By Antony Akilade
Professional services sales seem to be Compuware’s best-kept secret. Its $448m acquisition of IT services firm Data Processing Resources Corporation last month (CI No 3,690) will take its service revenues up to $1bn, easily outstripping the $540m receipts of its biggest rival, Computer Associates Global Professional Services, and putting it into the top rankings of the services sector.
Almost a year ago Computer Associates made great noises about its move into IT services, setting itself a target of $1 billion for first year revenues. Without fuss, Compuware has achieved a similar goal. Results posted last month show that professional services accounted for $620.7m or 37.8% of Compuware’s total revenue. Only 30% of this figure was directly tied to sales of Compuware’s own application development programs, testing tools or systems management software. Expansion of Compuware’s professional services activities beyond its core product-customer base is an aspect CA GPS will hope to mimic. But unlike CA, which has identified data warehousing and e-commence as targets for new services business, Compuware is leaning toward a growing demand for application management services.
It is something the company first stated in October 1998, when it signed an agreement with Bank One Corp said to be worth an estimated $30 -$40 million a year, to help transition and consolidate core-banking systems for the bank’s application development center in Troy, Michigan. This has since been followed by the announcement in December 1998 of a wide ranging contract with Ford Motor Co. This will see Compuware providing maintenance and enhancements for all applications systems in the Ford Worldwide Application Management Center. Chris Norris head of investor relations at Compuware states that this deal will build to be worth around $100m a year by March 2000.
Norris also explained that Compuware was seeking to build the IT staffing side of its business, which led to the DPRC buy. The acquisition will expand the number of technicians Compuware employs from 7,200 to 10,000. DPRC also boasts a strong client list that includes many blue-chip companies, including the likes of Disney Corp, Intel Corp., Nissan Motor Co, Exxon Corp and Edison Corp.
Formed in 1985 as a computer staffing outfit, DPRC went public in March 1996, and grew through an aggressive acquisition program. The Irvine, California based company returned revenues for the quarter ending April 1999 of $92.2m, amounting to $274.46m for the nine months to April 30 1999. DPRC gross margin for the quarter stood at 29.7% while operating margin for the quarter was reported as 10.7%. For the nine months to April 30 1999 gross margin stood at 30.1% with operating margin at 9.2%. Since going public in 1996 DPRC has recorded a 400% growth in revenue.
In past years DPRC has pushed to increase the proportion of revenues derived from high margin services in fault-tolerant applications development, network management and desktop support, Internet/intranet development and support, packaged software implementation, software engineering and help desk support. These now account for around 25% of revenue. This has been at the expense of DPRC’s mainframe staffing trade, however, and this part of the business has dropped away from around 70% of revenue in 1996 to 45% in March 1998.
DPRC will boost Compuware’s consultant headcount by around 3,400. This number includes 90 SAP consultants from Dallas, Texas-based SAP integration services provider IT Services Inc., which was bought by DPRC for $28 million in June 1999. It has no significant Y2K related revenue on its books. However, DPRC did report an unusually high consultant turnover rate of 33% for FY98. Norris says that this will be brought down as employees benefit from Compuware’s career development program. Compuware reports that its own turnover rate is around 15%, which is slightly below the market average.
The DPRC buy follows the purchase in March 1999 of Bloomfield Hills, Michigan-based MIS International, information systems and project management consulting firm for around $31m in Compuware stock, adding a further 400 consultants to Compuware ranks. The company provides professional services personnel to Fortune 500 companies, including major automotive manufacturers and their first-tier OEM suppliers.
But the biggest gain to Compuware is the increase in geographic reach, as DPRC has a significant presence in the south-western and south-eastern US states giving it additional access to 27 US cities. This allows Compuware to offer better service to clients spread across many locations. It does nothing to help Compuware expand its European professional services revenues, however. These accounted for just 15% of total professional services revenues in FY99, or $93 million.
Chris Norris states that Compuware has a target for revenue growth for its non-product related professional services of 35% to 40% in FY99. For FY99 it reported operating margins for its professional services of 18.4% up from 14.5% for FY98.
At present Compuware offers services in mainframe to client-server migration, its networked application solutions division provides services in performance management of applications, service level agreements, integration of voice and data and network standardization. Its Oracle services include Oracle application implementation and project management services using what Compuware refers to as its Paragon methodology. It also has a substantial e-commerce service that’s said to account for around 20% of professional services revenues overall.
CS First Boston investment analyst Wendell Laidley believes the buy will result in a 2% drop in Compuware’s operating margin through this fiscal year until the company can tighten up the DPRC business model. Laidely also sees an opportunity for Compuware to increase DPRC’s gross margins of around 30% by transitioning DPRC’s resources from traditional IT staffing/application development to higher margin Web-focused services where margins can be as high as 50%.
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