Guidance Software: Recent Considerations for Investment

Guidance Software (GUID) is the world leader in digital investigations. Their EnCase suite of forensic software products has become the industry standard and is used by consultancies, law enforcement and government agencies for searching, collecting, preserving, analyzing and authenticating electronic computer forensic data for use in criminal and civil court proceedings. Their customer base exceeds 28,000, including more than half of the Fortune 500 and over 1000 government and law enforcement agencies worldwide.

Industry Trend

Explosive Growth in Data Related Risks Requiring Digital Investigations

Worldwide adoption of local and wide area networks, e-mail and the internet have significantly increased communications within and between organizations and have created the ability to generate, store, share and distribute massive amounts of electronic information instantaneously all over the globe.

Increased productivity and lower costs of doing business through these networks comes at a price, higher exposure to organizations to increasing areas of risk associated with the growing proliferation of electronic data. Companies must now prioritize and prepare for the need to quickly and efficiently recover and analyze vast amounts of electronic data through processes called digital investigations.

This includes searching, collecting and processing litigation-related data, responding to regulatory requests for data, addressing corporate policy violations such as intellectual property theft, employee fraud and employee policy violations, and responding to IT security attacks or breaches.

GUID Stock Price

Technical Analysis

Like virtually all stock prices in every market, shares have been in a steady downtrend. In August, the shares broke their major support at the $8 area and plunged to below $6 and have been subject to the same worldwide liquidation as every other equity taking GUID down to a 52-week low at $2.00 in late October.

In more recent weeks the stock has resisted further decline even on the scary washout trading sessions and appears to be under a slow but steady accumulation. Downside risk now appears minimal. Technical patterns suggest that a move back up toward the August $8 to $11 gap zone is a high probability outcome for patient investors. Even to reach the low end at $8 would produce a 167% gain for buyers at the current $3 level. Technicals suggest a very favorable risk/reward profile for this company that has good fundamentals and a rock solid balance sheet.

Noteworthy Events

Recent Considerations for Investment

• Market Valuation – The recent decline in share price to below $3 now values the entire company at only $68 million, which is far below 1x 2008 revenue forecasts which will be about $90 million. GUID has cash of $34 million or $1.46 per share and no long-term debt.
• Record Revenue – Despite a challenging economic environment, the company reported a 14% increase in 3rd quarter revenue to a record $23.1 million. FY2008 will be ~ $90 million.
• Pay-Per Use Strategy – The company enhanced its’ software solutions business model when they announced EnCase eDiscovery, a Pay-Per-Use program which allows customers to pay on a per-case, per custodian basis and at a fraction of what it would cost to outsource the process. It offers organizations the option of paying for only what they use with charges tied to the amount of data searched, collected, processed and output into load files. Verizon (VZ), a leader in eDiscovery, recently signed an agreement to use EnCase eDiscovery on a Pay-Per-Use basis.
• Diversified Customer Base – The firm now boasts more than 28,000 clients worldwide including numerous government agencies. This diversified client base covers nearly every industry sector including utilities, healthcare, technology, insurance, educational institutions as well as police agencies, government investigation, and regulatory agencies.
• Stock Repurchase Program – When shares fell sharply in August, the company took immediate action to authorize an $8 million stock repurchase program which reflects confidence in their long-term outlook and their commitment to increase shareholder value.
• Insider Buying – Since shares fell below $6 in August, 5 directors and the CFO have begun stepping in with open market purchases ranging from $5.91 down to $3.08 per share.

Guidance Software Received Unsolicited $4.50 / Share Buyout Offer

On November 4th, Guidance Software announced that on October 6th it had received a $4.50 per share takeover proposal from AccessData Corp. of Linden, Utah. The company subsequently rejected the offer. This is another sign of confidence that management believes in the company and that they can achieve significantly higher returns to the stockholders.

Other Factors & Key Developments in 2008

• On October 22nd the company announced a strategic alliance with CACI International (CAI), a leading government IT systems integrator and services provider to provide a comprehensive leading-edge eDiscovery solution to the U.S. Department of Justice and other federal government agencies.
• In February, 2008 NATO Computer Incident Response Capability deployed Guidance Software EnCase Information Assurance technology to deliver forensic level analysis across networks.

Disclosure: It is possible at this or some subsequent date, the editors and staff of Cutler's Special Situation Reports (CSSR) may own, buy or sell securities presented.