McAfee Q1 2010 Earnings Call Transcript

Apr.30.10 | About: McAfee Inc. (MFE)

McAfee (MFE) Q1 2010 Earnings Call April 29, 2010 4:30 PM ET

Executives

Albert Pimentel - Chief Operating Officer and Chief Financial Officer

David DeWalt - Chief Executive Officer, President and Director

Kate Scolnick - Vice President, Investor Relations

Analysts

Michael Turits - Raymond James & Associates

Philip Winslow - Crédit Suisse First Boston, Inc.

Shaul Eyal - Oppenheimer & Co. Inc.

Steven Ashley - Robert W. Baird & Co. Incorporated

Walter Pritchard - Citigroup Inc

Brent Thill - UBS Investment Bank

Katherine Egbert - Jefferies & Company, Inc.

Brad Zelnick - Macquarie Research

John DiFucci - JP Morgan Chase & Co

Philip Rueppel - Wells Fargo Securities, LLC

Todd Raker - Deutsche Bank AG

Daniel Ives - FBR Capital Markets & Co.

Rob D. Owens

Heather Bellini - UBS

Kash Rangan - BofA Merrill Lynch

Adam Holt - Morgan Stanley

Sarah Friar - Goldman Sachs Group Inc.

Operator

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 First Quarter 2010 Earnings Conference Call. [Operator Instructions] Ms. Scolnick, you may begin your conference.

Kate Scolnick

Thank you. Good afternoon, and thank you for joining us today for McAfee's First Quarter 2010 Conference Call. With me today are McAfee President and CEO, Dave DeWalt; and McAfee Chief Financial Officer and Chief Operating Officer, Rocky Pimentel.

You will find in our press release and on our Investor Relations website, a GAAP to non-GAAP reconciliation of the first quarter 2010 financial results discussed in this conference call. The link is investor.mcafee.com, 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 earning levels for the second quarter of 2010; the assumed tax rate for 2010 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 products; 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 vary, 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 February 26, 2010, for a 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.

Our guidance as to revenue, operating income margins and earning levels discussed during this conference call and the question-and-answer session replaces and supersedes any previous guidance with respect to future periods and is valid as of today only. At this time, it is my pleasure to turn the call over to Dave.

David DeWalt

Okay. Thank you, Kate. Good afternoon, and welcome, everyone. Thank you for joining us. I'm pleased to report the 17th consecutive quarter of double-digit, year-over-year revenue growth for McAfee with revenue of $503 million, up 12%; deferred revenue of $1.4 billion, up 9%; cash flow from operations hitting a record $157 million; non-GAAP earnings per diluted share of $0.60; and sales in the quarter, up 11% and up 5% on a constant-normalized basis.

In the aggregate, compared to the fourth quarter, first quarter foreign exchange headwind negatively impacted our sales by $15 million, revenue by $12 million and non-GAAP earnings per share by $0.03. Also, compared to our first quarter guidance, we saw an additional headwind of $3 million in revenue and a penny in non-GAAP earnings per share as the U.S. dollar strengthened, more than we anticipated versus the euro and British pound.

Looking at the first quarter 2010 business results for McAfee, we're especially pleased with our record Consumer business performance. Consumer revenue grew 11% year-over-year to a record $190 million, and our sales grew 17% year-over-year on a constant-normalized basis. We saw growth in all areas of the Global Consumer business, with double-digit growth in North America and more than 26% growth in our International Consumer business with Europe, Middle East and Africa achieving its third quarter in a row of greater than 20% year-over-year sales growth. These continued strong results in our Consumer segment proved that our investments in this business have been effective, and our shared risk model continues to be very profitable for both McAfee and our partners. As a result, we continue to take market share from our competitors.

Our Consumer team had many exciting accomplishments during the quarter, executing on our strategy of protecting consumers where they need it: their PCs, the Web and mobile devices. Additionally, we continue to execute on our balanced partnership model with PC OEMs, Internet service providers, telecommunications companies, financial services, retail, social networks and portals on a global basis.

During the quarter, we launched our new ISP [Internet service provider] offerings with Verizon in the U.S. and Yahoo BB in Japan. We continued our optimized programs with AT&T, generating a year-over-year 73% increase in our subscriber base with them. We also launched our new portal offerings with Mail.com and accumulated more than 170,000 Facebook fans as their exclusive security partner. We also recorded 3.2 million downloads of our securities scanner in conjunction with Adobe Systems partnership and announced a new agreement with SK Telecom in South Korea for our new Google Android mobile product.

We generated more than $22 billion McAfee SECURE trustmark impressions and released our new ToPS for Mac product to our first partners. We launched a major upgrade to our core security suites, including a new user interface and significant performance improvements that was well welcomed with great reviews, including a 4.5-star review with CNET, higher than our major competitor.

And finally, I'm excited about the future products and services we have planned this year to extend the subscription life cycle and lifetime value relationship with our consumers. These new products and services include identity protection, collaboration, transactional security and extended smart phone mobile offerings.

And now, let me provide some color on our Corporate business. We achieved record first quarter revenue on our Corporate segment of $313 million, up 13% year-over-year. There was some real bright spots in this business this quarter. Customer demand was strong, and we experienced increased contract lengths without notable impact to discounting, and we had a strong pipeline at the end of the quarter.

During the quarter, we closed 376 deals greater than $100,000 in value. Within this, we have 56 deals greater than $500,000 in value and 19 deals greater than $1 million in value. We saw 17% growth in the sales value of deals greater than $100,000 over Q1 of last year, reflecting strong business from our largest and most strategic corporate relationships, and we're starting to see the payoff of these investments we've made in the area last year. For example, our two largest deals in the quarter were in financial services and the government sector, where we have specific vertical focuses.

We saw strong demand for our network solutions in Q1, and sales were up 14% year-over-year. The focus we have put on cross selling our best-of-breed portfolio is delivering solid results. And looking ahead, there continues to be great opportunity. You've also seen us bring terrific, new network products out already this year, including our next-generation firewall, called McAfee Firewall Enterprise 8, making the industry's most secure firewall even better.

I'd also specifically like to note our success in Asia this quarter. Our Corporate sales grew 32% on a constant-normalized basis in this region, building upon the improvements we had in Europe last quarter and our foundation of strong North American sales.

In Q1, we have modest growth in our Small- and Mid-market business. Over the last few quarters, we have focused effort into consolidating our global telesales infrastructure and reinvigorating our channel programs. While it's still too early to tell, we believe these investments will better align our resources with the opportunities we see in the market.

Our Corporate results could have been even better had we not have some operational execution challenges. Frankly speaking, one $7 million deal remained in our backlog due to operation challenges and processing the transaction. On top of this, several other deals greater than $1 million, that were originally in our forecast, slipped into Q2 and have now closed. It was disappointing for me and the team not to be able to book these additional transactions. This, coupled with our currency headwinds, brought us into the low end of our overall expectations for the quarter.

That said, we're seeing an economic recovery bring spending back to more normalized levels compared to this time last year. Along with our technology peers, we believe that IT spending is improving, and the security market should continue its historic trend about pacing the overall IT market rate of growth. The return to a more stable economic environment and more stabilized budgets will benefit McAfee, and our business remains strong.

Now let me hand it over to Rocky for his additional financial detail, and then I'll come back with some comments on our Q2 outlook. Rocky?

Albert Pimentel

Thank you, Dave. Good afternoon, everyone. The first quarter of 2010 was both rewarding and challenging for McAfee, and we achieved double-digit revenue growth, solid profitability and record operating cash flow. We have worked very hard over the last few years to diversify our business model and bring leading, comprehensive security solutions to customers that span the marketplace from the enterprise to consumers around the world.

We've successfully integrated several acquisitions to expand our market opportunity, while focusing on improving our global operations and the efficiency of our infrastructure. Dave has already highlighted some areas of focus from this quarter, and I will now take you through more of the financial results.

Turning to our Q1 results, we delivered record first quarter revenue of $503 million, up 12% year-over-year. On a quarter-over-quarter basis, currency had a negative impact of $12 million. This headwind was approximately $3 million more than we originally forecasted, as the dollar strengthened through the quarter. These results include a positive year-over-year impact from currency of approximately $11 million.

On a geographic basis, McAfee achieved double-digit year-over-year growth in nearly all of our geographies. North American revenue in Q1 was $284 million, up 12% from last year and accounted for 57% of consolidated revenue. International revenue reached a record of $219 million, up 13% over last year and accounted for 43% of consolidated revenue.

As reported in U.S. dollars, revenue results in our international geographies, compared to Q1 2009, showed Europe, Middle East and Africa grew 14%; Asia Pacific grew 22%; Latin America grew 17%; and Japan grew 3%. For the first quarter, approximately 79% of total revenue came from deferred revenue off the balance sheet, and approximately 91% of first quarter revenue was recurring in nature.

Looking at our Corporate business, we delivered revenue of $313 million, up 13% year-over-year. Our Consumer business had an exceptional quarter with record revenue of $190 million, up 11% year-over-year. We also achieved record sales, which were up 17% over Q1 last year on a constant-normalized basis and reflecting the success of our diverse consumer strategy.

Turning to other highlights from the remainder of the income statement, non-GAAP gross profit margin for the first quarter was 78.1%. Year-over-year, strong product margins were offset by a higher mix from our Network business and increased infrastructure costs and investments in improving our customer support. These investments will scale with future revenues, and we're looking forward to continue to improve the quality of our customer experience and expense efficiency, which will provide improved financial performance.

Q1 non-GAAP operating income was $127 million, resulting in a non-GAAP operating margin of 25.2% within our expected margin range and despite foreign currency headwinds. An important element to achieving McAfee's long-term growth potential is expanding our worldwide footprint and realizing the benefit our investment in new markets. For example, in the quarter, we opened up our new Cork facility to expand our sales capacity in Europe, Africa and Asia. We are pleased with the progress of our infrastructure improvements and also with the quality of the teams and partners we have developed globally.

During the quarter, we also continued to make operational investments and improvements in our sales infrastructure with the migration of our consumer commerce platform to a highly scalable world-class operation structure, launching the first phase of our CRM [customer relationships management] platform and continuing the rollout of our redesigned global telesales operation. We are encouraged by the early results of these programs.

In addition, we continue to reshape our go-to-market headcount and resources to focus on those markets and customers, which provide us the best growth opportunities. As of March 31, we had 6,095 employees worldwide. Year-to-date, we have continued to increase our sales capacity, streamline our acquired company's operations and shipped resources to more cost-effective locations.

We remained focused on striking the right balance between strategic investments in our future growth and improving operational efficiencies. We will continue this strategy in Q2 and for the remainder of the year to ensure our cost structure is aligned with our double-digit growth and profitability goals and to help partially offset continued currency headwinds.

Moving on, Q1 non-GAAP net income was $96 million, and non-GAAP earnings per diluted share was $0.60, up 6% year-over-year. This includes approximately a penny of additional currency headwind than we originally forecasted. And in our Q1, our GAAP tax rate was 28%, and our non-GAAP tax rate was 24%.

Turning to a few items on the balance sheet. Net accounts receivable balance at the end of the first quarter 2010 was $231 million, compared with $294 million for the fourth quarter. Days sales outstanding were 41 days for the first quarter 2010 as a result of strong cash collections, which reflects the benefit of our improved operational process.

Prepaid expenses, deferred costs of revenue and other current assets was $273 million, up 3% quarter-over-quarter, primarily due to increases in marketing spend. Total overall deferred cost of revenue and prepaid expenses, primarily associated with revenue sharing and royalty arrangements, were $270 million and slightly down sequentially.

Deferred revenue at the end of Q1 was $1.38 billion, up 9% year-over-year. Currency fluctuations had a negative impact of $34 million quarter-over-quarter and a positive impact of $9 million on deferred revenue year-over-year.

We ended the first quarter with $1.1 billion in short-term deferred revenue, down $7 million, sequentially; long-term deferred revenue was $317 million, down $22 million, due to the negative $34 million foreign exchange impact quarter-to-quarter. The composition of our deferred revenue balance at the end of the first quarter 2010 was 65%, related to Corporate and 35% to Consumer.

Finally, I'm especially pleased that we generated record operating cash flow of $157 million, which reflects our focus on managing our balance sheet as well as the success of our Consumer business. Under our stock buyback plan, we purchased approximately 3.7 million shares for $150 million during the quarter. Ending cash and marketable securities at quarter end was $902 million. And now, I'll turn it back over to Dave for closing comments.

David DeWalt

All right. Thanks, Rocky. To summarize and move into our outlook, we remain very excited about the opportunities we see in 2010. As we started off this year, there were a number of factors driving my confidence and optimism that remain true today. Economic conditions have stabilized. IT budgets are there, and security remains a top priority. The threat environment continues to escalate. At McAfee, we saw more malware come into our labs in 2009 than in the previous years combined.

In 2009, we added nearly 17 million pieces of new malware to our collection. That's more than 45,000 pieces a day. The increasingly complex regulatory environments around the globe on issues such as data breaches, payment card information and other customer data is just another driver of security decisions we expect to continue.

The overall risk of the cyber attack is compounded at a global proliferation of network devices. My counterpart at Ericsson recently predicted that by the end of year 2020, there'll be 50 billion devices connected to the Internet. It is an incredible number of devices to manage and to protect, especially when you consider that today, there's about 5 billion IP-connected devices. Enterprises continue to make standardization decisions on security, benefiting McAfee as we offer the industry's most comprehensive, interlocked security solution across end points, network and cloud.

Looking at McAfee's business, we have the right ingredients to continue to be the leader in the market. We have a very strong product cycle coming and product portfolio to help protect customers from consumers to enterprise, from network to end point, from individual PCs to the cloud. We've got an incredible network of partners and alliances across our business, covering many key growth verticals of government, telecommunications and technology.

A few examples such as: We recently announced a network partnership with Riverbed and Brocade; the Security Innovation Alliance has now surpassed the 100 partners; and we recently announced our Cloud Secure program, a program for Software-as-a-Service (sic) [Security-as-a-Service] providers to add additional security to their cloud deployments.

I'm also sure many of you will like a quick update on our CFO search. The good news is that we're close to hiring a new executive team member, and I look forward to announcing a decision soon.

Now turning to our guidance for the second quarter of 2010. We expect to achieve revenue in the range of $500 million to $520 million, non-GAAP operating income margin in the range of 24% to 26% and non-GAAP earnings per share in a range of $0.58 to $0.62 per share on a fully diluted basis.

Our outlook for Q2 2010 is based on fully diluted share count in the range of 158 million to 160 million shares, compared to a fully diluted share count of 158 million shares in Q2 2009, and we're assuming an annual non-GAAP tax rate of 24%.

To give you a little more color on our Q2 non-GAAP guidance assumptions, we estimate $0.04 to $0.05 per share of foreign currency headwind when compared with our first quarter 2010 guidance. The continuing purchases under our stock repurchase program and a $0.01 to $0.02 per share impact related to our recent faulty signature update.

What I'm referring to in this last point is the anticipated impact associated with the signature update we had last week. While responding to a new global threat to Windows PCs that attacks critical operating system components, an error, specifically, the release of a faulty DAT file, caused some of our customer computers to be rendered inoperable. As a result, we expect some negative impact resulting from getting our customers back up and running. I'm extremely proud of how the McAfee team responded and contained this issue, and it's largely behind us today.

While we're pleased with the performance in many parts of our business, we're taking measures to correct our execution challenges, including aligning our business operations and our cost structure appropriately. We will continue this strategy in Q2 and for the remainder of the year to ensure our cost structure is aligned with our double-digit growth and profitability goals and to help offset continued currency headwinds. The estimated cost reduction to our operating model is approximately $20 million.

And in closing, I hope you had a good understanding of the opportunity McAfee has this year: stabilizing global economy, the security market poised to grow faster than overall IT; and exponential growth threats and regulations and devices.

Simply put, the opportunity of security is one that still have a lot of greenfield and is a great business to be in. I firmly believe McAfee is very competitively positioned in this business with a good diversified model, strong product portfolio, top-notch partners and strategic alliances and a very strong team. In fact in the time I've been at McAfee, I've never been more encouraged by the opportunities we see for this company.

On behalf of the executive management team, I want to thank all the employees worldwide for their hard work and continued performance. Thank you. With that, I'll turn the call back over to Kate.

Kate Scolnick

Thanks, Dave. Rachel, we're ready to open the line for questions. [Operator Instructions]

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from Adam Holt with Morgan Stanley.

Adam Holt - Morgan Stanley

Related to some of the execution, you have a $7 million deal that got caught up in the process. So I was hoping maybe you could detail what part of the process that got caught up in and whether we should expect to see that in Q2? And then more broadly, can you give us a little bit more flavor or what some of the other execution challenges that you're seeing are and how you fix them?

David DeWalt

Sure, Adam. This is Dave. So I'll take that on. Yes, we had one of our largest deals in the quarter, a $7 million deal as I mentioned. Since it came in, even a couple of weeks before the end of the quarter, it was a pretty complex deal to ship. We ended up having one component of over 25 components. One of those components didn't ship. Because of that, we couldn't take it to revenue. We couldn't even put it in deferred revenue, and hence, it's in backlog. So unfortunately, a small shipping sort of operations snafu caused us a pretty large transaction, kind of one of the culprits here in the quarter. I would tell you there is a number of other deals that came in, some of which came in just after the cutoff. Unfortunately, they also account for Q2. And again, a little disappointment at our Corporate sales execution. Our operation execution take full responsibility. We had quite a bit of business. We had plenty of business, quite honestly, to make and beat the quarter. And then coupled with currency headwind, I mean, just look those two components, really, $0.03 EPS just on that, quarter-over-quarter. When you look at just from our guide, another penny. When you look at the revenue and the bookings impact, currency in these deals slips. That's why I went out of my way, Adam, to really say we feel really good about our business. We see a lot of good pipeline. We see a great opportunity here as a company. We're expanding. We're really motivated, but it is what it is, and we're disappointed with the quarter, of course, and we'll do better as we move forward.

Operator

Your next question comes from Sarah Friar with Goldman Sachs.

Sarah Friar - Goldman Sachs Group Inc.

Similar sort of question just on the guidance. So I understand the FX impact. But to get closer to your overall EPS guidance for June quarter, I'd have to assume margin degradation as they go from March to June. And just given all the work you're been doing to streamline the operations, bringing the acquisitions in, and so on, now why would I be seeing margin degradation one quarter to the next?

David DeWalt

Sure, Sarah. So this is Dave. And Rocky, feel free to add on here, if you like. Certainly, as we look at our Q2 guidance, there was a couple of components that called out. Obviously, we have a $0.04 or $0.05 impact just on currency, recognizing the Street consensus was $0.67. Obviously, just bringing it down purely on just currency. We kind of put an exchange rate now at about $1.32 on the euro. Of course, that's really were some of the biggest impact has been, the pound and the euro as well as you know. And then of course, this faulty DAT issue has some cost related to it as well. So when you kind of look at the sort of faulty DAT plus the currency that's probably the biggest component, there's some spending and some cost issues that are in our guidance forecast. And again, as I mentioned, we think the bulk of that's behind us. And certainly, we remitted [ph] everybody. But of course, it cost to do it as well. So that's kind of the guidance. Rocky, did you want to add on?

Albert Pimentel

Yes, I mean, I think that Dave's comment captured all. Obviously, we're still in the transition on our infrastructure upgrade. There's some elements that we still pay double expense on because we are in that transition. And I think the guidance is just trying to be cautious and thoughtful to make sure that we're not positioning ourselves at the best outcome of everything.

Operator

Your next question comes from Daniel Ives with FBR.

Daniel Ives - FBR Capital Markets & Co.

You talked about the cost reduction, the $20 million. Is that something that we should think of as an indicator of how you view the environment? Or just kind of speak to reducing cost if it kind of feels more like a one-quarter issue?

David DeWalt

Sure, Daniel. This is Dave. Certainly, as we look at it, we're seeing a fairly substantial headwind to currency throughout this year. And certainly, when you look at just that, it's causing us to want to make sure we've realigned our cost model to reflect some of that. That's just one factor. I think the second factor here is we have been aggressively hiring. If you look at just last year, 2008 to 2009, we added nearly 600-plus employees to the company. We continue to hire sales capacity in through to Q1, and we're netting more sales capacity into the model. We're really trying to now build and integrate acquisitions and move those acquisition integrations a little faster if we can. If you immediately try to hold on to the accountability of your business units as long as you can as the model's going, I think it's time for us to kind of phase-two integrate some of our acquisitions, recognize some of the synergy off of that we can do, and quite honestly, we think we can even keep or raise our UAR [ph] capacity, what we call unique capacity for field, as we go through all of this. So again, a way of realigning our cost structure, making sure we're doing the right thing for both top and bottom line, and of course, there's is a dollar amount I want to show you kind of what we've acted on and what we're doing.

Operator

Your next question comes from Heather Bellini with ISI.

Heather Bellini - UBS

I was just wondering, Dave, if you could talk a little bit more about the trend you're seeing regarding consumer demand for purchasing security software for their mobile devices, like PDAs and phones and smart phones?

David DeWalt

Sure, Heather. Absolutely. I mean, I tried to say this a little bit on the script, and hopefully, it came off a little bit. Our Consumer business is rocking. We almost have a tale of two cities here, a little bit in the Q1 quarter. I couldn't say enough good things about the trends I'm seeing in our consumer model. It really up constant normalize in the nearly 20%, 11% on revenue. But you know that on a bookings basis, it's much higher. We're seeing very steady registration rates. The partnerships are working. We're just getting more partners involved, like Verizon's and AT&T is coming online, the Facebook ones, the Adobe ones, really some good optimism in the next few quarters on that. And that's still largely on PC-based devices. Some of the announcements we made there is we've just really got a brand new Macintosh product. We've got four more products in the pipeline coming. We talked a little bit about the identity area, identity protection, the collaboration areas. The nice part here is we've got new partnerships, and we got new products. And then to your point, mobile, I just think this is a massive opportunity. We just launched a brand-new product on the Android platform. And of course, this is really after the Wi-Fi access threat portion because again, this device is just like any other device. Once you're Wi-Fi enabled, you have a bunch of threats. We launched our first big pilot with the largest telecommunications company in Korea, and we hope to continue to roll that out. We're pretty optimistic the mobile market is a good one. It will take us a few quarters to really engage it, but we've got some products now, we've got some partnerships now and we're running.

Operator

Your next question comes from Michael Turits with Raymond James.

Michael Turits - Raymond James & Associates

Can you clarify for me what you said about, I think, you call it normalized sales growth constant? Exactly what is that? And how does it compare to last quarter? It sounds like there's an acceleration there. I wanted to make sure I'm kind of apples to apples. And also you are still guiding to double-digit growth for the full year?

David DeWalt

So Michael, this is Dave. Let me just make sure I answer that. So first of all, for everyone, constant normalized is essentially the way we run our business. We really try to look at a normalized, without acquisition or with acquisition on a normalized basis as well as without a currency impact. So you try and look at the true nature of your sales, and this is where we really try to call out that we've been having strong growth in our business model. Now we said 11% overall sales growth and 5% up, constant normalized. So just the true, without exchange impact and without acquisitions impact, what we've got. And of course, this has been very strong for us. In Consumer was 17% constant normalized on a pretty positive number. So that's a little bit -- and of course, when you said double digit, I alluded to this at the end that we're realigning our cost structure. And yes, we're confident we can continue double-digit growth on our business model, and we want to make from a cost point of view, we're doing what we have to do as well as driving the top line.

Operator

Your next question comes from Phil Winslow from Crédit Suisse.

Philip Winslow - Crédit Suisse First Boston, Inc.

First, with the foreign currency rates that you talked about, what exchange rate are you assuming for the euro that relates to your bottom line guidance? And then also, I wonder if you can give us a sense for what product revenue did year-over-year? You mentioned a couple of deals slipping, so I'm curious what the product line look like?

Albert Pimentel

On the foreign exchange, we're below 1.34 for Q2 with 130 in the back half of the quarter. So we feel like we're looking at things in a very conservative light. In addition, the underlying theme to our cost performance or efficiency in this back half of the year, we're expecting to continue to see a sustained weak FX environment relative to foreign currencies. And so we're aligning the costs as David talked about, assuming we continue to see like a 1.30 or a 1.31 euro rate. Now one thing that's also hindered us, particularly in the first quarter because we've actually talked about foreign exchange in almost every prior quarter, we typically have a natural hedge in our foreign currency position between revenues and expenses. Unfortunately, some of our foreign currency expenses are outside of the European theater like India and other parts of Asia. Those currencies actually strengthened, and those are only an expense source so those currencies strengthen during the quarter which was anti to the normal trend of prior quarters, and we lost our natural hedge. So we're continuing to assess if we need to adjust our foreign exchange strategies, but to the extent those currencies return to their normal behavior and perhaps the volatility of the euro corrects itself, we will see a return to our natural hedge position.

David DeWalt

And Philip, I'd just add on, just a little bit -- the guys handed me the number here. For Q2, the specific euro was 1.3287. In case you want all for decimal points and then of course for the remainder of the year, 1.30 as Rocky outlined. On the product revenue question, certainly, we alluded to a very strong network solutions area. I'm very pleased with what's been happening there in our business. The Secure Computing acquisition is beginning to get us some real energy in that higher-end enterprise. You probably saw the way I talk to this was very strong Consumer, and then when you really look at the Corporate business, it was almost another tale of two cities in there, the over 100,000 category in terms of $100,000 ASP category was quite strong. We had a good growth in that segment of the market. Number of transaction, absolute dollar amount, standardization decisions felt really good. Really where the weakness was here in this particular quarter was in some of the small, mid as well, under $100,000 had some weakness there, as well as I mentioned, a $7 million transaction and a number of others that just slipped out of our fingers into the next day. And so that's a bit of the story for you.

Operator

Your next question comes from Todd Raker with Deutsche Bank.

Todd Raker - Deutsche Bank AG

I know you're beating this to death, but if I look at Q2 guidance, on the revenue side, at the low end, you're talking a little bit sequentially down. Can you quantify kind of the revenue impact from FX especially with the deals kind of slipping into April would seem that you have a head start on the quarter? And then as you talked about mix shift there, Dave, should we assume gross margins to kind of be based off around Q1 results with Network seeing some momentum?

David DeWalt

Yes, certainly. You should infer that. The Network business is what's been the strongest for us. Obviously, that product mix movement continues to put pressure on that gross margin line as you can imagine. But having said that, we do have a good start to Q2. We feel confident, but also with just with the number of variables going on, we felt like let's give good guidance here in terms of where we're at, $0.58 to $0.62 in the non-GAAP EPS and then of course, the $500 million to $520 million on the revenue. There was a pretty substantial revenue impact. You could see what Q1 was. I call that out specifically at $11 million. I think kind of the same ranges for Q2, and you'll get a little sense of kind of what we're feeling here in terms of just FX impact.

Operator

Your next question comes from Walter Pritchard with Citigroup.

Walter Pritchard - Citigroup Inc

I'm wondering if you could talk a bit about the mid market? It sounds like you were disappointed there, and I'm wondering if you could just help parse out maybe more if there's any market or competitive issues there more broadly in the sector versus maybe just more disappointment in your own execution? And then just as a quick follow up on the $0.01 to $0.02, I just want to understand, does that actually account to revenue item but then closed down into earnings? Or are you having to just incur additional expenses to help clean up some of the issues from the past couple of weeks?

David DeWalt

Yes, to your latter question first, more cleanup and costings, couple of little variables in there, but we've modeled that at about $0.01 to $0.02. And we wanted to make sure we kind of call that out, so that you could kind of look at that as an extra-ordinary item a bit. But it does hit our non-GAAP EPS to some cost point of view. When it comes to SMB, again, it's a bunch of different things going on and in different continents. So I apologize for the complex question. When we look at our endpoint side of the SMB, we probably couldn't be happier that, that's going really well, kind of getting good strong double-digit growth to the endpoint side. And the way this keeps maturing is -- our Total Protection Suite upgrades from AB to the full suite continues to play out very nicely in that mid, small. Probably our biggest challenge is in our Appliance business, Network business into that sector as well as the rest. And then when you jump over to other theaters or other international segments, we've got our softness and really where we've got to continue to execute. Now I did try to call out. I've been working on this pretty hard for a few months as has the whole sales teams. We built a whole new telecenter Cork, Ireland that Rocky alluded to, to try to bring online a telesales group. Largely, they were just getting started in Q1. I mean, most just got hired, very little productivity and really, we took most of the cost in Q1 and very little productivity so far. But having said that, telesales getting going. Our channel program is getting going and our pretty heavy focus on that mid and small. I think we'll improve there. But again, Q1, it was not and of course, that was it. And I would say a little bit more of we have some special programs in Q4 that pumped that mid and small. That probably cost us a little dip back down in Q1. So we hope Q2 comes back strong, and we're, let's say, maniacally focused on execution here.

Operator

Your next question comes from Brad Zelnick with Macquarie.

Brad Zelnick - Macquarie Research

I was hoping you might be able to give us an idea of how the tale of two cities broke down geographically? So if we dig deeper into Consumer versus Corporate, is there anything interesting to look up there? And just the second part, Rocky, for you on cash flow, just can you remind us where we are with relative to the Dell payments and what we should think about when we model cash flow for the rest of the year?

Albert Pimentel

I think at this point, Brad, we feel all of advanced payments to Dell are handled until future deals with other OEMs or partners that -- basically, the stuff that we've put in place is behind us now. So we feel good about the opportunity to continue to execute as we go forward on that.

David DeWalt

Just on the consumer versus the corporate theater of use. Just maybe to add on to Rocky a little bit, Dell has been a fabulous partner for us and as have our other partners that we've worked on hard. Hopefully, we've seen a pretty diversified balance now as you look at that business. It really is working. We've got good strong telcos. I kind of called out that 73% increase with AT&T specifically and the subscriber base with them. That's been very solid. When you start to look at Adobe and others, it's really balancing well. We've been very encouraged with the model here and even with Dell, that profitability model, that contract we did last year, now, that's behind us, and we continue to look at other ways to do things with Dell. They've been a very strong partner and hopefully, we'll even see more from them in the future. When it comes to kind of consumer and corporate theater base, consumer wise, it was very strong internationally. And we were up substantially all over the world and that's been a good part of it. Third quarter in a row in Europe, over 20% in sales growth. Of course Asia was up even more than that, almost 60%. When you look at some of the other regions, consumer is really model's beginning to work well. And so a 26% year-over-year just in international on the consumer side. On the corporate side, it was pretty similar all around. Europe is improving, Asia Pac did quite well. I called that one out in corporate. But North America and Europe were almost the same, predominantly on slipped deals and a couple of things that we just didn't get in at the end of the quarter. So I've been pleased with Europe improving, especially from a corporate point of view. And I wouldn't call that out any differently than any other theater right now in terms of the Q1 performance. We think we've kind of right at the boat, got it going, and now we just got to really drive for growth in this coming quarter.

Operator

Our next question comes from Rob Owens with Pacific Crest.

Rob D. Owens

Dave, from execution standpoint, it seems like two out of the last three quarters has been some execution issues. Any common threads on that front? And then number two, with regard to the endpoint, I understand your commentary that you couldn't be happier with an SMB. But what about endpoint as an overall category? And are you pretty well into the tail in terms of the ToPS upgrade cycle at this point?

David DeWalt

Yes, Rob. We've had some challenges getting product out the door. Complexity of us growing into a hardware business and software business, perpetual license models, subscription license models sometimes shows its side. I don't think it changes necessarily our sales and bookings growth and some of the things that have are happening overall. I mean we continue to grow as a company pretty substantially. How much we can get in the door and recognize as revenues sometimes has its challenges. We're doing everything we can to continue to improve and build upon that, and you can imagine sometimes deals come in at the end of the quarter, not always the easiest being a hardware company trying to ship stuff at the end of the quarter when they come in with an hour to go or with a couple of hours to go. Again, trying not to make an excuse just to say that we've got work to do to mature ourselves as a strong execution company when it comes to both finance and operations. When it comes to SMB, I would tell you, we need to keep working hard at the enterprise endpoint. We've got a little bit more than 50% of our overall AV to ToPS upgrades already occurred in our install base. And you kind of look about half of them already upgrade, and you look at the enterprise, it's a much higher percent in that high end. That's why the Network business is becoming important to the company. When you look at the SMB in mid, we'd still got a lot of strong cycles in the ToPS end point side of our business, and that's why I keep calling out that remaining 50% of our installed base, we can convert. A lot of it sits in that middle-market segment. So we're going keep focusing in and make sure we've got the right product portfolios, but I think you're reading it the right way. And of course, we've got a number of new products hooked up to ePO. As you know, that's a key. We just got solid core hooked up. We've got a number of risk and compliance products now. When I say hooked up, it's integrated more fully and of course, now we've got a lot of our network products integrated into ePO, which will be a driver for us. So I still think quite honestly, the pipeline's fantastic. We've got a lot of big deals and the biggest deals we've ever seen. We've got a very motivated sales force, and we just got to put Q1 behind us and drive.

Operator

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

Steven Ashley - Robert W. Baird & Co. Incorporated

My first question would be the prior guidance, a very high-level guidance you had provided last time saying your expected double-digit revenue earnings and cash flow growth. Is that still in place or is that something that's suspended now? And secondly, after you've had the chance to maybe look at the strong surge in PC growth consumer wise in the fourth quarter, if you had any comment or insight you could make on how the initial free trial rates were for netbooks versus more traditional PCs?

David DeWalt

Just comment on prior guidance, hopefully, I answered that in the previous questions too. Just saying yes, we're focused on double-digit growth, top and bottom. In cash flow, it's a part of our goals and our strategy for this year. Certainly, we're trying to make the adjustments from a cost point of view to keep meeting those goals. I kind of alluded to that in the sort of $20 million go-forward operating model adjustments we're making as well. And this is what it takes to be an elite company and that's our strategy. When it comes to the mix on the Consumer side, we continue to see us being able to optimize and work with the netbook and the slates. And so to the new types of devices coming out, the conversion rates have been improving especially as the education improves in the notebook arena. The netbook is just like any other device, it accesses the Internet, it has your identity on it, it basically is a computing environment that essentially has the same risks and threats as anything else. Just because it's cheaper from an overall dollar amount, doesn't mean the threats are changing. So from an educational point of view, that makes us get better conversion rates, and I would tell you I didn't see really any change in terms of our conversion rates overall. If anything, they've gotten actually better, more units, more conversions, build more partners in the Consumer side.

Operator

Your next question comes from Katherine Egbert with Jefferies.

Katherine Egbert - Jefferies & Company, Inc.

How much business has slipped from Q1 into Q2 exactly? And then also, when I look at your guidance, it's roughly flat quarter-on-quarter even if you take into account the FX, which looks like a revenue deceleration. Why is it in an economic recovery with deals being pushed into Q2 are you guiding to such a deceleration when everyone else is seeing growth?

David DeWalt

I'm not going to a specific number, an exact number to what rolled over. I did as best I could to show a $7 million transaction specifically and a number of other over $1 million deals that slipped and rolled in and closed already. I would just tell you we try to take all the variables that we saw, currency impacts, the DAT impact, the rolled over business to really put forth the guidance. As Rocky said, it gives us the best opportunity to sort of under promise and over perform for the coming quarter.

Operator

Your next question comes from Philip Rueppel with Wells Fargo Securities.

Philip Rueppel - Wells Fargo Securities, LLC

Dave, you had mentioned that this year is a big new product year. You've already introduced some but are there products slated for the second half? Do those all appear to be on time? And did you sense that there's any sort of pent-up demand or there was any delayed bookings in the channel for current products that may have affected the SMB segment over the past quarter?

David DeWalt

Sure, Philip. No, the products are all in line. We did have a very large launch just this past week at Interop for our next-generation firewall. I'm particularly happy with this product. I would tell you I think of all the network product areas, the firewall is going through the biggest refresh cycle. I believe during the economic downturn over the last 18 months or so, most of the infrastructure was not refreshed. The network firewall was one of those product areas that is being refreshed. We added a heck of a lot of features to that product. In addition to be very secure, we have a realtime feed from our cloud intelligence directly to the firewall that can drop traffic and protect the whole perimeter on-the-fly dynamically. We added applications support, kind of one upping the Palo Alto networks to the world in that area and really went after a very powerful and scalable firewall model. So we're happy with that. I would tell you we also got a whole suite of consumer products coming as I mentioned. And with the distribution we have, that's all good there. A whole new ePO product coming, and then of course a bunch of products for SMB. But I would tell you again, we've got channel programs, and telesales is a bit of our culprit in the mid-market still in the SMB. We've got to mature that especially internationally, and we'll put the money in place in Q1. We just got to get the fruits now in the coming quarters.

Operator

Your next question comes from Shaul Eyal with Oppenheimer & Co.

Shaul Eyal - Oppenheimer & Co. Inc.

Rocky, in your prepared comment, you talked about gaining share on the Consumer side. I was interested in learning kind of what's your views on the Corporate side with respect to market share also understanding that it's more of a fragmented market from a product perspective? And also, Rocky, are you guys hedged on the income statement or on the balance sheet for the next quarter?

Albert Pimentel

The hedges, if we take out, it's on the balance sheet side, Shaul. We use our natural hedge or what we have in the past on the income statement side. As I mentioned, we're going to continue to assess the strategies in light of the forecast on currency to see if we need to take different actions on the income side. But up until this quarter, it's been a very effective way for us to manage the business. So we'll continue to assess that. From a market share standpoint on the enterprise, I mean, Dave probably has much to say than I do on that. But we continue as we said, ToPS is seeing a great pipeline, big deals, deals that have multiple elements and complexity which shows that we are continuing to sustain a competitive advantage in the way that we conclude from that.

Albert Pimentel

Rocky, maybe just to add on here, Shaul. I mean, this is what I look at. There's a number of dials for you to look at, but again, I break Corporate into two pieces, sort of that upper enterprise and that small, mid. When you look at the upper enterprise, 376 deals over $100,000. In the over $100,000 value market, we grew 17% over the year prior on a constant normalized basis, 17%. I'd like to see that basically, other competitor is growing at that rate. And I feel like we've taken market share. We're getting a lot of strategic corporate relationships there. The Networks business is paying off, and we've been doing okay. And then if you added to it to the large deal, the $7 million deal and a bunch of other slipped deals, that segment feels good. We're executing, we're going after it. And as I said, where the challenged area was what's in that small, mid. And then of course, we've got to continue to execute on that and go after it. But again, once we see the quarter's results from all the competitors, we'll see you had more than a 17% growth up in that very area of the market.

Operator

Your next question comes from John DiFucci with JPMorgan.

John DiFucci - JP Morgan Chase & Co

David, it sounds like the economy is getting better and your consumer efforts are working. You're still a little shy this quarter. It just seems odd to me anyway that it sounds like you had some kind of internal operational issues at this point when signing or closing sounds like a very important large deal. Also having that faulty debt issue that come along this quarter, when you combine that with Rocky leaving, at the risk of sounding a little too blunt here, why should we have confidence that things are not worse than what sounds like [indiscernible] issues that might be just related to some growing pains because you are growing, especially from a company we've come to expect a high level of execution even when others are faltering over the last few years?

David DeWalt

John, to tell you as straight as I can tell you, what I see is we continue to have finance and operations issues. When I look at the last six or eight quarters, I've had my challenges, we've grown a lot, we nearly doubled this company in the last three years, we continue to expand and grow, we've got infrastructure challenges that we continue to try to grow and scale with our business. And when you look at the number of transactions, the complexity of those transactions, again, I'm not trying to make an excuse, I'm just trying to show you that the business looks good, the economics of our market look good. We've got to do a better job execution. My primary focus, I mentioned also that we have a new CFO on his way. I hope to make some announcements soon on that, we try to really drive there. We've made a number of other improvements in our finance and operations team this past quarter with some new talent coming and augmenting the great talent we already have. But again, this is an area of just got to improve and got to keep focusing in on. And of course, to that issue, I think I aged 20 years just in four days, I'll be honest with you. It was a lot of work. We recovered very fast, and it really ended up being kind of less than 100 customers-ish that were really impacted, not a significant number in the grand scheme of things. But when you look at it, we've got to make sure we do a better job with our quality assurance and some of our efforts, and of course, we are. And we're going to continue to be a strong company, and you can trust us and we're focused.

Operator

Your next question comes Kash Rangan with Merrill Lynch.

Kash Rangan - BofA Merrill Lynch

Dave, I'm sure you've done a great job outlining the issues but I'm more curious about what are you doing internally to address the operational sales execution and the SMB stuff? I'm sure as a management team, you've come up with a pretty clear, articulate internal plan. I'm just curious what are the things that you guys are going to be working on and also curious what kind of timeframe should we expect the resolution of these issues? Could it be as soon as second quarter or should we wait until the second half of the year?

David DeWalt

Yes, Kash, this is Dave. So again, obviously, we've got a number of things underway. I alluded to these telesales centers. One of the things we did was we had outsourced our sort of renewals and telemarketing, telesales infrastructure in Europe. We brought that in-house. As we wound down our contract with one of our vendors, we brought it all in-house. So you got a little cutover of cost there that was duplicative, but the productivity wasn't all there. So Europe is just getting there. We're hoping that this coming quarter and the future quarters, we keep lumping [ph] that whole model and that improves. They are mostly target, almost 100% targeted on that mid and small. I would tell you we worked on some channels programs. We have a partner and channel talent haul roll out with a whole bunch of new programs on Monday. So we're doing some more things with our channel community and bringing them in. I would tell you we continue to mature our North American markets and continue to spend money on infrastructure to improve that segment of the market, particularly what we call ToPS service which is our in-the-cloud model for both anti-malware as well as other e-mail Web types of services for that space. I would tell you MX Logic has been a great acquisition for the company, and we continue to see very strong results from that acquisition as well as partnerships. So I feel like we've got the ingredients here: Product, channel, telesales but we've got to put them all together and get on with it and focus and I hear you.

Operator

Your next question comes from Brent Thill with UBS.

Brent Thill - UBS Investment Bank

Dave, just a follow up on the signature update. I mean there's been various reports about what percent of the days had hit. I just want to be clear in terms of what you said. So the file update only impacted 100 customers, and was that all Enterprise or was there Consumer involved there? And just as a follow up, there were some fairly large companies that were hit by this. So I guess what are you offering them in return for some of the pain that they've had to go through in this manual patch process?

David DeWalt

Brent, as best as I can tell you, we're one week into this process but of course, we kind of got a good deal on this. When we look at it, as I mentioned, think 100 customers or so, large enterprise customers that were impacted. And certainly, we've apologized to them. I've done everything we can to make sure we've brought their systems back up. We've been helping them with a variety of services and support offerings, kind of tailored and optimized for their business models. And of course, we'll always be doing the right thing for those companies, and we have already done that and we think again that this crisis can also turn into a wake-up call for us in a number of ways. When it comes to the Consumer, we offered a straight package for those consumers. It included a two-year subscription extension as well as Starbucks gift cards and a repair reimbursement kind of model, package to really say sorry for those efforts. And some of those drove some costs and hopefully, I outlined that in the guidance as well. But there wasn't very many consumers, think in the small thousands of numbers in that range out of tens of millions. And of course like I said, I think 100 plus range for customers in that area and 1,000-ish in the consumer.

Kate Scolnick

With that, I'd like to turn the call back to Dave for any closing comments.

David DeWalt

Okay, Kate, thank you. And thank you, everybody for joining us. Certainly, as I outlined, we get a sense of our business model and what we're were up to, and again, we're very focused here. And again, I would like to thank all of the employees of McAfee and all their efforts they've had in the last week, not only with the challenge we had with that but also the business. And of course, we have a great opportunity in front of us, let's seize it. Thank you.

Operator

Ladies and gentlemen, this included concludes McAfee First Quarter 2010 Earnings Conference Call. You may all disconnect.

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