By Jessica Hodgson and John Kell
Of DOW JONES NEWSWIRES
SAN FRANCISCO -(Dow Jones)- McAfee Inc. (MFE) said Thursday its third-quarter profit fell 25% as higher costs associated with a strategy of boosting sales through partnerships led to lower margins, and revenue came in slightly shy of expectations.
Earnings per share met Wall Street's expectations, showing the relative resilience of the security software sector. Executives said high-end corporate technology spending remained tough, and the company's strategy of paying third-party technology companies to take trial versions of its software to boost revenue came into question.
Shares fell 5.6% to $41.80 in after-hours trading.
At the close, the stock was up 27% this year.
On a conference call, analysts questioned whether the highly telegraphed deals McAfee has struck recently, with partners ranging from PC makers such as Dell Inc. (DELL) to broadband providers such as Comcast Corp. (CMCSA), to get its tools into more customers' hands had helped fuel revenue and cash flow as much as the company said they would.
McAfee pointed to a nearly 50% rise in annual cash flow as evidence the deal strategy was working, but acknowledged it was "challenging" getting conversions, referring to the difficulty of converting trials into long-term revenue agreements.
The partnership deals, struck from 2007 onwards, were aimed at taking share from rivals, particularly market leader Symantec Corp. (SYMC) and have largely been hailed as a success despite the challenges. McAfee still reported a healthy 8% growth in consumer sales, but on a conference call, analysts expressed surprise that operating cash flow wasn't higher.
Chief executive Dave DeWalt said it remained very challenging getting big corporate security deals done, too, and those deals were closing at lower values than a year ago.
Revenue from McAfee's corporate security business still grew 25% compared with the year ago period.
McAfee's security software business is still performing strongly overall, but a high bar was set Wednesday by the performance of Symantec, which beat analysts expectations for its second quarter after a very weak first quarter. The outperformance sent its shares up 11% Thursday.
The company projected fourth-quarter earnings of 61 cents to 65 cents a share on revenue of $505 million to $525 million. Analysts polled by Thomson Reuters expected 63 cents and $507 million, respectively.
McAfee posted third-quarter earnings of $36.8 million, or 23 cents a share, down from $48.8 million, or 31 cents a share, a year earlier. Excluding stock-compensation and acquisition costs, earnings rose to 62 cents from 53 cents.
Revenue jumped 18% to $485.3 million amid a 25% increase in North America. International revenue grew 11%.
In July, the company had projected earnings of 58 cents to 62 cents on revenue of $475 million to $495 million.
-By Jessica Hodgson and John Kell, Dow Jones Newswires; 415-439-6455; jessica.hodgson@dowjones.com