Guidance Software, Inc.: Somebody's watching you

Shannon Roxborough | Oct 09, 2007 6:20am EDT | Comment

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Every website you visit and e-mail you send or receive, every phone call, voicemail or text message you exchange, every purchase you make with a debit or credit card, and virtually every piece of information on your personal and financial life compiled by commercial interests and government sources leaves a lifetime electronic footprint and paper trail.

It seems that privacy, once taken for granted, is a thing of the past. It could be argued that the very technological advances that make our lives more convenient have also made the all-intrusive Orwellian surveillance state more of a reality.

And that suits Guidance Software, Inc. (Nasdaq: GUID), a leader in computer forensic investigation technology, just fine. Guidance's software enables law enforcement organizations, corporations and government agencies to manage, search, collect, preserve and analyze digital information across computer networks. Guidance counts Halliburton (NYSE: HAL), the U.S. Department of State and a host of Fortune 500 companies among its clients.

Guidance's flagship product is EnCase, software that allows security personnel to monitor information traffic going in and out of their networks, and to sniff out and log suspicious activities by users (including specific patterns or keywords). A variation of the product is used in law enforcement labs by computer forensics investigators to collect digital evidence. EnCase can do everything from restoring "deleted" files from computer hard drives to helping catch rogue employees who are emailing company secrets to competitors, to tracking down sources of classified information leaks. Most experts prefer EnCase to competing products like Deepdive Technologies' DD500 and Paraben Corporation's P2.

On Aug. 14, Guidance reported that it lost $1 million, or $0.04 per share, in the second quarter, compared with a loss of $1.1 million, or $0.06 per share, in the year-ago period. Revenue surged 44%, to $18.5 million from $12.7 million, ahead of analysts' consensus estimates of $17.72 million. Gross profit was $13.17 million, compared with $9.19 million in the same period in 2006.

September was a busy month for the company. It launched a new course—for law enforcement officers, computer forensic examiners, corporate and private investigators, and network security personnel—for its Neutrino mobile phone forensics tool.

"As the use of mobile devices has become increasingly prevalent worldwide, we've been experiencing a rapid growth in demand for training on advanced investigative technologies such as our mobile phone acquisition tool," said Al Hobbs, vice president of training at Guidance Software in a news release on Sept. 18. "Given the sheer quantity of corporate and criminal investigations, terrorist activity and the preponderance of relevant data stored on cell phones, investigators need training on the devices used most often to communicate."

It also landed a couple of big-name clients: Lowe’s Companies, Inc. (NYSE: LOW), the home improvement retailer, licensed EnCase Enterprise to search, collect and preserve electronically stored information for its more than 1,400 stores nationwide, which "will allow Lowe's to reduce risk and address several core requirements in the eDiscovery process," according to John Colbert, CEO of Guidance Software. And office supply leader OfficeMax Incorporated (NYSE: OMX) signed on as a customer, purchasing the EnCase eDiscovery Suite to conduct in-house electronic data sweeping and collections.

The August issue of Law Technology News reported that Guidance received the highest marks in customer satisfaction for both in-house corporate and service provider software users in the 2007 Socha-Gelbmann Electronic Discovery Survey, an influential report in legal circles.

"Guidance Software technology is a game changer ... spending in its sector (eDiscovery) is currently skewed toward labor intensive and inefficient solutions for which Guidance Software offers significant ROI enhancement," Morgan Stanley's software analyst team recently said of the company's potential.

As a whole, Wall Street's outlook on Guidance has been mixed.

Earlier this year, Lehman Brothers and Wachovia Securities initiated coverage with "outperform" and "overweight" ratings, respectively. Guidance was rated a "strong sell" in new coverage by analyst Daniel Scalzi at Matrix USA, on Sept. 17. In an Oct. 4 initial report, Joshua Jabs, an analyst with Roth Capital Partners, kicked off coverage with a "buy" rating.

Jabs said that Guidance is the leader in the digital forensics business and noted that new regulations have accelerated electronic discovery in the forensic market. Setting a $15 one-year target, Roth analysts believe the company's higher profile (due to its recent IPO), a differential product offering and a strong reputation among attorneys will contribute to its top-line growth, which they expect to rise 37% year-over-year in 2007, to $76.6 million, and another 29% in 2008.

Guidance Software's stock closed at $12.81 on Monday, with a 52-week trading range between $10.92 and $17.90. Collectively, analysts have set a one-year target estimate at $16. Though CFO Frank Sansone exercised options for (then sold) 44,300 shares of common stock last month, 62% of company shares remain insider-owned.

All said, turning the tables and keeping a close watch on this company wouldn't be a bad idea.