Renewed Growth Can Be Seen in Telecommunications

One area of the market we haven’t talked about in a while is pure play technology. I find myself unenthusiastic about large-cap technology companies, although I’m sure there are some attractive opportunities in that sector.

However, I have been seeing life in the telecommunications sector of late; in particular, the fiber optic industry seems to be experiencing some renewed growth. Other than that, the pure play technology opportunities are in the small- and mid-cap sectors of the market.

Right now, there are two companies with distinguished track records that look poised for future success. One is a micro-cap company, while the other is a small-cap.

The first company is Netsmart Technologies Inc. (NASDAQ/SC/NTST). This little company trades on the NASDAQ Small-cap market, and sells computer workstation applications for mental health care operations.

The company’s growth isn’t spectacular, but it is solid. For its latest quarter ended September 30, 2005, the company reported record revenues of $8.52 million, up about 15% from the comparable quarter in 2004. Net income for the quarter was a modest $379,000, or $0.07 per share, compared to $633,000, or $0.11 per diluted share, in 2004.

Most impressive was the company’s order backlog, which, at September 30, 2005, was $28.6 million with a recurring revenue component of $16.5 million.

The other larger company with interesting prospects is VASCO Data Security Intl. Inc. (NASDAQ/SC/VDSI). This company also trades on the NASDAQ Small-cap market (a market full of great investment opportunities) and sells digital identity authentication software. The company’s “Digipass” security products allow for user access to small hardware devices like calculators, mobile phones, personal computers, and other portable devices.

Revenues at this company in the third quarter grew 79% to $13.27 million, up from revenues of $7.4 million in the comparable quarter of 2004. Net income for its third quarter of 2005 grew to $1.75 million, or $0.05 per diluted share, up over 50% from net income of $1.15 million, or $0.03 per diluted share, in 2004.

This company is fully priced on the stock market, but the market expects great things over the next several years.

So, if you’re considering any pure play technology opportunities in this market, I’d pass on the large-cap names. The best place for outperformance in this sector right now is in smaller companies.