McAfee Misses EPS, Top Line Grows - Analyst Blog

McAfee Inc. (MFE) reported fourth-quarter 2010 earnings per share of 47 cents, which was below the Zacks Consensus Estimate of 55 cents.

Revenue

McAfee Inc. reported fourth quarter revenue of $549.6 million, up 5.0% from $525.7 million in the year-ago quarter. The company ended the fourth quarter with moderate numbers and moves into 2011 with strong business momentum. Broad-based demand for the company's security solutions drove the company's revenues across its North America and International segments.

McAfee reported increases in revenues across all segments. The Corporate Business segment reported fourth quarter revenue of $340.2 million (62.0% of revenue), up 0.7% year over year. The Consumer Business segment reported revenue of $209.4 million (38.0% of revenue), up 11.5% year over year. This reflects strong performance by the company's OEM customers, as well as PC unit growth.

The North America segment reported revenue of $311.3 million, up 4.3% year over year. The International segment reported revenue of $238.3 million, up 4.9% on a year-over-year basis.

Operating Results

Fourth-quarter gross profit was $397.5 million, up 0.8% year over year. This resulted in a gross margin of 73.2% in the current quarter, compared to 75.0% in the year-ago quarter. Gross margin was affected by the product mix.

Operating income on a GAAP basis was $58.7 million, down 18.6% on a year-over-year basis. Excluding special items, non-GAAP operating income in the quarter was $106.6 million, down 2.5% on a year-over-year basis. This resulted in an operating margin of 19.3% in the current quarter, compared to 20.8% in the year-ago quarter. The margin was affected by higher operating expense.

The GAAP net income in the quarter was $60.5 million or 38 cents per share, up from $54.5 million or 34 cents per share reported in the year-ago quarter. Excluding special items, such as the impact of signature file update, restructuring, amortization, acquisition-related and other charges, non-GAAP net income was $73.4 million or 47 cents per share, up from $75.5 million or 47 cents in the year-ago quarter.

Balance Sheet & Cash Flow

During the recently concluded quarter, the company generated around $594.6 million in cash flow from operations. Days sales outstanding (DSOs) were 57 days. At the end of the fourth quarter, the company reported cash and marketable securities of $1.2 billion, up from $1.0 billion in the previous quarter. Deferred revenue was $1.5 billion.

Conclusion

The company delivered decent fourth-quarter results, although the EPS was below our expectations. The strong product portfolio, growth prospects in all its served markets, acquisitions, customer win momentum and good cash generation ability are positives.

We are a bit concerned about the intense competition that the company faces from smaller players, as well as hardware and software manufacturers entering the IT security business. Moreover, the enhanced level of security offered by Microsoft Corp.'s (MSFT) Windows OS also pose some challenges to McAfee.