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Network Associates sinks on warnings, downgrades

    Shares of Network Associates (Nasdaq: NETA) dropped more than 66 percent Wednesday on news that the company will miss fourth quarter estimates. The company, which also lost key executives, was slapped downgrades.

    The computer security service provider’s stock fell 8 to 3.65 in early trading on the Nasdaq.

    After the bell Tuesday, the company warned that it would fall short of analyst estimates for its fourth quarter. The maker of the McAfee antivirus software said it now expects a loss of between $130 million to $140 million, excluding charges. First Call analysts had called for a profit of 31 cents a share. The company also said that a number of key executives, including the CEO, will resign.

    According to the company, the miss was due to key distributors cutting inventory levels due to concerns over a broader economic slowdown.

    Analyst reaction to the news was mixed. Bear Stearns, which has underwriting ties to Network Associates, maintained its rating and estimates while both Chase H&Q and Adams, Harness & Hill cut their respective ratings.

    Analyst Erik Suppinger at Chase H&Q downgraded Network Associates to "market perform" and cut fourth quarter estimates.

    According to Suppinger, the company’s lack of strategic direction, the adoption of a consignment based distribution strategy and the company’s diminished credibility with investors lead to the ratings cut. "Accordingly, we believe that while the stock has traded down significantly, we do not anticipate a rebound in the stock any time soon," he added.

    Adams, Harkness & Hill analyst Kevin D. Wagner had a similar view, cutting the company to "market perform".

    In a research note, Wagner said that the drying up of large orders will impact the company. The analyst said that, in an increasingly competitive content security environment, Network Associates’ lack of follow-on orders will put them at a disadvantage against the cheaper products of competitors.

    On the positive side, Bear Stearns analysts Bob Lam, Olivia Golden and Peter Schubert kept their "attractive" rating and estimates in tact, pending further details from the company.

    In a research note, the analysts said that, while the magnitude of the shortfall is disappointing, the combination of a new management team and improved visibility with a sell-through model may attract investors. The note emphasized the brokerage’s bullish view on the strong industry fundamentals in the Internet security space, as a "buy" rating was maintained on a number of Network Associates’ competitors.