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Network Associates sinks
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December 27, 2000: 7:08 p.m. ET
Software maker dives on earnings news; main competitor on track
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NEW YORK (CNNfn) - Network Associates Inc.'s stock lost more than half its value Wednesday after the antivirus software maker warned of a big fourth-quarter loss and replaced its top executives.
Network Associates (NETA: Research, Estimates) said after the markets closed Tuesday that it expects a loss of $130 million-to-$140 million in the quarter because of a huge sales shortfall and increasing inventories held by its distributors. Analysts had expected Network Associates to post a fourth-quarter profit of $42 million, or 31 cents per share, according to First Call, which tracks Wall Street forecasts.
 The company also announced several senior management changes. Edwin Harper, a company director since 1993, was named chairman of the board. William Larson, the company's chairman and CEO, said he will step down when the company recruits a new CEO, which is expected to occur within the next 60 days. Peter Watkins, president, is leaving the company at the end of this month. Prabhat Goyal, chief financial officer, also will step down once a new CFO is appointed.
In heavy Nasdaq trade Tuesday, Network Associates shares fell $7.25 or 61.2 percent, to $4.50. That puts them 87 percent below their 12-month high of $37.18.
The Santa Clara, Calif.-based company's products include the McAfee antivirus software, the Sniffer Total Network Visibility product suite, the PGP Total Security Defense product suite and the Magic Total Support Desk.
Network Associates said that it expects its fourth-quarter revenue to be $55 million-to-$60 million, which would be 75 percent below the $242 million analysts had expected the company to report.
Executives pinned the blame for the shortfall on the company's distributors, which they said dramatically reduced their inventory levels, as well as a decrease in demand due to a slowing overall economy.
"The company further believes that the lower fourth-quarter demand is not related to the general competitiveness of its products but is due to concerns about the state of the economy from the customer base," Network Associates said in a statement.
Change in revenue recognition
The company said it is changing its revenue-recognition policy so that sales are recorded once the end-user receives products, instead of when the product is shipped to distributors.
Roughly $120 million of the company's revenue shortfall stems from not replenishing distributor sales made during the quarter and taking inventory returns from distributors. Those moves will leave about $10 million of inventory in the distribution channel, the company said.
Merrill Lynch analyst Mark Fernandes said that lower end-user demand for Network Associates' products, especially the Sniffer suite, caused another $40 million-to-$60 million of the revenue shortfall. Sniffer enables companies to analyze their computer networks for faults.
"We are maintaining our cautious intermediate-term neutral and long-term accumulate rating," Fernandes said in a research note. "We believe rebuilding will take 3-4 quarters."
"We acknowledge that a change in management is good for the company, and the change in distributor relations is probably the correct move, but it will likely take some time for the company to regain any momentum," said FAC/Equities analyst Matt Barzowskas in a research note.
Network Associates has numerous competitors, including Agilent, Cisco Systems, Computer Associates, Compuware, CheckPoint, Novell, and Symantec.
Analysts said on Wednesday that Network Associates' shortfall probably reflects company-specific problems, rather than an industry-wide slowing of antivirus and network management software sales. "It's a company-specific problem related to stuffing the channel," Fernandes said.
Shares of Symantec (SYMC: Research, Estimates), whose Norton Antivirus product competes against Network Associates' McAfee software, fell in sympathy Wednesday, ending the day $1.19 lower at $30.94, a 3.7 percent decline.
 In direct response to Network Associates' announcement, Symantec issued a statement after Wednesday's closing bell saying it remains on track to meet its fourth-quarter financial targets. The most recent financial guidance Symantec provided to analysts was to expect revenue of $206 million-to-$212 million and earnings per share in the range of 73-to-79 cents.
Symantec recognizes revenue when its products are sold to end customers, rather than to distributors, and reflects end-user demand for its products, John W. Thompson, the company's chairman and chief executive, said in the statement.
"The problems of one company's execution are not indicative of the entire industry segment," Thompson said. "We believe the Internet security opportunity represents tremendous potential for long-term growth. We are excited about our future and the possibilities it will bring for our customers and our shareholders." 
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Network Associates
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