Guidance's Legal "Land Grab"

Over the past year, Guidance Software (Nasdaq: GUID  ) has had major product launches as well as an IPO. That's a time-consuming combination, but management has pulled it off nicely. More importantly, the company's growth continues to be strong.

In the fiscal fourth quarter, revenues increased 38% to $17 million. However, there was a net loss of $900,000 or $0.05 per share, which compares to a net gain of $407,000 or $0.02 per share in the same period in 2005.

Founded in 1997, Guidance has a suite of software products to help companies conduct digital investigations. Last year, it upgraded its key products, EnCase Forensic; EnCase Enterprise; and eDiscovery. These products help with tasks like searching, preserving and analyzing data on servers, desktops, and laptops (without disrupting the workforce); locating relevant data; and authenticating the data for court purposes.

There are similar products on the market from Symantec (Nasdaq: SYMC  ) , McAfee (NYSE: MFE  ) , and EMC (NYSE: EMC  ) . However, Guidance's offering is integrated, comprehensive, and battle-tested in the court system (the software has been cited in more than 35 judicial opinions).

A potential growth driver for Guidance is a recent change to the Federal Rules of Civil Procedure, which essentially requires the use of digital investigative software for pretrial discovery. As a result, the company has been investing in its infrastructure, with headcount increasing from 221 to 338 over the past year. On the conference call, management said it's a "land grab" for the eDiscovery market and that Guidance wants to "dominate" it.

Management forecasts 2007 revenues at $72 million-$76 million and net income to range from a loss of $0.16 to a gain of $0.02 per share. However, as I mentioned in a recent article, the valuation is hefty, at about 4 times revenues (based on the $76 million forecast). While the company is definitely strong and positioned for growth, there is no rush to get into the stock.

For related reading:

Symantec is an Inside Value recommendation, and McAfee is a Stock Advisor pick. Try out these or any of our other Foolish newsletters for yourself, free for 30 days.

Fool contributor Tom Taulli does not own shares of any company mentioned in this article.

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