Network Engines Links Up with NOXS

Today Network Engines (NENG) announced a distribution deal with NOXS. You can access the entire press release by clicking here.  This is huge news for Network Engine investors, despite the fact that the stock barely reacted to the news (which is OK by me, since I just bought more).

So why is this news very bullish for Network Engines (NENG)?

• NOXS is one of the premier IT security software distributors in Europe. So this brings huge credibility to Network Engines and its NS Series Microsoft ISA Server product.

• I believe that Network Engine´s NS Appliance Series sales were slow because they did not have a focused "security-software only" distributor. With NOXS they now have a much  more focused distribution channel, which should help with NS Sales, particularly in Europe.

• NOXS´s endorsement of Network Engine´s NS Appliance for ISA will now make it easier for Network Engine´s to sign up other security-software focused distributors for the NS Series, thereby expanding the distribution network for this software dramatically. The bottom line is that NOXS is an established expert on IT Security software and they understand the market well, so if they are distributing the NS you can know for sure that this thing is for real and has excellent potential.

Aside from the positive aspects of this news, a note of caution is due. Just because Network Engine´s product is getting wider distribution, does not mean it will sell. Seemingly, the NOXS deal is limited at this time to Italy and France, so this is an essence a test period. If NOXS customers bite on the sales pitch, you can be sure the NS Series will be rolled out throughout Europe very rapidly. But, there still is the inital sales hurdle. In addition, it is important to note that Network Engine´s still has a long road ahead of it, since even with wide great distribution the company still needs to invest heavily to educate partners, distributors, and ultimately end-users.

Nevertheless, for the reasons mentioned above, I think this news is extremely positive for Network Engines, and it continues to validate my original investment thesis. I think the stock offers incredible an risk/reward at current prices, since the stock reflects zero success for the NS Series product, which if it is only modestly successful could still greatly increase Network Engine´s (NENG) revenue and earnings.

The bottom-line is that the security software market will grow for a long, long time and the appliance server market will grow for a long, long time. If Network Engine´s is successful in developing the sales channels for its proprietary NS Series product, the company could be in a sweet spot for awhile since it can easily and with little expense begin to develop, market, and sell other proprietary appliances. The current stock price does not reflect these upside opportunities at all, and as such there is little risk here and the potential for a huge long-term winner.

On a final note, I should mention that Network Engine´s filed their 10Q today and reported that their OEM division had operating earnings of about $3 million during Q1, while their Distribution segment lost $3 million. As mentioned here in the past, the Distribution segment, which has huge potential, is still masking profits at the OEM division. With $10 million to $12 million in operating earnings, I think the OEM division alone is worth at least $50 million. Adding in cash of about $30 million and you get a minimum valuation for Network Engine´s of $80 million. This is above the current stock price, and implies no valuation at all for the Distribution segment, which to me shows that Network Engine´s is a great investment gamble at current prices. About the only risk for Network Engine´s is the potential loss of the EMC account, but I see that as very unlikely at the current time and this potential loss is already reflected in the low valuation for the OEM segment and the entire company.

Please Note: We first recommended Network Engines (NENG) at $1.88, and still hold a position in the stock. All ideas, opinions, and/or forecasts, expressed or implied herein, are for informational purposes only and should not be construed as a recommendation to invest, trade, and/or speculate in the markets. Any investments, trades, and/or speculations made in light of the ideas, opinions, and/or forecasts, expressed or implied herein, are committed at your own risk, financial or otherwise.

Comments

[brian]

Given your latest analysis of the most current news on NENG, where would you value the company today? If they dont lose the EMC account, I would guess at below $2/share, this is a great "casino capital" bet..?

[blake]

Why do you think NS sales #'s were 100/100/135 the last 3 qtrs. Does the mkt want a different version of NS? or is it just the timing of the distribution deals. It seems to me that if the NS series is the best like the MSFT,WBSN,NOXS and Ingram micro deals suggest, we should start to see large orders in q3/q4. any additional thoughts? Thanks