Network Associates at a crossroads
As a long-time long (since MCAF in 1996), I have watched the company go through many phases. The tremendous growth in 96-98 came mostly from anti-virus, first through taking business away from SYMC and others, then through acquisition. In this period, the CEO's major strengths were: 1) managing the growth of his transaction-oriented sales force, and 2) recognizing that he had better do something to establish a new line of business because once a/v grew to $600m or more, it would be limited by market growth. His major weaknesses were a) failure to establish a culture of invention through which new lines of business could be developed, b) failure to have the company participate in the explosion of new web applications.
He did 1) incredibly well. In fact, I now believe that the management and growth of a large sales force to be his greatest strength.
He did 2) well too, getting the company into new lines of business, from help desk to encryption to firewalls to tune-ups.
His failure in a) resulted in him having to spend way way way way too much money to acquire new lines of business, and also always being a later entrant into those businesses. I also believe that a culture with more invention would have presented his sales force with more opportunities to "have" something that clients "wanted".
He recognized his failure in b) and has been getting the company into more web businesses like mcafee.com, direct pc, firewalls, and so on over the last 18 months.
Now:
a/v is no longer able to carry the company, but is a stable major source of profitable revenue, I estimate at >$550m/yr
Firewalls are still hot, but he bought one that has had the pants beat off it by CHKP. He may still have the last laugh if his integrated package of security tools "gels" in the minds of buyers. In my view, the firewall not only has to have all the features, it also has to be the easiest and best to manage if it is to displace CHKP.
Encryption has not taken off, but everyone believes that it will someday, so he is poised to do well here too.
Help desk continues to grow, probably responsible for $150-$200m/yr, and could easily outpace the market if he gets the feature-set and performance right.
Utilities are interesting, but mostly only as fillers for the suites out there ("suiteners" /--)). Not much revenue by themselves.
Network monitoring: one of his best product suites, probably generating $200m/yr.
The company reported sales last year of $990m, but many are now saying that some of that was not "real" sales, but rather simply product "in the channel". I agree with this point of view, but I think that the real sell-through number was probably about $850m. I believe the company has the capability to sustain growth of 25% per year through $2.5b/yr, which should lead to a 1999 "sales" of just over $1b. $150m of that will go to make up for the $150m of over-stuffed channel (resulting in the Q2 $25m number), so I expect $1999 to come in at around $0.85b. The company may wish to give itself some "cushion" into 2000, so it may recognize only, say, 90% of that, or about $770m. With $245m and $25m in Q1 and Q2 respectively, this would require about $200m in Q3 and $250m in Q4. None of this seems terribly unreasonable. Even if the $245m in Q1 was really closer to $200m, it is not unreasonable.
So, this company does not have to do anything unreal to make excellent revenue run rates through the end of the year. Profit will probably lag by a quarter, since Q2 was a disaster, but the real profit "test" will come in Q4's numbers.
A major uncertainty comes from Mr. Larson himself. Is he still engaged or has he taken such a big blow to the stomach that he is adrift. I don't know, and the conf calls have not shed much light on the situation. I do know that there are other people in the world who could run this company, so his presence is not entirely necessary. From watching him all these years, he did not strike me as the kind of person who would want to give up, to be remembered as the person to took NETA to nearly $1b in sales but then lost $6b in market cap. I don't think he would want to be remembered as just a great sales manager. And indeed I myself believe he is much more than that, despite the mis-steps he has taken over the last year. But none of that matters if he disengages. I would like to hear, from someone who knows, what his manner is these days. Is he still "Bill the Terrible", or does he not give a fig any more. Do sales people and techies still have to take a valium before and after a review with him, or are meetings with Bill now just an annoying 30 minutes out of your day? To my mind, this company is not sick, but it is wounded, and its survival depends a lot on the attitude of the guys at the top.
Also, truly big companies like HP, CSCO, and MSFT are now paying very close attention to the security arena. Of course, NETA may be a buyout candidate, but another possibility would be for one of these players to take NETA's business away from it, especially MSFT. True, it's always a looming specter, but the interest from the biggies has been more intense of late. What worries me here is that except for the occasional "[product] receives [award]" press release, this company has generated no innovative product news. It seems stagnant, which is certainly unlike the MCAF I used to know.
At any rate: the company has a great user base, great products (yes yes, they could certainly be better, but they get the job done for millions each day), a great sales force, and an interesting (to say the least) management team. My advice to them: pay more attention to innovation within the company, let the world know that you are inventing truly great stuff, and for goodness sakes try to calm the nerves of nervous investors [but don't lie to them]. Of course, it always goes without saying to just grow revenues and profits :-)
Anyway, enough ramblings for now. With the way the boards have degenerated, I'm almost scared of the responses this post will generate. All the best.
- A frustrated but hopeful Elephant |
