Finding one good idea is hard enough, let alone finding the series of good ideas that it takes to build and maintain a growing software franchise. While Websense (Nasdaq:WBSN) once had a good growth business in web filtering, that market is eroding and the company has yet to convince the Street that it can drive appealing growth from a broader expansion into web security.

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Down with the Old, In with the New
Websense's legacy web filtering business has not disappeared, but it is fading quickly. To compensate and give the company a shot at future growth, management has staked a lot on Triton - a suite that broadens the company's web security business and addresses additional markets like small/mid-sized businesses (SMB) and mobile device security.

So far, the transition is going reasonably well. Websense has converted a significant percentage of its base to Triton and it's making up an increasingly larger percentage of billings. For the fourth quarter, for instance, overall billings were up just 4%, while Triton billings were up about 34%.

In addition, management clearly hopes that a suite of new offerings will boost and continue that growth. X10G will take aim at Blue Coat customers with scalable web security for 10G networking. Blue Coat was already under pressure from Cisco (Nasdaq:CSCO), Websense and Intel (Nasdaq:INTC) before going private, and that transition should make its customer base even more vulnerable.

Beyond X10G is a product (I-Platform) that offers cloud-controlled web security to mid-market customers and a mobile security platform for mobile device management. As Apple (Nasdaq:AAPL), Samsung, and similar device usage keeps growing, it creates more and more security headaches for businesses and this is a market that a lot of companies have targeted for its growth potential.

Potential, but Where's the Spark?
Management has suggested in the past that the total addressable market for Websense could be in excess of $6 billion in 2014. While that is indeed a robust potential market, a look at sell-side estimates suggests mid-single digit market share on that basis.

As Websense has expanded beyond its core filtering business, it has increasingly come up against major players like Cisco, Check Point (Nasdaq:CHKP), Intel, Symanetc (Nasdaq:SYMC) and Fortinet (Nasdaq:FTNT). Unfortunately, Websense's revenue growth does not hold up so well in those comparisons.

Triton adoption looks like it is going well and this really needs to work for the company to see a decent multiple. Tech investors have no patience for low-growth stories and the M&A market bears this out; growth stories get big premiums (like Taleo and SuccessFactors), but value stories do not. (For related reading on mergers and acquisitions, see Biggest Merger And Acquisition Disasters.)

The Bottom Line
As deferred revenue has declined with lower filtering retention rates, Websense has seen its free cash flow conversion rate go in the wrong direction. At the same time, nobody seems especially willing to predict robust revenue growth for this software company.

That leaves Websense looking like a relatively inexpensive but low-potential software idea. If Triton really takes off and Websense can elbow aside larger rivals in the web security space, there could be meaningful upside. Simply regaining the free cash flow margin of 2010 by 2016, for instance, could mean an incremental 25% to the stock's fair value.

While Websense probably has little operational downside from today's level, there's still the risk of further multiple contraction. So, Websense ultimately ends up looking like many other software plays - if you believe in the revenue growth story, the potential value is there, but there is definitely downside should that growth fail to materialize.

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At the time of writing, Stephen Simpson did not own shares in any of the companies mentioned in this article.

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