McAfee After the Troubles?

McAfee (MFE) is a boxing fighter in the 7th round of an ongoing, drag-down fight. Its core services are data and system protection but it’s name was dragging mud until a drastic management changeover took place. McAfee’s CEO was replaced with Dave DeWalt formerly from EMC in March 2007. DeWalt cleaned out old management, quickly regaining some market credibility.

The company strategy has been defensive. Microsoft released its Windows Live OneCare suite and services in May 2006. Then the SEC options investigation caused the resignation of former CEO George Samenuk and the firing of President Kevin Weiss. Finally, Google announced in July 2007 purchase of Postini with its anti-spam, anti-virus, and instant message scanning offerings. Talk about a triple whammy and all in addition to normal competition from Symantec, who this week confirmedthe acquisition of Vontu.

The saving grace has been the security market has been good to McAfee. Estimates expect software security to hit $9.1 billion in 2007 (up 10.7% YoY). McAffee Q3 revenue posted at $322 million, up 12% YoY to Q3 in 2006 ($288 million), and up 1% quarterly ($314.3 million in Q2). Operating income leveled at $198 million (up 5%) and net income posted $63 million, a YoY increase of 104% and double 2006 ($30.3 million). Deferred revenue posted $954 million, a 14% YoY increase versus expected flat performance.

Enterprise revenue was $186 million versus consumer at $136 million (14% growth). International revenue is 49% ($157 million and a jump of 25% YoY), and domestic U.S. equals 51% ($165 million and up $3 million from YoY). Cash totaled $1.54 billion but will fall $350 million with the Safeboot acquisition in Q4. Q4 guidance is between $300-350 million and confirmation will arrive November 6 with Q4.

Company strategy is built on 1) systems protection, 2) network protection, 3) vulnerability risk management, and 4) the new data protection component. This is reinforced with a marketing campaign to increase brand awareness. Large accounts tend to be government agencies such as U.S. Commerce and USDA with revenue primarily supported by a 90% renewal rate of existing customers.

McAfee sees its market strength in product scalability. Integrating firewall, spyware, anti-virus, data protection into one enterprise system is seen as the competitive advantage. Businesses have responded, wanting all-in-one packages via McAfee’s Total Protection Suite (TOPS). McAfee also switched to direct sales to close deals and uses higher incentives for sales teams to hold onto the star sales reps. As a result, Microsoft’s OneCare has only taken a minimal share of McAfee’s market.

Anticipating the wave of virtualization, McAffee also has 8 products that complement VMWare to take advantage of this new growth area.

McAfee also chased emerging markets (Latin America grow 72% for McAfee), which have been growing like gangbusters. McAfee expects this growth to continue through both organic product development and further acquisition. For example, acquiring SafeBoot gives McAfee a product designed in 22 languages, a key point in translating value to emerging market consumers. This acquisition in Q4 will give McAfee a new foothold in Eastern Europe and will merge SafeBoot’s encryption with McAfee’s security risk management strategy and data loss prevention products while adding 4,400 new clients. Safeboot also comes with a pre-existing HP relationship for PC installation.

The McAfee options investigation will result in restatements between $100-150 million in Q3, lowering Q3 to $172 million. But investors expect, when done, McAfee will get back to business under DeWalt. And the company does plan a $246 million share repurchase after the options investigation is finished. Both factors are expected to boost McAfee shares above the current $40/share. The cash reserve would also continue to be helpful in acquiring more companies in the traditionally acquisition heavy security market.