NETWORK ENGINES, INC. 
By CANTON, Mass., Aug. 2, 2012 /PRNewswire/ -- NEI (Nasdaq: NEI), a leading provider of server-based application platforms, deployment solutions and lifecycle support services for software technology developers and OEMs worldwide, today reported financial results for its fiscal third quarter, the period ended June 30, 2012.
Third Quarter Financial Performance and Highlights
-- Net revenues were $64.6 million, a decrease compared to the $66.1
million reported for the third fiscal quarter last year but better than
guidance of $51 to $56 million.
-- EMC represented 54% of net revenues, a decrease from 63% of net revenues
for the third fiscal quarter last year and an increase from the 42% of
net revenues reported in the second quarter of 2012. Tektronix comprised
9% of net revenues during the quarter, an increase from 8% of net
revenues in the third fiscal quarter last year and down from the 22% of
net revenues for the second fiscal quarter this year. Symantec
represented 17% of net revenues during the quarter, an increase from 10%
of net revenues during the second fiscal quarter. Since Symantec was a
new customer in the year-ago quarter, revenues were not yet significant.
-- Gross margin was 11.2% of net revenues, within guidance of 11.0% to
11.5% and compared to 11.8% in the third quarter last year.
-- Operating expenses were $6.3 million, which was above the guidance range
of $5.5 million to $6.0 million, and compared to $6.1 million in the
year-ago third quarter. The higher operating expenses were due to
$592,000 in expenses related to the Company's pending acquisition by
UNICOM Systems.
-- Net income on a GAAP basis was $468,000, or $0.01 per share, which
exceeded the guidance of a loss of $(200,000) to net income of $300,000,
and compared to net income of $1.9 million, or $0.04 per share in the
same period a year ago. The net income for the third quarter of fiscal
2012 is inclusive of income tax expense of $361,000, while the year-ago
quarter included income tax (benefit) expense of $(85,000). As a result
of the Company's reversal of its deferred income tax valuation allowance
at September 30, 2011, NEI is now required to record federal income tax
expense, although it will be realizing the benefit of its deferred
income tax assets and therefore substantially all of the federal income
tax expense will not require cash payments.
-- Non-GAAP net income, which excludes stock-based compensation of
$118,000, amortization expense of $280,000 and acquisition related
expenses of $592,000 associated with the pending acquisition, was $1.5
million, or $0.03 per share, better than the expected range of non-GAAP
profit of $200,000 to $700,000. The non-GAAP net income compared to
non-GAAP net income of $2.4 million, or $0.06 per share, in the third
fiscal quarter of 2011.
On June 18, 2012, NEI signed a definitive merger agreement with UNICOM Systems, Inc. ("UNICOM") and a new UNICOM subsidiary under which UNICOM, a global information technology company and part of the UNICOM group of companies, will acquire NEI for $1.45 per common share in cash. As previously reported, the transaction is valued at approximately $63.2 million and currently is expected to close by the end of September 2012.
Greg Shortell, President and Chief Executive Officer of NEI, commented, "During the quarter, NEI signed a definitive agreement to be acquired by UNICOM Systems, Inc., which we believe is in the best interests of our shareholders and provides them with a significant premium to the stock's recent price range prior to the announcement. Operationally, we delivered another quarter of strong execution, exceeding our revenue guidance and reporting ongoing profitability. Revenues were above guidance primarily due to certain customers exceeding their forecasts and also because this was the first quarter since the flooding in Thailand that shipments were not constricted by the availability of hard drives."
For the nine month period ended June 30, 2012, net revenues were $200.2 million, compared to $202.8 million for the same period in 2011. Gross margin was $23.8 million, or 11.9% of net revenues, compared with gross margin of $22.9 million, or 11.3% of net revenues, for the same period last year. Total operating expenses were $18.3 million, or 9.1 percent of net revenues, compared with $18.2 million last year, or 9.0 percent of net revenues in the same period last year. On a GAAP basis, the Company reported net income of $3.2 million, or $0.07 per share, compared with net income of $4.7 million, or $0.11 per share, in the same period last year. The Company's non-GAAP net income, which excludes stock-based compensation, amortization expenses and acquisition related expenses, was $5.0 million compared to non-GAAP net income of $6.4 million for the same period last year. Net income amounts include $2.1 million of income tax expenses compared to $149,000 for the same period last year for the reason described above.
Balance Sheet
NEI finished the quarter with $14.3 million in cash and cash equivalents and $79.3 million in working capital. Accounts receivable increased to $50.3 million and inventory levels decreased to $36.6 million as of June 30, 2012 compared to $42.4 million and $42.9 million, respectively, as of March 31, 2012. NEI also has a $10 million bank credit facility.
Business Outlook
NEI currently anticipates the following results for its fiscal fourth quarter ending September 30, 2012, based on current forecasts from certain customers and historical trends and excluding any costs related to the UNICOM deal.
-- Net revenues in the range of $56 million to $61 million.
-- Gross margin in the range of 10.0% to 11.0% of net revenues.
-- Operating expenses between $5.5 million and $6.0 million, including an
estimated $100,000 of stock-based compensation expense and amortization
expense of $280,000.
-- Net income (loss) on a GAAP basis in the range of $(200,000) to
$300,000, net of projected income taxes at an effective rate of 40%.
-- Net income on a non-GAAP basis in the range of $200,000 to $700,000, net
of income taxes.
"We are projecting lower gross margins primarily due to customer mix and lower projected net revenues," stated Doug Bryant, Chief Financial Officer. "In regards to our balance sheet, we expect inventory levels to be higher and our cash position to be lower at the end of September because of the last time inventory purchases being executed during the quarter related to the transition of certain EMC product lines that we have previously announced."
Important Information about Non-GAAP References
References by NEI (the "Company") to non-GAAP net income and non-GAAP per share information refer to net income or per share information excluding stock-based compensation expense, amortization expense and expenses related to the Company's pending acquisition by UNICOM. GAAP requires that these expenses be included in determining net income or loss and per share information. The Company's management uses non-GAAP operating expenses, and associated non-GAAP net income (which is the basis for non-GAAP per share information) to make operational and investment decisions, and the Company believes that they are among several useful measures for an enhanced understanding of its operating results for a number of reasons.
First, although the Company undertakes analyses to ensure that its stock-based compensation grants are in line with peer companies and do not unduly dilute shareholders, the Company allocates grants and measures them at the corporate level. Second, management excludes their financial statement effect when planning or measuring the periodic financial performance of the Company's functional organizations since they are episodic in nature and unrelated to its core operating metrics. Last, we believe that providing non-GAAP per share information affords investors a view of results that may be more easily compared to peer companies and enables investors to consider the Company's results on both a GAAP and non-GAAP basis in periods when the Company is undertaking non-recurring activities.
The Company believes these non-GAAP measures will aid investors' overall understanding of the Company's results by providing a higher degree of transparency for certain expenses, and providing a level of disclosure that will help investors understand how the Company plans and measures its own business. However, non-GAAP net income should be construed neither as an alternative to GAAP net income or loss or per share information as an indicator of our operating performance nor as a substitute for cash flow from operations as a measure of liquidity because the items excluded from the non-GAAP measures often have a material impact on the Company's results of operations. Therefore, management uses, and investors should use, non-GAAP measures only in conjunction with the Company's reported GAAP results.
About NEI
NEI is a leading provider of server-based application platforms and lifecycle support services for software developers and OEMs worldwide. Through its expertise and comprehensive suite of solution design, system integration, application management, global logistics, support, and maintenance services, NEI is redefining application deployment solutions to provide customers with a sustainable competitive advantage. More than a decade of appliance innovation with the ability to provide physical, virtual and cloud-ready solutions makes NEI one of the most trusted software deployment partners in the industry. Founded in 1997, NEI is headquartered in Canton, Massachusetts, with facilities in Plano, Texas and Galway, Ireland, and trades on the NASDAQ exchange under the symbol NEI. For more information, visit www.nei.com.
Safe Harbor for Forward-Looking Statements
Statements in this press release regarding the Company's future financial performance, including statements regarding future net revenues, gross margin, operating expenses including stock-based compensation expenses and amortization expense, net income, profitability, inventory, cash, the proposed sale to Unicom and any other statements about the Company's management's future expectations, beliefs, goals, plans or prospects, constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The Company's actual results could differ materially from those stated or implied in forward-looking statements due to a number of factors, including those factors contained in the Company's most recent Annual Report on Form 10-K for the year ended September 30, 2011 and the most recent Form 10-Q for the quarter ended March 31, 2012 under the section "Risk Factors" as well as other documents that may be filed by the Company from time to time with the Securities and Exchange Commission. Forward-looking statements include statements regarding the Company's expectations, beliefs, intentions or strategies regarding the future and can be identified by forward-looking words such as "anticipate," "believe," "could," "estimate," "expect," "intend," "may," "should," "will," and "would" or similar words. The Company assumes no obligations to update the information included in this press release.
Contact:
Hayden IR
Peter Seltzberg
646-415-8972
peter@haydenir.com
ir@nei.com
NEI
Condensed Consolidated Statements of Operations
(in thousands, except per share data)
(unaudited)
Three Months Ended Nine Months Ended
------------------ -----------------
June 30, June 30, June 30, June 30,
2012 2011 2012 2011
---- ---- ---- ----
Net revenues $64,589 $66,105 $200,178 $202,764
Cost of revenues 57,387 58,333 176,373 179,914
------ ------
Gross profit 7,202 7,772 23,805 22,850
----------
Operating expenses:
Engineering and
development 1,586 1,610 4,859 4,788
Selling and
marketing 1,685 1,874 5,090 5,735
General and
administrative 2,737 2,273 7,477 6,630
Amortization of
intangible asset 280 332 840 997
Total operating expenses 6,288 6,089 18,266 18,150
----- ----- ------ ------
Income from operations 914 1,683 5,539 4,700
Interest and other (expense) income, net (85) 117 (229) 163
--- ---
Income before income taxes $829 $1,800 $5,310 $4,863
Provision for (benefit from) income taxes 361 (85) 2,124 149
--- --- ----- ---
Net income $468 $1,885 $3,186 $4,714
==== ====== ====== ======
Net income per share - basic $0.01 $0.04 $0.08 $0.11
===== ===== ===== =====
Net income per share - diluted $0.01 $0.04 $0.07 $0.11
===== ===== ===== =====
Shares used in computing basic net income per share 42,517 42,951 42,448 42,901
Shares used in computing diluted net income per share 43,026 43,910 43,030 44,072
The amounts in the table above include employee stock-based compensation as follows (in thousands):
Three Months Ended Nine Months Ended
------------------ -----------------
June 30, June 30, June 30, June 30,
2012 2011 2012 2011
---- ---- ---- ----
Cost of revenues $19 $31 $65 $102
Engineering and development 17 25 56 87
Selling and marketing 19 76 53 229
General and administrative 63 82 156 260
--- --- --- ---
$118 $214 $330 $678
==== ==== ==== ====
NEI
Non-GAAP Financial Measures and Reconciliations
(in thousands, except per share data)
(unaudited)
Three Months Ended Nine Months Ended
------------------ -----------------
June 30, June 30, June 30, June 30,
2012 2011 2012 2011
---- ---- ---- ----
GAAP net income $468 $1,885 $3,186 $4,714
Acquisition
related
expenses 592 - 691 -
Amortization
of intangible
asset 280 332 840 997
Stock-based
compensation 118 214 330 678
----------
Non-GAAP net income $1,458 $2,431 $5,047 $6,389
====== ====== ====== ======
GAAP basic net income per share $0.01 $0.04 $0.08 $0.11
Acquisition
related
expenses 0.01 - 0.01 -
Amortization
of intangible
asset 0.01 0.01 0.02 0.02
Stock-based
compensation - 0.01 0.01 0.02
------------
Non-GAAP basic net income per share $0.03 $0.06 $0.12 $0.15
===== ===== ===== =====
GAAP diluted net income per share $0.01 $0.04 $0.07 $0.11
Acquisition
related
expenses 0.01 - 0.02 -
Amortization
of intangible
asset 0.01 0.01 0.02 0.02
Stock-based
compensation - 0.01 0.01 0.02
------------
Non-GAAP diluted net income per share $0.03 $0.06 $0.12 $0.15
===== ===== ===== =====
Shares used in computing GAAP and non-GAAP
basic net income per share
42,517 42,951 42,448 42,901
Shares used in computing GAAP and non-GAAP
diluted net income per share
43,026 43,910 43,030 44,072
NEI
Condensed Consolidated Balance Sheets
(in thousands)
(unaudited)
June 30, September 30,
2012 2011
---- ----
ASSETS
Current assets:
Cash and cash equivalents $14,263 $19,852
Accounts receivable, net 50,274 43,522
Inventories 36,596 24,331
Deferred income taxes 15,001 15,001
Prepaid expenses and other current assets 3,747 4,886
Total current
assets 119,881 107,592
Property and equipment, net 2,569 2,569
Intangible asset, net 4,404 5,244
Deferred income taxes 14,147 15,855
Other assets 129 131
Total assets $141,130 $131,391
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $24,447 $23,360
Accrued liabilities 5,089 5,749
Deferred revenue 11,068 5,967
------ -----
Total current
liabilities 40,604 35,076
Deferred revenue 4,765 4,095
----- -----
Total liabilities 45,369 39,171
Stockholders' equity:
Common stock 485 481
Treasury stock (5,823) (5,646)
Additional paid-in capital 200,454 199,926
Accumulated deficit (99,355) (102,541)
------- --------
Total
stockholders'
equity 95,761 92,220
Total
liabilities
and
stockholders'
equity $141,130 $131,391
======== ========
NEI
Condensed Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
Three Months Ended Nine Months Ended
------------------ -----------------
June 30, June 30, June 30, June 30,
2012 2011 2012 2011
---- ---- ---- ----
Cash flows from operating activities:
Net income $468 $1,885 $3,186 $4,714
Adjustments to reconcile net income to cash
(used in) provided by operating activities:
Depreciation
and
amortization 548 601 1,690 1,708
Stock-based
compensation 118 214 330 678
Change in
deferred
income taxes 190 - 1,708 -
Other
adjustments 63 32 71 72
Changes in
operating
assets and
liabilities 5,448 (2,255) (11,717) (5,562)
Net cash (used in) provided
by operating activities 6,835 477 (4,732) 1,610
Net cash used in investing activities (429) (588) (772) (1,998)
Net cash provided by (used in) financing
activities 35 7 (85) 69
Net decrease in cash and cash equivalents 6,441 (104) (5,589) (319)
Cash and cash equivalents, beginning of
period 7,822 15,108 19,852 15,323
Cash and cash equivalents, end of period $14,263 $15,004 $14,263 $15,004
======= ======= ======= =======
SOURCE NEI
