Enterprise software firm Websense (NASDAQ:WBSN) endured considerable upheaval in 2006 when it decided to pursue new markets. Unfortunately, the search looks set to continue into 2007, and investors are definitely concerned -- as they should be. Following Websense's latest earnings report, the stock plunged 12%.
In the fiscal fourth-quarter earnings released last week, Websense's revenues increased 18% to $47.3 million. However, net income fell from $11.1 million, or $0.23 per share, to $7.8 million, or $0.17 per share. Websense is spending more to widen its distribution, in hopes of penetrating the small-and-medium business (SMB) market. To that end, the company recently struck a deal with Ingram Micro (NYSE:IM), the world's largest technology distributor.
Founded in 1994, Websense develops Web filtering and security software, helping customers deal with myriad threats such as spyware and phishing. However, its market is intensely competitive, filled with rivals such as Secure Computing (NYSE:SCUR), CA (NYSE:CA), and Trend Micro (NASDAQ:TMIC).
Websense is targeting SMB customers in hopes of finding renewed growth. But that's no easy feat, since it demands a large investment in sales and marketing. So Websense has a second strategy as well: It's attempting to expand its security offerings, including its recent $90 million purchase of PortAuthority Technologies. (Note that PortAuthority is Websense's first-ever acquisition, increasing the organization's risks in attempting to digest the new firm.)
PortAuthority's software helps companies keep track of their sensitive information. It crawls through a company's database, fingerprinting confidential data; those fingerprints can then be used to track where the data goes, and to whom. This is a promising growth market, but it's still in the early stages, and it'll take several years to gain revenue traction. Meanwhile, rivals such as IBM (NYSE:IBM) and Check Point Software Technologies (NASDAQ:CHKP) are eyeing the same market.
Unfortunately, Websense's core Web-filtering market is saturated, at least among large customers. On its face, the company's new focus on the SMB market makes sense. But similar transitions at other tech companies have had mixed results, since large and small customers have vastly different needs.
Websense's stock looks likely to languish for a while as the company tackles all these new risks. For Foolish investors, I don't see much of a bull case here.
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Fool contributor Tom Taulli does not own shares mentioned in this article. He is currently ranked 1,746 out of more than 21,000 in Motley Fool CAPS.
