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Network Associates struggles to bounce back

Analysts say Network Associates is struggling to recover from trying to do too much in a market that was slow to take to its products.

In its heyday, Network Associates consumed a number of companies to become the biggest player in Internet security software.

Now analysts say the company is struggling to recover from trying to do too much in a market that was slow to accept its products.

Beset with plummeting sales, its stock has sunk 74 percent this year, making it the worst performer in the Nasdaq 100 Index. Last week, its shares jumped on takeover rumors, but Wall Street analysts are hard-pressed to name anyone with both the money and the interest to buy the company.

Yesterday, Network Associates reported large losses. Revenue for the quarter fell from $249 million a year ago to a shocking $25 million this year. The company attributed the shortfall to resellers who had too much inventory to accept new deliveries.

"I scratch my head on who would be a buyer," said John Powers, who follows Network Associates for BancBoston Robertson Stephens and rates the company's stock as long-term "attractive." Powers said he believes that management isn't likely to sell at the stock's current price of $18 a share, when the company believes that it could rise to $30 in the next six months.

Network Associates isn't the only security software firm in trouble. Competing security suite players including Secure Computing and Axent have also faced challenges as "one-stop security shops," trying to offer everything to their customers.

Faring better have been firms such as Check Point Software and Internet Security Systems, which focus on a specific security market niches.

Network Associates' losses didn't surprise Wall Street, and the stock even rose more than 11 percent today. This time analysts had been warned, unlike last April, when poor earnings sent the stock plummeting 30 percent in one day.

The company has climbed back from its lows in April, when the stock hovered above $10 per share, as spokeswoman Jennifer Keavney said.

"We're up $2 today because we are right on the tracks," she added. Management contends that Network Associates is on the rebound. Inventory in the channel is back to acceptable levels, with $200 million in sales in the pipeline.

The company repeated its line yesterday that sales are taking longer to close because its security suites are more complex to sell and that enterprise sales are slowing overall because of Year 2000 concerns.

Powers, for one, is optimistic. "It's still trading like a really sick, sick company, but people are going to realize that it's a large, stable growth software company," he said. "They took as large a dose of medicine in one quarter as you can possibly take by letting the channel sell through cleanly."

Larson, known for his public bravado, took over antivirus firm McAfee Associates, now Network Associates, in late 1997 when it had 40 employees and $4.7 million in revenue. Growing by acquisition, Network Associates had nearly $1 billion in revenue last year and some 2,500 employees. But buying companies has proved easier than integrating them, and that's where Larson has stumbled this year.

Network Associates' antivirus business, where the company had its roots, continues to grow, and it's well-positioned in network management, Powers argues.

But Brown Brothers Harriman analyst Dawn Simon remains skeptical. She reiterated her short-term "avoid" and long-term "neutral" ratings on the stock today, reflecting a "show-me" attitude toward the company's strategy toward corporate business.

"The shift from point product to enterprise solution has obviously failed to progress as Network Associates had originally intended," Simon wrote today, saying management still needs to prove the strategy will work.