McAfee Q1 2009 Earnings Call Transcript

| About: McAfee Inc. (MFE)

McAfee, Inc. (MFE) Q1 2009 Earnings Call April 30, 2009 4:30 PM ET


Kelsey Doherty - Investor Relations

David DeWalt - President and Chief Executive Officer

Albert A. "Rocky" Pimentel - Chief Operating Officer and Chief Financial Officer


Sarah Friar - Goldman Sachs

Philip Winslow - Credit Suisse First Boston

Adam Holt - Morgan Stanley

Philip Rueppel - Wachovia Securities

John DiFucci - J.P. Morgan

Rob Owens - Pacific Crest

Todd Raker - Deutsche Bank

Michael Turits - Raymond James

Walter Prichard - Cowen & Co.

Brent Thill - Citigroup

Steven Ashley - Robert W. Baird

Daniel Ives - FBR Capital Markets

Kash Rangan - Merrill Lynch


Good afternoon ladies and gentlemen. My name is Rachel and I will your conference operator today. At this time, I would like to welcome everyone to the McAfee First Quarter 2009 Earnings Conference Call. All lines have been placed on-mute to prevent any background noise. After the speakers' remarks there will be a question-and-answer session. (Operator Instructions). Ms. Doherty, you may begin you conference.

Kelsey Doherty

Thank you, Rachel. Good afternoon and thank you for joining us today. This afternoon's conference call is being recorded and will be available for replay on McAfee's Investor Relations homepage at

With me on this afternoon's call are President and Chief Executive Officer Dave DeWalt and our Chief Operating Officer and Chief Financial Officer Rocky Pimentel. Dave will open this afternoon's call with a high level review of the quarter and a strategic discussion. Then Rocky will provide financial details and guidance for the second quarter 2009 and Dave will close and we'll be pleased to take your questions.

You will find in our press release on the Investor Relations section of our website, a GAAP to non-GAAP reconciliation of the first quarter 2008 financial results discussed in this conference call. The link is and our results are posted under quarterly results. We'll post our prepared remarks to the website following the conclusion of today's call.

During this conference call and the question and answer question session we will be making forward-looking statements regarding future events and the future performance of the company. Including our guidance on revenue, operating income margins and earnings levels for the second quarter of 2009, the impacts rate for 2009 we used in estimating our guidance, our business strategy and future business plans and prospects, trends in the security market and our competitive position, strategies and opportunities; the anticipated benefits of our current, new and future products and the anticipated benefits of our acquisition, partnerships and alliances.

Forward-looking statements are based on management's current expectations and are subject to risks and uncertainties. We caution listeners that actual results may vary, perhaps materially from the forward-looking statements we make during this call and the question and answer session this afternoon. We encourage listeners to review the Risk Factor contained in today's press release as well as the company's filings with the SEC, including the Annual Report on Form 10-K filed March 2, 2009 for more detailed information on the risks and uncertainties related to company and its business. We do not undertake to update any forward-looking statement.

With that, it's my pleasure to turn the call over to our President and CEO Dave DeWalt.

David DeWalt

Okay. Thank you, Kelsey. Good afternoon welcome everyone. Thank you for joining us today. Well McAfee had an excellent start to 2009 as we mentioned when we reported earnings in February. 2008 was about making strategic investments to drive growth. We also commented at that time that we are focused on optimizing our business model to build incremental shareholder value.

Our first quarter 2009 results show the impact of that strategy. It was a quarter of many records, record revenue of 448 million, up 21% year-over-year and our 13th consecutive quarter of double-digit year-over-year revenue growth.

We have record revenues for both of our Corporate and our Consumer businesses, record non-GAAP operating income of a 114 million which was up 38% year-over-year; record non-GAAP earnings per share of $0.57; up 31% year-over-year including a $0.03 benefit from insurance and a $0.02 dilution from the acquisition of Secure Computing. We also had record cash flow of a 146 million which was up a 105% including a $14 million litigation payment related to our derivative lawsuit from 2006.

So why is security proving to be so resilient for McAfee in a challenging economic environment?

Well first, the growth of the Internet and global markets are online, coupled with a low risk, high reward for cyber criminals is driving a significant increase in the threat landscape. Breaches are occurring daily in both the private and public sector with mass deployments of highly sophisticated worms and viruses.

In addition, cyber warfare is beginning to escalate worldwide along with an increasing threat of cyber terrorism. In the last six months alone, we have seen some of the most significant breaches and mass virus infections in the history of security. For example, in the last 12 months McAfee Avert Labs saw a 500% increase in malware and more malware than we've seen in the last five years combined.

Also, 285 million data records were breached in 2008 to compared with only 38 million in 2007. The FBI reported a 33% increase in Internet crime complaints in 2008 over 2007 and on top of that we now believe the worldwide problem related to data loss and identity theft exceeds $1 trillion.

The need for a strong global security provider has never been greater. And these trends are only increasing as we move through 2009. Companies are trying to be more frugal than ever in a difficult economic environment. Security has been highly fragmented market for many years with many, many vendors. This climate is creating an opportunity to consolidate cost, vendors and resources. The global security provider with the stronger suites will gain the most market share. The regulatory environment is also becoming increasingly complex. Regulations now mandate controls over confidential and personal identifiable information on a global basis.

Any company for example that processes a credit card must be able to prove PCI compliance. And more than 40 countries have data protection regulations, and there are more than 50 different regulatory requirements worldwide. And again, the strongest global security provider to help simplify regulation and reduce costs of audits will drive the most revenues.

And finally, consumers are under attack like never before, from identity snap, child predators and malware. The rise of Web 2.0 applications, new devices and easy access to the Internet create new opportunities for security providers. Security has never before been more significant to our customers and the need for a dedicated security company has never been more important. So why McAfee?

These macro conditions play right into the strength of McAfee's model and are contributing to our growth. Our growth drivers specifically McAfee include security product leadership, our partner eco-system and alliance initiatives and a powerful business model. First, we leave the security industry with the product portfolio that focuses on integration and manageability. Our 2009 product pipeline features are focused on increased manageability.

Our next generation ePO platform 4.5, which is now in beta has over 2300 customer participants. This next generation management counsel features improved scalability and enhanced user interface, improve dashboards and reporting functionality. In addition it offers increased integration of our recently acquired products and provides cross selling opportunities for install base and enabling lower switching costs from our competitors.

Second the interlock between our end point products and our network products, with an increased threat landscape the need to correlate data across layers of securities defense is critical.

We are now beginning to ship Total Protection suite capabilities for data loss, network admission control, intrusion prevention, firewalls, web security and email security. In addition, Total Protection for compliance is our newest example of this interlock featuring agent and agent less integration and management. We not believe any competitor in the market can replicate our capabilities in this area.

Third, a suite based approach grounded in reliability and ease of use. Our most recent suite announcement is our network solution called McAfee Unified Threat Management. Our UTM Firewalls features seven different models fully integrated with intrusion prevention, network firewall protection and VPN services.

These solutions are cost effective and easy to deploy and targeted at the small and mid market; and finally, enhanced protection for consumers. McAfee Family Protection will help families keep themselves and their children safe on the Internet including email contact approval, content filtering, time limits and social networking controls. Family Protection is expected to be available later this quarter.

McAfee's technology leadership has been acknowledged by industry analysts and publications. Most recently, we received SC Magazine's Excellence Award for best security company. Best endpoint security solution and best email security solution. We recognize in an open approach and our partner Ecosystem will create incremental value for our customers, partners and shareholders.

We believe security will ultimately become ubiquitous. To take advantage of that opportunity, we deliberately executed on a strategy that will extend our reach. Our partner Ecosystem now includes more than 12,000 resellers worldwide, 60 plus Security Innovation Alliance Partners or ISV's which are committed to helping customers drive operational savings for McAfee compatible products; nearly 50 OEM partners which license bundle and extend McAfee's reach to a broader user base and more than 200 brand name consumer partners driving global distribution.

This total includes partnerships with major PC OEM manufactures, Internet service providers, financial institutions and some of the largest telecommunication providers. The market accessed to our partnerships and alliances are significant. And finally, McAfee operates the resilient business model. Approximately 81% of our revenue in the first quarter came from the balance sheet.

Our business is reoccurring in nature, with 51% of total revenue this quarter from service and support, and another 41% from subscriptions, with approximately 92% of total first quarter revenues is reoccurring.

In addition, we have high customer retention rates. Enterprise customers have approximately 90% retention rates, and our average for consumer life cycles now extends more than three years.

And finally, we're leveraging our cost structure. First quarter non-GAAP operating margins were 25.4%. This was over a 300 basis point improvement, compared to last year's first quarter non-GAAP operating margins.

McAfee continues to grow faster than the security market and faster than our competitors in this space.

First quarter 2009 results demonstrate that despite a challenging environment, our strategy is working. Our customers from the consumer to largest enterprise, value enhanced protection integration, manageability, and a reproved return on security investment offered my McAfee.

So, with that, let me handed it over Rocky for the financial review of the quarter and guidance.

Rocky, take it away.

Albert A. "Rocky" Pimentel

Thank you, Dave. Good afternoon, everyone. We reported an exceptional start to 2009, and we are pleased with our first quarter results, which demonstrate the benefits of our ratable business model, improved operating leverage, and the strong operating cash flow characteristics of our business.

Sales, which are orders recorded during the quarter, grew 21% year-over-year during the first quarter even factoring in an approximately 5% negative impact from foreign currency. Excluding the impact of foreign exchange, we had double-digit year-over-year growth in sales during the first quarter in the McAfee core business.

First quarter 2009 revenue was $448 million, up 21% year-over-year, a record revenue quarter for McAfee and our 13th straight quarter of double-digit year-over-year revenue growth. Revenue from Secure Computing was $41 million for the first quarter. Foreign currency negatively impacted core McAfee revenue by approximately $15 million year-over-year and was not significant sequentially. Of the $448 million in revenue during the quarter, $228 million was service and support, up 21% year-over-year and $182 million was subscription, up 13% year-over-year.

North America revenue was $254 million, an increase of 34% from last year's first quarter, and accounted for 57% of the business. This was another record revenue quarter for North America, reflecting the impact of the acquisition of Secure Computing, strong performance in the core McAfee portfolio, and highlighted by several significant competitive displacements in both our network and end point businesses.

International revenue was $194 million, an increase of 7% when compared to the same period last year that accounted for 43% of the business.

Please not that foreign exchange negatively impacted international revenue growth by approximately 8%, compared to first quarter of 2008.

As reported in U.S. dollars, revenue in our international geographies compared to the first quarter of 2008, was down 1% in Europe, the Middle East and Africa. However, in local currency, EMEA grew 8% year-over-year, up 14% and Asia-Pacific, up 31% and Latin America, and up 31% in Japan. In local currency, Japan grew 14% year-over-year.

For the first quarter, approximately 81% of total revenue came from deferred revenue off the balance sheet. This result is consistent with the company's historical trends.

During the first quarter, we closed 350 deals having a value greater than $100,000, including 41deals over $500,000, and 16 deals over a $1 million. We continue to see momentum in large deal opportunity, including strengths in the pipeline.

Our broader security focused portfolio is driving larger sales opportunities.

Corporate revenue was $276 million, up 28% year-over-year. This was another record revenue quarter for our Corporate business. This was our sixth consecutive quarter of double-digit year-over-year revenue growth in our systems and network product segments.

Sales of Total Protection or ToPS, endpoint grew 34% year-over-year. And ToPS continues to drive competitive displacements.

On the consumer side, revenue grew 12% year-over-year for the first quarter to $172 million. This was another record revenue quarter for our consumer business, and we were very pleased with the results, especially in light of the weaker macro consumer environment.

Additional highlights from our first quarter consumer business include, the signing or extension of 15 new consumer partnerships, and launching of 69 new or enhanced online partnerships during the quarter. We had a record number of new trial registrations worldwide, with growth of more than 150% year-over-year.

Online sales of total protection or high-end consumer securities suite grew 98% year-over-year. Reviewing the rest of the income statement, GAAP gross profit margin for the first quarter of 2009 was 74.7%, compared with the fourth quarter 2008 of 75.2%, and first quarter 2008 of 75.7%.

Non-GAAP gross profit margin for the first quarter was 79.3%. This was unchanged compared to last quarter and down slightly compared to a year ago first quarter gross profit margin of 79.5%.

Total GAAP operating expenses in the first quarter 2009 were $283 million, compared with $226 million for first quarter of 2008, and $286 million for the fourth quarter of 2008.

Total operating expenses on a non-GAAP basis in the first quarter 2009 were $242 million, compared with $212 million for the first quarter of 2008, and $229 million for the fourth quarter of 2008.

Please note that effective this quarter, we have reclassified expenses associated with sales order operations. Formally included in general and administrative expense, sales and order operations now will be included as a component of sales and marketing expense, consistent with other companies in the software industry.

All numbers presented in this afternoon's call reflect this reclassification.

GAAP sales and marketing expenses for the first quarter of 2009 were $149 million.

First quarter 2009 sales and marketing expenses on a non-GAAP basis were $139 million or 31% of revenue, compared to $134 million for the fourth quarter.

This increase, on a non-GAAP basis, was primarily driven by head count from Secure Computing, and a reclassification of sales order operation expense, offset by reduced marketing expenses.

First quarter 2009 GAAP research and development costs were $78 million.

First quarter 2009 research and development costs on a non-GAAP basis were $71 million or 15.9% of revenue, compared to $61 million for the fourth quarter, also reflecting the impact of Secure Computing. We regretted six new patents in the first quarter, bringing our total patent portfolio to 426.

GAAP general and administrative expenses for the first quarter of 2009 were $38 million. On a non-GAAP basis, G&A expenses for the first quarter 2009 were $31 million or 7% of revenue, compared to $33 million for the fourth quarter.

This includes a $3 million reclassification of sales order operations expense. In addition, including the fourth quarter of 2008 and first quarter of 2009 G&A expenses, were insurance benefits related to historical litigation activity of $5 million and $6.5 million respectively.

The timing of this first quarter benefit was not anticipated. And therefore, was not included in first quarter guidance.

GAAP operating income for the first quarter was $52 million, resulting in a GAAP operating margins for the period of 11.6%. The year-over-year decrease in GAAP operating margin is driven primarily, by acquisitions.

Operating income on a non-GAAP basis for the first quarter was $114 million, resulting in a non-GAAP operating margin of 25.4%. Excluding the impact of the previously mentioned insurance benefit, non-GAAP operating margin was 24%.

We exceeded the first quarter non-GAAP operating margin guidance we provided in February.

The sequential and year-over-year improvement in McAfee's non-GAAP operating margin was a result of the cost savings and cost avoidance initiatives we outlined for you at the beginning of the year, which included containing discretionary marketing spend, disciplined head count management, as total employee head count at the end of the quarter was 5,548 employees, down 15 employees from our year-end total of 5,563.

Integration synergies related to Secure Computing, additional synergies are expected to be achieved throughout the rest of 2009 in accordance with our integration plan. Our focus on discretionary cost control and execution of ongoing business process improvements.

Moving on, GAAP other income for the quarter was $2 million. Non-GAAP other income was $3 million compared with $6 million in the fourth quarter of 2008 and $15 million in the first quarter of 2008. This decrease in other income reflected loss interest income associated with cash used for acquisitions and lower interest rates as well as interest expense from our $100 million unsecured term loan drawn down early in July as part of a credit agreement entered into with a consortium of banks late in 2008.

For the quarter, we had a GAAP tax rate of 1%. This effective GAAP tax rate is primarily due to tax benefits recognized in the quarter as a result of statute expirations in various jurisdictions. On a non-GAAP basis our tax rate was 24%.

In the first quarter of 2009 we reported net income on a GAAP basis of $53 million or $0.34 per share on a diluted basis. Our first quarter net income on a non-GAAP basis was $89 million. Non-GAAP earnings per diluted share was $0.57 up 31% year-over-year. Our non-GAAP earnings per share results for the first quarter of 2009 included $0.03 per share for the insurance benefit previously mentioned. Non-GAAP results also included approximately $0.02 per share of dilution from the acquisition of Secure Computing.

Investors and potential investors are encouraged to review the complete reconciliation of GAAP to non-GAAP financial measures set forth in the attachment to our press release issued this afternoon.

Turning to the balance sheet, out net accounts receivable balance at the end of the first quarter of 2009 was $240 million, compared with $195 million for the same period last year.

Days sales outstanding were 48 days of the first quarter 2009 unchanged from the first quarter of 2008. Deferred revenue at the end of the first quarter 2009 was $1.269 billion, up 17% year-over-year. Foreign currency negatively impacted deferred revenue by approximately $79 million year-over-year and approximately $35 million sequentially.

We ended the first quarter with $979 million in short-term deferred revenue, down $10 million when compared with the fourth quarter 2008.

Long-term deferred revenue was down by $13 million in the first quarter compared to the fourth quarter of 2008, ending the quarter at $291 million. We do not see unusual contract extensions nor did we see any unusual discounting during the quarter.

The composition of our deferred revenue balance at the end of the first quarter of 2009 was 66% related to Corporate and 34% for Consumer.

Please note that this slight shift in way towards Corporate deferred revenue compared to prior quarters is a result of the acquisition of Secure Computing, which closed in the fourth quarter of 2008.

We ended the first quarter of 2009 with cash and marketable securities at $801 million compared with $594 million at the end of the fourth quarter of 2008. This sequential increase was primarily due to increased cash flow from our business as well as the $100 million unsecured term loan drawn down in early January. We have $250 million in stock repurchase authorization remaining through July of 2009.

In the first quarter of 2009, we have generated total GAAP operating cash flow of $146 million; an increase of 105% over last year's first quarter; operating cash flow of $71 million. This year-over-year increase was primarily driven by growth in net income and increased cash collections of accounts receivable.

Please note that first quarter 2009 operating cash flow included a payment of approximately $14 million related to our recently concluded derivative lawsuit. We recognize that operating cash flow is an important indicator of the success of our business as demonstrated by our first quarter results. A successful 2009 should continue to drive strong cash flow results.

As I mentioned, revenue contributed by Secure Computing for the first quarter 2009 was $41 million, approximately 76% of first quarter revenue for Secure Computing came off the balance sheet.

Secure was $0.02 per share dilutive to our first quarter non-GAAP earnings per share, outperforming our initial expectations. This was a combination of slightly higher revenue realized during the quarter compared to our initial expectation as well as expense management across all aspects of the business.

Integration continues to progress according to plan. Next steps include the unification of our price book, integration of our sales and operations functions and IT infrastructure, expanded partner training and certification and tightening of the integration between Secure Computing sales force and the core McAfee sales force. We currently expect this acquisition to be neutral to slightly accretive to full year 2009 results.

Now I'd like to turn to guidance. The following updated guidance replaces and supersedes any previous guidance with respect to future periods and is valid as of today only. I would like to remind our listeners, that guidance is based upon management's current judgment and that the actual results may vary perhaps materially from those results anticipated in this guidance. Please see the footnotes to our press release for further details.

For the second quarter of 2009, we expect a revenue range of $455 million to $475 million. We expect a GAAP operating income margin of 11% to 15%. We expect an operating income margin on a non-GAAP basis of 23% to 25%. We expect the diluted share count in the range of 156 to 158 million shares. We assume an annual 12% GAAP tax rate and a non-GAAP tax rate of 24% for 2009.

Also for the second quarter of 2009, we expect GAAP earnings per share of between $0.28 and $0.32 per share on a diluted basis. On a non-GAAP basis, we expect earnings per share in a range from $0.54 to $0.58 per share on a diluted basis. This guidance includes an expected $0.01 to $0.02 per share dilution to non-GAAP earnings per share related to the Secure Computing acquisition.

In addition, guidance does not include any impact from future stock repurchases. In closing, on behalf of the executive management team, we want to thank our employees worldwide for these exceptional results in light of the operating environment around us. This performance is evidenced to the passion and dedication our employees have to make McAfee a world class company.

At this point, I will turn the call back to Dave.

Kelsey Doherty

Thank you, Rocky. All right, as Rocky indicated first quarter 2009 results were very strong quarter for McAfee. We had record results in nearly all areas of business from revenue to operating income to non-GAAP earnings per share to cash flow from operations. We believe security will remain a top priority in IT and for our consumers as the threat landscape continues to elevate.

Toward that end, we are incredibly focused here at McAfee on becoming the undisputed leader in digital security. We intend to continue driving sales and build market share even approach, as bundles market leading solutions in the suite, integrates management of this portfolio through EPL and creates clustered adviser status with McAfee security only focus and world class service and support team. And for the remainder of 2009, our focus is on execution. Our pipeline remains strong with several large deals already are closed in the quarter.

The go-to-market investments and sales capacity, partners and distributions we made in 2008 are yielding results in both our Corporate and Consumer segments and we remain on track with the integration of Secure Computing where we expect to continue recognizing operational and sales synergies through remainder of 2009. And we continue t prudently manage our cost structure on investing where we see opportunity and being mindful of the environment.

So, thank you joining us this afternoon. We look forward to answering your questions and to seeing you at our Investor Day in New York.

And with that I'll turn it back to Kelsey. Kelsey?

Kelsey Doherty

Thanks Dave and Rocky. As the operator poll for questions, I'd like to inform that McAfee plans to attend the J.P. Morgan Conference on Wednesday May 20th in Boston and the Cowen & Company Conference on Thursday May 28th in New York.

In addition, please mark your calendar for McAfee's Investor Day on Friday May 15th.

Investor Day will be held at the Grand Hyatt in New York. This is an invitation-only event. If you're interested and have not received an invitation, please go to our website at, where you will find information on how to signup.

Operator, please poll for questions. In the interest of time, please limit yourself to one question per person. Thank you.

Question-and-Answer Session


(Operator Instructions). Your first question comes from the line of Sarah Friar with Goldman Sachs.

Sarah Friar - Goldman Sachs

Good afternoon. Good quarter, guys. A quick one if I may, just on the cash flow Rocky. Clearly, a great cash flow quarter for you.

As you look forward through the rest of the year, I know folks are worried about whether or not you're going to keep up the growth on cash flow over the last year, given sort of the one-offs. How do you feel your position now when you look at the cash flow for the year, and any sense for the guidance for the full year?

Albert Pimentel

Sure. Thanks. We don't particularly give guidance on operating cash flow. But, we have made comments in the past that if you look at the historical relationship between non-GAAP operating income and operating cash flow, you would see a correlation.

Having said that, I think we've certainly been confident that if 2009 continues to be successful from an operating income standpoint that we expect that taking a consideration any new opportunities that would require investment.

But having put that aside or considering that separately, we would expect to have a very strong 2009 operating cash flow performance.

David DeWalt

And Sarah, just to add on to that, this is Dave. We've been focused quite a bit on cash flow from operations as you know. This is an area at least the last four to six quarters, we've had a series of one-time, either investments through prepays to the PC OEM manufactures or distribution partners and consumer, as well as just cleaning up some of the past with McAfee on litigation settlements and things like that.

So, a lot this is getting behind us. We're pleased that we're also getting some settlements with the insurance carriers. We've seen that now as well, where we're getting back recouping some of the legal fees that we have paid through that time.

And good great work by our legal team doing that. We still have some more of that to be able recoup. So, this is our focus. Cash flow from operations is critical. Rocky and his team are focused on receivables, as well as getting it behind us. So, we're hoping to continue to improve in that area.

Kelsey Doherty

Next question, please.


Your next question comes from the line of Phil Winslow with Credit Suisse.

Philip Winslow - Credit Suisse First Boston

Hi guys. Just following on your comment Dave on the pricing environment you saw out there in Q1. Obviously, a lot of other vendors were seeing some pricing pressure and other segments of software. Just wondering, how you comment on what you saw this enterprise, SNB (ph) consumer. Thanks.

David DeWalt

Sure Philip. Yeah. As you know, I see a lot of customers. We're very focused. Obviously, we're going after a lot of market share, in all the market segments you referred to, enterprise, mid, small, medium business. I will say, there wasn't any change in our discounting models, Rocky alluded to that on the script.

The only areas we tended to see was at times on the hardware on high-end hardware refreshes and renewals, instead of longer term contract durations. They shortened a little bit. But, the renewals rates stayed very high. The discounting stayed in place. And generally, pretty positive. It really showed the resiliency, I think the security generally, as a category, where I think some other segments were feeling more pressure on that model.

We were able to continue to work through it. But I mean, certainly, this is an area of opportunity for us to keep expanding and growing, and pricing so far has stayed up.

And even when you go under the consumer, 98% growth and some of the ToPS components very strong, our upper-end suites are continuing to drive higher ASPs. And when you look at the registrations that we're getting, and are now up over 150% year-over-year increase in registrations, last quarter we had 127% increase year-over-year. Now over 150. It's just again, showing that we continue to get a good model in consumer.

Kelsey Doherty

Next question, please.


Your next question comes from the line of Adam Holt with Morgan Stanley.

Adam Holt - Morgan Stanley

Thanks. I'll just ask a follow-up question to the comment about the significant increase in registrations. Obviously, that's a great leading indicator. I guess, two questions. One, can you comment on convergence? And then secondarily, can you talk a little bit about how you would expect to see those translate into actual subs and revenue over the next several quarters?

David DeWalt

Sure. Rocky, feel free to add on too. Thanks Adam. This is one of the leading indicators of the business. So, we obviously, monitor registrations. I think everybody knows, at least if you follow McAfee that we focused it on expanding the amount of capacity we ship on. We've enable to nearly double the amount of PC units we're shipping on, the amount of downloads, the amount of embedded environments that we're on. This is showing up now in some of the registrations.

Now having said that, when you look at the types of devices and the locations that we're actually delivering this too, the conversion rates aren't nearly as high as they will be in mature market.

Netbooks for example, or emerging markets typically, won't have as high of the conversion rate, as say the U.S. would on a classic Dell or HP type platform. So, little bit different conversion models. Certainly, where consumer confidence where it was in Q1, you don't see as much conversions as we would normally see in a stronger economic year.

But obviously, trying to drive how much we ship on, how much exposure we get. And then, how many registrations we get of the first two data points that you look for and driving your consumer business. The next one is optimizing conversions. And then obviously, bookings to revenue to renewal is the lifecycle.

We've been very encouraged frankly, at the end of that lifecycle as well, where we see now well over three years of lifecycle support to a consumer once you have won it. And those are the balances you're looking for in driving a consumer business.

We had 15 new partnerships. We're tracking right on our model. We are above our plan for the year already. And despite the tough consumer environment, I think the investments we made last year, and frankly even some of the dilution we took on EPS last year, because of those of payments are going to pay-off for the company this year and next year and beyond.

David DeWalt

Next question.

Kelsey Doherty

Next question.


Your next question comes from the line of Philip Rueppel with Wachovia Securities.

Philip Rueppel - Wachovia Securities

Yes, thanks very much. You mentioned that the dilution from the Secure acquisition was a lower than expected. On a revenue realization, have you experienced any cross sell opportunities, and have seen any uplift in terms of pricing, and/or sales of the standalone Secure products? Thanks.

David DeWalt

Yeah, thank you. Since the question, this is Dave. So, it's a little early for Secure to be honest within the McAfee model. Although, we're very encouraged. Hopefully, you've had a chance to see pretty positive results for Secure, 41 million in revenue, a little bit above where we thought.

We controlled costs well. A big part of this is integrating this to a suite, just like we did in the endpoint. We're integrating all of their components into a network security suite. We're working on that.

The installed base is real happy. With Secure Computing's products, we're beginning to get bigger and a bigger opportunities with both web, Optium-mail, firewalls as our McAfee sales force begins to influence transactions around the world. I think there is really opportunity for us to grow and build it.

On top of that, we have a brand new product line that's really launching in the small and mid market with Secure. This is our Unified Threat Management appliances, seven different models there, really targeted at out suite of services into a single appliance for small medium companies. We are hoping to leverage our strong telesales and channel distribution market for those products.

So as the year goes on, as we get more integrated to McAfee both product, technology market segment; obviously the goal there is to drive some strong revenue synergies in the company, I think we can do that.


Your next question comes from the line of John DiFucci with JP Morgan.

John DiFucci - J.P. Morgan

Thanks I will follow up Dave for the Consumer business too. As you point out the registrations are really strong and they were very strong last quarter. But I think last quarter you said that, you really hadn't started to see the convergence of those registrations that you really hadn't seen it yet, where those partnerships that you invested in last year had really started to payoff actually come through in the financials. Just curious are we seeing that now or is that still yet to come?

David DeWalt

Rocky, you want to comment on that?

Albert Pimentel

Yeah, I mean I think that there's certainly the benefit starting to show up, particularly this quarter in the relationships, I don't think you would doubt that, especially with 150% growth in trial registrations that correlates to the increase to each we now have with our new OEM partners.

But as Dave had cautioned, we're in a macro-consumer environment that is clearly unpredictable, with that fact we were able to grow the Consumer business double-digit year-over-year, I think shows the power of the model assets we put in place.

And I think we're very positive and optimistic about the continued evolution as we go forward. And by the way the Consumer model is completely ratable, so you are not going to see necessarily the consumer revenue benefit coming and yet we're building that into deferred side and well as we go out over the course of the rest of 2009.

David DeWalt

I'll just add on there, real quick John. This was one of our strongest consumer quarters we have had at least since I have been here, we've been really building the blocks up. We got a major new release coming. I leave it to that a little bit on the script with the family, family safety, family protection product. This is a nice area, it really protects social networks as well as home use for parents and families.

And then on top of that we have a major consumer release coming this summer as you know, we refresh every year. When you've got the suites like that on the real estate, we are hoping this keeps rolling through in tough economy, tough consumer confidence, but when the registrations are up, we're seeing it in our bookings, we're seeing it in the sales, eventually as the ratable model flushes through, you get more and more into the revenue of that, and hopefully we can keep taking share like we are.

Kelsey Doherty

Next question please.


Your next question comes from the line of Rob Owens with Pacific Crest.

Rob Owens - Pacific Crest

Yeah, good afternoon everyone. Dave, can you talk a little bit about your recent global reseller agreement with HP. How long you think it will take them to get spun up. And when it's going to drive an impact in the numbers? Thanks.

David DeWalt

Hey, Rob. Yeah, we're excited. Obviously, our approach has been distribution, distribution, distribution. And I called out specifically on the script just to give you a profile of what our strategy has been. Now having 50 plus OEM providers, 60 plus integration store technology through other security companies has being our SIA partnership. 12,000 channel partners, over 200 consumer partnerships.

And now we're starting to see the bigger or larger platform companies entertain distribution of McAfee's products. HP is one of those. We signed a global reseller agreement with them, primarily to drive a lot of the network security. A lot's been written HP's sort of angles with procurve and the server and storage capabilities into the enterprises. Network security is a critical part of that and we think that this is a good opportunity for the company to unite a large sales force and partner channel to help drive it.

But I will tell you Rob it's you know we're in first quarter of this just getting the program started and getting new operations deployed. But one of the big benefits we saw of Secure Computing quite honestly was that their platform was portable to HP gear. And so as part of this, many of the products like web security, email security, firewalls can run on HP appliances, HP servers, HP server blaze environments and of course for HP that drives hardware and storage and of course drives security for us.

So this is a good opportunity again early but hoping to leverage it more and more.

Kelsey Doherty

Next question please.


Your next question comes from the line of Todd Raker with Deutsche Bank.

Todd Raker - Deutsche Bank

Hey guys, I was wondering if you can dig into security briefing for a moment; and just can guys give us any sense for what the deferred revenue write-down was and the impact in the quarter both on the deferred revenue line and actually your revenue line will look like if you reverse it from pro-forma perspective?

Albert Pimentel

We've purposely don't... we only report GAAP revenues so we've just put it a bind us it's not even, I know other companies do pro-forma but we've just chosen to keep it a simple model.

Todd Raker - Deutsche Bank

If I look at Q2 on Secure Computing; can you expect that 41 million kind of run rate to starting to pick up pretty significantly or should we think of this is any baseline goes forward?

Albert Pimentel

Yeah I think it's a baseline go forward; we don't see any exceptional change to the profile as we go in the Q2.

David DeWalt

You get a little bit of increase but don't model too much more in that obviously you saw a change pretty substantially from Q4 to Q1 already as we look through it. It rolls off a little bit from the balance sheet to the income statement but not dramatically. So it takes a little bit of time to get the VSOE components to establish obviously in McAfee's model.

We talked about this when we acquired the company, a little bit higher threshold for recognizing revenue in McAfee's VSOE model than in Secure's model it just the way its done. So, we have to establish VSOE often times that takes four or five quarters to have done. So as we look at the near-term quarters it will be slightly increasing but not substantially.


Your next question comes from the line of Michael Turits with Raymond James.

Michael Turits - Raymond James

Hey guys, good evening. Well actually at the beginning of script I think here Dave gave numbers that were sales numbers or is revenue numbers. Could you review what those where and also excluding Secure? If I try to the classic bookings calculation revenue for change in deferred revenue pulling out Secure revenue and even putting in that FX deferred adjustment. I guess kind of a low-single digit bookings growth rate. Any change in deferred would help through those up and tell me why I shouldn't be concerned about low single digit bookings number?

Albert Pimentel

We don't specifically give out the bookings number. But we certainly look at revenue plus change in deferred, we had the impact of foreign exchange. We just -- we really are commenting in much more detail in that. I would say we're eluding to Dave's comments and my color the pipeline remains strong. We're very positive as we go into Q2 and I think just leave it at that.


So our next question comes from the line of Walter Prichard with Cowen and Company.

Walter Prichard - Cowen & Co.

Hi, my question is on the consumer side. You had as you alluded to pretty a strong pull through on the agreement that you saw and thus far and you signed a few in the quarter here. I am just wondering in terms of investment this year it would seem to me it could be good idea to try to spend more there and try to drive more consumer growth given the success you've had. I am wondering how you are balancing that with the desire to show some profitability and a greater profitability in cash flow this year in Consumer?

David DeWalt

Yeah. Thanks Walter this is Dave. Just real quick just to add on, I meant to do that before the question came up between the last one Michael had. We had 21% sales increase year-over-year, and that was in the script to see no sales equals bookings. So that's the way we describe it. Revenue was also 21% so basically this was a big part of our success was 20% plus growth on the booking side.

And on top of that we had double-digit growth in our core business on bookings or in sales as we describe it. So there is no single-digit growth. We had double-digit growth in the core, 21% overall bookings or sales grow and Rocky did call out in the script as well that when you start to look at FX impacts they were pretty substantial both on revenue and on bookings.

And so you could add back even more growth to both numbers if you were to look at the impact of Currency Exchange Act, for example, EMEA was one of the biggest impacts there and of course when FX adjusted you're looking more or like 8% growth with the sales numbers as opposed to what looks like may be down 1% on the revenue basis.

So, just quick question on that, and Walter do you, obviously Consumer is a real opportunity for the company. All these investments we made and some other opportunities coming downstream. There is a multitude of partnership models that we think our future for the Consumer model. We're continuing to make investments to continue to take market share. We've taken a lot of market share in the corporate; we think we can pick a lot more market share in the Consumer coming up.

We're trying to balance the investments and the growth with that of the profitability and we're very mindful of driving possibility. Hopefully this quarter, we've shown some of the that on all the models here and we want to continue to do it, but there is a balance and for us in our quest to become bigger and bigger as a security company making those investments that are critical and we're continuing to do so as we grow.

Kelsey Doherty

Next question please.


Your next question comes from the line of Brent Thill with Citi.

Brent Thill - Citigroup

Dave, the North American business is growing about 4 to 5 times faster than the international business. What investment do you still need to make in international market to help accelerate your growth there. And if you can just as a quick follow up, the number of million dollars deals doubled in the quarter year-over-year, how you're seeing that the pipeline on these big deals?

David DeWalt

Yeah, thanks Brent. That's very insightful of you actually, we've been executing very well, I kind of look at this way. When you look at the entire Americas continent, North and South America we're executing really well. We've had a tremendous market share gains from Canada, Argentina and we continue to do well there, strong management, strong execution, strong focus, good season veterans. We're still working a little bit in the international markets to be honest.

We talked about a new leader in Europe, Middle East, Africa very strong new executive has come in just got started quite honestly in January. We hired ahead of Asia Pacific a year ago was well. We're beginning to see the returns on that. International is a big market opportunity.

So despite seeing revenue not as strong as we'd like, we are beginning to see some signs in those regions that we can grow substantially and the partnerships in Consumer for example with Acer, with Toshiba with others that we've done are beginning to get reach for its consumer. We've made some good progress in the Enterprise segments and we continue to drive after it.

So on making investments with management, with people, with products, localization. I personally have been on tours in mostly emerging markets in the first quarter and next quarter trying to drive more demand. The emerging markets continue to be a good opportunity for the company. So, for us keep executing and in the America's we too and execute in the international markets. And if we can both of those really cranking, we hope we can, we should see some better results.


Our next question comes from the line of Steve Ashley by with Robert W. Baird.

Steven Ashley - Robert W. Baird

Yeah thank you. I'd actually like to go back to Sarah's initial question around cash flow, and ask specifically about PC OEM deals last year. What was... can you remind us what the dollar expenditure might have been for PC OEM deals in 2008? Thank you.

Albert Pimentel

For the whole year, Steve?

Steven Ashley - Robert W. Baird


Albert Pimentel

Let me check. I believe it was 55 million incremental year-over-year, my team has given me 55 million incremental over the prior year. And that's why we spend essentially for it. Last quarter being, I am sorry, this quarter Q1 being 15 million.

Steven Ashley - Robert W. Baird

Thank you.

Kelsey Doherty

First quarter of 2008 was 15 million, taking a year-over-year comp.

Albert Pimentel

Thank you, Kelsey. That answers you Steve.

Steven Ashley - Robert W. Baird


Kelsey Doherty

Next question please.


Your next question comes from the line of Daniel Ives with FBR Capital Markets.

Daniel Ives - FBR Capital Markets

Hi, Dave. You also have a good sense to marketing those to budgets. Is your sense that security as a percent of budget is increasing. As you showing by your results the resilience to security software across the board, what's your sense around that?

David DeWalt

Yeah Daniel, I do. If you look at almost every survey I know many of you put out excellent reviews of this. The last four or five years, security as a percentage of overall IT spend has increased. And, I think it's exacerbated here in the last six months, because security is the most prior type of a technology. And it's even grown more as a percentage in proportion of that of the overall IT spend.

There is no doubt IT spending isn't the same as it was a year ago or two years ago. But having said that, security as a percentage has grown. And I think what's important, at least from a strategy that McAfee taken on is, we are even helping companies save money in security by consolidating vendors, given them better protection at a lower cost type model. And that's proving to be a good recipe for us.

How many vendors show up at our, say hundreds and hundreds? How many companies or Fortune 500 companies have 10, 20, 30, 50 different security products, it's almost untellable to manage their operations in that way.

Now that the strong suites have shown up, the suite providers are taking more market share. We've got a strong console. I've got a great open partnering strategy now, with 60 plus vendors integrated to McAfee. And we want to look at a platform of security.

We're a good choice, because we give third-party integrations as well as a good suite ourselves. And I think in this climate, it's powerful when budgets are tough.

But security is improving. And it's helping us. And we hope the strength continues for some time. We think it will.

Kelsey Doherty

Next question, please.


Your next question comes from the line of Tony Arsela (ph) with Lumis Sales (ph).

Unidentified Analyst

Thanks. Yeah, I appreciate you guys maintaining the discipline on costs, and I think the cash flow numbers are really big statement to investors. The question basically, just revolves around revenue in the sense that you a came in about the midpoint of your guidance range. And that probably with the couple of million tailwind on Secure relative to your expectation. And I was just interested in a little balanced commentary on maybe what didn't quite go right for you in the quarter?

David DeWalt

Do you want to comment Rocky, or do you want to me take it?

Albert Pimentel

Yeah, as we pointed out, we continue to take a bit of a headwind on foreign exchange, which is unfortunate. And then, worked that the other way right at quarter end. But, that was one thing.

But I think in general, you have a transition from Q4 to Q1. We have much bigger opportunities that we see as we go through 2009. The size of deals can opportunities, deal opportunities continue to escalate, moving from the million dollar deal to the very big million dollar deals.

And I think these are all indicators to us qualitatively that though we're in tough environment that the security category continues to demonstrate its resilience and the environment. And I'll turn it back over to Dave to add more on top of that.

David DeWalt

So, Tony just a couple of points, on the spirits, humility and honesty. There is things that things don't work every quarter. And you have those. We had a lot of deals slipped through our fingers at the end of the quarter.

When you looked at the environment from January to February to March, it improved each month. But I wouldn't say, I don't think any CEO would say, March was just a great quarter for closing deals. A lot of deals weren't lost necessarily to competition. But, they lost in the quarter. That's just what happens. I mentioned a few large deals already closing.

That gives you a clue to what's going on. Other things like currency impact that Rocky mentioned, pretty big headwind there. And then, take a look at the percent of our revenue coming from the balance sheet, little higher than we had been before, 81% coming off the balance sheet. That will tell you little bit as well, what's going on just in our model.

And you take a few of those things, and the revenue ended up where the revenue was. But, when you couple that with strong sales bookings, 21% double-digit with the core business. And when you couple that with the cost avoidance controls, and Rocky's team they all put in place. I am pretty pleased with what we did in the tough quarter.

Kelsey Doherty

We'll take -- this will be one last question please.


Your final question comes from the line of Cash Rangan with Merrill Lynch.

Kash Rangan - Merrill Lynch

Hi, thanks for sneaking me in. I have a question for you Dave. As you look at Secure Computing acquisition, you've had it probably for six months now. I'm just wondering how -- what does your review and analysis of this acquisition going forward?

What are some of the surprises that you've uncovered? I think the perception historically has been that that's more of a fit for the government vertical being a proxy firewall. What are some of the surprises you're uncovering both positive, negative in terms of where you can take this product forward into different -- other verticals, different geographies?

And perhaps also, if you have the time, touch upon what it means competitively with that Check Point having their appliance business, and do you foresee any sort of competitive conflict at all between Secure and Check Point ahead? Thanks.

David DeWalt

Thanks Kash, this is Dave. So, you just gave me a two hour response like I could you and I will. But, just to shorten it little bi,. Secure Computing was everything I thought it was to be honest.

We were thinking that they had very strong point products. They have very strong point products. Their WebWasher product or secure web product (ph), very strong.

Their Mail product IML, very strong. Their Sidewinder firewall, very strong. The secure fly (ph) acquisition and application firewalls, very strong. Was I surprised that they weren't all integrated? No, they're not all integrated. We have to help integrate it.

One of the challenges we have as a company is to integrate their network security line. No surprise there. We're working hard at that. And we'll deliver that. We have a very aggressive road map to look after it.

I was very pleased and frankly, not surprised by the verticals. I wanted them to be very government oriented. I love that asset. The 25,000 installed customers. You could tell that we collected the cash well of their receivables. They've done a nice job with their products. People are paying them for their products. Their support is strong. And when you look at the Comprehensive National Cyber Security Initiatives in the United States Government, the protection of critical infrastructures, the world's governments.

This product is a trusted secure product. And when you kind of look at those components, you say, how do you leverage from your core. They give us a great opportunity to leverage from the core. So, we're optimistic that we can grow that and attack some of the vendors who have point product also.

We are optimistic that we can build an ecosystem of network security partners, as evidenced by many security partner announcements, including HP.

The more we can build an ecosystem like we have in consumer and like we had in other parts of our business around network, the stronger we'll become. So, not many surprises to be honest. The only big one was the economy. And I think we are also like coming a little bit. But, where you hit hard is high-end hardware, high-end appliances, and you get shorter contract durations.

It's going to probably hit you a little bit in that market. That's the reality. And we hope as we bottom out here and head towards a brighter future that we'll be able to grow everything.

So, with that let me say thank you to everybody for joining us. And I appreciate all the questions. And again, thank you huge to our McAfee employees out there. We really appreciate the hard work, very proud to work here. And again, thank you. And this does conclude the call.


Ladies and gentlemen, this concludes McAfee's first quarter 2009 earnings conference call. You may now disconnect.

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