Ordinarily, I might be tempted to really tear into small-cap signal reconnaissance/intelligence company Applied Signal (NASDAQ:APSG). It made the common mistake of missing estimates by a wide margin, and the metrics I follow closely, like margins and return on invested capital, aren't so great. But while this company's not on my buy list, I think a lot of the present troubles have to do with the company's small size and the nature of its markets.

Revenue in Applied Signal's first quarter was up only about 11%, while higher stock compensation expenses pushed operating income lower year over year. While I generally pay little attention to analyst estimates (after all, the most common word used in conjunction with them seems to be "surprise"), it's hard to ignore Applied's 35% shortfall.

On a more favorable note, the company did report that new orders were up 200%, to about $33 million. This is where I think a little context helps. The company blamed part of this quarter's revenue shortfall on delayed timing for some orders; some that should have been booked in the company's fourth quarter slipped into the first instead. If that's all true, and we're supposed to overlook this revenue shortfall, we also shouldn't get quite as excited about the order flow and the book-to-bill ratio; the "book" was inflated and the "bill" depressed by that same delay.

By and large, I like the mid-term prospects of the whole intelligence and defense communications sector. It's less likely that the war for domestic security will be fought with huge ships, submarines, and missiles from the likes of General Dynamics (NYSE:GD), Boeing (NYSE:BA), and Raytheon (NYSE:RTN), than with advanced communications, intelligence, and surveillance gear. That doesn't mean Applied Signal lacks competition in those fields; all three of the aforementioned defense-industry heavy hitters have some stake in high-tech communications, as do more specialized companies like Argon ST (NASDAQ:STST) or L-3 Communications (NYSE:LLL).

While Applied Signal definitely has potential, order and revenue slippage and big earnings misses have been all too common for it. I'll grant that the shares might rise, but Fools should nonetheless keep its above-average volatility in mind when deciding whether to buy or avoid.

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Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).