When I look at a stock I usually start off with the assumption that 50% of the stock price is driven by the state of the economy, 30% by the state of the industry and only 20% by the company. At this particular point, I would put it at 70% economy, 20% industry and only 10% company. It's just a mess out there, folks! No matter how good the company is doing, it just can't avoid the chain reactions happening in the global economy that are seriously distorting the supply and demand for this stock. It doesn't help that the company trades on the pink sheets or that management seems hapless in selling their story.

I think that management is seriously considering taking the company private and waiting out the secular shifts in the global economy as a private company so that it can have clean start as an IPO in a few years without the stench associated with being a pink sheet stock. They're profitable and cash-flow positive so they can pimp up their financials in private. Compliance with Sarbanes-Oaxley is also very expensive for a tiny company.

This company is in transition. Stay tuned.

NENG's 10Q for 3Q03 is out......

Risks of dependence on one strategic partner.

We derive a significant portion of our revenues from one customer, and our revenues may decline significantly if this customer cancels or delays purchases of our products, terminates their contract with us, or exercises certain of their other rights under the terms of the contract.

In the three and nine months ended June 30, 2003, one customer accounted for 48% and 50% of our total net revenues, respectively. Under the terms of a non-exclusive contract with this customer, the customer has the right to enter into agreements with other parties for similar products, the customer is not obligated to purchase any minimum quantity of products from us and the customer may choose to stop purchasing from us at any time. In addition, the customer may terminate the agreement in the event that we attempt to assign its rights under the agreement to another party without the customer’s prior approval. Furthermore, in the event that we default on certain portions of the agreement and do not cure during the prescribed cure period, the customer may obtain the right to manufacture the products defined in the agreement in exchange for a mutually agreeable royalty fee. If any of these events were to occur, or if this customer delays purchases of our products, our revenues and operating results would be adversely affected, our reputation in the industry may suffer and our ability to predict cash flow accurately would decrease.

Our distribution business relies on reference sales originating from our largest customer and our business would suffer if we lost these reference sales.

A significant portion of our distribution revenues are derived from reference sales of products, which are approved for configuration in the data storage networks sold by our largest customer.

We are one of two North American distributors that this customer refers its customers to for the supply of data storage network components that have been authorized for use in this customer’s data storage networks.

We expect this to continue in the future. These reference sales have historically had a higher margin and have represented a substantial amount of TidalWire’s revenues as compared to revenues from other sales. If we were to lose these reference sales or if the margins we derive from such sales were reduced to any significant degree, our results of operations and financial condition would suffer.

Network Engines finds profit after the tech bubble burst
Tom Witkowski, Journal Staff
August 11, 2003


CANTON -- Network Engines Inc. rode the success of a recent acquisition and a revamped business model to profitability for the first time as a public company last quarter. The company beat its second-quarter earnings and revenue estimates and leaped into the black earlier than expected. Its stock price surged 28 percent the next day, closing at $5.41, a new one-year high.

Wall Street has warmed to the story of an Internet-era company that rose from near death and found a profitable business.

In late 2000, investors drove the stock price down from a high of $42.50 to less than $1 six months later. Founder Larry Genovesi, who is now the chairman, brought in John Curtis as the new CEO in 2001. Curtis restructured the company, built a new business and bought another company.

The jury stayed out, and the share price hovered around $1 until January of this year. Now investors are jumping back in, lately taking the share price to levels it has not seen since late 2000. Network Engines, once dismissed by Wall Street, today has a growth business and expects to earn a profit in the current quarter as well.

Network Engines was founded in 1997 and went public in mid-2000, raising $117 million just as the Internet bubble burst. The company's web server business evaporated with the dot-com crash. But Network Engines engineered a turnaround over the last two years, landing a well-timed original equipment manufacturing deal with EMC Corp. that would place its technology inside devices bearing EMC's brand and then finding a new way to derive revenue from its hardware business and expertise by working with software companies.

"We made progress across every aspect of our business," said Curtis, citing seven consecutive quarters of sales growth.

The first step in the company's comeback was a deal to build the Centera product for Hopkinton-based data storage company EMC. Centera was designed for storing fixed content, such as medical records and e-mail messages. The product was introduced just as increased health care and securities regulations ignited a demand for exactly such a data storage platform. The relationship was bringing in half of Network Engines' revenue within a year.

"That product has really been 'right place, right time,' " said Mike Riley, Network Engines' vice president of marketing.

The second part of the company's resurrection began with the November 2002 purchase of TidalWire Inc., a Westborough-based data storage technology distributor. Network Engines paid $20 million in cash, stock and assumed debt for TidalWire's distribution channels. That business boosted Network Engines' sales immediately and also gave the company a new source of revenue.

In recent months, Network Engines has been partnering with software companies, licensing their software, installing it on its own hardware and then selling the resulting appliance. Customers are able to buy ready-installed software on a plug-in appliance, simplifying the process for the customers and the software companies and bringing new revenue into Network Engines and its partners.

Funk Software Inc. of Cambridge was the first partner and FalconStor Software of Melville, N.Y., the most recent. Both companies prefer to stick to software development and leave the hardware to others, but see the benefit to their customer of buying an appliance.


"Our customers typically buy our software and go install it on some machine somewhere in the network or even sometimes go buy a new machine. Not a lot of organizations have a lot of hardware laying around doing nothing that meets the minimum customer requirements for the task involved," said Kevin Walsh, Funk's director of product management. Funk sells wireless local area network, or LAN, security software.

FalconStor, a data storage software company, already has its own distributors and system integrators to reach large companies, but it sees the potential for growth in smaller companies with Network Engines' help.

"For midsize businesses or even departments with one specific need, such as tape virtualization, it will be easier for us," said Reijane Huai, CEO of FalconStor. He expects the Network Engines business eventually to account for 20 percent of his company's revenue within the next year.

"Having the appliance in place gives peace of mind. Everything's been preconfigured and tested. With the appliance model, end users can focus on one thing: deployment," said Huai.

Both partners represent storage and security, the two markets Network Engines is pursuing, said Riley.

"The market they decided to go after, helping software companies create appliances, it's a market that's beginning to grow," said founder Genovesi. Network Engines found a new revenue stream without creating a new technology, he said.

"One of the things they had as an advantage is, much of the technology they're using to build products now was technology built in the web engine days. The strategy is not a radical shift. It's essentially taking a skill set and applying it a different way," Genovesi said.

Network Engines, with about 40 people working in manufacturing, is pumping out about 30 percent of its full capacity. The company has 13,000 square feet of manufacturing space at its Canton headquarters, with one shift running on three lines. As business with its software partners grows, Network Engines can add more shifts.

"The company basically has been reinvented over the last year and a half. That is still a work in progress," said Riley.

But progress was faster than expected. Executives predicted a loss of $200,000 to $500,000 for the most recent quarter, with the break-even point on the horizon. Instead, last week CFO Douglas Bryant reported profit of $408,000, or a penny a share, on revenue of $27 million. In the first quarter, the company had lost $684,000, or 2 cents per share, on revenue of $19.4 million. Comparisons with 2002 earnings would not include the TidalWire business.


Even better news was that the company had its lowest cash burn since its IPO, going through just $260,000 during the quarter and ending with $38.6 million in cash, well above the $33 million to $35 million predicted.

For the current quarter, Network Engines expects similar results, with income of $200,000 to $500,000, or a penny a share, on revenue of $27 million to $29 million. The company will go through more cash, taking the cash on hand down to $33 million to $35 million, Bryant said.

The company's expenses will grow as Network Engines increases its engineering and sales costs, said Curtis. The challenge will be maintaining profitability in the coming quarters, while spending enough to continue growing the business, he said.

Today, Network Engines has 94 employees, down from over 200 at the height of the high-tech mania. But the company is once again in a growth mode and will continue partnering with software companies.

"This was the primary reason we acquired TidalWire and is the area of our business where we expect long-term growth," said Curtis. "We apply the engineering and manufacturing capabilities of the OEM business together with the effective go-to-market capabilities of our distribution operation."

http://boston.bizjournals.com/boston/stories/2003/08/11/story1.html?page=3

Network Engines (NENG) 
 Sales Trend 
 1Q02 to 4Q03 
 .                                                      Quarterly/ 
 .                                                        Annual 
 .                                                        Stock   
 Quarter    TidalWire    Centera     Others      Total    Return 
 . 
 1Q02           -        $ 1.5M      $ 0.6M      $ 2.1M     68% 
 2Q02           -          2.3M        0.7M        3.0M   (  9%) 
 3Q02           -          3.4M        0.7M        4.1M     16% 
 4Q02           -          4.8M        0.5M        5.3M   ( 10%) 
 . 
 FY02           -         12.0M        2.5M       14.5M     60% 
 . 
 1Q03       $ 0.3M         4.9M        0.8M        6.0M      4% 
 2Q03        10.2M         8.1M        1.1M       19.2M     49% 
 3Q03        12.6M        13.0M        1.4M       27.0M    155% 
 . 
 4Q03(E)     11.5M        13.8M        1.7M       27.0M     - 
 4Q03(E)     12.5M        14.8M        1.7M       29.0M     - 
 . 
 FY03(E)     34.6M        39.8M        5.0M       79.2M     - 
 FY03(E)     35.6M        40.8M        5.0M       81.2M 
 . 
        
  
 Business Outlook  
 .

Based on current forecasts from certain partners
and historical and seasonal trends, the Company
anticipates the following for its fourth fiscal
quarter ending September 30, 2003:
.
Net revenues in the range of $27 million to $29 million.
.
OEM appliance revenues between $15.5 and $16.5.
.
Distribution revenues between $11.5 and $12.5.
.
Operating expenses between $5.4 million and $5.7 million.
.
Gross margins in the range of 19 percent to 21 percent.
.
Net income on a GAAP basis in the range of
$200,000 to $500,000, or approximately $0.01 per share.
.
Cash position between $33 million and $35 million.
.

O/S (Diluted) as of 6/30/03 - 38.95M shares
.
http://www.networkengines.com/press/Q3%2003%20Earnings%20Release%207_24_03.pdf
.
.

I generally don't touch bulletin board stocks, Bernard. Here's a snapshot of the Japanese economy.

James Flanigan: Japan's Two Economies Need to Travel One Path
Los Angeles Times
July 13, 2003

Once again, Japan is generating excitement in world markets.

International investors have poured $10 billion into Japanese stocks in the last month, and the Nikkei average of the shares of leading Japanese companies is up 16% so far this year. Exports from the country's powerful corporations are sweeping the globe.

All that is causing some experts to ask, if tentatively, whether the world's second largest economy finally is on its way to recovery after 12 years of recession and paralysis.

The answer, at least for now, is no. That's because there are essentially two Japanese economies, and only one of them is showing signs of life.

Most people know the dynamic Japan of prominent companies and dominance in international trade, and that global force is doing fine. "Japan's leading companies, Toyota, Canon, Nissan and many more, have cleaned up their balance sheets and are in the best shape in years," says Kenneth Courtis, Tokyo-based vice chairman of Goldman Sachs Asia who has watched Japan's economy for more than 20 years.

Indeed, Japan's surplus on trade and investment income is running this year at $150 billion on an annual basis, thanks to exports of NEC semiconductors and Honda cars, as the Ministry of Finance noted last week in Tokyo.

But the Japanese economy that looks outward seems almost unrelated to its troubled cousin, the home-front economy of 127 million people that accounts for 85% of the nation's gross domestic product of $4 trillion.

For this economy, the statistics are grim. Japan's banks are burdened by more than $900 billion of bad loans. It's an enormous total that has built up over the last decade as these institutions have rolled over debts of client companies rather than compelled the companies to repay the debts or reorganize their operations. The rollovers were done at the behest of the Japanese government in the interest of stability.

But the strategy backfired. In fact, rolling over bad loans held back new lending by the banks and led to stagnation.

Despite the Nikkei's recent swell, stock prices in Japan today are roughly one-fourth of what they were a dozen years ago. Unemployment has been rising steadily, even though layoffs haven't been anywhere close to the scale of those in the U.S. (In Japan, many workers are simply kept on the payrolls, at relatively low wages and often with little to do.) Personal incomes and living standards have plummeted. The homeless are dramatically evident in Tokyo's parks.

The stalled internal economy has brought on deflation, with prices falling 1% to 3% and more a year. Deflation makes loans and mortgages harder to repay and property sales and transfers difficult, further stifling business activity.

Stalled Stimulus Plans

To spur the distressed economy, the government has launched numerous stimulus plans, mainly pushing money into public works, which favors the construction industry — a major backer of the Liberal Democratic Party that has ruled Japan since the end of World War II.

Government-funded initiatives have led to bizarre white elephant projects, such as little-used four-lane highways running near seasides and underused airports in isolated parts of the country.

Some funds for these endeavors have come from deposits made by Japanese citizens in Postal Savings Accounts, which the government invests. That was the great source of capital that helped rebuild Japanese industry in the decades after World War II.

But now, with capital tied up in make-work projects and in government bonds in a stalled economy, the accounts have failed to earn sufficient return to finance people's retirements. Investment in Japanese government bonds has earned only 1.65% a year over the last decade, a rate that has left Japan's pension system severely underfunded.

With the global side of the Japanese economy doing so well, does it matter that, back home, the economy is such a mess?

It does. Japan can't afford a weak and isolated domestic economy — and the United States can't afford for Japan to have one either. Japan is a leading U.S. trading partner and lender-investor, with the Japanese government holding an estimated $500 billion in U.S. Treasury notes and bonds.

Japan literally holds a mortgage on the U.S. economy.

A Shift Toward Reform

Change is necessary, and it may well be on its way. "Japan has approached financial collapse in the last year," says economist Adam Posen of Washington's Institute for International Economics. "It has dodged the bullet, but the crisis may have swung the consensus toward reform."

Reform will come in the restructuring of domestic institutions to make them behave like Japan's successful international companies.

New ways are being tried at a couple of banks, notably Shinsei Bank (the name means "new birth") that was created out of the failed, government-owned Long-Term Credit Bank three years ago.

Shinsei devotes half of its business to underwriting bond and stock issues for corporations, like a U.S. investment bank.

"Japanese companies are reducing their dependence on bank borrowing and raising money through public markets," explains Shinsei's chief executive, Masamoto Yashiro. "Japan is changing. That's why international investment is coming in."

But, he cautions, this is still Japan. Nothing will happen quickly. "The reform will take two to three years."

Whether the two Japans succeed or fail, the United States and much of the rest of the world will be profoundly affected.

IIJI owns 38% of CWCI. S&P shows IIJI as having 44.96M ADS outstanding and CWCI as having 10.04M ADS outstanding. These two stocks started to trade more closely together after IIJI nearly doubled in one day a few weeks ago as profits from the scorching hot Chinese portals started to recycle into secondary and tertiary players.

There are only 17 Japanese companies whose ADRs are listed on Nasdaq. IIJI and CWCI are really the only two broadband pure plays. By way of contrast, I follow more than 50 Chinese plays most of which are regularly being launched into the stratosphere by sheer momentum alone!

These Japanese companies tend to be more inscrutable than the Chinese companies, but IIJI and CWCI are somewhat unique because they bypassed listing on the Japanese exchanges and went straight for NASDAQ listing. There just aren't that many ways to get exposed to Japanese broadband without buying directly on the Japanese exchanges. The average Japanese household, for example, has a telecom (wireless/wireline) budget of around $200 a month, with less than 40% devoted to wireless!!

Once the powerful owners of these two companies clarify their commitments to IIJI and CWCI's capex programs then these companies's stocks will have better access to global capital and will have even higher demand. US institutions, in particular, are seriously underweight Japan.

From IIJI's 6F filing on 6/10/2003.

The Company (IIJI) has incurred shareholders' capital deficiency of 452,748 thousand yen as of the end of March, 2003 as the result of posting of a net loss of 13,765,686 thousand yen for this fiscal year.

Crosswave, 37.85% of which shares are owned by the Company, posted a large operating loss of 11,261,479 thousand yen for the previous fiscal year and 12,628,514 thousand yen for this fiscal year and its operating cash flow has significantly gone negative. Therefore, substantial doubt about the Company's ability to continue as a going concern exists.

In order to resolve such situation, the Company is planning the issuance of shares through third party allocation in an amount of 3,512,880 thousand yen, of which payment shall be made on June 6, 2003. Crosswave is scheduled to receive from the Company, Toyota Motor Corporation and Sony Corporation, its major shareholders, an advance of 3,100,000 thousand yen by the end of May, 2003 and 1,200,000 thousand yen by the end of June, 2003, or 4,300,000 thousand yen in total.

It is also in the coordination process with the Lenders as for when to receive the advance in an amount of 5,000,000 thousand yen which is the outstanding amount of the long-term facility pursuant to the Syndicated Loan Agreement by and between Crosswave and the Lenders as of May 21, 2002, and it is in the negotiation process with the major shareholders, etc. as for the business plan, including the funding thereafter.

The financial statements and schedules are created based upon the Company continuing as a going concern and they do not reflect any effect of aforementioned substantial doubt.

http://www.sec.gov/Archives/edgar/data/1090633/000115752303002374/a4412381.txt

It's just a matter of time, Paul.<g> More later.

This is one of the most advanced IP networks in the world....

Crosswave Expands Access to Wide-area Ethernet Platform Service
Monday July 7, 10:00 pm ET

TOKYO--(BUSINESS WIRE)--July 7, 2003--Crosswave Communications, Inc. (Crosswave, Nasdaq: CWCI) today announced it will expand its access options, starting July 10, 2003. The Ethernet access service area for the Wide-area Ethernet Platform Service will be broadened, and Powered Ethernet service by PoweredCom, Inc. will also be available.

Crosswave has added several services since the beginning of 2003, including OMP High-speed Ethernet Access, Dedicated Ethernet (KVH), Ethernet Access, and other access options. These combine to give customers a broader range of access options in various service areas, enabling the construction of end-to-end Ethernet networks nationwide.

Crosswave pioneered the Wide-area Ethernet Platform Service in October 1999, and has been employing the latest technology ever since to expand and promote the new wide-area network service. Crosswave will continue to expand access line options as well as new products and mobile access service areas. The Company will continue to offer lower prices to enable customers to flexibly build advanced, reliable, and cost effective networks with a mixture of high-speed and low-speed lines to suit any situation.

About Crosswave

Crosswave Communications Inc. (Crosswave, Nasdaq:CWCI) is a data communications carrier offering customers reliable and versatile broadband networks and network services, enabling them to streamline and innovate their business infrastructure. Founded in 1998 by Internet Initiative Japan (Nasdaq:IIJI - News), Sony Corporation (NYSE: SNE - News) and Toyota Motor Corporation (NYSE: TM - News), the Company has made groundbreaking changes in the Japanese telecommunications market by offering a completely data-centric network.

Currently, 90% of the traffic on Crosswave's nationwide network infrastructure is Ethernet-based, provided mainly through its flagship, Wide-area Ethernet Platform Service. Launched in 1999, the Wide-area Ethernet Platform service introduced a brand new type of network service to the market. The Company's fully integrated data centers and other services have redefined the role of carrier services by accommodating entire corporate system requirements. With the quality of its networks and its wide-ranging value-added features, the company has been a pioneer in the development of the data communications market in Japan. The Company offers its services to a diverse base of over 400 customers including many blue-chip companies in Japan.

The statements within this release contain forward-looking statements about our future plans that involve risk and uncertainties. These statements may differ materially from actual future events or results. Readers are referred to the documents filed by Crosswave Communications Inc. with the SEC, specifically the most recent reports on Forms 20-F and 6-K, which identify important risk factors that could cause actual results to differ from those contained in the forward-looking statements.

Contact:
Crosswave Communications Inc.
Media/Investor Relations:
Hiroaki Tsuno, +81-3-5205-4580
Fax: +81-3-5205-4581
press@cwc.co.jp

Broadband Market to Top 10 Trillion Yen in '07: Govt White Paper

July 5, 2003 (TOKYO) -- Japan needs to promote the use of broadband products and services by bolstering protective measures against computer viruses and other types of cyber attacks, the Posts and Telecommunications Ministry said in its annual white paper.

The report forecasts that the broadband-related market will grow to 10.2 trillion yen in 2007, from 2 trillion yen in 2002.

Posts and Telecommunications Minister Toranosuke Katayama submitted the report to the cabinet on July 4.

The annual report, titled "Pursuing the Creation of a Japanese-Led New IT Society," states that if Japan takes advantage of its cellular phone and other technologies, it will be able to become a global leader of the next-generation IT industry. The white paper also analyzes the actual status of Japan's IT society and the tasks it faces in order to develop further.

Because charges for high-speed, high-capacity broadband services in Japan are now among the cheapest in the world, the report predicts that the number of subscribers will increase to 59.67 million at the end of 2007, from 19.55 million at the end of 2002.

The spread of broadband services will expand the market for distributing music and other data to about 600 billion yen from about 250 billion yen over the same five-year period, the report says.

The document also points out Japanese companies suffered about 350 billion yen in damages from computer viruses last year.

(The Nihon Keizai Shimbun)


Japan's Broadband Users Reach 10 Million

July 1, 2003 (TOKYO) -- Japan's broadband users increased 528,892 from the end of April 2003 to reach 10,488,773 million, according to the Ministry of Public Management, Home Affairs, Posts and Telecommunications in its primary report on the number of broadband subscribers.

It took approximately 10 months since the end of July 2003, when the number of broadband users broke the 5 million mark, to pass another 5 million.

Fiber-to-the-home (FTTH) users increased 51,400 during the month of May to 398,336. It is the first time to see more than 50,000 users signing up for FTTH services in a month alone, the report said.

The number of subscribers to digital subscriber line (DSL) services was already announced by the ministry on June 9. At the end of May, the number grew 429,492 in the preceding month to 7,907,437.


Japan's Broadband The World's Fastest, Cheapest: ITU

May 8, 2003 (TOKYO) -- Japan offers the fastest, most inexpensive broadband communications services in the world, according to a survey by the International Telecommunication Union (ITU), an United Nations organization that coordinates telecom policy.

But even as the ITU named it the pioneer of the ubiquitous society, where users can connect to the Internet from anywhere anytime, Japan ranked No. 12 in terms of the percentage of people connected to broadband services. This shows that despite the availability of a broadband infrastructure, the nation still lacks content compelling enough to attract users.

The ITU first compared broadband Internet connection fees as a percentage of average household income in various nations. At 0.8%, Japan had the lowest and thus ranked No. 1. Switzerland and Iceland tied for second place at 1.3% each. South Korea ranked 18th with 3%, despite winning the top spot for the highest percentage of those connected to broadband services, with 21.3 out of 100 people connected. But these comparisons do not take transmission speed into consideration.

When comparing the monthly cost per 100kbps of service, Japan again topped the list with the cheapest, 0.18 dollars, followed by South Korea with 0.29 dollars. Iceland and Switzerland fell to 13th and 16th, respectively, in this category. South Korean services are of high quality but are costly for its citizens, who earn less than their European and Japanese counterparts. On the other hand, communications fees constitute a small portion of average Swiss household income, thanks to high earnings, but the transmission speeds of Swiss services are only 256kbps.

Based on these comparisons, ITU designated Japan, which competes with South Korea for the fastest speed of 12Mbps, as the nation boasting the best overall broadband service in the world.

(The Nihon Keizai Shimbun)

Japanese Firms' Spending Plans Up 6.7% This Fiscal Year - METI
Monday July 7, 4:51 am ET
Dow Jones Business News

TOKYO -(Dow Jones)- Japanese companies plan to increase capital expenditures by 6.7% on year this fiscal year through March 2004, a government poll showed Monday, in another sign business sentiment in Japan is improving.

This would mark the first rise in firms' planned capital expenditure in two years. Companies cut investment 9.8% in the fiscal ended March 31 and reduced such outlays 1.4% the year before.

Manufacturers plan to spend 17.1% more on plant and equipment this fiscal year, while non-manufacturers project a 1.5% rise, according to the annual survey carried out by Japan's Ministry of Economy, Trade and Industry.

The figures are largely in line with last week's Bank of Japan tankan survey, in which large companies said they planned to boost capital expenditure by 4.9% on average this fiscal year.

The METI survey said manufacturers in all industries plan to raise spending this fiscal year, with steel and nonferrous metal makers expecting expenditures to be 33.0% and 43.3% higher, respectively, than last year.

Automobile makers plan to increase outlays by 24.3% this fiscal year, while electronic machinery makers plan to boost spending 20.1%.

Non-manufacturers appeared less optimistic about business conditions, with fitness-related firms planning to slash capital spending by 90.4%, the biggest such cut among non-manufacturers. Heat suppliers and holiday resort developers were the most upbeat, expecting increases of 144.1% and 51.0% respectively.

The ratio of spending on upgrading or maintaining plant and equipment to total expenditure rose to 23.6% this year from 21.9% last year, the survey showed.

Companies plan to keep the ratio of expenditure on increasing production unchanged at 43.2%, and raise research and development expenses to 5.9% of the total from 5.0% last year.

Information technology-related spending is also forecast to rise 13.3% in fiscal 2003, compared with a fall of 22.5% last year.

The survey covered 2,204 companies with capital of more than Y100 million and had a response rate of 60.9%.

-By Joseph Quini, Dow Jones Newswires; 813-5255-2929; joseph.quini@dowjones.com
-Edited by Hugh Lawson

Small / Mid Cap Overview
03-Jul-03 09:47 ET

[BRIEFING.COM -- Robert J. Reid] Briefing.com has been highlighting small cap ideas on In Play nearly daily for the past six months. In this column, we will provide a more in-depth analysis of ideas. We are changing our strategy on the sector as a whole. The breakout strategy has worked well, but appears to have mostly run its course. While we are not abandoning those names, we recommend investors consider some value small caps.

Solid Second Quarter

Q2 was a heck of a quarter for the small cap space. The Russell 2000 and the S&P 600 Small Cap Index were up +23.0% and +19.6%, respectively. This compares to +14.9% for the S&P 500 and +12.4% for the Dow.

In the first half of 2003, Briefing.com highlighted some breakout / strong story opportunities in the In Play section.

For example, MetroLogic was profiled in January as a play on increased demand for airline security services.

Example (Jan 21): New High Profile -- Metrologic Inst (MTLG) 9.41 +1.86: Issue moves to a new 52-wk high. While volume today is 8.6x avg turnover, the 24% advance is occurring on just 33,000 shares traded. MTLG is a manufacturer of laser and holographic bar code scanners used by grocery stores, package handlers, and libraries. Co also offers airport baggage scanning systems. MTLG's 'scanning tunnel' system is used by airports to direct bags to the appropriate aircraft loading ramp by interpreting bar codes attached to luggage at the the time of check-in. Baggage that has not been properly entered into the system or identified as being searched is rejected and sent to a separate claim line to be investigated... MTLG is expected to grow EPS by 78.5% in 2003 to $0.50 (p/e 18.8). Stock higher today after MTLG raised Q4 outlook to +$0.25 from $0.10. Mkt-cap $52 mln.

MTLG is up 287% since then. Other winners include: ASKJ +194% (Jan 29); CNQR +145% (Jan 10); EELN +111% (Apr 3).

Stratasys is an example of a stock that appeared to be under accumulation based on its strong volume. Valuation helped to confirm that this was probably the case.

On March 21, we wrote: Stratasys, Inc. (SSYS 12.50) -- New High Profile (SSYS) 12.50 +0.75: Stratasys (SSYS) hit a new 52-week high today on almost 5x avg volume. Co makes prototyping devices that allow engineers and designers to create models and prototypes from computer-aided design (CAD) workstations; customers include GM, Intel, Boeing, Lego, Honda, Lockheed Martin, and Ford. Analysts expect 2003 EPS to grow 48% to $0.83 (P/E 15x) and 2004 EPS to grow 18% to $0.98 (P/E 13x). Mkt cap $66 mln, float 4.5 mln, avg daily volume 70k shares.... The stock is now above $35.

Our Current Strategy

We are now concerned that streteched valuations and over-extended technicals leaves previously compelling names such as MTLG and SSYS vulnerable to major price corrections.

The breakout strategy appears to be on its last leg. Lately, we have been focusing more on small cap value names for our readers. With the run-up, we are a bit more cautious on the small cap space and recommend investors may want to cash in some winning chips.

We are not abandoning our bullish views on the breakouts. We just like them at lower levels and would wait for a pullback to support levels. We prefer a p/e in the 18-20x range, rather than the current 25-35x level that many of these names now trade.

Recent price action has shown that small cap managers are beginning to rotate into value names in more mundane spaces. The sexy names appear to have had their run, leaving investors to look at metrics such as discount to book value as a catalyst to put money to work.

Value may not be a sexy area, but we believe that's where the emphasis should be. Some of the value names have made decent moves, but as long as their valuation is reasonable, they are worth a look.

Please email any comments or suggestions to rreid@briefing.com.

http://www.briefing.com

Rotation, Rotation, Rotation<g>

Have a good 4th, Raymond.

 
                   TTM    Mkt.   TTM    Stock Return      Stock 
            O/S   Sales   Cap    PSR  Week ending 7/3   Close-7/3  
 . 
 . 
 SOHU      35.1M  $ 39M  $1.2B  30.8x       +  7.8%      $33.84 
 NTES      31.0M  $ 27M  $1.2B  43.7x       + 10.7%      $37.63 
 IIJI      45.0M  $362M  $392M   1.1x       +110.1%      $ 8.70 
 CWCI      10.0M  $155M  $ 73M   0.5x       +134.0%      $ 7.30 
 . 
 . 
 CWCI - Each ADS is equal to 1/20th of a share of common 
 stock. The ADR ratio was changed to 1/20th on February 18, 2003. 
 . 
 . 
  
  
  
  
  
  
 

                            

Check your email, Raymond.<g>

Extremely low PSR. High Sales Growth.

IIJI owns 38%. Sony owns 24%. Toyota owns 24%


Overview of 4Q02 and FY2002 results

"We attained satisfactory performance in FY2002. Profitability continued to improve throughout the year," said Akio Onishi, CEO of Crosswave. "Crosswave achieved sales figures in FY2002 that almost doubled those of FY2001. We believe that corporate demand for network reconstruction remains strong despite the fact that, due to the general economic conditions, decision making for investments tends to take longer than before and the timing of investment has been slightly delayed."

"In 4Q02, Crosswave, aimed to differentiate its services from its competitors by expanding its service line-up for the Wide-area IP Platform Service and access line availability," continued Mr. Onishi. "We expanded the reach of our service through the launch of our "Private IP Service" which targets mid-size companies through our partners' sales channels. In addition, we put two new large-scale data center facilities into operation, further positioning Crosswave as the premier total network provider for corporate customers."

Forecast - financial performance for FY2003

"We are targeting FY2003 revenue to grow more than 50% from FY2002 revenue," said Yasuharu Fushimi, CFO of Crosswave. "We intend to improve profitability to turn adjusted EBITDA positive in FY2003, and to reach the break even point for net profit in FY2004."

http://www.cwc.co.jp/en/index.html

JAPAN STATS

 
 Population                 126.8 million  
 Working                     67.7 million  
 Literacy Rate               99%  
 E-Commerce Volume          $18.7 million 
 Wireless Internet Users    50.34 million 
 Registered Internet Sites      7 million 
 

e-Japan

In an effort to help close the Internet-adoption gap between Japan and its economic peers, the Japanese government launched its e-Japan initiative last year. The program is designed to provide Japanese consumers with high-speed Internet access, encourage competition among telecommunications providers, and provide tax incentives for the private sector to build high-speed optical, cable, and mobile Internet networks.

The government has earmarked $16.7 billion annually to fund the e-Japan initiative, which also includes provisions to encourage 30,000 Internet experts from other countries to work in Japan, enable Japanese citizens to pay their national taxes online by 2003, train schoolteachers on desktop computers, and modify legislation to encourage expanded e-commerce.

Although e-Japan is a government program, the initiative’s goal is to encourage Japan’s private sector to help raise the country’s Internet capabilities.—Ewan Morrison


http://business.cisco.com/prod/tree.taf%3Fpublic_view=true&kbns=1&asset_id=87206.html

Developing Infrastructure

In the past, a heavily regulated telecommunications industry made the introduction of fixed-line telecommunications infrastructure systems slow and costly in many areas, limiting availability and hampering Japan’s Internet-business readiness. But recent regulatory reforms, direct foreign ownership of Japanese service providers, and increased competition are resulting in rapid, significant improvements.

For the past few years, the government has spent $35 billion annually to improve its telecommunications infrastructure. Through its recently launched Fiber to the Home and e-Japan initiatives, it intends to provide all Japanese businesses, government offices, schools, and homes with high-speed Internet access by 2010.

Through these initiatives, businesses and consumers alike are embracing the Internet, and they are experimenting with high-bandwidth multimedia applications. IDC Japan predicts that the number of Japanese broadband users will increase 81% each year until 2005, when the number will reach 12.42 million. eMarketer predicts that Japanese business-to-consumer e-commerce will grow to $24.6 billion in 2004 from $5.9 billion in 2001.

NENG's patent cross-references sketch out a view of their patent activity which is a product of their $31M in cumulative R&D spending since 1998. From Patent No. 6,512,673 issued on January 28, 2003............

CROSS-REFERENCE TO RELATED APPLICATIONS

This application claims priority from earlier filed U.S. provisional patent application Serial No. 60/216,055, filed Jul. 5, 2000, which is incorporated herein by reference.

This application is related to the following co-pending, commonly assigned applications, the teachings of all of which are incorporated herein by reference:

U.S. Serial No. 60/215,952, filed Jul. 5, 2000, entitled "Server Architecture and Methods for Digital Data Processing,"

U.S. Serial No. 60/215,975, filed Jul. 5, 2000, entitled "Low Profile, High Density Storage Array,"

U.S. Serial No. 60/215,997, filed Jul. 5, 2000, entitled "Ventilating Slide Rail Mount,"

U.S. Serial No. 60/215,996, filed Jul. 5, 2000, entitled "Power Supply for Low Profile Equipment Housing,"

U.S. Serial No. 60/215,995, filed Jul. 5, 2000, entitled "Circuit Board Riser,"

U.S. Serial No. 60/244,354, filed Oct. 30, 2000, entitled "Ventilating Slide Rail Mount," and

U.S. Serial No. 60/244,361, filed Oct. 30, 2000, entitled "Low Profile, High Density Storage Array."

The heat is hot..........

Dell says overheating may limit the blade market's growth, but other vendors disagree
By Larry Greenemeier and Jennifer Zaino

Blade servers are hot. Maybe too hot, according to Dell Computer president and chief operating officer Kevin Rollins. Blades densely packed in a chassis generate excess heat, Rollins warned last week, and potential problems with heat dissipation could stunt growth in the blade-server market.

Blade technology "may not pan out" as well as expected, Rollins said at InformationWeek's Spring Conference. "It's great technology," he said, but concerns are growing about how to cool blades as more powerful, next-generation processors enter the market. "There isn't an obvious solution" to the problem, he said, noting that it's expensive to ventilate and cool densely packed systems. "So the market for blades may be smaller than thought," he added. This would be a blow to the server market, which has not seen much growth in recent years.

"There isn't an obvious solution" to the problem of keeping blade servers cool, Dell president Rollins says.

Sales of blade servers are expected to increase dramatically, from $341 million this year to $3.7 billion by 2006, according to IDC estimates. The research firm hasn't changed its projections based upon heat-dissipation concerns.

But Rollins isn't alone in his concerns about the technology. "Already the failure rate in the top third of server racks is three times the bottom two-thirds," says Kenneth Brill, executive director of the Uptime Institute, a research and consulting firm that specializes in data-center management. "Blades will further exacerbate this problem." Overheated servers can slow throughput and affect system reliability.

http://www.informationweek.com/story/IWK20030307S0034

Note that blade servers usually have to use the fastest processors possible. Storage blades have different design considerations depending on whether these are used for transactional data (DAS/SAN), collaboration data (NAS) or reference data (Centera).

Each Centera module, for example, uses a lowly Pentium III processor running Linux to manage four (4) 250GB disk drives from Maxtor and three (3) NICs (network interface cards). The semiconductor content of a typical disk drive is probably over 40% by now so the speed of the processor is effectively gated by the overall system "heat budget" which includes the heat profile of all those other components inside each box.

From NENG Patent Number 6,512,673 issued on January 28, 2003....

BACKGROUND OF THE INVENTION

The present invention relates to digital data processors, and, in particular, to methods and apparatus for cooling components within a digital data processor or ancillary device. The invention has particular application in compact, "low profile" devices where space is at a premium, airflow paths are restricted and overheating is of concern.

Heating is a constant and significant problem in digital data processors. The failure rates of many electronic components increase as operating temperatures rise. This is particularly true of central processing units which, themselves, often generate significant heat. The problem is compounded by the use of more densely packed circuit boards, by faster processor chips, and by the large power supplies needed to support the foregoing.

Most often, processors and associated components are cooled by airflow. Fans are typically used to push or pull air from one side of a chassis, across the components, and out the other side of the chassis. Thus, for example, a typical digital data processor includes chassis intake and/or exhaust fans, often with a fan on the central processing unit itself. While the steps of simply providing intake and exhaust fans on a chassis or housing wall, and of providing one or more device fans on critical components, have proven adequate to date, there remains a need to provide for the cooling of even more powerful, and/or more compact systems.

One object of the present invention is to provide an improved digital data processor apparatus and methods.

A more particular object is to provide such apparatus and methods for cooling components of digital data processors

http://patft.uspto.gov/netacgi/nph-Parser?Sect1=PTO2&Sect2=HITOFF&p=1&u=/netahtml/search....

The view from Japan................

World's First Water-Cooled Desktop PCs: Developed by NEC Using Hitachi Technology
June 23, 2003 (TOKYO) -- NEC Corp released a desktop personal computer equipped with a water-cooled heat dissipation system in May.

This was the first time that a leading PC vendor has commercialized a water-cooled desktop model.

In the laptop market, however, water-cooled products from Hitachi Ltd already are on sale. NEC's water-cooled module for desktop computers was developed in collaboration with a Taiwanese parts manufacturer licensed to use Hitachi's technology.

Overtaken in the Laptop Market

NEC originally intended to develop its own water-cooled module for PCs, to counter the problem of increasing noise from the cooling fan as microprocessors get faster and generate more heat. At some stage, conventional air cooling will be unable to cope with the heat, the company said.

Thus, in December 2001, serious development work began at NEC, utilizing the results of water-cooling R&D previously undertaken at the company's in-house research labs. The engineering team was eager to come up with a suitable design.

But just three months later, in February 2002, Hitachi unveiled its water-cooled laptop prototype. It was not a welcome sight for Hiroshi Sakai, manager, BB&M R&D division of NEC CustomTechnica, Ltd.

"Although we were disappointed, the Hitachi laptop definitely had a bearing on the development of our desktop models," said Sakai.

According to its original plan, NEC intended commercial release of water-cooled desktop PCs from 2004. But that was going to be too late. NEC gave up in-house development and decided instead to deploy Hitachi's water-cooling technology. It would concentrate on releasing a water-cooled desktop computer before another company did so. Because speed was of the essence, design of the water-cooling module, safety assessment, and case design were all conducted simultaneously.

Use of a Cooling Fan the Main Point of Difference

The water-cooling module developed by NEC and its Taiwanese partner works as follows. A cooling solution is fed by a centrifugal pump to a water-cooling jacket that absorbs heat from the microprocessor. The heated solution then flows into a radiator where the heat is released. A cooling fan cools the radiator, venting the hot air outside the computer case.

Hitachi's technology is utilized in components such as the cooling solution and the flexible tube used in part of the flow path. The maximum discharge capacity of the centrifugal pump is set four times higher than the pump used in Hitachi's laptops. Cooling capacity is a maximum of 75W.

The main difference between NEC's desktop design and Hitachi's laptop water-cooling mechanism is the use of a fan to cool the radiator. In the Hitachi laptops, the tube that circulates the cooling solution is fixed to the casing at the back of the LCD panel, and heat is dissipated by natural convection. In a desktop model, though, a tube would be difficult to attach and detach, and any possibility of upgrading the hardware would have to be sacrificed. The whole computer could overheat drastically too.

The laptop water-cooling design would be infeasible for a desktop PC.

Noise Held Down to 33dB(A)

Instead of dispensing with a cooling fan as in Hitachi's laptop models, NEC's solution was to retain the fan that cools the power supply unit. The fan would also serve to circulate air inside the computer, dissipating heat from the microprocessor at the same time. That is, the role of the water-cooling technology would be to efficiently transport heat away from the microprocessor, nearer the power supply unit.

However, the fan for the power supply unit was made larger than usual. The fan diameter was increased to 12cm, lowering the maximum speed from the normal 2,600rpm to 1,200rpm. This resulted in a much reduced noise level.

The pipe, reserve tank, and water-cooling jacket are all made of copper, an excellent heat conductor. This is to enhance the effect of the natural heat dissipation from parts other than the radiator, lessening the load on the cooling fan as much as possible. With these measures, the noise level is reduced to a maximum of 33dB(A). In air-cooled PCs of equivalent performance, the noise level is about 43dB(A).

Also, NEC considered ways to prevent water leaks. The centrifugal pump, being less shock-resistant than other parts, was of greatest concern. So the pump is encased in a plastic cover, with a humidity sensor placed inside. When the sensor detects a leak, the computer is forcibly powered off.

Water-Cooling Technology Advancing into the Home

Water-cooling technology for PCs is steadily growing in application. In October 2002, Toshiba Corp unveiled a prototype water-cooling module designed for laptop computers. Commercialization is expected before year-end, according to the company.

On May 28, Hitachi Cable, Ltd announced a desktop-computer water-cooling module with a cooling capacity of 150W. The module is due for release in the first half of 2003.

In the future, water-cooling technology will not be limited only to PCs. Hitachi cites a wide range of equipment in which the technology could be applied, including copiers, liquid-crystal projectors, plasma display panel (PDP) TVs, and game consoles. For devices used in home living rooms in particular, water-cooling technology that reduces fan noise sounds like good news, indeed.

NENG vs HIL 
 Recreational 'Ritmethic 
 2002 to 2003 
 . 
 . 
           NENG   NENG   NENG    NENG   HIL   HIL    HIL     HIL 
 Quarter   Stock  TTM    Market   TTM   TTM  Market  TTM    Stock  
 Ending    Price  Sales   CAP     PSR   PSR   Cap   Sales   Price 
 . 
 03/31/02  $0.92 $ 9.2M $ 30.3M  3.3x  1.4x $ 69.4M $ 48.6M $ 2.80 
 06/30/02   1.07  10.9M   34.5M  2.2x  2.2x   98.6M   44.9M   3.96 
 09/30/02   0.96  14.5M   29.3M  2.0x  1.5x   62.3M   41.2M   2.50 
 12/31/02   1.00  18.4M   30.6M  1.7x  1.7x   78.1M   47.0M   3.10 
 03/31/03   1.49  34.6M   49.9M  1.4x  2.4x  159.7M   66.7M   6.12 
 . 
 06/20/03   4.34  34.6M  145.4M  4.2x  5.9x  391.2M   66.7M  12.15 
 . 
 06/30/03    -    52.5M  145.4M  2.8x  4.5x  391.2M   86.8M    - 
 09/30/03    -    71.2M  145.4M  2.0x  2.9x  391.2M  132.8M    - 
 12/30/03    -    91.2M  145.4M  1.6x  2.3x  391.2M  171.5M    - 
 . 
 . 
 NENG - Quarterly sales of $22M in 3Q03  
 (3Q3 guidance - low-end), $24M in 4Q03 
 (3Q3 guidance - high-end) and $26M in  
 1Q04 (my estimte).  NENG's fiscal year  
 ends on September 30.  O/S assumed  
 constant at 33.5M until 12/30/03. 
 . 
 HIL - Quarterly sales of $40M in 2Q03  
 (guidance), $46M in 3Q03 (guidance),  
 and $55M in 4Q03 (guidance).  HIL's  
 fiscal year ends on December 31.  O/S 
 assumed constant at 32.2M until 12/30/03. 
 . 
 . 
 . 
 TTM - Trailing Twelve Months 
 PSR - Price to Sales Ratio 
 . 
  
  
  
  
  
  
 

                            

STORAGE MANAGEMENT SOFTWARE 
 1999 to 2002 
 Source: Gartner 
 . 
 . 
 Vendor     1999    %     2000    %       2001    %    2002   % 
 . 
 EMC    $ 803M  19.6%  $1.353B  28.3%  $1.496B 30.0% $1.205B 25.6% 
 Veritas  505M  12.3%     859M  18.0%     977M 19.6%    874M 18.6% 
 IBM      723M  17.7%     529M  11.1%     639M 12.8%    592M 12.6% 
 HP/CPQ   113M   2.8%     230M   4.8%     268M  5.4%    264M  5.6% 
 CA       799M  19.6%     616M  12.9%     202M  4.1%    235M  5.0% 
 Hitachi   NM    NM        57M   1.2%     118M  2.4%    209M  4.5% 
 Legato   172M   4.2%     139M   2.9%     180M  3.6%    135M  2.9% 
 BMC      229M   5.6%     163M   3.4%     161M  3.2%    121M  2.6% 
 NTAP      53M   1.3%     112M   2.3%      89M  1.8%    107M  2.3% 
 STK      113M   2.8%     144M   3.0%     120M  2.4%    106M  2.3% 
 Others   578M  14.1%     669M  14.0%     734M 14.7%    847M 18.0% 
 . 
 Total  $4.088B 100%    $4.786B 100%   $4.989B 100%  $4.689B 100% 
 . 
  
 Magic Quadrant for SAN Management Software 
 Gartner May 2003

.
In the storage area network management software market,
expect increased competition to expedite the availability
of richer capabilities, and tighter integration with
storage resource management and provisioning products.
.
Since Gartner's first assessment in 2002, SAN
management products have become richer in
functionality. Many, however, still require the
launching of multiple element managers to fully
manage the environment. In this research note,
Gartner provides a brief history of changes since
the original Magic Quadrant for SAN Management was
published. For inclusion in this Magic Quadrant,
vendors were required to be actively offering a product
and have referenceable customers. Gartner discusses
why EMC and Veritas software remain in the Leaders
Quadrant, describes CreekPath’s entrance into the
Visionaries Quadrant, and offers a perspective on
the niche and early market players within the Niche
Players Quadrant.
.
http://www.emc.com/news/analyst/magic_quadrant/magic_quad_san_mgmt.jsp
.
.

(CORRECTION/ADDITION)

NENG has also ended up 11 out of the last 12 weeks.

 
 Network Engines (NENG) 
 Weekly Stock Data 
 Last 12 Weeks  
 . 
                                                    Total Weekly 
   Week       Weekly     Weekly      Ave. Daily    Trading Volume 
  Ending      Close      Return    Volume (weekly)      ($)* 
 . 
 04/04/03    $ 1.56       4.0%        109,660       ~$   855,348 
 04/11/03      1.59       1.9%         59,880 
 04/17/03      1.75      10.1%        144,600 
 04/25/03      1.84       5.1%        310,260 
 05/02/03      1.86       1.1%        189,400  
 05/09/03      2.23      19.9%        220,700 
 05/16/03      2.19     ( 1.8%)       260,720 
 05/23/03      2.48      13.2%        369,560 
 05/30/03      2.59       4.4%        571,650 
 06/06/03      2.76       6.6%        164,624 
 06/13/03      3.66      32.6%        338,620       
 06/20/03      4.34      18.6%        656,213      ~$ 14,239,822 
 . 
 Change       +178%                     +498%          +1,565% 
 .    
 *Average Daily Volume (weekly) x 5 days x Weekly Closing Price 
 .    
 Have a good weekend! 
  
  
  
  
  
  
 

                            

Hey Kevin. Based on Nasdaq data, institutional ownership was 22.2% as of 3/31/2003. 13 institutions held 7.5M shares. 3 institutions established new positions (2.7M shares) while 2 institutions sold out their positions (0.7M shares) during the reporting period ending 3/31.

Based on a study by the Heritage Foundation, a stock like NENG with O/S of 33.5M shares and a market cap of around $140+M would typically have institutional ownership of 36%-40%. Average institutional ownership for the S&P 500 was also around 66% the last time I checked.

http://www.heritage.org/Research/Taxes/loader.cfm?url=/commonspot/security/getfile.cfm&PageID=40....

I think that it will be institutional buying that will power the expansion of NENG's sales multiple as it keeps on putting strong sales numbers on the board and as it becomes cash flow positive and profitable. Right now, NENG is already within reach of the $100M annual revenue run rate or $25M a quarter.

NENG has also ended up 10 out of the last 12 weeks.

Network Engines (NENG)
Weekly Stock Data
Last 12 Weeks
.

 
   Week       Weekly    Weekly     Ave. Daily 
  Ending      Close     Return   Volume (weekly) 
 . 
 04/04/03    $ 1.56       4.0%        109,660 
 04/11/03      1.59       1.9%         59,880 
 04/17/03      1.75      10.1%        144,600 
 04/25/03      1.84       5.1%        310,260 
 05/02/03      1.86     ( 1.1%)       189,400     
 05/09/03      2.23      19.9%        220,700 
 05/16/03      2.19     ( 1.8%)       260,720   
 05/23/03      2.48      13.2%        369,560 
 05/30/03      2.59       4.4%        571,650 
 06/06/03      2.76       6.6%        164,624 
 06/13/03      3.66      32.6%        338,620 
 06/20/03      4.34      18.6%        656,213 
 . 
 Change       +178%                     +498%    
 .          
 Have a good weekend! 
 . 
  
  
  
  
  
  
 

They have some patents and expertise in thin server design that were good enough to make IBM pony up $5.6M in licensing fees a few years ago. IBM invented computing and generates more patents than anybody else so, while largely unnoticed, that 1999 deal to license thin server reference designs from an unknown like NENG, which then had less than $2M in sales, was fairly significant. Perhaps that combination of patents and expertise is one of the reasons that they won the initial Centera contract at EMC, which probably has one of the toughest qualification cycles in technology.

Other companies in the server appliance business are RTX (private) and SteelCloud (public). IBM has farmed out its server appliance business to a top 5 contract manufacturer. Of course, the server vendors like Dell, Sun and HPQ all have the capability to make their own appliances. These vendors, however, focus on server appliances while NENG is carving out a niche in storage and security appliances, which are expected to grow much faster.

If you look at Centera, for instance, the growth potential is simply outstanding. One study already shows that fixed content will represent more than 50% of all stored content by 2005. One Centera customer (hospital) expects to increase its Centera storage 10x in the next two years. Another Centera customer (hospital) just bought 128 terabytes of Centera to house and network all its medical images. Entry-level Centera v1.0 was 10 terabytes (raw), but the average Centera version 1.0 deployment was 27 terabytes (raw). Those early adopter numbers from 150 customers (health, finance, manufacturing) tell you that a customer quickly adds more nodes once a customer learns how to deploy and use Centera. Customers typically buy their storage monthly, quarterly or annually to take advantage of the typical 35%-40% annual drop in storage capacity prices.

Centera v1.0 was rolled out in April 2002 and Centera v2.0 was only rolled out in April 2003 so it's still too early to gauge how long the recurring revenue potential is for EMC or NENG, but I already think this is the EMC product line that will have the longest recurring revenue potential because all a customer has to do is keep on adding Centera nodes to the IP network.

Here's the Centera in action, Raymond.

Centera's software (CentraStar) is based on the FilePool technology that EMC acquired for less than $50M in April 2001.

One of the founders of FilePool is also one of the founders of HyperTrust which operates this Centera-based ASP (application service provider).

http://www.send2store.com/Home.aspx

More background material on FilePool from EMC Belgium:

Eleven years ago the Belgian company Wave Research
was founded to develop FileWave, a sophisticated
software distribution product for Apple Macintosh
networks. The product was highly successful, selling
more than half a million licenses worldwide. In 1996, a
private funding round gave the company the opportunity
to launch a new design effort to deliver a next generation,
cross-platform, Internet and Intranet-centric
file distribution product. The company introduced this
technology under the name FilePool in December 1998.

A couple months later, Wave Research sold the rights
of FileWave to its long time European distributor in
order to focus its efforts on developing FilePool and
derivative products. After another round of venture
capital financing was completed, the company was
renamed FilePool, Inc. and its focus was on developing
storage server technology. As the Internet boom took
off the company evolved into a storage service
provider.

Filepool's online service EZ-Attach was an instant
success attracting millions of users within a few
months. When these users posted their documents on
a central storage platform over the Internet, they
received a unique, content-based key to retrieve their
information afterwards at anytime and any place. EMC
recognised the potential of the patented technology
and the proven scalability of the system.

EMC acquired FilePool in April 2001. At that time,
FilePool employed about 35 people and had its
headquarters in Sint-Katelijne-Waver in Belgium, with
smaller offices in Paris, Frankfurt, and San Francisco.
EMC quickly made the decision to transform the FilePool
team into an R&D unit focusing on the product development
of Centera, a perfect marriage of EMC's hardware
storage expertise and FilePool's innovative software.

FilePool was renamed the EMC Belgian Development
Group (EMC BDG) and grew its core development team
to 55 people. Today the organisation is structured in
four main units, two development teams (one for core
storage development, the other for interfaces, tools
and manageability), a quality assurance team and a
publishing and documentation team. Centera's
management, hardware development and product
marketing are handled by a team at EMC's worldwide
headquarters in Hopkinton, Massachusetts, USA.
The Belgian development team is truly international
with more than a quarter of the developers coming
from all over the world. Kurt Van Looveren, formerly
Vice President Software Engineering at Belgium's IT
security specialist Ubizen, serves as General Manager.

One of the co-founders of Wave Research, Jan Van
Riel, is one of the driving forces of the development
and has become EMC BDG's Director of Technology.

EMC BDG recently moved to a new facility in
Mechelen that has a fully equipped lab for research
into future technologies and will allow the team to
scale up to about 90 people. This meant that the
team had to say goodbye to their 19th century castle,
their big garden and assorted farmyard animals because
the building had simply become too small for the
current activities and ambitions of EMC BDG.<g>

After 12 months of highly confidential and intensive
development, EMC BDG can finally show its products.
Centera's core technology is perceived as ground
breaking and is a crucial element to EMC's strategy.
Centera's Belgian Roots

storage is a hot topic with the big brokerage firms going forward

Yes, new regulations like the ones below have a lot to do with this, but the storage sector has come a long way too. Storage has consistently been one of the best-performing technology sectors ever since EMC decisively broke the sacrosanct 1:1 linkage between the mainframe and storage in 1990 with the original Symmetrix.

NENG builds the storage nodes for EMC's Centera.

EMC Centera Compliance Edition™ Raises Bar for Regulatory Compliance

Meets SEC's New Interpretive Release for Rule 17a-4 for Electronic Records Retention; Becomes First Storage System Compliant with U.S. Department of Defense 5015.2 for Content Shredding; Designated by Deloitte Consulting as "21 CFR Part11 Ready" for Life Sciences Organizations

New York (SIA Technology Management Conference)- Tuesday, June 17, 2003

Setting the pace for regulated electronic records storage solutions, EMC Corporation today announced that Centera Compliance Edition™ content addressed storage (CAS) has achieved major compliance milestones in three of the most strictly regulated industries: financial services, federal government, and life sciences.

Financial Services: SEC Rule 17a-4

EMC announced that Centera Compliance Edition (CE) meets the standards set forth by the recent SEC Interpretive Release on Rule 17a-4. The SEC Interpretive Release clarified the Commission's views on the standards for broker-dealer firms preserving electronic records and email on disk-based storage media. Specifically, the Interpretive Release affirms that broker-dealers can meet the non-rewriteable and non-erasable requirements of Rule 17a-4 through the employment of a storage solution that uses integrated hardware and software codes to prevent the overwriting, erasure or alteration of the records. The SEC Interpretive Release also states that storage solutions that only mitigate the risk a record will be overwritten or erased do not meet the requirements of Rule 17a-4. "Such systems—which may use software applications to protect electronic records, such as authentication and approval policies, passwords or other extrinsic security controls - do not maintain the records in a manner that is non-rewriteable and non-erasable." For the full SEC Interpretive Release: http://www.sec.gov/rules/interp/34-47806.htm

Peter Gerr, Senior Analyst at Enterprise Storage Group, said, "EMC Centera Compliance Edition content addressed storage is driving the innovation wave in the regulated electronic records storage space and is currently the only disk-based storage solution that clearly meets all components of the new SEC Interpretive Release on Rule 17a-4."

Federal Government: DoD 5015.2

EMC announced that Centera CE has become the first-ever storage solution certified by the U.S. Department of Defense. CE's content shredding capability has proven to meet federal standards for the destruction of records. Content shredding ensures that records, once deleted, cannot be recovered. Although the DoD 5015.2 standard for shredding only governs Department of Defense components, it is a widely accepted benchmark outside of the federal space for organizations that need to minimize exposure to litigation by fully destroying expired records or meet privacy and security HIPAA regulations.

Life Sciences: FDA 21 CFR Part 11

EMC today announced that Deloitte Consulting, a premiere authority on life sciences regulatory compliance, has designated Centera CE as "Part 11 Compliance Ready" following an extensive audit and risk analysis of the solution.

Food and Drug Administration (FDA), 21 CFR Part 11 establishes requirements "to ensure that electronic records and electronic signatures are trustworthy, reliable and generally equivalent substitutes for paper records and traditionally handwritten signatures." This systematic approach to compliance mandates that drug development and clinical trial data must be archived in an unalterable form for the life of a drug or longer.

Dr. Michael Breggar, Global Director of Deloitte Consulting's Regulatory Practice, stated, "We believe that the Centera CE solution offers many advantages over certain existing magnetic and optical storage media solutions for purposes of compliant fixed content data management. Perhaps the most exciting feature of the Centera CE solution from a reliability standpoint is its self-healing functionality, which greatly enhances failure prevention."

For the full whitepaper on Deloitte's analysis:
http://www.emc.com/vertical/life_sciences.jsp?rfg=/forms/deloitte/index.jsp

In the international regulatory landscape, EMC Centera Compliance Edition is a certified solution under the trade and tax laws for Germany, Austria and Switzerland. These regulations, along with Germany's GoB and GoBS rules for proper accounting, set standards and methods for electronic bookkeeping.

About EMC Centera

The world's first CAS solution, EMC Centera is EMC's fastest growing product line. and the world's leading online archival storage medium. Resolving the challenges that had traditionally prevented institutions from bringing their fixed content online, Centera's revolutionary content addressing technology drastically reduces management overhead, enabling one full time employee to manage up to 350 terabytes of fixed content. Centera's unique self-healing and authentication features have prompted its industry-wide recognition as the first disk-based WORM (write once, read many) storage medium.

About EMC Centera Compliance Edition

With Centera Compliance Edition, Compliance Officers and IT administrators can leverage all the benefits of a base Centera CAS solution, while enjoying compliance-focused features such as retention enforcement, which enables compliance officers to set hardened retention periods on electronic records; enhanced disposition, or "shredding," which ensures that deleted data cannot be recovered using disk scanning tools; and application access security, which permits Systems Operators to establish access security and authorized activities by defined "communities" at the application or server level, and ensures the privacy of sensitive records.

About Deloitte Consulting

Deloitte Consulting is one of the world's leading management consulting firms, and is uniquely known for its straightforward approach to solving today's most complex business challenges. Deloitte Consulting works hand-in-hand with clients to improve business performance, drive shareholder value, and create competitive advantage. The firm has 20,000 professionals in 31 markets, and serves more than one-third of the companies in the Global Fortune® 500. It is the only consulting firm with five straight appearances on Fortune Magazine's list of "100 Best Companies to Work for in America." Deloitte Consulting can be found on the Internet at http://www.dc.com.

About EMC

EMC Corporation (NYSE: EMC) is the world leader in information storage systems, software, networks and services, providing automated networked storage solutions for organizations across the globe. Information about EMC's products and services can be found at www.EMC.com.

http://www.emc.com/news/press_releases/viewUS.jsp?id=1661

Good for you Raymond! Under $2 would have been better, but this is going to be a great stock to average up into if they keep on executing well.

NENG is currently growing faster than any of its storage networking peers below so keep an eye on them as well so you can maybe catch some of the trademarked rotational moves of some long-time storage investors, particularly the institutions.<g> As a point of reference, the enduring urban legend in storage networking circles is the former ANCOR which skyrocketed from less than $1 to more than $80 in the late 90s before it got taken out by Q-Logic around $50-$55 per share.

FALC and VIXL trade more on potential than anything else. HIL now derives nearly 50% of its revenues from Sun, which also resells storage gear from Hitachi and LSI. NENG now derives nearly 50% of its revenues from EMC with the other 40%-50% coming from distributing the products from the likes of Brocade, McData, Q-Logic and Emulex, which combined control more than 85% of the Fibre Channel Switch & HBA market.

 
 Selected Storage Networking Stocks 
 FALC vs VIXL vs HIL vs NENG 
 Selected Financial Data 
 . 
                                                       Average 
                              Market     TTM             Daily 
                     O/S       Cap      Sales     PSR   Volume 
 . 
 . 
 FalconStor (FALC)  45.6M    $277.3M   $12.3M    22.4x    132k 
 Vixel (VIXL)       23.3M     165.4M    21.4M     7.7x     79k 
 Dot Hill (HIL)     32.2M     379.6M    66.7M     5.7x    324k 
 Network Engines 
 (NENG)             33.5M     145.8M    34.8M     4.2x    272k 
 . 
 . 
 . 
  
 Technical Analysis 
 FALC vs VIXL vs HIL vs NENG 
 . 
 . 
            Divergence      Divergence 
              from             from            YTD 
             50 DMA          200 DMA       Stock Return   Beta 
               (%)             (%)             (%) 
 . 
 . 
 FALC        48.80%           58.95%          77.83%       NA 
 VIXL        74.23%          168.23%         255.00%      2.95 
 HIL         37.85%          144.30%         280.32%      1.56 
 NENG        95.90%          207.49%         335.10%      1.89 
 . 
 . 
 Beta - The Beta used is Beta of Equity. Beta is the 
 monthly price change of a particular company relative 
 to the monthly price change of the S&P500. The time 
 period for Beta is 5 years when available, and not  
 less than 2.5 years. This value is updated monthly. 
 . 
 Sources: Yahoo/Multex 
  
  
  
  
  
  
  
  
  
  
  
 

                            

Network Engines (NENG) 
 Expanding Sales ~ Expanding Sales Multiple 
  
 09/30/02 to 06/13/03 
 . 
 . 
            Market   TTM     PSR   Q2Q Sales    PSR 
    Date     Cap    Sales    TTM    Guidance    FTM    Cash 
 . 
 06/13/03  $122.7M  $34.6M   3.5x   $22-24M   ~1.4x  $33-35M 
 . 
 03/31/03*   50.0M   34.6M   1.4x   $22-24M   ~0.6x    38.8M 
 12/31/02    30.6M   18.4M   1.7x     NM        NM     41.8M 
 09/30/02    31.0M   14.5M   2.1x     NM        NM     56.2M 
 . 
 . 
 *First full quarter including TidalWire acquisition 
 . 
 PSR - Price to Sales Ratio 
 TTM - Trailing Twelve Months 
 FTM - Forward Twelve Months, based on Q2Q sales guidance x 4 
 NM  - Not Meaningful 
  
  
  
  
  
  
  
  
  
  
  
  
 

                            

In NTES footsteps? <g>

YTD, NENG has consistently been one of the strongest stocks in one of the strongest sectors (storage) in technology.

From Businessweek (Dcipher):

CORPORATE SNAPSHOT
NETWORK ENGINES INC
Other Dcipher reports:

The current wave of accumulation has outlasted all overhead resistance from sellers and driven NENG to a new fifty-two week high at 3.660. This preponderance of buying makes the stock one to watch for continued upside momentum. Further demand from investors could bring more new highs. The last trade for NENG was 3.660 on volume of 764,700 shares traded. In the short term, NENG may consolidate briefly before resuming its current uptrend.

A Moving Average describes a stock's price trend with respect to a specific time frame. To calculate a 10-day moving average, the closing prices for the most recent ten days are added together and then divided by ten. This renders the Average price of the stock for the most recent ten sessions. By calculating this average daily using only the most recent data, the average "moves" in conjunction with the underlying stock price. The moving average provides a reliable reference for tracking both trends and performance.

NENG shows a substantial positive divergence from its 200-day moving average line of more than 75%. Generally, the greater the difference between a stock's price and this important long-term technical indicator, the steeper will be that stock's long-term uptrend. A divergence this large from the 200-day line ranks in the top five percent of the market and is a bullish indication of long-term strength for NENG.

A positive divergence of more than 25% from the 50-Day Moving Average Line confirms that NENG has recently been under accumulation. Monitor the stock's performance relative to this significant intermediate term indicator. Some investors would consider NENG somewhat over-extended in its current price range because the stock is trading so far above its 50-day line. If NENG soon falls to profit taking or broader market momentum, as it converges with the 50-day line look for support in that range or a turn upward as indication of strength in its overall trend.

NENG has exhibited short-term momentum as implied by its positive divergence from the 10-Day Moving Average Line. Be advised that a pullback or consolidation on profit taking could soon be in order following any additional gains the stock might post in the near-term. If NENG is also above its 50 or 200-day moving average line, this is technical indication of a long-term uptrend for the stock.

Monitoring a stock's price in relation to its moving average lines is an effective means of understanding the dynamics of its price trend. When considered with other technical indicators, moving average lines offer powerful insight into price movements. If NENG is below its 50 or 200-day moving average line, the stock has recently been down trending and the break above the 10-day line could be first indication of a possible recovery.

A "Price Gap" represents a range of prices on a stock chart in which no trading takes place. This occurs when a stock opens for trading at a lower price than the previous day's close and then does not trade above that mark again. Negative opening gaps are bearish indication of weakness in investor demand. If this move lower is accompanied by surging volume, or is through a point of previous support, it could be early indication of a new downtrend.

NENG shows a negative opening gap of greater than 5% with its most recent open. Examine news or events to uncover what may have prompted this heightened selling pressure. If no news corresponds with this decline, keep a watchful eye as more weakness could follow.


The above report is based on mathematical calculations and, as such, no investment decision should be based solely on its conclusions. Follow this link for the full disclaimer

Please forward all questions and comments concerning this report to: Dcipher@telescan.com

The Japanese market remains red hot with 7 straight months of
consecutive increases in handset sales.

From Reuters:

 
 JAPANESE WIRELESS HANDSET SHIPMENTS 
 [MONTHLY] 
 Source: JEITA  
 . 
                2002      2003     YOY Change 
 . 
 January       3.274M    3.837M      17.2% 
 February      2.899M    3.633M      25.3% 
 March         3.128M    4.955M      58.4% 
 April         3.072M    4.323M      40.7% 
 . 
 4 Mo. Ave.    3.093M    4.187M      35.4% 
 .

Notes:

1) These JEITA numbers exclude PHS. PHS remained
below 100,000 units a month for 8 straight months
before recovering to top 100,000 units a month for
the last two months.

2) 2002 shipments were slightly over 40M units.
If Japan continues this blistering pace, it is on
track to ship 54M units in 2003 even without
accounting for seasonality and fashion ebb and
flow! 1 to 3 MP camera phones are slated for
late 2003 and early 2004, for example, and that
should appeal very strongly to the 20% of
Japanese wireless subscribers who replace their
phones every 7 months!

3) Until the Nokia and Samsung royalties come in,
most of IDCC's recurring royalties still come
from Japanese manufacturers, for better or betterer.<g>

An update on the Security Suites VS Security Appliances tug of war from Briefing.com. This is good for NENG's budding security appliance biz.

07:39 ET CHKP Check Point Sftwr cut to Underperform at CSFB

CSFB downgrades to Underperform from Neutral based on valuation as well as their belief that the co will continue to lose share to CSCO and NSCN as the mkt continues to migrate towards an appliance form factor; raises CHKP target to $17 from $16.

**************************************************************

QLGC, BRCD, MCDTA and ELX are downgraded due to valuation, but channel checks are very positive. This is good for TidalWire. QLGC, BRCD, MCDTA and ELX all have normalized gross margins above 50% and are very aggressive with their marketing dollars.

Storage Prices Might Have Outrun Growth
By Bill Snyder
Staff Reporter
06/09/2003 05:18 PM EDT

Saying that soaring valuations of enterprise data storage companies are ahead of growth potential, Punk Ziegel on Monday downgraded Emulex, Brocade, McData and QLogic.

Other analysts have similar concerns about QLogic, which also has been downgraded recently by Goldman Sachs and A.G. Edwards.......

.....Despite his downgrades, Punk Ziegel analyst Steve Berg said he believes there is still room for growth in the host bus adapter and switch markets. "I'm not concerned about commoditization until the end of 2005," he said........

........Similarly, A.G. Edwards analyst Shebly Seyrafi wrote:"We are downgrading shares of QLogic from buy/aggressive to hold/aggressive based on valuation. QLogic is a solid company, having, in our opinion, executed superbly during the slowdown and having gained meaningful share in the FC HBA market over the past few years. In addition, our distribution channel checks for both Emulex and QLogic are strongly positive in the current CQ2 quarter.

http://www.thestreet.com/_yahoo/tech/billsnyder/10092389.html


**************************************************************

NENG's original server appliance biz rose from $6.0M in FY99 to $43.1M in FY00 as the dotcoms furiously built out their IT infrastructures, but the market quickly fizzled out as the dotcoms imploded. NENG tried to segue into the corporate market on the back of the 1999 IBM licensing agreement -- which generated $4.7M in licensing fees in FY00 and $0.7M in FY01 -- but conservative corporate customers didn't want to manage racks of pizza box-sized servers from a unknown vendor. Consequently, NENG quickly lost traction and hit rock bottom in the June 2001 and September 2001 quarters when they thoroughly restructured the company.

Fortuitously, EMC acquired FilePool in March or April 2001
and was already in the process of revamping their old EOS platform (1996) for the fixed content market with FilePool software and their patented RAIN (redundant array of independent nodes) architecture. NENG was able to win the initial contract for Centera nodes when EMC sent out its RFPs (request for proposals). This was a major, major achievement for a tiny company on the ropes like NENG because EMC has the toughest qualification cycles in IT. Below is a description of the multi-billion dollar interoperability endurance course that NENG probably had to pass, in part or in whole:

In our EMC E-Labs, we replicate customer environments — using 2,600 terabytes of storage across nearly five acres of floor space. To date we've tested: nearly 400 server types from 21 different vendors, 40 operating systems (plus upgrade releases, patches, earlier versions, etc.), 81 third-party storage software products (including Veritas, BMC, and CA), 145 network connectivity elements and 1,200 other devices, ranging from HBAs and drivers to switches and tape subsystems

http://www.emc.com/horizontal/interoperability/index.jsp

***************************************************************

Below are several reference articles that shed light on NENG's technical advantages and how it fits into EMC's RAIN architecture.

***************************************************************

Optimize your storage for fixed content
by: Ed Palmer
Issue: May 2003

.......EMC's Centera is an example of an OO storage system specifically designed for fixed-content applications. Centera is a network-attached device, but it isn't NAS. EMC refers to Centera as content-addressed storage or CAS (see "Pros and cons of content addressed storage").

Centera's hardware architecture is based upon a redundant array of independent nodes (RAIN) architecture consisting of storage and access nodes. Each node is comprised of a 1GHz Pentium III processor, four 250GB ATA disks and three 10/100 BaseT network connections. The access nodes provide an interface to the client applications, while the storage nodes store application information in object form. Additionally, the nodes may be deployed in a clustered configuration for availability and performance.

Centera's entry point is an 8-node configuration configured for either 2.9TB of usable capacity (mirrored protection) or 4.3TB of parity protected capacity. Each Centera cabinet can contain up to 32 nodes, and 16 cabinets can be configured as a single cluster. Centera can also be managed as a domain, which scales up to seven clusters, holding more than a petabyte of storage.

http://storagemagazine.techtarget.com/strgFeature/1,291266,sid35_gci900477_idx2,00.html

***************************************************************

Network Engines revs hopes on new Sierra server
By Stephen Shankland
Staff Writer, CNET News.com
February 27, 2001, 6:05 PM PT


...........But the company has high hopes for Sierra, which Network Engines said has big improvements for those stacking up servers in data centers. The new system is designed to match the company's marketing shift from early adopters buying the latest thing to more conservative corporate clients.

The Sierra features a novel "heat pipe" that transfers heat from the chips to cooling fins. Because each fin is cooled by three fans, the failure of one fan won't cripple the system.

The cooling system allows the use of two Pentium III CPUs running at 1GHz, said marketing director Rick Friedman. It is also designed to accommodate faster Pentiums of the current generation and upcoming Intel models code-named Tualatin, he said.

"I think Network Engines has done a really good job of identifying the needs of the data center, in particular the need to remove heat from the rack-dense server," IDC's Humphreys said. The heat pipe technology is "unique," he added.

Another Sierra feature is the "CM bus," a system that lets administrators control the servers remotely. With it, administrators can restart servers, monitor their performance, and even wipe the hard disk and reinstall software.

And using supporting chips from ServerWorks, Sierra has two 64-bit, 66MHz PCI slots--the fastest speeds available.

http://news.com.com/2100-1001-253273.html

**************************************************************

IBM licenses skinny server designs
By Stephen Shankland
Staff Writer, CNET News.com
September 1, 1999, 4:45 AM PT

IBM has licensed the hardware and software of Network Engines' skinny servers, the companies announced yesterday.

The servers, each only 1.75-inches thick, can be stacked very densely to support high-powered Web sites. Those sites typically use lots of small, inexpensive servers to cope with the burden imposed by the huge numbers of Web surfers who can inundate a site.....

http://news.com.com/2100-1001-230520.html?tag=rn

The right place to be at this point of the business cycle.....

Love rally caps, the small ones
Tiny stocks have investors turning heads
By Thom Calandra, CBS.MarketWatch.com
Last Update: 11:13 AM ET June 4, 2003

..........The so-called micro-caps and nano-caps -- with market caps less than $100 million -- are causing investors to turn their heads toward an arena once given up for dead: highly speculative, cash-hungry companies that could dominate their fledgling industries, if only they got that one contract that could put them in the big time.

For every company with a stock price that has doubled or tripled since the small-cap rally that began in March, there is at least one that has gone nowhere, or traded in a choppy fashion that would make the most seaworthy investor queasy.......

Still, the micro-caps in my view have plenty of room to run this year. Driving the group in part will be the 8 percent or so yearly growth of America's M3 money supply, a growth in cash supplies that will provide -- for better and worse -- steady liquidity for investor speculation

http://cbs.marketwatch.com/news/story.asp?siteid=mktw&dist=mktwmore&guid=%7B660D4BD7%2D4040%....


Running with the bulls
Small growth leads rally in stock mutual funds
By Jonathan Burton, CBS.MarketWatch.com
Last Update: 12:02 AM ET June 9, 2003

SAN FRANCISCO (CBS.MW) - Stock mutual funds enjoyed their best one-week gain since March as buoyant investors shifted into funds that invest in healthcare, biotechnology and financial services stocks.

U.S. stock funds gained 4.1 percent in the week ended Thursday, investment data firm Lipper said Friday, rivaling a 4.5 percent rise in values during the week ended March 20.

Small-cap growth funds led the charge, continuing to break the bear market's grip, and a leading small-cap analyst said more upside is ahead.

Last week's surge marked only the third time in the past 12 months that stock funds produced such explosive gains. The group moved 8.2 percent higher during one week last October.

"It looks like investors - both retail and institutional - are predicting a turnaround," Lipper said in a statement. "They don't want to miss the boat if the argument for a rebound continues to gain strength."

Small-cap growth stock funds were the best-performers, up 5.3 percent. The group has dominated the large- and mid-cap stock fund categories for 10 of the past 11 weeks, according to Lipper. Technology and healthcare investments in particular helped propel the small-stock category ahead.

Indeed, small stocks are poised to move higher, Satya Pradhuman, chief small-cap strategist at Merrill Lynch, predicted.

"This broadening recovery is like to continue 12 to 18 months," he said.

The Russell 2000 benchmark small-stock index has gained 19.2 percent this year so far, practically erasing its 20.5 percent loss for all of 2002.

Sector funds fared even better than more diversified portfolios last week. Health and biotechnology fund advanced 6.5 percent, for example. Buyers evidently have shaken off broad economic concerns and focusing on company-specific fundamentals, according to Lipper.

The science and technology category also showed impressive strength, up 4.9 percent in the week and 27.6 percent year-to-date, Lipper said. Over the past 13 weeks alone, these funds have soared 30.7 percent - giving up ground in just three of those weeks.

Top-performing funds in the week ended Thursday included two volatile but white-hot standouts, according to research from financial data provider Standard & Poor's. Apex Mid Cap Growth (BMCGX: news, chart, profile) was up 14.7 percent, while Excelsior Biotechnology (UMBTX: news, chart, profile) gained 13.1 percent.

Jonathan Burton covers the mutual fund industry for CBS MarketWatch.com

http://cbs.marketwatch.com/news/story.asp?guid=%7BD279D835%2D337D%2D4604%2D85C2%2DECD371F6E342%7D&am....

Superb posts, Kevin.

1) Regarding the TidalWire distribution business, both McData and Q-Logic recently passed the $100M quarterly revenue milestone powered in both cases by their mid-range products -- exactly the kind of products favored by their 500 or so VARs.

I've followed first generation SANS (mainframe ESCON) and second generation SANs (fibre channel) markets long enough (since 1995) to know that the way a vendor positions itself in one generation usually sets up the next generation of opportunities, at least! NENG's foresight in buying TidalWire (and its access to 500 or so VARS and resellers building storage practices) will be validated over and over again in the years to come as SANs become faster (2Gbps to 4Gbps to 10Gbps) and multi-protocol (Ficon, Fibre Channel, iSCSI).

2) Centera currently provides 20%-25% gross margins while TidalWire provides 15%-20% gross margins. That's why some people considered it a counterintuitive purchase. NENG's business is also still very much storage network-oriented, but the opportunities are clearly there for NENG to sell several niche networking and security appliances around the SANs or dynamic storage pools that are forming in the mainstream corporate market. Those appliances should carry at least 25% gross margins. That will give it the best of both worlds: rapidly expanding sales and margins.

http:/www.tidalwire.com

More later.

Ahh, I prove you're wrong then you go vague. LOL. By the way, if you hadn't notice yet, I actually don't read posts from people like you. Waste of time. Good luck again, anyway!

You're wrong, as usual, Mickey.

The fixed wireless BCDMA alliance was the first opportunity for IDCC to translate the CDMA patents it acquired from SCS in 1992 from theory into practice at a time when the processing power wasn't simply available for mobile WCDMA. Even today the technology still hasn't caught up totally with the marketing hype as you can check for yourself from the almost daily dispatches from Japan.

Without that valuable lab and field work from 1994 to 1998, I don't think IDCC could have gotten the 1999 Nokia deal. They would most certainly have run out of money before 1999 and Nokia would have been able to buy IDCC's patent portfolio in a song and dance contest against Samsung and Siemens probably in a karaoke bar with a sauna.<g>

I also don't think IDCC would be getting the kind of CDMA patents that it is getting issued now if they hadn't taken Schilling's CDMA patents into the field.

You only make yourself and your friends look silly by your stupid revisionism that now claims that IDCC's BCDMA R&D, financed mostly by Siemens, Samsung and Alacatel, was a failure.

The key difference, Mickey, is that you and your friends have done nothing to increase the commercial value of IDCC's patent portfolio.

Zip. Zilch. Nada. Zero.

Would you have had the wit to increase R&D by $210M after the Motorola loss in order to increase the number of US Patents from 65 in 1995 to 240 in 2002?

I don't think so. The numbers clearly show that the market value of IDCC's patents increased as it continued to invest heavily in the foundation of IDCC's early TDMA and CDMA patents to build a patent portfolio that is now applicable to all five 3G standards -- based on TDMA, TDMA/CDMA and CDMA -- with every conceivable turn of process geometry.

Wideband CDMA, for example, was just not feasible in the mid-90s because the semiconductor processes were not sophisticated enough to create right kind of processing power for wireless handsets. That's one of the reasons why QCOM chose narrowband CDMA which had lower processing requirements and why IDCC, Siemens, Samsung and Alcatel decided to collaborate on a fixed wireless version of wideband CDMA -- the BCDMA alliance.

By the way, do you know when IDCC's earliest TDMA and CDMA are set to expire and become part of the public domain? If you do then you can understand why IDCC needs to continue to spend heavily in R&D while using its growing cash reserves to opportunistically create new engines for growth.

INTERDIGITAL (IDCC) 
 R&D -> Patents -> Royalties -> Cash 
 1995 to 2006 
 . 
 . 
                  US    %    Cumulative Cumulative   %      Cash/ 
 YEAR     O/S   Patents Chg. Royalties  Royalties/  Chg.    Mkt. 
                                         Share              Sec.  
 . 
 1995    46.5M    65     -   $ 100M     $ 2.15      -    $  64M 
 1996    46.5M    78    20%    129M       2.77     29%      55M 
 1997    48.2M    96    23%    135M       2.80      1%      26M 
 1998    48.8M   123    28%    227M       4.65     66%      52M 
 1999    50.5M   137    11%    293M       5.80     25%      83M 
 2000    57.3M   161    18%    344M       6.00      1%      89M 
 2001    53.4M   200    24%    397M       7.43     24%      90M 
 . 
 2002    56.1M   240    20%    485M       8.65     16%      88M 
 2003E  ~58.7M    -      -    ~832M      14.17     64%    ~351M 
 . 
 2004E  ~59.9M    -      -   ~1.05B      17.53     24%    ~480M 
 2005E  ~61.1M    -      -   ~1.30B      21.28     21%    ~594M 
 2006E  ~61.7M    -      -   ~1.57B      25.45     20%    ~725M 
 . 
 Notes:   
 . 
 1) The 2003 to 2006 O/S and Cash numbers are taken from  
 Frank Marsala's latest update. 
 . 
 2) 2003 numbers include 2002 accrued royalties from Nokia  
 and Samsung, and paid up royalties up to 2003 from Ericsson. 
 . 
  
  
  
  
  
  
  
  
  
  
  
  
  
 

                            

Patents are not lottery tickets that you fight over once the winning numbers come out, Mickey. LOL.
.

INTERDIGITAL (IDCC) 
 Patent Production  
 [TDMA/CDMA only] 
 1995 to 2002 
 . 
 . 
  
                      R&D     US       US     Foreign  Foreign 
                     Head-  Patents  Patents  Patents  Patents 
 YEAR   O/S     R&D  Count  Issued   Applied  Issued   Applied 
 . 
 1995  46.5M  $ 9.7M   96     65       38       NA      160 
 1996  46.5M   21.6M  143     78       56       NA      169 
 1997  48.2M   24.2M  112     96       67      301      221 
 1998  48.8M   17.2M  123    123       61      331      238 
 1999  50.5M   20.5M  137    137       76      345      213 
 2000  57.3M   26.0M  161    161      143      390      433 
 2001  53.4M   44.5M  237    200      210      415      665 
 2002  56.1M   46.7M  216    240      375      520      780 
 . 
 Total       $210.4M         240               520 
 . 
 . 
 . 
  
  
  
  
  
  
  
  
 

                            

Speaking of consolidation in the software industry, Oracle (TTM sales of $9.42B) just made a bid for PeopleSoft (TTM sales of $1.93B), which just made a bid for JD Edwards (TTM sales of $886M) earlier in the week.


Oracle bid set to shake up software industry
Friday June 6, 3:39 pm ET
By Reed Stevenson
Reuters

SEATTLE, June 6 (Reuters) - Oracle Corp.'s bid to buy rival software maker PeopleSoft Inc. on Friday for $5.1 billion could spark moves by bigger players hoping to carve out a larger piece of the market, analysts said.

At stake is the $65 billion market for business software, the applications that companies use to track their finances, inventory, production, sales, customers and employees.

The highly fragmented market has long been considered ripe for consolidation, with excellent growth prospects for software serving mid- to smaller-sized businesses.

Germany's SAP AG and No. 1 software maker Microsoft Corp. are pushing their own offerings, and Oracle, the leading database software maker, has also been trying to claim a piece of the business applications market.

Oracle's move was widely seen as defensive play after PeopleSoft said earlier this week that it would buy another major competitor, J.D. Edwards & Co., for $1.6 billion in a stock deal that would have vaulted PeopleSoft ahead of Oracle.

Albert Pang, a researcher at IDC Corp., said that anything could happen over the next few weeks, including attempts by business software heavyweight SAP or deep-pocketed Microsoft to scuttle Oracle's designs.

"The Microsoft factor has to play into this equation," Pang said, "They definitely would not want to let any opportunity pass by. The Oracle deal is far from a done deal."

The weaker global economy is only increasing the strength and influence of larger software makers, where the top four companies control only about 15 percent of the highly fragmented business software market, Pang said, making the market ripe for consolidation.

"I think this is going to force the hand" of other players in the sector, said Jamie Friedman, analyst at Fulcrum Global Partners.

Friedman said that Siebel Systems Inc., the maker of customer service and tracking software, could be pulled into a deal as either a buyer or a seller in the coming days or weeks.

BIGGER FISH

So far Redmond, Washington-based Microsoft has remained silent, although it could disrupt any ongoing deals quickly if it decides to tap into its $46 billion cash hoard.

But Microsoft has also repeatedly expressed its reluctance to buy big companies and it still faces an antitrust probe by European regulators.

"In the studies we've made of larger acquisitions, they're pretty difficult to pull off," Microsoft Chief Financial Officer John Connors told investors at a conference in New York on Thursday.

"We generally though are very good at small acquisitions where you basically are buying a company that had great research and development talent in the men and women you are trying to acquire," Connors said.

Another subtext to this week's developments is a race to control future standards for business software as companies shift their software and services over to Web-based services.

Microsoft, which has maintained its strategic lead over rivals by keeping a tight grip on computing standards and platforms, could step in as a buyer if it sees a threat to its own Web services initiative, called .NET, analysts said.

"When the dust settles you're going to be left with a handful of companies that are going to set the (software and Web services) standards," IDC's Pang said.

http://biz.yahoo.com/rf/030606/tech_software_1.html

Both J.D. Edwards and PeopleSoft had been close partners with IBM's $13 billion software division, which helped the companies reach global customers in exchange for their support of IBM's hardware and software. There's no reason to think that relationship will be negatively affected by today's acquisition.

Let The Software Shakeout Begin
http://www.forbes.com/2003/06/02/cx_ld_0602psft.html

Hitting $1 billion in sales is a rare feat in the software business. In fact, of the 549 publicly held software companies, only 15 have at least $1 billion in sales.

Software's Life Of Quiet Desperation
http://www.forbes.com/2003/04/10/cx_ld_0410software.html

Note: Only 5 software companies have ever reached the $2B revenue milestone: IBM, Microsoft, Oracle, SAP, and CA.

The short answer is that it's a very cheap stock in the right places at the right time.

The long answer starts in the numbers of this small cap work in progress.

FY02 revenue was $14.5M. TTM revenue was $35M 2Q03 revenue was already $19.5M including the first full quarter contribution ($10.2M) of the TidalWire acquisition. Going forward, NENG is on track to exit FY2003 (ending in September) with $25M to $30M in quarterly revenue or $100M to $120M in revenue on an annualized basis.

NENG was nearly profitable ($2.9M loss) and nearly cash flow positive (negative $3.3M) through the first 6 months of FY2003. I think it is on track to be modestly profitable and modestly cash flow positive exiting FY2003 excluding the cash burn entailed by new products.

At today's close of $2.81@33.5M shares, NENG currently has a market cap of $94M. That works out to a PSR of 2.69x based on TTM (trailing twelve months) revenue of $35M but a PSR range of only 0.78x to 0.94x based on a 4Q03 projected revenue range of $25M to $30M -- $100M to $120M on an annualized basis.

That's extremely cheap for a company fully capable of doubling sales for each of the next 2 to 3 years because of the way it has positioned itself to participate in the ongoing consolidation of the software industry around the customer-laid tracks created by the inexorable trend towards networked storage.

More later.

Useful links.

http://www.searchstorage.com
http://www.byteandswitch.com
http://is.pennnet.com/home.cfm
http://www.eweek.com/category2/0,3960,98,00.asp
http://www.computerworld.com/hardwaretopics/storage?from=left
http://www.nwfusion.com/topics/storage.html

Network Engines Announces Availability of Ipsum Networks Server Appliance Solution
Wednesday June 4, 8:45 am ET

Route Dynamics(TM) Product Suite is the First Automated Root Cause Analysis Tool for IP Routed Networks

CANTON, Mass.--(BUSINESS WIRE)--June 4, 2003-- Network Engines today announced availability of a server appliance offered by Ipsum Networks that identifies the root cause of Layer 3 problems across enterprise networks and monitors the impact on application flow path availability. Engineered and manufactured by Network Engines, a leading development, manufacturing and distribution partner for storage and security software and equipment providers, and sold by Ipsum Networks, the Route Dynamics product suite is the first server appliance solution to deliver real-time automated root cause analysis of complex and costly IP routing faults.

The Route Dynamics appliance is a stand-alone unit that can be installed quickly and easily into an enterprise environment to improve availability of network resources. The appliance puts automated fault and root cause capabilities into the hands of network technicians, allowing rapid resolution of IP routing faults and ensuring higher application and service availability....

http://biz.yahoo.com/bw/030604/45341_1.html


Funding pushes Ipsum onto $2B market track
Peter Key, Staff Writer
Week of 5/5/2003

A company co-founded by a University of Pennsylvania professor has received $6 million in venture funding to market software for detecting hard-to-spot computer network problems.

The second-round financing of Ipsum Networks Inc., which is based in Philadelphia's Old City, was led by Rho Ventures of New York. Sevin Rosen Funds, which has offices in Dallas and Palo Alto, Calif., also participated in the funding. Sevin Rosen provided Ipsum with an initial funding of $1.5 million in August 2001.

"We were able to demonstrate [to the venture funders] that we had not only developed a sort of innovative technology, but that we had gotten pretty good traction with several customers, that we were filling a real need," said Roch Guerin, Ipsum's chief executive officer, who is on leave from his duties as Penn's Alfred Fitler Moore professor of telecommunications networks.

The need exists among organizations that operate computer networks that use Internet Protocol, or IP, as a means of data transmission.

In those types of networks, computers transmit data by breaking it up into packets, addressing each packet and sending the packet on its way. Once on its way, the packet encounters a machine called a router. The router looks at the address on the packet and, based on information it shares with other routers, ships the packet to another machine that it thinks is on the way to the packet's ultimate destination. Eventually, the routers in the network get the packet to its destination, where it and its brother packets are reassembled.

The strength of an IP network is that it doesn't depend on a central computer or computers to work. In fact, IP was designed so that the United States could create computer networks that weren't dependent on a central machine or group of machines, and thus were tough to destroy.

The weakness of an IP network is that its smooth functioning depends on the accuracy of the information the routers pass among themselves. If they start passing inaccurate information, data flow through the network can be slowed or altogether stopped.

Without a way of monitoring the communication among routers on a network, however, it's impossible to spot inaccuracies until the inaccurate communication starts affecting the network's performance. Also, finding the source of the inaccurate communication can be quite difficult.

"Things that happen at one end of the network ripple and propagate and create changes everywhere that are very hard to track," Guerin said.

That means a problem caused by bad communications among routers on an IP network can take a while to solve.

That was OK when IP networks weren't widely used. In recent years, however, their use has been growing among such organizations as brokerages, which can lose millions of dollars each second one of their networks is down. As a result, the demand for something that can spot communications problems in an IP network before they damage the network also has been growing.

Guerin and Raju Rajan, with whom he worked at IBM Corp. in the 1990s, formed Ipsum to satisfy that demand.

"We both felt, Raju and myself, that there was an opportunity and that there was nothing to fill that hole and that we had a pretty good idea, based on all our experience in the networking sort of world, how to develop a novel solution," Guerin said.

Guerin and Rajan, who is Ipsum's chief technology officer, pitched their idea to venture capitalists. After they received seed funding from Sevin Rosen, they founded Ipsum and began trying to turn their idea into software. (They got the name for their company from nosce te ipsum, a Latin phrase meaning, "know thyself.")

Ipsum had its first version of the software, which it calls Route Dynamics, ready for internal testing last July. It has been testing the software, which it sells on server computers made by Network Engines Inc. of Canton, Mass., at customer sites the past few months, and was planning to make the software/server combinations generally available about now.

Route Dynamics works by monitoring two types of communications -- those happening among routers within a network and the communications that the network is sending to and receiving from other networks. That enables it to tell users what's going on in the system to which it's attached and the systems to which that system links at a level that is pretty much invisible to other network-monitoring equipment.

"Plug it in and it automatically discovers everything in all available [data] paths and application flows through your network," said Frank Hayes, Ipsum's vice president for marketing and business development.

Route Dynamics allows users to perform simulations so they can see what will happen to their network if they make any kind of change in it. It also enables them to perform differential analysis, which can be used to compare the condition of a network before a piece of equipment is installed to the condition of the network after installation. That enables them to spot if the equipment was incorrectly programmed, so they can fix it.

Route Dynamics isn't a cheap product. Hayes said the smallest server running it costs about $50,000.

The customers Ipsum is targeting consist of companies here and abroad of Fortune 1000 size.

The core computer systems at those kinds of companies usually don't use IP, according to Charles Phipps, a general partner at Sevin Rosen's Dallas office. Instead, its use is confined to what Phipps called those companies' "edge systems."

Still, there are enough of those so that Ipsum is forecasting a $2 billion market for Route Dynamics by 2006.

Additionally, "there is tremendous migration toward IP," said Dennis Drogseth, a vice president at the Portsmouth, N.H., office of Enterprise Management Associates Inc., a Boulder, Colo.-based tech consulting firm.

As a result, Drogseth thinks the market for Route Dynamics could see exponential growth, which the product is well-positioned to exploit.

"It has a good future in my view," he said. "There's not a lot of other products out there like it."

Peter Key can be reached at pkey@bizjournals.com
http://philadelphia.bizjournals.com/philadelphia/stories/2003/05/05/story4.html

I swapped the last fifth of my IDCC equity for IDCC options today. This one's going to continue to be a volatile trader until they get their product story in order. I might as well take full advantage of that fact.<g>

Check out ASCL to get an idea of how IDCC's balance sheet is going to look like once the Nokia and Samsung money come in.
This used to be the old Informix before they sold their $1B a year (sales) database business to IBM for a cool $1B in cash. Software and royalties have comparable gross margins.

TTM revenue is $128M with accelerating growth from $21M in 1Q02 to $35M in 1Q03. Get this, cash is now $616M after they got the final $109M payment from IBM. O/S is 232M shares, but they have a proposal at the ASM for a reverse 4 to 1 stock split that should bring O/S to around 58M shares so cash on hand is going to be something like $10.62 per share or thereabouts after the reverse stock split. The stock is currently at $4.18 so post-split, it will be around $16.72.

To summarize, ASCL's TTM revenue is currently $128M, post-split O/S will be around 58M shares, no debt, cash should be around $10.62 per share, and the stock should be in the $16 to $17 range based on today's close.

Sounds familiar? LOL.