McAfee Inc. (MFE) reported second-quarter 2010 earnings per share of 46 cents, in line with the Zacks Consensus Estimate, while revenue of $489.2 million was below the Zacks consensus estimate of $507.0 million.
Revenue
McAfee Inc. reported second quarter 2010 GAAP revenue of $489.2 million, up 4.0% from $468.7 million in the year-ago quarter. This advance was due to the revenue increases across both the consumer and corporate segments. On the other hand, the company generated approximately $14.0 million of lower in-period revenue as new sales orders were generated at lower revenue realization rates. The revenue realization rate fell short of the company’s expectations, with the lowest amount generated in the past four quarters.
McAfee reported increases in revenue across all segments. The Corporate Business segment reported second quarter revenue of $298.0 million (60.9% of revenue), up 3.0% year over year. In this segment, the company closed 474 deals, with values greater than $100,000 each, including 78 deals of over $500,000 in value and 30 deals of over $1.0 million in value.
The Consumer Business segment reported revenue of $191.0 million (39.0% of revenue), up 9.0% year over year. In this segment the company signed 25 agreements and also launched 67 new online partnerships, bringing the total to over 200 brand name partners globally.
The North America segment reported revenue of $286.0 million, up 8.0% year over year. The International segment reported revenue of $203.0 million, flat on a year-over-year basis. Currency fluctuation negatively impacted revenue by $5.0 million on a year-over-year basis, and by $12.0 million on a sequential basis.
Operating Results
Second-quarter GAAP gross profit was $358.4 million, up 1.4% on a year-over-year basis. Excluding special items, such as the impact of signature file update and amortization of expense, non-GAAP gross profit for the quarter was $385.6 million, up 6.5% on a year-over-year basis. This resulted in a gross margin of 74.7% in the current quarter, compared to 75.4% in the year-ago quarter.
Operating income on a GAAP basis was $55.1 million, down 1.4% on a year-over-year basis. Excluding special items, non-GAAP operating income for the quarter was $102.8 million, up 9.1% on a year-over-year basis. This resulted in an operating margin of 11.3% in the current quarter, compared to 11.9% in the year-ago quarter.
GAAP net income for the quarter was $39.4 million or $0.25 per share, down from $28.6 million or $0.18 per share reported in the year-ago quarter. Excluding special items like impact of signature file update, restructuring, amortization, acquisition related charges and others, non-GAAP net income was $71.6 million or $0.46 per share, up from $63.6 million or $0.40 per share in the year-ago quarter.
Balance Sheet & Cash Flow
During the recently-concluded quarter, the company generated around $134.0 million in cash flow from operations. Days sales outstanding (DSOs) were 45 days. At the end of the second quarter, the company reported cash and marketable securities of $804.0 million, down from $902.0 million in the previous quarter. Deferred revenue was $1.4 billion. During the second quarter, the company repurchased approximately 4.6 million shares of its common stock for $150.0 million, with another $200.0 million remaining that are authorized for repurchase.
Guidance
Management expects third quarter 2010 revenue in the range of $505.0 to $520.0 million. Third quarter 2010 GAAP net income is expected to be in the range of $0.29 to $0.33 per diluted share and non-GAAP net income in the range of $0.62 to $0.66 per diluted share. The tax rate for the year is expected to be 29.0% on a GAAP basis and 24.0% on a non-GAAP basis.
Conclusion
The company delivered respectable second-quarter results, although the EPS was in line our expectations. In addition, the company came up with decent third-quarter guidance. The strong product portfolio, growth prospects in all its served markets, acquisitions, customer win momentum and good cash generation ability are positives.
On the other hand, we are a bit concerned about the intense competition that the company faces from smaller players, as well as hardware and software manufacturers entering the IT security business. Plus, the enhanced level of security offered by Microsoft Corp.‘s (MSFT) Windows OS also poses some challenges to McAfee.
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