Software IPO: Highlights from Guidance Software's S-1 Filing

by: Evelyn Rubin

Guidance Software, a developer of software for digital investigations, filed last week to go public on Nasdaq. Highlights and excerpts from the company's S-1 filing:

Proposed Ticker: (NASDAQ:GUID)

Maximum Offering: $80 million

Underwriters: Morgan Stanley, Lehman Brothers, Wachovia, AG Edwards

Business Overview:

We develop and provide the leading software solutions for digital investigations. EnCase® Enterprise, our flagship product, enables corporations and government agencies to search, collect, preserve and analyze, from a single location, data across the servers, desktops and laptops that comprise their entire network. Our EnCase® Forensic software, which we believe is the industry standard tool in the field of digital forensic software, is used primarily by law enforcement and government agencies for searching, collecting, preserving, analyzing and authenticating electronic computer forensic data for use in criminal and civil court proceedings. We also offer a comprehensive array of forensic investigation and training services to help our customers manage their internal digital investigations, including eDiscovery requests, and learn how to effectively and efficiently use our software.

Financial Highlights: For the first six months of the year, revenues were $24.6 million, an increase of 46% over the same period in 2005. Revenues are split between product and service revenues; the latter component increased from 45.6% to 46.5% of sales between H1 05 and H1 06. Cost of revenues fell from 30.5% to 28.4% in this period. The company's most substantial OPEX item is sales and marketing (50.4% H1 06 sales) followed by G&A (14.6%) and R&D (13.6%). The company had a small net gain of $400k in the first half of 2005, and a net loss of $1.7 million in the first half of 2006.

For 2005, the company recorded net income of $1.6 million compared with a net loss of $792k in 2004. Revenues grew 43.1% in the period to $39.5 million of which service revenues declined from 42% to 41%. Cost of revenues declined from 35.9% to 29.7% of sales.

At the end of June, the company had $4 million in cash and cash equivalents. The company declared a cash distribution to its pre-IPO shareholders; other than this amount there are no material cash commitments.

This distribution will generally be equal to the sum of (i) our paid-in capital as of the date of declaration of our final distribution and (ii) our federal net income includible in the income of our stockholders as a result of our S Corporation status for all of our taxable periods starting in October 1998 and ending on the day prior to the day our status as an S Corporation terminates, less distributions previously made to our current stockholders with respect to such net income.

Use of Proceeds:Beside the portion of IPO proceeds targeted for funding the distribution mentioned above, the remainder is intended for general corporate/working capital.


Our customers include government agencies and global corporations in a wide variety of industries such as financial and insurance services, technology, defense contracting, telecom, pharmaceutical, manufacturing and retail. Our EnCase® Enterprise customer base currently includes more than 90 of the Fortune 500 and many federal and international government agencies, and we have deployed approximately 24,000 units of our EnCase® Forensic software to more than 1,000 government and law enforcement agencies and other customers worldwide. Our EnCase® Enterprise customers are primarily in North America, and also extend to Europe, Africa, the Middle East and Asia/Pacific Rim. Sales to customers outside of the United States accounted for 25%, 23% and 25% of our revenues for the fiscal years ended December 31, 2003, 2004 and 2005, respectively. The majority of our EnCase® Forensic customers are national and local government agencies, law enforcement agencies and other organizations of the United States government. No customer accounted for more than 10% of our total revenue in 2003, 2004 or 2005.

Key Competitors: The company lists as direct competition unnamed players developing computer forensic tools; consultants such as the big four accounting firms and managed security services companies. In terms of indirect competition the company mentions traditional security players like McAfee (MFE) and Symantec (NASDAQ:SYMC), storage infrastructure companies like EMC (EMC) and ZANTAZ (private), internal IT organizations and companies that provide corporate insurance to Global 2000 companies.

Employees and Management: At the end of August, the company had 296 full-time employees, of which 53 were in R&D, 121 in S&M and 46 in Professional Services. Shawn McCreight is founder and Chairman; in January 2003 he relinquished the CEO role which current CEO John Colbert took over in August 2004:

John Colbert has served as Chief Executive Officer since August 2004 and has served as a member of the Board of Directors since 2005. He previously held a number of executive positions at Guidance Software, Inc., including President and Chief Executive Officer from August 2004 to July 2005, Senior Executive Vice President from April 2004 to August 2004, Senior Vice President of Sales and Professional Services from July 2003 to April 2004, Vice President of Professional Services from March 2003 to July 2003, Vice President of Research and Development from March 2002 to October 2002, and Director of Training from June 2001 to March 2002. Prior to his service at Guidance Software, Inc., Mr. Colbert spent 14 years in law enforcement engaged in criminal investigations and computer forensic examinations.

Note that George Tenet, former Director of the CIA is a director in the company.

Current Ownership: Shawn McCreight is the largest shareholder with 55.7% of the company. John Patzakis, Chief Legal Officer who held the CEO role in 2003 holds 16.5%. Bob Sheldon holds 11.64%-he is not a director or officer in the company, and it is unclear from the S1 what his relationship to the company is.

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