After two years of slumping stock prices at Pasadena litigation support and cybersecurity firm Guidance Software Inc., the other shoe finally dropped for Chief Executive Victor Limongelli last month.
Guidance’s directors ousted Limongelli on Nov. 5 after the company missed seven of eight quarterly sales targets, replacing him with Chief Financial Officer Barry Plaga, who took over as interim chief executive.
Limongelli, who headed Guidance for more than 11 years, also resigned from the board.
The change came as Guidance posted a non-GAAP net loss of $180,000 (-1 cent per share) in the third quarter ended Sept. 30, compared with a loss of $2.3 million (-9 cents per share) from the same period a year earlier. Guidance posted revenue of $27.8 million in the quarter, a drop of less than 2 percent from the year-earlier period. The numbers fell short of Wall Street’s expectations of earnings of 5 cents a share.
Despite the narrower loss, shares of Guidance, which closed Nov. 26 at $5.86, have fallen 34 percent from a year ago, when they were trading at about $9. The company’s market capitalization has fallen to just under $158 million. (See page 33.)
“When you’re the guy at the top and the company continues to miss expectations, that’s likely the person whose head it falls upon,” said Kevin Liu, an analyst at B. Riley & Co. in Westwood.
Plaga said he had spoken to Limongelli since the board voted him out, and that his predecessor was handling the situation about as well as can be expected.
“He’s definitely not happy that it happened, but he understands it,” he said.
Plaga, who has expressed interest in taking the helm on a permanent basis, has about four to six months to prove himself worthy said an analyst who tracks the company.
Limongelli could not be reached for comment.
One prominent local technology executive, who spoke on condition of anonymity, said Limongelli’s background as an attorney no longer suited the company’s needs as it transitions away from the legal market, suggesting that Plaga’s background might be a better fit to lead the company going forward.
Prior to joining Guidance, Limongelli served as vice president and general counsel at Knowledge Networks Inc. in Palo Alto and as an associate at Philadelphia law firm Morgan Lewis & Bockius.
Plaga’s professional background includes an eight-year stint as chief financial officer at the Santa Monica video-game publisher now known as Activision Blizzard Inc. and as vice president of finance and corporate controller at Sun Microsystems Inc. in Santa Clara.
“They want someone who can lead them into the future as they continue to expand their business model,” said the executive.
Shifting markets
Shawn McCreight, the company’s chairman and chief technology officer, expressed support for Plaga in an earnings call last month.
“Barry Plaga is the right person to take over the helm,” said McCreight, noting that the board feels he has the right credentials to improve revenue growth as Guidance attempts to increase its market share in the cybersecurity sector.
In addition to its e-discovery software, which is used by law firms and corporations to produce corporate documents during litigation, Guidance sells a full suite of software products designed to protect businesses from cyberattacks. While Guidance is still a market leader in e-discovery, that sector is shrinking at a faster rate than the company’s executives anticipated.
“The Fortune 100-to-Fortune 500 market has been pretty well penetrated,” Plaga explained. “Now we’re moving downstream to small and medium-sized businesses.”
Lower price points in that market, he said, were a major reason for the company’s disappointing sales figures. Guidance also missed out on some federal contracts relating to cybersecurity in the third quarter, which contributed to its lower than expected revenue totals.
In addition, Guidance expanded its sales force in 2012, an expenditure that has yet to pay off with increased performance.
“They just never really derived the level of sales to ensure not only a return on investment but also to ensure they were profitable,” said B. Riley’s Liu.
It’s also taking Guidance time to gain a sizable foothold in the cybersecurity sector, where it competes with big names such as Mountain View’s Symantec Corp. and McAfee Inc. of Santa Clara.
Plaga said that he expects it would take about three or four quarters for Guidance’s cybersecurity products to start outperforming its e-discovery software.
But there is room for hope.
Though it still accounts for a small base, Guidance’s cybersecurity product revenue grew by 90 percent in 2013. The company accounts for both cybersecurity and e-discovery products in the same business segment and does not break out revenue figures for them individually.
Liu said he is optimistic that Guidance can turn things around and has a “buy” rating for the company with a price target of $8.50.
“They are still showing sequential improvement in their business,” he said.
