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February 11, 2010

Analyst: Vitalie Eremia, CFA Associate: Oxana Sutreac

Research Report NEWMARKET TECHNOLOGY, INC. RATING: BUY TARGET PRICE: $1.47 Market data Recent price, $ Market Cap, $ mn Shares out., mn 52wk range, $

$ millions 0.028

2008a

2009e

2010f

2011f

2012f

95.1

105.6

149.8

193.1

243.1

Revenue

0.5

Operating income

0.9

2.1

7.0

13.3

19.7

18.7

Operating margin

0.9%

2.0%

4.7%

6.9%

8.1%

-30.3 -31.9% -2.79

0.2 0.2% 0.01

3.2 2.1% 0.13

5.7 2.9% 0.22

6.7 2.8% 0.25

0.01 – 1.01

Net income Net margin EPS, $

Source: Reuters, SEC filings, analyst estimates

Summary NewMarket Technology (NewMarket) is an IT services company reselling hardware and software and offering systems integration and other IT services primarily in emerging markets, as well as in USA. The company enjoyed rapid growth before 2008 and aims to resume double-digit growth rates in 2010, having already announced a number of significant contracts. NewMarket is profitable and mostly cash flow positive, and we expect margins and cash flows to improve as the company grows its business. NewMarket’s strategy revolves around emerging markets, especially Latin America, Asia and Africa, which are expected to grow much faster than the mature markets in developed countries due to low saturation, high demand and lack of big competitors dominating developed markets. NewMarket has also announced plans to operate a sort of a business incubator through its Greenfield partnership program, helping emerging technology startups take off with a view of integrating successful ones into its own operations in emerging markets. Three companies currently participate in the program and one of them is being readied for launching commercial operations in Africa. Among the main risks associated with NewMarket we see the complex strategy involving Worldwide Strategies Inc. (see the report for details). While the goals of the strategy are legitimate as it aims to provide long-term investment return to NewMarket shareholders, the exact implementation of these plans remains veiled. Another risk is the company’s operations in Venezuela, whose eccentric leader is notorious for expropriating assets owned by foreign investors. We feel that the company is heavily undervalued as its $0.5 million market value is significantly below its tangible book value of $19 million. Our valuation suggests that NewMarket should be valued at $1.47 per share.

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Table of Contents NewMarket Technology, Inc. ......................................................................................................................... 1 Summary.................................................................................................................................................... 1 Investment Highlights .................................................................................................................................... 3 Investment Risks ........................................................................................................................................... 4 SWOT ............................................................................................................................................................ 5 Valuation........................................................................................................................................................ 6 Projections ................................................................................................................................................. 6 DCF valuation ............................................................................................................................................ 6 Relative valuation ...................................................................................................................................... 8 Final valuation ............................................................................................................................................ 9 Company Profile ..........................................................................................................................................10 Products and services .............................................................................................................................10 Corporate strategy ...................................................................................................................................10 Focus on emerging markets.................................................................................................................10 Focus on emerging technologies – the Greenfield partnership program .............................................10 Investor return strategy ........................................................................................................................11 Tiered business development approach ..............................................................................................11 Management team ...................................................................................................................................12 Financial Overview ......................................................................................................................................14 Income Statement ....................................................................................................................................14 Balance Sheet..........................................................................................................................................15 Cash Flows ..............................................................................................................................................17 Market Overview..........................................................................................................................................18 Disclaimer ....................................................................................................................................................19

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INVESTMENT HIGHLIGHTS Fast revenue growth NewMarket has exhibited outstanding growth since its launch. The company reports that it grew from under $1 million in revenue in 2003 to over $50 million in 2005. It further almost doubled its revenues by 2008, when it recorded $95 million. In recognition of this dynamic development, in 2006, NewMarket received several Technology Fast 500 1 awards from Deloitte : for being the #1 fastest growing technology company in Texas, the #3 fastest growing technology company in the United States and #5 fastest growing technology company overall in North America.

120 $ millions

100

Revenues

80 60 40 20

0 NewMarket intends to resume fast growth in 2010, planning to achieve $150 million in sales and 2004 2005 2006 2007 2008 2009e announcing an ambition to reach $1 billion within Source: company reports, analyst estimates (Q4-09). five years. A recent webcast revealed that in addition to the existing $100 million in revenues and $100 million worth of new contracts signed (see below), NewMarket has another $100 million in 2010 outsourcing service contract pipeline and $200 2 million in ODM (“Original design manufacturing”) contract pipeline in China . NewMarket’s CEO also announced that a new ODM contract could be announced soon that could become the largest contract in 3 the company’s history and its value could even exceed its current annual revenues . With these metrics, NewMarket plans to reach $300 million in sales in 2011.

Awards In addition to the 2006 Deloitte awards mentioned above, NewMarket boasts several others. Namely, the company was awarded the Tech Titans #1 award in 2007, and #5 in 2008, and it was a finalist in the 2007 th Dallas Chamber International Business Achievement Awards. NewMarket also ranks 279 in the 2009 VAR 500 ranking for the third year in a row (with slight variations in exact rank). These awards illustrate NewMarket’s leadership and can serve as a marketing tool for recruiting new customers. Major new contracts In recent months, NewMarket has announced several multimillion deals that should help the company reach its $150-million revenue goal in 2010. Most recently, the company announced a three-year $36million contract in China. This contract followed earlier announcements of two similar contracts: another $30-million contract in China and a $33-million contract in Latin America (both for three-year terms). These three contracts translate into $33 million in average annual revenues – one-third of NewMarket’s current annual sales! With such pace of new contract signing, reaching the $150 million goal should not be difficult to achieve. Focus on recurring revenues NewMarket has announced its increased focus on growing recurring revenues, as well as on extending the average term of contracts beyond one year. The new CEO, Mr. Noller, has announced that progress was being made in this regard and that the percentage of recurring contracts in the company’s revenues is growing. This focus should help stabilize NewMarket’s revenues and make them more resilient to temporary market fluctuations. A greater degree of revenue predictability should also allow management to focus on other areas of company development, such as signing up new customers and expanding presence to new markets and market segments.

1

All awards information as reported by the company. Contract pipeline apparently refers to contracts being negotiated, but not yet finalized. 3 Of course there are no guarantees for that, as warned by the Safe Harbor disclaimer relating to forward-looking statements at the beginning of the webcast. 2

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Focus on emerging markets NewMarket’s strategy revolves around exploiting opportunities in emerging markets, where competition is scarce, local expertise is weak and demand is growing. This strategy can be traced through the company’s expanding global network, which includes operations in Asia, Latin America and Africa. NewMarket expects to register 100% revenue growth from these markets in 2010. Global presence NewMarket is bidding on monetizing high-growth regional opportunities and its global network illustrates the company’s outreach. NewMarket has regional operations in North America, Asia and Latin America, and is expanding into East Africa. China has proved as a high-growth market for NewMarket already, with two three-year contracts announced recently that total $66 million – two-thirds of the company’s annual turnover. International expansion pursues the goal of benefiting not only from emerging market trends but also from diversifying regional risks away.

USA 32%

Brazil 16%

Q3-09 revenue

Venezuela 8%

Singapore 2%

China 42%

Diversified product portfolio In addition to diversified geographic markets, NewMarket also has a diversified product portfolio. The company offers Systems Integration and Infrastructure services, Telecommunications services, Security solutions, and Healthcare solutions. NewMarket re-sells, installs, customizes and supports products from Microsoft, SAP, BAAN, SSA Global, and many other software companies, as well as emerging technologies from its subsidiary, affiliate, and partner products and services. Experienced Management NewMarket’s management has decades of experience in technology and operational management – assets that are required to realize the company’s strategy involving start-ups and emerging markets. The company’s founder and chairman (and ex-CEO as of February 2010), Philip Verges has extensive experience in the technology field, having worked for the US Military and in private companies developing communication technologies. The newly appointed CEO, Bruce Noller, has over 25 years of financial, operational and marketing experience and has international management consulting experience in Singapore, Malaysia, China, Canada, Latin America and Europe. Greenfield partner program NewMarket has announced its Greenfield partner program, through which the company will partner with promising technology startups and help them take off by providing them with back office and other resources. Successful companies will become part of the NewMarket universe and will be developed until their maturity is reached (i.e. sustainable profitable operations). Such business model should provide additional diversification, a source of revenue growth and economies of scale.

INVESTMENT RISKS Assets in Venezuela NewMarket has a subsidiary in Venezuela, which serves the Latin American market and accounts for 8% of the company’s revenues and 6% of its total assets (as of Q3-09). While we are not familiar with the subsidiary’s relationship with local authorities, given the Venezuelan President’s past practices, we must note that risk of forced nationalization exists for NewMarket’s assets. Appearance on the Regulation SHO “Threshold Security List” NewMarket’s stock has been listed on the above mentioned list due to the fact that a certain volume of failed naked short covers has been reached in 5 consecutive trading days. While this can hardly affect the operational performance of the company, it may in theory be associated with negative developments, at Page 4 of 19


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least in the view of investors. Another possibility is a case of abusive naked short selling that may pursue an artificial depreciation of NewMarket’s share price. However, it is difficult to elucidate the true reason for the naked shorts on NewMarket’s stock and investors should just be aware of the situation. Penny stock limitations As NewMarket’s stock trades under $5 per share on the OTC market, it is subject to Penny Stock rules, limiting the liquidity of the shares and potentially limiting investor’s ability to fully realize investment gains in a timely manner. Confusing development strategy NewMarket has announced a multi-layered development strategy involving Worldwide Strategies Inc. (WWSG) and transferring businesses from NewMarket to WWSG, with subsequently issuing stock dividends to NewMarket shareholders. The strategy is not clearly defined on the company website and is only described in a series of webcasts with limited amount of details as to how exactly it will be implemented. This uncertainty may confuse and deter investors, at least until more information becomes available (a final deal with WWSG is expected to be reached soon). In addition, the costs of implementing this strategy are unknown, as well as how much management attention it will require (and management should be focused on growing sales and developing new operations at the same time). Please refer to the Company Overview section of this report for more details.

SWOT       

Strengths Profitable cash flow-positive operations Diversified product portfolio Diversified geographic markets Experienced management Recurring revenues Opportunities High growth potential in emerging markets Emerging technology potential from Greenfield partnerships

Weaknesses  Growth stalled in recent years

   

Threats Risk of expropriation in Venezuela Share-related risks (penny stock and naked shorts) WWSG-related strategy may not yield expected results or may be too costly to implement Competition should toughen in emerging markets

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VALUATION NewMarket is a growing company, it has announced a complex development strategy and has ambitious growth plans, all of which complicates valuation as there are many uncertain factors in the equation. We have constructed our projections based on the company’s public releases and took into account its corporate strategy that is based on operations in emerging markets, which should develop much more dynamically than the mature markets in developed countries. Our valuation is based on a combination of absolute valuation (DCF) and several relative valuation techniques.

Projections NewMarket has voiced its plans to report $150 million in revenues in 2010, $300 million in 2011 and reach $1 billion in sales within five years. Our projections are not as bold, but we do believe that fast growth is more than possible, especially in the light of several new contract announcements in recent months. Revenue and income forecast 400

$ mn

Revenue

350

Operating income

300

Net Income

250 200 150

100 50

0 -50

2008

2009

2010

2011

2012

Source: company reports, analyst estimates.

DCF valuation To build our DCF model, made the following assumptions for the model inputs:

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2013

2014


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Stock Price, $ Shares Outstanding, 000s Market cap, $ 000s Book Value of Net Debt, $ 000s Enterprise value, $ 000s Beta Market premium Risk free rate Cost of Equity Long-term Equity Weight Cost of Debt Long-term Tax rate Tax Effected Cost of Debt Long-term Debt Weight WACC Terminal growth Forward diluted shares, 000s

0.028 18,660.4 522.5 4,446.4 4,968.9 2.56 4.5% 3.7% 15.2% 91.7% 9.0% 38.0% 5.6% 8.3% 14.4% 2.0% 28,166

Source: SEC filings, Reuters, Yahoo! Finance, US Treasury, analyst estimates.

To calculate the weighted average cost of capital (WACC) we used the book value of equity instead of market value as the latter resulted in very high leverage (net debt of over $4 million was compared to a market cap of just $0.5 million) and led to a WACC of just 6.6%, which we think is far too low. We should mention that NewMarket’s beta is roughly double the size of the median beta for peers (see below for peer data). FCF forecast $ millions Revenue

Revenue growth

EBIT EBIT margin EBIT*(1-tax) (+) Dep & Amort (+) Stock-based compensation (+) CapEx (+) Decrease in non-cash working capital = Free Cash Flow (FCF) Terminal value Discounted cash flow Discounted terminal value

2009 105.6 11.0% 2.1 2.0% 2.1 0.2

2010 149.8 41.9% 7.0 4.7% 6.9 0.2

2011 193.1 28.9% 13.3 6.9% 10.3 0.2

2012 243.1 25.9% 19.7 8.1% 12.2 0.3

2013 298.9 23.0% 27.9 9.3% 17.3 0.4

2014 358.7 20.0% 37.9 10.6% 23.5 0.5

2015 419.7 17.0% 44.4 10.6% 27.5 0.5

2016 478.5 14.0% 50.6 10.6% 31.4 0.6

2017 531.1 11.0% 56.2 10.6% 34.8 0.7

2018 573.6 8.0% 60.7 10.6% 37.6 0.7

2019 602.3 5.0% 63.7 10.6% 39.5 0.8

2020 614.3 2.0% 65.0 10.6% 40.3 0.8

0.4

0.4

0.3

0.2

0.1

0.0

0.0

0.0

0.0

0.0

0.0

0.0

-0.2 -0.3

-0.3 -7.8

-0.3 -5.4

-0.4 -7.7

-0.4 -8.8

-0.5 -9.8

-0.5 -10.0

-0.6 -9.6

-0.6 -8.6

-0.7 -7.0

-0.7 -4.7

-0.8 -2.0

2.2

-0.6

5.1

4.7

8.5

13.7

17.5

21.8

26.2

30.7

34.8

38.3

2.2

-0.5

3.9

3.1

5.0

7.0

7.8

8.5

9.0

9.2

9.1

315.3 8.7

DCF valuation DCF valuation DCF stream DC terminal value Total DC Enterprise Value (Less) Net Debt Equity Value Price target, $

71.8

$ millions 70.7 71.8 142.5 4.4 138.1 4.90

The sensitivity of the DCF valuation to long-term growth rate and WACC is shown below:

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LT Growth ↓ 1.0% 2.0% 3.0%

12.4% 6.04 6.39 6.83

WACC 14.4% 4.69 4.90 5.15

16.4% 3.73 3.87 4.02

Even the conservative forecast of just 1% long-term growth rate (beyond the FCF forecast horizon) and of 16.4% WACC results in a share value which is much higher than the current market price.

Relative valuation For relative valuation we used four multiples-based techniques: P/E, EV/Sales, EV/EBITDA and P/B. As peers we picked publicly traded companies that offer IT systems integration services. These companies are much larger than NewMarket and may not be fully comparable, but we believe that they are nonetheless relevant. 4

Peer companies :  NCI, Inc. (NCIT)  Longtop Financial Technologies Limited (LFT)  Ness Technologies Inc. (NSTC)  CIBER, Inc. (CBR)  Cognizant Technology Solutions Corp. (CTSH)  ATOS ORIGIN (ATO.PA)  LOGICA (LOG.L)  CAP GEMINI (CAP.PA) Peers’ market data (in respective currencies): Ticker Currency Price Mkt Cap, mn

EV, mn

TTM sales, mn

NCIT

$

25.68

346.2

375.2

445.4

LFT

$

33.23

1,717.7

1,495.5

130.1

NSTC

$

5.60

215.3

216.1

547.4

CBR

$

3.21

223.2

271.5

1,055.0

CTSH

$

46.34

13,657.0

12,257.7

3,278.7

ATO.PA

31.91

2,224.8

2,790.1

5,349.1

LOG.L

£

1.15

1,840.7

2,386.1

3,694.7

CAP.PA

30.83

4,746.5

4,775.5

8,712.0

Source: Yahoo Finance, Euronext, SEC filings

Peer multiples (2010e): Ticker P/E EV/Sales

EV/EBITDA*

P/B (tangible)

NCIT

14.4

0.7

n/a

552.11

LFT

21.2

6.9

n/a

6.60

NSTC

13.7

0.4

n/a

3.15

CBR

10.4

0.3

n/a

4.91

CTSH

22.9

3.1

n/a

5.73

ATO.PA

11.9

0.5

5.5

n/m

LOG.L

10.6

0.7

8.1

n/m

CAP.PA

12.2

0.6

6.2

4.38

Median

12.9

0.6

6.2

5.32

* EBITDA forecasts available only for European companies (from Yahoo Finance France) 4

The last three companies in the list are listed on European exchanges and their stock symbols here are as reported by Yahoo! Finance.

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Source: based on analyst consensus data from Yahoo! Finance and Yahoo! Finance France.

Relative valuation: P/E valuation EPS FY2010e Peers' multiple (median), 2010 Price target, $

$ 0.13 12.9 1.68

EV/Sales valuation Sales FY2010e Peers' multiple (median), 2010 Enterprise value (Less) Net Debt Equity Value Price target, $

$ millions 149.8 0.6 90.8 4.4 86.4 3.07

EV/EBITDA valuation EBITDA FY2010e Peers' multiple (median),TTM Enterprise value (Less) Net debt Equity value Price target, $ P/B valuation Tangible book value, latest reported Peers' multiple (median) (MRQ) Equity value Price target, $

$ millions 7.2 6.2 44.6 4.4 40.2 1.43 $ millions 19.0 5.3 100.7 3.58

Final valuation Equally weighted average of the five valuation techniques results in $2.93 per share. We believe that this target warrants a discount to allow for the possibility that NewMarket will develop less dynamically than planned (although our forecasts already are more modest than the company’s own plans). We believe that 50% is quite a conservative discount, resulting in a fair value of NewMarket’s share of $1.47, which is over 50 times larger than the current market price, but we don’t believe it is not an overestimation.

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COMPANY PROFILE NewMarket Technology Inc. provides various information technology services and resells products from recognized brands globally. The company was established in 1997 as a family business and has grown to almost $100 million in annual revenues. NewMarket is listed on the OTC Pinksheets market under the symbol NWMT.

Products and services NewMarket offers an array of IT services to its customers:  Systems integration and technology infrastructure services;  Computer hardware distribution from brand partners such as Dell, HP, IBM, Cisco, Sony, Epson, Canon and Sanyo;  Reselling of operating systems and various software from Microsoft, Red Hat, Sybase, IBM, BEA, Veritas and others;  Telecommunication services: VoIP and traditional telephony, as well as providing the necessary infrastructure and hardware for a complete implementation;  Data security solutions;  Healthcare technology solutions. In addition to the above, pursuant to its Greenfield partnership program, NewMarket partners with emerging technology companies and thus the range of available products and services is being expanded.

Corporate strategy NewMarket has adopted a multi-layered strategy to take the company from the current $100 million in annual sales to $1 billion in five years’ time.

Focus on emerging markets NewMarket is focusing on emerging markets as its primary customer base. This approach offers a number of important advantages, such as:  Lack of competition, especially from large well-established companies that saturate western markets;  Economic growth in emerging markets fuels demand for NewMarket’s services;  Lack of supply may offer premium pricing opportunities in unsaturated markets;  Relatively fast pace of economic growth should allow quick revenue expansion;  Diversification of revenues across regions – many developing economies suffered significantly less during the 2008-2009 global downturn than western markets. Currently, NewMarket has active operations in China, Singapore, Venezuela and Brazil, and is working on launching operations in East Africa.

Focus on emerging technologies – the Greenfield partnership program NewMarket has announced its Greenfield partnership program, whereby the company partners with technology startups and provides them with various resources, such as back office, organizational structure and others, acting as a business incubator. The company plans to help such companies develop into successful operations, not least by taking their technologies to emerging markets, and then integrate the ones that succeed into NewMarket. This approach should help NewMarket build a diversified technology portfolio and increase revenues, although it will require extra resources and additional risk as there is no guarantee that every Greenfield partner will be successful. Currently, NewMarket has several Greenfield partners: Page 10 of 19


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NuMobile: software solutions for the mobile computing and smartphone market (North America, South America, China and East Africa). Alternet: mobile payment and m-commerce systems and solutions that tie together telecom operators, financial institutions, and payees such as mass public transportation and utility providers (North America, South America, China and East Africa). NovaEnergy: oil, gas, electric and alternative energy solutions (North America and East Africa).

Investor return strategy This is where things get a little confusing. NewMarket recognizes that the OTC market is not exactly the most efficient one when it comes to long-term investing due to the disconnect between the company’s operational performance and the performance of the share price. However, NewMarket has decided to turn this weakness into a strength and is promoting what it calls “milestone investment”. This approach relies on share price spikes that occur when positive news releases are published and aims to offer shortterm investment return opportunities. Worldwide Strategies Inc. Strategic investors are planned to be catered through a special structure involving off-loading stable and profitable business operations to a second company listed on a national exchange in return for its preferred stock that will be “dividended” through to NewMarket shareholders. National exchange listing pursues the goal of providing investors with a “higher quality” stock that better suits long-term investing (e.g. less volatile than OTC-listed stock). The second company is going to be Worldwide Strategies Inc. (WWSG), which is currently no more than an empty shell company listed on the OTC market. Negotiations are apparently still ongoing between it and NewMarket. In a recent webcast (webcasts are NewMarket’s alternative to full press releases) the company has described its first planned transaction with WWSG. We have represented it graphically below. Proposed Worldwide Strategies transaction:

Step 1

Brazilian operations are transferred from NWMT to WWSG

Step 2

WWSG is listed on a national exchange

Step 3

WWSG issues stock to NWMT which is dividended to NWMT shareholders

Steps 1 and 3 are supposed to become regular as NewMarket offloads its mature operations to WWSG, but it remains unclear to us how exactly the stock of WWSG will be transferred to NWMT shareholders (step 3).

Tiered business development approach NewMarket has announced a three-tier approach to developing its businesses that brings together the sub-strategies we mentioned above. The scheme below describes this approach:

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Greenfield partnership program

NewMarket

Worldwide Strategies

• Emerging technology startups developed

• Successful Greenfield partner businesses merged into NewMarket operations • Mature NewMarket businesses off-loaded to WWSG

We must admit that this strategy seems to be very ambitious and its implementation remains somewhat unclear (the WWSG part), but the ultimate goals and underlying principles have been clearly defined and make sense.

Management team5 Philip M. Verges – Founder, Chairman, ex-CEO A graduate of the U.S. Military Academy at West Point, Mr. Verges served in the U.S. Army with distinction in a wide variety of important engagements to include research and development of counter terrorism communication technologies and practices. After fulfilling his post-graduate military duties for the United States, Mr. Verges elected to pursue the private sector and was honorably discharged with the rank of captain. Mr. Verges' career after the Army included time in the Computer Sciences Research and Development Department of General Motors as an employee of Electronic Data Systems (EDS). Mr. Verges’ first business start-up experience was also at EDS in a new division concentrating on call center technology in financial institutions. Later, Mr. Verges added to his start-up experience at a $30 million technology services business with the responsibility to open a new geographic region. In 2008, Mr. Verges was recognized as an Ernst and Young Entrepreneur of the Year Finalist and a Tech Titans Corporate CEO Finalist. In addition to leading NewMarket, Mr. Verges is also a public speaker, giving several talks a year on topics ranging from emerging technologies to financial markets. Mr. verges was NewMarket’s CEO until February 2010. Bruce A. Noller – CEO & Board Member Mr. Noller brings over 25 years of financial, operational and marketing experience to NewMarket. Prior to joining NewMarket, Mr. Noller served as President of Noller and Associates Inc., a Dallas-based Accounting and Tax firm. Prior to founding his own firm in 1994, he served as Vice President for Integrated Control Systems, a worldwide management consulting firm. During that time, Mr. Noller proposed and oversaw engagements with a variety of industries including healthcare, distribution, manufacturing, retail, banking, insurance, mining and telecommunications. Mr. Noller has international management consulting experience in Singapore, Malaysia, China, Canada, Latin America and Europe. Mr. Noller holds an MBA from the University of North Texas.

5

Source of management information: NewMarket.

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50 Broad St. 10th Flr. New York NY 10004 info@primeequityresearch.com 1 (888) 797-2731 Philip J. Rauch – Chief Financial Officer & Board Member Prior to his appointment at NewMarket, Mr. Rauch held the positions of chief operating officer and chief financial officer for Defense Technology Systems, Inc., a U.S.-based company that designs, manufactures and installs safety and security equipment for domestic and international business communities. Prior to his tenure at Defense Technology Systems, Mr. Rauch was vice president of business operations at AboveNet, and from 1993 to 1997, he served as CFO of Columbus Construction. Mr. Rauch also served as CFO for F. Garofalo Electric Co., a Local #3 IBEW engineering and construction company.

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FINANCIAL OVERVIEW Income Statement During the past five years NewMarket has turned in a profit every year except in FY2008, which was affected by lower gross margin, as well as impairments and write-downs: impairment of goodwill ($7.2 million), impairment of software ($2.8 million) and write-downs of bad debt and receivables ($18.6 million). Revenues have stalled in recent years after an extraordinary ascent. Selected income statement indicators: $ millions, except per share data 2004 Total revenue 25.0

Year-over-year growth

Gross profit SG&A expenses Other operating expenses Operating income Interest expenses Bad debt expense Impairment of assets Other non-operating expenses Net income EPS (diluted), $

11.5 (10.3) (0.9) 0.3 (0.2) (0.2) 0.2 0.2 0.03

Gross margin Operating margin Net margin

46.1% 1.3% 0.6%

Year-over-year growth

2005 50.1 100.7% 18.6 (14.7) (0.2) 3.6 (0.4) (0.2) 2.9 0.32 1019.3% 37.0% 7.3% 5.8%

2006 77.6 54.8% 21.9 (16.6) (0.8) 4.5 (0.5) 2.3 5.9 0.55 72.0% 28.2% 5.7% 7.6%

2007 93.1 19.9% 25.8 (19.8) (0.8) 5.2 (0.6) (1.5) 4.9 7.3 0.69 26.6% 27.7% 5.6% 7.9%

2008 95.1 2.1% 20.3 (19.0) (0.5) 0.9 (1.1) (6.3) (22.4) 0.3 (30.3) (2.79) -502.6% 21.4% 0.9% -31.9%

Q1-09 19.3 -7.6% 3.0 (3.2) 0.0 (0.2) (0.2) 0.1 (0.5) (0.03) -132.8% 15.6% -0.8% -2.6%

Q2-09 24.5 7.8% 5.3 (3.2) (0.0) 2.0 (0.3) 0.1 1.2 0.08 11.2% 21.6% 8.3% 4.9%

Q3-09 31.7 -2.1% 6.1 (4.5) (0.0) 1.6 (0.3) 0.8 1.6 0.08 -42.9% 19.2% 5.0% 4.9%

Source: company reports, analyst calculations.

Evolution of NewMarket’s annual and quarterly revenue and income: 100.0

Total revenue

$ millions 80.0

Gross profit Operating income

60.0

Net income 40.0 20.0

(20.0)

2004

2005

2006

2007

2008

Q1-08

Q2-08

Q3-08

Q4-08

Q1-09

Q2-09

Q3-09

(40.0) Source: company reports.

The company derives revenue from 3 business segments that had the following share in total revenue in FY2008:  Programming services – 94%;  Service agreements – 3%;  Hardware and software sales – 3%. China has the largest share of NewMarket’s revenues, with USA second:

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Revenues by geographic location for Q3-2009: Venezuela 8%

USA 32%

Singapore 2%

Brazil 16%

China 42%

Note: USA derived on residual basis from other segment data. Source: company reports.

In Q3-FY2009 the SG&A expenses have increased 40% year-over-year due to the increase in number of employees in the Latin American and Chinese branches.

Balance Sheet NewMarket’s balance sheet is dominated by goodwill and trade receivables that represented 28% and 40% of all assets, respectively, as of September 30, 2009. Cash and cash equivalents have averaged at 8% of total assets in recent years. Selected balance sheet items: $ thousands 2007 Trade and other receivables 20,730 Cash and cash equivalents 5,202 Other current assets 6,084 Total current assets 32,016 Goodwill 22,345 Tangible assets 1,012 Other non-current assets 19,707 Total non-current assets 42,052 Total assets 75,080 Current borrowings 5,041 Trade and other payables 4,178 Other current liabilities 3,599 Total Current liabilities 12,818 Total non-current liabilities 3,970 Equity 58,292 Total equity and liabilities 75,080

2008 17,974 4,961 5,650 28,586 15,104 803 6,962 22,066 51,455 5,604 8,038 2,761 16,404 3,921 31,131 51,455

Q3-2009 21,668 3,715 5,681 31,063 15,104 783 6,684 21,788 53,635 4,673 7,244 3,964 15,880 3,488 34,266 53,635

Source: company reports.

Unlike revenues, NewMarket’s assets are concentrated in the US, with China and Brazil having sizable shares too:

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Geographic distribution of assets as of September 30, 2009: Venezuela 6%

Singapore 3% China 21%

Brazil 21%

USA 49% Note: USA derived on residual basis from other segment data. Source: company reports.

Equity financed more than half of total assets as of September 30, 2009. Equity financing is currently the company’s main source of external funding as management is not willing to undertake long-term borrowing due to unstable revenue flow and difficult predictability of demand. The financial gearing ratio has averaged at 1.5 during the past five years. The recent increase in the gearing ratio is due to the decrease in net income and increase in client receivables. Leverage ratios: Total debt to assets Total debt to equity Return on assets Return on equity Financial gearing

2004 32.4% 47.9% 0.6% 0.9% 1.5

2005 36.4% 57.2% 5.6% 8.9% 1.6

2006 30.1% 43.0% 9.1% 13.0% 1.4

2007 22.4% 28.8% 9.8% 12.6% 1.3

2008 39.5% 65.3% -59.0% -97.5% 1.7

Q1-09 36.6% 57.8% -1.0% -1.6% 1.6

Q2-09 35.9% 56.0% 2.4% 3.7% 1.6

Q3-09 36.1% 56.5% 2.9% 4.5% 1.6

Source: company reports, analyst calculations.

Fast company growth warrants a deeper look at turnover and cash conversion cycle as it is common to aggressively grow sales at the cost of lengthening the latter. The receivables collection period gradually increased by 2008 (more than doubling since 2004), but seems to have recovered somewhat during 2009. Inventories have a minor stake in the cash conversion cycle, NewMarket primarily being an IT services company. In 2008 the company maintained liquidity by increasing the days payables outstanding by 17 days, thus decreasing the cash conversion cycle and improving the cash flows. Activity ratios Days Receivables collection period Days sales of inventory Days payables outstanding Cash conversion cycle

2004 32.4 7.0 60.0 (20.6)

2005 69.3 14.1 108.7 (25.3)

2006 64.1 5.8 21.8 48.1

2007 64.4 11.5 22.3 53.6

2008 73.3 9.0 38.7 43.6

Q1-09 75.5 9.2 29.5 55.2

Q2-09 59.4 14.4 36.3 37.5

Q3-09 56.2 11.0 25.4 41.8

Source: company reports, analyst calculations.

Liquidity indicators weakened in 2008 with decreasing net working capital and cash on hand, but have recovered somewhat in Q3-2009 (except the cash position). Liquidity indicators: $ thousands 2004 Current ratio 1.4 Working capital 2,199 Cash 2,556

2005 1.4 6,141 3,107

2006 2.2 10,018 3,294

2007 2.5 19,198 5,202

2008 1.7 12,182 4,961

Source: company reports, analyst calculations.

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Q1-09 1.9 12,098 4,276

Q2-09 1.7 11,132 4,277

Q3-09 2.0 15,183 3,715


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Cash Flows Company’s cash flows show an irregular pattern. In 2008 losses were offset by non-cash impairments and write-downs, and working capital changes. CFI comprise cash flows used for advances to subsidiaries, receivables advance or proceeds from sales of PPE. CFF mainly reflect short-term sources of financing. Key cash flow indicators: $ thousands 2004 2005 CFO 268 1,488 CFI -1,852 -2,555 CFF 2,475 1,894 Net Cash Flow 924 551

2006 2,679 -603 -2,746 188

2007 -3,790 2,187 4,252 1,908

2008 7,769 -3,943 -2,401 -241

Q1-09 -918 -125 0 -685

Source: company reports, analyst calculations.

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Q2-09 3,362 -364 -336 1

Q3-09 -1,693 -77 -580 -563


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MARKET OVERVIEW Economists predict a worldwide economic recovery in 2010 that will include a ramp up in global IT spending. Forecasts vary between analysts but the overall theme is the same – one of growth. IDC 6 7 predicts that the worldwide IT spending will grow in 2010 by 3% , Gartner’s outlook talks about a 4.6% 8 increase and Forrester has an even more optimistic outlook for global IT markets with an 8.1% rise . The total predicted volume of worldwide IT spending also differs, probably reflecting differing definitions of IT spending. Thus, IDC forecasts that the market will reach $1.48 trillion in 2010, Gartner - $3.4 trillion and Forrester - $1.6 trillion. Generally, forecasters do not see a recovery to 2008 record levels of IT spending before 2011, but all agree that 2010 will be a year of improvement in IT spending from 2009. Regionally, emerging markets are expected to show highest growth rates because of low market penetration, large domestic customer base, skilled and cheap workforce, as well as government stimulus packages. 2010 regional IT spending growth forecasts: 14.0% 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% -2.0%

Asia/Pacific

Central/Eastern Europe IDC

Middle East and Africa Gartner

Latin America

North America

Forrester

Sources: http://www.idc.com/getdoc.jsp?containerId=prUS22192510 (Canada as North America), http://www.gartner.com/it/page.jsp?id=1284813 (USA as North America), http://smart-data-centers.tmcnet.com/topics/Smart-DataCenters/articles/72632-it-market-rebound-2010-forrester-research.htm (Canada as North America).

Growth rates predictions for IT market segments in 2010 also vary:

6

Source : http://www.idc.com/getdoc.jsp?containerId=prUS22192510 Source : http://www.gartner.com/it/page.jsp?id=1284813 8 Source : http://smart-data-centers.tmcnet.com/topics/Smart-Data-Centers/articles/72632-it-market-rebound-2010-forresterresearch.htm 7

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2010 global IT spending growth by segments: 12.0% 10.0%

8.0% 6.0%

4.0% 2.0%

0.0% Computing hardware

Software IDC

IT Services

Gartner

Telecom

Forrester

Sources : http://it.tmcnet.com/topics/it/articles/74415-mixed-forecast-it-spending-increase-2010-but-how.htm, http://www.gartner.com/it/page.jsp?id=1284813, http://smart-data-centers.tmcnet.com/topics/Smart-Data-Centers/articles/72632-itmarket-rebound-2010-forrester-research.htm (Canada as North America)

DISCLAIMER Prime Equity Research is an independent equity research company whose analysts adhere to the CFA Institute Code of Ethics and Standards of Professional Conduct. The opinions expressed in this research report are analyst’s personal views about the company. Opinions and recommendations contained in this report are submitted solely for information purposes and are not intended as an offering or a solicitation to buy or sell the securities mentioned above. NewMarket Technology, Inc. paid $10,000 for one year coverage, including other consulting services from a third party. Neither the analyst nor Prime Equity Research owns any equity or debt securities in the analyzed company.

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NewMarket Technology Report  

Prime Equity Research Analyst Report on NewMarket Technology