Tuesday, November 20, 2007

Large Network Engines (NENG) Holder Requests a Stock Buyback

In a 13D filing on Network Engines Inc. (Nasdaq: NENG), 6.5% holder Trinad Management disclosed a letter sent to the company requesting that Network Engines consider a share buy back program.

In the letter, Trinad said they support Greg Shortell and the new management team at Network Engines and said they approve of management’s decision to acquire Alliance Systems. Trinad said with $10 million in the bank and an additional $10 million in expected free cash flow, the company should dedicate a portion to projects which have the greatest return to shareholders such as a share buy-back program.
The firm notes the stock is trading at 52-week lows and is significantly undervalued. The firm said a buy-back program would improve investors' overall perception of Network Engines' equity value.
Copy of the Letter:
Dear Board Members:
We support Greg Shortell and the new management team at Network Engines and are encouraged by their accomplishments to date. We believe the focus of the sales and marketing efforts on diversifying the company’s customer base is yielding results and should allow for the continued generation of substantial free cash flow from operations.
Furthermore, we approve of management’s decision to acquire Alliance Systems, Inc. In our estimation, this acquisition should significantly increase shareholder value. It is our belief that the Company can realize increased sales through product portfolio expansion and cross selling opportunities. At the same time, synergies of the acquisition have provided Network Engines with the opportunity to significantly grow its business. The post-acquisition Network Engines should achieve economies of scale and will likely incur integration savings during FY 2008. The Alliance Systems acquisition and the shift in sales and marketing focus should result in an improved ability to successfully execute its business strategy.
Taking these positive events and Network Engines’ current and long term commitments into account, our financial analysis suggests that the Company currently has approximately $10 million in cash on its balance sheet and no funded indebtedness. In addition, our conservative projections indicate that the Company will generate an additional $10 million (or more) in free cash flow during the next 12 months. Accordingly, we strongly believe that this board and management has an obligation to dedicate a portion of its cash reserve and free cash flow to projects which have the greatest return to shareholders such as a share buy-back program. We request that the Board of Directors consider whether shareholder returns on other proposed uses of these excess funds are indeed superior to a share buy-back.
The Company’s stock hit a new 52 week low today (November 15, 2007) despite the impressive efforts and results posted by this management team. We appeal to the Board of Directors to consider immediately implementing a share buy-back program as it is in the best long-term interest of both the Company and its shareholders.
We believe that the Company is significantly undervalued and that a share buy-back program would improve investors’ overall perception of Network Engines’ equity value. Such a program could result in a reduction in the relative value discount currently applied to Network Engines’ stock by the investor community, by amongst other things demonstrating that this Board has confidence in the Company’s ability to execute its business plan. If the Board were to apply the same valuation metrics to its own stock as it did to the recently completed acquisition of Alliance Systems Inc., they would undoubtedly conclude that at these price levels the Company’s shares represent an equal or greater value than Alliance Systems. Most importantly, a smartly implemented buyback program could allow the company to materially reduce its number of outstanding shares thereby generating long term shareholder value in the most tax efficient manner. As a significant equity holder and long term investor, this is of far greater value then any short term impact to share price.
We encourage the Board of Directors and management to consider and adopt this strategy immediately and speak with other shareholders of the Company who may be equally frustrated and share our views. We would be willing to meet with the Board of Directors and work collaboratively to assist with the development of a long-term value creation plan that would benefit all shareholders.
Jay Wolf
Trinad Management, LLC

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