Starting Over at Network Associates


For a man who has to move a mountain of woes, George Samenuk is pretty chipper. The former IBM executive agreed to take over troubled Internet-security software and services company Network Associates International (NETA) on Jan. 3, succeeding former CEO William Larson. The next day, several law firms filed class-actions against NAI alleging that it misled investors.

The day after Christmas, Larson had announced that the company would post a disappointing fourth-quarter loss of between $130 million and $140 million. An accounting change was blamed for much of the shortfall. But Larson also admitted that resellers were returning products and that the company was facing an inventory buildup of nearly two months.

CEDING GROUND. Larson said the revenue shortfall would be a one-time event. But that didn't stop investors from pummeling the company's shares, from nearly $12 to just $3.25 in a single day. The stock has since recovered slightly, to around $5. But analysts and security-industry professionals who have watched NAI lose key engineers and market share say the company faces a rocky road, even with a change at the top. Samenuk points to NAI's top-notch product line, but the company has been ceding ground in almost all of its business sectors -- most important, in sales of its flagship McAfee antivirus product.

NAI also appears saddled with a dated online-sales model that relies on portal-like structures. And its business strategy of running disparate product offerings as separate business units has thus far not born fruit. "Frankly, a lot of their products have a second-tier reputation," says Sean Jackson, an analyst at SunTrust Equitable Securities. Although Jackson covers many of NAI's competitors, he chose not to cover NAI because he considers it an also-ran.

Larson's swift departure marks a harsh end to the grand vision of a big company that could be a one-stop-shop for Internet-security software and products as well as outsourced security-monitoring and upgrade services. Larson joined the company in 1993 from Sun Microsystems, taking the helm of what was then a small concern with 40 employees and only $60 million in annual sales. Under Larson in 1998, NAI amassed $1 billion in sales and reached a peak market capitalization of $6 billion, when its shares briefly topped $60. The company's market cap is hardly one-tenth that amount now, and it barely broke even on sales that fell to $683.7 million last year.

RESTORING CONFIDENCE. Investors initially bought into Larson's vision. But NAI, which restated earnings in 1997 and 1998, may have permanently spooked investors with one earnings restatement too many, critics say. Larson declined to comment, but Samenuk says one of his top priorities is restoring investor confidence.

NAI's problems run deep, analysts and security professionals say. In its main revenue generator, antivirus software, the company managed to increase sales revenues only 6% from 1998 to 1999, from $445 million to $470 million, according to International Data Corp. Even though NAI has 39% of the market, that growth rate compares unfavorably to the 27% growth posted by hard-charging competitor Symantec Corp., whose Norton Anti-Virus software is gaining ground in the corporate sector. "[NAI's] growth rate has been slow," says IDC analyst Brian Burke.

NAI also has admitted that sales of its Sniffer product (a network-diagnosis device that can help system administrators pinpoint vulnerabilities) have proved disappointing. Sniffer, which NAI acquired in a 1997 merger with Network General, accounts for 30% of the NAI's revenues. Security consultants, however, say the market has passed Sniffer by. More sophisticated tools are now snapping up new sales and converting customers.

NO OOMPH. Equally troubling, NAI's Gauntlet firewall product line has lost market share. Industry insiders say the company has failed to keep up with competitors such as Checkpoint Systems in key features that make these now-ubiquitous pieces of software easier to manage for larger enterprises and that its marketing has lacked oomph.

NAI hasn't helped matters by alienating security consultants and customers. For example, when NAI purchased a network-scanning-software system called CyberCop from Secure Networks in 1998, NAI announced that it would discontinue the Linux operating system version of the product. Customer outcry forced NAI to bring the Linux version back, but not before the company had lost valuable adherents.

Nor does NAI seem to have learned its lesson. In June, 2000, it eliminated a popular version of its firewall, called BSDi, that ran on an open-source operating system. Even though NAI had warned customers it planned to do so a year earlier, the move seemed to fly in the face of the growing popularity of open-source operating systems in high-tech companies. Samenuk counters that NAI has an extremely loyal customer following.

PROBLEMS LURK. NAI's efforts to make inroads into the nascent managed-security-services market through its subsidiary, MyCIO.com, have had mixed results -- and generated little in the way of real revenues. Simple matters, such as moving inventory, have presented problems as several of NAI's key resellers have flirted with bankruptcy, and many have returned large volumes of unsold products.

NAI's financial turmoil could make it even harder for the company to recruit and retain the top engineers it needs to write code that can compete with Check Point, Symantec, and a horde of others. Samenuk says he has already repriced stock options to a mere $4 to retain personnel and serve as an incentive.

Clearly, part of NAI's sales shortfall comes from a healthy change in its revenue-recognition policy. Starting in fourth-quarter 2000, the company will book sales only after a customer actually pays up, in contrast to when products landed at resellers. That move is long overdue, analysts says.

"MANIACAL FOCUS." But making the shift in a single quarter while the company breaks in new management will be a tall order. It's akin to "changing all four tires while driving at full speed," wrote John Hall, an analyst for Tucker Anthony Capital Markets, in a research note on Dec. 27. And even under the older sales-accounting system, NAI would have missed revenue projections for the fourth quarter by some $50 million, out of total sales of $200 million to $250 million. No matter how it books the sales, NAI would be in trouble.

Despite the gloomy forecasts from many analysts and security personnel, Samenuk is upbeat. The executive, who ran several big divisions for Big Blue, plans to enact "a maniacal focus on the customer" and mount a world tour to meet with customers and staff. "I'm bullish on Network Associates, or I wouldn't have joined it. In most of the product categories, the customers really like what we have to offer," he says.

With a stock that's more than 90% off its high of two years ago, Samenuk has his work cut out for him. NAI looks like a broken company in dire need of a fix. That could come from selling of chunks of it or from a tighter focus on a few products. In the meantime, investors and analysts alike are mounting a loud chorus of "Do Something, George!" And that can't come a moment too soon. By Alex Salkever in New York


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