Network Associates gets slammed

The software and computer-network security concern thus joined a slew of technology companies signaling that their results are falling short of forecasts. Notably, Microsoft Corp. (msft), on Dec. 15, slashed expectations for the current quarter and fiscal 2001, blaming slower economic growth.

The announcement of a management turnover, an earnings loss and a significant change of accounting methods comes as the company is recovering from disappointing investors in the first half of last year. The company said it expects its fourth-quarter revenue will come in at between $55 million and $65 million, or more than 25 percent lower than the amount it forecast in October. In addition, rather than 31 cents a share profit from operations, as it forecast then, Network Associates now expects a loss from operations of between $130 million and $140 million.

A year earlier, Network Associates (neta) reported fourth-quarter net income of $9.9 million, or seven cents a share, including $15.8 million of nonrecurring charges. Its year-earlier revenue in the period was $218 million.

Because of the accounting change, which entails deferring the time Network Associates books revenue until after its distributors actually sell its equipment to end users, the company said it took a $120 million hit to revenue in the quarter.

Some analysts, citing previous questions about the credibility of Network Associates' management team, said the magnitude of the current earnings shortfall may have played a part in the departure of the top executives.

"For a management team that was trying to build investors' confidence, this would have been tough for them to overcome," said Erik Suppiger, an analyst at Chase H&Q in San Francisco.

Network Associates is still trying to restore confidence from sharp earnings shortfalls recorded in the first and second quarters of 1999, said Suppiger.

At that time, inventories at the company's distributors grew to the point that the distributors essentially declined to take new orders, leading some analysts to accuse Network Associates of "stuffing the channel," or overselling to distributors in order to pad short-term financial results. At the time, the company denied the practice and said it had only made an error in forecasting sales.

The accounting change Network Associates announced Tuesday is intended to prevent such miscalculations.

In 1999, speculation was that the company had 12 to 14 weeks of inventory in the pipeline. Now the company said it has 7 1/2 weeks of inventory in the channel, which it said is in line with industry standards.

A company spokeswoman declined to comment further on the company's accounting changes.

Network Associates issued its warning and other announcements after the close of regular trading. As of 4 p.m. in Nasdaq Stock Market trading Tuesday, Network Associates shares were down 13 cents to $11.75. After hours Tuesday, the company's shares traded at $7.

In an interview, Larson, 44 years old, said "budget tightening by users on a world-wide basis" led to a $40 million to $60 million shortfall in customer demand. He insisted the company hadn't lost any sales to competitors.

About his resignation, Larson said he and his top two lieutenants -- Peter Watkins, Network Associates' president, and Prabhat Goyal, its chief financial officer -- decided to step down in order to turn over the reins to people more willing to work endless hours to continue building the business.

"You need somebody who's hungry and young and hasn't enjoyed huge financial rewards to really get on an airplane and press the flesh with the employees" and potential customers, Larson said.

He said he went to the board and told them of his decision to leave the company and added that "they were saddened, but they understood." Watkins and Goyal were unavailable for comment.

Network Associates said Edwin Harper, a company director since 1993 and president of Manufacturing Technologies Inc., was named Network Associates chairman, succeeding Larson, who will remain chief executive until a successor in that position is found.

Larson's departure ends a colorful chapter in Silicon Valley history.

He took the reins of a computer-virus protection company then called McAfee Associates Inc. from founder John McAfee in 1993, when it had 40 employees and annual revenue of about $20 million. In his first six years, Larson navigated the company through 45 acquisitions, the biggest being that of Network General Corp., which it bought for $1.3 billion in 1997.

The name was changed to Network Associates after that acquisition.

Larson is known for taking on competitors in advertisements, in the courts and elsewhere. At a company barbecue in 1997, for example, he vowed to crush British rival Dr. Solomon Software Ltd. Instead, in 1998, Network Associates acquired Dr. Solomon in a stock deal valued at about $670 million.

Network Associates ran an ad of Peter Norton of rival Symantec Corp. with a long nose and accused the company of overstating the capabilities of some products. When Symantec later sued Network Associates for copyright infringement, Network Associates fired back with a $1 billion defamation suit.

Network Associates dropped the defamation suit after a U.S. District Court in San Jose, Calif., denied Symantec's request for an injunction against a Network Associates product.

"I have no regrets," Larson said. "It has been an exciting and wild ride." SANTA CLARA, Calif. -- Network Associates Inc., citing the slowing economy and a need for fresh blood, warned it expects to report a surprise fourth-quarter loss and announced its three top executives are resigning, including Chairman and Chief Executive Officer William Larson.

The software and computer-network security concern thus joined a slew of technology companies signaling that their results are falling short of forecasts. Notably, Microsoft Corp. (msft), on Dec. 15, slashed expectations for the current quarter and fiscal 2001, blaming slower economic growth.

The announcement of a management turnover, an earnings loss and a significant change of accounting methods comes as the company is recovering from disappointing investors in the first half of last year. The company said it expects its fourth-quarter revenue will come in at between $55 million and $65 million, or more than 25 percent lower than the amount it forecast in October. In addition, rather than 31 cents a share profit from operations, as it forecast then, Network Associates now expects a loss from operations of between $130 million and $140 million.

A year earlier, Network Associates (neta) reported fourth-quarter net income of $9.9 million, or seven cents a share, including $15.8 million of nonrecurring charges. Its year-earlier revenue in the period was $218 million.

Because of the accounting change, which entails deferring the time Network Associates books revenue until after its distributors actually sell its equipment to end users, the company said it took a $120 million hit to revenue in the quarter.

Some analysts, citing previous questions about the credibility of Network Associates' management team, said the magnitude of the current earnings shortfall may have played a part in the departure of the top executives.

"For a management team that was trying to build investors' confidence, this would have been tough for them to overcome," said Erik Suppiger, an analyst at Chase H&Q in San Francisco.

Network Associates is still trying to restore confidence from sharp earnings shortfalls recorded in the first and second quarters of 1999, said Suppiger.

At that time, inventories at the company's distributors grew to the point that the distributors essentially declined to take new orders, leading some analysts to accuse Network Associates of "stuffing the channel," or overselling to distributors in order to pad short-term financial results. At the time, the company denied the practice and said it had only made an error in forecasting sales.

The accounting change Network Associates announced Tuesday is intended to prevent such miscalculations.

In 1999, speculation was that the company had 12 to 14 weeks of inventory in the pipeline. Now the company said it has 7 1/2 weeks of inventory in the channel, which it said is in line with industry standards.

A company spokeswoman declined to comment further on the company's accounting changes.

Network Associates issued its warning and other announcements after the close of regular trading. As of 4 p.m. in Nasdaq Stock Market trading Tuesday, Network Associates shares were down 13 cents to $11.75. After hours Tuesday, the company's shares traded at $7.

In an interview, Larson, 44 years old, said "budget tightening by users on a world-wide basis" led to a $40 million to $60 million shortfall in customer demand. He insisted the company hadn't lost any sales to competitors.

About his resignation, Larson said he and his top two lieutenants -- Peter Watkins, Network Associates' president, and Prabhat Goyal, its chief financial officer -- decided to step down in order to turn over the reins to people more willing to work endless hours to continue building the business.

"You need somebody who's hungry and young and hasn't enjoyed huge financial rewards to really get on an airplane and press the flesh with the employees" and potential customers, Larson said.

He said he went to the board and told them of his decision to leave the company and added that "they were saddened, but they understood." Watkins and Goyal were unavailable for comment.

Network Associates said Edwin Harper, a company director since 1993 and president of Manufacturing Technologies Inc., was named Network Associates chairman, succeeding Larson, who will remain chief executive until a successor in that position is found.

Larson's departure ends a colorful chapter in Silicon Valley history.

He took the reins of a computer-virus protection company then called McAfee Associates Inc. from founder John McAfee in 1993, when it had 40 employees and annual revenue of about $20 million. In his first six years, Larson navigated the company through 45 acquisitions, the biggest being that of Network General Corp., which it bought for $1.3 billion in 1997.

The name was changed to Network Associates after that acquisition.

Larson is known for taking on competitors in advertisements, in the courts and elsewhere. At a company barbecue in 1997, for example, he vowed to crush British rival Dr. Solomon Software Ltd. Instead, in 1998, Network Associates acquired Dr. Solomon in a stock deal valued at about $670 million.

Network Associates ran an ad of Peter Norton of rival Symantec Corp. with a long nose and accused the company of overstating the capabilities of some products. When Symantec later sued Network Associates for copyright infringement, Network Associates fired back with a $1 billion defamation suit.

Network Associates dropped the defamation suit after a U.S. District Court in San Jose, Calif., denied Symantec's request for an injunction against a Network Associates product.

"I have no regrets," Larson said. "It has been an exciting and wild ride."