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Guidance Software: A Lawsuit's Best Friend

There's something unusual about the Guidance Software (Nasdaq: GUID  ) IPO: The company never received any venture capital. But then again, it offers what is becoming a "must-have" product.

Essentially, Guidance helps its customers conduct digital investigations. Since 1998, thousands of customers have used the company's applications for criminal and civil cases -- including the officials involved in the Scott Peterson murder trial. The software has actually been cited in more than 35 judicial opinions. The track record is certainly a major competitive advantage for Guidance, and it has allowed the company to build an impressive board of directors, which includes former CIA director George Tenet and former U.S. cyber-security chief Amit Yoran.

Investigations are conducted with software on a central server that can search, collect, and preserve data from all networks, desktops, and laptops across a company. That means no interruption of business operations. And since the process is automated, it also means significantly lower costs.

True, the company does have competition from firms such as Symantec (Nasdaq: SYMC  ) , McAfee (NYSE: MFE  ) , EMC (NYSE: EMC  ) , and major consulting firms. However, these companies lack the kind of comprehensive product offering -- or the deep expertise -- Guidance can offer.

Still, to keep ahead of the competition, the company continues to innovate its product line. For example, it offers a new product that helps the federal government deal with searching classified documents. What's more, Guidance plans to launch a system that searches cell phone data.

Litigation is an undeniable drag on Corporate America, with an average of 400 lawsuits per company with revenues of $1 billion or more. Thus, if software such as what Guidance offers can shave off even $1 million per case, that amounts to a $400 million cost savings.

Guidance has grown its revenues from $17 million in 2003 to $39 million in 2005. And for the first nine months of this year, revenues increased from $27.1 million to $39.3 million. But there was also a loss of $2.1 million in 2006, mainly because the company has boosted its expenditures on sales and marketing.

At a market cap of $374 million, the business is selling at a frothy revenue multiple of seven or so. Thus, while Guidance is definitely solid, it may be worth waiting for the valuation to settle down.

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Symantec is aMotley Fool Inside Valuerecommendation. McAfee is a former Motley Fool Stock Advisor pick. Try out any of our newsletter services free for 30 days.

Fool contributor Tom Taulli does not own shares of companies mentioned in this article. He is currently ranked 429 out of 17,109 participants in Motley Fool CAPS, the Fool's new stock-rating service that you can join for free.

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