This week, Microsoft's (NASDAQ:MSFT) Bill Gates said we're in the "live era," in which software is delivered via the Internet as a service -- known as on-demand. What's more, Microsoft plans to charge for this software on a subscription basis.

Well, while Gates calls this revolutionary, there are companies that have been doing this for quite some time. A case in point is WebSideStory (NASDAQ:WSSI). Basically, the company provides website analytic tools; that is, it helps companies measure traffic to their sites, determining conversion rates, popular content areas, and so on. Customers include biggies like Adobe Systems (NASDAQ:ADBE), FedEx (NYSE:FDX), and New York Life.

For the third quarter, WebSideStory's revenues rose 98% to $11.3 million and net income increased to $1.8 million from $657,000 compared with the same quarter last year.

A big part of the growth came from WebSideStory's acquisition of Atomz. According to Jeff Lunsford, WebSideStory's CEO: "The integration is going well." What's more, the company has had success in cross-selling the Atomz search analytics products.

No doubt, the increase in online advertising -- as seen with the growth at Google (NASDAQ:GOOG) and Yahoo! (NASDAQ:YHOO) -- is driving the need for Web analytics. So, WebSideStory also announced that it upped its guidance. Previous guidance was for $0.13 to $0.14 per share in earnings and $11.9 million to $12.3 million in revenues for the next quarter. The new guidance is $0.14 to $0.15 per share in earnings and $12 million to $13.3 million in revenues.

But the good news for shareholders is that the growth in online advertising appears to be secular. Thus, expect the demand for Web analytics tools to continue to grow. Actually, the market is expected to sustain an annual compounded growth rate of 20% per year, reaching $931 million by 2009. As long as WebSideStory continues to improve its technologies -- internally and through acquisitions -- it should remain a key beneficiary of this boom.

On the face of it, the valuation looks high (in terms of a multiple to sales), but given the success of the Atomz acquisition, it is a good bet we'll see other deals and subsequent growth. In fact, the company's competition is privately held companies, such as WebTrends, that do not have the benefit of using public stock to get deals done. In fact, given the recent consolidation in the Web analytics space -- for example, Google recently purchased such a company -- a company like WebSideStory could be an attractive buyout candidate as well. But beware, dear investor: Speculating on deals or the prospect thereof is often muddy waters.

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