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'Smooth Sailing' at Network Associates Is Not Likely

Also, GE shareholders stand to see little benefit from an NBC Internet tracking stock.

Shares of

Network Associates


surged 2, or 12%, to 19 1/16 Thursday after the company told investors Wednesday it expected "smooth sailing" for the rest of the year. The enterprise software company, best known for its McAfee antivirus software, until earlier this year was on track to have $1 billion in annual sales. Then the real world of long sales cycles and millennium-bug concerns caught up with Network Associates. Its second-quarter sales were all of $25 million, making it a $100 million company based on that quarter's numbers (which, admittedly, were abnormally low).

But while sales shrunk at Network Associates, inventory didn't slim down commensurately. The company reported about $200 million in receivables, meaning it has shipped to wholesalers roughly two years of merchandise for which it hasn't collected. In accountant talk, this is called days sales outstanding, or DSOs, of roughly 740 days. Anything over 90 to 100 days, or three months, is considered more inventory than one company can prudently handle.

Christopher Shilakes, software analyst with

Merrill Lynch

, notes that the DSO figure for the quarter is meaningless because Network Associates basically stopped shipping to its distribution channel. Network Associates plans to reduce DSOs to 100 days in the third quarter and below that in the fourth quarter, he notes. Still, says Shilakes, "we do not believe it is back to business as usual for" Network Associates. He rates the stock a neutral, displaying the wait-and-see approach Wall Street tends to take on this "broken" stock for the foreseeable future.

Track This

In response to the column here Wednesday about

General Electric's

(GE) - Get Report

plans for a tracking stock,

NBC Internet

, reader

Todd Hagenah

and others want to know "what would be the advantage to current GE stockholders for the company to issue a tracking stock?" You're not going to like this, Todd, but the short answer is, "Not much."

Think of it this way. When

The Wall Street Journal

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reported last week that Microsoft was "moving closer" to issuing a tracking stock for its Internet operations, it quoted analysts predicting that a separate Microsoft Net issue would be worth as much as $50 billion. The stock ticked up 5, or nearly $28 billion, on the theory that a goodly amount of value would be added to Microsoft, which would own all of the contemplated spin-off.

Microsoft later said a tracking stock isn't "imminent," but GE already is moving ahead with one of its own. GE shareholders, through their total ownership of NBC, would own about half of NBCi, which will be built through the merger of



and parts of NBC's online operations. They would


get shares in the separate stock unless they bought it on the open market or bought shares of Xoom ahead of time. As noted, the current valuation of Xoom suggests NBCi is worth about $2 billion. Considering GE, through NBC, is contributing businesses with about $3 million in annual sales, that's a sweet deal. But given that GE's market cap is more than $375 billion, the tracking stock is relatively insignificant to GE shareholders. More important to GE is NBCi's ability to attract personnel and make acquisitions of similarly overvalued Net companies.

Also, for the record, NBC isn't contributing 10% of the financial motormouth TV channel


to NBCi, as was reported here. It's tossing in a 10% stake of

, the TV's station's new Web site. Big difference.

Adam Lashinsky's column appears Mondays, Wednesdays and Fridays. In keeping with TSC's editorial policy, he doesn't own or short individual stocks, although he owns stock in He also doesn't invest in hedge funds or other private investment partnerships. Lashinsky writes a monthly column for Fortune called the Wired Investor, and is a frequent commentator on public radio's Marketplace program. He welcomes your feedback at

As originally published, this story mischaracterized one figure. Please see

Corrections and Clarifications.