McAfee Inc. (MFE) reported third-quarter 2010 earnings per share of 46 cents, below the Zacks Consensus Estimate of 51 cents, while revenue of $523.0 million exceeded the Zacks Consensus Estimate of $514.0 million.

Revenue

McAfee Inc. reported third quarter revenue of $523.0 million, up 8.0% from $485.0 million in the year-ago quarter. This growth was due to revenue increases across both Consumer and Corporate segments. Broad-based demand for the company’s security solutions portfolio across its Corporate and Consumer segments also helped the increase.

McAfee reported increases in revenues across all segments. The Corporate Business segment reported third quarter revenue of $323.89 million (62.0% of revenue), up 4.9% year over year. In this segment, the company has been witnessing significant strength, with several $1.0 million-plus orders and a 25.0% increase in the average deal size on a year-over-year basis. Around 85% of these deals constitute multiple product elements from more than one of the company’s business units and a significant portion from its portfolio security products.

The Consumer Business segment reported revenue of $199.3 million (38.0% of revenue), up 12.8% year over year. This performance reflects strong performance by the company’s OEM customers as well as PC unit growth.

The North America segment reported revenue of $312.3 million, up 14.2% year over year. The International segment reported revenue of $210.9 million, down 0.4% on a year-over-year basis.

Operating Results

Third-quarter gross profit was $381.2 million, up 6.3% on a year-over-year basis. This resulted in a gross margin of 72.8% in the current quarter, compared to 73.9% in the year-ago quarter. Operating income on a GAAP basis was $64.0 million, down 51.0% on a year-over-year basis.

Excluding special items, non-GAAP operating income in the quarter was $138.0 million, up 7.0% on a year-over-year basis. This resulted in an operating margin of 12.3% in the current quarter, compared to 8.8% in the year-ago quarter.

The GAAP net income in the quarter was $37.0 million or $0.23 per share, down from $47.0 million or $0.30 per share reported in the year-ago quarter. Excluding special items such as the impact of signature file update, restructuring, amortization, acquisition-related charges and others, non-GAAP net income was $72.4 million or $0.46 per share, up from $71.9 million or $0.45 per share in the year-ago quarter.

Balance Sheet & Cash Flow

During the recently concluded quarter, the company generated around $139.0 million in cash flow from operations. Days sales outstanding (DSOs) were 48 days. At the end of the third quarter, the company reported cash and marketable securities of $1.0 billion, down from $804.0 million in the previous quarter. Deferred revenue was $1.4 billion.

Guidance

Management expects fourth quarter 2010 revenue in the range of $530.0 to $550.0 million. Fourth 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 $0.67 to $0.71 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 third-quarter results, although the EPS was in line with our expectations. In addition, the company came up with decent fourth-quarter guidance. The strong product portfolio, growth prospects in all its served markets, acquisitions, customer win momentum and good cash generation ability are positives.

 

While Intel Corporation’s (INTC)probable acquisition of McAfee is positive news, 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. Moreover, the enhanced level of security offered by Microsoft Corp.’s (MSFT) Windows OS also poses some challenges to McAfee.

 
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