Applied Signal's Profits Not Secret

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It certainly takes a Ph.D. candidate to understand the science of Applied Signal Technology's (Nasdaq: APSG) technology. But you don't need to be a genius to appreciate the company's finances.

Applied Signal had a blowout second quarter. Revenues surged 67% to $36.8 million from the same period a year ago. Net income grew 77% to $3.9 million. There was also a 47% increase, or $28.6 million, in new orders in the quarter.

The demand is coming primarily from the U.S. government, which is spending huge amounts on intelligence to combat worldwide terrorism.

You see, Applied Signal designs and develops signal-processing equipment, which allows for processing communications, such as monitoring foreign communications, satellite spectrum monitoring, and data intrusion detection. It's a highly technical business; it's also a secretive business. On the conference call, it was impossible to tell what some of its major contracts really are because they are classified for national security reasons.

U.S. government spending on intelligence technologies is not likely to abate any time soon. No doubt, this means the valuations are getting frothy in the sector, such as with Magal Security Systems (Nasdaq: MAGS), Mace Security (Nasdaq: MACE), Digital Recorders (Nasdaq: TBUS), IPIX (Nasdaq: IPIX), and ImageSensing Systems (Nasdaq: ISNS). But the growth is real, as seen earlier this week with the strong earnings report from Magal.

However, Applied Signal is a veteran in intelligence (founded in 1984) and has a deep relationship with the federal government. It also understands how to manage growth (the company has had to do so several times in the past). After all, sometimes hypergrowth can be a dangerous thing for a company.

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Fool contributor Tom Taulli is the author of The EDGAR Online Guide to Decoding Financial Statements. He does not own shares in any of the stocks mentioned.