nCipher (NCH)

The former management team at nCipher, which specialises in encryption and data protection, was well respected but never quite delivered the growth that the City wanted. So when a new team took over at the end of 2007, led by chief executive Geoffrey Finlay, there was hope that they might reinvigorate the group's share price.

But when Mr Finlay unveiled his new business plan, quite the opposite happened - nCipher’s shares slumped 13 per cent in a day. Mr Finlay says that he intends to double nCipher's sales in three years, but to do so he needs to increase investment this year. Analysts estimate that means an additional £3m-£4m in operating expenditure right now, so the current year's earnings forecasts have more than halved. nCipher is also changing its financial year-end from December to April, which it says should reduce pressure on deal closure at period ends. But the shift muddies financial waters and won't necessarily help build confidence.

Under Mr Finlay's leadership, nCipher plans to move from being a developer-led business towards being 'goal-oriented', with much of the extra investment going towards new sales people. Mr Finlay says that his developers are pleased with the establishment of a new 'Product Delivery Group', which will bring together product management, development and marketing much earlier than under the previous regime. Even so, a hard-nosed focus on sales could risk alienating the development team - raising potential concerns about staff retention - at a time when Mr Finlay admits that nCipher’s products need more work to make them easier to install and use.

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Whether investors are in the mood for a three-year turnaround story remains to be seen, too - particularly with spending on the rise. In similar situations at other companies, one-off investments have turned out to be more enduring. Many investors reduced their holdings during last year's share buybacks and they may wait for evidence that the investment is paying off before buying back in.

Substantial exposure to the financial services sector will not help sentiment either. Mr Finlay says that there's a "misconception that nCipher is disproportionately finance-centric" in its customer base. The pharmaceuticals, retail and education IT markets all present opportunities, he says, but admits that the core sectors of financial services and government are "material". However he won't be more precise than that. Detailing how well diversified nCipher really is would reassure investors who are concerned that, amid the current banking chaos, IT spending by financial services organisations is likely to come under severe pressure. Indeed, the 'c-level' management that nCipher wants to target, in order to win bigger contracts from 'enterprise' clients, may now have other priorities.

Nonetheless, Mr Finlay says that the sales pipeline remains healthy. nCipher has signed its first flagship deal with a major US financial institution for its KeyAuthority product, which Mr Finlay says validates his plan to chase "seven-figure and up" transactions.

Greater regulation raises opportunities, too. Headline-grabbing data losses from such organisations as the Department for Work and Pensions have increased pressure on governments to force companies to confess when customer information goes astray and to encourage better IT protection - this would build on the precedent set by a similar law in California. That potentially means more investment in encryption, and especially in nCipher's new tools which help companies manage all their encrypted files. Indeed, nCipher's 2007 results show that its business here remains in good health, with revenues meeting expectations and earnings well ahead.