Virus eater extraordinaire McAfee (NYSE:MFE) brings its fourth-quarter and full-year 2006 earnings numbers online tomorrow afternoon. Want to know what Wall Street expects to see? Read on. Want to know what really matters? Read on a bit more.

What analysts say:

  • Buy, sell, or waffle? Twenty-eight analysts follow McAfee, giving the firm 16 buy ratings, 11 holds, and a sell.
  • Revenues. On average, they're looking for 15% quarterly sales growth to $290.9 million.
  • Earnings. Profits are predicted to rise 26% to $0.34 per share.

What management says:
In December, McAfee announced a few steps it was taking to correct its past involvement in the stock options backdating scandal. It is going back and repricing unexercised stock options issued to two former executives and three current directors. The firm also advised that it may take "additional remedial measures." I'm just guessing, but suspect this refers to how it will deal with backdated stock options that have already been exercised.

In other news, McAfee advised us of a "cost reductions" and "restructuring" program aimed at shaving $10 million to $12 million from annual costs. These savings should quickly recoup the expense of the restructuring that will yield them $6 million to $8 million total, of which $2 million to $4 million will appear in Q4's results, with the balance falling in Q1 2007.

The bad news: "substantially all of these restructuring charges" will subtract actual cash from the coffers (i.e. these are not "non-cash charges to earnings"); and approximately 125 employees will lose their jobs, with most of these being in sales and marketing.

What management does:
McAfee has been experiencing continuous margin pressures over the last four quarters, with the rolling gross falling a little more every three months. Operating margins began falling as well two quarters back, and the net is also trending downwards -- although we saw signs of life there last quarter.

Margins

6/05

9/05

12/05

3/06

6/06

9/06

Gross

85.7%

86.0%

84.9%

84.9%

84.5%

83.5%

Operating

18.0%

21.4%

21.9%

22.8%

21.5%

19.8%

Net

24.8%

14.2%

14.1%

14.0%

12.6%

12.9%
All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ended in the named months.

One Fool says:
Peering deeper into the income statement, here's what we see. Sales are up 14% year over year in the last two quarters. Cost of goods sold (COGS) are up 37% -- hence the gross margin deterioration. And selling, general, and administrative costs (SG&A) are also out of line with sales growth, rising 20% during the period.

Looks to me like McAfee has a balancing act to perform. On the one hand, yes, SG&A is growing too fast, and so it's understandable that management would target sales and marketing for layoffs. But on the other hand, with both COGS and SG&A outpacing sales growth, perhaps the solution is to spend more on the marketing department, rather than less?

Come to think of it, the fastest growing operating cost at McAfee isn't in either of these categories -- it's stock options expensing, which rose 456% year over year. Seeing all the troubles stock options have already caused, if management is really looking for someplace to cut, this place looks like a fine place for a first incision.

Competitors:

  • CA (NYSE:CA)
  • Cisco (NASDAQ:CSCO)
  • IBM (NYSE:IBM)
  • Microsoft (NASDAQ:MSFT)
  • Novell (NASDAQ:NOVL)
  • Symantec (NASDAQ:SYMC)

For more on McAfee, read:

McAfee is a Stock Advisor selection. Microsoft and Symantec are Inside Value recommendations.

Fool contributor Rich Smith does not own shares of any company named above.