McAfee, Inc. (MFE)
Q4 2008 Earnings Call Transcript
February 12, 2009 4:30 p.m. ET

Executives

Kelsey Doherty – Director of Investor Relations
David DeWalt – President and Chief Executive Officer
Rocky Pimentel – Chief Operating Officer and Chief Financial Officer

Analysts

John DiFucci – JP Morgan
Philip Winslow – Credit Suisse
Heather Bellini – UBS
Michael Turits – Raymond James & Associates
Rob Owens – Pacific Crest Securities
Daniel Ives – Friedman, Billings, Ramsey Group
Adam Holt – Morgan Stanley
Steven Ashley – Robert W. Baird & Co.
Walter Pritchard – Cowen & Company, LLC
Frederick Green - Goldman Sachs & Co.
Philip Rueppel – Wachovia Securities

Presentation

Operator

Good afternoon, ladies and gentlemen. My name is Rachel and I will be your conference operator today. At this time, I would like to welcome everyone for the McAfee fourth quarter and full-year 2008 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. If you would like to ask a question during this time, simply press “*”, then the number “1” on your telephone keypad. If you would like to withdraw your question, press the “#” key. Thank you. Ms. Doherty, you may begin your conference.

Kelsey Doherty

Great. 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. On today''s call with me are our Chief Executive Officer and President, Dave DeWalt, and our Chief Operating Officer and Chief Financial Officer, Rocky Pimentel. Dave will open the call with an overview of the year and an update on the integration of Secure Computing; then Rocky will provide the financial details of the quarter and guidance. Dave will close the call and we will be pleased to take your questions.

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

This conference call, including the question-and-answer session, will contain forward-looking statements under the Securities Act of 1933 and the Securities Exchange Act of 1934. These statements, including among others, those regarding market trends, our strategic positioning, guidance on revenue, operating income margins and earnings levels for the first quarter of 2009, the assumed tax rate for 2009; expectations regarding the benefits of our recent acquisitions including those regarding the contribution from integration cost synergies and future plans for the Secure Computing business; the expected level and scope of security threats in future periods; expectations regarding the industry shift to security suites; expected industry growth rates of the market segments in which McAfee participates; expected new and future product introductions and the revenue opportunity associated with them; expected integrations of products from our acquisition of Secure Computing and recent acquisitions with McAfee’s existing product lines; expectations regarding McAfee''s business momentum, market position, business segments, statements regarding future partnership opportunities and our future growth opportunities; expectations about specific growth initiatives, cost savings, and cost avoidance; productivity improvements and other benefits from initiatives and strategies outlined for 2009; plans and benefits from our investment in our global systems and infrastructure, and future strategic acquisitions and other uses of cash by McAfee.

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 referenced in this call including any forward-looking statements made during the question-and-answer session. We encourage listeners to view 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 February 27, 2008 and most recently filed for quarterly report on Form 10-Q filed November 7, 2008 for more detailed information on the risks and uncertainties related to the company and its business. We do not undertake to update any forward-looking statements.

And with that, it’s my pleasure to turn the call over to our CEO and President Dave DeWalt.

David DeWalt

Okay. Thank you, Kelsey, and good afternoon and welcome everyone. Thanks for joining us today. 2008 was a year of market leaving results for McAfee. We delivered double digit year-over-year growth in key financial metrics. We increased our market share on all four quarters and we built the foundation for the future of our company. I want to say thank you to the entire McAfee team and our worldwide partners for their commitment to our vision and their dedication to providing our customers around the world the best security solutions to protect what is important to them. We’re building up best-in-class organization and I’m proud to be part of the team.

There are three key points I want to convey this afternoon. First, McAfee has come a long way and 2008 was a transformational year during which we invested in our business to drive future growth and had an opportunity to really help enhance the company. Our sales grew 20% year-over-year for 2008; revenue grew 22% year-over-year to 1.6 billion. Deferred revenue ended the year at 1.3 billion, up 24% year-over-year. GAAP earnings per share on a diluted basis reached $1.08. Non-GAAP earnings per share reached $2.01, an increase of 15% year-over-year. We also closed four acquisitions enhancing our data protection, network, and Web security solutions.

McAfee is the market leading solution in almost every category in which we compete. We launched innovative new technologies including Artemis, our always on, in-the-cloud threat prevention technology, which has been deployed to tens of millions of users now. We invested in our go-to-market capabilities, upgrading our field sales talent and strengthening our channel relationships. We created the industry’s first open platform, now including 40 new strategic innovation partners. We more than doubled our consumer distribution capacity. In the fourth quarter alone, we had 127% year-over-year increase in new registered trial subscriptions. This is a leading indicator of our consumer growth strategies. We significantly extended our brand reach and our recognition to innovative marketing actions and through new channels such as our Web security business. We generated more than 23 billion impressions of McAfee’s Secure trust mark in the fourth quarter alone and more than 82 billion impressions in 2008. And the year culminated with our addition to the S&P 500 in late December.

But we’re not done, which takes me to my second point - taking market share. For seven consecutive quarters we’ve taken market share and I’m convinced we can continue to do so. Our investments resulted in full-year 2008 double digit year-over-year growth in sales and revenue across all of McAfee’s product segments, geographies and market segments. For example, four of the largest employers in the world have now standardized with McAfee. We ship on over 50% of the PCs distributed by the top 10 PC OEM manufacturers and we partnered with more than 200 of the best known consumer brands, a 51% increase over last year. I’m also pleased to announce that this week we signed a multi-year exclusive contract with Lenovo to ship on their consumer PCs and notebooks worldwide. This new partnership is expected to help drive growth in the emerging markets.

This is a time for McAfee to grow and take market share. We believe we have the financial resources, the team, the product leadership, the go-to-market strategy, the partner ecosystem, and the global brand to compete effectively and win, which brings me to my third and final point - to drive growth in shareholder value by optimizing our business models. We are consciously driving growth at the same time we’re focusing in on continuing to optimize the model that delivers sustainable shareholder value. We delivered non-GAAP operating margins of 26.7% in the fourth quarter; excluding the impact of Secure, our best performance in almost three years. And our guidance for the first quarter of 2009 will show that we expect a 200 basis point improvement in non-GAAP operating margins year-over-year for that core business.