Since May, computer security software maker McAfee (NYSE:MFE) has suffered a double whammy: the tech plunge in stock values, and the poison of the stock-option backdating scandal. Now, with a likely earnings restatement on the horizon, all this uncertainly will likely keep a ceiling on the stock price for the foreseeable future.
In the second quarter, revenues for the Motley Fool Stock Advisor recommendation increased 13% to $277 million. Net income was $31 million or $0.19 per share, down from $42 million or $0.25 per share. The company is still an impressive cash-generator, adding $76 million in cash flows from operations in the second quarter. In all, it has $1.15 billion in the bank.
Facing huge rivals like Symantec (NASDAQ:SYMC) - as well as imminent competitors like Microsoft (NASDAQ:MSFT) - McAfee is spending large amounts in research and development, and getting results. For example, in the second quarter, it added 21 patents to its portfolio, for a total of 220.
The company's products meet the complex needs of individuals and major corporations alike. Its IntruShield software, which deals with intrusion prevention and detection, is popular with firms like Acxiom. For consumers, McAfee delivers its software via the Internet on a subscription basis. That strategy has been the hallmark of growth companies like Salesforce.com (NYSE:CRM) and NetSuite. In the second quarter, McAfee added 1.6 million net new subscribers, for a total of 20.8 million.
McAfee has been aggressive in its partnership strategy to grow its business. On a global basis, its software is recommended by Dell (NASDAQ:DELL), bundled on the manufacturer's computers as the default offering. Other partners include CompUSA, BSkyB, and AOL. In September, Equifax will also begin promoting McAfee products to its nine million customers.
Management is also using its partnership strategy to penetrate emerging markets such as China. Its partners there include China Unicom, StarSoftComm, and Baidu (NASDAQ:BIDU).
In addition, McAfee is the leader in wireless security. Some of these partners include Cingular Wireless, Motorola (NYSE:MOT), and Symbian. McAfee has its security solutions on about 28.5 million handsets.
Yet all this is overshadowed by the options scandal, in which a variety of companies have been discovered granting stock options at prices below a stock's fair market value, ensuring that certain employees - usually senior management - get immediate windfalls.
McAfee has established a special committee of the board of directors to investigate the matter. While its inquiry is not finished, the initial review has indicated that options were backdated, and the company will likely need to restate prior earnings; management has said that its prior financial statements are probably unreliable. Furthermore, McAfee will not be able to file its quarterly report for the second quarter on a timely basis.
It's too early to determine the scandal's overall impact on McAfee's perfroamce. It will certainly mean higher legal costs, a big distraction for management, and possible fines. For a highly competitive business like security software, this is likely to drag on McAfee's stock for some time.
For related reading:
- Options Inquiry Weighs on Openwave
- McAfee Making the World Safe for the Net
- RSA Security Locks Up Business
- Symantec Still Flat
McAfee is a Stock Advisor selection. Symantec and Microsoft areInside Valuerecommendations. Dell is an Inside Value and Stock Advisor pick. Take the newsletter that best fits your investing style for afree 30-day spin.
Fool contributor Tom Taulli does not own shares of any companies mentioned in this article.
