It was once an axiom that software companies were growth stocks. But, after several decades of IT investments by corporate America, it looks like the software industry is at a level of maturation. And for shareholders, the pain can be gruesome, as seen with stocks such as Visual Networks (NASDAQ:VNWK), Altiris (NASDAQ:ATRS), SeeBeyond (NASDAQ:SBYN), and others.
Still, there are a few companies that are finding ways to grow their software business -- albeit moderately in some cases. One example is Entrust (NASDAQ:ENTU). Yesterday, the company announced its first-quarter results. Revenues increased 8% to $23 million. Net income was $1 million, which was up from $500,000 in the same period in 2004. What's more, Entrust generated roughly $3 million in positive cash flow from operations -- increasing its cash balance to $100.2 million.
Founded 10 years ago, Entrust is focused on building software products to secure digital identities and information. Obviously, this is a critical area, especially in light of security breaches at companies such as ChoicePoint (NYSE:CPS) and Lexis-Nexus. It is even becoming a political issue. Thus, what is bad news for companies like ChoicePoint seems to be very good news for identity security companies like Entrust.
In the past quarter, Entrust struck some key deals. For example, the company entered into a deal with Microsoft (NASDAQ:MSFT) to add a second factor of authentication for the Windows environment.
Yet, as Bill Conner, Entrust's CEO, put it, "It was a tough quarter." That is, at least for enterprise customers. However, help came from the company's strength in the government sector. Basically, the service contracts Entrust agreed to in the past year are now starting to turn into software sales. That said, the two deals in excess of $1 million were for federal contracts.
Currently, good news does not go far for software companies. The sector is certainly out of favor on Wall Street. But Entrust is well-positioned as a solution provider for such critical areas as identity theft and phishing (fraudulent email to capture personal information). This should be a source of long-term growth for the company, as well as short-term growth. After all, the company upped its guidance for revenues from $46 million-$49 million to $48.5 million-$50.5 million in the first half of 2005. The company expects its earnings per share to range from $0.03 to $0.04 per share, which is up from $0.02 to $0.03 per share.
Fool contributor Tom Taulli owns shares in Entrust. The Motley Fool has a disclosure policy.
