McAfee Inc. Q2 2009 Earnings Call Transcript

| About: McAfee Inc. (MFE)

McAfee Inc. (MFE) Q2 2009 Earnings Call July 30, 2009 4:30 PM ET


Dave DeWalt - President & Chief Executive Officer

Rocky Pimentel - Chief Operating Officer & Chief Financial Officer

Brandie Claborn - Investor Relations


Rob Owens - Pacific Crest

David Haffner - JP Morgan

Philip Rueppel - Wells Fargo

Michael Turits - Raymond James

Walter Prichard - Cowen & Company

Manish - Morgan Stanley

Daniel Ives - FBR

Katherine Egbert - Jefferies

Steve Ashley - Robert W. Baird

Stephanie Withers - Goldman Sachs

Dormane Gyron - Weisel Partners

Richard Williams - Cross Research

Dennis - Credit Suisse

Brent Hill - Citi

Prethandar - Deutsche Bank


Good afternoon, ladies and gentlemen. My name is Rachel and I will be your conference operator today. At this time I would like to welcome everyone to the McAfee second quarter 2009 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker’s remarks there will be a question-and-answer session. (Operator instructions)

Ms. Claborn, you may begin your conference.

Brandie Claborn

Good afternoon and thank you for joining us today. This afternoon’s conference call is being recorded and will be available on our McAfee Investor Relations homepage at With me on today’s call are President and Chief Executive Officer, Dave DeWalt; and 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 and then Rocky will provide financial retails and guidance for the third quarter 2009. Dave will close and we will be pleased to take your questions.

You will find in our press release and on the Investor Relations section of our website, a GAAP to non-GAAP reconciliation of the second quarter 2009 financial results discussed in this conference call. The link is and our results are posted under quarterly results. We will post our prepared remarks to the website following the conclusion of today’s call.

During this conference call and the question-and-answer session, we will make 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 third quarter of 2009, the assumed tax rate for 2009 we used in estimating our guidance.

Our strategies and opportunities, trends in the security market, our competitive position and momentum, the anticipated benefits of our current, new and future product and the anticipated benefits of our acquisitions, 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 very perhaps materially from the forward-looking statements made during this call and the question-and-answer session this afternoon.

We encourage listeners to review the risk factors contained in today’s press release as well as the company’s filings with the SEC including the Form 10-K filed May 7, 2009, for more detailed information on the risks and uncertainties related to the company and its business. We do not undertake to update any forward-looking statements.

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

Dave DeWalt

Thank you, Brandie, good afternoon and welcome everyone, thanks for joining us today. In the second quarter 2009 our momentum continued with another exception quarter for McAfee with records set in most of the key metrics of the business.

In addition we’re pleased to announce another strong acquisition of MX Logic, the leader in cloud based security. This will help McAfee drive additional growth in the small and mid-market segments and creates the industry’s most comprehensive security of the service as a portfolio.

For the second quarter of 2009, we’re plowed to report quarterly records in revenue, deferred revenue, non-GAAP operating income and non-GAAP net income. Revenue reached a record $469 million, up 18% year-over-year, and our 14 consecutive quarter of double-digit year-over-year revenue growth.

Deferred revenue reached a record $1.31 billion, up 20% over the same period last year. Sales, which are orders received during the quarter, grew 22% year-over-year during the second quarter, even factoring in approximately 6% negative impact from foreign currency.

Excluding the impact of foreign exchange, we had a double-digit year-over-year and sequential organic growth in sales during the second quarter. Moreover, our corporate and consumer businesses delivered record revenue and our North America and international geographies also delivered record revenue.

Finally due to our sales momentum, we had a substantial increase in our product backlog, setting us up for an excellent start in the third quarter. In addition, to strong top line growth, we also had strong operating results as exemplified by record non-GAAP operating income of $125 million, up 23% year-over-year, and we have continued to leverage our cost structure.

Second quarter non-GAAP operating margin was 26.7%. This is a 100 basis point improvement compared to last year’s second quarter non-GAAP operating margins. Non-GAAP earnings per share were $0.60, up 15% year-over-year and a new record. Our balance sheet is also strong with $886 million in cash and marketable securities up $85 million quarter-over-quarter, and included a $32 million payment for our solid core systems acquisition in June.

For the six months ending June 30, 2009, McAfee generated $199 million in cash flow from operations, compared to $151 million in same period last year. Cash flow from operations for the second quarter of 2009 was $53 million. This includes increased investments in working capital, and a total of $20 million of payments to clean up prior year’s matters. Rocky will provide a little more color later.

Our results in market share gains continue to demonstrate that securities must have technology, and that McAfee is a company in the right place at the right time. Customers and partners choose McAfee for security leadership and improved returns. I’m very pleased with our corporate performance that resulted in more large deals and an increase of overall contract durations of 10% per year towards in our competition.

In the second quarter we closed 424 deals greater than $100,000 in value, including 57 deals greater than $500,000 and 28 deals valued over $1 million, matching our record for $1 million plus deals, and compared to 21 deals over $1 million a year ago, and 16 in the first quarter of this year.

Our momentum continues to accelerated, and we continue to win market share. 83 of the Fortune 100 now use McAfee technologies. These include some of the world’s largest financial institutions, telecommunications companies, governments, and technology companies. With 100 deals over $1 million in the last four quarters, this represents standardizing decisions and confidence in McAfee strategy among customers.

Turning to the mid market, this segment recorded yet another double digit year-over-year growth quarter. Our total protection suites in the mid market continue to grain popularity with 29% growth in sales over last year. Our sales outside of traditional anti- malware spaces organically grew 25% year-over-year, with our newly introduced McAfee UTM, or Unified Threat Management product.

The acquisition we announced today of MX Logic, is expected to further accelerate our growth in the mid market segment. This acquisition continues a strong of small and medium size acquisitions that allows us to broaden our product portfolio.

Today MX Logic has about 40,000 customers in the small and medium business segment. McAfee intents to extend MX Logic’s business around the world and into the large enterprise, as well as cross sell and up sell, current McAfee offerings into the MX Logic customer base. Additionally, McAfee’s future offerings will be enhanced by MX Logic’s expertise, in fast sales and support.

The acquisition of MX Logic reinforces our position as the leader in Security-as-a-Service and brings world class email and web defense including archiving and business continuity services, extending our proven expertise in providing cloud based services to our customers. MX Logic aligns with the McAfee’s vision to lead service of this via security SaaS by bringing industry leading technologies on a strong partner ecosystem.

Following completion of the proposed acquisition, McAfee will offer the most comprehensive and dedicated security portfolio in a market. This approach will give businesses in all market segments the flexibility to purchase these solutions at standalone offerings or mix and match these deployment choices to meet their exact needs.

We are paying $140 million for MX Logic, funded by cash from our balance sheet with an additional $30 million in the future, if certain performance targets are met. The acquisition is expected to close in the third quarter of 2009.

On the consumer side, the fine seasonal trends in the weak macro consumer environment, our revenue grew 13% year-over-year in the second quarter to $177 million, a new record. This is the sixth consecutive quarter, where we’ve had double digit year-over-year growth in the consumer base. It is the ninth consecutive quarter in sequential growth in consumer revenue as well.

In addition, our strategy to expand and diversify the distribution capacity of our consumer products resulted in many new strategic agreements. These include one of the largest telecommunications providers, the largest retailer, one of the largest banks in the U.S., and one of the largest and most diversified software companies.

In continuing our strategy of a balanced partner portfolio, we signed or extended 24 new partnerships, and launched 63 new or enhanced online partnerships during the quarter. We now have more than 200 partners around the world, along to take additional share on consumer market. These partnerships are prime examples of, why we continue to gain market share in the consumer space.

We have taken a portfolio approach that is balanced by both segment and geography. Furthermore, our new trial subscribers worldwide grew by more than a 140% year-over-year and our online sales of Total Protection, our high-end consumer security suite grew a 128% year-over-year. We have won approximately 100 awards for our consumer products over the last few years, including some of the most prestigious awards, showing that we have the best consumer security products.

This includes awards for one of the most exciting new products in our consumer segment launched in June called Family Protection. This timely product has been very well received by the medium and by customers looking to protect their families. It features protection elements that address the most current issues we face, such as social networking management, time limits and user reporting functionality.

Significant work has also been done in alliances and partnerships on the corporate side of our business. We now have about 70 Security Innovation Alliances, committed to helping our customers drive savings with McAfee compatible products. The Security Innovation Alliance is the only open security platform in the industry and it’s seen as a clear differentiator and advantage for McAfee by leading industry analysts.

We have over 18,000 channel partners worldwide and continue to expand our network. With MX Logic we also acquired a partner network of 1800 members. We have over 80 OEM partners in the corporate segment now, embedding McAfee security technologies to protect the offerings and solutions that they produce and sell the businesses of all sizes. With 15 new OEM design wins this year and then increasing our market share again in the corporate segment.

Turning to the product side, we continue to lead the industry. Prime examples of key product announcements that can drive our future growth are, our next generation release of ePO or ePolicy Orchestrator, this release 4.5 the major milestones for the company that allows for lower switching cost from competitors and further streamline security operations for our customers.

ePO provides real time visibility for our customers in the security of their IT environment and is the glue for our platform to provide optimized security. On the network side, we officially announced our network security business unit and new products including the McAfee Total Protection Internet Gateways, allowing customers to make one purchase to acquire Web, mail and network DLP protection to deploy the McAfee appliances. This provides industry-leading threat production with acquisition cost savings of 50% or more.

In June, we also announced upgrade to our enterprise firewall products with next generation capabilities that help customers increase network security and lower their compliance and operational costs. The products McAfee Firewall Enterprise, McAfee Firewall Enterprise Control Center and McAfee Firewall Enterprise Profiler also feature streamline management through integration with ePO and leverage McAfee Global Threat Intelligence to provide world class protection.

Later this year, we will launch an online backup product for consumers that will be offered as a standalone product and also be offered through our 2010 suite products. The standalone product will provide unlimited storage at $59.99 price point and be available in 26 languages.

In short our strategy is working. We have a growing opportunity to expand our security footprint on almost every layer of the technology stack. We have the products, the partnerships, the momentum and the macro conditions continue to be strong. The need for security is everywhere.

The threat landscape continues to elevate and regulatory compliance requirements worldwide are on the rise. Also, cyber security is a key priority for the government at the highest level, as underscored by President Barack Obama, when he presented his administration cyber security review in late May.

All of this means one thing; security is more important than ever, for protecting countries from cyber terrorism and cyber warfare, for keeping companies operating and for making consumer digital lives safe. We believe McAfee is perfectly positioned for the future and with that let me hand it over to Rocky, for the financial review of the quarter and guidance. Rocky.

Rocky Pimentel

Thank you, Dave. Good afternoon everyone. This quarter last year was my first earnings call with McAfee and I’m proud to say, we have come a long way. For the second quarter of 2009, we are pleased to report record balanced revenue growth and operating expansion, margin expansion that lead to record non-GAAP net income.

Our 2009 strategic operating imperatives include driving operational efficiency, improving our business model, improving sales productivity and the successful integration of our acquisitions, to ensure we are positioned for 2010 and beyond. Our strategic agenda includes upgrading the infrastructure.

I’m pleased to report we are on track with this initiative and it includes more than 70 key at the street projects such as our customer relationship management initiatives, extending and enhancing our dot-com and web infrastructure, improving ERP system, enhancing our supply chain processes and improving our acquisition and integration capabilities.

These are critical in preparing us to take advantage of the future growth opportunities in front of us. In addition to investing in these projects, we are investing in our people as well. We’ve added to our team with new leadership and information technology, finance operations, and supply chain management, essentially all of whom have come from other leading technology companies.

Moving on to the financials, second quarter 2009 revenue, was $469 million, up 18% year-over-year, foreign currency had a negative impact on revenue of approximately $22 million year-over-year, and was not significant sequentially. North American revenue was $265 million, an increase of 30% from last year’s second 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 numerous competitive displacements in both our network and end-point businesses. International revenue reached a record $203 million, an increase of 6% when compared to the same period last year, and accounted for 43% of the business.

As reported in US dollars, revenue in our international geographies compared to the second quarter of 2008, showed Europe, the Middle East, and Africa declined 2%, Asia-Pacific grew 18%, Latin America grew 36%, and Japan grew 20%. Excluding the impact of foreign currency, international revenue grew 17%, year-over-year, and grew double-digit in each theater worldwide as follows: Europe, Middle East and Africa grew 12%, Asia-Pacific grew 35%, Latin America grew 36%, and Japan grew 15%.

For the second quarter, approximately 79% of total revenue came from deferred revenue of the balance sheet, and as Dave mentioned, we had 28 deals over $1 million. Approximately, 50% of total revenue this quarter came from service and support, and 41% from subscriptions, with approximately 91% of total second quarter reoccurring.

We were also particularly pleased with our product revenue, which grew both year-over-year, and quarter-over-quarter, further evidence that we continue to make progress in new business growth. Product revenues include both software license sales, and hardware sales. Corporate revenue was $191 million, up 21% year-over-year. This was another record revenue quarter for our Corporate business.

Corporate highlights include another strong quarter in our mid market business as Dave noted, in addition to total protection, sales of our new flagship suites introduced at the end of last year, total protection for the secure business, and total protection for the end point essential are showing exceptional points.

We also signed the largest data protection deal on our history at more than $3 million. We continue to see major competitive displacements data protection across the world due to strength of our product offering, ease of deployment, and our sales execution.

Solidcore Systems exceeded our expectations in the second quarter. What we’re seeing in strong demand for embedded security across all geographies, driven by PCI compliance initiatives, the first phase of integration was completed ahead of schedule as Solidcore Systems was already a strategic innovation alliance partner when we acquired them. This is another benefit to the SIA program that Dave talked about.

On the Consumer side, revenue grew 13% year-over-year for the second quarter to $177 million. This was another record revenue quarter for our consumer business, and marked the 11th of 12 quarters of double digit year-over-year revenue growth. We continued to deliver above market results in the consumer space because of our diversified portfolio built on a SaaS model.

Reviewing the rest of the income statement, GAAP gross profit margin for the second quarter 2009 was 75.4% compared with the first quarter 2009 of 74.7%, and second quarter 2008 of 77.4%.

Non-GAAP gross profit margin for the second quarter was 79.7%, compared with last quarter’s 79.3% and a year ago gross profit margin of 81%. GAAP operating income for the second quarter was $56 million, resulting in a GAAP operating margin for the period of 11.9%. The year-over-year decrease in GAAP operating margin percentage is driven primarily by acquisitions.

Operating income on a non-GAAP basis for the second quarter was $125 million, resulting in a non-GAAP operating margin of 26.7%. This was our highest operating margin in more than three years and we exceeded the second quarter non-GAAP operating margin guidance we provided in April.

Excluding acquisitions, McAfee’s core non-GAAP operating margin was even higher at 29.5%. The sequential year-over-year non-GAAP operating margin expansion was the result of our cost reduction and cost avoidance initiatives we outlined for you at the beginning of the year, related to discretionary cost controls, integration synergies, related to Secure Computing, ongoing business process improvements, and disciplined management of our headcount.

As I outlined earlier, we have ongoing infrastructure projects underway that are helping to drive further efficiencies as we continue to grow. Total employee headcount at the end of the quarter, was 5,778 employees up 230 employees from the first quarter of 2009 reflecting approximately 100 employees from the solid core systems acquisition, which closed June 1, and approximately 130 new McAfee employees primarily in our sales organization.

As our second quarter results reflect, we are focused on balancing capacity requirements for future growth with the importance of continued margin improvements. Continuing GAAP, other income for the quarter was a loss of $800,000. Non-GAAP other income was a loss of $800, compared with $3 million of income in the first quarter 2009, and $13 million of other income in the second quarter 2008.

This decrease in other income reflected foreign currency losses, lost interest income associated with cash used for acquisitions and lower interest rates, as well as the interest expense from our $100 million term loan drawn down early in January as part of a credit agreement entered in to with a consortium of banks late in 2008.

For the quarter we had a GAAP tax rate of 48%, the higher GAAP tax rate is primarily due to the increase in the annual effective GAAP tax rate from Q1 to Q2 due to changes in the jurisdictional mix of income. On a non-GAAP basis, our tax rate continues to be 24%. In the second quarter of 2009, we reported net income on a GAAP basis of $29 million or $0.18 per share on a diluted basis.

Our second quarter net income on a non-GAAP basis was $95 million. Non-GAAP earnings per diluted share were $0.60 up 15% year-over-year. 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, our net accounts receivable balance at the end of the second quarter, 2009 was $266 million up more than 30%, compared with $202 million for the same period last year. Day sales outstanding were 51 days for the second quarter 2009, up five days compared to the year ago period, primarily due to the acquisition of Secure Computing in the fourth quarter of 2008 and a higher number of large transactions in the second quarter of 2009.

Deferred revenue at the end of the second quarter, 2009, was $1.31 billion up 20% year-over-year. Currency fluctuations had a negative impact of approximately $45 million year-over-year and a positive impact of approximately $29 million sequentially on deferred revenue. We ended the second quarter with $1 billion in short term deferred revenue up $22 million when compared with the first quarter 2009.

Long term deferred revenue was up $16 million in the second quarter compared to the first quarter 2009, ending the quarter at $306 million. We did experience slightly higher discounting during the quarter as a result of our growth in larger customer sales. The composition of our deferred revenue balance at the end of the second quarter of 2009, was 66% related to corporate and 34% for consumer.

Please note that this slight shift in weighting towards corporate deferred revenue compared to the year ago period is a result of the acquisition of Secure Computing, which closed in the fourth quarter of 2008.

We ended the second quarter of 2009, with cash and marketable securities of $886 million, which included a payment of $32 million related to the acquisition of Solidcore Systems, compared with $801 million at the end of the first quarter of 2009.

In the second quarter 2009, we generated total GAAP operating cash flow of $53 million, which includes increased investments in working capital, and $20 million for settlement of litigation and tax payments for prior year filings, dating back to 1998, compared with $80 million in the year ago period.

For the six-month period ended June 30, 2009, operating cash flow was $199 million, compared to $151 million in the year ago period, an increase of 32% year-over-year. Our third quarter forecast and progress to-date for operating cash flow gives us confidence in achieving our cash flow objectives. We currently expect cash flow from operations to be inline with Wall Street analysts’ expectations for the current quarter, which is currently slightly above $100 million.

Secure Computing was neutral to our second quarter results of $0.65, slightly outperforming our expectations. In the second quarter, we completed the unification of our Price Book integration of our sales order operation functions, and information technology infrastructure. Looking forward, we will continue to drive leverage of the combined sales forces. We continue to expect this acquisition to be neutral to slightly accretive to full year 2009 non-GAAP results.

Now I would like to turn to guidance. The following updated guidance replaces and supercedes any guidance with respect to future periods and as valid as of today only. I would like to remind our listeners that, guidance is based upon management’s current judgment, and that 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 third quarter of 2009, we expect a revenue range of $475 million to $495 million. We expect a GAAP operating income margin of 12% to 14%. We expect an operating income margin on a non-GAAP basis of 24% to 26%. We expect a diluted share count in the range of 159 million to 161 million shares. We assume an annual 28% GAAP tax rate, and a non-GAAP tax rate of 24% for 2009.

Also for the third quarter of 2009, we expect GAAP earnings per share of between $0.25 and $0.29 per share on a diluted basis. On a non-GAAP basis, we expect earnings per share in a range from $0.58 to $0.62 per share on a diluted basis. Our expectations regarding MX Logics contribution to our revenues for the remainder of the year post closing, is approximately $8 million to $10 million.

Please note currently, MX Logic’s revenues are primarily from monthly subscriptions resulting in modest deferred revenue. Overtime, MX Logic’s business model will evolve to more closely reflect McAfee’s model of longer term contracts. We expect this acquisition to be slightly dilutive to third quarter and full year 2009 non-GAAP results, and neutral to slightly accretive to 2010 non-GAAP results. Guidance for the third quarter of 2009 outlined this afternoon contains our current expectations regarding the impacts of the acquisition of MX Logic.

On behalf of the executive management team, we want to thank our employees for their commitment sacrifices and performance during the second quarter, because they are the ones, who deliver McAfee’s success. In addition, we would like to welcome the Solidcore team and we would like to welcome the Solidcore team, and soon the MX Logic team to McAfee, and look forward to their contributions to making McAfee the market leader in security.

Now, I would like to turn it back to Dave for closing comments.

David DeWalt

Alright, thank you, Rocky. As Rocky indicated, second quarter of 2009 was a strong quarter for McAfee. We had record set in most of the key metrics of our business. We believe security will remain our top priority, and we’re focused on becoming the undisputed leader in digital security.

We intend to continue building market share through the approach that bundles market leading solutions in the suites, integration through EPO, and creates trusted advisor status with McAfee’s security-only focus and world class service and support team.

For the remainder of 2009, our focus is on execution. Our pipeline remains strong with several large deals already closed in the third quarter and we remain on track with all of our acquisitions and expect to continue recognizing operational and sales synergies for the remainder of 2009 and we continue to prudently manage our cost structure, while investing where we see opportunity and being mindful of the environment.

So thank you for joining us this afternoon and we look forward to answering your questions and I will turn it back over to Brandie.

Brandie Claborn

Thank you, Dave and Rocky. As operator poll for questions, I would like to inform you that McAfee plans to attend the Pacific Crest Technology Forum on Tuesday, August, 11 in Vail. Operator, please poll for questions in the interest of time, please limit yourself to one question per person. Thank you.

Question-and-Answer Session


Your first question comes from Rob Owens - Pacific Crest.

Rob Owens - Pacific Crest

Dave, could you talk a little bit about the economics you are currently seeing in the consumer market increase competition for OEMs and just what that business looks like right now? Thanks.

Dave DeWalt

Sure, Rob. Absolutely, the consumer business has been a real shining star for us. As you know we’ve worked hard over the last couple of years now, really building a very diverse platform for distribution of our products. I was really pleased to talk a bit about some of the strategic partnerships today.

We had a very large telecommunications company engages in distribution of the consumer product, a very large bank, a very large software company, a very large retailer, and really for us it’s the 200-plus distribution outlets that we’re getting now that’s really created some diversification against the OEM kind of traditional PC OEM market.

This is certainly competitive market, but for us, we have really seen our model performing very well as we move that towards a very diverse portfolio. So, not a lot of change competitively there and we just say that for us we’re getting better and better at looking for new outlets of distribution and this was a good quarter for us in getting a bunch of new partnerships. Some of those are just starting and just beginning engaged in the next 90 days or so, but we’re very pleased with that.


Your next question comes from John DiFucci - JP Morgan.

David Haffner - JP Morgan

This is David Haffner on for John. Thanks for taking our questions. Just a quick, I guess two housekeeping one. I don’t know if you guys shared with us already, if so pardon me for asking if you did, but can you please let us know the top-line contribution from the Secure acquisition and Solidcore perhaps?

Just a quick follow-up, the trial subscriptions have been growing at a pretty nice clip at least the last few quarters, can you just give us an idea of how conversion rates are going there on the consumer business?

Dave DeWalt

We haven’t broken out all of the acquisitions. We did for a little while just to kind of give you a sense of how we they were doing. We were pleased with Secure Computing. We did mention that it performed a little bit better than we had planned and that we really attain the main goal there, which was also to get it just breakeven kind of neutral, slightly above for our non-GAAP per share.

So, operationally it was nice. We are able to get Secure Computing integrated a bit more into our model and we’re building a lot of pipeline, so some positive things happening there. Solidcore outperformed its plans, but we only had a stub quarter for it and we’re pleased again to really go after an extension of our market, which is in the new devices. We are able to get into a lot more platforms like ATMs, kiosk, point-of-sales, all kinds of new areas of the business, so that’s got a lot of promise too.

Then the second part, we did have a really nice 140-plus percent increase in trial registrations. That comes on the heels of two consecutive other quarters of over 100% growth there as well. We are still learning, how to get the conversions real high on some of the emerging markets, particularly on minis and some of the smaller net-book type devices, but as you can see, we had a sequential increase in growth in our consumer business quarter-over-quarter.

We landed a lot more partnerships again, and it’s paying-off pretty well. The consumer confidence is in all that grade, but having said that we’ve now had nine consecutive sequentially increasing growth quarters for our consumer business. So, its paying-off and I think we’ll keep working on that conversion number.

Rocky Pimentel

I think, sort of reflect on Dave’s comments. The strong double-digit growth in both our corporate and consumer business is a reflection that we are in fact taking market share from our competition so in a very difficult time to see that kind of strong double-digit performance I would hope would impress people that we are really doing the right things at McAfee and we expect to continue to do that. That’s a standard we set.


Your next question comes from Philip Rueppel - Wells Fargo.

Philip Rueppel - Wells Fargo

Could you give us a sense or just general environment out there the North American growth, are you starting to see some signs that people are loosening up their budgets, or it is really just a move towards security and then second of all, Dave, you mentioned cyber securities is big in terms of potential government spending have you seen that loosen up yet and is that something that is driving, secure business or both the secure and traditional business thanks.

Dave DeWalt

General environment wise, we keep seeing security as a high priority and that’s the nice part about what we’re at right now is a dedicated security company we have seen a number of verticals that are really pressing to increase their architecture and improve upon that a lot more threats out there.

We’re seeing terrorism, war fair kinds of threats, large scale crime type attacks on networks and even with President Obama coming out and saying hey, this is a priority, we’re going to protect our infrastructure it is creating awareness and while the economy is not that great for IT or for anybody in general, security seems to be a very high area, and of course when you add on top compliance.

Then you have a consolidating environment in security and give McAfee a chance to reduce costs for companies while creating higher protection is a good model and you are seeing again, a great top line result for us. I’m very pleased with it, and when you really look t at it minus foreign exchange you have a 28% growth for the company. If you take foreign exchange impact we are 22% this is good number for the company double-digit organic growth.

It just shows again we’re exciting we got double-digit out of every major segment including international and continuing to drive the top line in the bottom line for same time of course, now with governments beginning to look at other countries now as areas to partner, we’re seeing the U.K., other native nation and there’s opportunities arising in government all over the world, so we hope to keep capitalizing on it, and this is a good government quarter coming up here in Q3 and we hope to leverage it.


Your next question comes from Michael Turits - Raymond James.

Michael Turits - Raymond James

You said that MX Logics, $8 million to $10 million in contributions in the third quarter? What do you think the run rate of revenue should be going forward on a quarterly basis?

Rocky Pimentel

I think we said $8 to $10 over the remainder of the year. From the point of the expected close of the acquisition through the end of December is the $8 to $10 million.

Dave DeWalt

We pointed out too that remember, this is a bit of a ratable subscription business. A lot of it is monthly and of course, we have got to move it in to our model, so with only four or five months of close here, you’ll get a sense that $8 to $10 million, you get a little sense of the run rate there and things, but it’s a nice acquisition for us. 40,000 customers, 1800 partners and really gives us a chance to drive hard at that S&B segment we see a lot opportunity to take competition there take market share from competition and will be driving that.


Your next question comes from Walter Prichard - Cowen & Co.

Walter Prichard - Cowen & Co.

I’m wondering you guys had a pretty good margin performance in the quarter and talk about the core margins on the business approaching 30%. I’m wondering how we should think about margins going forward? Should we expect that the core margins continue to go up as that business just sort of grows naturally and then sort of a constant rate of drag here in terms of some dilution ongoing basis from things that you may buy here and in the future?

Rocky Pimentel

I mean, that’s a fair way to look at it, Walter although as we talk about we’re making investments in the infrastructure, at the same time we’re continuing to grow the business. We’re mindful that the range that we gave in the guidance, 24% to 26%, trying contemplate that there are certain things you may not control all of the timing on. So we’re just trying to be sensitive that our investments and acquisitions are all playing a part and what we can with margins on a short term basis.

Dave DeWalt

I would add in to, Walter, one of the things you probably noticed in Rocky’s script was we were able to really make the top and bottom lines here while putting a lot of investment in to the company and not just in the area of some of the working capital, but also in headcount.

We got a 130 mostly salespeople organically into the model. 230 people all total when you count solid core. So we’re going aggressively and looking at this growth opportunity. We keep seeing that. We’re very mindful of expansion on operating margin, but it’s both sides top and bottom line for us, taking market share, and we got a lot of that into the model in this quarter, and most of it came in sales capacity which is nice for the future.

Rocky Pimentel

Walter, I’ll add our short term objectives for 2009 was to get to point where hopefully we can have sustainable 25% or better operating margins. So far we’ve done a good job demonstrating that objective and then with the core McAfee operating margin exceeding 29%, hopefully people realize as we continue to successfully integrate the acquisitions. At some point perhaps we will be able to demonstrate the 30% operating margins, which are longer term targets.


Your next question comes from Manish - Morgan Stanley.

Manish - Morgan Stanley

This is Manish for Adam. I had a question on your network security business. You had launched the UTM and commenting some announcements, regarding your strategy. Could you talk about, how the initial traction was and what kind of competitive environment do you see? Then just a related question was the 100 salespeople that you are adding, are they just across the Board or are they focused on any particular segment?

Dave DeWalt

So first question on the network security, yes, we were very pleased to get a series of seven models launched early in the second quarter around unified threat management. The UTM space is largely aimed at the small and mid size companies. We had excellent results there and I called out specifically a 20% plus growth in that area. Non-anti-malware grew 26% for us.

That was a good area for us, good sign, we got good traction navigates, and really now when coupled with no one premising like a UTM and cloud based service that comes from MX Logic. We think we have a great opportunity to really penetrate the SMB and mid markets with both end point and network as well as cloud and we’ll be putting that all together and driving at this quarter as we close MX Logic as well.

Towards, your question, yes we have 130 net new people that joined the business here in the second quarter. As I mentioned, most of them were in the field or sales organizations. I didn’t breakout total sales versus feel sales, but we really saw an opportunity in emerging markets. So we went after gross sectors in the emerging areas, but it really sprinkled across both mid end enterprise as well as all the major fairs was.


Your next question comes from Daniel Ives - FBR.

Daniel Ives - FBR

Can you just talk about Europe, this quarter what you saw there and the expectations. There is a lot of potential softness that would seem your concern, but you guys are kind of going against that trend. Can you just talk and just given your experience just maybe you could frame it relative to what you’ve seen relative to previous down turns?

Dave DeWalt

At least from my perspective EMEA is still a work in progress area for McAfee. If you really looked at our results, we had very strong results internationally, 17% overall, 17% without the currency impact looking a constant currency, Europe did fine.

I think we didn’t do a lot better. We have some great new management in the company now. As you know if you followed us, we’ve been really focusing on Europe now. We’ve been improving. It’s great to see it. Great to say, you focused a good quarter. We think we can do better.

There is a lot opportunity for us to take out the regional competitors in that market and really focusing in a more growth. We’ve got great growth now at a consumer in North America. We’re starting to do well in Asia Pac, and Japan, and Latin America. Europe is the one that’s been lagging a little bit for us, and we want to do better, and I think we can. So the pipeline looks healthy there, and we hope to continue.

I think for all the same reasons I mentioned earlier the macro conditions worldwide for security are good. The threat landscape is just as high in Europe as it is in anywhere else in the world. Cyber crime, terrorism and warfare kind of elements are driving governments and verticals in Europe just like they are in the U.S. So there’s no reason why we can’t grow in Europe like we are elsewhere in the world. So our aim is to improve there.


Your next question comes from Katherine Egbert - Jefferies.

Katherine Egbert - Jefferies

It looks like large deals continued to be a bright spot to you, and it stands quite in contrast to what one of your competitors reported yesterday. Can you talk about your success in the large deals, how are you winning there? Also you mentioned you closed some larger deals already in Q3. Can you talk about that?

Dave DeWalt

Yes, we’ve had a great success and continued to drive despite a challenging environment, as we all know, we’re going to see an opportunity to consolidate vendors and provide a protection for our bigger customers and then choosing us.

I called out a lot of wins that we had, and a lot of wins that really moved into kind of product backlog and really into the third quarter’s results. So, we’re seeing it. We’re winning it across the board in large enterprises. I think they are turning to McAfee for help as a trusted advisor and, this is working.

There’s no reason we can’t keep growing that. I don’t see any signs of abating in that area. We have a very healthy pipeline of large transactions allover the world. We’ll continue to drive that and I think this is just a recipe of McAfee’s strategy right now. We have good suites.

We have good products in that suite, and we can correlate network to endpoint better than anybody else in security can do. The combination of multi-layers of defense right now is very powerful companies and our sales force is beginning to get that. They’re getting trained. They’re getting a little more mature, and we hope to keep doing better there.


Your next question comes from [Prethandar] – Deutsche Bank.

Prethandar – Deutsche Bank

I actually had a question on your trial subscriptions, I mean, what is the typical length of the subscription? How much is the pricing differential in geographies like North America versus emerging markets?

Dave DeWalt

Yes, so the length of the trial subscription. It’s going to take me a while to explain all of that, but I will just tell you that typically with our different distribution partners, it varies.

Sometimes we give a 30-day, or 60-day trial, sometimes it’s 90, sometimes it even be one year depending on how the partnership is and the way we design it. So it really does vary. The real trick to really growing that business is to be good at conversions, and really be good at being able to market to them, being able to drive successful conversions.

As you can see we have a big pipeline of registered trials, and that’s really where we’ve been performing well the last three quarters, 100-plus percent growth in registered trials, and then we got to keep getting good at converting those trials now. It’s going to like having a big pipeline you have to be able to convert it.

We’re seeing a steady increase in conversions there as evidenced by our Consumer business growth, but again, we feel like we got a good opportunity. Our goal here is to keep diversifying that capacity, and making sure we ship on as many devices as we can, through as many downloads as possible and beat our competition.


Your next question comes from Steve Ashley - Robert W. Baird.

Steve Ashley - Robert W. Baird

Actually of two product questions, first of all ePO 4.5 shift, you talked about the ease of migration. Does it create any other cross sale or incremental revenue opportunities that wasn’t available in the predecessor or ePO product, and my second question is around the new tops for internet gateway. Just maybe you can talk about how you are pricing and going to market there? What points you’re trying to attack in terms of the end market, and just some color around that. Thank you.

Dave DeWalt

Sure, Steve. ePO 4.5, major release for us. For those not familiar with ePO, this is essentially our security console. Our security console is what we can use to manage operations for security across a number of layers. This is a particularly important release, because it really enabled us to integrate a number of the acquisition products as well as some of the organically developed products into the ePO framework. I think you really hit it on the key.

The key there is, when we get integration, we have cross-sell opportunity. We’ve got a much nicer integration of our data loss protection prevention products. We saw some nice bigger deals starting to show up. Rocky mentioned a script of $3 million transaction. This is what starts to give us leverage there. On top of that, we have a very nice integration of our Risk and Compliance products now in the ePO.

We’re now working hard on Solidcore, getting that integrated, but 4.5 gave us a much better framework for which we can integrate including now, our Network Security products and you alluded to the tops for internet gateway. The same strategy deployed on the end point is deployed on the network side. We now have a Web, mail and data loss prevention combination. That is very powerful.

If you followed us with Secure, we gained almost 30,000 customers of both Web and mail. We now are combining Web and mail with data loss prevention that can provide strong economics for our customers, as well as help us and usurp some of the competition in the market for us. Again, that’s starting to really play out well. We really only shipped it and packaged it just in the second quarter, but we’re hoping the second half of the year can really tell a tail there.


Your next question comes from Sarah Friar - Goldman Sachs.

Stephanie Withers - Goldman Sachs

This is Stephanie Withers on for Sarah. Just a question on cash flow, it looks like for the past kind of several quarters, we’ve seen cash flow growth lag earnings growth. I’m just curious, if you could give us insight into kind of what gives you confidence into the next quarter you can be more inline with the analyst expectations.

Rocky Pimentel

I think I have given guidance on how people should think about cash flow. Obviously, depending on the timing of transactions and the growth of our business, it’s going to affect cash flow each quarter, because obviously you are investing in accounts receivable principally and we’re watching that very closely, the quality of earnings are there. The cash flow ultimately or the flow of funds from those transactions ultimately shows up.

As a result of the growth of our business, we obviously have different characteristics on a quarter-to-quarter basis. So, I don’t think we have any concerns about being able to deliver on our objective and cash flow and satisfy people’s expectations. We continue to put in place mechanics to do a better job of that, but because we’re growing double-digit globally, it will change our profile and working capital.

As I said in the comments, so far the indicators for this quarter based on July results are very positive and we’re very focused on making sure that’s another metric that we deliver.

Dave DeWalt

Stephanie I would just add-on to it, Rocky called this out, but this is important when you look at the first half of 2009 versus the first half of 2008, we’re up 32% on cash flow. So, 32% is tracking towards some of our other metrics and it’s a longer period to look at cash flow sometimes and just wanted to point that out 32% growth first half versus first half is the right way to look at our business.

There is some timing anomalies that go in there. July looks good so far, this is something that will continue to get some real good traction in growth.


Your next question comes from Tim Klasell - Weisel Partners.

Dormane Gyron - Weisel Partners

Hi this is [Dormane Gyron] for Tim. Just a couple of quick questions; one is you are adding quite a few sales and to go after the emerging market opportunity. How are you balancing that with the channel and how to expand more to the mid-market?

Dave DeWalt

Certainly the way we look at it is, channels everything to the company and we do a high-touch model wherever possible, but channel is all of our model. We look at increasing our partner revenues at a faster rate than anything else. We mostly do channel business with the exception of a little consumer. All of our business is channel oriented. So, everything emerging market related, the more mature markets are channel based.

So, when we say, we’re adding sales and field capacity, some comes in the form of working with the partner, some comes in the for really high touch salespeople just driving at accounts than fulfilling and partnering with partners, but our whole model here is to improve upon that and we’ve had a lot of success in taking channel partners away from our competition and continuing to do that in just 130 more personnel and that direction will just help drive more momentum there.


Your next question comes from Richard Williams - Cross Research.

Richard Williams - Cross Research

Do you guys disclose percentage of consumer online sales as the total of consumer?

Dave DeWalt

No, we haven’t given that, Rocky go ahead.

Rocky Pimentel

We don’t give that as a metric, but it’s very substantial, so.

Dave DeWalt

Yes, we haven’t been releasing that, but it’s a very high number as you know with all of our electronic distribution models, it’s a percentage.

Rocky Pimentel

We defended as substantially most of our consumer sales effectively our online type sales.


Your next question comes from Dennis - Credit Suisse.

Dennis - Credit Suisse

This is Dennis for Phil Winslow. Can you describe what you saw in the quarter in the corporate environment in terms of pricing and competitive landscape? Maybe more details on the discounting you mentioned and also if you are seeing any changes in renewal rates?

Dave DeWalt

So in the corporate segment, we had a slight increase in discounting, and I want to emphasize the work slight. Quarter-to-quarter it can change a little bit depending on the number of big deals. If you remember the two comps we’re up against here was essentially 16 deals, last quarter over $1 million, and 21 deals a year ago same period. So when you really look at it, that’s how we’re comparing it. Now we have 28 deals over $1 million.

So the large deal number can skew it slightly upward in a discounting. We’ve really didn’t see much and I really wanted to call out. Most importantly, we actually saw a 10% increase in our contract durations.

So I think more customers are going with McAfee, standardizing our McAfee and our contracts are getting longer. So those are good signs when you are looking at the business, and I know some of the competition had some shorter duration there and some increase discounting. So again, that’s the signs you’re looking for.

Rocky Pimentel

I would add, Dennis. The sale of our deals over $1 million continues to grow. So it just shows the power of our broad portfolio sales. We’ve always say that part of our leverage or our competitive advantage would be being able to sell a very broad portfolio. I think it’s very positive is in light of our ability to do the big deals and to provide the discounting. We continue to preserve our gross margins and our operating margins, so we really good about our pricing framework right now.


Your final question comes from Brent Hill - Citi.

Brent Hill - Citi

Just relative to the closer against your pipeline, can you just characterize what you’re seeing now versus maybe nine months ago? How you expect that to fair in the second half of this year?

Dave DeWalt

Certainly nine months ago, I think we had really in that fourth quarter. We had a pretty challenging environment just because a lot of the corporate area was kind of nervous about what was coming, as you kind of got the news of the economic conditions deteriorating. I really saw almost every month getting a little bit better. Now I don’t really look like a V-shaped recovery from a year ago, but it’s incrementally improving. The outlook and visibility looks a little bit better.

We’re getting our hands around really close processes. I think this is a tribute to our sales force is, we can’t understand the close process. I know how many people need to sign off of that process. You got to understand the value of your business, and really be diligent about that. So we’re getting better and better about that. We saw close rates to be very strong in a quarter.

As I mentioned, we’ve closed several large deals already. We’re continuing to see that kind of opportunity as a company, and I think [Multiple Speaker] usually does with the government quarter, as well as the fourth quarter, and I’m hoping question even do better than we did in the first half.

Again, I want to thank everybody for joining us today, and appreciate your time. This does conclude McAfee’s second quarter financial results. Thanks for joining us.


Ladies and gentlemen, this concludes McAfee second quarter 2009 earnings conference call. You may all disconnect.

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