Network Associates reports Q1 loss

Already plagued by questionable accounting practices and federal investigation, Network Associates Inc. said on Thursday that it lost US$3.7 million, or US$0.02 per share, in the first quarter of 2003, after earning US$15.7 million in the same quarter a year ago.

Revenue was down for the Santa Clara, California, network security company, which reported revenue of US$215.2 million for the quarter, after pulling in US$220.7 million in the year-ago quarter.

Disappointing as those numbers may be, the extent of Network Associates' financial troubles is not yet understood. In March, the company said that it would restate financial results for fiscal years 1998, 1999 and 2000, citing information uncovered in a federal investigation of its accounting practices. Results from those years will be modified to reflect revenue on sales to distributors recorded on a sell-through basis, in addition to other issues raised by federal investigators.

Under sell-through methodology, sales into distribution channels should not be counted as revenue until the products have been sold by the distributors to their customers.

Network Associates, which sells the popular McAfee antivirus software, also said in March that it would delay filing its 2002 Form 10-K, the detailed annual report filed with the U.S. Securities and Exchange Commission so it can restate those results for prior years.

Despite its financial troubles, Network Associates made two large investments in intrusion detection and prevention (IDP) technology in recent weeks.

On April 1, the company announced it was buying IntruVert Networks Inc., a maker of hardware-based firewalls and intrusion detection systems, for US$100 million. Days later, Network Associates said it would purchase host-based IDP maker Entercept Security Technologies Inc. for US$120 million cash.

"Unexpected challenges" in some business areas were cited as the cause for the disappointing first quarter by Company Chairman and Chief Executive Officer George Samenuk in a statement. However, the recent intrusion prevention acquisitions have positioned Network Associates for growth, Samenuk said.

Network Associates is predicting that revenue will remain flat in the second quarter at about US$215 million to US$220 million. For the year, the company said it will have revenue of between US$930 million and US$950 million.

But the earnings picture for the second quarter and 2003 remains murky. Network Associates did not provide projected quarterly or 2003 earnings information on a GAAP (generally accepted accounting principles) basis, saying that future earnings depend, in large part, on the performance of its stock.

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