MFE Mcafee

McAfee, Inc. (NYSE:MFE) today reported financial results for the third quarter ended September 30, 2010.

Third Quarter 2010 Highlights:

• Entered into a definitive agreement to be acquired by Intel Corporation for $48 per share in cash, valuing the deal at $7.7 billion
• Revenue reached a third quarter record of $523 million, an increase of eight percent year-over-year
• Deferred revenue reached a record $1.4 billion, an increase of eight percent year-over-year
• Cash flow from operations reached $139 million, bringing total cash and marketable securities to $1.0 billion at quarter end. Year to date, cash flow from operations reached a record $431 million, an increase of 23 percent year-over-year.
• GAAP and non-GAAP earnings per diluted share were $0.30 and $0.67, respectively. Non-GAAP earnings per diluted share was a record and increased nine percent year-over-year.

Executive Commentary:

“We are pleased to deliver strong third quarter results that serve as a testament to our strategy and execution. These results also reflect the validation and confidence our customers, partners and employees have in the proposed acquisition of McAfee by Intel,” said McAfee president and chief executive officer, Dave DeWalt. “Our revenue growth was the result of broad based demand for our security solutions portfolio across our corporate and consumer segments. With this, we effectively controlled expenses and delivered record year-to-date operating cash flow.”

“Looking ahead, we are confident in our security market leadership and we are uniquely positioned for continued market share gains. McAfee’s cloud-based endpoint to network interlock strategy is clearly gaining traction as we provide customers leading products and services for the latest demands in mobility, virtualization and embedded security solutions. We believe the rapid expansion of internet enabled devices will continue to drive demand for cloud optimized security solutions for the most complete protection against the evolving global threat landscape,” continued DeWalt.

Third Quarter 2010 Financial Summary and Operational Metrics:

$ in Millions, except pershare and % data

 

Q3 2010

 

Q3 2009

 

%Change

 

% Change ConstantCurrency Change***

Total Net Revenue $523 $485 8% 11%           Non-GAAP Operating Income* $138 $129 7% 17% Non-GAAP Net Income* $104 $99 6% 15% Non-GAAP Net Income Per Share* (Diluted) $0.67 $0.62 9% 19%           GAAP Operating Income $64 $43 51% 78% GAAP Net Income $47 $37 27% 50% GAAP Net Income Per Share (Diluted) $0.30 $0.23 31% 55%           Deferred Revenue $1,442 $1,334 8% 10% Cash & Marketable Securities $1,029 $906 14%

 

*A complete reconciliation of GAAP to non-GAAP results is set forth in the attachment to this press release.

***Management evaluates and reviews growth rates adjusted for the impact of foreign currency fluctuations to provide a framework for assessing how our underlying business performed. Current period GAAP and non-GAAP results are converted using the comparable average prior-period exchange rates. The current period deferred revenue balance has been adjusted for foreign currency impacts over the last 12 months.

Third Quarter 2010 Balance Sheet and Cash Flow Summary:

• Cash and marketable securities was $1.0 billion at the end of the third quarter of 2010
• Cash flow from operations was $139 million
• Days sales outstanding (DSOs) were 48 days
• Deferred costs of revenue and prepaid expenses associated with revenue-sharing and royalty arrangements were $303 million
• Deferred revenue reached a record of $1.4 billion
• Approximately 77 percent of revenue during the third quarter of 2010 came from prior period deferred revenue

Key Announcements:

• McAfee completed the acquisition of privately owned tenCube, the provider of the WaveSecure mobile security service
• McAfee hosted its third annual customer and partner event, FOCUS 10, which attracted thousands of attendees and tripled its number of partners attending
• McAfee appointed Gert-Jan Schenk as president of its Europe, Middle East and Africa region
• McAfee unveiled its “Security Connected” initiative, enabling partners, developers and customers to apply a more intelligent, effective and sustainable approach to securing digital information. As part of this initiative, McAfee released the first two of four new connected security platforms, McAfee Endpoint Security 9 and McAfee Security Management 5.
• McAfee delivered McAfee Management for Optimized Virtualized Environments AntiVirus (MOVE AV), which makes virtual desktop security simpler and more scalable for large enterprise deployments
• McAfee was named a leader in the Data Leak Prevention Suites market (Forrester Research Inc.’s “The Forrester Wave™: Data Leak Prevention Suites, Q4, 2010, October 2010”). McAfee was also named a leader in the Gartner “Magic Quadrant for Mobile Data Protection,” as published on September 7, 2010.
• McAfee announced the general availability of the McAfee® Enterprise Mobility Management (McAfee® EMM®) 9.0 platform, which deepens support for iPhone and other iOS devices, as well as expands Android support and provides greater control for administrators
• McAfee EMM will provide Motorola smartphone users with advanced security to address corporate market demand, including the increased use of mobile productivity apps

Financial Outlook:

• McAfee expects net revenue in the fourth quarter of 2010 of $530 million to $550 million
• The company expects fourth quarter 2010 GAAP net income of $0.29 to $0.33 per diluted share and non-GAAP net income of $0.67 to $0.71 per diluted share
• This guidance reflects an assumed 29 percent annual GAAP tax rate and a 24 percent annual non-GAAP tax rate for 2010

Conference Call Information:

• The company will host a conference call today at 1:30 P.M. Pacific, 4:30 P.M. Eastern to discuss its quarterly results. Participants should call (800) 809-7467 (U.S. toll-free) or (706) 679-4671 (international). The passcode is 45023515.
• Attendees should dial in at least 15 minutes prior to the conference call
• A replay of the call will be available until November 11, by calling (800) 642-1687 (U.S. toll-free) or (706) 645-9291 (international)
• A Web cast of the call may also be found on the Internet through McAfee’s Investor Relations Web site at http://investor.mcafee.com

Disclosure Statements and Discussion of Non-GAAP Financial Measures:

Management evaluates and makes operating decisions using various performance measures. In addition to reporting financial results in accordance with GAAP, we also consider adjusted gross profit, operating income and net income, which we refer to as "non-GAAP gross profit," "non-GAAP operating income" and "non-GAAP net income." In calculating non-GAAP gross profit, non-GAAP operating income and non-GAAP net income, management adjusts for certain items to facilitate its review of the comparability of the company's operating performance on a period-to-period basis because such items are not, in management's review, related to the company's ongoing operating performance.

Non-GAAP gross profit excludes amortization of purchased technology, stock-based compensation expense and certain other items. Non-GAAP net income and non-GAAP operating income exclude amortization of purchased technology and intangibles, stock-based compensation expenses, acquisition-related costs, restructuring charges, provision for income taxes and certain other items. Management used a 24 percent non-GAAP effective tax rate to calculate non-GAAP net income in 2010 and 2009. Management believes the 24 percent effective tax rate is reflective of a long-term normalized tax rate under the global McAfee operating structure.

We present non-GAAP gross profit, non-GAAP operating income and non-GAAP net income because we consider each to be an important supplemental measure of our performance. Management uses these non-GAAP financial measures to make operational and investment decisions, to evaluate the company's performance and to forecast and to determine compensation. Further, management utilizes these performance measures for purposes of comparison with its business plan and individual operating budgets and allocation of resources. In addition, when evaluating potential acquisitions, management adjusts for the items described above in its evaluation of target performance.

We further believe that these non-GAAP financial measures are useful to investors in providing greater transparency to the information used by management in its operational decision making. We believe that calculating non-GAAP gross profit, non-GAAP operating income and non-GAAP net income also facilitates a comparison of McAfee's underlying operating performance with that of other companies in our industry, which may from time to time use similar non-GAAP financial measures to supplement their GAAP results. However, non-GAAP gross profit, non-GAAP operating income and non-GAAP net income have limitations as analytical tools, and you should not consider these measures in isolation or as a substitute for GAAP gross profit, GAAP operating income and GAAP net income or any other performance measure determined in accordance with GAAP. In the future, we expect to continue to incur expenses similar to certain of the non-GAAP adjustments described above and exclusion of these items in the presentation of our non-GAAP financial measures should not be construed as an inference that all of these costs are unusual, infrequent or non-recurring. Investors and potential investors are cautioned that there are material limitations associated with the use of non-GAAP financial measures as analytical tools. Some of the limitations in relying on non-GAAP net income are:

• Amortization of purchased technology and intangibles, though not directly affecting our current cash position, represents the loss in value as the technology in our industry evolves, is advanced or is replaced over time. The expense associated with this loss in value is not included in the non-GAAP net income presentation and therefore does not reflect the full economic effect of the ongoing cost of maintaining our current technological position in our competitive industry, which is addressed through our research and development program.
• The company regularly engages in acquisition and integration activities as part of its ongoing business. Therefore, we expect to continue to experience acquisition and retention bonuses, direct acquisition costs and integration costs related to acquisition activity in future periods.
• The company's income tax expense will ultimately be based on its GAAP taxable income and actual tax rates in effect, which may differ significantly from the 24 percent rate assumed in our non-GAAP financial measures for 2010 and 2009
• Other companies, including companies in our industry, may calculate non-GAAP net income differently than we do, limiting its usefulness as a comparative tool

In addition, many of the adjustments to our GAAP financial statements result in the exclusion of items that are recurring and will be reflected in the company's financial results for the foreseeable future. The company compensates for these limitations by providing specific information regarding the GAAP amounts excluded from the non-GAAP financial measures. The company further compensates for the limitations of our use of non-GAAP financial measures by presenting comparable GAAP measures equally or more prominently. The company evaluates the non-GAAP financial measures together with the most directly comparable GAAP financial measure.

Investors and potential investors are encouraged to review the reconciliation of non-GAAP financial measures contained within this press release with our GAAP financial measures. For more information, see the consolidated statements of income and the "Reconciliation of GAAP to Non-GAAP Financial Measures" contained in this press release.

Forward-Looking Statements:

This release contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward looking statements include statements regarding the preliminary results for the quarter ended September 30, 2010; guidance on expected results for the fourth quarter of 2010; and tax rates for 2010. Forward looking statements also include statements about the security market, the demand for and value of McAfee's security solutions, and McAfee’s strategy, market leadership and positioning for continued market share gains. Actual results could vary, perhaps materially, and the expected results may not occur. In particular, actual results are subject to other risks, including that the announcement and pendency of the acquisition by Intel could disrupt McAfee’s business. In addition, McAfee may not achieve its planned revenue realization rates or sales targets, succeed in its efforts to grow its business or combat effectively the security threats of the future, leverage its relationships and opportunities to the degree expected or capture market share, notwithstanding related commitment or related investment. McAfee may not benefit from its acquisitions, strategic alliances or partnerships as anticipated; the company's product and service offerings may not continue to interoperate effectively with operating systems causing delayed or lost sales or increased expenses; the company may experience delays in product development or the release of previously announced products; the company may experience delayed or lost sales and revenue as a result of outages in integrated systems on which it is highly dependent; or the company may not satisfactorily anticipate or meet its customers' needs or expectations. Actual results are also subject to a number of other factors, including customer and distributor demand fluctuations, currency fluctuations, and macro and other economic conditions both in the United States and internationally, including the adverse global economic conditions. The forward-looking statements contained in this release are also subject to other risks and uncertainties, including those more fully described in McAfee's filings with the SEC including its quarterly report on Form 10-Q for the period ended June 30, 2010. McAfee does not undertake to update any forward looking statements.

About McAfee, Inc.:

McAfee, Inc., headquartered in Santa Clara, California, is the world's largest dedicated security technology company. McAfee is relentlessly committed to tackling the world's toughest security challenges. The company delivers proactive and proven solutions and services that help secure systems and networks around the world, allowing users to safely connect to the Internet, browse and shop the web more securely. Backed by an award-winning research team, McAfee creates innovative products that empower home users, businesses, the public sector and service providers by enabling them to prove compliance with regulations, protect data, prevent disruptions, identify vulnerabilities, and continuously monitor and improve their security. http://www.mcafee.com

McAfee and/or other noted McAfee related products contained herein are registered trademarks or trademarks of McAfee, Inc., and/or its affiliates in the U.S. and/or other countries. McAfee Red in connection with security is distinctive of McAfee brand products. Any other non-McAfee related products, registered and/or unregistered trademarks contained herein are only by reference and are the sole property of their respective owners. © 2010 McAfee, Inc. All rights reserved.

MCAFEE, INC. AND SUBSIDIARIESCONDENSED CONSOLIDATED BALANCE SHEETS(in thousands)(Unaudited)     September 30,2010 December 31,2009   Assets: Cash and marketable securities $ 1,029,005 $ 950,168 Accounts receivable, net 280,451 294,315 Prepaid expenses, deferred costs of revenue and other current assets (A) 295,694 263,891 Property and equipment, net 145,735 133,016 Deferred income taxes 593,111 604,737 Goodwill, intangibles and other long-term assets, net (A)   1,655,213     1,717,059   Total assets $ 3,999,209   $ 3,963,186       Liabilities: Accounts payable $ 60,931 $ 55,104 Accrued liabilities 350,262 312,299 Deferred revenue (B) 1,442,472 1,407,473 Accrued taxes and other long-term liabilities   59,336     70,772   Total liabilities 1,913,001 1,845,648   Stockholders' Equity: Common stock 1,915 1,868 Treasury stock (1,169,816 ) (845,118 ) Additional paid-in capital 2,429,694 2,251,916 Accumulated other comprehensive loss (11,288 ) (3,291 ) Retained earnings   835,703     712,163   Total stockholders' equity   2,086,208     2,117,538   Total liabilities and stockholders' equity $ 3,999,209   $ 3,963,186     (A)

Deferred costs of revenue and prepaid expenses primarily associated with revenue-sharing and royalty arrangements were $302.8M and $271.8M as of September 30, 2010 and December 31, 2009, respectively.

(B)

Short term and long term deferred revenue were $1,097.2M and $345.3M as of September 30, 2010 and $1,068.7M and $338.8M as of December 31, 2009, respectively.

  MCAFEE, INC. AND SUBSIDIARIESCONDENSED CONSOLIDATED STATEMENTS OF INCOME(in thousands, except per share data)(Unaudited)     Three Months EndedSeptember 30, Nine Months EndedSeptember 30, 2010   2009 2010   2009     Net revenue $ 523,259 $ 485,271 $ 1,515,243 $ 1,401,666   Cost of net revenue (A) (B) 121,608 107,410 343,421 297,855 Amortization of purchased technology 20,475 19,360 61,313 57,193 Impact of signature file update - - 725 -         Gross profit 381,176 358,501 1,109,784 1,046,618   Operating costs:   Research and development (A) 86,391 82,231 251,927 238,841   Sales and marketing (A) 162,596 155,506 484,060 461,566   General and administrative (A) 46,174 40,779 135,140 120,180   Restructuring charges 1,398 1,714 26,279 10,919   Amortization of intangibles 7,446 10,492 22,591 30,600   Acquisition-related costs 8,678 25,114 13,493 31,798  

Litigation-related and other costs

4,250 - 4,250 2,325   Impact of signature file update - - 1,093 -   Loss on sale/disposal of assets and technology   193     160   257     238     Total operating costs   317,126     315,996   939,090     896,467     Income from operations 64,050 42,505 170,694 150,151   Interest and other income (loss), net (809 ) 1,069 (158 ) 3,249   Impairment of marketable securities   -     -   -     (710 )   Income before provision for income taxes 63,241 43,574 170,536 152,690   Provision for income taxes 16,681 6,785 46,996 33,792         Net income $ 46,560   $ 36,789 $ 123,540   $ 118,898     Net income per share - basic $ 0.30   $ 0.23 $ 0.80   $ 0.76   Net income per share - diluted $ 0.30   $ 0.23 $ 0.79   $ 0.75     Shares used in per share calculation - basic   152,788     157,186   154,976     155,580   Shares used in per share calculation - diluted   154,988     159,925   157,215     158,250     (A) Stock-based compensation expense is included as follows: Cost of net revenue $ 2,012 $ 1,598 $ 5,644 $ 4,406 Research and development 9,174 6,699 23,227 19,904 Sales and marketing 12,751 10,646 36,936 36,841 General and administrative 7,849 7,656 21,876 20,563         $ 31,786   $ 26,599 $ 87,683   $ 81,714     (B) In the three and nine months ended September 30, 2009, cost of net revenue includes $2.7M of acquisition-related costs.   MCAFEE, INC. AND SUBSIDIARIESCONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS(in thousands)(Unaudited)     Nine Months EndedSeptember 30, 2010 2009   Cash flows from operating activities: Net income $ 123,540 $ 118,898 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 129,030 126,402 Stock-based compensation expense 87,683 75,656 Excess tax benefit from stock-based awards (9,338 ) (8,643 ) Deferred income taxes 26,660 12,993 Non-cash restructuring charge 12,857 840 Impairment of marketable securities - 710 Other non-cash items 4,665

 

4,592 Changes in assets and liabilities, net of acquisitions: Accounts receivable, net 6,386 95,744 Prepaid expenses, deferred costs of revenue, and other assets (37,623 ) (72,097 ) Accounts payable 6,136 2,203 Accrued taxes and other liabilities 29,467 (25,150 ) Deferred revenue   51,439     19,071   Net cash provided by operating activities   430,902     351,219   Cash flows from investing activities: Purchase of marketable securities (287,159 ) (307,789 ) Proceeds from sales of marketable securities 145,929 14,830 Proceeds from maturities of marketable securities 247,445 141,265 Purchase of property and equipment (54,481 ) (44,401 ) Acquisitions, net of cash acquired (42,489 ) (171,618 ) Other investing activities   10,390     158   Net cash provided by (used in) investing activities   19,635     (367,555 ) Cash flows from financing activities: Proceeds from issuance of common stock under our employee stock benefit plans 83,402 70,548 Excess tax benefit from stock-based awards 9,338 8,643 Repurchase of common stock (324,698 ) (21,737 ) Bank borrowings - 100,000 Payment of accrued purchase price and contingent consideration (19,556 ) - Other financing activities   (3,157 )   (4,949 ) Net cash (used in) provided by financing activities   (254,671 )   152,505   Effect of exchange rate fluctuations on cash   (12,532 )   19,902   Net increase in cash and cash equivalents 183,334 156,071 Cash and cash equivalents at beginning of period   677,137     483,302   Cash and cash equivalents at end of period $ 860,471   $ 639,373     MCAFEE, INC. AND SUBSIDIARIESRECONCILIATION OF GAAP TO NON-GAAP FINANCIAL MEASURES(in thousands, except per share data)(Unaudited)       Three Months EndedSeptember 30, Nine Months EndedSeptember 30, 2010 2009 2010 2009 Net revenue: GAAP net revenue $ 523,259 $ 485,271 $ 1,515,243 $ 1,401,666 Impact of signature file update (1)   -     -   6,105     - Non-GAAP net revenue $ 523,259   $ 485,271 $ 1,521,348   $ 1,401,666   Gross profit: GAAP gross profit $ 381,176 $ 358,501 $ 1,109,784 $ 1,046,618 Impact of signature file update (1) - - 6,830 - Stock-based compensation expense (2) 2,012 1,598 5,644 4,406 Amortization of purchased technology (3) 20,475 19,360 61,313 57,193 Acquisition-related costs   -     2,717   -     2,717 Non-GAAP gross profit $ 403,663   $ 382,176 $ 1,183,571   $ 1,110,934   Operating income: GAAP operating income $ 64,050 $ 42,505 $ 170,694 $ 150,151 Impact of signature file update (1) - - 7,923 - Stock-based compensation expense (2) 31,786 26,599 87,683 81,714 Amortization of purchased technology (3) 20,475 19,360 61,313 57,193 Amortization of intangibles (3) 7,446 10,492 22,591 30,600 Restructuring charges (4) 1,398 1,714 26,279 10,919 Acquisition-related costs (5) 8,678 27,831 13,493 34,515

Litigation-related and other costs

(6) 4,250 - 4,250 2,325 Loss on sale/disposal of assets and technology (7) 193 160 257 238         Non-GAAP operating income $ 138,276   $ 128,661 $ 394,484   $ 367,655   Net income: GAAP net income $ 46,560 $ 36,789 $ 123,540 $ 118,898 Impact of signature file update (1) - - 7,923 - Stock-based compensation expense (2) 31,786 26,599 87,683 81,714 Amortization of purchased technology (3) 20,475 19,360 61,313 57,193 Amortization of intangibles (3) 7,446 10,492 22,591 30,600 Restructuring charges (4) 1,398 1,714 26,279 10,919 Acquisition-related costs (5) 8,678 27,831 13,493 34,515

Litigation-related and other costs

(6) 4,250 - 4,250 2,325 Loss on sale/disposal of assets and technology (7) 193 160 257 238 Marketable securities (accretion) impairment (8) (322 ) - (1,151 ) 710 Provision for income taxes (9)   16,681     6,785   46,996     33,792   Non-GAAP income before provision for income taxes 137,145 129,730 393,175 370,904   Non-GAAP provision for income taxes (10)   32,915     31,135   94,362     89,017 Non-GAAP net income $ 104,230   $ 98,595 $ 298,812   $ 281,887   Net income per share - diluted: * GAAP net income per share - diluted $ 0.30 $ 0.23 $ 0.79 $ 0.75 Stock-based compensation expense per share (2) 0.21 0.17 0.56 0.52 Other adjustments per share

 (1), (3)-(10) 

0.17 0.22 0.56 0.51         Non-GAAP net income per share - diluted * $ 0.67   $ 0.62 $ 1.90   $ 1.78     Shares used to compute Non-GAAP net income per share - diluted   154,988     159,925   157,215     158,250  

* Non-GAAP net income per share is computed independently for each period presented. The sum of GAAP net income per share and non-GAAP adjustments may not equal non-GAAP net income per share due to rounding differences.

 

This presentation includes non-GAAP measures. Our non-GAAP measures are not meant to be considered in isolation or as a substitute for comparable GAAP measures, and should be read only in conjunction with our consolidated financial statements prepared in accordance with GAAP. For a detailed explanation of the adjustments made to comparable GAAP measures, the reasons why management uses these measures, the usefulness of these measures and the material limitations of these measures, see items (1) through (10).

 

Items (1) through (10) on the “Reconciliation of GAAP to Non-GAAP Financial Measures” table are listed to the right of certain categories under “Net Revenue”, “Gross profit,” “Operating income,” “Net income” and “Net income per share - diluted” and correspond to the categories explained in further detail below under paragraphs (1) through (10).

The non-GAAP financial measures are non-GAAP net revenue, non-GAAP operating income, non-GAAP net income and non-GAAP net income per share — diluted, which adjust for the following items: the impact of signature file update, stock-based compensation expense, amortization of purchased technology and intangibles, restructuring charges, acquisition-related costs, loss on sale/disposal of assets and technology, litigation-related and other costs, marketable securities (accretion) impairment, income taxes and certain other items. We believe that the presentation of these non-GAAP financial measures is useful to investors, and such measures are used by our management, for the reasons associated with each of the adjusting items as described below:

(1)

Impact of signature file update primarily reflects the negative impact during the three months ended June 30, 2010, related to prior-period deferred revenue and additional costs incurred. The deferred revenue was originally scheduled to be recognized from the balance sheet and was delayed into future periods due to actions we took when providing customer care packages to our customers related to our release in April of an anti-virus signature file update that impacted some of our customers. We consider our operating results without this impact when evaluating our ongoing performance as we believe that the exclusion allows for more accurate comparisons of our financial results to previous periods. In addition, we believe it is useful to investors to understand the specific impact of the signature file update on our operating results.

  (2)

Stock-based compensation expense consist of expense relating to stock-based awards issued to employees and outside directors including stock options, restricted stock awards and units, restricted stock units with performance-based vesting and our Employee Stock Purchase Plan. Because of varying available valuation methodologies, subjective assumptions and the variety of award types, the Company believes that the exclusion of stock-based compensation expense allows for more accurate comparisons of our operating results to our peer companies, and for a more accurate comparison of our financial results to previous periods. In addition, the Company believes it is useful to investors to understand the specific impact of stock-based compensation expense on our operating results.

  (3)

Amortization of purchased technology and intangibles are non-cash charges that can be impacted by the timing and magnitude of our acquisitions. The Company considers its operating results without these charges when evaluating its ongoing performance and/or predicting its earnings trends, and therefore excludes such charges when presenting non-GAAP financial measures. The Company believes the assessment of its operations excluding these costs is relevant to its assessment of internal operations and comparisons to the performance of other companies in its industry.

  (4)

Restructuring charges include excess facility and asset-related restructuring charges and severance costs resulting from reductions of personnel driven by modifications to the Company’s business strategy, such as acquisitions or divestitures. These costs may vary in size based on the Company’s restructuring plan. In addition, the Company’s assumptions are continually evaluated, which may increase or reduce the charges in a specific period. The Company’s management excludes these costs when evaluating its ongoing performance and/or predicting its earnings trends, and therefore excludes these charges when presenting non-GAAP financial measures.

  (5)

Acquisition-related costs include direct costs of the acquisition and expenses related to acquisition integration activities. Examples of costs directly related to an acquisition include transactions fees, due diligence costs, acquisition retention bonuses and severance, fair value adjustments related to contingent consideration, amounts or recoveries subject to escrow provisions, and certain legal costs related to acquired litigation. Additionally, we have included direct costs related to our pending acquisition by Intel. These expenses vary significantly in size and amount and are disregarded by the Company’s management when evaluating and predicting earnings trends because these charges are unique to specific acquisitions, and are therefore excluded by the Company when presenting non-GAAP financial measures.

  (6)

Litigation-related and other costs are charges related to discrete and unusual events where the Company has incurred significant costs which, in the Company’s view, are not incurred in the ordinary course of operations. Examples of such charges include litigation and investigation-related charges. The Company’s management excludes these costs when evaluating its ongoing performance and/or predicting its earnings trends, and therefore excludes these charges when presenting non-GAAP financial measures. Further, the Company believes it is useful to investors to understand the specific impact of these charges on its operating results. In the third quarter of 2010, we combined the “Investigation-related and other costs” and “Legal settlements” line items which were previously reported separately into this line item for ease of presentation.

  (7)

Loss on sale/disposal of assets and technology relate to the sale or disposal of assets of the Company. These losses or gains can vary significantly in size and amount. The Company’s management excludes these losses or gains when evaluating its ongoing performance and/or predicting its earnings trends, and therefore excludes these items when presenting non-GAAP financial measures. In addition, in periods where the Company realizes gains or incurs losses on the sale of assets and/or technology, the Company believes it is useful to investors to highlight the specific impact of these amounts on its operating results.

  (8)

Marketable securities (accretion) impairment includes “other than temporary” declines in the fair value of our available-for-sale securities and subsequent recoveries of these losses. The Company’s management excludes these losses/income when evaluating the company’s ongoing performance and/or predicting earning trends, and therefore excludes these losses/income when presenting non-GAAP financial measures.

  (9)

Provision for income taxes is our GAAP provision that must be added back to GAAP net income to reconcile to non-GAAP income before taxes.

  (10)

Non-GAAP provision for income taxes reflects a 24% non-GAAP effective tax rate in 2010 and 2009 which is used by the Company’s management to calculate non-GAAP net income. Management believes that the 24% effective tax rate is reflective of a long-term normalized tax rate under the global McAfee legal entity and tax structure as of the respective period end.

  MCAFEE, INC. AND SUBSIDIARIESPROJECTED GAAP REVENUE AND RECONCILIATION OF PROJECTEDGAAP NET INCOME PER SHARE TO PROJECTED NON-GAAP NET INCOME PER SHARE(Unaudited)   Q4 FY'10 Projected GAAP revenue range $530M - $550M     Projected net income per share reconciliation:   Projected GAAP net income per share range - diluted

$0.29 - $0.33

    Add back: Projected stock-based compensation adjustment per share, net of tax (A) $0.13 - $0.17 Projected other adjustments per share, net of tax (B)

$0.17 - $0.21

    Projected non-GAAP net income per share range - diluted* $0.67 - $0.71  

*

We believe that providing a forecast of the non-GAAP items set forth above is useful to investors, and such items are used by our management, for the reasons associated with each of the adjusting items as described below.

 

(A)

Stock-based compensation expense consist of expense relating to stock-based awards issued to employees and outside directors including stock options, restricted stock awards and units, restricted stock units with performance-based vesting and our Employee Stock Purchase Plan.  Because of varying available valuation methodologies, subjective assumptions and the variety of award types, the Company believes that the exclusion of stock-based compensation expense allows for more accurate comparisons of our operating results to our peer companies, and for a more accurate comparison of our financial results to previous periods. In addition, the Company believes it is useful to investors to understand the specific impact of stock-based compensation expense on our operating results.

 

(B)

Other adjustments include amortization of purchased technology and intangibles, litigation-related and other costs, restructuring charges, acquisition-related costs, loss/gain on sale/disposal of assets and technology, income taxes and certain other items.  We exclude these items because we believe they are not directly related to the operation of our business.  A more detailed explanation of the reasons why we exclude these categories from our GAAP net income is contained in paragraphs (1) through (10) above under the table entitled “Reconciliation of GAAP to Non-GAAP Financial Measures.”  

 

For Q4 FY’10, this guidance reflects an assumed annual GAAP and non-GAAP tax rate of 29% and 24%, respectively.

  MCAFEE, INC. AND SUBSIDIARIESCONDENSED CONSOLIDATED GAAP REVENUE BY GEOGRAPHY(in thousands)(Unaudited)                   Three Months EndedSeptember 30, 2010 Three Months EndedJune 30, 2010 Three Months EndedMarch 31, 2010 Three Months EndedDecember 31, 2009 Three Months EndedSeptember 30, 2009   McAfee North America $ 312,279 60 % $ 285,858 58 % $ 284,197 57 % $ 298,562 57 % $ 273,464 56 %   McAfee International 210,980 40 % 203,381 42 % 218,548 43 % 227,104 43 % 211,807 44 %                     GAAP net revenue $ 523,259 100 % $ 489,239 100 % $ 502,745 100 % $ 525,666 100 % $ 485,271 100 %   McAfee North America

 (1) 

2,893   McAfee International

 (1) 

  3,212   Non-GAAP adjustments 6,105   McAfee North America 288,751 58 %   McAfee International 206,593 42 %     Non-GAAP net revenue $ 495,344 100 %  

This presentation includes a non-GAAP net revenue measure. Our non-GAAP net revenue measure is not meant to be considered in isolation or as a substitute for a comparable GAAP net revenue measure, and should be read only in conjunction with our consolidated financial statements prepared in accordance with GAAP. For a detailed explanation of the adjustment made to the comparable GAAP net revenue measure, the reasons why management uses this measure, the usefulness of this measure and the material limitations of this measure, see item (1) on the Reconciliation of GAAP to Non-GAAP Financial Measures.

  MCAFEE, INC. AND SUBSIDIARIESCONDENSED CONSOLIDATED GAAP REVENUE BY PRODUCT GROUPS(in thousands)(Unaudited)                   Three Months EndedSeptember 30, 2010 Three Months EndedJune 30, 2010 Three Months EndedMarch 31, 2010 Three Months EndedDecember 31, 2009 Three Months EndedSeptember 30, 2009   McAfee Corporate $ 323,897 62 % $ 298,449 61 % $ 312,507 62 % $ 337,910 64 % $ 308,573 64 %   McAfee Consumer 199,362 38 % 190,790 39 % 190,238 38 % 187,756 36 % 176,698 36 %                 GAAP net revenue 523,259 100 % 489,239 100 % $ 502,745 100 % $ 525,666 100 % $ 485,271 100 %   McAfee Corporate

 (1) 

6,105   McAfee Consumer

 (1) 

-   Non-GAAP adjustments 6,105   McAfee Corporate 304,554 61 %   McAfee Consumer 190,790 39 %     Non-GAAP net revenue $ 495,344 100 %  

This presentation includes a non-GAAP net revenue measure. Our non-GAAP net revenue measure is not meant to be considered in isolation or as a substitute for a comparable GAAP net revenue measure, and should be read only in conjunction with our consolidated financial statements prepared in accordance with GAAP. For a detailed explanation of the adjustment made to the comparable GAAP net revenue measure, the reasons why management uses this measure, the usefulness of this measure and the material limitations of this measure, see item (1) on the Reconciliation of GAAP to Non-GAAP Financial Measures.