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McAfee, Inc. Reports Preliminary Third Quarter 2006 Revenue of $288 Million
SANTA CLARA, Calif., Oct. 26 /PRNewswire-FirstCall/ McAfee, Inc. (NYSE: MFE) today announced preliminary unaudited results for the third quarter ended September 30, 2006. These results are preliminary because, as previously announced, McAfee has determined that it will need to restate its historical financial statements to record additional non-cash charges for stock-based compensation expense over a ten year period. McAfee currently expects that the aggregate non-cash charges that will result from the restatement will likely be in the range of $100 million to $150 million. Further, in addition to non-cash charges for stock-based compensation, McAfee expects there to be related tax effects and other expenses incurred and other adjustments recorded as a result of the restatement. McAfee intends to file its restated financial results and related periodic reports as quickly as practicable.
"Our third quarter results reflect good revenue growth in our business and across all of our geographies. As we listen to our customers, we know that there is a continued growing need for additional levels of security and protection in a world that is becoming more dangerous. McAfee has proven to them that we deliver solutions they can depend on," said Dale Fuller, interim chief executive officer and president of McAfee, Inc.
Mr. Fuller continued, "From the enterprise of one to the enterprise of thousands, McAfee will execute upon its strategy to deliver comprehensive, integrated and easy to manage protection backed by nearly two decades of proven expertise."
All results and guidance reported today are presented without taking into account any adjustments that may 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, 2006.
Financial Highlights and Operational Metrics:
$ in Millions, except per share and % change data
Q3 2006 Q3 2005 % Change
Total Revenues $287.8 $252.9 14
GAAP Operating Income $36.1 $15.5 133
GAAP Net Income $30.3 $22.5 34
GAAP Net Income Per
Share (Diluted) $0.19 $0.13 46
Non-GAAP Operating Income* $67.2 $76.6 (12)
Non-GAAP Net Income* $58.2 $62.8 (7)
Non-GAAP Net Income
Per Share* (Diluted) $0.36 $0.37 (3)
Bookings $349 $301 16
Deferred Revenue $836 $657 27
Cash & Equivalents &
Investments $1,234 $1,198** 3
- A complete reconciliation of GAAP to non-GAAP is set forth in the attachment to this press release.
- Includes $50 million in restricted cash.
Operating Summary:
Third quarter bookings increased by 16% to $349 million year-over-year. While bookings were solid across all of our geographic regions, growth on an absolute dollar basis in North America was particularly strong.
Corporate revenue grew 14% year over year to $168 million in the third quarter. Sales of our new Total Protections solutions, network protection and Foundstone solutions contributed to third quarter revenue in this segment.
Consumer revenue was $120 million, up 14% compared to the third quarter of 2005. McAfee had strong partner performance in our online business with revenue of $106 million, up 20% year over year. The Company added 1.7 million net new subscribers this quarter, bringing our total subscriber base to 22.5 million.
Security Risk Management Strategy:
On October 16th, 2006, McAfee announced its security risk management strategy (see release titled: McAfee Announces Security Risk Management Strategy, October 16th). Over time business risks will make IT security departments accountable for managing risk and positively impacting business outcomes. According to a recent report from IDC, the worldwide security compliance and control market was valued at approximately $5.8 billion in 2005 and is forecasted to grow to $14.9 billion in 2010, representing a 20.8% compound annual growth rate(1).
Recent Acquisitions:
In October 2006, McAfee announced the acquisition of Citadel Security and Onigma. Both acquisitions will further McAfee's position in the security risk management market. Citadel Security will provide McAfee customers with leading solutions in security policy compliance and vulnerability remediation. The acquisition of Citadel is expected to close in the fourth quarter of 2006, subject to customary closing conditions including Citadel shareholder approval and expiration of Hart-Scott-Rodino (HSR) waiting period. Onigma will provide data loss prevention technology, protecting organizations from the risks of unauthorized transfer of data, in real-time, from within or outside of the organization. The acquisition of Onigma closed on October 12, 2006.
"As operating systems become more complex, hackers will actively seek to exploit inevitable vulnerabilities. McAfee's customers can depend on our continued commitment to innovation. In fact, McAfee has already proven to our customers worldwide that we already do," said Dale Fuller.
Financial Outlook:
McAfee expects net revenue for the fourth quarter of 2006 to be between $275 million and $295 million. The Company expects GAAP net income to be between $0.16 and $0.20 per share and non-GAAP net income to be between $0.31 and $0.35 per share. This guidance reflects an assumed 30% GAAP tax rate and a 27% 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 Summary:
The Company's balance sheet at September 30, 2006 included cash, cash equivalents, and investments of $1,234 million.
Deferred revenue grew by $28 million from the second quarter of 2006 to $836 million in the third quarter, reaching another all-time high for McAfee. Consistent with previous quarters, approximately 83% of revenue during the third quarter came from the balance sheet. Perpetual plus pricing in our corporate business, combined with our switch to subscription based suites in the consumer market have created a highly ratable revenue model with visibility into future revenue streams.
During the quarter, the Company generated approximately $79 million in cash flow from operations. Days sales outstanding (DSOs) were 42 days, consistent with the second quarter of 2006.
Capital Management:
McAfee intends to invest its surplus cash in R&D, small to mid-size strategic acquisitions and for the repurchase of its shares. The Company is currently precluded from repurchasing shares due to its ongoing stock option review and the pending restatement. Upon completion of the review and the filing of all amended historical financial statements and outstanding quarterly reports, the Company may be in a position to resume its share repurchase program. McAfee has $246 million in repurchase authorization available until October 25, 2007.
Business Highlights:
- McAfee named Dale Fuller as interim chief executive officer and president, Roger King as executive vice president of worldwide sales and Charles J. Robel as non-executive chairman of the board
- McAfee added 21 patents in the third quarter, bringing its total to 241 patents
- The McAfee consumer business expanded its partnership base through new agreements with Earthlink and the Embarq Corporation. Internationally, McAfee signed new agreements with Unified Distribution as well as with Epson - one of the major PC OEMs in Japan, and two new ISPs in Brazil - Telemar and UAI. McAfee Consumer also completed several successful launches including Baidu - the leading search engine in China - and Dell China
- McAfee released its 2007 consumer products, including McAfee VirusScan Plus, McAfee PC Protection Plus, McAfee Internet Security Suite and McAfee Total Protection and McAfee Wireless Protection
- McAfee unveiled two new offerings as part of its security risk management portfolio - McAfee Foundstone Enterprise 5.0 and McAfee Preventsys Compliance Auditor and Risk Analyzer
- McAfee VirusScan Mobile and McAfee VirusScan Mobile Enterprise Edition are now available for the Windows Mobile 5.0 platform
- McAfee received strong third-party validation in the third quarter:
- Gartner Inc., has placed the Company in the leader's quadrant in its "Magic Quadrant for Enterprise AntiVirus, 2006" as published on August 31, 2006
- McAfee was recognized as a Leader in the September 2006 report, "Forrester Wave: Client Security Suites: Q3 '06," for its comprehensive functionality set and robust management capabilities
- McAfee Total Protection for Small Business Advanced was named a VARBusiness Best Midmarket Product of the Year by CMP Media's VARBusiness magazine
- McAfee SiteAdvisor was selected by Time Magazine for inclusion in its prestigious annual "50 Coolest Websites" list
- McAfee achieved a number of enterprise customer wins in the quarter, including a large United States defense contractor and a Department of Defense agency
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 888-790-2935 (U.S. toll-free) or 517-623-4381 (international), pass code: MFE
- Attendees should dial in at least 15 minutes prior to the conference call
- A replay of the call will be available until November 9th by calling 888-458-8106 (U.S. toll-free) or 203-369-3730 (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.com
Disclosure Statements:
Non-GAAP net income and non-GAAP operating income for the third quarter ended September 30, 2006 exclude amortization of purchased technology and intangibles expense, 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% for 2006. McAfee management believes that the 27% 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. McAfee's 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 management's and its investors' ability to evaluate McAfee's comparable historical operating results.
Discussion of Non-GAAP Financial Measures:
McAfee management evaluates and makes operating decisions using various performance measures. In addition to our GAAP results, we also consider adjusted gross profit, operating income and net income, which we will refer to as "non-GAAP gross profit," "non-GAAP operating income" and "non-GAAP net income." Non-GAAP gross profit excludes amortization of purchased technology and stock-based compensation charges. Non-GAAP net income and non-GAAP operating income exclude amortization of purchased technology and intangibles expense, stock-based compensation charges, retention bonuses and severance payments related to acquisitions, gain or loss on sale of assets and technology, restructuring charges (benefits), in-process research and development charges, SEC settlement charge and SEC and compliance costs, provision for income taxes and certain other items. The Company's management used a 27% and 25% non-GAAP effective tax rate to calculate non-GAAP net income in 2006 and 2005, respectively. Management believes that the 27% and 25% effective tax rates in each respective period are reflective of a long- term normalized tax rate under the global McAfee legal entity and tax structure as of the respective period end.
Non-GAAP gross profit, non-GAAP operating income and non-GAAP net income are supplemental measures of our performance that are not required by, or presented in accordance with, GAAP. The presentation of these non-GAAP financial measures are not intended to be used in isolation and, moreover, they should not be considered as a substitute for gross profit, operating income, net income or any other performance measure determined in accordance with GAAP. We present non-GAAP gross profit, non-GAAP operating income and non-GAAP net income because we consider each to be an important supplemental measure of our performance. The Company's management uses these non-GAAP financial measures to make operational and investment decisions, to evaluate the Company's performance, to forecast, and to determine compensation. Further, management believes that both management and investors benefit from referring to these non-GAAP financial measures in assessing the Company's performance when planning, forecasting and analyzing future periods. We further believe that these non-GAAP financial measures are useful to investors in providing greater transparency to the information used by management in its operational decision making.
In calculating non-GAAP gross profit, non-GAAP operating income and non- GAAP net income, our management excludes certain items to facilitate its review of the comparability of the Company's operating performance on a period-to-period basis because such items are not, in management's review, related to the Company's ongoing operating performance. Management uses this view of its operating performance for purposes of comparison with its business plan and individual operating budgets and allocation of resources. Additionally, when evaluating potential acquisitions, management excludes the items described above from its consideration of target performance and valuation. See the footnotes to the "Reconciliation of GAAP to Non-GAAP Financial Measures" for a discussion of the specific categories excluded from GAAP net income in the calculation of non-GAAP net income.
We believe that the use of calculating non-GAAP gross profit, non-GAAP operating income and non-GAAP net income also facilitates a comparison of McAfee's underlying operating performance with that of other companies in our industry, which use similar non-GAAP financial measures to supplement their GAAP results. However, calculating non-GAAP gross profit, non-GAAP operating income and non-GAAP net income have limitations as an analytical tool, and you should not consider this measure in isolation or as a substitute for GAAP gross profit, operating income and net income. In the future, we expect to continue to incur expenses similar to certain of the non-GAAP adjustments described above and exclusion of these items in the presentation of our non- GAAP financial measures should not be construed as an inference that all of these costs are unusual, infrequent or non-recurring. Investors and potential investors are cautioned that there are material limitations associated with the use of non-GAAP financial measures as an analytical tool. Some of the limitations in relying on non-GAAP net income are:
- Amortization of purchased technology and intangibles, though not directly affecting our current cash position, represents the loss in value as the technology in our industry evolves, is advanced or is replaced over time. The expense associated with this loss in value is not included in the non-GAAP net income presentation and therefore does not reflect the full economic effect of the ongoing cost of maintaining our current technological position in our competitive industry which is addressed through our research and development program.
- The Company regularly engages in acquisition and assimilation activities as part of its ongoing business and therefore we expect to continue to experience acquisition and retention bonuses and in-process research and development charges related to merger and acquisition activity in future periods.
- The Company's income tax expense will be ultimately based on its GAAP taxable income and actual tax rates in effect, which may differ significantly from the 27% and 25% rates assumed in our non-GAAP financial measures for 2006 and 2005, respectively.
- Other companies, including other companies in our industry, may calculate non-GAAP net income differently than we do, limiting its usefulness as a comparative tool.
In addition, many of the adjustments to our GAAP financial measures reflect the exclusion of items that are recurring and will be reflected in the Company's financial results for the foreseeable future. The Company compensates for these limitations by providing specific information regarding the GAAP amounts excluded from the non-GAAP financial measures. The Company further compensates for the limitations of our use of non-GAAP financial measures by presenting comparable GAAP measures more prominently. The Company evaluates the non-GAAP financial measures together with the most directly comparable GAAP financial measure.
Investors and potential investors are encouraged to review the reconciliation of non-GAAP financial measures contained within this press release with our GAAP net income. For more information, see the consolidated statements of income and the "Reconciliation of GAAP to Non-GAAP Financial Measures" contained in this press release.
Forward-Looking Statements:
This release contains forward-looking statements which include those regarding the preliminary unaudited results for the third quarter ended September 30, 2006 and guidance on expected operating results for the fourth quarter 2006, the anticipated timing for McAfee's filing of the restatements of its historical financial statements and related periodic reports, McAfee's stated goal of leading the security risk management market, its ability to execute on that goal and the specific steps it will take in an attempt to achieve that goal, the expected closing date of McAfee's acquisition of Citadel, McAfee's stated intent relating to its future areas of focused cash expenditures, and its expectations regarding its share repurchase program and the timing thereof. Actual results could vary perhaps materially and the expected results may not occur. In particular, McAfee may be required to make adjustments to its unaudited preliminary third quarter results, as well as to its financial results previously reported for prior periods, as a result of its review into past stock option grants and the announced restatement, and the Citadel acquisition may not close when anticipated, or at all. In addition, actual results are subject to other risks, including that McAfee may not achieve its planned revenue realization rates; succeed in its efforts to grow its business, build upon its technology leadership or capture market share, notwithstanding related commitment or related investment. The Company may not benefit from its strategic alliances or partnerships as anticipated, customers may not respond as favorably as anticipated to the Company's product or technical support offerings, the Company's product and service offerings may not continue to interoperate effectively with newly developed operating systems, including Microsoft's Vista, or the Company may not satisfactorily anticipate or meet its customers' needs or expectations. Actual results are also subject to a number of other factors, including customer and distributor demand fluctuations and macro and other economic conditions both in the U.S. and internationally. The forward-looking statements contained in this release are also subject to other risks and uncertainties, including those more fully described in McAfee's filings with the SEC including its annual report on Form 10-K for the year ended December 31, 2005 and its quarterly reports filed on Form 10-Q.
Financial Tables:
The completion of the ongoing review of past stock option grants could result in prior period non-cash stock compensation charges and related tax effects, which could affect the preliminary unaudited results and full year guidance reported in this release. Therefore, all results reported in this release are unaudited and should be considered preliminary until the Form 10-Q for the third quarter ended September 30, 2006 is filed with the SEC.
(1) (Worldwide Security Compliance and Control 2006 - 2010 Forecast and Analysis: Going Beyond Compliance to Proactive Risk Management. September 2006, by Rose Ryan.)
About McAfee, Inc.
McAfee, Inc., headquartered in Santa Clara, California, and the global leader in Intrusion Prevention and Security Risk Management, delivers proactive and proven solutions and services that secure systems and networks around the world. With its unmatched security expertise and commitment to innovation, McAfee empowers home users, businesses, the public sector, and service providers with the ability to block attacks, prevent disruptions, and continuously track and improve their security.www.mcafee.com
NOTE: McAfee, SiteAdvisor, Intrushield, Foundstone, VirusScan, and Avert are registered trademarks or trademarks of McAfee, Inc. and/or its affiliates in the US and/or other countries. McAfee Red in connection with security is distinctive of McAfee brand products. All other registered and unregistered trademarks herein are the sole property of their respective owners.
McAFEE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
(Preliminary and unaudited)
September 30, December 31,
2006 2005
Assets:
Cash and marketable securities $1,234,281 $1,257,021
Restricted cash 1,043 51,428
Accounts receivable, net 134,867 158,680
Prepaid expenses, income taxes and
other current assets 149,176 106,791
Property and equipment, net 90,623 85,641
Deferred taxes 455,296 448,126
Goodwill, intangibles and other
long term assets, net 589,164 534,937
Total assets $2,654,450 $2,642,624
Liabilities:
Accounts payable $36,966 $34,678
Accrued liabilities 243,421 263,855
Deferred revenue 836,491 746,420
Accrued taxes and other long term
liabilities 137,795 142,638
Total liabilities 1,254,673 1,187,591
Stockholders' Equity:
Common stock 1,726 1,705
Treasury stock (303,074) (68,395)
Additional paid-in capital 1,436,262 1,356,881
Deferred stock-based compensation - (474)
Accumulated other comprehensive income 28,311 31,302
Retained earnings 236,552 134,014
Total stockholders' equity 1,399,777 1,455,033
Total liabilities and
stockholders' equity $2,654,450 $2,642,624
McAFEE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
(Preliminary and unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
2006 2005 2006 2005
Net revenue $287,780 $252,911 $837,111 $734,020
Cost of net revenue (1) 49,863 33,155 133,334 100,932
Amortization of purchased
technology 5,424 3,938 14,491 11,674
Gross profit 232,493 215,818 689,286 621,414
Operating costs:
Research and development (1) 56,159 46,960 164,046 130,074
Marketing and sales (1) 93,382 71,878 272,138 219,198
General and administrative (1) 35,454 27,276 113,326 88,548
SEC and compliance costs 7,901 - 11,673 -
Amortization of intangibles 2,651 2,876 8,290 10,109
Acquisition retention bonuses
and severance 2,146 934 5,409 3,790
Restructuring (benefits)
charges (1,393) (10) (274) 5,962
In-process research and
development - - 460 4,000
Loss (gain) on sale/disposal of
assets and technology 54 212 207 (499)
SEC settlement charge - 50,000 - 50,000
Divestiture expense - 207 - 996
Reimbursement from transition
services agreement - (3) - (362)
Total operating costs 196,354 200,330 575,275 511,816
Income from operations 36,139 15,488 114,011 109,598
Interest and other income, net 12,569 7,153 32,499 16,049
Income before provision for
income taxes 48,708 22,641 146,510 125,647
Provision for income taxes 18,423 94 43,972 25,432
Net income $30,285 $22,547 $102,538 $100,215
Net income per share - basic $0.19 $0.14 $0.64 $0.61
Net income per share - diluted $0.19 $0.13 $0.63 $0.60
Shares used in per share
calculation - basic 159,728 166,221 161,343 164,245
Shares used in per share
calculation - diluted 161,541 170,712 163,249 168,383
(1) Prior to January 1, 2006, the Company accounted for stock compen- sation expense under APB 25, "Accounting for Stock Issued to Employees", which measured stock compensation expense using the intrinsic value method. As of January 1, 2006, the Company accounts for stock compensation expense under SFAS 123R, ''Share-Based Payment", which requires stock compensation expense to be recognized based on grant date fair value. Periods prior to January 1, 2006, have not been restated to conform with the provisions of SFAS 123R.
Stock-based compensation charges are included as follows:
Cost of net revenue $609 $- $1,962 $-
Research and development 3,844 1,808 12,115 569
Marketing and sales 5,571 480 16,524 188
General and administrative 4,250 705 12,914 1,312
$14,274 $2,993 $43,515 $2,069
McAFEE, INC. AND SUBSIDIARIES
RECONCILIATION OF GAAP TO NON-GAAP FINANCIAL MEASURES
(in thousands, except per share data)
(Preliminary and unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
2006 2005 2006 2005
Net revenue:
GAAP net revenue $287,780 $252,911 $837,111 $734,020
Gross profit:
GAAP gross profit $232,493 $215,818 $689,286 $621,414
Stock-based compensation
charges (A) 609 - 1,962 -
Amortization of purchased
technology (B) 5,424 3,938 14,491 11,674
Non-GAAP gross profit $238,526 $219,756 $705,739 $633,088
Operating income:
GAAP operating income: $36,139 $15,488 $114,011 $109,598
Stock-based compensation
charges (A) 14,274 2,993 43,515 2,069
Amortization of purchased
technology (B) 5,424 3,938 14,491 11,674
SEC and compliance costs (C) 7,901 - 11,673 -
Amortization of intangibles(B) 2,651 2,876 8,290 10,109
Acquisition retention
bonuses and severance (D) 2,146 934 5,409 3,790
Restructuring (benefits)
charges (E) (1,393) (10) (274) 5,962
In-process research and
development (F) - - 460 4,000
Loss (gain) on
sale/disposal of assets
and technology (G) 54 212 207 (499)
SEC settlement charge - 50,000 - 50,000
Divestiture expense - 207 - 996
Reimbursement from transition
services agreement - (3) - (362)
Non-GAAP operating income $67,196 $76,635 $197,782 $197,337
Net income:
GAAP net income: $30,285 $22,547 $102,538 $100,215
Stock-based compensation
charges (A) 14,274 2,993 43,515 2,069
Amortization of purchased
technology (B) 5,424 3,938 14,491 11,674
SEC and compliance costs (C) 7,901 - 11,673 -
Amortization of intangibles(B) 2,651 2,876 8,290 10,109
Acquisition retention
bonuses and severance (D) 2,146 934 5,409 3,790
Restructuring (benefits)
charges (E) (1,393) (10) (274) 5,962
In-process research and
development (F) - - 460 4,000
Loss (gain) on
sale/disposal of assets
and technology (G) 54 212 207 (499)
SEC settlement charge - 50,000 - 50,000
Divestiture expense - 207 - 996
Reimbursement from transition
services agreement - (3) - (362)
Provision for income taxes (H) 18,423 94 43,972 25,432
Non-GAAP income before
provision for income taxes $79,765 $83,788 $230,281 $213,386
Non-GAAP provision for
income taxes (I) 21,537 20,947 62,176 53,347
Non-GAAP net income $58,228 $62,841 $168,105 $160,039
Net income per share - diluted: *
GAAP net income per share -
diluted $0.19 $0.13 $0.63 $0.60
Stock-based compensation
adjustment per share (A) 0.09 0.02 0.27 0.01
Other adjustments per share(B)
-
(I) 0.08 0.22 0.13 0.34
Non-GAAP net income per share
- diluted $0.36 $0.37 $1.03 $0.95
Shares used to compute Non-GAAP
net income per share - diluted: 161,541 170,712 163,249 168,383
* Non-GAAP net income per share is computed independently for each period presented. The sum of GAAP net income per share and non-GAAP adjustments may not equal non-GAAP net income per share due to rounding differences.
This presentation includes non-GAAP measures. Our non-GAAP measures are not meant to be considered in isolation or as a substitute for comparable GAAP measures, and should be read only in conjunction with our consolidated financial statements prepared in accordance with GAAP. For a detailed explanation of the adjustments made to comparable GAAP measures, the reasons why management uses these measures, the usefulness of these measures and the material limitations on the usefulness of these measures, see Items (A) through (I).
Items (A) through (I) on the "Reconciliation of GAAP to Non-GAAP Financial Measures" table are listed to the right of certain categories under "Gross Profit," "Operating Income," "Net Income" and "Net Income per Share" correspond to the categories explained in further detail below under paragraphs (A) through (I).
While we currently do not believe a non-GAAP net revenue metric is meaningful, GAAP net revenue has been provided to enable an understanding of the relationships between GAAP net revenue and the GAAP and non-GAAP financial measures included in the table above. As an example, this facilitates non- GAAP expense to revenue analysis. The non-GAAP financial measures are non- GAAP gross profit, non-GAAP operating income, non-GAAP net income and non-GAAP net income per share - diluted, which adjust for the following items: stock- based compensation, amortization of purchased technology and intangibles, SEC and compliance costs, restructuring (benefits) charges, acquisition retention bonuses and severance, loss/gain on sale/disposal of assets and technology, in-process research and development, income taxes and certain other items. We believe that the presentation of these non-GAAP financial measures is useful to investors, and such measures are used by our management, for the reasons associated with each of the adjusting items as described below:
(A) Stock-based compensation charges consist of non-cash charges relating to employee stock options, restricted stock awards and units, and employee stock purchase plan awards determined in accordance with APB 25 and SFAS 123R, beginning January 1, 2006. Because of varying available valuation methodologies, subjective assumptions and the variety of award types, the Company believes that the exclusion of stock-based compensation allows for more accurate comparisons of our operating results to our peer companies, and for a more accurate comparison of our financial results to previous periods. In addition, the Company believes it is useful to investors to understand the specific impact of the application of SFAS 123R on our operating results.
(B) Amortization of purchased technology and intangibles expense are non- cash charges that can be impacted by the timing and magnitude of our acquisitions. The Company considers its operating results without these charges when evaluating its ongoing performance and/or predicting its earnings trends, and therefore excludes such charges when presenting non-GAAP financial measures. The Company believes the assessment of its operations excluding these costs is relevant to its assessment of internal operations and comparisons to the performance of other companies in its industry.
(C) SEC and compliance costs are charges related to discrete and unusual events where the Company has incurred significant compliance costs and which, in the Company's view are not ordinary course. Recent examples of such charges include (i) the Company's engagement through September 2006 of independent consultants to examine and recommend improvements to its internal controls to ensure compliance with federal securities laws as required by the Company's January 2006 settlement with the SEC, and (ii) costs related to the currently ongoing special committee investigation into the Company's past stock option practices. The Company's management excludes these costs when evaluating its ongoing performance and/or predicting its earnings trends, and therefore excludes these charges when presenting non-GAAP financial measures. Further, the Company believes it is useful to investors to understand the specific impact of these charges on its operating results.
(D) Acquisition retention bonuses and severance vary significantly in size and amount and are disregarded by the Company's management when evaluating and predicting earnings trends because these charges are specific to prior acquisitions, and are therefore excluded by the Company when presenting non- GAAP financial measures.
(E) Restructuring (benefits) charges include excess facility and asset- related restructuring charges and severance costs resulting from reductions of personnel driven by modifications to the Company's business strategy, such as acquisitions or divestitures. These costs may vary in size based on the Company's restructuring plan. In addition, the Company's assumptions are continually evaluated, which may increase or reduce the charges in a specific period. The Company's management excludes these costs when evaluating its ongoing performance and/or predicting its earnings trends, and therefore excludes these charges when presenting non-GAAP financial measures.
(F) In-process research and development constitute non-cash charges that vary significantly in size and amount depending on the business combination and, therefore, are disregarded by the Company's management when evaluating its ongoing performance and/or predicting its earnings trends, and are therefore excluded by the Company when presenting non-GAAP financial measures. Further, the Company believes it is useful to investors to understand the specific impact of these charges on its operating results.
(G) Loss (gain) on sale/disposal of assets and technology relate to the sale or disposal of assets or product lines of the Company. These gains or losses can vary significantly in size and amount. The Company's management excludes these costs when evaluating its ongoing performance and/or predicting its earnings trends, and therefore excludes these charges when presenting non- GAAP financial measures. In addition, in periods where the Company realizes gains or incurs losses on the sale of assets and/or technology, the Company believes it is useful to investors to highlight the specific impact of these charges on its operating results.
(H) Provision for income taxes is our GAAP provision that must be added back to GAAP net income to reconcile to non-GAAP income before taxes. The effective tax rate differs from the statutory rate primarily due to the impact of foreign tax credits and lower effective rates in some overseas jurisdictions.
(I) Non-GAAP provision for income taxes. The Company's management used a 27% and 25% non-GAAP effective tax rate to calculate non-GAAP net income in 2006 and 2005, respectively. Management believes that the 27% and 25% effective tax rates in each respective period are reflective of a long-term normalized tax rate under the global McAfee legal entity and tax structure as of the respective period end.
McAFEE, INC. AND SUBSIDIARIES
PROJECTED GAAP REVENUE AND RECONCILIATION OF PROJECTED
GAAP NET INCOME PER SHARE TO PROJECTED NON-GAAP NET INCOME PER SHARE
(in millions, except per share data)
(Preliminary and unaudited)
Q4 FY'06
Projected GAAP revenue range $275 - $295
Projected net income per share reconciliation:
Projected GAAP net income per share range - diluted $0.16 - $0.20
Add back:
Projected stock-based compensation
adjustment per share, net of tax (1) 0.06 - 0.10
Projected other adjustments per
share, net of tax (2) 0.05 - 0.09
Projected non-GAAP net income per
share range - diluted* $0.31 - $0.35
* We believe that providing a forecast of the non-GAAP items set forth above is useful to investors, and such items are used by our management, for the reasons associated with each of the adjusting items as described below.
(1) Stock-based compensation charges consist of non-cash charges relating to employee stock options, restricted stock awards and units, and employee stock purchase plan purchases determined in accordance with SFAS 123R. Because of varying available valuation methodologies, subjective assumptions and the variety of award types, the Company believes that the exclusion of stock-based compensation allows for more accurate comparisons of our operating results to our peer companies, and for a more accurate comparison of our financial results to previous periods. In addition, the Company believes it is useful to investors to understand the specific impact of the application of SFAS 123R on our operating results.
(2) Other adjustments include amortization of purchased technology and intangibles, SEC and compliance costs, restructuring charges, acquisition retention bonuses and severance, loss/gain on sale of assets and technology, in-process research and development, income taxes and certain other items. We exclude these expenses because we believe they are not directly related to the operation of our business. A more detailed explanation of the reasons why we exclude these categories from our GAAP net income is contained in paragraphs (B) through (I) above under the table entitled "Reconciliation of GAAP to Non- GAAP Financial Measures."
Revenue by Product Groups - Press Release - Total Consolidated Revenue
by Product Groups - Press Release - Total Consolidated
(in thousands)
Q3 2006 Q2 2006 Q1 2006
McAfee $287,780 100% $277,364 100% $271,967 100%
McAfee Corporate $167,970 58% $166,183 60% $160,280 59%
McAfee Consumer $119,810 42% $111,181 40% $111,687 41%
-McAfee.com 105,535 37% 94,713 34% 97,512 36%
-Retail 14,275 5% 16,468 6% 14,175 5%
Divested Businesses
-NAI Labs - 0% - 0% - 0%
Total MFE $287,779 100% $277,364 100% $271,967 100%
Q4 2005 Q3 2005
McAfee $253,258 100% $252,910 100%
McAfee Corporate $147,004 58% $147,607 58%
McAfee Consumer $106,254 42% $105,303 42%
-McAfee.com 89,968 36% 87,597 34%
-Retail 16,286 6% 17,706 8%
Divested Businesses
-NAI Labs 21 0% 1 0%
Total MFE $253,279 100% $252,911 100%
Gross Bookings by Product Groups - Press Release - Total Consolidated
(in thousands)
Q3 2006 Q2 2006 Q1 2006
McAfee $348,963 100% $333,138 100% $326,161 100%
McAfee Corporate $183,301 53% $183,043 55% $169,626 53%
-Enterprise 110,089 32% 104,243 31% 91,311 28%
-SMB 73,212 20% 78,800 23% 78,315 24%
McAfee Consumer $165,662 47% $150,095 45% $156,535 47%
-McAfee.com 144,202 41% 130,540 39% 130,140 40%
-Retail 21,460 6% 19,555 6% 26,395 8%
Total MFE $348,963 100% $333,138 100% $326,161 100%
Q4 2005 Q3 2005
McAfee $369,212 100% $300,618 100%
McAfee Corporate $225,300 61% $171,239 57%
-Enterprise 136,021 37% 94,560 31%
-SMB 89,279 24% 76,679 26%
McAfee Consumer $143,912 39% $129,380 43%
-McAfee.com 115,783 31% 102,708 34%
-Retail 28,129 8% 26,672 9%
Total MFE $369,212 100% $300,618 100%
SOURCE McAfee, Inc.
