McAfee believes this restatement is likely to result in aggregate non-cash charges in the range of $100 million to $150 million. In addition, McAfee expects the restatement to include other adjustments to certain balance sheet and income statement accounts that will affect its previously reported results. McAfee intends to file restated financial results and related periodic reports as soon as practicable.
"McAfee reported its 11th consecutive quarter of record revenue and achieved an all-time high deferred revenue balance during the third quarter of 2007," said Dave DeWalt, McAfee's chief executive officer and president. "The Company continued its momentum with reported revenue of $322 million for the third quarter of 2007 and deferred revenue of $954 million as of September 30, 2007. Our third quarter growth was balanced across each of our corporate and consumer segments, we closed the largest corporate sale in McAfee's history and we drove robust expansion of our international business."
"McAfee continues to execute against our Security Risk Management strategy as we expanded our portfolio of solutions both organically and through acquisition," continued DeWalt. "This fall we introduced McAfee® ePolicy Orchestrator® 4.0, our next-generation centralized management console; we successfully integrated our McAfee Data Loss Prevention solution into ePolicy Orchestrator; we announced an initiative to secure virtual machines; and we launched our 2008 consumer security suites, featuring the industry's first Triple Play - PC, Web and Mobile protection. In addition, we recently announced the acquisition of SafeBoot, an industry leader in mobile data protection and desktop encryption. We expect to close this acquisition in the fourth quarter of 2007 after regulatory approvals are received. McAfee remains exclusively focused on security and is taking important steps to anticipate and meet the evolving needs of our consumer, mid-market and large enterprise customers."
All results and guidance reported today are presented without taking into account any adjustments to either current or previously reported results that will be required in connection with the restatement and should be considered preliminary until McAfee files its amended historical financial statements and its Form 10-Q for the third quarter ended September 30, 2007.
Third Quarter Operating Summary:
Corporate revenue grew to $186 million in the third quarter of 2007, an 11 percent increase over the same period last year. Growth during the quarter was due to performance in our systems business, including McAfee Total Protection solutions for enterprises and small and medium businesses, as well as strength in our network solution sales. During the third quarter of 2007, we closed 271 deals over $100,000, including 22 deals over $500,000 and eight deals over $1.0 million -- and the largest deal in McAfee's history.
Consumer revenue grew to $136 million in the third quarter of 2007, a 14 percent increase over the same period last year. In the third quarter of 2007, McAfee signed or extended 13 agreements and launched 62 new or enhanced online partners, including deals in the United Kingdom, Germany, Singapore, Japan, Mexico and North America. McAfee also continues to aggressively distribute McAfee SiteAdvisor, the world's first safe search and surf technology, which Internet users worldwide have already downloaded 90 million times.
North American revenue was $165 million in the third quarter of 2007, up two percent compared with $162 million in the third quarter of 2006. North American revenue accounted for 51 percent of total revenue for the third quarter of 2007.
Outside of North America, McAfee continues to expand, with third quarter international revenue of $157 million, up 25 percent from $126 million in the third quarter of 2006. Compared with the third quarter of 2006, revenue from Europe and the Middle East grew by 17 percent, Japan grew by 41 percent, Asia Pacific grew by 38 percent and Latin America grew by 72 percent.
Financial Outlook:
McAfee's guidance includes a fourth quarter close of our pending acquisition of SafeBoot Holding B.V.
The Company expects net revenue in the fourth quarter of 2007 of $330 million to $350 million.
The Company expects fourth quarter 2007 GAAP net income of $0.28 to $0.32 per share and non-GAAP net income of $0.42 to $0.46 per share on a diluted basis.
This guidance reflects an assumed 22 percent GAAP tax rate and a 27 percent non-GAAP tax rate. See the reconciliation of projected GAAP net income per share to projected non-GAAP net income per share attached to this press release.
Balance Sheet and Cash Flow Summary:
The Company's balance sheet at September 30, 2007, included cash, cash equivalents, and investments of $1.544 billion, compared to $1.414 billion at the end of the second quarter of 2007. The totals for the third quarter of 2007 do not reflect the outlay of cash for the acquisition of SafeBoot Holding B.V., which is expected to close in the fourth quarter of 2007.
Deferred revenue was $954 million at the end of the third quarter, a 14 percent increase over the third quarter of 2006. Approximately 85 percent of revenue during the third quarter of 2007 came from recognition of deferred revenue on the balance sheet.
During the third quarter of 2007, the Company generated approximately $119 million in cash flow from operations, compared with $79 million in the same quarter last year. Days sales outstanding (DSOs) were 44 days, compared with 42 days in the third quarter of 2006.
Business Highlights:
Corporate:
McAfee extended its Security Risk Management vision and announced a definitive agreement to acquire privately owned SafeBoot Holdings B.V. -- a move that should position McAfee as the leading security vendor to offer data loss prevention and encryption at the end-point with scalable centralized management.
McAfee continued to round out its management team with the addition of Mark Cochran as executive vice president and general counsel, Michael DeCesare as executive vice president of worldwide sales operations and David Welsh as executive vice president, corporate strategy and business development.
The Company also demonstrated the importance of expanding its intellectual property portfolio, adding 15 patents in the third quarter. McAfee now holds 294 total patents.
Enterprise:
During the quarter, McAfee announced the availability of McAfee ePolicy Orchestrator 4.0 (ePOTM), which lets enterprises and governments centrally manage security and compliance products from multiple vendors, and McAfee Data Loss Prevention Host 2.0, which includes comprehensive device management and integration with McAfee ePO. The Company also announced that McAfee VirusScan® Enterprise 8.5i supports the Windows XP embedded operating system, which allows companies to manage security on point-of-sale terminals, including airline kiosks and ATMs.
In a move designed to ease customer burdens and expand its partner ecosystem, McAfee released the McAfee Security Innovation Alliance(TM), a new program for technology companies that want to integrate with McAfee ePO. McAfee also became a core member of the LiMo Foundation. Through this strategic relationship, McAfee will use its mobile security expertise to enhance the end-user experience for the world's first global Linux-based software platform for mobile devices.
In addition, the Company announced it is working with partners on new and innovative security offerings for virtual machines. Eight of McAfee's products currently support VMware, Inc.'s VMware Workstation, VMware Server and VMware ESX, including: McAfee Total Protection, McAfee Host Intrusion Prevention, McAfee Network Access Control, McAfee Remediation Manager, McAfee Foundstone, McAfee Security Agent, McAfee Hercules and McAfee Policy Auditor.
McAfee also announced a number of new customers on the enterprise side, including the United States Department of Agriculture, which invested in McAfee anti-virus and security solutions, and Phoenix Park Gas Processors ltd. in the Caribbean, which selected McAfee Data Loss Protection. In addition, Verio, an Internet service provider headquartered in Denver, is offering their consumer and small and medium business customers a set of managed services, including McAfee security.
Mid-Market:
McAfee continued its focus on the rapidly-growing market of security products for mid-sized companies and released a software trial version of the McAfee Secure Internet Gateway appliance. The free 30-day software trial is designed for businesses that can use their own server and VMware Server virtualization technology to evaluate the Web and email security appliance.
Consumer/Small:
McAfee announced several partnerships for its consumer side of the business. Versatel, one of the top internet service providers in Germany, is offering McAfee Internet Security Suite and McAfee VirusScan Plus to their broadband subscriber base. Suddenlink, a top-10 U.S. operator of cable broadband systems, is also partnering with McAfee to protect its ISP subscribers from online threats. O2 a leading provider of mobile and broadband services to consumers and businesses in the UK will be bundling McAfee Internet Security Suite, as part of their new UK Broadband service, which launched in October 2007.
The Company also announced that McAfee SiteAdvisor reached its 90 million download milestone and the availability of the McAfee Easy PCI Plan, designed to help companies achieve compliance with the Payment Card Industry Data Security Standard (PCI DSS).
Awards and Recognition:
McAfee received several accolades during the third quarter, including three awards in Computerworld magazine's (Singapore and Malaysia editions) inaugural Customer Care Awards 2007. CompTIA named McAfee VirusScan as one of the most influential technology products of the past 25 years and SC Magazine awarded the Secure Internet Gateway 3000 a Best Buy designation and 5 Stars in a Secure Content Management group test. McAfee Secure Internet Gateway was also elected the "Best Security Appliance of the Year" in the Channel Awards 2007.
In addition, Alva Purvis, vice president of worldwide channel enablement for McAfee, was named one of the "50 Most Powerful Women of the Channel" by VARBusiness/CRN Magazine.
McAfee received recognition for its commitment to corporate citizenship with its listing on the prestigious FTSE4Good US Index, which measures potential constituents for working towards environmental sustainability, developing positive relationships with stakeholders and upholding and supporting universal human rights. In addition, the Company presented the inaugural McAfee Cybercrime Fighter Award to Texas Attorney General Greg Abbott. The award, which recognizes Attorney General Abbott for his fight to protect Texas children from online predators, was presented during the McAfee Strategic Executive Security Summit in Dallas.
Avert Labs:
McAfee's security threat and research organization, McAfee Avert Labs(R), announced that it kept customers safe from 27 Microsoft security vulnerabilities in the third quarter. The research division also released its "Mobile Malware: Threats and Prevention" white paper.
Conference Call Information:
The Company will host a conference call today at 1:30 p.m. Pacific, 4:30 p.m. Eastern to discuss its quarterly results. Participants should call (800) 809-7467 (U.S. toll-free) or (706) 679-4671 (international). The passcode is 16619339. Attendees should dial in at least 15 minutes prior to the conference call A replay of the call will be available until November 1, by calling (800) 642-1687 (U.S. toll-free) or (706) 645-9291 (international) A Web cast of the call may also be found on the Internet through McAfee's Investor Relations Web site at http://investor.mcafee.comDisclosure Statements:
Non-GAAP net income and non-GAAP operating income for the third quarter ended September 30, 2007, exclude amortization of purchased technology and intangibles expense, non-cash stock-based compensation charges, retention bonuses and severance payments related to acquisitions, gain or loss on sale of assets and technology, restructuring charges (benefits), and SEC and compliance costs. Non-GAAP net income assumes an effective tax rate of 27 percent for 2007. Management believes that the 27 percent non-GAAP effective tax rate reflects a long-term normalized tax rate under the global McAfee legal entity and tax structure as of the period end. Management uses non-GAAP net income and non-GAAP operating results to evaluate the Company's operating performance and believes that excluding these items enhances the ability of management and investors to evaluate McAfee's comparable historical operating results.-McAfee
