McAfee Inc. Q4 2007 Earnings Call Transcript

Feb. 7.08 | About: McAfee Inc. (MFE)

McAfee Inc. (MFE) Q4 2007 Earnings Call February 7, 2008 4:30 PM ET

Executives

Kelsey Doherty - VP, Investor Relations

Dave DeWalt - President and CEO

Eric Brown - CFO and COO

Analysts

Philip Rueppel - Wachovia Securities

John DiFucci - Bear Stearns

Sarah Friar - Gold man Sachs

Daniel Ives - Friedman, Billings, Ramsey

Rob Owens - Pacific Crest

Katherine Egbert - Jefferies

Phil Winslow - Credit Suisse

Walter Pritchard - Cohen

Todd Raker - Deutsche Bank

Miranda Davidson - Raymond James

Sterling Auty - JPMorgan

Kevin Buttigieg - Stanford Group.

Operator

At this time, I would like to welcome everyone to the McAfee Q4 2007 Earnings Call. (Operator Instructions)

Thank you Ms. Doherty. You may begin your conference.

Kelsey Doherty

Thank you very much. Good afternoon and thank you for joining us. Today's conference call is being recorded and will be available for replay on McAfee's Investor Relations homepage at investor.mcafee.com.

On today's call, are our Chief Executive Officer and President, Dave DeWalt and our Chief Operating Officer and Chief Financial Officer, Eric Brown. Dave will open the call with a review of the highlights of the quarter and McAfee's 2008 imperatives; Eric will then provide details of our fourth quarter 2007 results and discuss our guidance for the first quarter and full year of 2008. Dave will close the call and then we'll take your questions.

You'll find in our press release and on the Investor Relations section of our website, a GAAP to non-GAAP reconciliation of the fourth quarter 2007 financial results discussed in this conference call. The link again 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.

This conference call, including the question-and-answer session, will contain forward-looking statements. These statements include, among others, those regarding market trends, our strategic positioning, guidance on revenue, operating income margins and earnings levels for the first quarter and full year 2008.

Expectations regarding the benefits of our recent acquisition of SafeBoot Holding, B.V., and ScanAlert Inc., the expected level and scope of security threats in future periods, expected industry growth rates of the market segments in which McAfee participates, expected new and future product introductions and the revenue opportunity associated with them. Expected integrations of products from recent acquisitions with existing McAfee product lines. Expectations regarding McAfee's business momentum, market position, business segments, statements regarding future partnership opportunities, specific growth initiatives and strategies outlined for 2008 in McAfee's business, and plans regarding future strategic acquisitions and other uses of cash by McAfee, including our recently approved stock repurchase program.

Forward-looking statements are based on management's current expectations and are subject to risks and uncertainties, including that McAfee may not achieve its planned revenue realization rate, succeed in its effort to grow its business or effectively combat the security threats of the future, build upon its technology leadership or capture market share, or benefit from its acquisition or strategic relationships as anticipated.

McAfee customers may not respond as favorably as anticipated to the company's product or technical support offerings, and the company may not satisfactorily anticipate or meet its customer's needs or expectations. The company's product and service offerings may not continue to inter-operate effectively with the newly developed operating systems. The company may experience delays in product development or the release of previously announced products. The company may choose not to deliver a previously announced product, the company may experience delays or losses in revenue resulting from outages in the integrated systems on which it is highly dependent, and further risks may arise from the review of our past, including but not limited to potential risk.

In addition, a number of operational and other factors including new product introductions, the mix of products and services sold, the size of deals closed in a quarter, the amount of revenue deferred in a quarter, the integration of acquired businesses, changes in senior management, the competition we face in the market, currency fluctuations in the greater macroeconomic environment, to name a few, may cause our revenue, growth margins, and operating results to fluctuate significantly from period to period.

We caution listeners that actual results may vary, perhaps materially, from the forward-looking statements referenced in this call including any forward-looking statements made during the question-and-answer session. We encourage listeners to review the risk factors contained in today's press release, as well as the company's filings with the Securities and Exchange Commission, including the company's 2006, 10-K and third quarter 2007 10-Q filed December 21st, 2007 for more detailed information on the risks and uncertainties related to the company and its business. Now, it is my pleasure to turn the call over to our CEO and President, Dave DeWalt.

Dave DeWalt

All right, Kelsey. Thank you very much. Good afternoon everybody and welcome to our call. Well, McAfee had a great finish to 2007. In the fourth quarter, we delivered our strongest sales execution in more than three years. It was our third consecutive quarter of accelerating growth and we had double digit growth across all non-GAAP metrics and set records across all major business segments.

For the fourth quarter of 2007, we had record revenue of $357 million, up 17% year-over-year. Our investments in North America resulted in 11%grwoth year-over-year, and this was balanced by continued growth in international, which was up 24% year-over-year.

We had record deferred of over $1 billion, up 16% year-over-year. And we also had record revenue plus change in deferred revenue of $446 million, up 22% year-over-year. We had record non-GAAP net income of $75 million, up 26% year-over-year. Record non-GAAP diluted earnings per share of $0.46. We had a record 453 deals over $100,000, a record 56 deals over $500,000 and 14 deals over $1 million.

We had growth in our total protection suite of over 112% year-over-year and by more than 55% over the third quarter of 2007. We had more than 20% growth in all of our corporate product groups, systems protection, network protection and vulnerability and risk management, demonstrating that our security risk management strategy is working.

We also had a record revenue quarter for our consumer business, including a major new consumer product release and consumer active paid subscribers reached record new levels. In addition, we closed the SafeBoot acquisition in the fourth quarter. SafeBoot had record sales in the quarter. And today, we are announcing the close of the ScanAlert acquisition and they also had a very strong fourth quarter.

And finally, we signed a record number of new partnerships across our business segments, including two major new relationships that will help drive our consumer business in 2008.

This continued strength in our execution and our demonstrated stability of demand for our products leaves us optimistic about the company's future prospects. As a result, the McAfee Board has approved $750 million stock repurchase program, committing to deliver significant stockholder value and reflecting the Board and Management's confidence that we can continue to grow the business profitability.

So, why is McAfee's performance getting stronger? The answer is simple. Well, we recognized that though there were slowdowns in other areas of the economy, security continues to be a spending priority for our customers.

According to a recent survey by industry analysts, security spending is increasing at a rate of two to three times that of overall IT spending. There are three major factors which contribute to the increase in security spending. First of all, customers are looking for more comprehensive protection from increased threats. The amount of malware has been exponentially increasing year-over-year as an explosion of devices flood the market.

Secondly, customers are facing greater compliance requirements and higher risk in cost of non compliance. Almost every major industry in every market segment, is facing increased compliance requirements such as SOX, FISMA, HIPO, Basel 2, PCI just to name a few. And thirdly, they are looking to optimize their security environment at a lower cost.

Economic pressures continue to demand a closer look at spending, playing directly in the McAfee's technical and economic advantages. I believe McAfee is ideally positioned to capitalize on these trends, as three major business imperatives for 2008. These imperatives are, first to dominate and extend our leadership in corporate and consumer Endpoint security. As I mentioned, ToPs grew a 112% year-over-year in the fourth quarter and we closed the record number of big deals setting standard in 100s of large customers.

Customers are moving from best of breed products like anti-virus to a more efficient way of buying security. They are seeking out best of sweet solutions. With our single agent, single console approach to Endpoint security management, McAfee is defining the market. Our leadership position was validated in December when Gardner group placed us at the top of the leaders quadrant of this magic quadrant for Endpoint protection platforms. This is an important third party validation that differentiates our strategy and solutions.

Two major initiatives have been crucial in our efforts to winning the competition for the Endpoint. ePolicy Orchestrator, we call it ePO and total protection for Endpoint, or ToPs. During 2007, we had significantly increased the number of ToPs nodes under ePO management.

Nodes converted were up by 200% year-over-year. As an example, customers like Pfizer are choosing McAfee over the competition because of our comprehensive Endpoint protection and integration. After extensive competitive testing, Pfizer chose to upgrade to both ToPs for the Endpoint and IntruShield for their network in the fourth quarter.

At the end of 2007, we further strengthened our Endpoint security, when we acquired SafeBoot. There is a compelling synergy between SafeBoot's encryption technology and McAfee's Endpoint capabilities, and SafeBoot has met all of our expectations so far. In fact during the fourth quarter, SafeBoot had both record sales and the highest revenue quarter in their history. We accelerated EPO integration with SafeBoot and expect to ship in this quarter of Q1.

The reason we are so focused on Endpoint Solution is that we see a significant and sustained opportunity at the end point. During 2008, more than 100 million Endpoints will come up for renewal. These end points are protected by point products today and are all candidates for conversions to the best of breed suites. So far, McAfee had seen great momentum in converting its antivirus franchise to ToPs, however less than 25% of our won customer base has upgraded to ToPs. And less than 10% of our major competitions have upgraded to their suites. This leaves a monumental opportunity for market share shifts and accelerated growth

The revenue opportunity here is compelling as well. We see a revenue uplift or average sales price increase of more than 30% on customers converting from Point products to ToPs.

We also plan to take on the competition even more. There are many opportunities to convert new customers that are in the processes of reviewing their long-term security plans, the estimated market opportunity is in the neighborhood of $3 billion

Our second major imperative is to interlock our Endpoint Solutions and secure the network perimeter. These warrants are a security risk management vision. With McAfee's next-generation IntruShield and Bladeserver appliances, we are poised to extend our growth strategy in this segment as well.

In 2007, we launched the largest and most comprehensive engineering product in our history, ePO 4.0. This product not only manages Endpoints to a single-console, single-agent model, but also forms a strategy to interlock and secure the network.

In the network area, we see a market of more than $2 billion that we can target. To pursue this, we've increased the range of appliances we offer from easy to deploy mid-market offerings to industry leading high-end intrusion prevention. In addition, we are creating virtual and multifunction appliances that will be launched in 2008.

Total Protection for the network will interlock with our ePO console and our other Endpoint products. As with our Endpoint Protection, customers are seeing the value in our network security offerings and approach. As an example, we closed a significant transaction during the fourth quarter where the customer was a major US Government agency. They chose McAfee IntruShield because of our high performance, purpose build appliances and our integration with ePO.

In addition, to our network security offerings, we've also build capabilities to address vulnerability and risk management, a market that is at least $1.6 billion market today. We are also looking to create suite that enable compliance reporting under management by ePO.

Interlocking our solutions will help us win in the market make it easier and more cost effective for our customers who have the benefit of greater protection, while satisfying their compliance requirements.

And our third major imperative is to secure new frontiers, such as securing the internet. This builds on our multiplatform strategy of PC, internet and mobile. In addition, security management for virtual machines and our growing partnership with VMware coupled with significant growth opportunities in emerging front tier market like India, China and Brazil, will help accelerate our growth even further.

We have made a series of acquisitions that position us to deliver on these new front tier imperatives. The most recent of this was ScanAlert the creator of HACKER SAFE website certification services. This protects more than 50 million e-commerce transactions per month and advises consumers which sites are safe for shopping. We plan to integrate this ScanAlert technology with McAfee's award winning safe search called SiteAdvisor. These capabilities represent a foundation for a new and robust web security platform that compliments McAfee's secure PC platform and that will enable McAfee to make the internet a safer place for millions of consumers worldwide. This capability also opens up new revenue channels as McAfee positions itself, between the search engine, e-commerce and the consumers.

Another trend we've been watching is virtualization. This is the most disruptive technology to emerge in 15 years, in my opinion, and virtualization will change the computing landscape. There already are new challenges to security in the virtual environment and in the future, we expect to find significant opportunities for McAfee.

Finally, we are looking to win in the emerging markets, emerging markets like China, Brazil and India, where the exponential growth in computing power represents significant growth opportunities for McAfee. We have strong teams in each of the regions and the go-to-market strategy is to capitalize on the power of partner distribution.

So in closing, let me say that McAfee is poised to breakout in 2008. We have the vision, we have strategy and we have the plans. We are pleased with our results for the fourth quarter and we are excited about the opportunities we see for the future of the business.

And with that, Eric will take over the call to review our quarterly performance, then I'll come back for a brief conclusion, then we'll take your questions. Eric?

Eric Brown

Thank you very much Dave, good afternoon everyone. We finished the 2007 fiscal year with a very solid fourth quarter. Our fourth quarter of 2007 revenue was better than anticipated, exceeding the high end of our revenue guidance range. While our non-GAAP EPS came in at the high-end of our projected range, fourth quarter revenue was $357 million, up 17% year-over-year. Our revenue over-achievement during the quarter was due to strong sales execution across all geographies and product segments.

Let me start by summarizing our revenues by geography. North American revenue was $186 million, a gain of 11% from last year’s fourth quarter. North America accounted for 52% of revenues in the fourth quarter of 2007.

We experienced greater growth outside of North America. Our international revenue was $171 million, up 24% year-over-year. In fact, we registered double-digit year-over-year revenue gains across all geographies. Europe, the Middle-East and Africa grew 24%. Asia Pacific grew 39%, Latin America grew 30% and Japan grew 11%. We believe that we are capturing significant market share internationally. International revenue accounted for 48% of our total revenue in the fourth quarter of 2007.

Corporate revenue in the fourth quarter was $215 million, up 24% year-over-year. Growth of corporate revenue is driven by gains in sales of Total Protections for Endpoint and IntruShield product lines.

Turning now to consumer: Revenue from our consumer business in the fourth quarter was $141 million, up 7% year-over-year. Please note that in the fourth quarter of 2007, we marked the 1-year anniversary of the change from an upfront retail model to a subscription model. As a result of this change, our year-over-year consumer revenue comparison was adversely impacted by approximately $9 million. Therefore, under normalized basis, our year-over-year consumer growth would have been approximately 13%.

In our consumer business, we have the highest ASP levels in our direct business ever, due to greater traction of our high-end suites. In fact, our highest end consumer suite Total Protection for consumer had its best quarter ever.

We signed or extended 14 partner agreements and launched 60 new or enhanced online partnerships. These new partners include Sprint, SogoInvest, which is a consumer online training firm, UOL, which is Brazil's main media and online portal, and H&R Block.

We signed a new deal with Toshiba Europe GmBH to preload McAfee consumer security on Toshiba desktops and laptops. Toshiba Europe GmBH is approximately twice the size of Toshiba US in terms of PC unit shipments.

At Dell, we will once again be the default and recommended security partner from February 2008 through April 2008 in all Dell regions except in the US. And downloads for McAfee SiteAdvisor's surpassed the $100 million mark at year end, exceeding the download goal we set at the very beginning of 2007.

Now, turning to the financial statements; during Q4 2007, we reported record revenue of $357 million. Included in the Q4 2007 results was a favorable year-over-year revenue impact due to foreign exchange of approximately $18 million.

81% of our total revenue came from deferred revenue on the balance sheet. McAfee has a highly ratable business model and this continues to provide visibility into our future revenue streams.

Full year 2007 revenue was up 14% over 2006. We closed the year with revenue of $1.31 billion. We exceeded the upper end of our revenue guidance range issued at the beginning of 2007. For the full year '07 we closed more than 39 deals over $1 million, compared with the 2006 total of 16 deals over $1 million.

Adjustments to our commission structure, revitalization of our marketing programs and improved corporate sales execution helped fuel the more than doubling of large deals during the year.

Moving down the income statement, GAAP gross profit margin for the fourth quarter were 75.8% compared with a result in Q3 '07 of 75.8% and Q4 2006 of 77.4%. Non-GAAP gross profit margins for the fourth quarter were 79%, compared with last quarter’s 78.3% and the year ago gross profit margin of 80.1%.

Total GAAP operating expenses in Q4 2007 was $237 million, up 17% from last year’s $203 million. Total operating expenses on a non-GAAP basis in Q4 2007 were $195 million. This is 12% higher than last year’s Q4 total of $175 million. GAAP sales and marketing expenses were $109 million. Sales and marketing expenses on a non-GAAP basis were $104 million or 29% of revenue.

Quarter-over-quarter non-GAAP sales and marketing expenses grew sequentially by approximately $17 million due to the following.

Additional headcount in sales, approximately 75 new individuals were added in the fourth quarter of 2007 to improve our overall capacity model. Increased marketing program spent to promote brand awareness and increased sales expenses for commissions and bonus as a result of over-achievement on the fourth quarter sales plan.

We believe that these incremental investments in sales and marketing, particularly the additional direct quota carry capacity, which was dilutive in the short-term, will produce positive returns in 2008.

GAAP research and development cost were $54 million. R&D costs on a non-GAAP basis were $51 million or 14% of revenue. Quarter-over-quarter non-GAAP R&D expenses were essentially flat. Our R&D efforts are continuing to pay off. During Q4 2007, we added 16 new patents, bringing McAfee’s total patent portfolio to 310.

We also completed a number of scheduled major product releases, including the fully integrated ePO version of DLP or data loss prevention and the next generation IntruShield platform. GAAP G&A expenses were $54 million. On a non-GAAP basis G&A expenses were $40 million or 11% of revenue, up $5 million sequentially. This is due in part to legal expenses, the acquisition of SafeBoot and ongoing indemnification cost.

Our GAAP operating income for Q4 is $33 million. These results in an operating margin for the period on a GAAP basis of 9.3%, compared with the year ago operating margin of 11%. Our operating income for Q4 on a non-GAAP basis was $87 million, leading to a non-GAAP operating margin of 24.3%, compared with 22.9% a year ago. For the full year 2007, we finished with a non-GAAP operating margin of 24.7%.

Other income for the quarter was $16.3 million compared with $19.9 million in Q3 2007 and $12.1 million in Q4 2006. The quarter-over-quarter decrease in other income was primarily related to lost interest income associated with the SafeBoot acquisition, which closed in the middle of the fourth quarter as well as lower foreign gains in Q4 compared to Q3 2007.

Total employee headcount at the end of the quarter was 4,247. This is up by 256 from the 3,991 employees that we reported at the end of Q3 2007. This largely reflects the headcount we added as a result of our acquisition of SafeBoot. The total number of employees added from SafeBoot during the quarter was 159.

Due to non-recurring adjustment to tax reserves related to the integration of SafeBoot and other provision adjustments, the company's GAAP tax-rate for the quarter was 75%. On a non-GAAP basis our tax-rate was unchanged from a year ago at 27%. Please note that on a full year basis, our GAAP tax-rate was 27%.

In Q4 2007, we reported net income on a GAAP basis of $12 million or $0.07 per share on a diluted basis. Year-over-year GAAP earnings per share decreased by 63%. This is primarily due to the higher GAAP tax rate in Q4 2007. We do not expect that our GAAP tax rate will continue at the high level experienced in Q4 2007.

For the full year, GAAP net income was $167 million or $1.02 per share on a diluted basis. This compares with our 2006 result of $137 million or $0.84 per share on a diluted basis, an increase of 21% for the full year.

Our fourth quarter net income on a non-GAAP basis was $75 million or $0.46 per share on a diluted basis. Year-over-year we increased our non-GAAP earnings per share by 24%. Full year net income on a non-GAAP basis was $287 million and non-GAAP earnings per share on diluted basis were $1.75 per share. This compares with our 2006 result of $229 million or $1.40 per share, an increase in full year earnings per share of 24%. This was above the upper end of our initial, full year 2007, non-GAAP earnings per share guidance.

Our net accounts receivable balance at the end of Q4 2007 was $232 million. DSOs were 59 days for Q4 2007, compared with 50 days in the fourth quarter of last year. The increase in DSOs was primarily due to the acquisition of SafeBoot in the fourth quarter of 2007 and an increase in the accounts receivables due to higher end sales.

We posted a record level of deferred revenue at the end of Q4 2007, it was $1.045 billion, up 16% on a year-over-year basis and also up $90 million over the third quarter of 2007. Our short-term deferred revenue increased by $65 million in the fourth quarter compared with the third quarter.

We ended the quarter with $802 million in short-term deferred revenue. Our long-term deferred revenue was also up $25 million over the third quarter and we ended the quarter at $243 million. We ended the year with cash and marketable securities of $1.319 billion, up 6% year-over-year. This represented a net decrease versus the third quarter of about $225 million. Please note that these totals reflect an outflow of cash associated with the acquisition of SafeBoot, which closed in November 2007.

In the fourth quarter 2007, we generated a total GAAP operating cash flow of $92 million. For the full year 2007 GAAP operating cash flow was $394 million. In 2006 full year, GAAP operating cash flow was $290 million. On a year-over-year basis operating cash flow increased 36%.

The cash flow summary for the fourth quarter is as follows. Starting with GAAP net income of $12 million we have $13 million for depreciation and amortization, we had $26 million of non-cash adjustments to reconcile the net income, including stock compensation and other. And we had $41 million for changes in working capital, deferred revenue, deferred taxes and other items. This is nets to a GAAP operating cash flow of approximately $92 million in the fourth quarter 2007, compared with $86 million in the fourth quarter of 2006.

In Q3 2007, operating cash flow was $115 million. Sequentially the operating cash flow for the quarter was down due to the impact of lengthening DSOs mentioned previously. The outflow of GAAP-only related operating expenses for restatement related costs and an increase in prepaid expenses. Below the operating cash flow line, we used $8 million for capital spending in the fourth quarter.

The composition of our deferred revenue balance as of the end of Q4 2007, was 62% for corporate and 38% for consumer. Additionally, as a result of the restatement we are updating the composition of our deferred revenue for Q3 2006, which was 57% for corporate and 43% consumer.

McAfee is pleased to announce that its Board of Directors has approved a $750 million stock repurchase program through July 29, 2009. The company may commence the repurchase of its stock at the conclusion of its current quarterly blackout period following today's announcement of fourth quarter 2007 financial results.

Pursuant to the terms of the repurchase program, Management’s discretion will determine the timing of stock repurchase transactions. Our repurchase activity will depend on market conditions, stock price, corporate and regulatory requirements and capital availability, among other factors.

Guidance: I would like to review our expectation for our results in the first quarter of 2008 and full year 2008. The following updated guidance replaces and supersedes any previous guidance with respect to future periods and is valid as of today only. I would like to remind listeners that guidance is based upon managements current expectations and that actual results may vary perhaps materially, from those results anticipated in this guidance. Please see the footnotes in our press release for further details.

For the first quarter of 2008, we expect revenue of between of between $345 million and $360 million. We expect our GAAP operating income margin to be 12.5% to 16.5%. We expect our operating income margin on a non-GAAP basis to be 23.5% to 25.5%. We assume a GAAP tax rate for the first quarter of 24% and a non-GAAP tax rate of 27%. We expect diluted share count to range between 165 million and 167 million shares.

Also, for the first quarter of 2008, we expect GAAP EPS between $0.24 and $0.29 per share. On a non-GAAP basis, we expect EPS between $0.42 per share and $0.47 per share on a diluted basis.

For the full year 2008, we expect revenue of between $1.425 billion and $1.525 billion. We expect our GAAP operating income margin to be 13% to 17%. We expect our operating income margin on a non-GAAP basis to be 23% to 27%. We assume a GAAP tax-rate for the full year of 24% and a non-GAAP tax rate of 27%..

We expected diluted share count to range between 167 million and 171 million shares. Also for the full year 2008, we expect GAAP EPS between $1.25 and $1.35 per share, on a non-GAAP basis, we expect EPS between $1.85 and $1.95 per share on a diluted basis.

Please note that the guidance provided does not include any accretive EPS impact for the new stock repurchase program. We are not forecasting the timing, expected average purchase price or total shares to be repurchased. We will provide updates on the program on a quarterly basis and adjust guidance based on actual, repurchased program results.

I'll now turn the call back over to Dave to conclude.

Dave DeWalt

Okay, Eric. Thank you very much. As Eric and I have outlined, Q4 was a very strong quarter, but it's just the beginning. During the past year, the company has made many structural and process improvements, many of the benefits of which we have not been able to be felt by the entire organization yet, but that impact is coming and the best news is that our execution is just going to improve.

We are focused, we are energized, we have a record Q4 results across all of our businesses, the pipeline is very strong and our visibility is improving. We closed two important acquisitions that will pay dividends in 2008 and beyond. We have the strategy and the products, we are now executing more effectively.

2008 is going to be a great year for McAfee. So with that thank you for joining us today. I'll hand it back over to Kelsey for some Q&A.

Kelsey Doherty

Great. Thanks, Dave. As the operator polls for questions, I would like to just inform you that McAfee will be presenting at the Goldman Sachs conference in Las Vegas, on Wednesday February 27, the Morgan Stanley conference in Dana Point, California on Tuesday, March 4 and the Citigroup conference in Las Vegas on Wednesday, March 19.

In addition, please mark your calendars and save the date for Investor Day 2008, which will be held Wednesday, May 7, in New York. More details will be forthcoming. Operator, you may now poll for questions. Please limit yourself to one question and answer at a time. Thanks.

Question-and-Answer Session

Operator

(Operator Instructions)

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

Philip Rueppel - Wachovia Securities

Hi and congratulations on a great on quarter.

Dave DeWalt

Hi Philip

Philip Rueppel - Wachovia Securities

Looking forward, it sounds like you are very comfortable with the macro environment on the enterprise. Could you talk a little bit more and dig a little bit more into the consumer business? Is there added uncertainty around that given consumer PC buying trends? Or is your partner program sort of buffering at? And, along those lines, have you seen any change, as you started to renew your partner contracts, in pricing or scope of those contracts? Thanks very much.

Dave DeWalt

Thanks Philip, this is Dave. I think you hit it right, the macro environment particularly in the corporate has been very strong, I mean we haven't seen anything, I pay particular attention in the script there to talk a little bit about security as percentage to IT spend. We are really seeing a magnification on the security spend here in the corporate market segments. But even turning the consumer, we've been pretty bullish on what we have been seeing there.

We had a very strong fourth quarter record revenues for the consumer business and Eric outlined a little bit of the sort of one-time affect but normalizing we had a 13% growth in a consumer segment there. We just came off a pretty strong product release too, so we just have our major product release coming off of Q3 into Q4. I do worry a little bit about the macro climates particularly consumers but generally speaking we've been doing well, we've got new partnerships and bunch of new contracts that keep us going. So, kind of, new product refresh, as well as some new partnerships keep us going.

And international has been really what's been positive for us overall. We've talked a little bit about the emerging markets and some of the growth areas we’ve been seeing kind of in those markets has being pretty solid.

So, we were focusing international, focusing on new partnerships and the new search internet areas, has been positive for us. So, we are trying to counter anything that we might see consumer wise on PC shipments with other approaches to ISPs, Telcos and other kinds of routes to markets. So, so far so good and we are hoping to improve upon what we've done already.

Eric Brown

Next question please.

Operator

Your next question comes from the line of John DiFucci with Bear Stearns.

Dave DeWalt

Hi John.

John DiFucci - Bear Stearns

Dave this quarter you had 14 deals over a $1 million and I think that was versus about 8 last year and I think this is a fourth quarter in a row where you have actually increased that number. I know it's been a focus of yours and, but I'm just trying to get a feel of how this -- I mean, you talked in your prepared remarks about converting customers from point product purchases to bigger purchases and it looks like that what's happening here.

But, just kind of get a feel for -- what it looks like going out further? Do you think this is sustainable? And is this one of the reasons why? And maybe Eric can. It is related to the fact that account receivables were higher here? Or is it because the larger deals tend to close at the end of a quarter?

Eric Brown

So I gather. This is Eric. I'll take the second part of that. Yeah, I think your observation is spot on. I think that our revenue over performance was a result of very strong closure rates in larger transactions at the tail-end of the quarter. And that indeed drive the DSO up. As to the deal environment perspective, Dave I'll let you handle that part of the question.

Dave DeWalt

Yeah, we've focused on this John. It's been an area where I found a lot of market opportunity and we have even shown it this year. We had a very steady increase. I made particular notes to talk about the 450 plus deals over $100 million; 56 deals over $500 million; 14 deals over $1million. Pretty significant effort there and most of which are becoming standardization decisions for the customer and really my heart believes that there is a window of opportunity here for our company to take some major market share from the competitors.

For many years we've seen the anti-virus franchise kind of being a point product kind of market and it's really accelerated from point products to a best of suite and frankly even with the economy conditions this is probably going to accelerate that even more as I look at cost, and compliances, drivers for why they are choosing a vendor over another.

So, when you look at our competition, you'll look at your own installed base. I mentioned we have 75% of our own install base to convert yet from our traditional spy markets over the ToPs and DLP and encryption, HIPS, SMAC those types of solutions and we will 30% increase in ASPs when we convert.

So with 75% to go 30% ASP uplifts and 90% of our competitors market still yet to convert, it's an interesting landscape in the next year. $100 million plus nodes up for renewal. Who can execute? Who can do that at the best? That's what I am focusing the sales force, particularly in the corporate, to go after is, how do we win those standardization decisions? Show our best-of-suite approach and really be focused in on winning this market share in this near-term.

I have never seen a market quite as open as this one probably is right now with our competitions. So, we'll see if we can do it.

John DiFucci - Bear Stearns

Well, thanks a lot guys. Keep it up.

Dave DeWalt

Thank you.

Operator

Your next question comes from the line of Sarah Friar with Goldman Sachs.

Sarah Friar - Gold man Sachs

Good afternoon, guys. Good quarter.

Dave DeWalt

Thank you, Sarah.

Sarah Friar - Gold man Sachs

My question revolves around SafeBoot actually, so two things, two parts. One, can you talk a little bit about the competitive environment there? Is it still very much Greenfield opportunity? Or do you typically start to see more of a Check Point or even any impact from BitLocker?

And then secondarily Eric, I wonder, if you could give us any sense for the attribution from SafeBoot, particularly just the impact on the margin line, I kind of want to understand, how dilutive it might have been?

Dave DeWalt

Will you take the first part Eric or go ahead to the second part?

Eric Brown

Okay, in terms of the impact of SafeBoot on our fourth quarter reported results Sarah and it was exactly as expected. As you recall when we announced SafeBoot back in October last year, we expected it to be $0.02 dilutive to our non-GAAP EPS, but came in spot on that, so no surprises. And the operating results were exactly in line with our expectations that SafeBoot had a very good fourth quarter 2007.

Dave DeWalt

And Sarah just on the competitive landscape comment, I think, we have again a window of opportunity here frankly, if we can exploit, I paid attention too in the script there to call out that we have now a new integration with ePO we’ve now completed and will shipping in our first quarter. ePO integration was SafeBoot this enables compliance reporting if you loose a machine, you know it is encrypted, all of the PCI level one data breach notification requirements are satisfied through this integration. We have an excellent opportunity to leverage a single management console against an agent now that is encryption and DLP base. And that's pretty significant, because when compete with a Check Point, you compete with Symantec or some other vendor here. They do not have this integration. So how do we bring our suite to data protection? We launched a new suite called ToPs for data. This a real growth opportunity for the company integrated with ePO and frankly the per node price on encryption is much higher frankly than some of the other products we've got like AV that accelerates the ASP on our total suite and adds another product that's competitive for us against our competitors. So when you look at that combo, we like our opportunity and when you look at some of other vendors even BitLockers you mentioned trying coming in as part of an OS or part of [LongHop] premier solution. It's still not able to do key management integration with the enterprise, things that we really do well with SafeBoot. So, I'm very optimistic about the opportunity. We'll see if we can again execute on it, but it looks good so far.

Kelsey Doherty

Next question…

Operator

Your next question comes from the line of Daniel Ives with Friedman, Billings, Ramsey.

Daniel Ives - Friedman, Billings, Ramsey

Good quarter! Can you talk about, just in the current environment, some of the uncertainty? Are you are using that to your benefit on the M&A front, may be on the public or private vendors? Just talked about, how you're viewing the acquisition landscape? Thanks.

Dave DeWalt

I'll take the first part, Eric, if you have any comments, feel free. You know there are always opportunities when you look at market corrections like this, but frankly we are sticking with our approach, small and medium acquisition models, which fit real well with the company. I think SafeBoot and ScanAlert have been really right into our wheel house with what we have been doing with SiteAdvisor and what wee have been doing with ToPs. I'm really looking to try to get the tuck-ins that enable us to create quick leverage in the model. And so, you know still in the security market there is a lot out there that we can leverage and we will continue to look at that as a strategy, but kind of in the small and medium kind of range. Eric any comment?

Eric Brown

Yeah and that is exactly consistent with what we have articulated probably over the last twelve to eighteen months. So we are staying the course here.

Kelsey Doherty

Next question…

Operator

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

Dave DeWalt

Hi, Rob.

Rob Owens - Pacific Crest

Couple of questions. can you talk a little bit more about SafeBoot? Potentially what's the contribution to deferred was in the quarter, given that SafeBoot's under a VSOE? And second, I was just curious around Dave's comments with virtualization and the relationships with VM were strengthening.

Any evidence of that through partnerships and any new products we should see coming down the pipe? More so to secure virtualization, not just your appliances running in the virtual environment. Thank you.

Eric Brown

Yeah, the SafeBoot contribution, again we are not going to split it out in detail, but I would say that the contribution to the differed that we inherited was not that significant. It is less than $10 million in the revenue contribution, recognized in the period by us was even less than that.

Dave DeWalt

Yeah and Rob, just to your comment on virtualization there. I am very excited about our product roadmap. We haven't announced all the technologies yet, but we have been very focused on this segment. It is a real, again market shift opportunity, frankly as you see more and more endpoint sort of capacity of both CPU and disc moving in to a virtual environment, it is creating an opportunity for security on that virtual environment. So we have a handful of products. We have focused our Foundstone Services on vulnerability assessments and sort of pen test or penetration test into VMware. Now, we’ve been partnering with VMware on that front, discovered quite a few opportunities for us from a product point of view.

We have got a nice roadmap but if you think about just everything from our ability to scan images related to any virus or images that have moved in to our virtual environment from sort of dab and test of production, you have a whole anti-virus opportunity optimized for VMware.

We have a great knack opportunity in network access controls to virtual images inside the machine. You have got ePO management, deployment of signature files in to our virtual environment and the list goes on. There is an opportunity here to port product, not just to run virtual as you mentioned, but actually to optimize and manage Hypervisor much more securely. And again it is going to be a cross to OS both Windows and Linux environments and you have got open-source vendors like XenSource and VSS from Microsoft.

It is an interesting landscape and, again, I am cautiously optimistic there. But everything I have been seeing from our customers has been screaming out, “prove to me, security is viable in a virtual environment”. How do you show me that? It starts with penetration tests and vulnerability assessments, leads in the products and this a fertile ground for anyone to take frankly and I am focused on it.

Kelsey Doherty

Next question please.

Operator

Your next question comes from the line Katherine Egbert with Jefferies.

Katherine Egbert - Jefferies

Good afternoon. Can you tell us for 2008. What you think the breakdown by revenue of percentage consumer versus corporate would be?

Eric Brown

Yes, Katherine this is Eric. We are not going to decompose it at this time. So, I would recommend you, look at the trends we've had over the last four quarter and use that as the base line for breaking out your lined items in your models.

Katherine Egbert - Jefferies

Okay. And then real quick, you said $18 million revenue tailwind in the fourth quarter. What was the foreign exchange impact on expenses?

Eric Brown

It would have been obviously bit less than that, and just to be clear, the $18 million it was the FX pickup Q4 '07 versus Q4 '06.

Katherine Egbert - Jefferies

Okay. Thanks.

Kelsey Doherty

Next question please.

Operator

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

Phil Winslow - Credit Suisse

Hi, guys great quarter.

Dave DeWalt

Thanks.

Phil Winslow with Credit Suisse

Dave, I was wondering if you could just comment on the indirect channel and just, historically, that has been sort of a trouble spot for McAfee and just what you guys have been doing to fix that? And, sort of, what progress you made during Q4? And just your expectations for '08?

Dave DeWalt

Yeah it's a great question Phil this has been an area that I have been very focused on. It's been a little bit of a challenge for McAfee in years passed. I understand it wasn't here that whole time, but our slid little bit from channel to direct back to channel. I am definitely not been confused on that model we are 100% channel. We don't take orders directly. We are focused on a separate consumer online and some areas like that, but everything corporate through channel. We have early reached out to our channel partners, nurture them.

I named Roger King who was running sales prior Mike DeCesare as our channel chief worldwide. This has helped a lot in focusing our organization specifically on the channels. Making sure we are nurturing them as strategic partners to us. And frankly we've been seeing quite a positive impact from that. Third quarter and fourth quarters really resulted in lifts for the channel organization. They are making more money. They are bringing us in more deals, across the world.

So, both consumers with partnerships on OEM preloads to partnerships with ISPs, to search, to channel distributions in the corporate, you know it's a big part of the D&A we're trying to bring into the company here and execute on. But it's been good progress so far. I wouldn't say it's perfect, but our sales force isn't confused about where we are going, and how we're doing it. And this is about execution now with our partners and being the best partner in security to them.

Eric Brown

Yeah, I would also just add on, give some anecdotal information about mid market. Year-over-year, we have more than 20% increase in new license and competitive displacement activity and ToPs continue to be a predominant driving factor in terms of this success.

Kelsey Doherty

Next question please.

Operator

Your next question comes from the line of Walter Pritchard with Cohen

Walter Pritchard - Cohen

Hi, Dave. May be you could just talk about ToPs, you said that 75% of people have not upgraded, which means that about 25% have, and I think you've talked about the number being something like 12% last quarter. Are those the right numbers, first of all? And then second of all, as you look a year from now, if that opportunity, I would assume, sort of, starts to decelerate in terms of up selling, what do you think, a year from now, becomes the big driver on the Enterprise side to replace ToPs? Which is clearly the big driver today.

Dave DeWalt

Yeah, Walter, good question. And you're right. I said that 75% of our own installed base and this being our install base with AV and kind of maybe, AV and Spy as we think of it. We've been making great progress in the conversion. We've had our product ToPs out for about 18 months or so now and we have been accelerating our acceptance and conversions, now in the past four quarter. And you could see we are up over 200% with the growth there, 112% in the fourth quarter alone.

So, this is playing out pretty well and we got a very healthy pipeline for moving conversions to the next level, SafeBoot's helped us there. But to answer your question, yeah the 25% number is kind of right, but the 12% it wasn't. We haven't disclosed what it previously was, but I was trying to show you that, still three quarters of our install base. And frankly we believe more than 90% of our competitor's install base has yet to move from a point product to a suite product.

So, to answer your question. Where is the market opportunity here? Market opportunity is not only in converting and cross-selling our install base, its converting and cross-selling our competitors install base. And we have been seeing significant uptick in our competitive displacements, worldwide, and particularly in point products in the security market and I think that's what's interesting to me is watching this best-of-breed to breadth-to-suite approach work.

And especially as economic conditions worsen if they do its really going to accelerate the suite kind of model and place right through out technical and economic advantages. So, I am looking to that, we're going to keep adding products to the endpoint, keep adding opportunities. We added DLP, we added SafeBoot Encryption, we've added SiteAdvisor and the more we can play the management/agent kind of single concept, the stronger we get.

Kelsey Doherty

Next question please.

Operator

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

Dave DeWalt

Hey Todd.

Todd Raker - Deutsche Bank

Hi, guys. Nice quarter. Two quick questions for you, first, from a guidance perspective relative to consensus, the revenue numbers are coming up, which is great but the EPS numbers are basically in mine, can you just talk about how you are thinking about incremental investments on the OpEx line going forward? And just given the indication that you'd love a stock buyback, but how aggressive current stock prices you guys anticipate being? And what's the level you are up to?

David DeWalt

Go ahead, Eric.

Eric Brown

Well, I will respond to the second half of the question first. Again we are not going to comment about what we may or may not do in the velocity of repurchase, a different price points, we just frankly don't want the market to trade ahead of us, it’s not good for a long term stockholders. In terms of our thinking about the kind of the operating model in 2008 bare in mind the acquired business of SafeBoot, we are converting that from what was a pure, “up front revenue model” to “a ratable model”. We are obviously picking up all the OpEx, and so, that has a kind of gradual affect, as you look throughout 2008. It's that kind of flips to kind of positive study state. So, there is some of that factored into our guidance and our own internal operating plan.

The second thing is that we are seeing opportunities particularly on the corporate side to make investments in marketing and unique sales carrying capacity to push the product, to push the endpoint solutions, to push the network solutions as well. And your outlook today versus six months ago is a bit different as we finalized our operating plan. We think that there is a lot of wide space out there. Dave spoke to the other fact that there is a 100 plus million nodes for renewal, probably $3 billion or in that neighbor of opportunity. And we think it probably make sense to spend a bit more to grow the top line, have that capacity, have that presence to take greater share in that multi billion dollar market opportunity.

Dave DeWalt

But, having said that, Todd, we obviously have a considerable number of programs for operating efficiencies and focusing on that area. Eric has done a tremendous job and focusing in on our gross margins, on our manufacturing processes, on our preloads on the OEM and we have a whole list of areas we focused in both top line growth and operating efficiencies. But again we see a big growth window here and it's an interesting opportunity for the company to take a lot of market share.

Kelsey Doherty

Next question please.

Operator

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

Miranda Davidson - Raymond James

Hi, this is Miranda Davidson calling for Michael..

Dave DeWalt

Hi, there.

Miranda Davidson - Raymond James

Hi, how are you doing? What has been the trend in consumer OEM revenue share payments? Have they stabilized or are they putting additional pressure on gross margins?

Dave DeWalt

Yeah, go ahead, I'll answer the first part, Eric you can add on. We have been seeing them pretty much staying the same. It depends from vendor to vendor, from theatre to theater, but generally speaking, it's been pretty stable. As you know, this is a market segment we've been in for a few years now, and certainly it's got more competitive. People understand that this is a good space to be in, the PC OEM preload. We optimized our infrastructure.

So, while you start to see competition, you start to see efficiency gains and conversions and other aspects of the business too. And generally speaking, overall, this has been staying the same and we talked a little about the ASPs going up a bit in the consumer, particularly in the enterprise area, or top end area of the consumer. So, net-net, not much change there and it's been still a positive trend for us. Do you want to add on, Eric?

Eric Brown

No, I think, the point about ASPs going up in our direct business, this is positive, that's all incremental margins, very good balance to the partnered led programs. What we're seeing again is ongoing success with the partner distribution model in international. It is really a significant driver across the board, kind of double digit gains that we have in our different geographies. So, that model was working. There is large number of partners out there and we've been disciplined and selective about how we structure these deals or decide not to enter into certain transactions. So, we'll continue to maintain that discipline.

Kelsey Doherty

Next question please.

Operator

Your next question comes from the line of Sterling Auty with JPMorgan

Sterling Auty - JPMorgan

Yeah thanks, hi guys. You talked to the operating margin kind of an investment in 2008, but talk to us about the gross margin in terms -- what are the key impacts to gross margins we should be thinking about in '08? And, kind of, what the level of gross margins we should be thinking about? Whether it is pricing pressure out there in the marketplace in some of the segments? Or just a hardware software mix?

Eric Brown

There are a couple of things. I will take the other question here. First of all it is important to note that our full year '07 non-GAAP operating income margin improved by about 120 basis points versus full year 2006 non-GAAP operating income margin. So, we are showing some improvement of leverage there. In regards to the gross profit margin, the factors impacting that level are, consumer partner, rev share deals, we have already touched upon that topic, and of course the mix of hardware and software.

We continue to think that we are going enjoy success with the network based products. We just launched in the fourth quarter of '07 the next-generation IntruShield platform. We think that we are going to sell a lot of IntruShield in 2008. And so, in any given quarter, again this could be that mix of IntruShield say to the endpoint protection license and/or maintenance components. That's going to impact the gross profit margins.

Having said that, as we look out to get a little bit more granularity on full year guidance and thinking on the gross profit margin, we are thinking about 80% plus or minus for the full year 2008. And that is reflective of a mix fairly similar to what we experienced here over the last several quarters of 2007.

Kelsey Doherty

We just have time for one more question please.

Operator

Your last question comes from the line of Kevin Buttigieg with Stanford Group.

Kevin Buttigieg - Stanford Group.

Thank you, just to go back to the increase in sales capacity that you were talking about earlier, I was wondering, if you could talk about it, in terms of what the added individuals would represent in terms of a percentage increase in your quarter carrying sales capacity? Did you complete all the hiring that you intended to in the fourth quarter? Or will more take place this year? And could you talk about what your timeframe of expected productivity is for the typical sales person?

Dave DeWalt

Good question there. I'll say, we haven't given out any of our overall capacity numbers or productivity per sales rep, but rest assure this was a very focused area for myself and Eric and Mike DeCesare who came in. We did a tremendous amount of analysis on what was the productivity per unique account manager, by theater, by product line, really analyze that and then really try to lay that over top of, what do we want to do from a growth point of view? How do we want to invest? Where do we want to invest? And we did a lot of work there.

In the fourth quarter we felt that it was a good quarter for us to load the bulk of our sales capacity into, because again we felt like we had a strong quarter, get that into that quarter, get them ramped up, get them producing for the first quarter and into the new year. So, largely we did do that, although all these things continue to grow, we'll continue to add capacity throughout the year, if we continue to see the growth opportunity. But we are all over watching the model, making sure we do it, making sure we optimize our channel in that way. And again you can get a little sense of our outlook, just by the fact that we're investing in that capacity for growth.

Dave DeWalt

Okay. Just want to say thank you to everybody joining us this afternoon and this does conclude our Q4, 2007 earnings call, and have a good day everybody. Bye.

Operator

This concludes today's conference call. You may now disconnect.

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