There were not many surprises for investors of enterprise software firm Compuware (Nasdaq: CPWR) in the earnings release last week. In mid-October, management reported that the third quarter would be "challenging." While the company indicates that things will get better -- don't they all? -- the problem is that it has various divisions that are likely to be sluggish for some time.
In the third quarter, revenues fell 1% to $288.5 million. Net income increased from $24.2 million, or $0.06 per share, to $24.8 million, or $0.07 per share. Software license revenue fell 11% to $56.7 million, which is particularly troubling. This type of revenue is crucial for the future growth of a software company, since it leads to ongoing services and maintenance fees.
Essentially, Compuware has a variety of businesses. First, there are tools to help companies develop business applications, as well as systems to test and deliver the applications. Next, there is software that reports on information technology (IT) infrastructures, allowing for things like better budgeting and cost savings. Also, there is the Covisint segment, which helps streamline supply chains (i.e., manage suppliers, partners, and customers).
Unfortunately, Compuware still has a significant business in mainframe software, as license sales fell 25% over the past year. True, mainframes are not a growth business, but competitors such as BMC (NYSE: BMC) are still posting decent results.
Moreover, Compuware's professional services division was also weak, with revenues declining from $118.1 million to $116.6 million in the third quarter. Then again, about 40% of its revenues come from Michigan, which has been decimated because of the ailing auto industry.
But the Covisint segment has been strong, with a 60% increase in revenues over the past year. The division has also successfully expanded from its auto focus and is now getting lots of traction in the health-care space. In the third quarter, Covisint snagged 17 new health-care customers.
Of course, the fact remains that Compuware must deal with competition that is getting stronger and stronger. This is primarily the result of increased M&A activity from big players like IBM (NYSE: IBM). What's more, there are few signs that this activity will slow down.
For the most part, Compuware is a mature cash-cow business. In fact, for the year, it will likely generate about $200 million in cash from operations, so expect aggressive stock buybacks. But, in light of the problems in professional services and license sales, the buybacks are probably not enough to get investors excited about the stock.
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Fool contributor Tom Taulli does not own shares of any company mentioned in this article.
He is currently ranked 12 out of 11,654 in CAPS. The Fool has a disclosure policy.
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