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Technology Stocks : NENG: Network Engines, Inc. -- Ignore unavailable to you. Want to Upgrade?

To: Amboy Charlie who wrote (54)	11/9/2003 4:18:49 PM
From: Gus	Respond to of 186

Hey Charlie, I remember you. Good to have you around. More later on NENG's earnings report. Late lunch.

To: Amboy Charlie who wrote (54)	11/10/2003 1:49:22 AM
From: Gus	Read Replies (1) \| Respond to of 186

Are profits anathema to small cap tech investors, or what? At this stage of its development, NENG is still a sales growth and sales mix story, Charlie, even though NENG's current management should be commended for using profitability to ground a young company with less than 100 employees. NENG's original management/founders were all over the place and had no such discipline; although, to be fair, the late 90s were heady times that encouraged that kind of behavior. There was some knee-jerk reaction to the nearly 7% sequential quarterly decline in Centera revenue, but NENG attributed it to some changes in EMC's Centera distribution model and guided to a sequential increase of anywhere from 7% to 28% in the historically strong Christmas quarter so that should put that issue to rest fairly quickly. More than anything else, the wide range probably indicates the natural uncertainty flowing from EMC's rapid-fire moves in acquiring Legato, which closed early in the December quarter, and Documentum, which is expected to close early in the March quarter. EMC formally rolled out Centera v1.0 in April 2002. Centera v1.0 was distributed primarily by EMC's ISV partners so EMC had to develop an inventory model that reflected the relatively long sales cycle (6-18 months or up to 2 budget periods) of its content management partners. Under the original setup, I think NENG booked the sales of its Centera nodes as soon as they shipped it to EMC's North Carolina facility where EMC turned it into the finished Centera product (turnaround time of around 3-4 days) before becoming part of EMC's finished goods inventory available for drawdown by its ISV partners. EMC's sales force started selling Centera early this year when EMC rolled out Centera v2.0 in April 2003. Then EMC decided to buy Legato and Documentum which meant that EMC had to adapt its Centera-related inventory model to reflect the fact that different sales forces inside EMC (EMC direct, EMC indirect, Legato direct/indirect, DCTM direct/indirect) and outside EMC (more than 50+ ISV partners with their own predominantly direct sales force) would be drawing down from EMC's Centera-related inventory. Under the current setup NENG no longer books sales when they ship the Centera nodes to EMC's North Carolina facility but instead waits until the finished Centera product is *actually* drawn down from EMC's Centera-related finished goods inventory. This new consignment model has a positive effect on EMC's cash conversion cycle (by elongating the time it takes to pay its payables) and a negative effect on NENG's cash conversion cycle (by elongating the time it takes to collect its receivables), but considering the torrid growth of EMC's new storage platform, this concession on NENG's part doesn't appear to be out of line or alarming. Keep in mind that Centera is primarily a channel-friendly software play for EMC. Note, for example, how they continue to make it more palatable for somebody like IBM Global Services -- at the behest of its customers -- to buy the hardware from NENG, license the RAIN architecture and CentraStar operating system from EMC and use products from EMC/Legato, EMC/Documentum or any one of more than 50+ ISVs who have already ported their products to Centera. Being fairly familiar with the EMC sales ramp, there is no doubt in my mind that EMC will keep on fine-tuning their operating model to compress the Documentum/Legato/Centera sales cycle until they move the Centera platform to the corporate mainstream alongside Symmetrix DMX and Clariion. I would buy this puppy on any dip. I loved the way they casually dropped the reference to the unnamed OEM which accounted for less than 10% of server appliance revenue, but already accounted for more sales than any other OEM except EMC. It wasn't that too long ago when NENG would hold a conference call and nobody would attend.