McAfee CEO Discusses Q3 2010 Results - Earnings Call Transcript

| About: McAfee Inc. (MFE)

McAfee (MFE) Q3 2010 Earnings Call October 28, 2010 4:30 PM ET


Kate Scolnick - Vice President, Investor Relations

David DeWalt - Chief Executive Officer, President and Director

Jonathan Chadwick - Chief Financial Officer


Ryan Lee

Brent Thill - UBS Investment Bank

Sarah Friar - Goldman Sachs Group Inc.

Michael Turits - Raymond James & Associates


Good afternoon, ladies and gentlemen. My name is Via, and I will be your conference operator today. At this time, I would like to welcome everyone to the McAfee Third Quarter 2010 Earnings Conference Call. [Operator Instructions] Ms. Scolnick, you may begin your conference, Ma'am.

Kate Scolnick

Good afternoon and thank you for joining us today for McAfee's third quarter 2010 conference call. With me today are McAfee President and Chief Executive Officer, Dave DeWalt; and McAfee Chief Financial Officer, Jonathan Chadwick. We are providing a slide presentation during today's call, and we will post these slides along with our prepared remarks to the website following the conclusion of the call. Also you will find in our press release in our Investor Relations website a GAAP to non-GAAP reconciliation of the third quarter 2010 financial results as discussed during this call. And for your reference, we will be providing a rule of thumb for our foreign exchange assumptions during today's call and this will also be posted to our website.

During this conference call and the question-and-answer session, we will be making forward-looking statements regarding future events and the future performance of the company, including our guidance on revenue; operating income margins; earnings levels and operating cash flow for the fourth quarter of 2010; the assumed tax rate for 2010 we used in estimating our guidance; the timing and anticipated benefits from our acquisition by Intel; our strategies and opportunities; trends in the security market and in the macroeconomic conditions for IT; our competitive position; 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 the call and 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 SEC, including our Form 10-Q filed August 6, 2010, for more detailed information on the risks and uncertainties related to the company and its business. We do not undertake to update any forward-looking statements.

Our guidance as to revenue, operating income margins, earning levels and operating cash flow 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 DeWalt.

David DeWalt

Okay, thank you, Kate. It's my pleasure to be with you today and report outstanding quarterly results for McAfee. Against the backdrop of a historic transition for McAfee that could have cost significant disruption, our third quarter results beat records on several metrics. These excellent results are a testament to our strategy and the confidence of our customers, partners and employees in the proposed combination of McAfee and Intel. I'd like to thank all of the McAfee employees and our customers and partners for demonstrating strong support in the acquisition. The support is evidenced by lower discounts, longer contracts and a higher percentage of new customer business, as well as lower attrition among our employees. All of this shows that the future is clearly very bright for McAfee. Our outstanding third quarter results are a clear sign of a team that's executing very well. I'm very proud to be a part of this team and I believe McAfee is stronger than ever before.

I'd like to start out today's call with some financial highlights from the quarter, followed by some industry insights and then some exciting new product announcements.

In Q3, we achieved record third quarter revenue of $523 million, up 8% year-over-year. We also achieved record deferred revenue of $1.4 billion, also up 8% year-over-year; record year-to-date operating cash flow of $431 million, up 23% year-over-year; and record non-GAAP earnings per share of $0.67, up 9% year-over-year. Our Q3 performance is clear evidence that our customers and partners understand and support our strategy of delivering innovative, holistic security risk management solutions and the future potential of the combination of Intel and McAfee. During the quarter, we closed a record number of sales orders above $100,000, with a total of 525 deals this quarter, up 11% sequentially and 6% year-over-year.

Within this, we had 33 transactions over $1 million, up 10% sequentially and up 6% year-over-year. Discounting was at the lowest point this year and our renewal rates are looking very strong. A particular note, some of our largest transactions in the past quarter involve customers spending more with McAfee on security beyond the PC than the sizable amounts that they already spent on traditional Windows PC security. This is additional evidence that our strategy of offering a broad security portfolio across expanding end points, the network and the cloud, is right on point.

Our Network Security business in particular is growing rapidly and reported strong double-digit year-over-year sales growth, the best performance since we acquired Secure Computing in 2008. As a result of changing network perimeters in our customer's organizations, we're especially seeing great demand for a firewall, intrusion prevention and network access control products.

I'm also very pleased to report that our Consumer business continues to thrive. We achieved record revenue of $199 million, up 13% year-over-year. Our PC OEM relationships and our broad portfolio of ISPs, telcos, financials and portal partners continues to deliver continued profitability for us and also gaining traction in the marketplace with our web and mobility offerings.

McAfee's strong performance in Q3 was in conjunction with I believe is one of the most exciting developments in the company's history. As you know, on August 19, we announced that McAfee has agreed to be acquired by Intel. I'm very excited about the expanded opportunities McAfee will have as part of the Intel family. This transaction fits perfectly with our vision of ubiquitous security and is expected to accelerate innovation at McAfee and ultimately make the digital world a safer place.

During the quarter, we received strong endorsements from our customers and do not see any disruption to our business. In fact, I'm happy to report that our Q3 results beat even our own early forecast, particularly given that this transaction was announced with just five weeks left in the quarter. The acquisition is on track, and we're working through regulatory approvals and customary closing conditions. Our special shareholder meeting is scheduled for November 2, and we look forward to closing by the middle of 2011, after which McAfee will operate as a wholly-owned subsidiary of Intel.

Intel's agreement to acquire McAfee underscores that security is a fundamental component of modern computing and is increasingly relevant in a completely connected world, providing protection to a rapidly expanding heterogeneous world of connected devices requires a fundamentally new approach to security. The proposed combination of Intel and McAfee will be about helping provide greater protection efficiency to end points of mobility and embedded devices by bringing software and silicon together to do the heavy lifting. We are not moving away from our core security business of software-based end point protection and network security technologies but instead, intend to improve security for all of our customers by providing integrated hardware and software solutions.

There are three critical areas of focus for this. First of all, mobile and embedded device security. Connected devices, such as copiers, smart meters, medical devices and others require optimized protection with a lower memory footprint and low CPU utilization such as wait-listing. Secondly, security is moving down the stack. We expect the combination of software and silicone to create the next generation of security technologies following a path similar to the one virtualization technology has taken over the past decade. We'll be able to utilize the silicon to enable the security software and provide better performance and higher efficacy. And third, managing security. With McAfee, Intel's acquiring ePolicy Orchestrator, the industry's leading security management platform, which gives enterprises the capability to centrally manage security across the myriad of devices using a single console. In addition, it's important to understand that McAfee will be a stand-alone independent subsidiary of Intel and continue to operate without interruption and with autonomy. This means a continued focus on multi-platform and multi-device support. McAfee and Intel have been working together for some time already, and we look forward to introducing the first products from our strategic partnership next year.

To comment further on McAfee's customer and partner support, we recently held our annual FOCUS Security Conference for a record number of customers and partners in Las Vegas. In its third year, this event attracted thousands of attendees and more than triple the number of attending partners to be updated on our strategy and vision. Customers are increasingly recognizing McAfee's strategic role and have raised the level of importance as a critical partner within their IT infrastructure. This was abundantly obvious at FOCUS, where I personally met with customers who told me that McAfee has evolved in a true and trusted security adviser for the critical technology infrastructures.

Here's what some of the customers told me. First, more than ever, customers are looking for a focused security company. With the increasing complex threat landscape, a clearly focused and trusted security adviser is a necessity, especially for larger organizations. This is evidenced by McAfee now having more than 94% of the Fortune 500 as customers. Second, customers want more integration, not less. The more integrated, the better. And third, tightening the seams between products and the partner ecosystem is what will better help customers manage security, risk and compliance. And fourth, our customers' top concerns around consumerization of IT, cloud security and protecting their intellectual property. It's highly encouraging that all of these focus areas are for McAfee. Given these customers’ comments and taking into account the improved macroeconomic environment, we're confident McAfee is aligned with the most critical trends security and will benefit from being a trusted adviser for integrated solutions.

As a part of FOCUS, we made five major announcements. First, we shared our vision for the future with McAfee 3.0 security connect. We expect this strategy to lead McAfee into our next few years with ubiquitous security that's connected to the end point network and the cloud and fed by global threat intelligence.

Second, we reinforced our end-point leadership with our Endpoint Security platform 9 product announcement. This release sets new performance standards for any malware and data security across an expansive array of devices.

Third, we unveiled the next-generation ePolicy Orchestrator as part of the McAfee Security and Management Platform 5, providing unified monitoring, management and reporting system that scales to any sized organization and ensures all endpoints, networks and content are secure. ePO continues to be a very important differentiator in the marketplace for McAfee.

And fourth, we expanded our mobility leadership. We completed the acquisition of tenCube and began integration of their market-leading mobility solutions in the McAfee's product offerings. Also, based on our Trust Digital acquisition, we announced McAfee Enterprise Mobility Management Platform 9, enabling highly scalable secure enterprise mobility management. This was our first quarter of owning Trust Digital and while it's early, we're very excited about the expansion of our leadership in this area of the marketplace. This quarter, we had several dozen new Trust Digital engagements, with key enterprise customers but we also had several new partnership opportunities that we're excited about.

And fifth, we discussed security for virtualizing environments at FOCUS. With Citrix and several other partners we unveiled McAfee Management for Optimized Virtual Environments, or MOVE. MOVE meets the market in making virtual desktop security simpler and more scalable. We're also partnering with VMware, part of their vShield product family for virtualized and cloud environments. These announcements reflect the direction of our strategy of silicon satellite, secure device management, all integrated to our cloud and our on-premise management platforms. This allows our customers to secure and manage more connected devices as we expect the number of connected endpoints to expand from about 1 billion to more than 50 billion.

Over the past few years, we have worked hard to dramatically expand the breadth of our product offerings. We have broadened our security footprint to help customers respond. We'll go on any kind of endpoint to network or any cloud and across the technology stack. We have a solid cycle of new products and technologies, and our vision and strategy is working when expanded market opportunities as the number of connected devices explodes. Couple that with integrating the three components of our strategy, all connect and all leveraging the power of unrivalled McAfee global threat intelligence, we have an offering nobody else can match. We've created a bridge from PC-centric world to a world where everything is digital and everything is connected. And more importantly, we are continuing to gain mind share in the marketplace by developing and acquiring the right technologies to where the security market is headed.

So with all that, let me hand it over to Jonathan for a more in-depth review of our financials. Jonathan?

Jonathan Chadwick

Thanks, Dave. As you can imagine, given the Intel acquisition and all the work leading up to it, Q3 was a particularly exciting quarter. And it was all gratifying to see such great performance across the board. We achieved, and in many cases exceeded, the goals we set this quarter, including record third quarter revenue, record deferred revenue, record non-GAAP earnings per share and record year-to-date operating cash flow. Our solid financial results reflect continued global demand for our end-to-end security portfolio, strong operational performance and focused execution. And as Dave mentioned, we had a record number of corporate deals while contract durations increased, discounting declined to the lowest point this year and our revenue utilization rate improved, all reflecting the real momentum of our corporate segment.

Now turning to the Q3 results in more detail. On a constant currency basis, we achieved strong year-over-year growth in each of our major metrics. Again on constant-currency basis, revenue was up 11%, non-GAAP net income was up 15%. Non-GAAP earnings per share were up 19% and as a note, GAAP earnings per share was up 55%. Deferred revenue was up 10%.

I'd like to note also our reported cash flow from operations was $139 million. On a year-to-date basis, operating cash flow is up 23% year-over-year. Now I'd like to go into a little bit more detail on our Q3 revenue and sales results. Q3 reported revenue with a third quarter record of $523 million, up 8% year-over-year and up 11% on a constant-currency basis. And as predicted, we did observe continued level of foreign exchange headwinds this quarter. [indiscernible] (33:25) Total Q3 negative revenue impact from foreign exchange was $17 million year-over-year and $3 million quarter-over-quarter. And as a note, revenue in Q3 included less than a $250,000 benefit related to previously deferred revenue associated with our Q2 signature release.

Turning to our Q3 revenue results on a geographic basis. North America revenue was $312 million, up 14% year-over-year and up 15% on a constant-currency basis. Growth in this region was driven primarily by strong results in our Public Sector and Network Security businesses. And in Q3, North America revenue represented 60% of consolidated revenue.

Q3 international revenue was $211 million flat with last year, or up 7% on a constant-currency basis. Consistent strength in our International Consumer business and strong corporate performance in Japan and Asia Pacific was partially offset by softness in our EMEA Corporate business. In Q3, international revenue represented 40% of our consolidated revenues.

On a segment basis, our Corporate business is showing strong momentum and in Q3 achieved revenue of $324 million, up 5% year-over-year and up 9% on a constant-currency basis. We are seeing significant strength in our $1 million-plus sales orders with average deal size up 25% year-over-year. 85% of these orders had multiple product elements from more than one of our business units and a significant percentage of each deal from our portfolio security products beyond our PC offerings.

Virtual SMB sales orders were up mid-teens year-over-year. This segment of the business continues to be an important area of focus for our Corporate business. Our recent Security Paradox market research report shows that over 50% of midsized organizations have seen an increase in IT security risks facing their company, 40% of these companies had a data breach in the last year. Clearly, there's ongoing demand for effective and cost-efficient security solutions in this segment of the market.

Passing to a little bit of additional color from our Corporate business units. Q3 Network Security revenue and sales orders were both up double digits year-over-year. This growth was driven primarily by our very strong Public Sector business, particularly in North America. Year-to-date, our IPS and final product revenues are up over 30%, reflecting strong demand for our intrusion prevention and next-generation cloud.

We had a solid end-point quarter [indiscernible] (35:56) that our ToPS conversions brought. And as Dave mentioned earlier, we saw a nice lift of sales beyond traditional PCs, as well as a good number of new customers. Our Clients' Risk and Compliance business had double-digit, year-over-year revenue and sales order growth in Q3. We saw strong demand for our risk vulnerability of PCI solution for this quarter.

Now turning to our Consumer business. In Q3, we achieved an all-time revenue record of $199 million, up 13% year-over-year and up 16% on a constant-currency basis. And this really strong performance reflects our OEM partnerships continuing to pay off and we continue to see solid PC unit growth. In addition, our top ISP, telco, financials and portal partner business grew at 11% year-over-year, and our direct online business had its 11th consecutive quarter of double-digit year-over-year growth. We also saw another quarter of strong double-digit growth in our premium Total Protection Suite offering. And overall our consumer margin in the Consumer business continues to be very strong.

During the quarter, we cited or reviewed our extended partnership agreement and released a new identity protection service, a new family protection product for iPhone and iPad, and a refresh [indiscernible] (37:17). I'm also pleased to report we received very positive feedback [indiscernible] (37:22) McAfee-Intel combination from our partners around the world.

So in summary, our Corporate business continued capitalizing the momentum we felt last year. We have a very strong platform and [indiscernible] (37:33). And our Consumer business remains very strong with our diversified distribution model, including PC OEMs, telcos, mobile and web security. Looking ahead, we believe we are well-positioned to further expand our addressable markets, capitalize on key trends, which is mobile security, virtualization of our customers at McAfee, trusted security solutions are seen as important areas.

Now moving down the rest of the income statement. Q3 and non-GAAP gross profit margin for the third quarter was 77.1%, down approximately 100 basis points sequentially. And as a reminder, our strategy encompasses a broad portfolio of offerings including software, hardware, services in collaboration, cloud-based solutions. Q3 had a higher mix of hardware [indiscernible] (38:20).

Non-GAPP operating expenses in Q3 were $65 million, up $7 million sequentially, about 5% [indiscernible] (38:30) . We remain focused on aligning our business operations and cost structure [indiscernible] (38:35) while continuing to invest it. As of September 30, we had 6,121 employees worldwide, up slightly sequentially. Q3 non-GAAP operating income was $138 million, up 7% year-over-year. And I'm pleased to report that our Q3 non-GAAP operating margin was 26.4%, slightly above our own expectation to reflecting a good cost control. Including the effects of foreign exchange in revenue expenses, we saw total negative impact to non-GAAP operating income of approximately $12 million year-over-year.

Q3, our non-GAAP tax rate was 24%, and our Q3 non-GAAP net income was $104 million, up 6% over Q3 last year and non-GAAP net income as a percentage of revenue was 20%, slightly improved from last quarter. Non-GAAP earnings per share were a record $0.67, up 9% year-over-year, and GAAP earnings per share was $0.30, up [indiscernible] (39:31) With stronger than expected results reflect a solid Q3 financial performance despite foreign exchange headwinds. And on constant-currency basis, non-GAAP earnings per share were up 19% year-over-year and GAAP earnings per share were up 55%.

Now turning to some cash flow and balance sheet highlights. During the quarter, we generated $139 million of operating cash flow, which was ahead of our expectations. Strong collections in the geographic mix of our business in this quarter drove this upside to our own forecast. I am very pleased that year-to-date, our operating cash flow was up 23%.

Cash and marketable securities at the end of the third quarter were at $1 billion. This reflects our strong operating cash flow performance in Q3 and the absence of a stock repurchase in the quarter. Please note that we have suspended our repurchase program due to our pending acquisition by Intel. And during the quarter, we closed our acquisition of tenCube. And looking ahead, we plan to continue with our strategy of acquiring small and medium-sized companies.

Accounts receivable at the end of the quarter were $280 million ahead of $244 million sequentially. DSO was 48 days for Q3 compared to 45 days sequentially and 43 days in Q3 of last year. We continue to be very pleased with the overall health of our receivables portfolio.

Deferred revenue at the end of Q3 was a record $1.4 billion, up 8% year-over-year and up 10% on a constant-currency basis. The composition of our deferred revenue at the end of Q3 was 66% related to our Corporate business and 34% related to our Consumer business. Approximately 77% of our Q3 revenue was from the balance sheet. Approximately 88% was recurring in nature for services, support and subscription.

Now before I move to our guidance for Q4, I'd like to make a comment about our Q3 results within the context of the last several quarters of McAfee's performance. Over the last few years, McAfee has been on a consistent and strong growth journey, and we’ve worked hard to successfully strengthen our Security Solutions portfolio, expand our addressable markets and integrate acquisitions. We remain on course of being financially successful at present and beyond. With a strong business pipeline, marketplace leadership in key emerging markets, which is mobility and virtualization.

In summary, McAfee demonstrated a strong operational execution in Q3 across many aspects of our business. We overachieved on most of our key financial metrics which reflects the health, robustness and the fact that our strategies are really paying off. We are very optimistic about McAfee's edge and the market prospects.

Now moving to our outlook and guidance. Let me remind you again that our comments include forward-looking statements. You should review our recent SEC filings that identify important risk factors, and that actual results could differ materially from those contained in forward-looking statements. The guidance we're providing is on a non-GAAP basis with a reconciliation to GAAP.

For the fourth quarter of 2010, we expect to achieve revenue in the range of $530 million to $550 million.

As I've stated previously gross margins can vary from quarter-to-quarter due to the mix of our security product and services portfolio. We expect to manage gross margins and operating expenses together to achieve a targeted operating income range. We expect Q4 non-GAAP operating income margin to be in range of 25% to 26%. And non-GAAP earnings per share in the range of $0.67 to $0.71. In Q4 we expect to expand our employee base with targeted hiring in sales, engineering and business operations. We expect to continue to generate between $100 million to $150 million in operating cash flow for the quarter. And in Q4, we do expect to be at the higher end of it. Our outlook for Q4 is based on a total share count of about 159 million shares and we are assuming an annual non-GAAP tax rate of 24%.

And within our Q4 non-GAAP guidance assumptions, we estimate the following currency rule of thumb. We're assuming $1.36 U.S. dollar-to-euro exchange rate for Q4. And for every $0.01 movement in the euro, revenue is impacted by $1.3 million, and non-GAAP earnings per diluted share is impacted by approximately $0.005. For Q4 we're anticipating a negative impact of $16 million dollars year-over-year. We highly encourage you to take this into account as you construct your answers.

In closing, I'd like to take a moment to thank our employees for their particularly hard work and many, many contributions this quarter. And now I'll turn the call back to Dave for closing comments.

David DeWalt

Okay. Thanks, Jonathan. McAfee's addressable market is growing. Our strategy is working and our financial performance continues to be strong. I believe the future has never looked brighter, especially with the strong support we're seeing for our Intel acquisition. McAfee offers a full complement of consumer and corporate security products, services and solutions, covering all the bases, end point, network and the cloud. We've shifted this company's effective opportunity from a very good foundational antivirus business to a business that continues to lead the market with best-of-breed comprehensive solutions while entering a green field of new market opportunities that is a stronger push into mobile and virtualization. We have a world-class PC OEM partner model, and we have diversified our Consumer business in many other channels that are performing well and contributing to our results. Now I hope you seeing the huge product cycle we're in. We have new products and refresh cycles going in in all business units.

So to summarize, we remain very excited about the security opportunity. We have the right ingredients to continue to be the leader in digital security world. We have a very strong product cycle and product portfolio to protect customers from consumers to enterprises, from network to end point, from under digital PCs to the cloud. We've got an incredible network of partners and alliances across our business, covering many key growth verticals, including government public communications and technology. So in closing, I hope you have a good understanding of the opportunity McAfee has. It shall only be accelerated by us joining the Intel family.

So on behalf of the executive management team, I again want to thank our employees worldwide for their hard work and continued performance. So with that, Jonathan and I will open the call for some questions. Operator?

Question-and-Answer Session


[Operator Instructions] The first question will come from Michael Turits with Raymond James.

Michael Turits - Raymond James & Associates

Can you talk a little about how factors including the PC refresh cycles, which is beginning to slow, as well as the move to smaller formats, tablets, netbooks, might be impacting on how you seem to be overcoming your largest competitor? Yesterday talked about a negative impact to conversion rates from that migration to smaller formats.

David DeWalt

Sure, Michael. This is Dave. Now there's a lot of factors that go into this. I mean, clearly we still see robustness in the PC Windows market without a doubt. As you know, we've significantly extended our own presence over the last 18 months on a variety of PC OEM partners, with ACER, with Dell with some of the others that we've been really expanded to. We've been getting in the new markets and new opportunity. So just for us, the amount of capacity we have just in the PC world has grown. And that has helped the business overall and will continue to help the business overall. I would also tell you we've done a really nice job extending our portfolio of products. I think this has been an area that we've been very successful in. We added many new products this past quarter alone: identity protection, our family protection products. We now have offerings completely for the Apple family, from iPhones to the iPads, to the Mac products. So we start to look at our diversification of not just PC OEMs but telcos and ISPs and ways you could get to the PC market. We also have a pretty good foundation of getting from the PC market to beyond the PC market with mobility and other types of new tablet-like products that are in some cases really extraordinarily exciting for a vendor like us. So I think we're seeing the teams and the opportunity and financially, we have a very good engine to go after these markets with and hopefully that will continue for years to come.


The next question will come from Heather Bellini with ISI Group.

Ryan Lee

This is Ryan Lee in place of Heather. Just sort of a quick question about your Corporate segment. You mentioned that less discount attributed to the growth in the sector. Can you just talk about whether that's going to be a pattern going forward and if you just now talk about the deal durations that you're seeing out there that will be great.

David DeWalt

This was the color that I was very excited about. As most of you know, Q3 is an interesting quarter around the world sometimes, just in terms of the opportunity to close business. In the Corporate segment, we had really our strongest quarter for the year in the corporate model built in large deals, 33 deals over $1 million, as well as deals really over $100,000 in value. But we also saw good strength under $100,000, as Jonathan pointed out, with our SMB business. So we're executing a lot better ourselves. And then on top of that, I think we've really got ourselves in position of selling the value of network, cloud and end point together, or a better model. That's giving us the ability to discount less, get longer contract durations and really drive the business. Our end point note count was up, the amount of new business that we sold to brand new customers was up. And quite honestly, for me, it was in a quarter of potentially a lot of disruption with the Intel announcement, where people were asking questions, how does this work? So combination of validation of our customers with the Intel-proposed merger is a good one, along with good execution by our corporate teams and it shows I think we're on the right track here. And I think as the economy continues to improve, we'll keep doing that. Jonathan, you want to add anything?

Jonathan Chadwick

The only other thing I would add is, this isn't much of an operational comment. I think there's been really tight interaction with possible parties [indiscernible] (50:22) working deals all the way most of the quarter obviously with the Intel acquisition announcement and the potential for a disruption. I think both Dave and I feel really proud of the way the teams all came together, focused on those deals, really making sure we're working the discounts and really making sure value was being sold. And I think the results speak for themselves.


The next question will come from Brent Thill with UBS.

Brent Thill - UBS Investment Bank

Maybe Jonathan can take this. Just in terms of the next steps with the Intel transaction, how should we think about the next milestones you need to clear? And then for Dave, on the mobile opportunity. Going forward, do you think you can monetize the mobile world at the same rate you've been monetizing the PC world? In other words, is the margin profile the same, lower, higher?

Jonathan Chadwick

As you know, it's a pretty complex process acquiring a public company. We have a number of steps we need to go through, all of which we're well on track to do. As you know, we have filed and mailed our proxy document, that's a matter of public record. Next week, we have our own shareholder vote. We're well on track with respect to that process, and we're expecting that to go obviously very well. The next step beyond that as you know is the regulatory process in a number of jurisdictions around the world. And again, what I'd share is that we're really comfortable with the process and the progress we're making with that, which the teams inside McAfee and also with Intel have been progressing very well.

David DeWalt

And then, Brent, good question on mobile. I think this is really the large question out there for all the security industry. As I have gone through the last two quarters, I'm really surprised at how big the opportunity is becoming and delighted to see it. When you look at really the introduction of the Apple iPad just not that long ago, you’re really seeing a huge expansion opportunity for us all. The amount of commerce being driven off these devices, which is really, in my opinion, the tipping point here is usually do you start to use of that device for more than sort of entertainment? Is it more of a commerce device? Will you put your credit card, your debit card? Will you conduct business on that device? And more and more, you'll start to see the need for security be involved with the decision-making when they buy a device. So we're watching that happen at a rapid pace. And as I talked on the Q2 call, we really watch the Enterprise segment taking off fast. The number one, literally at our events in Vegas just a few weeks ago with our users, with IT consumerization, there wasn't a CIO or a CSO who didn't say the number one challenge and opportunity they had was how to secure the plethora of new devices that they're being asked to connect to their networks. And as you know, there's a lot of them being sold in the market today. So it's giving CIOs an opportunity to lower their CapEx, let employees buy their own device, bring it in, but didn't have to connect it. So we're actually seeing an expansion of devices beyond the PC. And I actually called out, this was the first quarter I really solid deals over $1 million where the new deal that were non PC-based was bigger than the original deal that was PC-based. That is a significant point for me on the Enterprise segment and we see more and more of that activity now. And has a little bit of Trust Digital acquisition as well as ePO being integrated there. And now we're seeing very quickly the consumer market growing. Obviously the communications companies, telecommunications companies are rapidly driving at this area. I really think as we sit here another quarter, we'll see another acceleration window there. It's anybody's guess how big this could be but I'm seeing the margins and the price points to be very elastic in a positive way. I'm seeing the opportunity for turnovers and refreshes in this space to be much more rapid than the PC market. That's a key, too. Consumers are going out and buying products every six, nine months, year as opposed to two, three years in the PC market. So there's a lot of good indicators here that we'll be sitting a year from now, with a very robust market opportunity in mobile. I think it's much sooner than we had thought even a quarter or two ago.

Jonathan Chadwick

In fact, just to add on to that. Maybe taking on sales as an example, one of the things we've been tracking obviously is the consumerization of our own IT space. We're tracking probably double the number of devices accessing the Internet inside McAfee's environment and we're really pleased with our own use of trust digital inside the business today and the way we're securing that. These are experiences actually phenomenal. So I'd say it's a very good leading indicator of where things are going.


The final question will come from Sarah Friar with Goldman Sachs.

Sarah Friar - Goldman Sachs Group Inc.

Dave, not to belabor this point, but one thing we do scratch our head about on tablets and a lot these smartphone devices is as yet though people are not really buying antivirus or kind of more traditional security technologies for them. I agree that the management element, particularly from an enterprise standpoint, is important. But when do you think you reach that tipping point where there's actually your own security the way we would see in the PC world on those kind of tablet/smartphone devices?

David DeWalt

This is Dave. I think that's a very accurate statement. We are seeing this market emerge for tablets. And I think you probably just mean smart devices in general, smartphones, tablets in a class together. But it isn't traditional antivirus that is the number one feature request there. The number one feature request is typically management, allow a policy to authenticate a device to the network securely, particularly within the Enterprise segment. So we're finding a lot of demand right now to enable devices to securely connect to the network. That doesn't mean they have to be scanned for storage on that device, but just the simple authentication of the device on to the network. And then if the device is lost, with sensitive information on it we wipe it, lock it, kill it, encrypt it, basic PCI compliance features for data management. We believe we have that full suite right now. And as I said, we're starting to see deals that are getting very large for us in these enterprises and interesting opportunity there to just safely and securely connect them. Once those devices, in my opinion, get much more robust storage on them and they probably will, then the antivirus market may come into play here in a bigger way because then the storage of content needs to be scanned and managed in a way we manage typical PC Windows devices today. But I think AV would be a lagger clearly so far, but there's a bunch of leading-edge products and features that, in my opinion, are very much ready for the market and are available and they're being rolled out pretty extensively today.

David DeWalt

And I do want to thank everybody for joining us and appreciate the attendance. We think we have a great opportunity clearly, and we look forward to talking to everybody soon. Thank you.


Ladies and gentlemen, this concludes McAfee's third quarter 2010 earnings conference call. You may all disconnect.

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