Description

NETP is a software company that is trading at around 69% of net cash. While NETP has burned cash historically, it has made good progress in reducing costs. The cash balance actually remained flat from Q2 to Q3 and the company estimates that Q4 cash burn will be less than $2M. While I think Q4 burn will be lower than $2M and this should decrease even further going forward, a $2M/Q burn rate would leave the company with net cash equal to its current stock price in Q4 2004 or around 2 years from now if nothing more positive happens.

Further cost reductions and some customer wins should propel the company to at least a consistent cash neutral position in the next year or so. In addition, the company has had discussions about using some of the cash to buy back shares in some form. I think this would be a wise decision given the discount in the market price.

The company is also a prime candidate for a shareholder activist given its low cash burn, high cash position and ownership of a discreet asset that could be sold for value (software). See LQID.

NETP has a batch of brand name clients (see below) who use and value the product. NETP is able to generate gross profit margins in excess of 60% and has shown it has the ability to scale down its operations to be more in line with its existing base of business. I believe another software company in the CRM space, for example, could profit tremendously from an acquisition of NETP. They would be able to utilize the cash on the balance sheet and use NETP’s existing customers as an opportunity for additional sales.

The company spent $1.21M on R&D in the 3Q or almost 50% of total operating expenditures. I believe this can be reduced and could be reduced dramatically if the company was acquired by a larger software company. Reasonable reductions in R&D expenditures would bring the company into at least a cash neutral position.

Management has told me that they have received many calls from shareholders regarding their cash hoard urging management to buy back shares or issue a dividend. Management has told me they consider this at each board meeting. As the cash burn stabilizes (which I think it has given last quarter performance), I think the board will get more comfortable in recommending some form of buy back. There are several major shareholders that can and probably have provided a concentrated voice to management to maximize value.

I believe that management will either achieve some success in winning new customers and move to at least a cash neutral position or take some steps to reduce the discount in its shares via a share buy back or self tender or sell the company outright. Management has 2.5 million options struck in the $0-$3 range.

With the low level of cash burn, large discount to net cash value, the presence of a real asset and options in the $0-$3 range motivating management, I believe that there is minimal downside and the opportunity for attractive returns over the next year. Management has been prudent so far in rapidly reducing the cash burn. I believe that they will continue to be prudent in maximizing value going forward.

Financial Summary (9/30/02):

Cash $64.65
Total Liabilities 9.03
Net Cash $55.62
Diluted Shares Outstanding 29.8
Net Cash Per Diluted Share $1.87
Current Stock Price $1.29
Stock Price as a % of Net Cash 69.1%

Historical Cash Balance Changes:
Q1 ’02: (4.26)
Q2 ’02: (4.72)
Q3 ’02: 0.03

Historical EBITDA -Capex:
Q1 ’02: (3.86)
Q2 ’02: (2.98)
Q3 ’02: (1.44)

NETP’s software helps companies sell more items by suggesting other products that are similar or possibly as attractive to items in existing or previous orders given a customer’s profile. NETP argues that this allows the user to grow revenue, drive demand and increase profitability. NETP cites customers such as 3M, Brylane, Great Universal Stores, J.C. Penney, J&L Industrial Supply and half.com. NETP software is designed to integrate with and add value to existing CRM systems.

Catalyst

New customer wins that would increase top line and move company to a consistent cash neutral or better position.

Share buy back or self-tender.

Shareholder activism.