McAfee’s First Quarter as a Pure-Play Consumer Business Grows 25%

Rhea-AI Summary

McAfee Corp. (NASDAQ: MCFE) reported strong financial results for Q1 2021, with net revenue reaching $442 million, a 25% increase year-over-year. The company gained 885,000 new direct-to-consumer subscribers, bringing the total to 18.9 million. Net income surged to $83 million, compared to $8 million the previous year, resulting in a net income margin of 19%. McAfee's adjusted EBITDA was $199 million, or a 45% margin. Additionally, net cash from operating activities rose 51% year-over-year, totaling $259 million. The outlook for Q2 expects revenue between $430 million and $434 million.

Positive

• 25% year-over-year growth in net revenue, totaling $442 million.
• Net income increased to $83 million, representing a 19% margin.
• Added 885,000 new subscribers in Q1, reaching 18.9 million total subscribers.
• 51% year-over-year increase in net cash from operating activities, totaling $259 million.
• Special dividend of $4.50 per Class A share upon the completion of asset sale.

Negative

• Enterprise business segment classified as discontinued operations may impact future revenue diversification.
• Expected stranded costs of $40 million to $45 million in Q2 guidance.

McAfee Corp. (“McAfee,” or the “Company”) (NASDAQ: MCFE), the device-to-cloud cybersecurity company, today announced its financial results for the three months ended March 27, 2021.

“McAfee achieved significant increases in revenue, subscribers, profitability and cash flow to start Fiscal 2021. We continue to secure our customers’ ever-increasing digital footprint as people are living more of their lives online. This accelerating transformation combined with our market leading capabilities drove 25% year-over-year consumer revenue growth and an additional 885,000 net new direct-to-consumer subscribers in Q1. I am very pleased with our team’s continued execution across all regions,” said Peter Leav, McAfee’s President and Chief Executive Officer.

On March 8^th, 2021, McAfee announced the pending sale of certain assets together with certain liabilities of our Enterprise business segment (substantially all of our “Enterprise Business”). For presentation purposes related to this announcement, the related assets, liabilities and financial results of the Enterprise Business were classified as discontinued operations in our condensed consolidated financial statements and are thus excluded from continuing operations for all periods presented. Moving forward McAfee will operate as one reportable segment.

First Quarter Fiscal 2021 Financial Highlights from Continuing Operations

• Net revenue was $442 million, reflecting a 25% growth year-over-year
• Net Income of $83 million or a Net Income Margin of 19%, as compared to $8 million or a Net Income Margin of 2% in the year ago period
• Adjusted EBITDA of $199 million or a 45% Adjusted EBITDA Margin, inclusive of approximately $22 million stranded costs

First Quarter Fiscal 2021 Financial Highlights from Continuing and Discontinued Operations

• Net revenue was $773 million, reflecting a 13% growth year-over-year
• Net Income of $94 million or a Net Income Margin of 12%, as compared to $9 million or a Net Income Margin of 1% in the year ago period
• Adjusted EBITDA of $316 million or a 41% Adjusted EBITDA Margin
• McAfee’s combined Net cash provided by operating activities was $259 million for the quarter, up 51% year-over-year
• McAfee’s combined Unlevered Free Cash Flow was $298 million for the quarter, up 35% year-over-year

First Quarter Fiscal 2021 Business Highlights

• McAfee ended the quarter with 18.9 million Core DTC subscribers, adding over 885,000 net new subscribers in the past three months compared to 668,000 net new subscribers during the previous quarter
• Signed a multi-year extended agreement with Fujitsu Client Computing to deliver best in class consumer security solutions to Fujitsu device users
• Renewed an agreement with the UK electrical retailer Dixons Carphone to offer McAfee consumer security services
• Signed an extension & expansion agreement with the consumer division of Lumen, a US based service provider
• Entered into a definitive agreement to sell certain assets together with certain liabilities, comprising substantially all of the Enterprise Business to Symphony Technology Group ("STG") for $4 billion and announced a special one-time dividend of $4.50 per Class A common share upon transaction close

Commenting on the Company’s financial results, Venkat Bhamidipati, McAfee’s Executive Vice President and Chief Financial Officer added, “Continued strong demand for our consumer security offerings in the quarter, along with our laser focus on operational discipline, resulted in 25% year-over-year growth in Adjusted EBITDA and 35% year-over-year growth in unlevered free cashflow generation.”

Financial Outlook

McAfee provides the following expected financial guidance for continuing operations for the quarter ending June 26, 2021:

Net Revenue of $430 million to $434 million

Total Adjusted EBITDA of $161 million to $165 million⁽¹⁾ which includes an estimated $40 million to $45 million of stranded costs

For the full year ending December 25, 2021, McAfee expects the following for continuing operations:

Net Revenue of $1,770 million to $1,790 million

Total Adjusted EBITDA of $693 million to $703 million⁽¹⁾ which includes an estimated $150 million of stranded costs

The financial outlook is subject to important assumptions and risks referenced in the section entitled “Forward-Looking Statements” below, which investors should read carefully.

Webcast / Conference Call Details

In conjunction with this announcement, McAfee will host a webcast conference call today, May 4, 2021, at 5:00 p.m. Eastern Time to discuss its financial results. The listen-only webcast is available at https://ir.mcafee.com/investors. Investors and participants can access the conference call over the phone by dialing (833) 301-1122, or for international callers (631) 658-1012. The conference ID is 3087333.

Following the conference call, a replay of the webcast, supplemental financial information and earnings slides will be made available on the Investor Relations page of the McAfee’s website at https://ir.mcafee.com/news-and-events/events.

About McAfee

McAfee is the device-to-cloud cybersecurity company. Inspired by the power of working together, McAfee creates consumer and business solutions that make the world a safer place. www.mcafee.com

(1)

Adjusted EBITDA is a non-GAAP financial measure, and should be considered in addition to, but not as a substitute for, information provided in accordance with GAAP. We are not able to forecast net income (loss), the most directly comparable GAAP financial measure, on a forward-looking basis without unreasonable efforts due to the high variability and difficulty in predicting certain items that affect net income (loss) including, but not limited to, interest expense and other, net, provision for income tax expense, foreign exchange gain (loss), net and equity-based compensation expense, any of which may be significant. Our forward-looking guidance regarding adjusted EBITDA should not be used to predict our future net income (loss), as the difference between the two measures varies as a result of these and other items.

Use of Non-GAAP Financial Information

In addition to McAfee’s results which are determined in accordance with generally accepted accounting principles in the United States (“GAAP”), the Company believes the following non-GAAP measures presented in this press release and discussed on the related teleconference call are useful in evaluating its operating performance: adjusted operating income, adjusted operating income margin, adjusted EBITDA, adjusted EBITDA margin, adjusted net income, adjusted net income margin, adjusted earnings per share (“EPS”) and unlevered free cash flow. Certain of these non-GAAP measures exclude equity-based compensation, depreciation and amortization expense, transformation and transition expense, restructuring expense, interest expense and other, net, provision for income tax expense, foreign exchange (gain) and loss, income or loss from discontinued operations, net of taxes, and other costs we do not believe are reflective of our ongoing operations. McAfee believes that these non-GAAP financial measures are provided to enhance the reader’s understanding of our past financial performance and our prospects for the future. McAfee’s management team uses these non-GAAP financial measures in assessing McAfee’s performance, as well as in planning and forecasting future periods. The non-GAAP financial information is presented for supplemental informational purposes only and should not be considered a substitute for financial information presented in accordance with GAAP, and may be different from similarly titled non-GAAP measures used by other companies. A reconciliation is provided herein for each non-GAAP financial measure to the most directly comparable financial measure stated in accordance with GAAP. Readers are encouraged to review the related GAAP financial measures and the reconciliation of these non-GAAP financial measures to their most directly comparable GAAP financial measures.

Forward-Looking Statements

In addition to historical consolidated financial information, certain statements in this press release and on the related teleconference call may contain “forward-looking statements” within the meaning U.S. federal securities laws that involve substantial risks and uncertainties. All statements other than statements of historical fact included in this press release and on the related teleconference call are forward-looking statements. These statements may include words such as “anticipate,” “estimate,” “expect,” “project,” “plan,” “intend,” “believe,” “may,” “will,” “should,” “can have,” “likely” and other words and terms of similar meaning in connection with any discussion of the timing or nature of future operating or financial performance or other events. For example, all statements McAfee makes relating to its estimated and projected financial results or its plans and objectives for future operations, growth initiatives, or strategies; the estimated timing of the closing of the pending sale of the Enterprise Business or the expected use of proceeds therefrom; the impact of the pending sale of the Enterprise Business on McAfee’s Consumer business; and McAfee’s plans and objectives for future operations, growth initiatives, or strategies are forward-looking statements. All forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those that McAfee expected. Specific factors that could cause such a difference include, but are not limited to: delays in obtaining required regulatory approvals or the satisfaction of other closing conditions; the effectiveness and efficiency of any separation activities as a result of the pending sale of the Enterprise Business; the timing of the declaration of a special dividend, which is based on a number of assumptions regarding the realizable net cash proceeds from the pending sale of the Enterprise Business and other cash flow items; the impact of the COVID-19 pandemic; McAfee’s ability to adapt to rapid technological change, evolving industry standards and changing customer needs, requirements or preferences; the impact on McAfee’s business of a network or data security incident or unauthorized access to its network or data or its customers’ data; the effects on McAfee’s business if we are unable to acquire new customers, if its customers do not renew their arrangements with us, or if McAfee is unable to expand sales to its existing customers or develop new solutions or solution packages that achieve market acceptance; McAfee’s ability to manage its growth effectively, execute its business plan, maintain high levels of service and customer satisfaction or adequately address competitive challenges; McAfee’s dependence on its senior management team and other key employees; McAfee’s ability to enhance and expand its sales and marketing capabilities; McAfee’s ability to attract and retain highly qualified personnel to execute its growth plan; the risks associated with interruptions or performance problems of its technology, infrastructure and service providers; McAfee’s dependence on Amazon Web Services cloud infrastructure services; the impact of data privacy concerns, evolving regulations of cloud computing, cross-border data transfer restrictions and other domestic and foreign laws and regulations; the impact of volatility in quarterly operating results; the risks associated with McAfee’s revenue recognition policy and other factors may distort its financial results in any given period; the effects on McAfee’s customer base and business if we are unable to enhance its brand cost-effectively; McAfee’s ability to comply with anti-corruption, anti-bribery and similar laws; McAfee’s ability to comply with governmental export and import controls and economic sanctions laws; the potential adverse impact of legal proceedings; McAfee’s ability to identify suitable acquisition targets or otherwise successfully implement its growth strategy; the impact of a change in McAfee’s pricing model; McAfee’s ability to meet service level commitments under its customer contracts; the impact on McAfee’s business and reputation if it is unable to provide high-quality customer support; McAfee’s dependence on strategic relationships with third parties; the impact of adverse general and industry-specific economic and market conditions and reductions in IT and identity spending; McAfee’s dependence on adequate research and development resources and its ability to successfully complete acquisitions; McAfee’s reliance on software and services from other parties; the impact of real or perceived errors, failures, vulnerabilities or bugs in McAfee’s solutions; McAfee’s ability to protect its proprietary rights; the impact on McAfee’s business if we are subject to infringement claim or a claim that results in a significant damage award; the risks associated with McAfee’s use of open source software in its solutions, solution packages and subscriptions; McAfee’s reliance on SaaS vendors to operate certain functions of its business; the risks associated with indemnity provisions in McAfee’s agreements; the risks associated with liability claims if McAfee’s breach its contracts; the impact of the failure by McAfee’s customers to pay it in accordance with the terms of their agreements; the risks associated with exposure to foreign currency fluctuations; the impact of potentially adverse tax consequences associated with McAfee’s international operations; the impact of changes in tax laws or regulations; McAfee’s ability to maintain its corporate culture; McAfee’s ability to develop and maintain proper and effective internal control over financial reporting; the risks associated with having operations and employees located in Israel; and the impact of catastrophic events on McAfee’s business. Given these factors, as well as other variables that may affect McAfee’s operating results, you should not rely on forward-looking statements, assume that past financial performance will be a reliable indicator of future performance, or use historical trends to anticipate results or trends in future periods. The forward-looking statements included in this press release and on the related teleconference call relate only to events as of the date hereof. McAfee undertakes no obligation to update or revise any forward-looking statement as a result of new information, future events or otherwise, except as otherwise required by law.

Presentation of Financial Measures

McAfee Corp. (the “Corporation”) was incorporated in Delaware on July 19, 2019. The Corporation was formed for the purpose of completing an initial public offering (the “IPO”) and related transactions in order to carry on the business of Foundation Technology Worldwide LLC (“FTW”) and its subsidiaries (the Corporation, FTW and its subsidiaries are collectively the “Company”). The Corporation, as the sole managing member of FTW, exclusively operates and controls the business and affairs of FTW. The Corporation consolidates the financial results of FTW and reports a redeemable noncontrolling interest (“RNCI”) related to the LLC Units and Management Incentive Units (MIUs) not owned by the Corporation.

MCAFEE CORP.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in millions except per share amounts)
		Three Months Ended
		March 27, 2021				March 28, 2020
Net revenue		$	442			$	354
Cost of sales			116				99
Gross profit			326				255
Operating expenses:
Sales and marketing			85				60
Research and development			44				38
General and administrative			48				58
Amortization of intangibles			36				36
Restructuring charges			8				1
Total operating expenses			221				193
Operating income			105				62
Interest expense and other, net			(60	)			(75	)
Foreign exchange gain (loss), net			35				11
Income (loss) from continuing operations before income taxes			80				(2	)
Provision for income tax expense (benefit)			(3	)			(10	)
Income from continuing operations			83				8
Income from discontinued operations, net of taxes			11				1
Net income		$	94			$	9
Less: Net income attributable to redeemable noncontrolling interests			64			N/A
Net income attributable to McAfee Corp.		$	30			N/A
Net income attributable to McAfee Corp.:
Income from continuing operations attributable to McAfee Corp.		$	27			N/A
Income from discontinued operations attributable to McAfee Corp.			3			N/A
Net income attributable to McAfee Corp.		$	30			N/A
Earnings per share attributable to McAfee Corp., basic:
Continuing operations		$	0.17			N/A
Discontinued operations		$	0.02			N/A
Earnings per share, basic(1)		$	0.18			N/A
Earnings per share attributable to McAfee Corp., diluted:
Continuing operations		$	0.16			N/A
Discontinued operations		$	0.02			N/A
Earnings per share, diluted(1)		$	0.18			N/A
Weighted-average shares outstanding, basic			162.4			N/A
Weighted-average shares outstanding, diluted			176.3			N/A

(1)

Basic and diluted earnings per share of Class A common stock are not applicable prior to the initial public offering (“IPO”) and related Reorganization Transactions (as defined in Note 1 to the unaudited condensed consolidated financial statements to be included in our 2021 Q1 quarterly report on Form 10-Q to be filed with Securities Exchange Commission). See Note 15 Earnings Per Share, to the notes to unaudited condensed consolidated financial statements for the number of shares used in the computation of earnings per share of Class A common stock and the basis for the computation of earnings per share.

MCAFEE CORP.
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(in millions, except share and per share amounts)
		March 27, 2021				December 26, 2020
Assets
Current assets:
Cash and cash equivalents		$	346			$	231
Accounts receivable, net			76				72
Deferred costs			155				137
Other current assets			44				42
Current assets of discontinued operations			312				432
Total current assets			933				914
Property and equipment, net			111				115
Goodwill			1,018				1,018
Identified intangible assets, net			666				729
Deferred tax assets			24				24
Other long-term assets			86				68
Long-term assets of discontinued operations			2,524				2,560
Total assets		$	5,362			$	5,428
Liabilities, redeemable noncontrolling interests and deficit
Current liabilities:
Accounts payable and other current liabilities		$	239			$	227
Accrued compensation and benefits			118				179
Accrued marketing			108				118
Income taxes payable			9				14
Long-term debt, current portion			44				44
Lease liabilities, current portion			10				10
Deferred revenue			915				823
Current liabilities of discontinued operations			947				970
Total current liabilities			2,390				2,385
Long-term debt, net			3,893				3,943
Deferred tax liabilities			6				5
Other long-term liabilities			134				153
Deferred revenue, less current portion			92				80
Long-term liabilities of discontinued operations			630				662
Total liabilities			7,145				7,228
Commitments and contingencies (Note 17)
Redeemable noncontrolling interests			6,177				4,840
Equity (deficit):
Class A common stock, $0.001 par value - 1,500,000,000 shares authorized, 162,372,554 shares issued and outstanding as of March 27, 2021 and 161,267,412 shares issued and outstanding as of December 26, 2020			—				—
Class B common stock, $0.001 par value - 300,000,000 shares authorized, 267,065,127 shares issued and outstanding as of March 27, 2021 and as of December 26, 2020			—				—
Additional paid-in capital			(7,835	)			(6,477	)
Accumulated deficit			(88	)			(118	)
Accumulated other comprehensive income (loss)			(37	)			(45	)
Total deficit			(7,960	)			(6,640	)
Total liabilities, redeemable noncontrolling interests and deficit		$	5,362			$	5,428

MCAFEE CORP.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
		Three Months Ended
		March 27, 2021				March 28, 2020
Cash flows from operating activities:
Net income		$	94			$	9
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			110				132
Equity-based compensation			26				15
Deferred taxes			1				1
Foreign exchange (gain) loss, net			(35	)			(11	)
Other operating activities			4				17
Change in assets and liabilities:
Accounts receivable, net			118				168
Deferred costs			(20	)			(9	)
Other assets			(34	)			(13	)
Other current liabilities			(2	)			(21	)
Deferred revenue			45				(18	)
Other liabilities			(48	)			(99	)
Net cash provided by operating activities			259				171
Cash flows from investing activities:
Additions to property and equipment			(11	)			(20	)
Other investing activities			—				(1	)
Net cash used in investing activities			(11	)			(21	)
Cash flows from financing activities:
Proceeds from revolving credit facility			—				300
Payment for the long-term debt			(11	)			(11	)
Distributions to members of FTW			(79	)			(50	)
Payment of dividends			(14	)			—
Payment of tax withholding for shares and units withheld			(23	)			—
Payment of IPO related expenses			(3	)			—
Net cash provided by (used in) financing activities			(130	)			239
Effect of exchange rate fluctuations on cash and cash equivalents			(3	)			(4	)
Change in cash and cash equivalents			115				385
Cash and cash equivalents, beginning of period			231				167
Cash and cash equivalents, end of period		$	346			$	552
Supplemental disclosures of noncash investing and financing activities and cash flow information:
Acquisition of property and equipment included in current liabilities		$	(3	)		$	(4	)
Distributions to members of FTW included in liabilities			(35	)			—
Dividends payable included in liabilities			(19	)			—
Liability for equity units repurchase			—				(10	)
Other			(3	)			2
Cash paid during the period for:
Interest, net of cash flow hedges			(50	)			(71	)
Income taxes, net of refunds			(14	)			(14	)

MCAFEE CORP.
UNAUDITED NON-GAAP FINANCIAL MEASURES
(in millions)

We have included both financial measures compiled in accordance with GAAP and certain non-GAAP financial measures, including adjusted operating income, adjusted operating income margin, adjusted EBITDA, adjusted EBITDA margin, adjusted net income, adjusted net income margin, adjusted EPS and unlevered free cash flow and ratios based on these financial measures.

Adjusted Operating Income, Adjusted Operating Income Margin, Adjusted EBITDA and Adjusted EBITDA Margin

The following table presents a reconciliation of our adjusted operating income and adjusted EBITDA to our net income for the periods presented:

		Three Months Ended
(in millions)		March 27, 2021				March 28, 2020
Net income		$	94			$	9
Add: Amortization			63				63
Add: Equity-based compensation			14				14
Add: Acquisition and integration costs(2)			1				1
Add: Restructuring(3)			8				1
Add: Management fees(4)			—				2
Add: Transformation and transition(5)			1				7
Add: Executive severance(6)			—				2
Add: Interest expense and other, net			60				75
Add: Provision for income tax expense (benefit)			(3	)			(10	)
Add: Foreign exchange loss (gain), net			(35	)			(11	)
Add: Income from discontinued operations, net of taxes			(11	)			(1	)
Adjusted operating income			192				152
Add: Depreciation			7				7
Adjusted EBITDA		$	199			$	159
Net revenue		$	442			$	354
Net income margin			21.3	%			2.5	%
Adjusted operating income margin			43.4	%			42.9	%
Adjusted EBITDA margin			45.0	%			44.9	%

See Appendix A for an explanation of non-GAAP measures and other items.

Discontinued Operations

The following table presents a reconciliation of our discontinued operations adjusted operating income and adjusted EBITDA to our income from discontinued operations, net of taxes for the periods presented:

		Three Months Ended
(in millions)		March 27, 2021				March 28, 2020
Income from discontinued operations, net of taxes		$	11			$	1

FAQ

What were McAfee's Q1 2021 financial results?

McAfee reported a net revenue of $442 million, a 25% increase year-over-year, with net income of $83 million.

How many new subscribers did McAfee gain in Q1 2021?

McAfee added 885,000 new direct-to-consumer subscribers in Q1 2021.

What is McAfee's financial outlook for Q2 2021?

McAfee expects net revenue between $430 million and $434 million for Q2 2021.

What special dividend did McAfee announce?

McAfee announced a special one-time dividend of $4.50 per Class A common share pending the close of its asset sale.

What was McAfee's adjusted EBITDA for Q1 2021?

McAfee's adjusted EBITDA for Q1 2021 was $199 million, representing a 45% margin.