BankBostons Report on feb 24
Positive impressions of NETA's product line repositioning. Network Associates is in the process of fundamentally repositioning the company which will enable it to
emerge as a provider of a broad-based integrated product line for network management, systems management, and security management. Over the course of the
next few quarters, NETA will introduce its complete Net Tools Product Suite, with each of the various point products fully integrated to form a leading suite
solution. Some of the key elements of the new product flow in the next several quarters include:
- Integrated internal communications architecture for event management that spans the anti-virus, security, network management, and service desk product lines.
- Dramatically enhanced and highly scalable service product that is cost effective for all enterprises, from small businesses to the largest enterprises; that also merges
the best of today's Magic and McAfee service desk offerings.
- Comprehensive ability to manage all the elements in a network, from the desktop through the server to the network infrastructure elements.
- Increasingly powerful stand-alone security capabilities that gain additional power when integrated with the assessment, reporting, and response capabilities of the
overall NETA network systems and network management environment.
While NETA has released a number of individual elements of the refreshed product line over the last two quarters, we anticipate in late Q1:99 and Q2 the company
will mark the first public promotion of the powerful, newly architected product line.
Network Associates' business processes are improving. Now that it has been a few months since NETA's last acquisition, the company appears to be successfully
digesting the piece parts. In addition, the acquisition respite has enabled the company to concentrate on quality assurance, customer satisfaction, sales and product
visibility, and educating the sales force to more effectively sell the company's complete product line. The sales organization has also been reorganized to form a
group of account representatives to specifically drive account penetration at the low-end.
Network Associates' business fundamentals remain on track for Q1:99. Two months into Q1:99, we remain confident that Network Associates' business
fundamentals remain on track. We are confident with company's ability to meet or slightly exceed our Q1:99 revenue estimate of $285 million and our EPS estimate
of $0.48. Network Associates has a number of new and improved products that have either recently shipped or will ship in Q1:99. A few of these products include:
the Web-based Magic Total Service Desk (TSD), Zero Administration Client 2001 (ZAC), and new security products.
Summary and valuation. At its current price of $49.00, Network Associates is trading at a P/E of 22.9x our expected 1999 EPS estimate of $2.14 and at 5.7x
expected 1999 revenues. We think the valuation is compelling with or without a reduction to EPS from a changed accounting treatment for purchased acquisitions.
We think investors should begin to focus on CY 2000 possibilities, which for fiscal year 2000, we would expect to see EPS around $2.75 and revenue of $1.65
billion or better. With an estimated $800 million in recurring revenue expected next year, the company's visibility remains remarkably clear. As the quality of the
financial results continues to grow, and with a fundamental repositioning of the product offerings, we would expect Network Associates to trade at 30x
forward-year multiple and we reiterate our Strong Buy rating. |
