NETWORKS ASSOCIATES INC/ (NETA) Annual Report (SEC form 10-K)
Net Revenue. Net revenue increased 35% to $990.0 million in 1998 from $735.7 million in 1997, and 43% from $515.0 million in 1996. The increases in net revenue are due to the increases in product revenue and services and support revenues described below.
Product revenue increased 31% to $831.4 million from $634.3 million in 1997, and 46% from $435.5 million in 1996. The increase in the growth rate in product revenues was primarily due to increases in the licensing of anti-virus software products, renewing expiring anti-virus licenses, continued acceptance of the our Sniffer products and continued acceptance of our support services. The increase is also attributable to a lesser extent to the licensing of products, other than anti-virus and Sniffer products, to new and existing customers as well as expansion into indirect product distribution channels and international markets.
Services and support revenues include revenues from software support, maintenance contracts, education and consulting services, as well as those revenues from customer support and maintenance contracts which are deferred and recognized over the related service period. Service revenues increased 56% to $158.7 million in 1998 from $101.4 million in 1997, and 28% from $79.5 million in 1996. The increase in services and support revenues resulted from growth in all categories of service revenues,
principally due to the growth of our installed customer base and the resulting renewal of maintenance contracts.
We have experienced significant growth in net income (before acquisition and related costs) and net revenue. However, our rate of growth has slowed in recent periods due to increased price competition, a maturing anti-virus market and an increasingly higher base from which to grow. Our growth rate and net revenue depend significantly on renewals of existing orders. Recently, we began a strategy of up-selling existing licenses to higher level product suites. If our renewal or up-sale rates slow or decline, our net revenues and operating results would be adversely affected. As we have continued to evolve as an enterprise-wide software provider, we have seen a lengthening in our sales cycle. In addition, like a number of other enterprise-wide software providers, we have recently identified and expect a continued slowing or reduction in customer capital spending related to Year 2000 compliance issues. If the purchasing patterns of our current or potential customers, particularly those to whom we market broader enterprise solutions, are meaningfully impacted by Year 2000 concerns, we could experience a significant reduction in our net revenue, net income and related growth.
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