Guidance Software: Insulated From Economic Concerns

Guidance Software (GUID) develops and sells software to companies and government agencies (FBI, law enforcement, and state attorneys, etc.), which helps search, collect, preserve and analyze data across servers, desktops, and laptops for criminal and civil court proceedings. Guidance also provides support and maintenance to help its customers implement its solutions, conduct investigations, and train their IT staff to use its products. Guidance's software was used in the Laci Peterson and BTK cases, which was a huge windfall for the company's brand name. Now, data collected by Guidance is being viewed as evidence in legal proceedings, which is huge since legal recognition is key to success in this market.

In short, we love the Guidance story and its leading position as a pure-play in a rapidly growing market. Specifically, Guidance is the premier, pure-play company in the "E-Discovery" market, which is expected to grow by 30% per year over the next five years. The market's growth is being driven by increased stock-option investigations, insider trading, and other corporate fraud. Such fraud has forced companies to implement new electronic-records retention policies (for example, some policies require the storage of emails, documents, and instant messages for up to seven years), which will result in more information to search, sort, and analyze in a possible litigation.

Guidance IPO'd last year at $11.50 per share. The company used the IPO funds to ramp up its investment in selling and marketing and continued product development. As a result of the investments, the company has generated operating losses, but its top-line is growing at over 40% per year. We expect the company will now leverage its investments, while the top-line growth will remain strong over the next several years. After its IPO, the shares rallied to nearly $18, but have since retrenched to the $14 level. We believe the Guidance story will now get more attention, as investors look for growth investments in a waning economy. Guidance is almost completely insulated from the U.S. economic concerns, since there will always be litigation.

Disclosure: none