Blue Coat Systems (NASDAQ:BCSI), a key player in the Web acceleration and security appliance market, reported blue, blue earnings Wednesday after the bell. Actually, make those losses. In a bit of a stunning reversal, the business hemorrhaged $2.6 million in the fourth quarter on a GAAP basis.

This is a company that, until February 2006, was expected to earn $0.30 to $0.32 a share in earnings for the third quarter. In a not so funny week for investors, it warned twice, and proceeded to only earn 20 cents or $3 million for that quarter. Now, the fourth quarter rolls around, and I'll be darned if the company isn't now losing money.

For the second quarter in a row, management trotted out the excuse that slower growth in its core market -- proxy appliances -- contributed to the disappointing earnings. As revenue growth was flat sequentially, and up 26% year over year (a substantial slowdown from the previous quarter's 46% year-over-year growth), I think this excuse has some merit. However, if I hear it again next quarter, I might not be so kind. After all, the company has finally gotten around to updating its core product this quarter, after a year with no feature updates, and it would be reasonable to allow a quarter or so for the product transition to kick-start growth a bit.

All things considered, the Web acceleration and network control markets are good places to be. Competitors like Cisco (NASDAQ:CSCO), Network Appliance (NASDAQ:NTAP), and to an extent Akamai (NASDAQ:AKAM) provide stiff competition, but the future looks bright as companies continue to demand better ways to manage traffic. For example, eBay's (NASDAQ:EBAY) Skype wreaks havoc on internal networks, creating spikes in demand for bandwidth as well as overwhelming routers, and Blue Coat's products are able to control how Skype is used on the network, giving IT admins a bit of a breather.

Should investors be interested in this stock, trading at a little over one times sales and a P/E ratio around 20 (when taking in account the cash position)? If growth is kick-started again, the company could do well here, since it's zoomed from an also-ran in the security appliance market to No. 1 in market share in the past few years. However, it might be worthwhile to see if the new product features can gain some traction in the market, and give management a chance to prove it can stem the red ink. Given that next quarter's guidance now calls for continued losses, maybe we should really fit Blue Coat for a red coat.

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Fool contributor Stephen Ellis does not own shares of any companies mentioned in this article.