McAfee Q3 2010 Earnings Call Transcript

McAfee Q3 2010 Earnings Call Transcript
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McAfee (MFE)

Q3 2010 Earnings Call

October 28, 2010 4:30 pm ET

Executives

Kate Scolnick - Vice President, Investor Relations

David DeWalt - Chief Executive Officer, President and Director

Jonathan Chadwick - Chief Financial Officer

Analysts

Ryan Lee

Brent Thill - UBS Investment Bank

Sarah Friar - Goldman Sachs Group Inc.

Michael Turits - Raymond James & Associates

Presentation

Operator

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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.

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