McAfee, Inc. Reports 27 Percent Growth on Record Revenue of $410 Million for the Third Quarter 2008

McAfee, Inc. Reports 27 Percent Growth on Record Revenue of $410 Million for the Third Quarter 2008

SANTA CLARA, Calif., Oct. 30, 2008– McAfee, Inc. (NYSE: MFE) today reported financial results for the third quarter ended September 30, 2008.

“McAfee’s third quarter results validate that our focus on security market leadership continues to drive financial performance,” said Dave DeWalt, McAfee’s chief executive officer and president. “We achieved double-digit, year-over-year revenue growth across our five geographic markets and both corporate and consumer segments. Global enterprises continue to standardize their security with McAfee. Partners, corporations, governments and consumers see compelling value in McAfee's solutions, which provide enhanced protection in a rising threat environment, increased manageability and improved return on investment.”

“We continued to see robust demand across our portfolio of security solutions. In particular, McAfee Network Security Platform, formerly known as IntruShield, grew sales more than 100 percent over last year’s third quarter,” added DeWalt. “The planned acquisition of Secure Computing, expected to close this quarter, should extend the success of our Total Protection strategy through best-of-breed technology suites featuring intrusion prevention, firewall, Web security, data protection, network access control and e-mail security capabilities. The planned acquisition further underscores our commitment to providing customers with critical protection that interlocks the endpoint and network, and we expect it to strengthen McAfee's leadership position in security risk management.”

 Third Quarter Financial Highlights and Operational Metrics:

* A complete reconciliation of GAAP to non-GAAP results is set forth in the attachment to this press release.

Third Quarter 2008 Operating Summary:

• $410 million is another record revenue quarter for McAfee
• This is the eleventh consecutive quarter of double-digit, year-over-year revenue growth
• Non-GAAP net income of $0.53 per share on a diluted basis is a quarterly record for McAfee
• GAAP net income was $0.31 per share on a diluted basis

Corporate Business:

• Revenue grew 33 percent to $247 million in the third quarter of 2008, compared with the same period last year
• $247 million is record quarterly revenue for McAfee’s corporate business
• Growth during the quarter was driven by McAfee Total Protection Endpoint for Enterprise, Data Protection and McAfee’s Network Security Platform, formerly known as IntruShield
• In the third quarter of 2008, McAfee closed 340 deals over $100,000, including 52 deals over $500,000 and 28 deals over $1 million. Twenty-eight deals over $1 million during a quarter is a record for the company.

Consumer Business:

• Revenue grew 20 percent to $163 million in the third quarter of 2008, compared with the same period last year
• The consumer business has achieved double-digit, year-over-year revenue growth 14 of the last 15 quarters
• In the third quarter of 2008, McAfee signed or extended 18 agreements and launched 55 new or enhanced online partnerships

North America:

• Revenue grew 32 percent to $219 million in the third quarter of 2008, compared with the same period last year  
• North American revenue accounted for 53 percent of total revenue for the third quarter of 2008, compared with 51 percent of total revenue for the third quarter of 2007

International:

• Revenue grew 22 percent to $191 million in the third quarter of 2008, compared with the same period last year
• McAfee had double-digit, year-over-year revenue growth across all geographies in the third quarter of 2008
• Compared with the third quarter of 2007, revenue from Europe, the Middle East and Africa grew by 24 percent, Asia Pacific grew by 16 percent, Japan grew by 10 percent and Latin America grew by 42 percent
• International revenue accounted for 47 percent of total revenue for the third quarter of 2008, compared with 49 percent of total revenue for the third quarter of 2007

Key Announcements:

• McAfee announced plans to acquire Secure Computing, a leading provider of network security, and completed the acquisition of Reconnex, a leading data loss prevention company
• McAfee announced that it is teaming with industry leaders HP ProCurve, Intel Corporation and VMware Inc. The relationships are designed to deliver best-in-class security for HP ProCurve networking products, Intel business PC platforms and the VMware platform.
• McAfee announced several new products, including its 2009 consumer security suites, McAfee Unified Secure Access for network access control, Total Protection for Virtualization and Total Protection for Secure Business for small and medium sized businesses
• McAfee announced it is extending its “in the cloud” computing technology with the introduction of McAfee Active Protection for the consumer and McAfee Artemis for the enterprise. This is the industry’s first technology to shield computer users against attacks as they happen without requiring a traditional scheduled update.
• McAfee held its first ever user conference, FOCUS 08 at the MGM Grand in Las Vegas, which was attended by more than 1,200 people from 47 countries. Customer and partner feedback on the event was extremely positive, reflecting the critical role security is playing in the enterprise, as well as McAfee’s leadership position in the industry.
• Gartner, Inc. has placed the company in the leader’s quadrant in its “Magic Quadrant for Mobile Data Protection,” as published on September 23, 2008
• McAfee added a total of 14 new partners to its McAfee Security Innovation Alliance (SIA) technology partner program, including Alcatel-Lucent, ArcSight and CommVault, bringing the total partners to 34

Balance Sheet and Cash Flow Summary:

At September 30, 2008, the company reported cash and marketable securities of $1.003 billion, compared with $1.131 billion at the end of the second quarter of 2008. The change includes payments for the company’s repurchase of approximately 4.0 million shares of its common stock for $132 million under the company’s stock repurchase program and $48 million for acquisitions during the third quarter of 2008. This outflow was offset by $87 million of operating cash flow and $30 million of proceeds from the exercise of stock options. The totals for the third quarter of 2008 do not reflect the expected expenditure of cash that will be required to complete the acquisition of Secure Computing.

As noted above, during the third quarter of 2008, the company generated approximately $87 million in cash flow from operations. Operating cash flow used during the quarter included a $16 million increased investment year-over-year in partnerships we entered into this year and payment of $25 million for a litigation settlement. Days sales outstanding were 46 days, up from 44 days in the third quarter of 2007.

Deferred revenue was $1.057 billion at the end of the third quarter of 2008, an 11 percent increase over the September 30, 2007 balance. Seventy-eight percent of revenue during the third quarter of 2008 came from prior period deferred revenue.

Secure Computing Acquisition Update:   

On September 22, 2008, McAfee announced that it had signed a definitive agreement to acquire Secure Computing. McAfee currently estimates that the transaction will close in the fourth quarter of 2008. On October 15, 2008, McAfee received notification that the United States Department of Justice and Federal Trade Commission had granted early termination of the Hart-Scott-Rodino waiting period for the proposed acquisition. The closing of the acquisition remains subject to adoption of the merger agreement by the Secure Computing stockholders and satisfaction of other customary regulatory and closing conditions.All forward looking statements contained in this release are for McAfee’s business on a standalone basis, and do not take into account the potential impact on McAfee of the Secure Computing acquisition, unless specifically stated otherwise.

Financial Outlook:

McAfee expects net revenue in the fourth quarter of 2008 of $400 million to $420 million.

The company expects fourth quarter 2008 GAAP net income of $0.54 to $0.60 per share and non-GAAP net income of $0.50 to $0.56 per share on a diluted basis.

This guidance reflects an assumed 25 percent GAAP tax rate benefit and a 27 percent non-GAAP tax rate expense for the fourth quarter of 2008. The GAAP tax rate benefit reflects the impact of receiving administrative relief in October 2008 for incremental taxes previously accrued related to certain acquisition integration activities. In addition, guidance does not reflect the future impact of the company’s stock repurchase program or the potential impact of the acquisition of Secure Computing that McAfee announced September 22, 2008. See the reconciliation of projected GAAP net income per share to projected non-GAAP net income per share attached to this press release.

Conference Call Information:

• (706) 679-4671(international). The passcode is 63898958.
• Attendees should dial in at least 15 minutes prior to the conference call
• Available until November 13, by calling (800) 642-1687 (U.S. toll-free) or (706) 645-9291 (international)
• Internet through McAfee’s Investor Relations Web site at http://investor.mcafee.com

Disclosure Statements and Discussion of Non-GAAP Financial Measures:

Management evaluates and makes operating decisions using various performance measures. In addition to reporting financial results in accordance with GAAP, we also consider adjusted gross profit, operating income and net income, which we refer to as “non-GAAP gross profit,” “non-GAAP operating income” and “non-GAAP net income.” In calculating non-GAAP gross profit, non-GAAP operating income and non-GAAP net income, 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.

Non-GAAP gross profit excludes amortization of purchased technology and patents, non-cash stock-based compensation charges and stock-based compensation charges related to tender offer. Non-GAAP net income and non-GAAP operating income exclude amortization of purchased technology, patents and intangibles, non-cash stock-based compensation charges and stock-based compensation charges related to tender offer, acquisition related costs, loss (gain) on sale/disposal of assets and technology, restructuring (benefits) charges, SEC and compliance costs, legal settlement for a patent-related matter, acquired intangible asset expensed to research and development, impairment of marketable securities, provision for income taxes and certain other items. Management used a 27 percent non-GAAP effective tax rate to calculate non-GAAP net income in 2008 and 2007. Management believes that the 27 percent effective tax rate in each respective period is reflective of a long-term normalized tax rate under the global McAfee legal entity and tax structure as of the respective period end. 

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. 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 utilizes these performance measures for purposes of comparison with its business plan and individual operating budgets and allocation of resources. In addition, when evaluating potential acquisitions, management excludes the items described above from its consideration of target performance and valuation.

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.  We believe that 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 may from time to time use similar non-GAAP financial measures to supplement their GAAP results. However, non-GAAP gross profit, non-GAAP operating income and non-GAAP net income have limitations as analytical tools, and you should not consider these measures in isolation or as a substitute for GAAP gross profit, operating income and net income or any other performance measure determined in accordance with GAAP. 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 analytical tools. Some of the limitations in relying on non-GAAP net income are:

• Amortization of purchased technology, patents 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 integration activities as part of its ongoing business. Therefore, we expect to continue to experience acquisition and retention bonuses, in-process research and development charges and integration costs related to acquisition activity in future periods.

• The company’s income tax expense will ultimately be based on its GAAP taxable income and actual tax rates in effect, which may differ significantly from the 27 percent rate assumed in our non-GAAP financial measures for 2008 and 2007.

• Other companies, including 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 statements result in 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 gross profit, operating income and 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 results for the quarter ended September 30, 2008, guidance on expected operating results for the fourth quarter of 2008, expectations regarding the pending acquisition of Secure Computing, including those regarding McAfee’s future plans for Secure Computing’s business, the expected closing date of the acquisition, expectations as to growth opportunities and other benefits from the acquisition and expected plans for the integration of Secure Computing’s products, McAfee’s positioning for continuing industry leadership and solid performance in the remainder of 2008, business strategy, business momentum, market position, relationships and opportunities, McAfee’s expectations regarding growth opportunities, the benefits of strategic relationships or partnerships, the benefits of McAfee’s security solutions and the industry shift to security suites. Actual results could vary, perhaps materially, and the expected results may not occur. In particular, actual results are subject to other risks, including that McAfee may not achieve its planned revenue realization rates or sales targets, succeed in its efforts to grow its business or combat effectively the security threats of the future, build upon its technology leadership, leverage its relationships and opportunities to the degree expected, or capture market share, notwithstanding related commitment or related investment. The company may not benefit from its acquisitions, 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, the company may experience delays in product development or the release of previously announced products, the company may experience delayed or lost sales and revenue as a result of outages in integrated systems on which it is highly dependent, the company may not satisfactorily anticipate or meet its customers’ needs or expectations, or the industry shift to security suites may not be adopted to the extent anticipated. Actual results are also subject to a number of other factors, including customer and distributor demand fluctuations, currency fluctuations and macro and other economic conditions both in the United States and internationally including the current credit crisis and related global economic turmoil. The Company may experience further declines in the fair value of its investment securities or realize losses relating to other than temporary declines in its investment securities given the current credit crisis and related global economic turmoil. In addition, further risks may arise from governmental inquiries into our past stock option granting practices, including but not limited to, potential fines and penalties, and disruptions to our ongoing business and significant legal, litigation, accounting, tax and other expenses. 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 quarterly report on Form 10-Q for the period ended June 30, 2008. McAfee does not undertake to update any forward looking statements.

About McAfee, Inc.:

McAfee, Inc., headquartered in Santa Clara, California, is the world's largest dedicated security technology company. It delivers proactive and proven solutions and services that secure systems and networks around the world, allowing users to browse and shop the Web securely. With its unmatched security expertise and commitment to innovation, McAfee empowers home users, businesses, the public sector and service providers by enabling them to comply with regulations, protect data, prevent disruptions, identify vulnerabilities and continuously monitor and improve their security. http://www.mcafee.com.

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McAfee, SiteAdvisor, IntruShield and/or other noted McAfee related products contained herein are registered trademarks or trademarks of McAfee, Inc., and/or its affiliates in the U.S. and/or other countries. McAfee Red in connection with security is distinctive of McAfee brand products.  Any other non-McAfee related products, registered and/or unregistered trademarks contained herein are only by reference and are the sole property of their respective owners. © 2008 McAfee, Inc. All rights reserved.