McAfee, Inc. (MFE)
Q1 2009 Earnings Call Transcript
April 30, 2009 4:30 p.m. ET

Executives

Kelsey Doherty – Vice president of Investor Relations
David DeWalt - President and Chief Executive Officer
Albert A. ""Rocky"" Pimentel - Chief Operating Officer and Chief Financial Officer

Analysts

Sarah Friar - Goldman Sachs
Philip Winslow - Credit Suisse First Boston
Adam Holt - Morgan Stanley
Philip Rueppel - Wachovia Securities
John DiFucci - J.P. Morgan
Rob Owens - Pacific Crest
Todd Raker - Deutsche Bank
Michael Turits - Raymond James
Walter Prichard - Cowen & Co
Brent Thill - Citigroup
Steven Ashley - Robert W. Baird
Daniel Ives - FBR Capital Markets
Tony Ursillo -- Loomis Sayles & Co
Kash Rangan - Merrill Lynch

Presentation

Operator

Good afternoon ladies and gentlemen. My name is Rachel and I will your conference operator today. At this time, I would like to welcome everyone to the McAfee First Quarter 2009 Earnings Conference Call. All lines have been placed on-mute to prevent any background noise. After the speakers'' remarks there will be a question-and-answer session. (Operator Instructions) If you’d like to ask a question at that time please press * then the number 1 on your telephone keypad. If you’d like to withdraw your question press the pound key. In the interest of time you’ll be limited to only one question. Thank you. Ms. Doherty, you may begin you conference.

Kelsey Doherty – Vice president of Investor relations

Thank you, Rachel. Good afternoon and thank you for joining us today. This afternoon''s conference call is being recorded and will be available for replay on McAfee''s Investor Relations homepage at investor.mcafee.com. With me on this afternoon''s call are President and Chief Executive Officer Dave DeWalt and our Chief Operating Officer and Chief Financial Officer Rocky Pimentel. Dave will open this afternoon''s call with a high level review of the quarter and a strategic discussion. Then Rocky will provide financial details and guidance for the second quarter of 2009 and Dave will close and we''ll be pleased to take your questions.

You will find in our press release on the Investor Relations section of our website, a GAAP to non-GAAP reconciliation of the first quarter 2008 financial results discussed in this conference call. The link is investor.mcafee.com and our results are posted under quarterly results. We''ll post our prepared remarks to the website following the conclusion of today''s call.

During this conference call and the question-and-answer session we will be making forward-looking statements regarding future events and the future performance of the company, including our guidance on revenue, operating income margins and earnings levels for the second quarter of 2009, the impacts rate for 2009 we used in estimating our guidance, our business strategy and future business plans and prospects, trends in the security market and our competitive position, strategies and opportunities; the anticipated benefits of our current, new and future products and the anticipated benefits of our acquisition, partnerships and alliances. Forward-looking statements are based on management''s current expectations and are subject to risks and uncertainties. We caution listeners that actual results may vary, perhaps materially from the forward-looking statements we make during this call and the question-and-answer session this afternoon. We encourage listeners to review the risk factors contained in today''s press release as well as the company''s filings with the SEC, including the annual report on Form 10-K filed March 2, 2009 for more detailed information on the risks and uncertainties related to company and its business. We do not undertake to update any forward-looking statement.

With that, it''s my pleasure to turn the call over to our President and CEO Dave DeWalt.

David DeWalt – Chief Executive Officer

Okay. Thank you, Kelsey. Good afternoon and welcome everyone. Thank you for joining us today. Well McAfee had an excellent start to 2009 as we mentioned when we reported earnings in February. 2008 was about making strategic investments to drive growth. We also commented at that time that we are focused on optimizing our business model to build incremental shareholder value. Our first quarter 2009 results show the impact of that strategy. It was a quarter of many records, record revenue of 448 million, up 21% year-over-year and our 13th consecutive quarter of double-digit year-over-year revenue growth. We had record revenues for both of our corporate and our consumer businesses, record non-GAAP operating income of a $114 million, which was up 38% year-over-year; record non-GAAP earnings per share of $0.57; up 31% year-over-year including a $0.03 benefit from insurance and a $0.02 dilution from the acquisition of Secure Computing. We also had record cash flow of a $146 million which was up a 105% including a $14 million litigation payment related to our derivative lawsuit from 2006.

So why is security proving to be so resilient for McAfee in a challenging economic environment? Well first, the growth of the Internet and global markets are online, coupled with a low risk, high reward for cyber criminals is driving a significant increase in the threat landscape. Breaches are occurring daily in both the private and public sector with mass deployments of highly sophisticated worms and viruses. In addition, cyber warfare is beginning to escalate worldwide along with an increasing threat of cyber terrorism. In the last six months alone, we have seen some of the most significant breaches and mass virus infections in the history of security. For example, in the last 12 months McAfee Avert Labs saw a 500% increase in malware and more malware than we''ve seen in the last five years combined. Also, 285 million data records were breached in 2008 compared with only 38 million in 2007. The FBI reported a 33% increase in Internet crime complaints in 2008 over 2007 and on top of that we now believe the worldwide problem related to data loss and identity theft exceeds $1 trillion.

The need for a strong global security provider has never been greater. And these trends are only increasing as we move through 2009. Companies are trying to be more frugal than ever in a difficult economic environment. Security has been highly fragmented market for many years with many, many vendors. This climate is creating an opportunity to consolidate cost, vendors and resources. The global security provider with the stronger suites will gain the most market share. The regulatory environment is also becoming increasingly complex. Regulations now mandate controls over confidential and personal identifiable information on a global basis. Any company for example that processes a credit card must be able to prove PCI compliance. And more than 40 countries have data protection regulations, and there are more than 50 different regulatory requirements worldwide. And again, the strongest global security provider to help simplify regulation and reduce costs of audits will drive the most revenues.

And finally, consumers are under attack like never before, from identity snap, child predators and malware. The rise of Web 2.0 applications, new devices and easy access to the Internet, create new opportunities for security providers. Security has never before been more significant to our customers and the need for a dedicated security company has never been more important, so, why McAfee? These macro conditions play right into the strength of McAfee''s model and are contributing to our growth. Our growth drivers specifically in McAfee include security product leadership, our partnered eco-system and alliance initiatives and a powerful business model. First, we leave the security industry with the product portfolio that focuses on integration and manageability. Our 2009 product pipeline features are focused on increased manageability.

Our next generation ePO platform 4.5, which is now in beta, has over 2300 customer participants. This next generation management console features improved scalability and enhanced user interface, improved dashboards and reporting functionality. In addition it offers increased integration of our recently acquired products and provides cross selling opportunities for installed base and enabling lower switching costs from our competitors. Second the interlock between our end point products and our network products, with an increased threat landscape, the need to correlate data across layers of securities defense, is critical. We are now beginning to ship Total Protection suite capabilities for data loss, network admission control, intrusion prevention, firewalls, web security and email security. In addition, Total Protection for compliance is our newest example of this interlock featuring agent and agentless integration and management. We do not believe any competitor in the market can replicate our capabilities in this area.

Third, a suite based approach grounded in reliability and ease of use. Our most recent suite announcement is our network solution called McAfee Unified Threat Management. Our UTM Firewalls features seven different models fully integrated with intrusion prevention, network firewall protection and VPN services. These solutions are cost effective and easy to deploy and targeted at the small and mid market; and finally, enhanced protection for consumers. McAfee Family Protection will help families keep themselves and their children safe on the Internet including email contact approval, content filtering, time limits and social networking controls. Family Protection is expected to be available later this quarter. McAfee''s technology leadership has been acknowledged by industry analysts and publications. Most recently, we received SC Magazine''s Excellence Award for best security company, best endpoint security solution and best email security solution. We recognize that an open approach and our partnered Ecosystem will create incremental value for our customers, partners and shareholders.