IONA (NASDAQ:IONA) develops software for service-oriented architecture (SOA), which helps companies use Web technologies to improve their information technology (IT) environments. It's a market undergoing consolidation, such as with Software AG's $546 million acquisition of webMethods and Oracle's (NASDAQ:ORCL) $6.6 billion bid for BEA Systems (NASDAQ:BEAS).

Late last week, IONA reported its fiscal Q3 results. Revenue rose 19% to $24.2 million and license revenue was up 24.7% to $14.6 million. In fact, getting a boost from biggie customers like Citigroup (NYSE:C) and Nokia (NYSE:NOK), the Artix product line increased its license revenue by 82%. IONA posted GAAP net income of $3.1 million, or $0.08 per share, and cash flows from operations were a healthy $6.6 million. The company has about $58.8 million in the bank.

To rev up growth, IONA is pushing hard on alliances. The company is now a gold certified partner with Microsoft (NASDAQ:MSFT), which should help it win more customers next year. IONA is also pursuing an open-source strategy, which means offering some of its software as a free download. As seen with companies like Sourcefire (NASDAQ:FIRE), the strategy is far from easy.

Another big issue is that IONA gets about 25% of its revenue from the financial sector. On the conference call, management talked about "subprime" issues with some of its customers, saying there could be a slowdown. Keep in mind that IONA's Q4 guidance for revenue is a soft $20 million to $22 million. 

All in all, IONA has done a fairly good job in terms of cash flows, revenue growth, and product innovation. But as a small business, the company may be more susceptible to volatility in different sectors, such as financial services. In other words, the lackluster stock performance could continue for the rest of the year.

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Fool contributor Tom Taulli, author of The Complete M&A Handbook, does not own shares mentioned in this article. He is ranked No. 6,023 out of more than 70,000 investors in Motley Fool CAPS.