McAfee May Be Recession Proof

Feb.24.09 | About: McAfee Inc. (MFE)

McAfee doesn’t seem to be terribly bothered by the recession. The Security software category should be relatively recession proof, and McAfee will continue to benefit from that. The company also has a good M&A track record, and in this market, with valuations compressed, it can pick up whatever is missing in its portfolio at attractive prices. Among those, I’d say, Qualys could be a top target, setting them up for managed security in a SaaS mode. [Read: Top Seven SaaS Startups.] Let’s look at the Q4 2008 results and acquisitions.

Q4 revenue of $424 million was short of the Street’s expectations of $436 million but recorded impressive 20% growth over the year. EPS of $0.53 was $0.01 higher than the market’s expectations and recorded 15% growth over the year.

By region, North America contributed 55% of total quarterly revenue and grew 25% over the year. International revenue grew 12% over the year with growth of 1% in Europe, the Middle East, and Africa, 49% in Asia Pacific, 39% in Latin America and 26% in Japan. This was McAfee’s twelfth straight quarter of double-digit growth in international revenue.

By segment, Corporate Revenues grew 21% and contributed $261 million for the quarter. They had record sales of Total Protection, or ToPS, which grew 11% over the year. The Consumer segment grew 16% over the year. The company more then doubled its consumer distribution capacity and recorded impressive 127% growth in new registered trial subscriptions for the quarter. It added approximately 3,000 new McAfee Secure customers in the quarter, taking the total customer base to 14,000.

For the fiscal 2008, McAfee closed revenues at $1.6 billion, growing 22% over the year with an EPS of $2.01, an increase of 15% in the period.

During the year, McAfee invested in its business to drive growth. The company had been going full force after the market in 2007, and its efforts have started to bring results in 2008.

The company closed four acquisitions in the year, which helped improve its product suite. The product range now boasts of an end-to-end selection for data protection, network and web security solutions. During the quarter, McAfee completed the acquisition of Secure Computing for an estimated $465 million. The deal is expected to combine Secure Computing’s strengths in firewall, web and e-mail gateway filtering with McAfee’s intrusion prevention, desktop encryption, data-leak prevention, regulatory compliance and centralized management capabilities.

Additionally, the company continued to innovate with its products. It launched a new threat prevention technology for cloud computing called Artemis and invested in go-to-market capabilities, upgraded its field sales talent and strengthened its channel relationships. It also announced another release of its general security management consol, E-Policy Orchestrator (EPO).

The company continued to invest in relationships and announced a multi-year exclusive contract with Lenovo to pre-load on the latter’s consumer PCs and notebooks for shipping worldwide to help drive growth in emerging markets.

Going forward, McAfee is focusing on two initiatives to help improve margins. First, it expects to leverage its consumer model as its PC OEM relationships develop. It’s also planning to take the recent acquisitions to the next level by leveraging revenue growth and cost synergies, and expanding cross-sell and up-sell opportunities. McAfee is hoping to realize its vision of an “integrated security environment across the endpoint, the network, and the cloud.”

Its second initiative is to improve cost efficiencies through personnel reductions, application of best-in-class processes and facilities consolidation. The company expects to save about $50 million in the year through these initiatives.

The company is looking at revenues of $440-$460 million for Q1 with an EPS of $0.46-$0.50. For the entire year, it is expecting an improvement of 200-basis points in operating margins.

At the time of writing, the stock was trading at $29.96 with a market capitalization of $4.6 billion.

Disclosure: None