McAfee Hacks Into Success

McAfee tried that in the late 1990s -- with limited success. "Our idea was to become a broad provider of information technology," said Vince Rossi, the company's senior vice president for product marketing. A few years later, the company was caught up in an ugly (and not completely resolved) accounting scandal that led to a change in management and the criminal indictment of several former senior executives.

With a mandate to make major changes, new CEO George Samenuk sold off Sniffer Technologies, its network management arm, for $235 million, and Magic Solutions, its help desk-related product line, for $46 million. (A third and much smaller sale had little effect on the company's business.)

The resulting shake-up focused the company on the fast-growing security market, a segment driven by well-publicized hacker attacks on everything from credit card companies to instant messages. Market researcher Gartner says that license revenue from security software of all types totaled $5.4 billion in 2004, and will likely reach $6.6 billion in 2005 and $11.4 billion by 2009.

At first glance, the divestitures delivered a blow to McAfee's top and bottom lines. Including the former businesses, annual revenue was off by 2.8% in 2004 while pro forma net income dropped 15.6%. But when the divested businesses are excluded, which is how analysts are beginning to look at the company, the story is different.

A year earlier, in the first quarter of 2004, revenue from the company's security business totaled $174 million; this year, that grew to $235.7 million, a jump of 35.5%. (If the divested businesses are factored in to the year-ago figure, total revenue grew from $219.1 million to $235.7 million, a gain of just 8%.)

Similarly, GAAP net income dropped 38% in the quarter, to $35.9 million from $57.9 million. But on a pro forma basis that excludes one-time gains from 2004's results, the company would have earned $45.6 million, or 27 cents a share -- more than twice the $20.9 million, or 11 cents a share, recorded in last year's comparable quarter.