Network Associates Reports Third Quarter Revenue of $232 Million; Earnings of $9 Million

In the third quarter, the company generated $32 million in cash from operations, bought back $100 million of face value of its zero coupon convertible debt and completed the acquisition of McAfee.com, ending the quarter with cash and marketable securities totaling $999 million.  "Our third quarter results demonstrate Network Associates' commitment to growth in revenue and profit," said George Samenuk, chairman and CEO of Network Associates.  "The completion of the McAfee.com tender offer gives us an opportunity to leverage new growth opportunities in the consumer and small business markets and to drive the next generation of wireless and online computer security."

Operating Highlights

Regarding the company:
In the third quarter, Network Associates completed its tender offer for the remaining shares of McAfee.com. McAfee.com is now part of Network Associates' McAfee Consumer group, which incorporates McAfee retail products and McAfee.com online services.  The new group will aggressively target the consumer and small and home office space with a comprehensive offering of software, hardware and online service solutions.  

Network Associates closed the largest deal in its history in the third quarter with a five-year contract with the Department of Defense's (DoD) Defense Information Systems Agency (DISA).  Under the terms of the contract, McAfee Security anti-virus and security solutions will be deployed to more than three million users.  This deal represents a significant expansion of our prior relationships with DISA as they chose to strengthen their protection using Network Associates' industry-leading policy manager -- ePO.  

Also in the third quarter Network Associates acquired Traxess, a company focused on stream-to-disk technology.  This technology will be a key part of our upcoming InfiniStream line of security and network forensics products.  InfiniStream forensics will capture one, two or even three days of gigabit speed network data in real time and allow that traffic to be "played back."  This information will be critical in apprehending hackers and in troubleshooting the most difficult networking problems.  The first of the InfiniStream product will focus on security forensics and will be available in the first half of 2003.  With this forensics capability, software supplied through our partnership with ISS, and the next generation of high speed Sniffer hardware, Network Associates will offer the most effective system in the industry for stopping hackers.  

Over the past year, cybersecurity became a primary focus of the United States government and on September 18, 2002, the White House launched the National Strategy to Secure Cyberspace, a collaborative effort between the public and private sectors.  Network Associates took part in the development and review of the National Strategy on multiple levels of the organization, including members of the executive staff, research and development, product development and government relations.  

Network Associates' commitment to strengthening and enriching its channel partnerships has continued to gain momentum this past quarter.  In a move to better serve its expanded channel partner base, Network Associates consolidated three channel product divisions -- McAfee Security, Sniffer Technologies, and Magic Solutions -- into a single North America channel organization.  Also this quarter, industry resellers representing thousands of end users named Network Associates the "Best Overall Event Partner" at CMP Media's Breakaway Xchange Conference in Las Vegas, August 2002.

Regarding products:

McAfee Security
In the third quarter, McAfee Security continued to protect customers from today's advanced Internet threats, also known as blended threats, with the introduction of McAfee Active Client Security suite.  This comprehensive desktop security solution delivers integrated protection from viruses, and blended and future threats.  

McAfee AVERT (Anti-Virus Emergency Response Team) continued to lead the charge in protecting customers from today's destructive viruses, including Bugbear, Slapper and Klez. McAfee AVERT worked around the clock to keep virus writers and hackers at bay while ensuring that customers were rapidly alerted to the detection of and protection from viruses during outbreaks.  

IDC named McAfee the worldwide market share leader for the fifth consecutive year in the Corporate Antivirus Software category and for the second year in the Managed Antivirus Services category with 29 percent of the market and 73 percent of the market, respectively.  The IDC report, "Antivirus Software 2002: A Segmentation of the Market," issued in August, noted that the corporate anti-virus market represents 72 percent of the total anti-virus software market, reaching over $1.2 billion.  

McAfee Security received numerous industry awards and accolades.  McAfee WebShield e500 gateway appliance received top honors from PC Magazine when it was awarded the Editor's Choice in a comparative review of filtering and security appliances.  Windows and .Net Magazine recognized McAfee NetShield for Windows and McAfee VirusScan Wireless with its Readers' Choice Award in the security category.  McAfee Desktop Firewall 7.5 received certification from ICSA Labs, demonstrating that its solution provides critical security services across multiple Windows platforms.  Additionally, McAfee received the customer brand recognition award from market research firm Frost & Sullivan, which was based on research among anti-virus and encryption purchase decision-makers from medium and large companies across Europe.  

In addition to the contract with the Department of Defense, McAfee Security saw several competitive customer wins in the third quarter, including USDA and Woolworth's.

McAfee Consumer
McAfee.com continued to build its subscriber base, signing on over 115,000 new users and bringing total subscriptions for its online managed security solutions to over 1.7 million.  In its continued effort to protect home users and small businesses, McAfee.com announced the next generation of Personal Firewall and Personal Firewall Plus services to prevent passive and active Trojan horse programs, malicious spyware and hybrid Internet threats from sending data from their PCs to unauthorized recipients.  McAfee.com also received industry recognition for its SpamKiller solution, which was awarded an eight out of 10 rating in a recent review of anti-spam products by leading technology resource Web sites, CNET and ZDNet.  

Also this quarter, McAfee.com partnered with British Telecom (BT), the UK's largest communications service provider, to provide broadband users with personal firewall, anti-virus and privacy services.  As security threats continue to evolve, consumers are increasingly turning to their service providers for protection against these threats.  Under this agreement, customers will now be able to receive the always up-to-date solutions to protect their PCs against viruses, hackers and other Internet threats.  

In addition, the McAfee Consumer group continues to strengthen its retail software offering with the launch of its new anti-virus, firewall and bundled security solutions that address the small office and home user markets.  McAfee VirusScan Home Edition 7.0 and VirusScan Professional 7.0 earned CNET's "Editor's Choice" awards, beating out leading competitors' newest offerings.  PC Magazine also gave VirusScan 7.0 "5 out of 5" stars, and ICSA Labs awarded McAfee Firewall 4.0 its checkmark of certification, recognizing McAfee's firewall protection as an increasingly critical part of a user's home computer system.

Sniffer Technologies
In the third quarter, Sniffer Technologies continued to build on its OEM business strategy and expand itself in new and existing markets through a strategic partnership with Ixia.  The partnership consists of the integration of Sniffer Technologies protocol analysis and fault isolation technology with Ixia's network verification solutions.  The combined technology enables network equipment manufacturers, service providers and IT/Network Management professionals to ensure quality product and service offerings through the added ability to perform packet level analysis of network performance issues.  

Underlining Sniffer's industry leadership in the LAN and WAN management market, Frost & Sullivan awarded Sniffer Technologies its Market Engineering Leadership Award for the second consecutive year.  The Frost & Sullivan Market Engineering Leadership Award is given to companies that have displayed leadership and excellence in all areas of the market engineering process, including the identification of market challenges, drivers and restraints, as well as strategy development and methods of addressing these market dynamics.  Sniffer saw several customer wins in the third quarter, including the New York City Human Resources Administration and Connexim in North America and Telstra Global IP Networks in the Asia Pacific region.

Magic Solutions
Magic Solutions continued to demonstrate growth and a loyal customer base in the education market, announcing that John Hopkins University, University of West Florida, East Carolina University, Eastern Michigan University and Utah Valley State College all selected Magic Service Desk as their service desk of choice.  The universities and college selected Magic Service Desk for its thin-client architecture, browser-based accessibility, cost-efficiency and ability to integrate seamlessly into their existing networks.  In addition to the success in the education market, Magic also closed deals with Teletech, First Horizon Home Loan Corp.  and Mirant in the U.S.

Magic Solutions continued to build its market presence in the third quarter announcing its Peregrine to Magic Migration Program.  Targeting small, medium and large organizations, the displacement program is designed to provide a seamless transition for customers using Peregrine and/or Remedy products to the Magic Service Desk solution for a significant increase in stability, reliability and performance for their service desk operations.  

Building on its channel strategy, Magic Solutions announced a new solution that integrates legacy databases and Web services with Magic Service Desk

Service Management Integration (SMI)
Offered through selective North American channel partners, the SMI solution enables organizations to associate critical information from their back-end operations with help desk tickets, problem management issues, and change management processes within Magic Service Desk.

Financial Outlook
Network Associates expects fourth quarter net revenue (inclusive of McAfee.com) to be between $252 million and $257 million.  On a pro forma basis, the company expects fourth quarter net earnings to be between $0.24 and $0.26 per share.  

For the full calendar year 2003, the company expects net revenue to be between $1.0 billion and $1.03 billion, and pro forma net earnings to be between $0.70 and $0.75 per share.  

Pro forma net earnings excludes interest expense on the company's convertible debt, amortization expense, compensation charges relating to employee stock options, costs related to the McAfee.com acquisition, and certain one-time charges.  

About Network Associates
With headquarters in Santa Clara, Calif., Network Associates, Inc.  is a leading supplier of network security and availability solutions.  Network Associates is comprised of three product groups: McAfee Security, delivering world-class anti-virus and security products; Sniffer Technologies, a leader in network availability and system security; and Magic Solutions, a leader in innovative service management solutions.  For more information, Network Associates can be reached at 972-308-9960 or on the Internet at http://www.networkassociates.com or http://www.mcafee.com.