Is Blue Coat's Slowdown Permanent? (BCSI)

Shares of Blue Coat Systems, Inc (BCSI) had a bad day at the office a few weeks back. For their fiscal Q3 06 ending January 31, revenue rose 44% to $35.5 million. But, the number dropped slightly from the immediately previous quarter. Guidance for the fiscal fourth quarter (April 30) was lousy at $34.5 to $35.5 million.

This is a business that had been growing very fast. From fiscal 2003 to fiscal 2005, revenue more than doubled to $96 million. And, then the music died and investors are worried that this is going to be a series of deja vu all over again quarters in the future with $35 million in revenue forever. The stock has come down from about $52 in November to $22 recently.

The company was not overly encouraging. The company CEO, Brain NeSmith made the comment that "although the company has grown share in the proxy appliance market, we are reaching levels where any further gains in market share will occur more slowly". Welcome to the funeral, Mr. NeSmith.

The company did just buy Permeo Technologies, Inc. The company provides prophylactic software which allows companies to extend their corporate applications to mobile users like workers and customers. This cuts down on information theft and "leakage", to use Permeo's term. The company has a number of large banks, brokerages, and consumer electronics firms as customers including Bank of America, Chase, IBM, H-P, and Nomura Securities.

Blue Coat is not in a deadend business either. The company claims to have installed more than 25,000 of its applications worldwide. IDC ranks that company first in the world in Secure Content and Application Delivery market. The company obviously views the market as slowing down, but it is hardly going away. Permeo's market, with the increase in remote worker and customers tied into central IT systems, would seem to have an excellent future.

So, we have a company with steady revenue that makes money. Blue Coat has $72 million in cash and short-term investments and a market cap of $314 million. Back out the cash and the company trades for two times sales.

Perhaps Mr. NeSmith succumbed to despair too early, or perhaps his dog kicked him, but it seems a little premature to give up on Blue Coat when it is trading at these levels.

Douglas A. McIntyre is the former Editor-in-Chief and Publisher of Financial World Magazine. He was also the president of Switchboard when it was the 10th most visited site in the world, according to MediaMetrix. He has been chief executive of FutureSource, LLC and On2 Technologies, Inc. He has served on the boards of TheStreet.com and Edgar Online.