sales force and related changes in the sales strategy during 2012, which had a negative impact on license sales. The increase in maintenance fees for fiscal 2012 as compared to fiscal 2011 is primarily attributable to current year on-premises solution sales exceeding customer cancellations as we experienced a high renewal rate with existing customers and, to a lesser extent, positive impact of revenue from dynaTrace and foreign currency rate fluctuations. The increase in subscription fees for fiscal 2012 is primarily the result of new SaaS solution sales exceeding customer cancellations. The increase in professional services fees for fiscal 2012 primarily relates to delivering a small backlog of projects and an increase in demand for our managed service offerings which are marketed as  Guardian Services, and to a lesser extent, additional revenue related to the acquisition of dynaTrace.

APM segment revenue increased $78.0 million during fiscal 2011 as compared to fiscal 2010 due primarily to a $50.9 million increase in subscription fees and an $18.9 million increase in software license fees. The increase in subscription fees can be attributed to a full year of revenue from subscription services offerings in fiscal 2011 as opposed to only five months during fiscal 2010, as we acquired Gomez in November 2009 (see note 2 of the consolidated financial statements included in this report for additional information). The increase in software license fees can be attributed to increased market demand for our APM solutions that monitor on-premises technology applications.
 
 
Operating expenses increased $71.4 million during fiscal 2012 as compared to fiscal 2011 and $59.4 million for fiscal 2011 as compared to fiscal 2010. The increase for fiscal 2012 can be attributed to continued investment in our APM solutions including hiring developers and sales personnel, increasing the capacity of our web application services network and the acquisition of dynaTrace. We believe these investments are needed to further enhance our product offerings to meet the demand that businesses have for APM solutions when managing their application performance. The costs associated with these investments exceeded revenue growth, which had a negative impact on our contribution margin for fiscal 2012 as compared to fiscal 2011. The increase in operating expenses for fiscal 2011 can be attributed to additional costs associated with increased revenue from the Gomez acquisition and stengthening market demand for our APM solutions. As Gomez was acquired during November 2009, only five months of expenses for Gomez products were included in fiscal 2010 operating expenses as opposed to a full year of expenses recognized during fiscal 2011.

Application performance management revenue by geographic location is presented in the table below (in thousands):

   
Year Ended March 31,
 
   
2012
   
2011
   
2010
 
United States
  $ 143,945     $ 125,956     $ 69,390  
Europe and Africa
    85,720       68,554       58,273  
Other international operations
    40,778       37,489       26,310  
Total APM segment revenue
  $ 270,443     $ 231,999     $ 153,973  
 
Mainframe

The financial results of operations for our Mainframe segment were as follows (in thousands):

                     
Period-to-Period Change
 
   
Year Ended March 31,
   
2011 to
   
2010 to
 
   
2012
   
2011
   
2010 (1)
   
2012
   
2011
 
Revenue
                             
Software license fees
  $ 110,289     $ 95,820     $ 118,576       15.1 %     (19.2 )%
Maintenance fees
    303,639       310,965       334,161       (2.4 )     (6.9 )
Professional services fees
    5,389       6,547       7,901       (17.7 )     (17.1 )
Total revenue
    419,317       413,332       460,638       1.4       (10.3 )
                                         
Operating expenses
    99,310       99,659       114,474       (0.4 )     (12.9 )
                                         
Contribution margin
  $ 320,007     $ 313,673     $ 346,164       2.0 %     (9.4 )%
                                         
Contribution margin %
    76.3 %     75.9 %     75.1 %                
 
 
(1)
The Mainframe business unit includes $13.6 million in revenue related to products that were divested during fiscal 2010. See note 3 of the consolidated financial statements included in this report for additional information.
 
Mainframe segment revenue increased $6.0 million for fiscal 2012 as compared to fiscal 2011 primarily due to a $14.5 million increase in software license fees partially offset by a $7.3 million decline in maintenance fees. Several significant license transactions with government entities were recognized during fiscal 2012, resulting in the recognition of $31.2 million in license fees during fiscal 2012, some of which we had anticipated closing in the fourth quarter of 2011. Additionally, two license contracts with financial services companies closed during fiscal 2012, resulting in the recognition of $4.9 million in license fees. Significant license transactions during fiscal 2011 resulted in the recognition of approximately $19.1 million in license fees.  We do not anticipate comparable revenues from significant license transactions in the coming years and therefore, expect mainframe revenue to decline going forward.
 

 
Mainframe segment revenue decreased $47.3 million for fiscal 2011 as compared to fiscal 2010 due primarily to a reduction in software license fees and maintenance fees recognized and the divestiture of our Quality and Testing product line (see note 3 to the consolidated financial statements for additional information related to the divestiture). Fiscal 2010 revenue recognized related to divested products was $13.6 million. Although we continued to experience a high maintenance renewal rate with our current mainframe customers during fiscal 2011, the decline in mainframe license deals during fiscal 2010 and fiscal 2011 had a negative impact on mainframe maintenance revenue as new or growth customers are not entirely replacing the maintenance revenue loss from the non-renewed or reduced capacity mainframe maintenance arrangements.

The contribution margin and expenses for fiscal 2012 were essentially unchanged from fiscal 2011. The contribution margin increased for fiscal 2011 as compared to fiscal 2010 due to the reduction in operating expenses associated with the decline in revenue and the restructuring completed during fiscal 2010 to maximize efficiencies including the divestiture of certain products (see note 3 to the consolidated financial statements included in this report for additional information).

Mainframe revenue by geographic location is presented in the table below (in thousands):

   
Year Ended March 31,
 
   
2012
   
2011
   
2010
 
United States
  $ 246,469     $ 243,235     $ 272,101  
Europe and Africa
    104,048       108,966       123,071  
Other international operations
    68,800       61,131       65,466  
Total Mainframe segment revenue
  $ 419,317     $ 413,332     $ 460,638  
 
Changepoint

 The financial results of operations for our Changepoint segment were as follows (in thousands):

                     
Period-to-Period Change
 
   
Year Ended March 31,
   
2011 to
   
2010 to
 
   
2012
   
2011
   
2010
   
2012
   
2011
 
Revenue
                             
Software license fees
  $ 13,815     $ 9,226     $ 8,649       49.7 %     6.7 %
Maintenance fees
    15,551       14,547       13,992       6.9       4.0  
Subscription fees
    2,192