NetManage Finishes 2007 on a High Note as Rocket Awaits

February 25, 2008 Timothy Prickett Morgan

In December, Rocket Software, a privately held maker of System i and mainframe tools, offered $69 million to acquire NetManage, a maker of host connectivity and application modernization tools for mainframes and System i servers. The offer came after years of ups and downs and consolidation in the tools and connectivity market. And it looks like NetManage is on the financial mend as Rocket Software is working to get the financing to close the NetManage deal.

In the fourth quarter ended December 31, NetManage said that its revenues hit $10.9 million, up 27 percent compared to the fourth quarter of 2006 and also up 27 percent compared to its third quarter in 2007, when it had $8.7 million in sales. And significantly, NetManage actually had a decent net income in the fourth quarter, booking $1.7 million in net earning (17 cents per share), which compared quite favorably to the $916,000 loss (10 cents a share) the company had in the final quarter of 2006.

For the full 2007 year, NetManage did not have such heady comparisons, with sales rising 1.4 percent to $36.1 million and the company booking a net loss of $1.3 million, or 13 cents per share. Still, in 2006, NetManage booked a $2.5 million loss on $35.6 million in sales, so the company’s product development and marketing and its cost cutting were getting traction in the second half of 2007. NetManage ended 2007 with $25.4 million in cash, which means the $69 million deal by Rocket Software to take over NetManage really comes to a $43.6 million acquisition deal at this point.

“We are pleased to wrap up the year with strong revenue growth and our third consecutive quarter of profitability,” said Zvi Alon, chairman, president, and chief executive officer at NetManage in a statement accompanying the financial results. “In the fourth quarter, we signed nine new technology deals with notable partners such as Cordys and introduced a number of advanced solution updates and packages. During 2007, we focused on driving revenues from new and existing partnerships, introducing new customer solutions, improving operational efficiencies and achieving profitability. I am excited about the progress we have made throughout the year and believe the company is well positioned to capture future market opportunities.”

In addition to announcing its financials for the final quarter of 2007, NetManage said that due diligence on the deal was done on January 22 and that Rocket Software required more time to syndicate the financing behind the acquisition. On February 11, Rocket Software announced that the two companies agreed to extend the termination date on the deal to February 29.

“The recent uncertainty in the debt markets has resulted in unexpected delays in our ability to secure the financing for the transaction,” explained Andrew Youniss, chief executive officer at Rocket Software. “We are impressed by the results of our due diligence investigation of NetManage and their strong fourth quarter 2007 results. We stand behind our offer and continue to be optimistic about obtaining financing for the acquisition of NetManage.”

Wall Street is not sure what to make out of this, and NetManage’s market capitalization is at $52.3 million as we got to press on Friday, down from the $71 million peak it hit back in December when Rocket Software announced the deal to buy NetManage. It would seem that Wall Street investors are unsure if Rocket Software will make the deadline by this Friday to secure financing to close the deal. We’ll see, and we’ll let you know what happens.

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