Enterprise-software company Compuware (NASDAQ:CPWR) has enjoyed a good move in its stock since July, while the software sector as a whole has been in rally mode. But the company is wrestling with some troubles in a few of its sectors that will probably result in muted top-line growth.

In the fiscal third-quarter earnings report released last week, revenues increased 3% to $315.1 million, and net income fell from $37.7 million to $36.5 million. However, earnings per share increased from $0.10 to $0.11 because of a reduction in the number of shares outstanding, from 388.3 million to 343.1 million. There was also some pickup in license revenues, which went from $83.3 million to $86 million. This move is important, because it generally means ongoing service and maintenance fees for the company.

Founded in 1973, Compuware is now a mix of businesses, including software tools to build business applications, systems that monitor and provide reports on information technology (IT) infrastructures, and Covisint, which is a platform that helps to improve supply chains and customer interactions.

Compuware also has a professional-services business, but roughly 40% of its revenues come from the Michigan area, which has been severely affected by the problems with Ford (NYSE:F) and GM (NYSE:GM). And according to the Compuware conference call, there is no visibility as to when things are expected to improve in this area.

Another issue is Compuware's sizeable mainframe business. The weakness in this division -- marked by a 25% drop in license fees -- dampened the overall software-license growth in the fiscal third quarter. Not only does the company have tough competition from the likes of BMC (NYSE:BMC), but the mainframe business is mostly a mature segment.

There is a bright spot, however, in the firm's Covisint division. On the conference call, the president of the division, Bob Paul, was upbeat -- especially on the past two quarters. Covisint is also moving into health care, where it can help to reduce costs through better management of patients and payers. In the fiscal second quarter, the division picked up 17 new health-care customers, including Louisiana Medicaid and United Physicians Group.

No doubt, the health-care industry presents a big market opportunity. But it will take some time for this opportunity to pay off, because of the long sales cycles and complex regulations.

Compuware does generate substantial operational cash flows. For the full year, the amount should be about $200 million. In turn, the company has been aggressively buying back its shares -- $405 million worth in the past six months.

While this is good, the fact remains that the mainframe and professional-services business will be a drag on performance. Yet interestingly enough, it appears that investors are looking past these issues.

Actually, with the wave of software mergers and acquisitions from big players such as IBM (NYSE:IBM) and Oracle (NASDAQ:ORCL), Compuware could be buyout bait. The company certainly has a large customer base and steady cash flows. However, if such a scenario does not pan out -- as is often the case with buyouts -- then we are still left with a company that has few prospects for growth.


Fool contributor Tom Taulli does not own shares of companies mentioned in this article. He is currently ranked 1,623 out of more than 21,000 participants in Motley Fool CAPS. Follow the link to find out what other investors like you think about Compuware, and add your own opinion to our stock-rating community. Participation is absolutely free. The Fool has a disclosure policy.