Four years after chief executive William Larson decided McAfee Associates (MCAF) should break out of its antivirus software niche, the fast-growing company is finding some success as an Internet security and network management software vendor.
In a preliminary earnings report this week, McAfee beat Wall Street estimates by a penny per share. Then it largely won in a series of court rulings in its nasty legal dust-up with rival Symantec.
Part of McAfee's success stems from its revenue model, which one Wall Street researcher calls "an Internet model before the Internet model was cool."
"The Internet has fundamentally changed the business model for the software industry," Larson said. "We are the most Internet-centric of the Internet companies."
McAfee gives its software away for free over the Net, but then charges corporations a two-year subscription fee with the promise of technical support. The giveaway, Larson admits, is largely a marketing ploy: corporate MIS departments want tech support and will pay for it, so one employee's free download might turn into a two-year subscription sale for hundreds of seats.
"Antivirus software exploded because of the Net," said Larson, who acknowledges that luck has played a part in McAfee's astounding growth rate, from $20 million in annual sales four years ago to a run rate of $350 million in its latest quarter.
Although the Net produced both a profusion of computer viruses (15,000 known today) and heightened interest in antivirus software, McAfee has used good old-fashioned salesmanship to build its businesses in security and network management.
"Our growth is spurred by cross-selling and up-selling," said Larson, a self-described sales guy who came to McAfee from Sun Microsystems. McAfee has "200 quota-bearing sales reps" plus a network of value added resellers (VARs).
Larson thinks McAfee's effort to play with the big guys in security and network management will pay off. "There's lots of evidence that markets will consolidate around the most popular application," he said. That application, he believes, is antivirus software
McAfee, however, isn't even the biggest antivirus software company. Symantec remains the top antivirus vendor, and the two companies are locked in an acrimonious dispute in the courts as well as the marketplace.
Symantec has accused McAfee of stealing its software code and putting it in McAfee products, and both sides claimed victory in a judge's split decision in the case this week. In the general nastiness of the fight, McAfee has filed a $1 billion defamation suit against Symantec over public statements regarding the case, even though Symantec issued a public apology in August.
"I'm hoping that will start to quiet down now [after this week's court rulings]," said Steve Frankel, an analyst with Boston-based brokerage firm Adams Harkness.
"McAfee has been successful in broadening its product line--its thrust is security more broadly than antivirus software," Frankel said. "To the extent that McAfee is selling [security software] in suites wrapped around the core product, it can be successful. On a standalone basis, I'm not sure it can be successful."
The suites strategy consists of two basic components. McAfee's Total Virus Defense Suite includes virus-scanning and its security software, recently enhanced with a low-end firewall. McAfee ServiceDesk Suite includes help-desk software and a "zero administration client suite."
Significantly, Frankel noted, McAfee's core antivirus category is expanding from the desktop to putting antivirus capabilities in servers, firewalls, and email servers. "And the consumer is starting to understand the importance of antivirus software," he added.
That consumer boomlet may, however, benefit Symantec more than McAfee, because Symantec has stronger retail distribution.
Frankel credits Larson with McAfee's rising fortunes, both in the marketplace and on Wall Street.
"He has consistently broadened the markets it serves and built up a nice business in network management, started to do help-desk software and now security," said Frankel, who rates McAfee's stock "attractive," his firm's second-highest recommendation.
Wall Street has done well by McAfee, and vice versa. Larson boasted that his operating margins and profitability are among the highest in the software industry, and the company is bullish on its prospects as a security vendor.
"We?re betting the security market will be a huge growth market. We?re very optimistic," said Probhat Goyal, the company's chief financial officer. "This raises the bar for any antivirus maker."
Part of McAfee's security strategy is tied up in the SecureOne Framework that has allied McAfee with encryption software firm RSA Data Security, RSA parent and authentication firm Security Dynamics, and VeriSign, a certificate authority for authentication.
McAfee's role in that alliance is its Viper API, its engine for scanning documents created with Word or Excel macros, encrypting them for security, sending them via an intranet or over the Net, then using authentication to be sure only the right people receive the documents.
But Larson dreams even bigger than the security market.
"We are becoming an enterprise management company optimized for Windows NT," he said. That strategic bet--coming, oddly enough, from an executive shaped in Sun's rah-rah Unix culture--is based on Larson's belief that NT's growing acceptance inside corporations will produce a major platform transition.