3SOF

NEI $1.74..Steady Upwards Move. Strong Earnings/Guidance Expected Shortly. Aggressive Consolidation in Cloud Computing Sector Makes NEI a Tasty Acquisition Candidate.

http://stockcharts.com/freecharts/gallery.html?s=NEI


The latest, and probably significant development is, the upcoming monster new product release by EMC which could potentially be a game changer for NEI (EMC is NEI's largest customer)

In a recent CC, NEI's CEO hinted that revenues will jump significantly starting in 2Q 2011 (or the current quarter) ending March 30, 2011. NEI will report 1Q earnings in less than 2 weeks according to IR. If this is the case, guidance going forward could be really strong. Since this has not been announced by NEI, the current pps does not reflect this significant event.

Here is EMC's latest on the new product launch:

http://www.theregister.co.uk/2011/01/04/emc_vnx_unified_storage/

Even without the potential windfall from the EMC product launch, NEI's revenues are growing at 20%+/year due to ever increasing demand for "virtual machines" and other storage/security products the company makes for EMC, DEll, and other customers.

Players in the hot "cloud computing" like NEI are expected to grow significantly in the future. There is also significant consolidation in the sector making NEI an ideal buyout candidate because it is trading at 0.25 timers sales, it's consistently profitable, has a strong balance sheet, and has a long list of blue chip customers.

Highlights and 1Q earnings expectations:

- NEI's current market cap is $65 million

- NEI's 1Q 2011 revenues to be reported in about 2 weeks will be about $62 million vs. $48 million same quarter last year and sequentially stronger than 2Q 2010.

- Net income will range from $800K to $1 Million vs. $140K.

- NEI's balance sheet is super strong with 40c/share cash and ZERO debt.

- The stock is trading at 0.25 times sales and 12 PE. This is a 200 - 300% discount from sector averages

Not surprisingly, NEI is starting to gain visibility:

12/23/2010 8:58 AM ET

Capstone Investments initiates coverage on Network Engines (NASDAQ: NEI) with a "Buy."

Capstone analyst says, "NEI benefits from software companies who do not wish to deal with the hardware aspects of selling software as an appliance. Shares are currently attractive as the June quarter miss (due to difficulties in forecasting as the company was ramping up several rapidly growing businesses) resulted in a lower share price that does not adequately reflect the company's long-term fundamentals, in our opinion. NEI is a beneficiary of strong trends in storage (currently 55% of revenue) and security (30% of revenue), and is also a play on deduplication (as it provides EMC with Avamar deduplication software on DELL servers)."

Last Friday, Gleacher analyst Brian Marshall issued a short research note this morning summarizing a few trends he thinks will be important in IT in 2011 and beyond.

1) Cloud computing, he says, currently consumes only two percent of the global enterprise storage budget today, and he expects that to grow to between 15 and 20 percent within five years.

2) He says solid-state storage–which uses flash memory to enhance storage in servers by breaking up the bottlenecks that exist between processors that do the number crunching and hard drives that store the data–is "at a nascent stage," and that solid-state use in enterprise applications will only get more important in 2011.

3) Finally, expect more virtualization in the data center. Currently, corporations virtualize about 30 percent of their servers and storage machines. Marshall thinks over five years, that will grow to about 70 percent, and if the conditions are right, 2011 could be a year where the growth rate could accelerate significantly.

About Network Engines:

Network Engines, Inc. (NASDAQ: NEI/formerly NENG) provides application platforms, appliances, and deployment services for software developers, original equipment manufacturers, and service providers worldwide.

The company designs and manufactures server-based platform and appliance solutions, on which software applications are applied to enterprise and telephony information technology networks.

The company sells its application platform solutions to customers operating in the data storage, network security, carrier communications, and enterprise communications markets. The company also offers support services related to solution design, integration control, global logistics, and support and maintenance programs. 

Trading at 0.3 X sales Growing at 40%+. Products in several hot sectors (Storage/Virtualization/Cloud Computing/Network Security/Telecom/Wireless

My expectation: 3+ after strong 1Q 2011 earnings/guidance in two weeks.

NEI's Chart is looking better and better:

http://stockcharts.com/freecharts/gallery.html?s=NEI


Highlights and 1Q earnings expectations:

- 0.3 times sales of $240 Million/year. This is 300 - 5000% lower valuation than other
sector players

- Revenues of $62+ million vs. $48 million.

- Net income 300 - 500% higher than $140K posted in 1Q 2011.

- 40c/share cash and ZERO debt.

- Revenues and earnings are expected to ramp up significantly starting this quarter (See EMC comments below): Guidance strong and bullish


The latest, and probably the most significant development for NEI, is the upcoming EMC's new product release during this quarter ending March 30. This could potentially be a game changer for NEI.

In a recent CC, NEI's CEO stated that a new program with EMC will enter the revenue stage this quarter:

http://www.wsw.com/webcast/mcm13/register.aspx?conf=mcm13&page=nei&url=http%3A//www.wsw.com/webcast/mcm13/nei/

For this reason, I expect a step change in revenues and net income going forward. Guidance will therefore be strong and bullish.

Note that in the presentation the the CEO is bullish about all product lines: Storage, Network Security, Telecom data/video (iPhone/iPad/droids/etc), Cloud computing, Other opportunities.

Also notice that while gross margin has decreased from 16 to 11% since last year, revenues have jumped 40%+. More importantly, operating costs have decreased because NEI is leveraging its large capacity to mass produce. The bottom line is that operating costs have decreased an amazing 17% to 10% during that time. The company expects stable margins and any new revenues will trickle straight down to the bottom line.

The article below includes a section entitled " Get Ready for The Storage Rocket Ride." The author recommends EMC as one on 5 top 2011 stocks. But since NEI is a main EMC supplier, what is good for EMC is good for NEI.

http://www.fool.com/investing/high-growth/2010/12/14/our-top-5-tech-stocks-for-2011-emc.aspx

Players in the hot "cloud computing" such as NEI are expected to grow significantly in the future (see Bryan Marshall's comments below). There is also significant consolidation in the sector making NEI an ideal buyout candidate.


Below are some recent developments highlighting the fact that NEI is in the right place at the right time.

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During the latest CC, NEI's CEO stated that revenues will jump significantly starting in 2Q 2011 (or the current quarter) ending March 30, 2011. The guidance forward will likely be very strong if NEI is participating in EMC's new grand product release.

http://www.theregister.co.uk/2011/01/04/emc_vnx_unified_storage/

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Last Friday, Gleacher analyst Brian Marshall issued a short research note this morning summarizing a few trends he thinks will be important in IT in 2011 and beyond.

1) Cloud computing, he says, currently consumes only two percent of the global enterprise storage budget today, and he expects that to grow to between 15 and 20 percent within five years.

2) He says solid-state storage–which uses flash memory to enhance storage in servers by breaking up the bottlenecks that exist between processors that do the number crunching and hard drives that store the data–is "at a nascent stage," and that solid-state use in enterprise applications will only get more important in 2011.

3) Finally, expect more virtualization in the data center. Currently, corporations virtualize about 30 percent of their servers and storage machines. Marshall thinks over five years, that will grow to about 70 percent, and if the conditions are right, 2011 could be a year where the growth rate could accelerate significantly

======>>>

Not surprisingly, NEI is starting to gain visibility:

Capstone Investments Starts Network Engines (NEI) at Buy; A Prime Storage/Security Integrator

12/23/2010 8:58 AM ET

Capstone Investments initiates coverage on Network Engines (NASDAQ: NEI) with a "Buy."

Capstone analyst says, "NEI benefits from software companies who do not wish to deal with the hardware aspects of selling software as an appliance. Shares are currently attractive as the June quarter miss (due to difficulties in forecasting as the company was ramping up several rapidly growing businesses) resulted in a lower share price that does not adequately reflect the company's long-term fundamentals, in our opinion. NEI is a beneficiary of strong trends in storage (currently 55% of revenue) and security (30% of revenue), and is also a play on deduplication (as it provides EMC with Avamar deduplication software on DELL servers)."


About Network Engines:

Network Engines, Inc. (NASDAQ: NEI/formerly NENG) provides application platforms, appliances, and deployment services for software developers, original equipment manufacturers, and service providers worldwide.

The company designs and manufactures server-based platform and appliance solutions, on which software applications are applied to enterprise and telephony information technology networks.

The company sells its application platform solutions to customers operating in the data storage, network security, carrier communications, and enterprise communications markets. The company also offers support services related to solution design, integration control, global logistics, and support and maintenance programs.