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April 22, 2004

NAI unloads Sniffer, to be called McAfee again

Networks Associates Inc is to sell its loss-making Sniffer network management software division to private investors for about $275m cash and will change the name of the company to McAfee Inc to match its major brands.

By CBR Staff Writer

It’s a cost-cutting move, designed to take the cost of running Sniffer off the books and help the firm towards a goal of having a 25% operating margin by mid-2005. But the sale will mean NAI reports lower earnings in the short term, executives said.

Cost reduction is our highest priority, CEO George Samenuk said in a conference call following the announcement. Many other productivity and cost-cutting initiatives will roll out over next several months.

The buyers are Silver Lake Partners and Texas Pacific Group. The new Sniffer will be called Network General Corp, and will keep the Sniffer brand on the products. Between 450 and 500 employees will leave NAI for the new company.

Samenuk said the deal means that $200m in annual revenue will be lost faster than NAI can match it with reduced costs. This means the transaction will be dilutive to the company’s earnings in 2004.

Details of the cost-cutting were not fully spelled out, but will include fundamentally redesigning internal back office systems, strategically modifying product designs, and modifying web services to the company’s reseller and distribution partners

The firm’s channel programs will be overhauled and expanded, Samenuk said, to increase sales productivity. The company has already started doing this, increasing spending on channel marketing in the first quarter.

Today the new McAfee has about 90% of its business going through the channel, president Gene Hodges told ComputerWire. In about six weeks that will be about 99%, he said. He did not say whether this meant direct sales layoffs.

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Hodges said that NAI/McAfee will bear some Sniffer costs into the middle of next year, because the company’s support and other departments were integrated across all the firm’s brands, and will continue to support the Sniffer transition.

The company also gave insight yesterday into its first-quarter performance. Revenue is expected to be $217m, and net earnings will be $0.32 per share. At the pro forma level, EPS will be $0.10, a penny worse than the First Call estimate.

Samenuk said NAI was unable to unload the costs of its Magic Solutions helpdesk software business, which was divested during the quarter for similar reasons, as fast as it had anticipated, which hit the bottom line.

To balance the bad news with something to reassure investors, the company has started breaking out its bookings growth metrics, to give investors more detail on the forward-looking health of NAI revenues.

Bookings means the revenue recognized up-front added to the revenue recognized over the lifetime of subscriptions, according to the firm. Bookings for the standalone McAfee were up 32% year over year, Samenuk said, compared to revenue up 11%.

The name change will not take effect until the Sniffer sale is completed, expected to be in the third quarter. The company then will be comprised just of its consumer and enterprise network and endpoint security products.

The McAfee brand has its origins with the popular anti-virus software, named after industry pioneer John McAfee, but was rolled out across most of the company’s products in a branding exercise last July.

This article is based on material originally published by ComputerWire

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