NAI announces a top-level reorganization

Santa Clara, Calif.-based Network Associates Inc. brought in the new year with a set of fresh faces, including a new CEO and other senior management changes. But it appears as if the new faces will have last year’s burdens to deal with.

George Samenuk was appointed as the company’s new CEO and president on Jan. 3, and was also named to the Board of Network Associates Inc. Samenuk most recently held the position of president and CEO of Tradeout Inc., and worked with IBM in various senior management positions for 22 years prior to that.

William Larson, NAI’s former CEO and chairman, will continue as a board member of several outside technology companies and as a private investor, he said.

Larson had indicated in a teleconference held in late December that the company had a plan to transition its management leadership to new management in the first quarter of 2001.

Other senior management members affected by the announcement included Peter Watkins, president, who stepped down from his position on Dec. 31, and Prabhat Goyal, who has stepped down from his position as chief financial officer. Terry Davis, NAI’s corporate controller, was named as acting chief financial officer for the company this month, and Edwin Harper, a director with the company since 1993, was last month appointed as NAI’s new chairman.

The company began to search for a new CEO in November of last year, with the assumption that the fourth quarter would be successful, Larson said.

But in the same teleconference held in December, Larson announced that NAI would be “joining the ranks of technology companies anticipating a revenue and earnings per share shortfall in the fourth quarter.”

The company expects to report consolidated revenue for the final quarter of the year in the range of US$55 to US$65 million, he said, and a net loss, excluding amortization expense, non-cash interest expense and compensation charges related to employee stock options, of between US$130 and US$140 million.

For the calendar year 2000, Larson announced that the company expects to report consolidated revenue in the range of US$742 to US$752 million, and a net loss in the range of US$84 and US$94 million.

The company said it would be reporting actual results on Jan. 25.

“In the past six weeks, we have seen many significant-sized deals delayed in light of recent economic uncertainties,” Larson said. “This shortfall in end-user demand is expected to be as large as US$40 to US$60 million dollars. We have experienced this budget tightening by end users on a worldwide basis.”

Larson stressed that NAI is in its “best product cycle ever,” and that the announced events would not affect the future of the company.

Bob Lam, an analyst with Bear Stearns in New York, said that there were a few indicators that this announcement would be made.

“There are two things here,” Lam said. “The IT market has slowed down, and they are impacted by it. Also, the old management team has not really done a very good job in terms of execution, and this really wasn’t the first time they missed earnings. I found it quite positive that they [have appointed a new CEO]. He seems to be – I have not met him but – based on his resume, he seems like a pretty solid guy to run the company.”

Larson added that there is another significant factor that contributed to its performance in the fourth quarter: the deterioration of the financial strength of distributors. Larson named a few of the distributors in peril, including European distributor CHS, which went bankrupt in 1999.

NAI recognizes revenue based on sales into its distributors with a reserve, he explained, so their financial status is very relevant to the company.

“As a result of this ongoing deterioration of distributors’ financial conditions, we have decided to move to our revenue recognition to being based on sales out to end users, effective the first quarter, 2001,” Larson said.

The decision to move to the new model of revenue recognition was thought best to be completed during the old management’s term, he said, “to create the best possible foundation for the new management upon entering in the first quarter.”

After the announcement of his new position, Samenuk said during a teleconference that he had high hopes for the future of the company, and that the number one priority would be to rebuild credibility and shareholder value. He explained that would be accomplished by doing three things: implementing a “maniacal focus” on customers; fostering international growth, particularly in Europe and Asia; and sales execution.

“The space that we’re in is very attractive and fast-growing,” he said. “It’s a segment of the industry that all of our customers need. They may postpone PC purchases, they may postpone other technology purchases. But certainly Internet security (and) Internet availability are all key, because all of our customers are building their infrastructure to other customers, suppliers and other organizations that is mission-critical.”

Lam said that there really should not be any impact on customers as a result of all the recent announcements, but he added that it will really depend on what route the company ends up taking.

“If they decide to maybe discontinue products, which there is a possibility of, although I am speculating here, then they might want to focus on more high-growth areas. That would impact some customers,” he offered.

Most companies in the Internet security space are doing quite well, he said, adding that he does not anticipate any other companies to find themselves in the same position.

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