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Filed Pursuant to Rule 424(b)(4)
Registration No. 333-259367

 

PROSPECTUS

20,000,000 SHARES

 

LOGO

McAfee Corp.

CLASS A COMMON STOCK

$22.50 per share

 

 

The selling stockholders identified in this prospectus are offering 20,000,000 shares of our Class A common stock. We are not selling any shares of Class A common stock under this prospectus, and we will not receive any of the proceeds from the sale of the shares being sold by the selling stockholders.

Our Class A common stock is listed on the Nasdaq Stock Market LLC (“Nasdaq”) under the symbol “MCFE.” On September 9, 2021, the last sale price of our Class A common stock as reported on the Nasdaq was $23.32 per share.

 

 

Investing in shares of our Class A common stock involves risk. See “Risk Factors” beginning on page 24.

 

     Per share      Total  

Public offering price

   $ 22.50      $ 450,000,000  

Underwriting discounts and commissions(1)

   $ 0.7875      $ 15,750,000  

Proceeds to the selling stockholders, before expenses

   $ 21.7125      $ 434,250,000  

 

(1)

We have agreed to reimburse the underwriters for certain expenses in connection with this offering. See “Underwriters (Conflicts of Interest)” for additional information regarding underwriting compensation.

To the extent that the underwriters sell more than 20,000,000 shares of our Class A common stock, the selling stockholders have granted the underwriters the option to purchase up to additional 3,000,000 shares of our Class A common stock at the public offering price less the underwriting discount within 30 days from the date of this prospectus.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed on the adequacy or accuracy of this prospectus. Any representation to the contrary is a criminal offense.

The underwriters expect to deliver the shares of our Class A common stock to our investors on or about September 14, 2021.

 

Morgan Stanley  

Goldman Sachs & Co. LLC

   TPG Capital BD, LLC
BofA Securities    Citigroup                    

 

Deutsche Bank Securities

  HSBC   Mizuho Securities

RBC Capital Markets

  UBS Investment Bank   Barclays

Piper Sandler

  Stifel   Academy Securities   Blaylock Van, LLC

C.L. King & Associates

  Ramirez & Co., Inc.   Siebert Williams Shank

September 9, 2021


Table of Contents

TABLE OF CONTENTS

 

     Page  

Prospectus Summary

     2  

Risk Factors

     24  

Cautionary Note Regarding Forward-Looking Statements

     66  

Industry and Market Data

     68  

Trademarks, Trade Names, and Service Marks

     68  

Use of Proceeds

     69  

Dividend Policy

     70  

Capitalization

     71  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     72  

Business

     117  

Management

     129  

Executive Compensation

     133  

Certain Relationships and Related Party Transactions

     169  

Principal and Selling Stockholders

     173  

Description of Certain Indebtedness

     178  

Description of Capital Stock

     182  

Shares Eligible for Future Sale

     187  

Material U.S. Federal Income Tax Considerations for Non-U.S. Holders

     189  

Underwriters (Conflicts of Interest)

     193  

Legal Matters

     207  

Experts

     207  

Where You Can Find More Information

     208  

Index to Financial Statements

     F-1  

 

 

We are responsible for the information contained in this prospectus and in any free writing prospectus we prepare or authorize. Neither we nor the selling stockholders nor the underwriters have authorized anyone to provide you with different information, and neither we nor the selling stockholders nor the underwriters take responsibility for any other information others may give you. Neither we nor the selling stockholders nor the underwriters are making an offer to sell these securities in any jurisdiction where the offer or sale is not permitted. You should not assume that the information contained in this prospectus is accurate as of any date other than its date.

For investors outside of the United States: neither we nor the selling stockholders nor any of the underwriters have done anything that would permit this offering or possession or distribution of this prospectus or any free writing prospectus we may provide to you in connection with this offering in any jurisdiction where action for that purpose is required, other than in the United States. You are required to inform yourselves about, and observe any restrictions relating to, this offering of the shares of our Class A common stock and the distribution of this prospectus and any such free writing prospectus outside of the United States.

 

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BASIS OF PRESENTATION

Unless the context requires otherwise, references in this prospectus to the “Company,” “we,” “us,” “our,” and “McAfee” refer to McAfee Corp. and its consolidated subsidiaries after giving effect to the reorganization transactions described in this prospectus that were completed in connection with our initial public offering and excluding the Enterprise Business (as defined herein), which was sold to STG (as defined herein) on July 27, 2021.

As used in this prospectus:

 

   

“Enterprise Business” refers to certain of our Enterprise assets together with certain of our Enterprise liabilities, which were sold to STG pursuant to a definitive agreement dated March 6, 2021;

 

   

“fiscal 2018” refers to the fiscal year of Foundation Technology Worldwide LLC and its subsidiaries ended December 29, 2018;

 

   

“fiscal 2019” refers to our fiscal year ended December 28, 2019;

 

   

“fiscal 2020” refers to our fiscal year ended December 26, 2020;

 

   

“fiscal 2021” refers to our fiscal year ending December 25, 2021;

 

   

“Intel” refers to Intel Corporation;

 

   

“IPO” refers to the initial public offering of shares of Class A common stock of McAfee Corp.;

 

   

“Reorganization Transactions” refers to the reorganization transactions that are described under “Prospectus Summary—Summary of the Reorganization Transactions and Our Structure”;

 

   

“Sponsor Acquisition” refers to: (i) the conversion of McAfee, Inc., which was then a part of a business unit of Intel, into a limited liability company, McAfee, LLC, (ii) the contribution of McAfee, LLC to Foundation Technology Worldwide LLC, a wholly-owned subsidiary of Intel, (iii) the transfer beginning on April 3, 2017, by Intel and its subsidiaries of assets and liabilities of the Predecessor Business not already held through Foundation Technology Worldwide LLC to Foundation Technology Worldwide LLC, and (iv) the acquisition immediately thereafter on April 3, 2017, by our Sponsors and certain co-investors of a majority stake in Foundation Technology Worldwide LLC, following which our Sponsors and certain of their co-investors owned 51.0% of the common equity interests in Foundation Technology Worldwide LLC, with certain affiliates of Intel retaining the remaining 49.0% of the common equity interests;

 

   

“Sponsors” refers to investment funds affiliated with or advised by TPG Global, LLC (“TPG”) and Thoma Bravo, L.P. (“Thoma Bravo”), respectively; and

 

   

“STG” refers to Symphony Technology Group.

 

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PROSPECTUS SUMMARY

This summary highlights information contained in other parts of this prospectus. Because it is only a summary, it does not contain all of the information that you should consider before investing in shares of our Class A common stock, and it is qualified in its entirety by, and should be read in conjunction with, the more detailed information appearing elsewhere in this prospectus. You should read the entire prospectus carefully, especially “Risk Factors,” “Cautionary Note Regarding Forward-Looking Statements,” and our financial statements and the related notes, before deciding to purchase shares of our Class A common stock.

OVERVIEW

Our Company

McAfee has been a pioneer and leader in protecting consumers from cyberattacks for more than 30 years with integrated security, privacy, and trust solutions. We built our platform through a deep, rich history of innovation and have established a leading global brand. When securing the digital experience of a consumer who is increasingly living life online, McAfee is singularly committed to one mission: to protect all things that matter through leading-edge cybersecurity.

We live in a digital world. Consumers are increasingly mobile, interacting through multiple devices, networks and platforms, while leveraging technology as they work, socialize, consume and transact. Remote work and increasing work from home arrangements are driving a pronounced convergence of work and personal life. This lifestyle shift has been accompanied by a more challenging threat landscape and an increase in points of vulnerability, risking individuals’ privacy, identity, data and other vital resources. This challenge, coupled with an increase in cyberthreats, has heightened the importance of the consumer in making security decisions for their converged digital lives.

We have a differentiated ability to secure the digital experience against cyberthreats, using threat intelligence capabilities developed through the scale and diversity of our sensor network. Our sensor network includes our subscribers’ endpoints, personal networks, and cloud-based environments that generate massive amounts of data that we translate into actionable, real-time insights. As of 2020, the platform is continuously enriched by artificial intelligence, machine learning and the telemetry gathered from over one billion sensors. As of 2020, our vast and dynamic data set and advanced analytics capabilities enable us to provide defense for advanced zero-day threats by training machine learning models on the over 60 billion threat queries. McAfee simplifies the complexity of threat detection and response by correlating events, detecting new threats, reducing false positives, and guiding consumers through remediation. Protecting our subscribers has been the foundation of our success, enabling us to maintain an industry-leading reputation among our subscribers and partners.

For over 30 years, consumers have turned to McAfee as a leader in cybersecurity services. Our Personal Protection Service provides holistic digital protection for an individual or family at home, on the go, and on the web. Our platform includes device security, privacy and safe Wi-Fi, online protection, and identity protection, creating a seamless and integrated digital moat. With a single interface, simple set up and ease of use, consumers obtain immediate time-to-value whether on a computer, smartphone or tablet, and across multiple operating systems.

Our digitally-led omni channel go-to-market strategy has reached the consumer at crucial moments in their purchase lifecycle resulting in the protection of over 600 million devices as of June 26, 2021. We have longstanding exclusive partnerships with many of the leading PC original equipment manufacturers (“OEMs”)


 

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and increasingly with mobile and internet service providers (“ISPs”) as the demand for mobile security protection increases. Through many of these relationships, our consumer security software is pre-installed on devices on a trial basis until conversion to a paid subscription. Our go-to-market channel also includes some of the largest electronics retailers globally. We operate a global business, with 37% of our fiscal 2020 net revenue earned outside of the United States and Canada.

In 2017, investment funds affiliated with or advised by TPG Global, LLC (“TPG”) and Thoma Bravo, L.P. (“Thoma Bravo”) (collectively “Sponsors”) acquired a controlling interest in McAfee, accelerating our transformational journey to optimize and reinforce our cybersecurity platform. Over the years, we have invested in new routes to market and partnerships for the business. We have also made multiple operational changes designed to increase efficiency in our product delivery and go-to-market strategies. These efforts included the transformation of our performance marketing through a digital first approach focused on new customer acquisition, channel led conversion and overall customer retention, through our PC led product experience and consumer application development programs. Our investments in our platform and strategy have reinforced our market leadership, and we intend to continue innovating to protect our subscribers.

Sale of our Enterprise Business

On July 27, 2021, we completed the sale of our Enterprise Business to STG, pursuant to a Contribution and Equity Purchase Agreement (the “Purchase Agreement”) entered in on March 6, 2021 between McAfee, LLC (“US Seller”) and McAfee Security UK LTD (“UK Seller” and together with US Seller, the “Seller Entities”) and Magenta Buyer LLC, organized by a consortium led by STG, entered into the Purchase Agreement, in exchange for (i) $4,000,000,000 in cash consideration and (ii) the assumption of certain liabilities of the Enterprise Business as specified in the Purchase Agreement. We believe this transaction will allow McAfee to singularly focus on our Consumer business and to accelerate our strategy to be a leader in personal security for consumers.

In connection with the closing of the sale, the Seller Entities and Buyer entered into a Transition Services Agreement, Transitional Trademark License Agreement, Intellectual Property Matters Agreement and Commercial Services Agreement, under which each party granted certain licenses to the other party with respect to certain intellectual property rights and technology transferred by us in the Enterprise Sale and retained by us after the consummation of the sale of our Enterprise Business. We also agreed not to compete with the Enterprise Business for four years following the closing of the transaction. In addition, we and Buyer agreed to indemnify each other for losses arising from certain covenant breaches under the Purchase Agreement and certain liabilities expressly assumed or retained by the relevant indemnifying party.

In August 2021, we used a portion of the proceeds received in the transaction to repay $332 million of our First Lien USD Term Loan and €563 million of our First Lien EUR Term Loan. We expect to use a portion of such proceeds to pay approximately $175 million in customary transaction expenses and other one-time charges. The remaining proceeds were distributed by Foundation Technology Worldwide LLC, our controlled subsidiary, on a pro rata basis to all holders, including McAfee Corp. McAfee Corp. expects its pro rata portion of such proceeds to pay approximately $300 million in required corporate taxes and related payments in connection with the transaction. McAfee Corp. declared a one-time special dividend of $4.50 per share to holders of record of our Class A Common Stock as of August 13, 2021, paid on August 27, 2021. Purchases of shares in this offering will not receive this special dividend. We also expect to pay approximately $300 million in total additional one-time separation costs and stranded cost optimization, a portion of which will be expenses paid using proceeds from the sale of our Enterprise Business.


 

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Industry Background

We live in an increasingly digitally interconnected and mobile world that is driving profound changes for consumers, causing them to react to the following trends:

Online adoption use is global and continues to grow. According to IDC, there were over 4 billion Internet users in 2020, of which the number of mobile-only Internet users is expected to grow at an approximate 8% compound annual growth rate (“CAGR”) from 2020 to 2024. Furthermore, Frost & Sullivan estimates there were over 6 billion Internet-connected devices worldwide in 2020. This significant growth in the mobile install base is driving the ubiquity of the Internet and online browsing.

The global consumer is completing more of their everyday routine online, expanding their digital footprint. Consumers are more comfortable engaging in critical transactions on mobile devices and their PCs. At the same time, they are rapidly expanding their social interactions and media consumption online, while shifting data storage to cloud-based solutions to store personal photos and large amounts of data that is accessible across any endpoint device. Per eMarketer, the average U.S. adult spent over 7.8 hours per day consuming digital media in 2020, representing 59% of total media consumption and an increase of 15% over the prior year. While unlocking consumers’ digital lives allows for convenience, using a greater number of digital platforms increases the surface area that cybercriminals can use to access personal data.

Increased attack surface results in high risk of being hacked and critical data used for profit. Cyberattacks have evolved from rudimentary malware into highly sophisticated, organized and large-scale attacks. According to RiskBased Security, during 2020, nearly 4,000 data breaches were reported, resulting in over 37 billion records being exposed. Increasing ransomware attacks have generated billions of dollars in payments to cybercriminals and inflicted significant damage and expenses for consumers.

There is a need for integrated device-to-cloud cybersecurity solutions that secure consumers in a connected world by offering the following:

 

   

Comprehensive and convenient security solutions to protect consumers across their digital footprint.

 

   

Consumer protection powered by seamless digital experience across device platforms.

 

   

Consumer products to address privacy needs.

 

   

Comprehensive threat intelligence leveraging a unique global sensor network.

KEY BENEFITS OF OUR SOLUTIONS

We protect consumers with our differentiated ability to detect, analyze, and manage responses to adversarial threats. Our subscribers trust us to protect and defend their families, data, network and online experience whether it is on a device or in the cloud, at home or on the go.

Our products are multi-faceted privacy protection solutions that provide consumers security in their everyday lives. Our Personal Protection Service is designed to provide a comprehensive suite of features that protect consumers and their families across their digital lives. Our products provide cross-device identity protection, online privacy, and Internet and device security against the latest virus, malware, spyware and ransomware attacks that are pervasive across all digital devices. Personal Protection Service allows consumers to have mobile and PC virus protection across all of their devices, spam filtering capabilities, the ability to securely


 

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encrypt sensitive files on public networks, and erases digital footprints that could be used to compromise their data, identity and privacy.

 

   

Our solutions provide a seamless and user friendly experience. From working on laptops, to accessing social media on phones, or accessing home entertainment, our Personal Protection Service provides multi device protection for the modern connected family. With a single McAfee Total Protection subscription, our subscribers can protect multiples devices without impeding the consumer experience via cloud-based online and offline protection across devices to enjoy security at home and on the go. McAfee Total Protection comes with performance-enhancing features that allow for more productivity and entertainment by automatically assigning more dedicated processor power to the apps you are actively using. With a single interface, simple set up and ease of use, consumers obtain immediate time-to-value from our solutions once installed. Our security, privacy and trust solutions provide a seamless and convenient experience, and an integrated digital moat. We are one of the few scaled cybersecurity companies with integrated data protection and threat defense capabilities built into technologies and solutions that span the digital ecosystem.

 

   

Our solutions have comprehensive features that provide consumers peace of mind that their online experience is protected. Our Personal Protection Service is designed to be a holistic digital protection of consumers and their families. Personal Protection Service encompasses data and device security and identity protection through our suite of products while delivering an experience that is equally easy to use whether on a computer, a mobile smartphone or a tablet and across multiple operating system platforms.

 

   

Our solutions are supported by our global threat intelligence network, which is bolstered by artificial intelligence, machine learning, and deep learning to increase efficacy and efficiency. As of 2020, our portfolio leverages over one billion telemetry sensors across multiple domains that feed our threat intelligence and insights engines. As of 2020, McAfee’s Global Threat Intelligence (“GTI”) supplies threat intelligence to over 2.3 trillion threat queries each year. By leveraging artificial intelligence, machine learning, and deep learning, we use complex threat detection and response algorithms that collect data from our vast customer base to correlate events, detect new threats, reduce false positives, and customers through remediation.

Market Opportunity

According to Frost & Sullivan, the global consumer endpoint security market (comprised of endpoint protection and prevention and consumer privacy and identity protection) addressed by our solutions is expected to reach nearly $13.1 billion in 2020, growing to $18.7 billion in 2024. The consumer endpoint security market has remained strong throughout the COVID-19 pandemic and has not shown signs of waning during the first half of 2021. While the COVID-19 pandemic may have accelerated the market for consumer endpoint security solutions, we believe there continues to be a robust market for consumer personal protection, including mobile solution and broader Consumer protection offerings.

Competitive Strengths

Our competitive strengths include:

 

   

Brand recognition. We have been a trusted provider of cybersecurity products for over 30 years. This trust was built on protecting hundreds of millions of consumers. Our brand recognition continues to drive customer loyalty and bolsters mutually-beneficial long-standing partner relationships.

 

   

Holistic cybersecurity solutions seamlessly integrated across the consumers’ entire digital ecosystem. Our holistic personal protection service is designed to secure the digital experience and protect privacy of our consumers and their loved ones, across multitude of devices, online, and virtually anywhere. With a single interface, simple set up and ease of use, we provide a seamless and integrated digital moat.


 

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Unique footprint across devices. Our consumer solutions protected over 600 million devices as of June 26, 2021. Our massive security footprint spans traditional devices including PCs, mobile devices including smartphones and tablets, home gateways and smart / Internet of Things (“IoT”) devices. The vast data from these endpoints helps inform our intelligence and insights engine.

 

   

Scale and diversity of threat intelligence network. As of 2020, the McAfee portfolio is continuously enriched by the intelligence gathered from over one billion sensors across diverse domains and multiple segments to inform our machine learning, deep learning, and artificial intelligence capabilities.

 

   

Differentiated omnichannel go-to-market strategy. We have longstanding exclusive partnerships with many of the leading PC and mobile OEMs, communications and ISPs, retailers and ecommerce sites, and search providers. The varied routes to market let us reach the consumer at several crucial moments in their subscription lifecycle.

 

   

Experienced management team with deep cybersecurity expertise. Our world-class management team has extensive cybersecurity expertise and a proven track record of building innovative products and cultivating effective go-to-market strategies at scaled public and private software businesses.

Our Growth Strategy

Our strategy is to maintain and extend our technology leadership in cybersecurity solutions by driving frictionless and secure digital experiences. We believe that consummation of the Enterprise Sale will enable us to focus on and devote all of our resources to delivering leading solutions to protect consumers across their digital lives. The following are key elements of our growth strategy:

 

   

Continue to leverage our strength as a trusted cybersecurity brand to increase sales from new and existing subscribers. We have one of the most trusted brands and comprehensive cybersecurity platforms in the market. We will continue to invest in and leverage our brand to take advantage of the significant growth opportunity within our core business, as our portfolio of solutions expands. We will continue to target and educate subscribers through our various sales & marketing motions.

 

   

Invest in new and existing routes to market for subscribers. We will continue to drive sales through our direct-to-consumer channels by investing in digital and performance marketing motions. We intend to strengthen our value proposition to our PC OEMs, and replicate that success with retail and ecommerce partners. We also intend to drive new customer growth by expanding our relationships with communications service providers and ISPs utilizing the cross-platform functionality of our solutions.

 

   

Enhance and tailor the subscriber conversion and renewal process. As we expand our routes to market and partnerships, we strive to evolve our conversion and renewal process through our performance marketing and other digital marketing approaches, as well as, partner education that best supports mutually beneficial consumer-centric initiatives.

 

   

Continue to innovate and enhance our consumer security platform and user experience. To protect our customer’s digital experience across devices, networks and online interactions we plan to continue to invest in new product and platform innovation to help protect data wherever it resides or travels and defend against threats across multiple domains. At the product level, we have created a platform of integrated solutions that aligns with consumer needs for a holistic, easy to use cybersecurity solution. We will continue to utilize our “test and learn” design methodology to improve the customer experience while ensuring our products deliver value and an engaging experience on PC, mobile, tablet, and online. As the digital world gets more complex, our approach is to continue to offer unified solutions that meet customer needs.

 

   

Continue to pursue targeted acquisitions. We have successfully acquired and integrated businesses, including TunnelBear (a consumer VPN provider). We will continue to pursue targeted acquisitions


 

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and believe we are well positioned to successfully execute on our acquisition strategy by leveraging our scale, global reach and routes to market, and data assets.

Our Products

We have one of the industry’s most comprehensive cybersecurity portfolios protecting consumers’ digital life.

Our Personal Protection Service provides holistic digital protection of the individual and family wherever they go, whatever they do and whatever they own. It encompasses device security, privacy, and safe Wi-Fi, online protection, and identity protection through a trusted brand with an experience that is equally easy to use whether on a computer, a mobile smartphone or a tablet and across multiple operating system platforms. Our Personal Protection Service delivers a multi-experience user interface with no performance trade-offs, and with a focus on simple and seamless protection during a consumers’ digital experience. Our platform frees consumers to work on sensitive files, videoconference their friends, and have their kids go on social media platforms while having peace of mind that our Personal Protection Service is keeping their data and files encrypted, alerting them when they are at risk, and helping them to resolve security threats. We achieve this by integrating the following solutions and capabilities within our Personal Protection Service:

 

   

Device Security. Our award-winning Anti-Malware Software and real-time threat defense has won over 65 awards since 2015 and helps protect over 600 million consumer devices across Android, iOS, and Windows protected from viruses, ransomware, malware, spyware and phishing as of June 26, 2021. Our net promoter score grew from 36 in 2019 to 45 as of June 26, 2021. These 600 million devices help power our threat intelligence engine. As consumers expand their digital footprint with an increasing number of devices and share personal data among them by hopping from one device to another, our threat intelligence engine becomes more robust. We built our Total Protection / LiveSafe solution with the purpose of protecting all of our consumers’ data, regardless of the device they are using or the network they are on. Through our interface, consumers can easily protect additional devices and have peace of mind by being able to observe each device’s security status. Beyond PCs and mobile, we have developed our Secure Home Platform (“SHP”) that protects consumer household IoT systems. Provided through major service providers and router OEMs around the world, our SHP simplifies network security in the home and protects household IoT devices, such as Alexa, smart TVs, and gaming systems.

 

   

Online Privacy and Comprehensive Internet Security. Our Safe Connect VPN and TunnelBear help consumers make any Wi-Fi connection safe and private. With bank-grade AES 256-bit encryption, our solution keeps personal data, such as banking account credentials and credit card information protected while keeping IP addresses and physical locations private. This capability helps consumers prevent password and data theft and IP-based tracking and allows customers to access global content, by bypassing local censorship. Consumers can add an additional layer of protection with FileLock by creating password-protected encrypted drives to store their sensitive files, such as tax returns and financial documents. Once these documents are not needed anymore they can be securely deleted with Shredder. Our WebAdvisor acts as a trusted companion protecting consumers from accessing malware and phishing sites while surfing and from downloading unsafe files. As we protect the consumer’s digital life, we also offer our Safe Family solution to keep children safe while they learn to navigate the digital life. Our parental control software blocks age-inappropriate websites, provides device usage monitoring and device restriction services and gives parents the ability to track children’s devices.

 

   

Identity Protection. Our IdentityProtection includes cyber monitoring, which searches over 600,000 online black markets—including the Dark Web—for compromised personally identifiable information,


 

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credit monitoring and SSN trace, helping consumers take action to prevent from fraud. Our solution also helps consumers recover from fraud through our 24/7/365 support and range of additional services, such as our full-service ID restoration, stolen funds reimbursement, lost wallet recovery, and identify theft insurance, covering expenses up to $1 million. Our Password Manager adds another level of security by securely managing and storing various complex passwords eliminating potential weaknesses caused by simple or re-used passwords.

We also provide these services to consumers who want to complement their existing protection in the form of individual products, such as Mobile Security, Safe Connect, Safe Family, WebAdvisor, and Identity Theft Protection, as well as to consumers who want to protect their complete digital life through our Total Protection and LiveSafe portfolio brands.

In addition, we extended our protection services to small business owners and the gamer community. Our Small Business Security package helps small businesses keep their businesses and customer data safe by leveraging our award-winning multi-device protection and privacy capabilities, enhanced with our 24/7 technical support and virus removal service. Our Gamer Security package delivers anti-malware functionality while enhancing gaming performance. By offloading threat detection to the cloud, keeping necessary virus definitions locally, and optimizing system resources like CPU, GPU, and RAM by pausing background services, we deliver a smoother and safer gaming experience.

Our Technology

We deploy the latest technologies to maintain our competitive advantage in our product offerings as well as to design a digital experience for consumers that drive customer engagement, satisfaction, and retention.

Quality of Our Protection and AI

Our solutions defend against a wide range of threats by using technology that leverages a combination of threat intelligence and artificial intelligence. Unlike other alternatives that rely only on artificial intelligence, our approach minimizes false positives while detecting a wide range of threats, including new zero-day threats that have never been seen before.

Our solutions are enhanced by our Global Threat Intelligence Telemetry from detected events across the product portfolio in addition to structural and behavioral feature vectors from telemetry collected through our artificial intelligence sensors. This telemetry enables McAfee to understand the blueprint of threats for which we do not necessarily possess the sample but can identify based on behavioral and structural vectors which improves our efficacy in detecting zero-day threats.

Our Machine Learning Scanner provides two options for performing automated analysis—on the device or in the cloud. The former uses machine learning on customer systems to determine whether existing and incoming files match known malware. Our cloud-based machine learning scanner collects and sends file attributes and behavioral information to the machine-learning system in the cloud for malware analysis, without transmitting personally identifiable information.

Anti-Malware Engine

Our anti-malware engine is the core component of our award-winning products. Using patented technology, the engine analyzes potentially malicious code to detect and block Trojans, viruses, worms, adware, spyware, and other threats. The engine scans files at particular points, processes, and pattern-matches malware definitions with data it finds within scanned files, decrypts, and runs malware code in an emulated environment, applies heuristic techniques to recognize new malware, and removes infectious code from legitimate files.


 

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Consumer Experience Innovation

We continuously improve the digital experience for consumers through the following technologies:

 

   

Platform Innovation. Our continuous innovations across our online presence, ecommerce, analytics, and product platform aim towards creating the best-possible experience for consumers. Our analytics platform draws from millions of consumer engagement interactions, accumulated over years and years, provides us with the insights to craft the ideal consumer experience. We use these insights to design a comprehensive, unified seamless security experience for consumers that can be managed from any mobile device. This rich set of engagement patterns also allows us to fine-tune the purchasing process by displaying the right landing page and choosing the ideal payment provider to ensure a successful transaction. Combined with our next generation messaging system and tailored marketing campaigns, we improve customer engagement, satisfaction, as well as acquisition efficiency and retention.

 

   

Ability to Integrate with Our Partners. Through our ongoing collaboration with our OEM partners, we developed an integrated consumer experience that increases the conversation of potential indirect customers to our platform. Working closely with each OEM, we are continuously testing and improving each element of the consumer journey, from our tailored OEM landing pages and messaging, to our product trials, trial experience, offerings options, pricing, and shopping chart and payments experience. Additionally, we also integrated our product platform with leading telecommunication providers, retailers, as well as networking equipment manufacturers to be the underlying platform for their mobile and IoT related security offerings.

Sales and Marketing

Our go-to-market engine consists of a digitally-led omnichannel approach to reach the consumer at crucial moments in their purchase lifecycle including direct to consumer online sales, acquisition through trial pre-loads on PC OEM devices, and other indirect modes via additional partners such as mobile providers, ISPs, electronics retailers, ecommerce sites, and search providers.

 

   

Direct to consumer marketing. We market directly to consumers through our website, McAfee.com, with digital sales motions and analytics-based cart conversion capabilities.

 

   

PC OEMs. We have a strong PC OEM partner ecosystem with major OEMs including Dell, HP, Lenovo, Asus, and Samsung, in which we pre-install a 30-day free trial of our security platform. Our digital and performance marketing engine engages with the purchasing customer to highlight the value of the security platform and convert the consumer to a direct McAfee customer. In some cases, PC OEMs preinstall a one-year or longer subscription and the OEM pays McAfee a royalty. During the subscription lifecycle, McAfee engages the consumer with our digital marketing engine to convert the consumer to a McAfee customer at the end of the subscription period.

 

   

Retail and eCommerce. We partner with major retailers worldwide including Office Depot, Staples, Walmart, Sam’s Club, MediaMarkt, Best Buy, and Amazon, to offer consumers a McAfee subscription for purchase through the retailer stores and ecommerce websites. During the subscription lifecycle McAfee engages the consumer with our digital marketing engine to convert the consumer to a McAfee customer at the end of the subscription period.

 

   

Communications Service Providers, ISPs and Mobile Providers. We partner with major service providers worldwide including Verizon, T-Mobile, Lumen, Telefonica, NTT Docomo, Softbank, British Telecom, and Sky, to offer our mobile security and secure home platform products through the service providers. In some cases, we also partner with the service providers to integrate and bundle one or more of our security products into their mobile product value added service offerings. In addition to our partnerships with service providers, we partner with Samsung to pre-install one or more of our security products on their smartphones.


 

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Search Providers. McAfee also partners with search engine providers to integrate our secure web search products.

Our omnichannel approach and strong partnerships work together to increase our presence at key moments of purchase and security engagement for consumers, allowing us to drive customer engagement and acquisition of new subscribers.

SUMMARY RISK FACTORS

An investment in our Class A common stock involves a high degree of risk. Any of the factors set forth under “Risk Factors” may limit our ability to successfully execute our business strategy. You should carefully consider all of the information set forth in this prospectus, and, in particular, you should evaluate the specific factors set forth under “Risk Factors” in deciding whether to invest in our Class A common stock. Among these important risks are the following:

 

   

The COVID-19 pandemic has affected how we are operating our business, and the duration and extent to which this will impact our future results of operations and overall financial performance remains uncertain.

 

   

If we are unsuccessful at executing our business plan and necessary transition activities as a standalone consumer cybersecurity company following the recent sale of our Enterprise Business, our business and results of operations may be adversely affected and our ability to invest in and grow our business could be limited.

 

   

The cybersecurity market is rapidly evolving and becoming increasingly competitive in response to continually evolving cybersecurity threats from a variety of increasingly sophisticated cyberattackers. If we fail to anticipate changing customer requirements or industry and market developments, or we fail to adapt our business model to keep pace with evolving market trends, our financial performance will suffer.

 

   

We operate in a highly competitive environment, and we expect competitive pressures to increase in the future, which could cause us to lose market share.

 

   

Our results of operations can be difficult to predict and may fluctuate significantly, which could result in a failure to meet investor expectations.

 

   

Forecasting our estimated annual effective tax rate is complex and subject to uncertainty, and there may be material differences between our forecasted and actual tax rates.

 

   

We face risks associated with past and future investments, acquisitions, and other strategic transactions.

 

   

Over the last several years, we have pursued a variety of strategic initiatives designed to optimize and reinforce our cybersecurity platform. If the benefits of these initiatives are less than we anticipate, or if the realization of such benefits is delayed, our business and results of operations may be harmed.

 

   

If our solutions have or are perceived to have defects, errors, or vulnerabilities, or if our solutions fail or are perceived to fail to detect, prevent, or block cyberattacks, including in circumstances where customers may fail to take action on attacks identified by our solutions, our reputation and our brand could suffer, which would adversely impact our business, financial condition, results of operations, and cash flows.

 

   

Failure to adapt our product and service offerings to changing customer demands, or lack of customer acceptance of new or enhanced solutions, could harm our business and financial results.


 

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If the protection of our proprietary technology is inadequate, we may not be able to adequately protect our innovations and brand.

 

   

If we fail to maintain relationships with our channel partners, or if we must agree to significant adverse changes in the terms of our agreements with these partners, it may have an adverse effect on our ability to successfully and profitably market and sell our products and solutions.

 

   

If our security measures are breached or unauthorized access to our data is otherwise obtained, our brand, reputation, and business could be harmed, and we may incur significant liabilities.

 

   

We operate globally and are subject to significant business, economic, regulatory, social, political, and other risks in many jurisdictions.

 

   

We may become involved in litigation, investigations, and regulatory inquiries and proceedings that could negatively affect us and our reputation.

 

   

Our substantial leverage could adversely affect our ability to raise additional capital to fund our operations, limit our ability to react to changes in the economy or our market, expose us to interest rate risk, and prevent us from timely satisfying our obligations.

 

   

Restrictions imposed by our outstanding indebtedness and any future indebtedness may limit our ability to operate our business and to finance our future operations or capital needs or to engage in acquisitions or other business activities necessary to achieve growth.

 

   

Our principal asset is our interest in Foundation Technology Worldwide LLC, and we are dependent upon Foundation Technology Worldwide LLC and its consolidated subsidiaries for our results of operations, cash flows, and distributions.

 

   

We will be required to pay certain Continuing Owners and certain Management Owners for certain tax benefits we may realize or are deemed to realize in accordance with the tax receivable agreement between us and such Continuing Owners and Management Owners, and we expect that the payments we will be required to make will be substantial.

 

   

In certain circumstances, under its limited liability company agreement, Foundation Technology Worldwide LLC will be required to make tax distributions to us, the Continuing Owners and certain Management Owners and the distributions that Foundation Technology Worldwide LLC will be required to make may be substantial.

SPONSOR ACQUISITION

Through April 3, 2017, the Predecessor Business was operated as a part of a business unit of Intel. Also prior to April 3, 2017, McAfee, Inc., a Delaware corporation, then a wholly-owned subsidiary of Intel, was converted into a Delaware limited liability company, McAfee, LLC. Following such conversion, Intel contributed McAfee, LLC to Foundation Technology Worldwide LLC, a wholly-owned subsidiary of Intel. On April 3, 2017, Intel and its subsidiaries transferred assets and liabilities of the Predecessor Business not already held through Foundation Technology Worldwide LLC to Foundation Technology Worldwide LLC. Immediately thereafter on April 3, 2017, our Sponsors and certain of their co-investors acquired a majority stake in Foundation Technology Worldwide LLC, which we refer to, collectively, as the Sponsor Acquisition. Following the Sponsor Acquisition, our Sponsors and certain of their co-investors owned 51.0% of the common equity interests in Foundation Technology Worldwide LLC, with certain affiliates of Intel retaining the remaining 49.0% of the common equity interests. We have operated as a standalone company at all times following the Sponsor Acquisition.


 

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SUMMARY OF THE REORGANIZATION TRANSACTIONS AND OUR STRUCTURE

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”). On October 21, 2020, the Corporation became the sole managing member and holder of 100% of the voting power of FTW due to the reorganization transactions described below. With respect to the Corporation and FTW, each entity owns only the respective entities below it in the corporate structure and each entity has no other material operations, assets, or liabilities.

In October, 2020, the Corporation completed the IPO pursuant to which the Corporation and selling stockholders sold an aggregate of 37 million shares of Class A common stock par value $0.001 per share (“Class A common stock”) at a public offering price of $20.00 per share. The Corporation issued 31 million shares and received $586 million in proceeds, net of underwriting discounts and commissions, of which $553 million was used to purchase newly-issued limited liability company units (“LLC Units”) and $33 million was used to purchase LLC Units from existing holders (“Continuing LLC Owners”) of interests in FTW, at a purchase price per unit equal to the public offering price per share of Class A common stock, less underwriting discounts and commissions.

We refer to the holders of management incentive units of FTW (“MIUs”) as well as members of management who hold LLC Units following the closing of the offering or are to receive Class A common stock in satisfaction of existing incentive awards as “Management Owners.” We refer to those of our pre-IPO investors and certain of their affiliates who received shares of Class A common stock in connection with the Reorganization Transactions (as defined below) and who do not hold LLC Units as “Continuing Corporate Owners,” and together with the Continuing LLC Owners, as “Continuing Owners.”

In connection with the closing of the IPO, the following Reorganization Transactions were consummated:

 

   

a new limited liability company operating agreement (“New LLC Agreement”) was adopted for FTW making the Corporation the sole managing member of FTW;

 

   

the Corporation’s certificate of incorporation was amended and restated to, among other things, (i) provide for Class A common stock and Class B common stock and (ii) issue shares of Class B common stock to the Continuing Owners and Management Owners, on a one-to-one basis with the number of LLC Units they own (except that Management Owners will not receive shares of Class B common stock in connection with their exchange of Management Incentive Units (“MIUs”)), the exchange of which will be settled in cash or shares of Class A common stock, at the option of the Company, for nominal consideration; and

 

   

the Corporation (i) issued 126.3 million shares of its Class A common stock to certain of the Continuing Owners in exchange for their contribution of LLC units or the equity of certain other entities, which pursuant to the Reorganization Transactions, became its direct or indirect subsidiaries and (ii) settled 5.7 million restricted stock units (“RSUs”) with shares of its Class A common stock, net of tax withholding, held by certain employees, which were satisfied in connection with the Reorganization Transactions.

The diagram below depicts our organizational structure immediately following this offering, assuming no exercise by the underwriters of their option to purchase additional shares of Class A common stock.


 

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LOGO

DIVESTITURE OF THE ENTERPRISE BUSINESS

On July 27, 2021, McAfee, LLC and McAfee Security UK LTD (“UK Seller” and together with US Seller, the “Seller Entities”) and Magenta Buyer LLC, organized by a consortium led by STG, entered into the Second Amendment to Contribution and Equity Purchase Agreement (the “Purchase Agreement Amendment”) governing the sale by the Company of certain assets of its Enterprise Business to STG in exchange for (i) $4,000,000,000 in cash consideration and (ii) the assumption of certain liabilities of the Enterprise business as specified in the Contribution and Equity Purchase Agreement (as amended, the “Purchase Agreement”) (such transaction, the “Enterprise Business Sale”). The Purchase Agreement Amendment clarifies the treatment of


 

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certain transferred employees of the Enterprise Business and the treatment of certain residual cash balances and certain transferred assets and liabilities upon the consummation of the Enterprise Business Sale, among other matters.

OUR SPONSORS

TPG. TPG is a leading global alternative asset firm founded in 1992 with more than $96 billion of assets under management as of March 31, 2021 and offices in Beijing, Fort Worth, Hong Kong, London, Luxembourg, Melbourne, Mumbai, New York, San Francisco, Seoul, Singapore and Washington, DC. TPG’s investment platforms are across a wide range of asset classes, including private equity, growth equity, impact investing, real estate, secondaries and public equity. TPG aims to build dynamic products and options for its investors while also instituting discipline and operational excellence across the investment strategy and performance of its portfolio.

Thoma Bravo. Thoma Bravo is a leading investment firm building on a more than 40-year history of providing capital and strategic support to experienced management teams and growing companies. Thoma Bravo has invested in many fragmented, consolidating industry sectors in the past, but has become known particularly for its history of successful investments in the application, infrastructure and security software and technology-enabled services sectors, which have been its investment focus for more than 15 years. Thoma Bravo manages a series of investment funds representing more than $57.5 billion of capital commitments and more than $76 billion of assets under management.

CORPORATE INFORMATION

McAfee Corp. was formed in Delaware on July 19, 2019. Our principal executive offices are located at 6220 America Center Drive, San Jose, California 95002, and our telephone number is (866) 622-3911. Our Internet website is www.mcafee.com. The information on, or that can be accessed through, our website and the other websites that we present in this prospectus is not part of this prospectus, and you should not rely on any such information in making the decision whether to purchase shares of our Class A common stock.


 

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THE OFFERING

 

Issuer in this offering

McAfee Corp.

 

Class A common stock offered by the selling stockholders

20,000,000 shares (or 23,000,000 shares if the underwriters exercise in full their option to purchase additional shares of Class A common stock).

 

Underwriters’ option to purchase additional shares of Class A common stock from the selling stockholders

3,000,000 shares.

 

Class A common stock to be outstanding after this offering

175,849,441 shares (or 178,003,855 shares if the underwriters exercise in full their option to purchase additional shares of Class A common stock).

 

Class B common stock to be outstanding after this offering

255,532,090 shares (or 253,377,676 shares if the underwriters exercise in full their option to purchase additional shares of Class A common stock).

 

Voting power held by holders of Class A common stock after giving effect to this offering by the selling stockholders

40.8%

 

Voting power held by holders of Class B common stock after giving effect to this offering by the selling stockholders

59.2%

 

Voting rights

Holders of our Class A common stock and Class B common stock vote together as a single class on all matters presented to stockholders for their vote or approval, except as otherwise required by law or as otherwise provided by our certificate of incorporation. Each share of Class A common stock and Class B common stock entitles its holder to one vote per share on all such matters. See “Description of Capital Stock.”

 

Use of proceeds

The selling stockholders will receive all of the net proceeds from this offering. We will not receive any of the proceeds from the sale of shares of Class A common stock offered by the selling stockholders. We will, however, bear the costs associated with the sale of shares by the selling stockholders, other than underwriting discounts and commissions. See “Use of Proceeds.”
 

 

Conflicts of Interest

Affiliates of TPG beneficially own in excess of 10% of our issued and outstanding common stock. Because TPG Capital BD, LLC, an


 

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affiliate of TPG, is an underwriter in this offering and its affiliates own in excess of 10% of our issued and outstanding common stock, TPG Capital BD, LLC is deemed to have a “conflict of interest” under Rule 5121 (“Rule 5121”) of the Financial Industry Regulatory Authority, Inc. (“FINRA”). Accordingly, this offering is being made in compliance with the requirements of Rule 5121. Pursuant to that rule, the appointment of a “qualified independent underwriter” is not required in connection with this offering as the member primarily responsible for managing the public offering does not have a conflict of interest, is not an affiliate of any member that has a conflict of interest and meets the requirements of paragraph (f)(12)(E) of Rule 5121. See “Underwriters (Conflicts of Interest).”

 

Dividend Policy

Foundation Technology Worldwide LLC expects to pay a cash distribution to its members on a quarterly basis at an aggregate annual rate of approximately $200 million. McAfee Corp. is expected to receive a portion of any such distribution through the LLC Units it holds directly or indirectly through its wholly-owned subsidiaries on the record date for any such distribution declared by Foundation Technology Worldwide LLC, which is expected to equal the number of shares of Class A common stock outstanding on such date. McAfee Corp. expects to use the proceeds it receives from such quarterly distribution to declare a cash dividend on its shares of Class A common stock. We intend to fund any future dividends from distributions made by Foundation Technology Worldwide LLC from its available cash generated from operations.

 

  In addition, in connection with the consummation of the sale of our Enterprise Business to STG, we declared a one-time special dividend of $4.50 to holders of record of our Class A common stock as of August 13, 2021, paid on August 27, 2021. Purchasers of shares in this offering will not be entitled to receive such special dividend with the respect to the shares of Class A common stock that they purchase in this offering.

 

  The timing, declaration, amount of, and payment of any such dividends will be made at the discretion of McAfee Corp.’s board of directors, subject to applicable laws, and will depend upon many factors, including the amount of the distribution received by McAfee Corp. from Foundation Technology Worldwide LLC, our financial condition, results of operations, capital requirements, contractual restrictions, general business conditions, and other factors that McAfee Corp.’s board of directors may deem relevant. Moreover, if, as expected, McAfee Corp. determines to initially pay a dividend following any quarterly distributions from Foundation Technology Worldwide LLC, there can be no assurance that McAfee Corp. will continue to pay dividends in the same amounts or at all thereafter. See “Dividend Policy.”

 

Controlled Company

Following this offering, our Sponsors and Intel and certain of its affiliates will control approximately 77.7% of the combined voting


 

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power of our outstanding common stock. As a result, we will continue to be a “controlled company” under the Exchange’s corporate governance standards. Under these standards, a company of which more than 50% of the voting power is held by an individual, group, or another company is a “controlled company” and may elect not to comply with certain corporate governance standards.

 

Risk factors

You should read the “Risk Factors” section of this prospectus for a discussion of factors to consider carefully before deciding to invest in shares of our Class A common stock.

 

Exchange symbol

“MCFE”

Unless otherwise indicated, the number of shares of Class A common stock to be outstanding after this offering is based on 166,004,840 shares of Class A common stock outstanding as of June 26, 2021 and excludes:

 

   

265,376,691 shares of Class A common stock issuable upon exchange or redemption of LLC Units, together with corresponding shares of Class B common stock;

 

   

5,854,008 shares of Class A common stock that would be outstanding if all vested MIUs were exchanged for shares of Class A common stock, and 6,814,340 shares of Class A common stock that would be outstanding if all unvested MIUs were exchanged for shares of Class A common stock;

 

   

23,847,140 shares of Class A common stock issuable upon vesting of outstanding RSUs;

 

   

1,834,063 shares of Class A common stock issuable upon vesting of outstanding PSUs;

 

   

482,231 shares of Class A common stock issuable upon exercise of vested option awards having a weighted average exercise price of $19.88 and 1,350,954 shares of Class A common stock issuable upon exercise of unvested option awards having a weighted average exercise price of $19.38;

 

   

43,130,213 shares of Class A common stock reserved for future issuance under our 2020 equity incentive plan, without taking into account the “evergreen” provision of our 2020 equity incentive plan; and

 

   

9,389,809 shares of Class A common stock authorized for sale under the Employee Stock Purchase Plan (“ESPP”) without taking into account the “evergreen” provision of our ESPP;

Unless otherwise indicated, this prospectus reflects and assumes no exercise by the underwriters of their option to purchase up to 3,000,000 additional shares of our Class A common stock in this offering.


 

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SUMMARY OF CONSOLIDATED FINANCIAL AND OTHER DATA

The following table sets forth the summary consolidated financial and other data of McAfee Corp. for the periods presented and at the dates indicated below.

The summary of consolidated statements of operations and cash flows data presented below for fiscal 2018, fiscal 2019, and fiscal 2020 are derived from the audited consolidated financial statements that are included elsewhere in this prospectus. The consolidated balance sheet data as of June 26, 2021 is derived from unaudited condensed consolidated financial statements that are included elsewhere in this prospectus. The summary of unaudited condensed consolidated statements of operations and cash flows data for the six months ended June 27, 2020 and June 26, 2021 are derived from unaudited condensed consolidated financial statements that are included elsewhere in this prospectus.

On March 6, 2021, we entered into a definitive agreement (the “Purchase Agreement”) with a consortium led by Symphony Technology Group (“STG”) under which STG agreed to purchase certain of our Enterprise assets together with certain of our Enterprise liabilities (“Enterprise Business”), representing substantially all of our Enterprise segment, for an all-cash purchase price of $4.0 billion. The divestiture transaction closed on July 27, 2021. The divestiture of our Enterprise Business represents a strategic shift in our operations that will allow us to focus on our Consumer Business. As a result of the divestiture, the results of our Enterprise Business were reclassified as discontinued operations in our consolidated statements of operations and excluded from both continuing operations and segment results for all periods presented. Starting in the first quarter of fiscal 2021, we began to operate in one reportable segment as the Enterprise Business comprised substantially all of our Enterprise segment. Results of discontinued operations includes all revenues and expenses directly derived from our Enterprise Business, with the exception of general corporate overhead costs that were previously allocated to our Enterprise segment but have not been allocated to discontinued operations. The Enterprise Business, as specified in the Purchase Agreement, was reclassified as discontinued operations in our consolidated balance sheets, subject to changes set forth in the Purchase Agreement, which included amendments to the agreement in July 2021. See Note 3 to our audited consolidated financial statements that are included elsewhere in this prospectus for additional information about the divestiture of our Enterprise Business.

We maintain a 52- or 53-week fiscal year that ends on the last Saturday in December. The year ended December 29, 2018 is a 52-week year starting on December 31, 2017 and ending on December 29, 2018. The year ended December 28, 2019 is a 52-week year starting on December 30, 2018 and ending on December 28, 2019. The year ended December 26, 2020 is a 52-week year starting on December 29, 2019 and ending on December 26, 2020. Six months ended June 27, 2020 is a 26-week period starting on December 29, 2019 and ending on June 27, 2020. Six months ended June 26, 2021 is a 26-week period starting on December 27, 2020 and ending on June 26, 2021.

The unaudited condensed consolidated financial statements were prepared on a basis consistent with our audited consolidated financial statements and include all adjustments, consisting of normal and recurring adjustments that we consider necessary for a fair statement of the financial condition and results of operations as of and for such periods. Operating results for the periods presented are not necessarily indicative of the results that may be expected in future periods, and operating results for the six months ended June 26, 2021 are not necessarily indicative of results for the full year. The following information should be read in conjunction with “Capitalization,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” our audited consolidated financial statements, and our unaudited condensed consolidated financial statements and the related notes included elsewhere in this prospectus.


 

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Results of Operations Data

 

    Fiscal Year Ended     Six Months
Ended
 
(in millions expect per share data)   December 29,
2018
    December 28,
2019
    December 26,
2020
    June 27,
2020
    June 26,
2021
 

Net revenue

  $ 1,161     $ 1,303     $ 1,558     $ 737     $ 909  

Cost of sales(2)

    386       391       444       209       232  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

    775       912       1,114       528       677  

Operating expenses:

         

Sales and marketing(2)

    348       299       348       140       174  

Research and development(2)

    186       161       188       75       92  

General and administrative(2)

    170       182       235       100       93  

Amortization of intangibles

    153       146       143       72       49  

Restructuring charges

    19       6       2       1       8  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    876       794       916       388       416  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

    (101     118       198       140       261  

Interest (expense) and other, net

    (308     (296     (307     (149     (118

Foreign exchange gain (loss), net

    30       21       (104     (6     15  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations before income taxes

    (379     (157     (213     (15     158  

Provision for income tax expense (benefit)

    29       38       5       (5     7  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations

    (408     (195     (218     (10     151  

Income (loss) from discontinued operations, net of taxes

    (104     (41     (71     41       51  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

  $ (512   $ (236   $ (289   $ 31     $ 202  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Less: Net income (loss) attributable to redeemable noncontrolling interests

    N/A       N/A       (171     N/A       136  
     

 

 

     

 

 

 

Net income (loss) attributable to McAfee Corp.

    N/A       N/A     $ (118     N/A     $ 66  
     

 

 

     

 

 

 

Net income (loss) attributable to McAfee Corp.:

         

Income (loss) from continuing operations attributable to McAfee Corp.

    N/A       N/A     $ (55     N/A     $ 50  

Income (loss) from discontinued operations attributable to McAfee Corp.

    N/A       N/A       (63     N/A       16  
     

 

 

     

 

 

 

Net income (loss) attributable to McAfee Corp.

    N/A       N/A     $ (118     N/A     $ 66  
     

 

 

     

 

 

 

Earnings (loss) per share attributable to McAfee Corp., basic:

         

Continuing operations

    N/A       N/A     $ (0.34     N/A     $ 0.31  

Discontinued operations

    N/A       N/A       (0.39     N/A       0.10  
     

 

 

     

 

 

 

Earnings (loss) per share, basic(1)

    N/A       N/A     $ (0.73     N/A     $ 0.40  
     

 

 

     

 

 

 

Earnings (loss) per share attributable to McAfee Corp., diluted:

         

Continuing operations

    N/A       N/A     $ (0.34     N/A     $ 0.30  

Discontinued operations

    N/A       N/A       (0.39     N/A       0.09  
     

 

 

     

 

 

 

Earnings (loss) per share, diluted(1)

    N/A       N/A     $ (0.73     N/A     $ 0.39  
     

 

 

     

 

 

 

Weighted-average shares outstanding, basic

    N/A       N/A       162.3       N/A       163.7  

Weighted-average shares outstanding, diluted

    N/A       N/A       162.3       N/A       179.5  

Statements of Cash Flows Data

         

Net cash provided by (used in):

         

Operating activities

  $ 319     $ 496     $ 760     $ 288     $ 448  

Investing activities

    (677     (63     (51     (33     (18

Financing activities

    459       (734     (651     (162     (239

 

  (1)

Basic and diluted earnings (loss) per share of Class A common stock are applicable only for periods after October 22, 2020, which is the period following our IPO and related Reorganization Transactions. Refer to Note 17 in our audited consolidated financial statements included elsewhere in this prospectus


 

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  for information about the Net Loss Per Share during fiscal 2020. Refer to Note 15 Earnings Per Share in the notes to the unaudited condensed consolidated financial statements included elsewhere in this prospectus for information about the Earnings Per Share during the six months ended June 26, 2021.

 

  (2)

Includes equity-based compensation expense as follows:

 

     Fiscal Year Ended      Six Months Ended  
(in millions)    December 29,
2018
     December 28,
2019
     December 26,
2020
     June 27,
2020
     June 26,
2021
 

Cost of sales

   $ 1      $ —        $ 5      $ —        $ 2  

Sales and marketing

     1        1        23        1        7  

Research and development

     1        1        40        —          10  

General and administrative

     3        3        45        15        14  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total equity-based compensation expense from continuing operations

     6        5        113        16        33  

Discontinued operations

     22        20        200        3        45  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total equity-based compensation expense

   $ 28      $ 25      $ 313      $ 19      $ 78  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Consolidated Balance Sheet Data

 

(in millions)    As of June 26, 2021  

Cash and cash equivalents

   $ 420  

Working capital(1)

     (1,351

Total assets

     5,437  

Current and long-term deferred revenue

     1,019  

Current and long-term debt, net of borrowing costs(2)

     3,948  

Redeemable noncontrolling interests

     7,687  

Accumulated deficit

     (52

 

(1)

Working capital is comprised of current assets less current liabilities.

(2)

In connection with the consummation of the sale of our Enterprise Business to STG, we repaid $332 million of our First Lien USD Term Loan and €563 million of our First Lien EUR Term Loan in August 2021. See “Capitalization”.

Non-GAAP Financial Measures

We believe that in addition to our results determined in accordance with GAAP, adjusted operating income, adjusted operating income margin, adjusted EBITDA, adjusted EBITDA margin, adjusted net income, adjusted net income margin, and free cash flow are useful in evaluating our business, results of operations and financial condition. We believe that this non-GAAP financial information may be helpful to investors because it provides consistency and comparability with past financial performance and facilitates period to period comparisons of operations, as these eliminate the effects of certain variables from period to period for reasons that we do not believe reflect our underlying business performance. However, non-GAAP financial information is presented for supplemental informational purposes only and should not be considered in isolation or as a substitute for financial information presented in accordance with GAAP. Our presentation of these measures should not be construed as an inference that our future results will be unaffected by the types of items excluded from the calculation. Other companies in our industry may calculate these measures differently, which may limit their usefulness as a comparative measure.


 

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See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Non-GAAP Financial Measures” for explanations of how we calculate these measures and for reconciliation to the most directly comparable financial measure stated in accordance with GAAP.

 

     Fiscal Year Ended     Six Months Ended  
(in millions except percentages)    December 29,
2018
    December 28,
2019
    December 26,
2020
    June 27,
2020
    June 26,
2021
 

Net revenue

   $ 1,161     $ 1,303     $ 1,558     $ 737     $ 909  

Operating income (loss)

   $ (101   $ 118     $ 198     $ 140     $ 261  

Operating income (loss) margin

     (8.7 )%      9.1     12.7     19.0     28.7

Net income (loss)

   $ (512   $ (236   $ (289   $ 31     $ 202  

Net income (loss) margin

     (44.1 )%      (18.1 )%      (18.5 )%      4.2     22.2

Adjusted operating income

   $ 220     $ 427     $ 624     $ 303     $ 403  

Adjusted operating income margin

     18.9     32.8     40.1     41.1     44.3

Adjusted EBITDA

   $ 247     $ 455     $ 651     $ 317     $ 417  

Adjusted EBITDA margin

     21.3     34.9     41.8     43.0     45.9

Adjusted net income (loss)

   $ (57   $ 116     $ 278     $ 127     $ 235  

Adjusted net income (loss) margin

     (4.9 )%      8.9     17.8     17.2     25.9

Net cash provided by operating activities

     319       496       760       288       448  

Net cash used in investing activities

     (677     (63     (51     (33     (18

Net cash provided by (used in) financing activities

     459       (734     (651     (162     (239

Free cash flow

     257       435       714       260       430  

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

We regularly monitor adjusted operating income, adjusted operating income margin, adjusted EBITDA, and adjusted EBITDA margin to assess our operating performance. We define adjusted operating income as net income (loss), excluding the impact of amortization of intangible assets, equity-based compensation expense, interest expense and other, net, provision for income tax expense, foreign exchange loss (gain), net, income (loss) from discontinued operations, net of taxes, and other costs that we do not believe are reflective of our ongoing operations. Adjusted operating income margin is calculated as adjusted operating income divided by net revenue. We define adjusted EBITDA as adjusted operating income, excluding the impact of depreciation expense plus certain other non-operating costs. Adjusted EBITDA margin is calculated as adjusted EBITDA divided by net revenue. We believe presenting adjusted operating income, adjusted operating income margin, adjusted EBITDA, and adjusted EBITDA margin provides management and investors consistency and comparability with our past financial performance and facilitates period to period comparisons of operations, as it eliminates the effects of certain variations unrelated to our overall performance. Adjusted operating income, adjusted operating income margin, adjusted EBITDA, and adjusted EBITDA margin have limitations as analytical tools, and you should not consider it in isolation or as a substitute for analysis of our results as reported under GAAP. Some of these limitations are:

 

   

although depreciation and amortization are non-cash charges, the assets being depreciated and amortized may have to be replaced in the future, and adjusted EBITDA does not reflect cash capital expenditure requirements for such replacements or for new capital expenditure requirements;

 

   

adjusted operating income and adjusted EBITDA do not reflect changes in, or cash requirements for, our working capital needs;

 

   

adjusted operating income and adjusted EBITDA do not reflect the significant interest expense, or the cash requirements necessary to service interest or principal payments, on our debt;


 

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adjusted operating income and adjusted EBITDA do not reflect income tax payments that may represent a reduction in cash available to us; and

 

   

other companies, including companies in our industry, may calculate adjusted operating income and adjusted EBITDA differently, which reduce their usefulness as comparative measures.

Because of these limitations, you should consider adjusted operating income and adjusted EBITDA alongside other financial performance measures, including operating income (loss), net income (loss) and our other GAAP results. In evaluating adjusted operating income, adjusted operating income margin, adjusted EBITDA, and adjusted EBITDA margin, you should be aware that in the future we may incur expenses that are the same as or similar to some of the adjustments in this presentation. Our presentation of adjusted operating income, adjusted operating income margin, adjusted EBITDA, and adjusted EBITDA margin should not be construed as an inference that our future results will be unaffected by the types of items excluded from the calculation of adjusted operating income, adjusted operating income margin, adjusted EBITDA, and adjusted EBITDA margin. Adjusted operating income, adjusted operating income margin, adjusted EBITDA, and adjusted EBITDA margin are not presentations made in accordance with GAAP and the use of these terms varies from other companies in our industry.

Adjusted Net Income and Adjusted Net Income Margin

We regularly monitor adjusted net income and adjusted net income margin to assess our operating performance. Adjusted net income assumes all net income (loss) is attributable to McAfee Corp., which assumes the full exchange of all outstanding LLC Units for shares of Class A common stock of McAfee Corp., and is adjusted for the impact of amortization of debt issuance costs, amortization of intangible assets, equity-based compensation expense, foreign exchange loss (gain), net, income (loss) from discontinued operations, net of taxes, and other costs that we do not believe are reflective of our ongoing operations. The adjusted provision for income taxes represents the tax effect on net income, adjusted for all of the listed adjustments, assuming that all consolidated net income was subject to corporate taxation for all periods presented. We have assumed rate of 22% which represents our long term expected corporate tax rate excluding discrete and non-recurring tax items. This amount has been recast for periods reported previously.

Adjusted net income margin is calculated as adjusted net income divided by net revenue. Adjusted net income and adjusted net income margin have limitations as analytical tools, and you should not consider it in isolation or as a substitute for analysis of our results as reported under GAAP. Some of these limitations are:

 

   

although amortization is non-cash charge, the assets being amortized may have to be replaced in the future, and adjusted net income does not reflect cash capital expenditure requirements for such replacements or for new capital expenditure requirements;

 

   

adjusted net income does not reflect changes in, or cash requirements for, our working capital needs;

 

   

other companies, including companies in our industry, may calculate adjusted net income differently, which reduce its usefulness as comparative measures.

Because of these limitations, you should consider adjusted net income alongside other financial performance measures, including net income (loss) and our other GAAP results. In evaluating adjusted net income and adjusted net income margin, you should be aware that in the future we may incur expenses that are the same as or similar to some of the adjustments in this presentation. Our presentation of adjusted net income and adjusted net income margin should not be construed as an inference that our future results will be unaffected by the types of items excluded from the calculation of adjusted net income and adjusted net income margin. Adjusted net income and adjusted net income margin are not presentations made in accordance with GAAP and the use of these terms vary from other companies in our industry.


 

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Free Cash Flow

We define free cash flow as net cash provided by operating activities less capital expenditures. We consider free cash flow to be a liquidity measure that provides useful information to management and investors about the amount of cash generated by the business that can be used for strategic opportunities, including investing in our business, making strategic acquisitions, and strengthening the balance sheet.


 

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RISK FACTORS

This offering and investing in shares of our Class A common stock involves a high degree of risk. You should carefully consider the risks and uncertainties described below together with all of the other information contained in this prospectus, including our consolidated financial statements and the related notes appearing at the end of this prospectus, before deciding to invest in shares of our Class A common stock. If any of the following risks actually occurs, our business, prospects, results of operations, and financial condition could suffer materially, the trading price of our Class A common stock could decline, and you could lose all or part of your investment. Please also see “Cautionary Note Regarding Forward-Looking Statements.” In addition, the impacts of the COVID-19 pandemic and any worsening of the economic environment may exacerbate the risks described below, any of which could have a material impact on us. This situation is changing rapidly and additional impacts may arise that we are not currently aware of.

Risks Related to the COVID-19 Pandemic

The COVID-19 pandemic has affected how we are operating our business, and the duration and extent to which this will impact our future results of operations and overall financial performance remains uncertain.

The COVID-19 pandemic is having widespread, rapidly evolving, and unpredictable impacts on global society, economies, financial markets, and business practices. Federal, state and foreign governments have implemented measures to contain the virus, including social distancing, travel restrictions, border closures, limitations on public gatherings, work from home, and closure of non-essential businesses. At the onset of the COVID-19 pandemic, we implemented work-from-home requirements, made substantial modifications to employee travel policies, and cancelled or shifted marketing and other corporate events to virtual-only formats. While we have begun to adjust our current policies and procedures in accordance with public health guidance that is available, we cannot be certain that similar precautionary measures will not be necessary in the future, and any such precautionary measures could negatively affect our customer success efforts, sales and marketing efforts, delay and lengthen our sales cycles, or create operational or other challenges, any of which could harm our business and results of operations. In addition, the COVID-19 pandemic has disrupted the operations of many of our channel partners, and may continue to disrupt their operations, for an indefinite period of time, including as a result of any future public health precautionary measures, uncertainty in the financial markets, or other harm to their businesses and financial results, resulting in delayed purchasing decisions, extended payment terms, and postponed or cancelled projects, all of which could negatively impact our business and results of operations, including our revenue and cash flows. Further, if the COVID-19 pandemic has a substantial impact on our employees’, partners’, or third-party service providers’ health, attendance, or productivity in the future, our results of operations and overall financial performance may be adversely impacted.

The ultimate duration and extent of the impact from the COVID-19 pandemic depends on future developments that cannot be accurately forecasted at this time, such as the efficacy of new vaccines, the efficiency and scope of global inoculation efforts, the severity and transmission rate of the disease and new variants, the actions of governments, businesses and individuals in response to the pandemic, the extent and effectiveness of containment actions, the impact on economic activity, and the impact of these and other factors on our employees, partners, and third-party service providers. This uncertainty also affects management’s accounting estimates and assumptions, which could result in greater variability in a variety of areas that depend on these estimates and assumptions, including those related to investments, receivables, retention rates, renewal and pricing. For example, we have experienced growth and increased demand for our solutions in recent quarters, which may be due in part to greater demand for devices or our solutions in response to the COVID-19 pandemic. We cannot determine what, if any, portion of our growth in net revenue, the number of our Direct to Consumer subscribers, or any other measures of our performance during 2020 and the first half of 2021 was the result of such responses to the COVID-19 pandemic. However, if we are unable to successfully drive renewals of new subscriptions and retention of new customers in future periods, including any such new subscriptions or new

 

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customers that may be related to the response to the COVID-19 pandemic, or if global conditions and macroeconomic forces, including those related to the COVID-19 pandemic, reduce demand for solutions in the future, we may be unsuccessful in sustaining our recent growth rates. In addition, the extent to which the COVID-19 pandemic will continue to drive demand for devices is uncertain, and if demand for devices decreases, we may experience slower growth in future periods. These uncertainties may increase variability in our future results of operations and adversely impact our ability to accurately forecast changes in our business performance and financial condition in future periods. If we are not able to respond to and manage the impact of such events effectively or if global economic conditions do not improve, or deteriorate further, our business, financial condition, results of operations, and cash flows could be adversely affected.

Risks Related to the Recent Sale of our Enterprise Business

If we are unsuccessful at executing our business plan and necessary transition activities as a standalone consumer cybersecurity company following the recent sale of our Enterprise Business, our business and results of operations may be adversely affected and our ability to invest in and grow our business could be limited.

On July 27, 2021, we completed the sale of our Enterprise Business to STG, which divestiture comprised a substantially whole operating segment. This and other operational transitions have involved turnover in management and other key personnel and changes in our strategic direction. Transitions of this type can be disruptive, result in the loss of focus and employee morale and make the execution of business strategies more difficult. We also expect to pay approximately $300 million in additional one-time separation costs and stranded cost optimization, a portion of which will be expenses paid by proceeds from the transaction. We have also entered into a transition service agreement under which we will provide assistance to STG including, but not limited to, business support services and information technology services as well as a commercial services agreement, under which we will provide certain product services and licensed technology, including certain threat intelligence data, that has historically been provided to the enterprise business. We may experience delays in the anticipated timing of activities related to such transitions and higher than expected or unanticipated execution costs. If we do not succeed in executing on these transition activities while achieving our cost optimization goals, or if these efforts are more costly or time-consuming than expected, our business and results of operations may be adversely affected, which could limit our ability to invest in and grow our business.

We may not achieve the intended benefits of the sale of our Enterprise Business.

We may not realize some or all of the anticipated benefits from the sale of our Enterprise Business. The resource constraints as a result of our focus on completing the transaction, which include the loss of employees, could have a continuing impact on the execution of our business strategy and our overall operating results. Further, our remaining employees may become concerned about the future of our remaining operations and lose focus or seek other employment. There can be no guarantee that the divestiture will result in stronger long term financial and operational results for our remaining consumer business.

Additionally, in connection with the divestiture, our Board of Directors returned a portion of the proceeds of the sale of our Enterprise Business in the form of distributions paid to holders of LLC Units of FTW, including McAfee Corp., and to holders of our Class A common stock in the form of a special dividend of $4.50 per share to holders of record of our Class A common stock as of August 13, 2021. The use of proceeds in this manner could impair our future financial growth.

Our future results of operations are dependent solely on the operations of our pure play consumer cyber security business and will differ materially from our previous results.

The Enterprise Business generated approximately 46% of total combined company revenue for fiscal 2020, and approximately 51% of total combined company revenue for fiscal 2019. Accordingly, our future financial

 

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results will differ materially from our previous results since our future financial results are dependent solely on our consumer operations. Any downturn in our consumer business could have a material adverse effect on our future operating results and financial condition and could materially and adversely affect the trading price of our outstanding securities.

Risks Related to Competition and Industry Trends

The cybersecurity market is rapidly evolving and becoming increasingly competitive in response to continually evolving cybersecurity threats from a variety of increasingly sophisticated cyberattackers. If we fail to anticipate changing customer requirements or industry and market developments, or we fail to adapt our business model to keep pace with evolving market trends, our financial performance will suffer.

The cybersecurity market is characterized by continual changes in customer preferences and requirements, frequent and rapid technological developments and continually evolving market trends. We must continually address the challenges of dynamic, and accelerating market trends, such as the emergence of new cybersecurity threats, the continued decline in the sale of new personal computers, and the rise of mobility and cloud-based solutions, all of which make satisfying our subscribers’ diverse and evolving needs more challenging.

The technology underlying our solutions is particularly complex because it must effectively and efficiently identify and respond to new and increasingly sophisticated threats while meeting other stringent technical requirements in areas of performance, usability, and availability. Although our subscribers expect new solutions and enhancements to be rapidly introduced to respond to new cybersecurity threats, product development requires significant investment, the efficacy of new technologies is inherently uncertain, and the timing for commercial release and availability of new solutions and enhancements is uncertain. We may be unable to develop new technologies to keep pace with evolving threats or experience unanticipated delays in the availability of new solutions, and therefore fail to meet customer expectations. If we fail to anticipate or address the evolving and rigorous needs of our subscribers, or we do not respond quickly to shifting customer expectations or demands by developing and releasing new solutions or enhancements that can respond effectively and efficiently to new cybersecurity threats on an ongoing and timely basis, our competitive position, business, and financial results will be harmed.

The introduction of new products or services by competitors, market acceptance of products or services based on emerging or alternative technologies, and the evolution of new standards, whether formalized or otherwise, could each render our existing solutions obsolete or make it easier for other products or services to compete with our solutions. In addition, modern cyberattackers are skilled at adapting to new technologies and developing new methods of breaching customers. We must continuously work to ensure our solutions protect against the increased volume and complexity of the cybersecurity threat landscape. Changes in the nature of advanced cybersecurity threats could result in a shift in cybersecurity spending and preferences away from solutions such as ours. If our solutions are not viewed by our subscribers as necessary or effective in addressing their cybersecurity needs, then our revenues may not grow as quickly as expected, or may decline, and our business could suffer.

We cannot be sure that we will accurately predict how the cybersecurity markets in which we compete or intend to compete will evolve. Failure on our part to anticipate changes in our markets and to develop solutions and enhancements that meet the demands of those markets will significantly impair our business, financial condition, results of operations, and cash flows.

We operate in a highly competitive environment, and we expect competitive pressures to increase in the future, which could cause us to lose market share.

The markets for our solutions are highly competitive, and we expect both the requirements and pricing competition to increase, particularly given the increasingly sophisticated attacks, changing customer preferences

 

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and requirements, current economic pressures, and market consolidation. Competitive pressures in these markets may result in price reductions, reduced margins, loss of market share and inability to gain market share, and a decline in sales, any one of which could seriously impact our business, financial condition, results of operations, and cash flows.

We face competition from players, such as NortonLifelock, Avast/AVG, Kaspersky, Trend Micro, ESET, and Microsoft, which expanded from desktop anti-malware into mobile, security, VPN, and identity protection among others. At the same time we compete with point-tool providers, such as Cujo and Dojo in the home IoT space or AnchorFree, ExpressVPN, and ProtonVPN in the network security space, across our full consumer offering.

In addition to competing with these and other vendors directly for sales to end-users of our products, we compete with several of them for the opportunity to have our products bundled with the product offerings of our strategic partners, including computer hardware OEMs, ISPs, mobile carriers, and other distribution partners. Our competitors could gain market segment share from us if any of these strategic partners replace our solutions with those of our competitors or if these partners more actively promote our competitors’ offerings than ours. In addition, vendors who have bundled our products with theirs may choose to bundle their products with their own or other vendors’ software or may limit our access to standard product interfaces and inhibit our ability to develop products for their platform. We also face competition from many smaller companies that specialize in particular segments of the markets in which we compete, including Crowdstrike, VMware, Netskope, and Zscaler. In the future, further product development by these providers could cause our products and services to become redundant or lose market segment share, which could significantly impact our sales and financial results.

We face growing competition from network equipment, computer hardware manufacturers, large operating system providers, telecommunication companies, and other large or diversified technology companies. Examples of large, diversified competitors include Microsoft, International Business Machines Corporation, and Dell Technologies. Large vendors of hardware or operating system software increasingly incorporate cybersecurity functionality into their products and services, and enhance that functionality either through internal development or through strategic alliances or acquisitions. Similarly, telecommunications providers are increasingly investing in the enhancement of the cybersecurity functionality in the devices and services they offer. Certain of our current and potential competitors may have competitive advantages such as longer operating histories, more extensive international operations, larger product development and strategic acquisition budgets, and greater financial, technical, sales, and marketing resources than we do. Such competitors also may have well-established relationships with our current and potential subscribers and extensive knowledge of our industry and the markets in which we compete and intend to compete. As a result, such competitors may be able to respond more quickly to new or emerging technologies and changes in customer requirements, or to devote greater resources to the development, marketing, sale, and support of their products. These competitors have made strategic acquisitions or established cooperative relationships among themselves or with other providers, thereby increasing their ability to provide a broader suite of products, and potentially causing customers to decrease purchases of, or defer purchasing decisions with respect to, our products and services. Additionally, some or all of our solutions may rely upon access to certain hardware or software interfaces. These competitors may limit our access to such interfaces or may provide greater or earlier access available to others. These actions could adversely affect the operations of our products relative to competitors or render our solutions inoperative.

Cybersecurity protection is also offered by certain of our competitors at prices lower than our prices or, in some cases, free of charge. Other companies bundle their own or our competitors’ lower-priced or free cybersecurity products with their own computer hardware or software product offerings in a manner that discourages users from purchasing our products and subscriptions. Our competitive position could be adversely affected to the extent that our current or potential subscribers perceive these cybersecurity products as replacing the need for our products or if they render our solutions unmarketable—even if these competitive products are inferior to or more limited than our products and services. The expansion of these competitive trends could have a significant negative impact on our sales and financial results by causing, among other things, price reductions of our products, reduced profitability, and loss of market share.

 

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To compete successfully, we must continue to develop new solutions and enhance existing solutions, effectively adapt to changes in the technology or rights held by our competitors, respond to competitive strategies, and effectively adapt to technological changes within the consumer cybersecurity market. If we are unsuccessful in responding to our competitors, our competitive position and our financial results could be adversely affected.

Our business depends substantially on our ability to retain subscribers and to expand sales of our solutions to them. If we are unable to retain our subscribers or to expand our product offerings, our future results of operations will be harmed.

For us to maintain or improve our results of operations in a market that is rapidly evolving and places a premium on market-leading solutions, it is important that we retain existing subscribers and that our subscribers expand their use of our solutions. Our subscribers have no obligation to renew their subscription with us upon their expiration. Retention rates may decline or fluctuate as a result of a number of factors, including but not limited to the level of our subscribers’ satisfaction or dissatisfaction with our solutions, our prices and the prices of competing products or services, industry consolidation, the effects of global economic conditions, new technologies, changes in our subscribers’ spending levels, and changes in how our subscribers perceive the cybersecurity threats. In addition, a significant portion of our renewals come from autorenewal arrangements incorporated within our solutions. Any changes in the laws regarding autorenewal arrangements could adversely affect our ability to retain consumer subscribers and harm our financial condition and operating performance.

In addition, our ability to generate revenue and maintain or improve our results of operations partly depends on our ability to cross-sell our solutions to our existing subscribers. We expect our ability to successfully cross-sell our solutions will be one of the most significant factors influencing our growth. We may not be successful in cross-selling our solutions because our subscribers may find our additional solutions unnecessary or unattractive. Our failure to sell additional solutions to our existing and new subscribers could adversely affect our ability to grow our business.

We may need to change our pricing models to compete successfully.

The intense competition we face in the cybersecurity market, in addition to general economic and business conditions (including the economic downturn resulting from the COVID-19 pandemic), can result in downward pressure on the prices of our solutions. If our competitors offer significant discounts on competing products or services, or develop products or services that our subscribers believe are more valuable or cost-effective, we may be required to decrease our prices or offer other incentives in order to compete successfully. Additionally, if we increase prices for our solutions, demand for our solutions could decline as subscribers adopt less expensive competing products and our market share could suffer. If we do not adapt our pricing models to reflect changes in customer use of our products or changes in customer demand, our revenues could decrease.

Any broad-based change to our pricing strategy could cause our revenues to decline or could delay future sales as our sales force implements and our subscribers adjust to the new pricing terms. We or our competitors may bundle products for promotional purposes or as a long-term go-to-market or pricing strategy or provide price guarantees to certain subscribers as part of our overall sales strategy. These practices could, over time, significantly limit our flexibility to change prices for existing solutions and to establish prices for new or enhanced products and services. Any such changes could reduce our margins and adversely affect our results of operations.

If cybersecurity industry analysts publish unfavorable or inaccurate research reports about our business, our financial performance could be harmed.

An increasing number of independent industry analysts and researchers regularly evaluate, compare, and publish reviews regarding the performance, efficiency, and functionality of cybersecurity products and services,

 

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including our own solutions. The market’s perception of our solutions may be significantly influenced by these reviews. We do not have any control over the content of these independent industry analysts and research reports, or the methodology they use to evaluate our solutions, which may be flawed or incomplete. Demand for our solutions could be harmed if these industry analysts publish negative reviews of our solutions or do not view us as a market leader. If we are unable to maintain a strong reputation, sales to new and existing subscribers and renewals could be adversely affected, and our financial performance could be harmed.

Risks Related to Our Financial and Operating Performance

Our results of operations can be difficult to predict and may fluctuate significantly, which could result in a failure to meet investor expectations.

Our results of operations have in the past varied, and may in the future vary, significantly from period to period due to a number of factors, many of which are outside of our control, including the macroeconomic environment. These factors limit our ability to accurately predict our results of operations and include factors discussed throughout this “Risk Factors” section, including the following:

 

   

the level of competition in our markets, including the effect of new entrants, consolidation, and technological innovation;

 

   

macroeconomic conditions in our markets, both domestic and international, as well as the level of discretionary technology spending;

 

   

fluctuations in demand for our solutions;

 

   

disruptions in our business operations or target markets caused by, among other things, terrorism or other intentional acts, pandemics, such as the COVID-19 pandemic, riots, protests or political unrest, or earthquakes, floods, or other natural disasters;

 

   

variability and unpredictability in the rate of growth in the markets in which we compete;

 

   

technological changes in our markets;

 

   

our ability to renew existing subscribers, acquire new subscribers, and sell additional solutions;

 

   

execution of our business strategy and operating plan, and the effectiveness of our sales and marketing programs;

 

   

product announcements, introductions, transitions, and enhancements by us or our competitors, which could result in deferrals of customer orders;

 

   

the impact of our recent divesture of our enterprise business, and any stranded or other costs incurred in connection with the transaction and the efficacy of our cost optimization efforts following the transaction;

 

   

the impact of future acquisitions or divestitures;

 

   

changes in accounting rules and policies that impact our future results of operations compared to prior periods; and

 

   

the need to recognize certain revenue ratably over a defined period or to defer recognition of revenue to a later period, which may impact the comparability of our results of operations across those periods.

Furthermore, a high percentage of our expenses, including those related to overhead, research and development, sales and marketing, and general and administrative functions are generally fixed in nature in the short term. As a result, if our net revenue is less than forecasted, we may not be able to effectively reduce such expenses to compensate for the revenue shortfall and our results of operations will be adversely affected. We also expect the recent sale of our enterprise business to lead to increased costs that were previously allocated to both segments to now be part of continuing operations which will have a dilutive impact on operating margins. We

 

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also expect to pay approximately $300 million in additional one-time separation costs and stranded cost optimization, a portion of which will be expenses paid by proceeds from the transaction. In addition, our ability to maintain or expand our operating margins may be limited given economic and competitive conditions, and we therefore could be reliant upon our ability to continually identify and implement operational improvements in order to maintain or reduce expense levels. There can be no assurance that we will be able to maintain or expand our current operating margins in the future.

We derive revenue from the sale of security products and subscriptions or a combination of these items, which may decline.

Our sales may decline and fluctuate as a result of a number of factors, including our subscribers’ level of satisfaction with our products and services, the prices of our products and services, the prices of products and services offered by our competitors, reductions in our subscribers’ spending levels, and other factors beyond our control. We also derive part of our revenue through indirect agreements with third parties including mobile providers, ISPs, electronics retailers, ecommerce sites, and search providers. Any change in these agreements, in indirect party’s demand with end consumers in mobile, ISP, and retail, in user search behavior, advertising market for search or ecosystem changes could adversely affect our revenue. If our sales decline, our revenue and revenue growth may decline, and our business will suffer. We recognize a majority of revenue as control of the goods and services is transferred to our customer. As a result, a majority of revenue we report each quarter is the recognition of deferred revenue from subscriptions entered into during previous quarters. Consequently, a decline in sales in any single quarter will not be fully or immediately reflected in revenue in that quarter but will continue to negatively affect our revenue in future quarters. Accordingly, the effect of significant downturns in sales is not reflected in full in our results of operations until future periods. Furthermore, it is difficult for us to rapidly increase our revenue through additional sales in any period, as revenue from subscriptions must be recognized over the applicable future time period. Finally, any increase in the average term of a subscription would result in revenue for such subscriptions being recognized over longer periods of time.

The sudden and significant economic downturn or volatility in the economy in the United States and our other major markets could have a material adverse impact on our business, financial condition, results of operations, or cash flows.

We operate globally and as a result our business and revenues are impacted by global macroeconomic conditions. In recent periods, investor and customer concerns about the global economic outlook, which significantly increased in 2020 and early 2021 due to the COVID-19 pandemic, have adversely affected market and business conditions in general. In addition, a weakening of economic conditions could lead to reductions in demand for our solutions. Weakened economic conditions or a recession could reduce the amounts that subscribers are willing or able to spend on our products and solutions, and could make it more difficult for us to compete against less expensive and free products for new subscribers. Furthermore, a high percentage of our expenses, including those related to overhead, research and development, sales and marketing, and general and administrative functions are generally fixed in nature in the short term. If we are not able to timely and appropriately adapt to changes resulting from a weak economic environment, it could have an adverse impact on our business, financial condition, results of operations, and cash flows.

We have experienced net losses in recent periods and may not maintain profitability in the future.

We experienced net losses of $236 million and $289 million for fiscal 2019 and 2020, respectively. While we have experienced revenue growth over these same periods, we may not be able to sustain or increase our growth or maintain profitability in the future or on a consistent basis. In recent years, we have changed our portfolio of products and invested in research and development to develop new products and enhance current solutions.

We also expect to continue to invest for future growth. We expect that to achieve profitability we will be required to increase revenues, manage our cost structure, and avoid significant liabilities. Revenue growth may

 

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slow, revenue may decline, or we may incur significant losses in the future for a number of possible reasons, increasing competition, a decrease in the growth of the markets in which we operate, or if we fail for any reason to continue to capitalize on growth opportunities. We also expect the recent sale of our enterprise business to lead to increased costs that were previously allocated to both segments to now be part of continuing operations which will have a dilutive impact on operating margins. Additionally, we may encounter unforeseen operating expenses, difficulties, complications, delays, and other unknown factors that may result in losses in future periods. If these losses exceed our expectations or our revenue growth expectations are not met in future periods, our financial performance may be harmed.

Changes in tax laws or in their implementation may adversely affect our business and financial condition.

Changes in tax law may adversely affect our business or financial condition. As part of Congress’s response to the COVID-19 pandemic, the Families First Coronavirus Response Act, commonly referred to as the FFCR Act, was enacted on March 18, 2020, the Coronavirus Aid, Relief, and Economic Security Act, commonly referred to as the CARES Act, was enacted on March 27, 2020, the act commonly known as the Consolidated Appropriations Act, 2021 was enacted on December 27, 2020, and the act commonly known as the American Rescue Plan Act was enacted on March 11, 2021. Each contains numerous tax provisions. In particular, the CARES Act retroactively and temporarily (for taxable years beginning before January 1, 2021) suspended application of the 80%-of-taxable-income limitation on the use of NOLs, which was enacted as part of the TCJA. It also provided that NOLs arising in any taxable year beginning after December 31, 2017 and before January 1, 2021 are generally eligible to be carried back up to five years. The CARES Act also temporarily (for taxable years beginning in 2019 or 2020) relaxed the limitation of the tax deductibility for net interest expense by increasing the limitation from 30% to 50% of adjusted taxable income.

Regulatory guidance under the Tax Cuts and Job Act (“TCJA”), the FFCR Act, the CARES Act, the Consolidated Appropriations Act, 2021, and the American Rescue Plan Act is and continues to be forthcoming, and such guidance could ultimately increase or lessen impact of these laws on our business and financial condition. It is also likely that Congress will enact additional legislation in connection with the COVID-19 pandemic, some of which could have an impact on our Company. In addition, it is uncertain if and to what extent various states will conform to the TCJA, the FFCR Act, the CARES Act, the Consolidated Appropriations Act, 2021, or the American Rescue Plan Act. The Biden Administration has also proposed a significant number of changes to U.S. tax laws, including an increase in the maximum tax rate applicable to U.S. corporations and certain individuals, which could potentially have retroactive effect and may significantly affect McAfee Corp. or FTW. Any such rate increases or future changes to U.S. tax laws could also require McAfee Corp. to increase its payments to the Continuing Owners and Management Owners pursuant to its tax receivable agreement.

As a multinational corporation, forecasting our estimated annual effective tax rate is complex and subject to uncertainty, and there may be material differences between our forecasted and actual tax rates.

Forecasts of our income tax position and effective tax rate are complex and subject to uncertainty because our income tax position for each year combines the effects of a mix of profits and losses earned by us and our subsidiaries in various tax jurisdictions with a broad range of income tax rates, as well as changes in the valuation of deferred tax assets and liabilities, the impact of various accounting rules and changes to these rules and tax laws, such as the U.S. federal income tax laws, including impacts of the TCJA, FFCR Act, CARES Act, Consolidated Appropriations Act, 2021, and American Rescue Plan Act arising from future interpretations of such legislation, the results of examinations by various tax authorities and the impact of any acquisition, business combination, or other reorganization or financing transaction. To forecast our global tax rate, we estimate our pre-tax profits and losses by jurisdiction and forecast our tax expense by jurisdiction. If our mix of profits and losses, our ability to use tax credits, or effective tax rates by jurisdiction is different than those estimated, our actual tax rate could be different than forecasted, which could have a material impact on our financial condition and results of operations.

 

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As a multinational corporation, we conduct our business in many countries and are subject to taxation in many jurisdictions. The taxation of our business is subject to the application of multiple and conflicting tax laws and regulations as well as multinational tax conventions. Our effective tax rate is highly dependent upon the geographic distribution of our worldwide earnings or losses, the tax regulations in each geographic region, the availability of tax credits and carryforwards, changes in accounting principles (including accounting for uncertain tax positions), and changes in the valuation of our deferred tax assets, and the effectiveness of our tax planning strategies. The application of tax laws and regulations is subject to legal and factual interpretation, judgment, and uncertainty, and significant judgment is required to determine the recognition and measurement attributes prescribed in certain accounting guidance. Tax laws themselves are subject to change as a result of changes in fiscal policy, changes in legislation, and the evolution of regulations and court rulings. Consequently, taxing authorities may impose tax assessments or judgments against us that could materially impact our tax liability and/or our effective income tax rate.

Our provision for income taxes is subject to volatility and can be adversely affected by a variety of factors, including but not limited to: unanticipated decreases in the amount of revenue or earnings in countries with low statutory tax rates, changes in tax laws and the related regulations and interpretations (including various proposals currently under consideration), changes in accounting principles (including accounting for uncertain tax positions), and changes in the valuation of our deferred tax assets. Significant judgment is required to determine the recognition and measurement attributes prescribed in certain accounting guidance. This guidance applies to all income tax positions, including the potential recovery of previously paid taxes, which if settled unfavorably could adversely impact our provision for income taxes.

In addition, we are subject to examination of our income tax returns by the Internal Revenue Service (“IRS”) and other tax authorities. If tax authorities challenge the relative mix of our U.S. and international income, our future effective income tax rates could be adversely affected, including for future periods and retroactively. While we regularly assess the likelihood of adverse outcomes from such examinations and the adequacy of our provision for income taxes, there can be no assurance that such provision is sufficient and that a determination by a tax authority will not have an adverse effect on our business, financial condition, results of operations, and cash flows.

Our ability to use certain net operating loss carryforwards and certain other tax attributes may be limited.

Under Sections 382 and 383 of the Code, if a corporation undergoes an “ownership change,” the corporation’s ability to use its pre-change net operating loss carryforwards and other pre-change tax attributes to offset its post-change income and taxes may be limited. In general, an “ownership change” occurs if there is a cumulative change in ownership of the relevant corporation by “5% shareholders” (as defined under U.S. income tax laws) that exceeds 50 percentage points over a rolling three-year period. Similar rules apply under state tax laws. If our corporate subsidiaries experience one or more ownership changes in connection with transactions in our stock, then we may be limited in our ability to use our corporate subsidiaries’ net operating loss carryforwards and other tax assets to reduce taxes owed on the net taxable income that such subsidiaries earn. Any such limitations on the ability to use net operating loss carryforwards and other tax assets could adversely impact our business, financial condition, results of operations, and cash flows.

We face risks associated with past and future investments, acquisitions, and other strategic transactions.

We may buy or make investments in complementary or competitive companies, products, and technologies, sell strategic businesses or other assets, or engage in other strategic transactions. For example, in fiscal 2018 we bolstered our consumer VPN offering through our acquisition of TunnelBear. The consideration exchanged for an acquisition may be greater than the value we realize from the transaction. In addition, we and our Sponsors periodically evaluate our capital structure and strategic alternatives with advisors and other third parties in an effort to maximize value for our stockholders. We cannot be certain when or if any of the discussions we have will lead to a proposal that we may find attractive, including with respect to the refinancing or repricing of some

 

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or all of our indebtedness, the sale of some or a significant portion of our assets, or other similar significant transactions. Whether in connection with such events or otherwise, we may also take other actions that impact our balance sheet and capital structure, including the payment of special dividends, the increase or decrease of regular dividends, repayment of debt, repurchases of our equity through privately negotiated transactions, as part of a tender offer, in the open market and/or through a share repurchase plan, including an accelerated share repurchase plan, or any other means permitted by law. In some cases these transactions could be with, or disproportionately benefit, one or more of our significant stockholders.

Future transactions could result in significant transactions-related charges, acceleration of some or all payments under our tax receivable agreement, disparate tax treatment for our stockholders, distraction for our management team, and potential dilution to our equity holders. In addition, we face a number of risks relating to such transactions, including the following, any of which could harm our ability to achieve the anticipated benefits of our past or future strategic transactions.

Technology and market risk. Cybersecurity technology is particularly complex because it must effectively and efficiently identify and respond to new and increasingly sophisticated threats while meeting other stringent technical requirements in areas of performance, usability, availability, and others. Our investments and acquisitions carry inherent uncertainty as to the efficacy of our technology roadmap. The decisions we make regarding customer requirements, market trends, market segments, and technologies may not be correct and we may not achieve the anticipated benefits of these transactions.

Integration or separation. Integration of an acquired company or technology is a complex, time consuming, and expensive process. The successful integration of an acquisition requires, among other things, that we integrate and retain key management, sales, research and development, and other personnel; integrate or separate the acquired products into or from our product offerings from both an engineering and sales and marketing perspective; integrate and support, or separate from, existing suppliers, distribution, and partner relationships; coordinate research and development efforts; and potentially consolidate, or prepare standalone, facilities and functions and back-office accounting, order processing, and other functions. If we do not successfully integrate an acquired company or technology, we may not achieve the anticipated benefits.

The geographic distance between sites, the complexity of the technologies and operations being integrated or separated, and disparate corporate cultures, may increase the difficulties of such integration or separation. Management’s focus on such operations may distract attention from our day-to-day business and may disrupt key research and development, marketing, or sales efforts. In addition, it is common in the technology industry for aggressive competitors to attract customers and recruit key employees away from companies during the integration phase of an acquisition.

Internal controls, policies, and procedures. Acquired companies or businesses are likely to have different standards, controls, contracts, procedures, and policies, making it more difficult to implement and harmonize company-wide financial, accounting, billing, information, and other systems. Acquisitions of privately held and/or non-U.S. companies are particularly challenging because their prior practices in these areas may not meet the requirements of GAAP and U.S. export regulations. Furthermore, we may assume liabilities associated with past practices and the Company’s compliance with legal and regulatory requirements in the jurisdictions in which they or we operate. Any acquisitions may require that we spend significant management time and attention establishing these standards, controls, contracts, procedures, and policies.

Key employees may be difficult to retain and assimilate. The success of many strategic transactions depends to a great extent on our ability to retain and motivate key employees. This can be challenging, particularly in the highly competitive market for technical personnel. Retaining key executives for the long term can also be difficult due to other opportunities available to them. Disputes that may arise out of earn-outs, escrows, and other arrangements related to an acquisition of a company in which a key employee was a principal may negatively affect the morale of the employee and make retaining the employee more difficult.

 

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Risks Related to Our Solutions and Sales to Our Subscribers

Over the last several years, we have pursued a variety of strategic initiatives designed to optimize and reinforce our cybersecurity platform. If the benefits of these initiatives are less than we anticipate, or if the realization of such benefits is delayed, our business and results of operations may be harmed.

Over the last several years, we have pursued a variety of strategic initiatives designed to optimize and reinforce our cybersecurity platform, including investing in new routes to market and partnerships, refining our go-to-market strategies, adding new capabilities and products through strategic acquisitions, and divesting our enterprise business to focus on a standalone consumer-focused strategy. The anticipated benefits of these initiatives may not be fully realized, if at all, until future periods. However, if we do not achieve the anticipated benefits from these and our other strategic initiatives, or if the achievement of such anticipated benefits is delayed, our financial condition, results of operations, and cash flows may be adversely affected.

Our investments in new or enhanced solutions may not yield the benefits we anticipate.

The success of our business depends on our ability to develop new technologies and solutions, to anticipate future customer requirements and applicable industry standards, and to respond to the changing needs of our subscribers, competitive technological developments, and industry changes. Within our consumer business, we are presently investing in cybersecurity solutions to protect consumers’ PC and mobile devices, identity, privacy, family safety, web browsing, IoT, and smart home devices. We intend to continue to invest in these cybersecurity solutions by adding personnel and other resources to our business. We will likely recognize costs associated with these investments earlier than the anticipated benefits. If we do not achieve the anticipated benefits from these investments, or if the achievement of these benefits is delayed, our business, financial condition, results of operations, and cash flows may be adversely affected.

The process of developing new technologies is time consuming, complex, and uncertain, and requires the commitment of significant resources well in advance of being able to fully determine market requirements and industry standards. Furthermore, we may not be able to timely execute new technical product or solution initiatives for a variety of reasons such as errors in planning or timing, technical difficulties that we cannot timely resolve, or a lack of appropriate resources. Complex solutions like ours may contain undetected errors or compatibility problems, particularly when first released, which could delay or adversely impact market acceptance. We may also experience delays or unforeseen costs related to integrating products we acquire with products we develop, because we may be unfamiliar with errors or compatibility issues of products we did not develop ourselves. Any of these development challenges, or the failure to appropriately adjust our go-to-market strategy to accommodate new offerings, may result in delays in the commercial release of new solutions or may cause us to terminate development of new solutions prior to commercial release. Any such challenges could result in competitors bringing products or services to market before we do and a related decrease in our market segment share and net revenue. Our inability to introduce new solutions and enhancements in a timely and cost-effective manner, or the failure of these new solutions or enhancements to achieve market acceptance and comply with industry standards and governmental regulation, could seriously harm our business, financial condition, results of operations, and cash flows.

If our solutions have or are perceived to have defects, errors, or vulnerabilities, or if our solutions fail or are perceived to fail to detect, prevent, or block cyberattacks, including in circumstances where subscribers may fail to take action on attacks identified by our solutions, our reputation and our brand could suffer, which would adversely impact our business, financial condition, results of operations, and cash flows.

Many of our solutions are complex and may contain design defects, vulnerabilities, or errors that are not detected before their commercial release. Our solutions also provide our subscribers with the ability to customize a multitude of settings, and it is possible that a customer could misconfigure our solutions or otherwise fail to configure our solutions in an optimal manner. Such defects, errors, and misconfigurations of our solutions could cause our solutions to be vulnerable to cybersecurity attacks, cause them to fail to perform the intended

 

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operation, or temporarily interrupt the operations of our subscribers. In addition, since the techniques used by adversaries change frequently and generally are not recognized until widely applied, there is a risk that our solutions would not be able to address certain attacks. Moreover, our solutions could be targeted by bad actors and attacks specifically designed to disrupt our business and undermine the perception that our solutions are capable of providing their intended benefits, which, in turn, could have a serious impact on our reputation. The risk of a cybersecurity attack increased during the recent COVID-19 pandemic as more individuals are working from home and utilizing home networks for the transmission of sensitive information. Any cybersecurity vulnerability or perceived cybersecurity vulnerability of our solutions or systems could adversely affect our business, financial condition, results of operations, and cash flows.

Changing, updating, enhancing, and creating new versions of our solutions may cause errors or performance problems in our products and solutions, despite testing and quality control. We cannot be certain that defects, errors, or vulnerabilities will not be found in any such changes, updates, enhancements, or new versions, especially when first introduced. In addition, changes in our technology may not provide the additional functionality or other benefits that were expected. Implementation of changes in our technology also may cost more or take longer than originally expected and may require more testing than initially anticipated. While new solutions are generally tested before they are used in production, we cannot be sure that the testing will uncover all problems that may occur in actual use.

If any of our subscribers are affected by a cybersecurity attack (such as suffering a ransomware attack or otherwise becoming infected with malware) while using our solutions, such subscribers could be disappointed with our solutions or perceive that our solutions failed to perform their intended purpose, regardless of whether our solutions operated correctly, blocked, or detected the attack or would have blocked or detected the attack if configured properly. If our subscribers experience security breaches or incidents, such subscribers and the general public may believe that our solutions failed. Real or perceived security breaches or incidents impacting our subscribers could cause disruption or damage or other negative consequences and could result in negative publicity about us, reduced sales, damage to our reputation and competitive position, increased expenses, and customer retention challenges.

Furthermore, our solutions may fail to detect or prevent malware, viruses, worms, or similar threats for any number of reasons, including our failure to enhance and expand our solutions to reflect market trends and new attack methods, new technologies and new operating environments, the complexity of our subscribers’ environment and the sophistication and coordination of threat actors launching malware, ransomware, viruses, intrusion devices, and other threats. Failure to keep pace with technological changes in the cybersecurity industry and changes in the threat landscape could also adversely affect our ability to protect against security breaches and incidents and could cause us to lose subscribers.

If we are unable to increase sales of our solutions to new subscribers, our future results of operations may be harmed.

An important part of our growth strategy involves continued investment in direct marketing efforts, channel partner relationships, our sales force, and infrastructure to add new subscribers. The number and rate at which new subscribers may purchase our products and services depends on a number of factors, including those outside of our control, such as subscribers’ perceived need for our solutions, competition, general economic conditions, market transitions, product obsolescence, technological change, public awareness of security threats to IT systems, macroeconomic conditions, and other factors. These new subscribers, if any, may renew their subscriptions at lower rates than we have experienced in the past, which could affect our financial results.

We rely on large amounts of data from a variety of sources to support our solutions and the loss of access to or the rights to use such data could reduce the efficacy of our solutions and harm our business.

Like many of our industry peers, we leverage large amounts of data related to threats, vulnerabilities, cyberattacks, and other cybersecurity intelligence to develop and maintain a number of our products and services.

 

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We collect, develop, store, and otherwise process portions of this data using third parties and our own technology. We cannot be assured that such third parties or our technology that support the collection, development, storage or other processing of such data, and the sources of such data itself, will continue to be effective or available and the loss or reduction in quality of such data may adversely impact the efficacy of our solutions. Changes in laws or regulations in the United States or foreign jurisdictions, or their interpretation or application, or the actions of governmental or quasi-governmental entities may increase the costs to collect, develop, store, or otherwise process such data, partially or completely prohibit use of such, impose burdensome obligations in connection with such, or could result in disclosure of such data to the public or other third parties, which may reduce its value to us or as part of our solutions and thereby harm our business.

Risks Related to Our Brand and Intellectual Property

If the protection of our proprietary technology is inadequate, we may not be able to adequately protect our innovations and brand.

Our success is dependent on our ability to create proprietary technology and to protect and enforce our intellectual property rights in that technology, as well as our ability to defend against adverse claims of third parties with respect to our technology and intellectual property rights. To protect our proprietary technology, we rely primarily on a combination of patent, copyright, trademark, and trade secret laws, as well as contractual provisions and operational and procedural confidentiality protections. The agreements that we enter into with our employees, contractors, partners, vendors, and end-users may not prevent unauthorized use or disclosure of our proprietary technology or infringement of our intellectual property rights and may not provide an adequate remedy in the event of unauthorized use or disclosure of our proprietary technology or infringement of our intellectual property rights, which may substantially harm our business. Furthermore, we cannot be assured that such agreements will be fully enforceable, or that they will not be breached by the counterparties, or that we will be able to detect, deter, or adequately address any such breach or threatened breach. As a provider of cybersecurity solutions, we may be an attractive target for computer hackers or other bad actors and may have a greater risk of unauthorized access to, and misappropriation of, our systems, technology, and proprietary information. Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy aspects of our products or obtain and use information that we regard as proprietary. Policing unauthorized use of our products and infringement of our rights is difficult. In addition, the laws of some foreign countries, including countries where we sell solutions or have operations, do not protect proprietary rights to as great an extent as do the laws of the United States. Our means of protecting our proprietary rights may not be adequate and third parties, including current and future competitors, may independently develop similar or superior technology, duplicate or reverse engineer aspects of our products, or design around our patented technology or otherwise infringe or circumvent our intellectual property rights.

As of June 26, 2021, we had approximately 1,375 issued U.S. patents, in addition to approximately 835 issued foreign patents. There can be no assurance that any of our pending patent applications will issue or that the patent examination process will not result in our narrowing the claims applied for in our patent applications or that any current or future issued patents will not be later challenged, limited, or invalidated. Furthermore, there can be no assurance that we will be able to detect any infringement of our existing or future intellectual property rights or, if infringement is detected, that we will be successful in asserting claims or counterclaims, that our intellectual property rights will be enforceable, that any damages awarded to us will be sufficient to adequately compensate us for the infringement, that we will be able to obtain injunctive relief to prevent ongoing infringement, or that the costs of seeking enforcement will not outweigh any benefits.

There can be no assurance or guarantee that any products, services, or technologies that we are presently developing, or will develop in the future, will result in intellectual property that is subject to legal protection under the laws of the United States or a foreign jurisdiction or that produces a competitive advantage for us.

 

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We may be sued by third parties for alleged infringement, misappropriation, or other violation of their proprietary rights, and it may be necessary for us to sue third parties to enforce and protect our proprietary rights, resulting in potential lengthy and expensive litigation.

From time to time, third parties may claim that we have infringed, misappropriated, or otherwise violated their intellectual property rights, including claims regarding patents, copyrights, trademarks, and trade secrets. Because of constant technological change in the segments in which we compete, the extensive patent coverage of existing technologies, and the rapid rate of issuance of new patents, we expect the trend of third-party claims to continue and that we will be required to defend against actual or threatened litigation of this type. The litigation process is subject to inherent uncertainties, so we may not prevail in litigation matters regardless of the merits of our position. Our participation in any litigation could cause us to incur substantial costs and could distract our management from the day-to-day operations of our business. In addition to the expense and distraction associated with litigation, adverse determinations could cause us to lose our proprietary rights, prevent us from manufacturing or selling our products, require us to obtain licenses to patents or other intellectual property rights that our products are alleged to infringe, misappropriate, or otherwise violate (which licenses may not be available on commercially reasonable terms or at all), or re-design or re-engineer our products to address actual or claimed infringement, misappropriation, or other violation and subject us to significant liabilities.

If we acquire technology to include in our products from third parties, our exposure to actions alleging infringement, misappropriation, or other violation may increase because we must rely upon these third parties to verify the origin and ownership of such technology. Our agreements with such third parties may not provide adequate protections or remedies, and we may not be able to compel such third parties to provide any available remedies in the case of such actions. Similarly, we face exposure to actions alleging infringement, misappropriation, or other violation if we hire or engage software engineers or other personnel who were previously engaged by competitors or other third parties and those personnel inadvertently or deliberately incorporate proprietary technology of third parties into our products despite efforts to prevent such infringement, misappropriation, or other violation.

From time to time, the U.S. Supreme Court, other U.S. federal courts and the U.S. Patent and Trademark Appeals Board, and their foreign counterparts, have made and may continue to make changes to the interpretation of patent, copyright, trademark, or other intellectual property laws in their respective jurisdictions. We cannot predict future changes to the interpretation of such existing laws or whether U.S. or foreign legislative bodies will amend such laws in the future. Any such changes may lead to uncertainties or increased costs and risks surrounding the prosecution, validity, ownership, enforcement, and defense of our issued patents and patent applications and other intellectual property, the outcome of third-party claims of infringement, misappropriation, or other violation of intellectual property brought against us and the actual or enhanced damages (including treble damages) that may be awarded in connection with any such current or future claims, and could have a material adverse effect on our business, financial condition, results of operations, and cash flows.

We rely on certain technology that we license from third parties, including software that is integrated with internally developed software and used with our products. Any loss of those licenses or any quality issues with third-party technology integrated with our products could have an adverse impact on our reputation and business.

We rely on certain technology that we license from third parties, including third-party commercial software and open source software, which is integrated into or used with many of our solutions. This third-party technology may currently or could, in the future, infringe the intellectual property rights of third parties or the licensors may not have sufficient rights to the technology they license us in all jurisdictions in which we may sell our solutions. The licensors of the third-party technology we use may discontinue their offerings or change the prices for and other terms under which their technology is licensed. If we are unable to continue to license any of this technology on terms we find acceptable, or if there are quality, security, or other substantive issues with any of this technology, we may face delays in releases of our solutions or we may be required to find alternative

 

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vendors or remove functionality from our solutions. In addition, our inability to obtain certain licenses or other rights might require us to engage in potentially costly and time-consuming dispute resolution or litigation regarding these matters. Any of the foregoing could have a material adverse effect on our business, financial condition, results of operations, and cash flows.

Our use of open source software could negatively affect our ability to sell our solutions and subject us to possible litigation.

We use open source software in our solutions and our development and operating environments and expect to continue to use open source software in the future. Open source software is typically provided without assurances of any kind and could contain errors, bugs, or vulnerabilities or infringe the intellectual property rights of third parties. Because the source code of open source software components included in our solutions is publicly available, in instances where our usage is publicly disclosed or known, it may be easier to identify exploits or vulnerabilities in such open source software components, making our solutions using such open source software components more vulnerable to third parties seeking to compromise, undermine, or circumvent our solutions. If open source software programmers do not continue to develop and enhance open source technologies, our development expenses could increase and our schedules could be delayed. In addition, we may face claims from others seeking to enforce the terms of open source licenses, including by demanding release of derivative works or our proprietary source code that was developed using or otherwise used in connection with such open source software. The terms of many open source licenses have not been interpreted by U.S. or foreign courts, and these licenses could be construed in a way that could impose other unanticipated costs, conditions, or restrictions on our ability to commercialize our products. These claims could also result in litigation, require us to purchase a costly license, require us to devote additional research and development resources to change our solutions, or stop or delay shipment of such solutions, any of which could have a negative effect on our business, financial condition, results of operations, and cash flows. In addition, if the license terms for the open source software that we utilize change, we may be forced to reengineer our solutions or incur additional costs. Although we have policies designed to manage the use, incorporation, and updating of open source software into our products, we cannot be certain that we have in all cases incorporated open source software in our products in a manner that is consistent with the applicable open source license terms and inclusive of all available updates or security patches, and as a result we may be subject to claims for breach of contract or infringement by the applicable licensor, claims for breach of contract or indemnity by our partners or subscribers, or other third parties, or we or our partners or subscribers could be required to release our proprietary source code, pay damages, royalties, or license fees or other amounts, seek licenses, or experience quality control or security risks, any of which could require us to re-engineer our solutions, discontinue sales in the event re-engineering cannot be accomplished on a timely basis, or take other remedial action that may divert resources away from our development efforts, any of which could adversely affect our business.

If we fail to successfully promote or protect our brand, our business, and competitive position may be harmed.

Due to the intensely competitive nature of our markets, we believe that building and maintaining our brand and reputation is critical to our success, and that the importance of positive brand recognition will increase as competition in our market further intensifies. Over our 30-year history, we have invested and expect to continue to invest substantial resources to promote and maintain our brand as a trusted cybersecurity provider, but there is no guarantee that our brand development strategies will enhance the recognition of our brand or lead to increased sales of our solutions.

In recent years, there has been a marked increase in the use of social media platforms, including blogs, chat platforms, social media websites, and other forms of internet-based communications that allow individuals access to a broad audience of consumers and other persons. The rising popularity of social media and other consumer-oriented technologies has increased the speed and accessibility of information dissemination and given users the ability to more effectively organize collective actions such as boycotts. Negative publicity, whether or not

 

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justified, can spread rapidly through social media. The dissemination of information via social media could harm our brand or our business, regardless of the information’s accuracy. To the extent that we are unable to respond timely and appropriately to negative publicity, our reputation and brand could be harmed. This could include negative publicity related to our products or services or negative publicity related to actions by our executives, team members or other unaffiliated individuals or entities that may be perceived as being associated with us. Moreover, even if we are able to respond in a timely and appropriate manner, we cannot predict how negative publicity may affect our reputation and business. In addition, we and our employees use social media and other internet-based communications methods to communicate with our end-users, subscribers, partners, and the public in general. There is risk that the social media communications of us or our employees could be received negatively. Failure to use social media or other internet-based communication methods effectively could lead to a decline in our reputation. Further, laws and regulations, including associated enforcement priorities, rapidly evolve to govern social media platforms and other internet-based communications, any failure by us or third parties acting at our direction to abide by applicable laws and regulations in the use of social media or internet-based communications could adversely impact our reputation, financial performance or subject us to fines or other penalties. Other risks associated with the use of social media and internet based-communication include improper disclosure of proprietary information, negative comments about our brand, products, or services, exposure of personally identifiable information, fraud, hoaxes, or malicious dissemination of false information.

Risks Related to Third Party Relationships

We rely significantly on third-party channel partners to facilitate the sale of our products and solutions. If we fail to manage our sales and distribution channels effectively, or if our partners choose not to market and sell our solutions to their customers, our operating results could be adversely affected.

We sell a significant portion of our solutions through third-party intermediaries such as affiliates, retailers, ecommerce, PC OEMs, and other distribution channel partners (we refer to them collectively as “channel partners”). In fiscal 2018, fiscal 2019, and fiscal 2020, our largest customer accounted for 13%, 13%, and 13%, respectively, of our net revenue with its parent company contributing an additional 1%, 2%, and 5%, respectively. Our reliance on these channel partners is subject to a number of risks, including:

 

   

our channel partners are generally not subject to minimum sales requirements or any obligation to market our solutions to their customers;

 

   

many channel partner agreements are nonexclusive and may be terminated at any time without cause and or renegotiated with us on new terms that may be less favorable due to competitive conditions in our markets and other factors;

 

   

our channel partners may encounter issues or have violations of applicable law or regulatory requirements or otherwise cause damage to our reputation through their actions;

 

   

certain of our channel partners market and distribute competing solutions and may, from time to time, may place greater emphasis on the sale of these competing solutions due to pricing, promotions, and other terms offered by our competitors;

 

   

any consolidation of electronics retailers can increase their negotiating power with respect to software providers such as us and any decline in the number of physical retailers could decrease the channels of distribution for us;

 

   

the continued consolidation of online sales through a small number of larger channels has been increasing, which could reduce the channels available for online distribution of our solutions; and

 

   

sales through our partners are subject to changes in general economic conditions, strategic direction, competitive risks, and other issues that could result in a reduction of sales, or cause our partners to suffer financial difficulty which could delay payments to us, affecting our operating results.

From an anti-bribery and anti-corruption perspective, our business activities are subject to the FCPA and similar anti-bribery or anti-corruption laws, regulations, and rules of the countries that we operate in. These laws

 

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generally prohibit companies and their employees and third party business partners, representatives, and agents from engaging in corruption and bribery, including offering, promising, giving, or authorizing the provision of anything of value, either directly or indirectly, to a government official or commercial party to influence any official action, direct business to any person, gain any improper advantage, or obtain or retain business. Anti-corruption and anti-bribery laws have been enforced aggressively in recent years and are interpreted broadly. We and our third-party partners may have direct or indirect interactions with officials and employees of government agencies or state-owned or affiliated entities and may be held liable for inaccurate or incomplete accounting records, internal accounting controls deemed inadequate by applicable regulatory authorities, and corrupt or other illegal activities of our employees, affiliates, third parties, representatives, and agents even if we did not explicitly authorize those activities. This risk is even greater in the countries where we operate that are known to present a heightened risk for corruption.

A significant portion of our revenue is derived from sales through our PC OEM partners that bundle our products with their products. Our reliance on this sales channel is significantly affected by our partners’ sales of new products into which our products or services are bundled. Our revenue from sales through our PC OEM partners is affected primarily by the number of personal computers on which our products are bundled, the geographic mix of their sales, and the rate at which consumers purchase or subscribe to the bundled products. Our PC OEM partners are also in a position to exert competitive pricing pressure. The rate at which consumers purchase or subscribe to the bundled products is affected by other factors, including other terms with the OEM. The continued decline in the PC market as the market shifts towards mobility has increased competition for PC OEMs’ business and gives PC OEMs leverage to demand financial concessions from us in order to secure their business. These agreements require a significant commitment of resources and capital. There is no guarantee we will have sufficient resources to maintain these agreements or secure new PC OEM partners. Even if we negotiate what we believe are favorable terms when we first establish a relationship with a PC OEM, at the time of the renewal of the agreement, we may be required to renegotiate our agreement with them on less favorable terms. Lower net prices for our products or other financial concessions would adversely impact our financial results. Further, acquiring high numbers of subscribers through our PC OEM partner channel may adversely impact our profitability, as we may see lower average prices from higher mix of new subscribers and under the PC OEM agreements we may see higher partner related spending during the period of high PC demand and high customer acquisition, until such subscribers renew with us upon subscription expiration. Any adverse changes in our relationship with our channel partners could have an adverse effect on our business and financial results.

We rely on third-parties to replicate and package certain of our software products, which subjects us to risks of product delivery delays and other supply risks.

We rely on a limited number of third parties to replicate and package our boxed software products. Our reliance on these third-parties reduces our control over our supply chain and exposes us to risks, including reduced control over quality assurance, product costs, product supply, timing, and transportation risk. From time to time, we may be required to add new partners to accommodate growth in orders or the addition of new products. It is time consuming and costly to qualify and implement new supply chain partner relationships, and such additions increase the complexity of our supply chain management. If we lose, terminate, or fail to effectively manage our supply chain partner relationships, or if any of our partners experience production interruptions or shut-downs, including those caused by a natural disaster, epidemic, pandemic (such as the COVID-19 pandemic), capacity shortage, or quality-control problem, it would negatively affect sales and adversely affect our business and results of operations.

We rely on third parties to support our information technology infrastructure and any service interruptions or other failures of our third-party providers or of our information technology infrastructure could result in disruption to our operations or adversely impact our business.

We engage third parties to provide variety of information technology products and services to support our information technology infrastructure. Any failure on the part of our third-party providers or of our information

 

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technology infrastructure to operate effectively, stemming from maintenance problems, upgrading or transitioning to new platforms, a breach in security or other unanticipated problems could result in interruptions to or delays in our operations or our products or services. Our third-party providers may also discontinue providing the information technology products or services we use and we may be required to replace such products or services, which could result in unanticipated expenses and disruptions to our information technology infrastructure.

In addition, we make significant investments in new information technology infrastructure, but the implementation of such investments could exceed estimated budgets and we may experience challenges that prevent new strategies or technologies from being realized according to anticipated schedules. If we are unable to effectively maintain our current information technology and processes or encounter delays, or fail to exploit new technologies, then the execution of our business plans may be disrupted. Our employees and other personnel require effective tools and techniques supported by our information technology infrastructure to perform functions integral to our business. Any failure to successfully provide such tools and systems, or ensure that our personnel have properly adopted them, could materially and adversely impact our ability to achieve positive business outcomes.

Some of our systems or data that we may maintain or process may not be adequately backed up, and our disaster recovery planning cannot account for all eventualities. The occurrence of a natural disaster, intentional sabotage, or other unanticipated problems could result in significant interruptions to our operations or the permanent loss of valuable data, which could harm our reputation and reduce the efficacy and value of products and services. In addition, the implementation of changes and upgrades to our information technology infrastructure and any errors, vulnerabilities, damage, or failure of our information technology infrastructure, could result in interruptions to our operations or products or services and non-compliance with certain laws or regulations, which may lead us to face fines or penalties, give rise to indemnification or other contractual claims against us by our subscribers or other third parties, and otherwise adversely impact our business.

Our third-party strategic alliances expose us to a range of business risks and uncertainties that are outside of our control and that could have a material adverse impact on our business and financial results.

We have entered, and intend to continue to enter, into strategic alliances with third parties to support our future growth plans. These relationships involve technology licensing, product integration, and co-marketing and co-promotion activities. For example, we have arrangements with operating system vendors that provide us with sufficient technological access to new and updated versions of their operating systems to enable us to develop and deploy interoperable products that are deeply integrated with their operating systems on our subscribers’ networks and devices. We also partner with certain Internet search providers to promote their offerings to our subscribers. We invest significant time, money, and resources to establish and maintain these strategic relationships, but we have no assurance that any particular relationship will continue for any specific period of time.

Furthermore, certain of these strategic partners currently offer, and may in the future offer, products, and services that compete with our own solutions in certain markets, and in the future these partners may impose limitations on, or terminate, our partnerships in order to improve their own competitive position. Generally, our agreements with these partners are terminable without cause with no or minimal notice or penalties. Any adverse change in our relationships with a significant strategic partner could limit or delay our ability to offer certain new or competitive solutions, increase our development costs, and reduce our revenue, any of which could have an adverse impact on our competitive position and our financial performance. In addition, we could be required to incur significant expenses to develop a new strategic partnership or to develop and implement an alternative plan to pursue the opportunity that we targeted with the former partner, which could adversely affect our business, financial condition, results of operations, and cash flows.

 

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Risks Related to our Technology Systems and Privacy

If our security measures are breached or unauthorized access to our data is otherwise obtained, or if we suffer other cybersecurity incidents, our brand, reputation, and business could be harmed, and we may incur significant liabilities.

As a cybersecurity leader, we are a high-profile target for data breaches, cyberattacks, and other intentional disruptions of our systems and our solutions. Our networks and solutions may have bugs, defects, or vulnerabilities that may be targeted by hackers and could be targeted by attacks specifically designed to disrupt our business, access our network, source code or other data (including by causing data to be lost, corrupted or unavailable), and harm our reputation. Similarly, experienced computer programmers or other sophisticated individuals or entities, including malicious hackers, state-sponsored organizations, criminal networks, and insider threats including actions by employees and third-party service providers, may attempt to penetrate our network security or the security of our systems and websites, and misappropriate proprietary information or cause interruptions of our solutions, including the operation of the global civilian cyber intelligence threat network. This risk has increased during the current COVID-19 pandemic as more individuals are working from home and utilizing home networks for the transmission of sensitive information. The techniques used to obtain unauthorized access, disable or degrade service, or sabotage systems change frequently, often are not recognized until launched against a target, and may originate from less regulated or remote areas around the world. As a result, we may be unable to proactively prevent these techniques, implement adequate preventative or reactionary measures, react to or address any attack or incident in a timely manner or enforce the laws and regulations that govern such activities. Such attacks may go undetected for a period of time complicating our ability to respond effectively. In addition, it is possible that hardware failures, human errors (including being subject to phishing attacks, social engineering techniques, or similar methods) or errors in our systems could result in data loss, unavailability, or corruption, or cause the information that we collect to be incomplete or contain inaccuracies. We may not be able to correct any security flaws or vulnerabilities promptly, or at all. A breach of our network security and systems or other cybersecurity incidents or events, including attacks involving ransomware or other malware, that cause the loss or public disclosure of, or access by third parties to, our systems or any unauthorized access to, or loss, corruption, unavailability, or unauthorized use of data that we maintain or process, or the perception that any of these have occurred, could have serious negative consequences for our business, including possible fines, penalties and damages, reduced demand for our solutions, an unwillingness of our subscribers to use our solutions, harm to our brand and reputation, and time consuming and expensive litigation. In addition, such a security breach or incident could impair our ability to operate our business, including our ability to provide subscription and support services to our subscribers. Additionally, our service providers may suffer or be perceived to suffer, data security breaches or other incidents, or may have exploitable defects or bugs in their systems, software, or networks, that may compromise data stored or processed for us that may give rise to any of the foregoing. Additionally, supply chain attacks have increased in frequency and severity, and we cannot guarantee that third parties and infrastructure in our supply chain have not been compromised or that they do not contain exploitable defects or bugs that could result in a breach of or disruption to our solutions, systems, or networks or the systems and networks of third parties that support us and our services. Any of these negative outcomes could adversely impact our business and results of operations.

We incur significant costs in an effort to detect and prevent security breaches and other security-related incidents and we expect our costs will increase as we make improvements to our systems and processes to prevent further breaches and incidents. In the event of a future breach or incident, we could be required to expend additional significant capital and other resources in an effort to prevent further breaches or incidents, which may require us to divert substantial resources. Moreover, we could be required or otherwise find it appropriate to expend significant capital and other resources to respond to, notify third parties of, and otherwise address the incident or breach and its root cause. Each of these could require us to divert substantial resources.

Furthermore, while our errors and omissions insurance policies include liability coverage for certain of these matters, if we experience a widespread security breach or other incident, we could be subject to indemnity claims or other damages that exceed our insurance coverage. We also cannot be certain that our insurance coverage will

 

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be adequate for data handling or data security liabilities actually incurred, that insurance will continue to be available to us on economically reasonable terms, or at all, or that any insurer will not deny coverage as to any future claim. The successful assertion of one or more large claims against us that exceed available insurance coverage, or the occurrence of changes in our insurance policies, including premium increases or the imposition of large deductible or co-insurance requirements, could have a material adverse effect on our business, including our financial condition, results of operations, and reputation.

We rely on payment cards to receive payments and are subject to payment-related risks.

We accept a variety of payment methods, including credit cards and debit cards, as payment for certain of our consumer solutions. Accordingly, we are, and will continue to be, subject to significant and evolving regulations and compliance requirements relating to payment card processing. This includes laws governing the collection, processing and storage of sensitive consumer information, as well as industry requirements such as the Payment Card Industry Data Security Standard (“PCI-DSS”). These laws and obligations may require us to implement enhanced authentication and payment processes that could result in increased costs and liability, and reduce the ease of use of certain payment methods. For certain payment methods, including credit and debit cards, we pay interchange and other fees, which may increase over time. We are also subject to payment card association operating rules and agreements, including PCI-DSS, certification requirements, and rules governing electronic funds transfers, which could change or be reinterpreted to make it difficult or impossible for us to comply. If we fail to comply with these rules or requirements, or if our data security systems are breached or compromised, we may be liable for losses incurred by card issuing banks or consumers, subject to fines and higher transaction fees, lose our ability to accept credit or debit card payments from our consumers, or process electronic fund transfers or facilitate other types of payments. Any failure to comply with these requirements could significantly harm our brand, reputation, business, and results of operations.

Our failure to adequately maintain and protect personal information of our subscribers or our employees in compliance with evolving legal requirements could have a material adverse effect on our business.

We collect, use, store, disclose, or transfer (collectively, “process”) personal information, including from employees and subscribers, in connection with the operation of our business. A wide variety of local and international laws and regulations apply to the processing of personal information. Data protection and privacy laws and regulations are evolving and being tested in courts and may result in increasing regulatory and public scrutiny and escalating levels of enforcement and sanctions. For example, the E.U. has adopted the General Data Protection Regulation (“GDPR”), which took effect on May 25, 2018. The GDPR imposes requirements that may limit how we are permitted to process data on behalf of ourselves and our clients, and we may be required to incur significant additional costs to comply with these requirements. Applicable laws, regulations and court decisions in the E.U. relating to privacy and data protection could also impact our ability to transfer personal data internationally. The GDPR specifies substantial maximum fines for failure to comply of up to 20 million Euros or 4% of a company’s worldwide turnover, whichever is higher. Continued compliance with the GDPR and national laws in the E.U. may require significant changes to our products and practices to ensure compliance with applicable law.

A variety of data protection legislation also apply in the United States at both the federal and state level, including new laws that may impact our operations. For example, in June 2018, the State of California enacted the California Consumer Privacy Act of 2018 (“CCPA”), which went into effect on January 1, 2020, with enforcement by the state attorney general beginning July 1, 2020. The CCPA defines “personal information” in a broad manner and generally requires companies that process personal information of California residents to make new disclosures about their data collection, use, and sharing practices, allows consumers to opt-out of certain data sharing with third parties or sale of personal information, and provides a new cause of action for data breaches. Moreover, California voters approved the California Privacy Rights Act (“CPRA”), in November 2020. The CPRA significantly modifies the CCPA, creating obligations relating to consumer data beginning on

 

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January 1, 2022, with implementing regulations expected on or before July 1, 2022, and enforcement beginning July 1, 2023. On March 2, 2021, Virginia enacted the Virginia Consumer Data Protection Act, or CDPA, which becomes effective on January 1, 2023, and on June 8, 2021, Colorado enacted the Colorado Privacy Act, or CPA, which takes effect on July 1, 2023. The CPA and CDPA share similarities with the CCPA, CPRA, and legislation proposed in other states. Aspects of these state privacy statutes remain unclear resulting in uncertainty and potentially requiring us to modify our data practices and policies and to incur substantial additional costs and expenses in an effort to comply. Additionally, the Federal Trade Commission, and many state attorneys general are interpreting federal and state consumer protection laws to impose standards for the online collection, use, dissemination, and security of data. The burdens imposed by the CCPA and other similar laws that have been or may be enacted at the federal and state level may require us to modify our data processing practices and policies and to incur substantial expenditures in order to comply.

Global privacy and data protection legislation, enforcement, and policy activity are rapidly expanding and evolving, and may be inconsistent from jurisdiction to jurisdiction. On July 16, 2020, the Court of Justice of the European Union (“CJEW”), Europe’s highest court, held in the Schrems II case that the E.U.-U.S. Privacy Shield, a mechanism for the transfer of personal data from the E.U. to the U.S., was invalid, and imposed additional obligations in connection with the use of standard contractual clauses approved by the European Commission. The impact of this decision on the ability to lawfully transfer personal data from the E.U. to the U.S. remains uncertain. The European Commission released a draft of revised standard contractual clauses addressing the CJEU concerns in November 2020, and on June 4, 2021, published new standard contractual clauses. We may, in addition to other impacts, experience additional costs associated with increased compliance burdens relating to the Schrems II case, regulatory guidance, and other developments relating to cross-border data transfers, and we and our subscribers face the potential for regulators in the European Economic Area (“EEA”) to apply different standards to the transfer of personal data from the EEA to the U.S., and to block, or require ad hoc verification of measures taken with respect to, certain data flows from the EEA to the U.S. We may experience reluctance or refusal by current or prospective European subscribers to use our products, and we may find it necessary or desirable to make further changes to our handling of personal data of EEA residents. The regulatory environment applicable to the handling of EEA residents’ personal data, and our actions taken in response, may cause us to assume additional liabilities or incur additional costs and could result in our business, operating results and financial condition being harmed. We and our subscribers may face a risk of enforcement actions by data protection authorities in the EEA relating to personal data transfers to us and by us from the EEA. Any such enforcement actions could result in substantial costs and diversion of resources, distract management and technical personnel and negatively affect our business, operating results and financial condition. Additionally, we may be or become subject to data localization laws mandating that data collected in a foreign country be processed only within that country. If any country in which we have subscribers were to adopt a data localization law, we could be required to expand our data storage facilities there or build new ones in order to comply. The expenditure this would require, as well as costs of compliance generally, could harm our financial condition.

In addition to the GDPR, the European Commission has another draft regulation in the approval process that focuses on a person’s right to conduct a private life. The proposed legislation, known as the Regulation of Privacy and Electronic Communications, or ePrivacy Regulation, would replace the current ePrivacy Directive. Originally planned to be adopted and implemented at the same time as the GDPR, the ePrivacy Regulation is still being negotiated. Most recently, on February 10, 2021, the Council of the E.U. agreed on its version of the draft ePrivacy Regulation. If adopted, the earliest date for entry into force is in 2023, with broad potential impacts on the use of internet-based services and tracking technologies, such as cookies. Aspects of the ePrivacy Regulation remain for negotiation between the European Commission and the Council.

Further, in June 2016, the U.K. voted to leave the E.U., which resulted in the U.K. exiting the E.U. on January 31, 2020, subject to a transition period that ended on December 31, 2020. Brexit could lead to further legislative and regulatory changes. The U.K. has implemented legislation similar to the GDPR, including the U.K. Data Protection Act and legislation similar to the GDPR referred to as the U.K. GDPR, and which provides

 

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for substantial penalties of up to the greater of 17.5 million British Pounds or 4% of a company’s worldwide turnover, whichever is higher. Further, it remains to be seen whether the U.K.’s withdrawal from the E.U. pursuant to Brexit will substantially impact the manner in which U.K. data protection laws or regulations will develop in the medium to longer term and how data transfers to and from the U.K. will be regulated. On June 28, 2021, the European Commission announced a decision of “adequacy” concluding that the UK ensures an equivalent level of data protection to the GDPR, which provides some relief regarding the legality of continued personal data flows from the EEA to the U.K. Some uncertainty remains, however, as this adequacy determination must be renewed after four years and may be modified or revoked in the interim.

Our actual or alleged failure to comply with any applicable laws and regulations or contractual obligations relating to privacy, data protection, or information security, or to protect such data that we process, could result in litigation, regulatory investigations, and enforcement actions against us, including fines, orders, public censure, claims for damages by employees, subscribers, and other affected individuals, public statements against us by consumer advocacy groups, damage to our reputation and competitive position, and loss of goodwill (both in relation to existing subscribers and prospective subscribers), any of which could have a material adverse effect on our business, financial condition, results of operations, and cash flows. Evolving and changing definitions of personal information, personal data, and similar concepts within the E.U., the United States, and elsewhere, especially relating to classification of IP addresses, device identifiers, location data, household data, and other information we may collect, may limit or inhibit our ability to operate or expand our business, including limiting strategic partnerships that may involve the sharing of data. Additionally, if third parties that we work with, such as vendors or developers, violate applicable laws or our policies, such violations may also place personal information at risk and have an adverse effect on our business. Even the perception of privacy concerns, whether or not valid, may harm our reputation, subject us to regulatory scrutiny and investigations, and inhibit adoption of our products by existing and potential subscribers.

Risks Related to Our International Operations

We operate globally and are subject to significant business, economic, regulatory, social, political, and other risks in many jurisdictions.

Global or regional conditions may harm our financial results. We have operations in many countries and our business activities are concentrated in certain geographic areas including without limitation the Asia Pacific (“APAC”), Europe, Middle-East, and Africa (“EMEA”), and Latin American Region (“LAR”) regions. We derived 40% of our net revenue from international subscribers for fiscal 2020. As a result, our domestic and international operations and our financial results may be adversely affected by a number of factors outside of our control, including:

 

   

global and local economic conditions;

 

   

differing employment practices and labor issues;

 

   

formal or informal imposition of new or revised export and/or import and doing-business regulations, including trade sanctions, taxes, and tariffs, which could be changed without notice;

 

   

regulations or restrictions on the use, import, or export of encryption technologies that could delay or prevent the acceptance and use of encryption products and public networks for secure communications;

 

   

compliance with evolving foreign laws, regulations, and other government controls addressing privacy, data protection, data localization, and data security;

 

   

ineffective legal protection of our intellectual property rights in certain countries;

 

   

increased uncertainties regarding social, political, immigration, and trade policies in the United States and abroad, such as those caused by recent U.S. legislation and the withdrawal of the United Kingdom (the “U.K.”) from the European Union (the “E.U.”), which is commonly referred to as “Brexit;”

 

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geopolitical and security issues, such as armed conflict and civil or military unrest, crime, political instability, human rights concerns, and terrorist activity;

 

   

natural disasters, public health issues, pandemics (such as the COVID-19 pandemic), and other catastrophic events;

 

   

inefficient infrastructure and other disruptions, such as supply chain interruptions and large-scale outages or unreliable provision of services from utilities, transportation, data hosting, or telecommunications providers;

 

   

other government restrictions on, or nationalization of, our operations in any country, or restrictions on our ability to repatriate earnings from a particular country;

 

   

seasonal reductions in business activity in the summer months in Europe and in other periods in other countries;

 

   

costs and delays associated with developing software and providing support in multiple languages;

 

   

greater difficulty in identifying, attracting, and retaining local qualified personnel, and the costs and expenses associated with such activities;

 

   

longer payment cycles and greater difficulties in collecting accounts receivable; and

 

   

local business and cultural factors that differ from our normal standards and practices, including business practices that we are prohibited from engaging in by U.S. Foreign Corrupt Practices Act of 1977 (“FCPA”) and other anti-corruption laws and regulations.

Research and development risks. We employ engineers in a number of jurisdictions outside the United States. In many of these jurisdictions the laws relating to the protection of rights in technology and intellectual property are less strict than the laws in the United States or not enforced to the same extent as they are enforced in the United States. As a result, in some foreign jurisdictions we may be subject to heightened attempts to gain unauthorized access to our information technology systems or surreptitiously introduce software into our products. These attempts may be the result of hackers or others seeking to harm us, our products, or our subscribers. We have implemented various measures to manage our risks related to these disruptions, but these measures may be insufficient, and a system failure or security breach or incident could negatively impact our business, financial condition, results of operations, and cash flows. The theft or unauthorized use or publication of our trade secrets and other confidential or proprietary business information as a result of such an incident could negatively impact our competitive position. In addition, we may incur additional costs to remedy the damages caused by these disruptions or security breaches or incidents.

Other operating risks. Additional risks of international business operations include the increased costs of establishing, managing, and coordinating the activities of geographically dispersed and culturally diverse operations (particularly sales and support and shared service centers) located on multiple continents in a wide range of time zones.

Risks Related to Regulation

We are subject to governmental export and import controls that could subject us to liability or impair our ability to compete in international markets.

Our solutions are subject to U.S. export and import controls, specifically the Export Administration Regulations and economic sanctions enforced by the Office of Foreign Assets Control. We incorporate standard encryption algorithms into certain of our solutions, which, along with the underlying technology, may be exported outside of the United States only with the required export authorizations, including by license, license exception, or other appropriate government authorizations, which may require the filing of a classification request or report. Furthermore, U.S. export control laws and economic sanctions prohibit the shipment of certain

 

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products and services to countries, governments, and persons targeted by U.S. sanctions. Even though we take precautions to ensure that we and our channel partners comply with all relevant regulations, any failure by us or our channel partners to comply with U.S. export requirements, U.S. customs regulations, U.S. economic sanctions, or other laws could have negative consequences, including reputational harm, government investigations, and substantial civil and criminal penalties (e.g., fines, incarceration for responsible employees and managers, and the possible loss of export or import privileges).

In addition, changes in our solutions or changes in export and import regulations may create delays in the introduction of our solutions into international markets, including as a consequence of new licensing requirements, prevent certain personnel from developing or maintaining our products, prevent our end-subscribers with international operations from deploying our products globally or, in some cases, prevent or delay the export or import of our solutions to certain countries, governments, or persons altogether. Any change in export or import regulations, economic sanctions or related legislation, shift in the enforcement or scope of existing regulations, or change in the countries, governments, entities, persons, or technologies targeted by such regulations, could result in decreased use of our solutions by, or in our decreased ability to develop, export to, import into, or sell our solutions to, existing or potential end-subscribers with international operations. Any decreased use of our solutions or limitation on our ability to develop, export to, import into, or sell our solutions in international markets would likely adversely affect our business, financial condition, results of operations, and cash flows.

There is also significant uncertainty about the future relationship between the United States and various other countries, most significantly China, with respect to trade policies, treaties, government regulations, and tariffs. The current United States presidential administration is continuing to pursue substantial changes to United States foreign trade policy imposed by the previous administration with respect to China, Mexico, and other countries, including the possibility of imposing greater restrictions on international trade, restrictions on sales and technology transfers to certain Chinese corporations, and continued increased tariffs on goods imported into the United States. Given the relatively fluid regulatory environment in China and the United States and uncertainty regarding how the United States or foreign governments will act with respect to tariffs, international trade agreements and policies, a trade war, further governmental action related to tariffs or international trade policies, or additional tax or other regulatory changes in the future could occur and could directly and adversely impact our financial results and results of operations.

Failure to comply with the U.S. Foreign Corrupt Practices Act, other applicable anti-corruption and anti-bribery laws, and applicable anti-money-laundering laws could subject us to penalties and other adverse consequences.

We currently conduct a substantial portion of our operations and sell our products and services in numerous countries outside of the United States, including in the APAC, EMEA, and LAR regions. Our global operations are subject to the FCPA, the U.K. Bribery Act 2010, and other anti-corruption, anti-bribery, anti-money laundering, and similar laws in the United States and other countries in which we conduct activities. In addition, other applicable anti-corruption laws prohibit bribery of domestic government officials as well as commercial bribery, which involves the giving or receiving improper payments to or from non-government parties.

While we have implemented policies, internal controls, and other measures reasonably designed to promote compliance with applicable anti-corruption, anti-bribery, and anti-money-laundering laws and regulations, our employees, agents, and strategic partners may engage in improper conduct for which we might be held responsible. Any violations of these anti-corruption, anti-bribery laws and anti-money laundering laws and regulations, or even allegations of such violations, can lead to an investigation and/or enforcement action, which could disrupt our operations, involve significant management distraction, and lead to significant costs and expenses, including legal fees. If we, or our employees, agents, or strategic partners acting on our behalf, are found to have engaged in practices that violate these laws and regulations, we could suffer severe fines and penalties, profit disgorgement, injunctions on future conduct, securities litigation, bans on transacting government business, and other consequences that may have a material adverse effect on our business, financial condition, results of operations, and cash flows.

 

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In addition, our brand and reputation, our sales activities, or the value of our business could be adversely affected if we become the subject of any negative publicity related to actual or potential violations of anti-corruption, anti-bribery, or anti-money-laundering laws and regulations.

If we fail to comply with environmental requirements, our business, financial condition, results of operations, cash flows, and reputation could be adversely affected.

Our operations and the sale of our solutions are subject to various federal, state, local, and foreign environmental and safety regulations, including laws adopted by the E.U., such as the Waste Electrical and Electronic Equipment Directive (“WEEE Directive”), and the Restriction of the Use of Certain Hazardous Substances in Electrical and Electronic Equipment Directive (“E.U. RoHS Directive”), of certain metals from global hot spots. The WEEE Directive requires electronic goods producers to be responsible for marking, collection, recycling, and treatment of such products. Changes in the WEEE Directive of the interpretation thereof may cause us to incur additional costs or meet additional regulatory requirements, which could be material. Similar laws and regulations have been passed or are pending in China, South Korea, Norway, and Japan and may be enacted in other regions, including in the United States, and we are, or may in the future be, subject to these laws and regulations.

The E.U. RoHS Directive and similar laws of other jurisdictions limit the content of certain hazardous materials such as lead, mercury, and cadmium in the manufacture of electrical equipment, including our products. Currently, our products comply with the E.U. RoHS Directive requirements. However, if there are changes to this or other laws, or to their interpretation, or if new similar laws are passed in other jurisdictions, we may be required to reengineer our products or to use different components to comply with these regulations. This reengineering or component substitution could result in substantial costs to us or disrupt our operations or logistics.

We are also subject to environmental laws and regulations governing the management of hazardous materials, which we use in small quantities in our engineering labs. Our failure to comply with past, present, and future environmental and safety laws could result in increased costs, reduced sales of our products, substantial product inventory write-offs, reputational damage, penalties, third-party property damage, remediation costs, and other sanctions, any of which could harm our business, financial condition, results of operations, and cash flows. To date, our expenditures for environmental compliance have not had a material impact on our results of operations or cash flows, and although we cannot predict the future impact of such laws or regulations, they will likely result in additional costs and may increase penalties associated with violations or require us to change the content of our products or how they are manufactured, which could have a material adverse effect on our business, financial condition, results of operations, and cash flows. We also expect that our business will be affected by new environmental laws and regulations on an ongoing basis, which may be more stringent, imposing greater compliance costs and increasing risks and penalties associated with violations which could harm our business.

General Business Risks

If we are unable to attract, train, motivate, and retain senior management and other qualified personnel, our business could suffer.

Our success depends in large part on our ability to attract and retain senior management personnel, as well as technically qualified and highly skilled sales, consulting, technical, finance, and marketing personnel. It could be difficult, time consuming, and expensive to identify, recruit, and onboard any key management member or other critical personnel. Competition for highly skilled personnel is often intense, particularly in the markets in which we operate including Silicon Valley. If we are unable to attract and retain qualified individuals, our ability to compete in the markets for our products could be adversely affected, which would have a negative impact on our business and financial results. Our competitors may be successful in recruiting and hiring members of our management team or other key employees, including key employees obtained through our acquisitions, and it may be difficult for us to find suitable replacements on a timely basis, on competitive terms or at all.

 

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Changes in management or other critical personnel may be disruptive to our business and might also result in our loss of unique skills, loss of knowledge about our business, and may result in the departure of other existing employees, subscribers or partners. We have experienced recent turnover in our senior management team, and further turnover in the future could adversely affect our business.

We operate in an industry with an overall shortage of skilled and experienced talent that generally experiences high employee attrition. We have experienced significant turnover over the last few years and expect that may continue. The loss of one or more of our key employees could seriously harm our business. If we are unable to attract, integrate, or retain the qualified and highly skilled personnel required to fulfill our current or future needs, our business, financial condition, results of operations, and cash flows could be harmed.

Effective succession planning is also important to the long-term success of our business. If we fail to ensure effective transfer of knowledge and smooth transitions involving key employees could hinder our strategic planning and execution. The loss of senior management or any ineffective transitions in management, especially in our sales organization, could significantly delay or prevent the achievement of our development and strategic objectives, which could adversely affect our business, financial condition, results of operations, and cash flows.

We may become involved in litigation, investigations, and regulatory inquiries and proceedings that could negatively affect us and our reputation.

From time to time, we are involved in various legal, administrative, and regulatory proceedings, claims, demands, and investigations relating to our business, which may include claims with respect to commercial, product liability, intellectual property, data privacy, consumer protection, breach of contract, employment, class action, whistleblower, and other matters. In the ordinary course of business, we also receive inquiries from and have discussions with government entities regarding the compliance of our contracting and sales practices with laws and regulations. Such matters can be costly and time consuming and divert the attention of our management and key personnel from our business operations. We have been and are currently, and expect to continue to be, subject to third-party intellectual property infringement claims by entities that do not have operating businesses of their own and therefore limit our ability to seek counterclaims for damages and injunctive relief. Plaintiffs may seek, and we may become subject to, preliminary or provisional rulings in the course of any such litigation, including potential preliminary injunctions requiring us to cease some or all of our operations. Similarly, if any litigation to which we are a party is resolved adversely, we may be subject to an unfavorable judgment that may not be reversed upon appeal. Any claims or litigation could cause us to incur significant expenses and, if successfully asserted against us, could require that we pay substantial damages (including, for example, treble damages if we are found to have willfully infringed patents and increased statutory damages if we are found to have willfully infringed copyrights), pay ongoing royalty payments, delay or prevent us from offering our products or services, or require that we comply with other unfavorable terms. In addition, we might be required to seek a license for the use of such intellectual property, which may not be available on commercially reasonable terms or at all. We may also decide to settle such matters on terms that are unfavorable to us.

Our business is subject to the risks of product defects, warranty claims, product returns, and product liability.

Our solutions are highly complex and may contain design defects or errors that are not detected before their commercial release, particularly when first introduced or as new versions or upgrades are released. Despite testing by us and by current and potential subscribers, design defects or errors may not be found until after commencement of commercial shipments, resulting in customer dissatisfaction and loss of or delay in market acceptance and sales opportunities. These errors and quality problems could also cause us to incur significant repair or replacement costs, divert the attention of our engineering personnel from our product development efforts, and cause significant customer relations problems. We may also incur significant costs in connection with a product recall and any related indemnification obligations. We have experienced errors or quality problems in the past in connection with solutions and enhancements and expect that errors or quality problems

 

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will be found from time to time in the future. Any of these errors or other quality problems could adversely affect our results of operations.

Historically, the amount of warranty claims we have received has not been significant, but there is no guarantee that claims will not be significant in the future. Any errors, defects, or other problems with our products could negatively impact our subscribers and result in financial or other losses. While we typically seek by contract to limit our exposure to damages, liability limitation provisions in our standard terms and conditions of sale, and those of our channel partners, may not be enforceable under some circumstances or may not fully or effectively protect us from customer claims and related liabilities and costs, including indemnification obligations under our agreements with channel partners or subscribers. The sale and support of our solutions also entail the risk of product liability claims. In addition, even claims that ultimately are unsuccessful could require us to incur costs in connection with litigation and divert management’s time and other resources, and could seriously harm the reputation of our business and solutions.

We may be unable to raise additional capital on acceptable terms, or at all.

We believe that our available cash and cash equivalents generated from our operating activities and unused availability under our Revolving Credit Facility, will be sufficient to meet our near term working and other capital requirements. However, if cash is required for unanticipated needs, including in connection with a proposed acquisition of a company or technology, we may need additional capital. The development and marketing of new solutions and our investment in sales and marketing efforts require a significant commitment of resources. If the markets for our solutions develop at a slower pace than anticipated, we could be required to raise additional capital. We cannot guarantee that, should it be required, sufficient debt or equity capital will be available to us under acceptable terms, if at all. If we were unable to raise additional capital when required, our business, financial condition, results of operations, and cash flows could be seriously harmed.

Our business, financial condition, results of operations, or cash flows could be significantly hindered by the occurrence of a natural disaster, terrorist attack, pandemic, or other catastrophic event.

Our business operations are susceptible to outages due to fire, floods, unusual weather conditions, power loss, telecommunications failures, terrorist attacks, pandemics, such as the COVID-19 pandemic, and other events beyond our control, and our sales opportunities may also be affected by such events. Natural disasters including tornados, hurricanes, floods and earthquakes may damage the facilities of our subscribers or those of their suppliers or retailers or their other operations, which could lead to reduced revenue for our subscribers and thus reduced sales. In addition, a substantial portion of our facilities, including our headquarters, are located in Northern California, an area susceptible to earthquakes. We do not carry earthquake insurance for earthquake-related losses. Despite our implementation of network security measures, our servers are vulnerable to computer viruses, break-ins, and similar disruptions from unauthorized tampering with our computer systems. We may not carry sufficient business interruption insurance to compensate us for losses that may occur as a result of any of these events.

Additionally, our subscribers may face a number of potential business interruption risks that are beyond our respective control. For example, our subscribers depend on the continuous availability of our cloud-based offerings. Our cloud-based offerings are vulnerable to damage or interruption from a variety of sources, including damage or interruption caused by telecommunications or computer systems failure, fire, earthquake, power loss, cyberattack, human error, terrorist acts, and war. We use a variety of third-party data centers and do not control their operation. These facilities and networks may experience technical failures and downtime, may fail to distribute appropriate updates, or may fail to meet the increased requirements of a growing customer base, any of which could temporarily or permanently expose our subscribers’ networks, leaving their networks unprotected against the latest security threats, or, in the case of technical failures and downtime of a customer’s security operation center, all security threats. Depending upon how subscribers have configured their use of our products and services, network downtime within our data centers may also prevent certain subscribers from being able to access the Internet during the period of such network downtime.

 

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To the extent that such events disrupt our business or the business of our current or prospective subscribers, or adversely impact our reputation, such events could adversely affect our business, financial condition, results of operations, and cash flows.

Risks Related to Our Indebtedness

Our substantial leverage could adversely affect our financial condition.

As of June 26, 2021, our total debt outstanding under our Senior Secured Credit Facilities was approximately $3,993 million and additional unused borrowing capacity under our Revolving Credit Facility was approximately $660 million. In connection with the closing of the sale of our enterprise business, we repaid approximately $1 billion of our outstanding indebtedness.

Our high degree of leverage could have important consequences, including:

 

   

making it more difficult for us to make payments on the Senior Secured Credit Facilities and our other obligations;

 

   

increasing our vulnerability to general economic and market conditions and to changes in the industries in which we compete;

 

   

requiring a substantial portion of cash flow from operations to be dedicated to the payment of principal and interest on our indebtedness, thereby reducing our ability to use our cash flow to fund our operations, future working capital, capital expenditures, investments or acquisitions, future strategic business opportunities, or other general corporate requirements;

 

   

restricting us from making acquisitions or causing us to make divestitures or similar transactions;

 

   

limiting our ability to obtain additional financing for working capital, capital expenditures, debt service requirements, investments, acquisitions, and general corporate or other purposes;

 

   

limiting our ability to adjust to changing market conditions and placing us at a competitive disadvantage compared to our competitors who are less highly leveraged; and

 

   

increasing our cost of borrowing.

Borrowings under our Senior Secured Credit Facilities are at variable rates of interest and expose us to interest rate risk. If interest rates increase, our debt service obligations may increase even though the amount borrowed remains the same, and our net income and cash flows, including cash available for servicing our indebtedness, will correspondingly decrease.

Restrictions imposed by our outstanding indebtedness and any future indebtedness may limit our ability to operate our business and to take certain actions.

The terms of our outstanding indebtedness restrict us from engaging in specified types of transactions. These covenants restrict our ability to:

 

   

incur additional indebtedness;

 

   

create or incur liens;

 

   

engage in consolidations, amalgamations, mergers, liquidations, dissolutions, or dispositions;

 

   

pay dividends and distributions on, or purchase, redeem, defease, or otherwise acquire or retire for value, our capital stock;

 

   

make acquisitions, investments, loans (including guarantees), advances, or capital contributions;

 

   

create negative pledges or restrictions on the payment of dividends or payment of other amounts owed from subsidiaries;

 

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sell, transfer, or otherwise dispose of assets, including capital stock of subsidiaries;

 

   

make prepayments or repurchases of debt that is contractually subordinated with respect to right of payment or security;

 

   

engage in certain transactions with affiliates;

 

   

modify certain documents governing debt that is subordinated with respect to right of payment;

 

   

change our fiscal year; and

 

   

change our material lines of business.

In addition, our First Lien Credit Agreement includes a financial covenant which requires that, at the end of each fiscal quarter, for so long as the aggregate principal amount of borrowings under the Revolving Credit Facility exceeds 35% of the aggregate commitments under the Revolving Credit Facility, our first lien net leverage ratio cannot exceed 6.30 to 1.00. Our ability to comply with this financial covenant can be affected by events beyond our control, and we may not be able to satisfy it. See “Description of Certain Indebtedness.” As a result of these restrictions, we may be:

 

   

limited in how we conduct our business;

 

   

unable to raise additional debt or equity financing to operate during general economic or business downturns;

 

   

unable to compete effectively or to take advantage of new business opportunities; and/or

 

   

limited in our ability to grow in accordance with, or otherwise pursue, our business strategy.

Our Senior Secured Credit Facilities also contain numerous affirmative covenants that will remain in effect as long as our Senior Secured Credit Facilities remain outstanding. We are also required to make mandatory prepayments of the obligations under our Senior Secured Credit Facilities in certain circumstances, including upon certain asset sales or receipt of certain insurance proceeds or condemnation awards, upon certain issuances of debt, and, annually, with a portion of our excess cash flow.

We cannot guarantee that we will be able to maintain compliance with these covenants or, if we fail to do so, that we will be able to obtain waivers from the lenders or investors and/or amend the covenants.

A breach of any of the covenants in the credit agreements governing our Senior Secured Credit Facilities could result in an event of default, which, if not cured or waived, could trigger acceleration of our indebtedness and an increase in the interest rates applicable to such indebtedness, and may result in the acceleration of or default under any other debt we may incur in the future to which a cross-acceleration or cross-default provision applies. The acceleration of the indebtedness under our Senior Secured Credit Facilities or under any other indebtedness could have a material adverse effect on our business, results of operations, and financial condition. In the event of any default under our existing or future credit facilities, the applicable lenders could elect to terminate borrowing commitments and declare all borrowings and loans outstanding, together with accrued and unpaid interest and any fees and other obligations, to be due and payable. In addition, we have granted a security interest in a significant portion of our assets to secure our obligations under our Senior Secured Credit Facilities. During the existence of an event of default under our Senior Secured Credit Facilities, the applicable lenders could exercise their rights and remedies thereunder, including by way of initiating foreclosure proceedings against any assets constituting collateral for our obligations under the Senior Secured Credit Facilities.

Despite our level of indebtedness, we and our subsidiaries may still be able to incur substantially more debt, including off-balance sheet financing, contractual obligations, and general and commercial liabilities. This could further exacerbate the risks to our financial condition described above.

We and our subsidiaries may be able to incur significant additional indebtedness in the future, including additional tranches of term loans and/or term loan increases, increases to our revolving commitments and/or

 

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additional revolving credit facilities as well as off-balance sheet financings, contractual obligations, and general and commercial liabilities. Although the terms of Senior Secured Credit Facilities contain restrictions on the incurrence of additional indebtedness, such restrictions are subject to a number of significant exceptions and qualifications and any additional indebtedness incurred in compliance with such restrictions could be substantial. These restrictions also will not prevent us from incurring obligations that do not constitute indebtedness. If we and our subsidiaries incur significant additional indebtedness or other obligations, the related risks that we face could increase.

We may be adversely affected by the phase-out of, or changes in the method of determining, the London Interbank Offered Rate (“LIBOR”) or the Euro Interbank Offered Rate (“EURIBOR”), or the replacement of LIBOR and/or EURIBOR with different reference rates.

LIBOR is the basic rate of interest used in lending between banks on the London interbank market and is widely used as a reference for setting the interest rate on U.S. dollar-denominated loans globally. EURIBOR is a basic rate of interest used in lending between Eurozone banks and is widely used as a reference for setting the interest rate on Euro-denominated loans globally. Our Senior Secured Credit Facilities use LIBOR and EURIBOR as reference rates such that the interest due to our creditors under those facilities is calculated using LIBOR or EURIBOR, as applicable.

On July 27, 2017, the U.K.’s Financial Conduct Authority (the authority that administers LIBOR) announced that it intends to phase out LIBOR by the end of 2021, and subsequently extended the phase-out period until June 2023. It is unclear whether new methods of calculating LIBOR will be established such that it continues to exist after 2023, or if alternative rates or benchmarks will be adopted. Changes in the method of calculating LIBOR, or the replacement of LIBOR with an alternative rate or benchmark, may adversely affect interest rates and result in higher borrowing costs. This could materially and adversely affect our results of operations, cash flows, and liquidity. We cannot predict the effect of the potential changes to LIBOR or the establishment and use of alternative rates or benchmarks. We may need to renegotiate our Senior Secured Credit Facilities or incur other indebtedness, and changes in the method of calculating LIBOR, or the use of an alternative rate or benchmark, may negatively impact the terms of such renegotiated Senior Secured Credit Facilities or such other indebtedness. If changes are made to the method of calculating LIBOR or LIBOR ceases to exist, we may need to amend certain contracts and cannot predict what alternative rate or benchmark would be negotiated. This may result in an increase to our interest expense.

The European Money Markets Institute (the authority that administers EURIBOR) has undertaken a number of reforms in response to the EU Benchmark Regulation, which was first published in June 2016 and requires only benchmarks published by “authorized administrators” to be used in new financial contracts beginning on January 1, 2022. It is unclear whether new methods of calculating EURIBOR will be established such that it continues to exist after 2021, or if alternative rates or benchmarks will be adopted. Changes in the method of calculating EURIBOR, or the replacement of EURIBOR with an alternative rate or benchmark, may adversely affect interest rates and result in higher borrowing costs. This could materially and adversely affect our results of operations, cash flows, and liquidity. We cannot predict the effect of the potential changes to EURIBOR or the establishment and use of alternative rates or benchmarks. We may need to renegotiate our First Lien Credit Agreement or incur other indebtedness, and changes in the method of calculating EURIBOR, or the use of an alternative rate or benchmark, may negatively impact the terms of such renegotiated First Lien Credit Agreement or such other indebtedness. If changes are made to the method of calculating EURIBOR or EURIBOR ceases to exist, we may need to amend certain contracts and cannot predict what alternative rate or benchmark would be negotiated. This may result in an increase to our interest expense.

 

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We utilize derivative financial instruments to reduce our exposure to market risks from changes in interest rates on our variable rate indebtedness, including our Senior Secured Credit Facilities, and we will be exposed to risks related to counterparty credit worthiness or non-performance of these instruments.

We have entered into interest rate swap instruments to limit our exposure to changes in variable interest rates. While our hedging strategy is designed to minimize the impact of increases in interest rates applicable to our variable rate debt, including our Senior Secured Credit Facilities, there can be no guarantee that our hedging strategy will be effective, and we may experience credit-related losses in some circumstances. See Note 15 to our audited consolidated financial statements included elsewhere in this document.

Risks Related to Our Organizational Structure

Our principal asset is our interest in Foundation Technology Worldwide LLC, and we are dependent upon Foundation Technology Worldwide LLC and its consolidated subsidiaries for our results of operations, cash flows, and distributions.

We are a holding company and have no material assets other than our direct and indirect ownership of the LLC Units. As such, we have no independent means of generating revenue or cash flow, and our ability to pay our taxes and operating expenses, including to satisfy our obligations under the tax receivable agreement, or declare and pay dividends in the future, if any, depend upon the results of operations and cash flows of Foundation Technology Worldwide LLC and its consolidated subsidiaries and distributions we receive from Foundation Technology Worldwide LLC. There can be no assurance that our subsidiaries will generate sufficient cash flow to distribute funds to us or that applicable state law and contractual restrictions will permit such distributions.

We anticipate that Foundation Technology Worldwide LLC will continue to be treated as a partnership (and not as a “publicly traded partnership,” within the meaning of Section 7704(b) of the Code, subject to tax as a corporation) for U.S. federal income tax purposes and, as such, generally will not be subject to any entity-level U.S. federal income tax. Instead, taxable income will be allocated to holders of Foundation Technology Worldwide LLC Units. Accordingly, we and our subsidiaries will be required to pay income taxes on our allocable share of any net taxable income of Foundation Technology Worldwide LLC. Further, Foundation Technology Worldwide LLC and its subsidiaries may, absent an election to the contrary, be subject to material liabilities pursuant to partnership audit rules enacted pursuant to the Bipartisan Budget Act of 2015 and related guidance if, for example, its calculations of taxable income are incorrect. Further, we are responsible for the unpaid tax liabilities of the corporate entities we acquired as part of the Reorganization Transactions (as defined herein), including for the taxable year (or portion thereof) of such entities ending on the date of our initial public offering (the “IPO”). To the extent that we need funds and Foundation Technology Worldwide LLC and its subsidiaries are restricted from making such distributions, under applicable law or regulation, or as a result of covenants in the credit agreements of Foundation Technology Worldwide LLC and its subsidiaries, we may not be able to obtain such funds on terms acceptable to us or at all and as a result could suffer an adverse effect on our liquidity and financial condition.

We are required to pay certain Continuing Owners and certain Management Owners for certain tax benefits we may realize or are deemed to realize in accordance with the tax receivable agreement between us and such Continuing Owners and Management Owners, and we expect that the payments we will be required to make will be substantial.

The contribution by certain Continuing Owners and certain Management Owners to McAfee Corp. of certain corporate entities in connection with the Reorganization Transactions and future exchanges of LLC Units for cash or, at our option, for shares of our Class A common stock have produced and are expected to produce or otherwise deliver to us favorable tax attributes that can reduce our taxable income. We are a party to a tax receivable agreement, under which generally we are required to pay to certain of our Continuing Owners and

 

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certain Management Owners (collectively, the “TRA Beneficiaries”) 85% of the applicable cash savings, if any, in U.S. federal, state, and local income tax that we actually realize or, in certain circumstances, are deemed to realize as a result of (i) all or a portion of McAfee Corp.’s allocable share of existing tax basis in the assets of Foundation Technology Worldwide LLC (and its subsidiaries) acquired in connection with the Reorganization Transactions, (ii) increases in McAfee Corp.’s allocable share of existing tax basis in the assets of Foundation Technology Worldwide LLC (and its subsidiaries) and tax basis adjustments in the assets of Foundation Technology Worldwide LLC (and its subsidiaries) as a result of sales or exchanges of LLC Units, (iii) certain tax attributes of the corporations McAfee Corp. acquired in connection with the Reorganization Transactions (including their allocable share of existing tax basis in the assets of Foundation Technology Worldwide LLC (and its subsidiaries)), and (iv) certain other tax benefits related to entering into the tax receivable agreement, including tax benefits attributable to payments under the tax receivable agreement. We generally will retain the benefit of the remaining 15% of the applicable tax savings.

The payment obligations under the tax receivable agreement are obligations of McAfee Corp., and we expect that the payments we will be required to make under the tax receivable agreement will be substantial. Assuming no material changes in the relevant tax law and that we earn sufficient taxable income to realize all tax benefits that are subject to the tax receivable agreement, we expect that the reduction in tax payments for us associated with the tax attributes described above would aggregate to approximately $3,294.8 million over 20 years from the date of this offering based on an assumed offering price of $28.34 per share of our Class A common stock (the closing price on June 25, 2021) and assuming all future sales of LLC Units in exchange for our Class A common stock would occur on the one-year anniversary of this offering at such price. In this scenario, we estimate that we would be required to pay the TRA Beneficiaries 85% of such amount, or $2,800.6 million, over the 20-year period from the date of this offering. The actual amounts may materially differ from these hypothetical amounts, as potential future reductions in tax payments for us and tax receivable agreement payments by us will be determined in part by reference to the market value of our Class A common stock at the time of the sale and the prevailing tax rates applicable to us over the life of the tax receivable agreement and will be dependent on us generating sufficient future taxable income to realize the benefit. See “Certain Relationships and Related Party Transactions—Recapitalization Transactions in Connection with our IPO—Tax Receivable Agreement.” Payments under the tax receivable agreement are not conditioned on the TRA Beneficiaries’ ownership of our shares.

The actual increase in tax basis, as well as the amount and timing of any payments under the tax receivable agreement, will vary depending upon a number of factors, including the timing of sales by the Continuing Owners and participating Management Owners, the price of our Class A common stock at the time of the sales, whether such sales are taxable, the amount and timing of the taxable income we generate in the future, the tax rates then applicable to us, and the portions of our payments under the tax receivable agreement constituting imputed interest. Payments under the tax receivable agreement are expected to give rise to certain additional tax benefits attributable to either further increases in basis or in the form of deductions for imputed interest. Any such benefits that we are deemed to realize under the terms of the tax receivable agreement are covered by the tax receivable agreement and will increase the amounts due thereunder. The tax receivable agreement provides that interest, at a rate equal to one-year LIBOR (or if LIBOR ceases to be published, a replacement rate with similar characteristics) plus 1%, will accrue from the due date (without extensions) of the tax return to which the applicable tax benefits relate to the date of payment specified by the tax receivable agreement. In addition, where we fail to make payment by the date so specified, the tax receivable agreement generally provides for interest to accrue on the unpaid amount from the date so specified until the date of actual payment, at a rate equal to one-year LIBOR (or if LIBOR ceases to be published, a replacement rate with similar characteristics) plus 5%, except under certain circumstances specified in the tax receivable agreement where we are unable to make payment by such date, in which case interest will accrue at a rate equal to one-year LIBOR (or if LIBOR ceases to be published, a replacement rate with similar characteristics) plus 1%.

Payments under the tax receivable agreement will be based in part on our tax reporting positions. We will not be reimbursed for any payments previously made under the tax receivable agreement if such basis increases

 

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or other attributes or benefits are subsequently disallowed by a taxing authority. As a result, in certain circumstances, the payments we are required to make under the tax receivable agreement could exceed the benefits that we actually realize in respect of the attributes in respect of which the tax receivable agreement required us to make payment.

In addition, the tax receivable agreement provides that in the case of a change of control of McAfee Corp. (as defined therein) or a material breach of our obligations (that is not timely cured) under the tax receivable agreement, or if, at any time, we elect an early termination of the tax receivable agreement, our payment obligations under the tax receivable agreement will accelerate and may significantly exceed the actual benefits we realize in respect of the tax attributes subject to the tax receivable agreement. We will be required to make a payment to the TRA Beneficiaries covered by such termination in an amount equal to the present value of future payments (calculated using a discount rate equal to the lesser of (i) 6.5% per annum and (ii) one-year LIBOR (or if LIBOR ceases to be published, a replacement rate with similar characteristics) plus 1%, which may differ from our, or a potential acquirer’s, then-current cost of capital) under the tax receivable agreement, which payment would be based on certain assumptions, including those relating to our future taxable income. In certain cases, a sale or other disposition of a substantial portion of assets of Foundation Technology Worldwide LLC will be treated as a change of control transaction. In these situations, our obligations under the tax receivable agreement could have a substantial negative impact on our, or a potential acquirer’s, liquidity and could have the effect of delaying, deferring, modifying, or preventing certain mergers, asset sales, other forms of business combinations, or other changes of control. These provisions of the tax receivable agreement may result in situations where the TRA Beneficiaries have interests that differ from or are in addition to those of our other stockholders. In addition, we could be required to make payments under the tax receivable agreement that are substantial, significantly in advance of any potential actual realization of such further tax benefits, and in excess of our, or a potential acquirer’s, actual cash savings in income tax.

If we were to elect to terminate the tax receivable agreement immediately after this offering, based on the offering price of $28.34 per share of our Class A common stock (the closing price on June 25, 2021), we estimate that we would be required to pay approximately $2,901.0 million in the aggregate under the tax receivable agreement.

Finally, because we are a holding company with no operations of our own, our ability to make payments under the tax receivable agreement is dependent on the ability of our subsidiaries to make distributions to us. The First Lien Credit Agreement restricts the ability of our subsidiaries to make distributions to us, which could affect our ability to make payments under the tax receivable agreement. To the extent that we are unable to make payments under the tax receivable agreement as a result of restrictions in the First Lien Credit Agreement, such payments will be deferred and will accrue interest until paid, which could negatively impact our results of operations and could also affect our liquidity in periods in which such payments are made.

In certain circumstances, under its limited liability company agreement, Foundation Technology Worldwide LLC will be required to make tax distributions to us, the Continuing Owners and certain Management Owners and the distributions that Foundation Technology Worldwide LLC will be required to make may be substantial.

Funds used by Foundation Technology Worldwide LLC to satisfy its tax distribution obligations to the Continuing Owners and certain Management Owners will not be available for reinvestment in our business. Moreover, the tax distributions that Foundation Technology Worldwide LLC will be required to make may be substantial, and will likely exceed (as a percentage of Foundation Technology Worldwide LLC’s net income) the overall effective tax rate applicable to a similarly situated corporate taxpayer.

As a result of potential differences in the amount of net taxable income allocable to us and to the Continuing Owners and certain Management Owners, as well as the use of an assumed tax rate in calculating Foundation Technology Worldwide LLC’s tax distribution obligations to the Continuing Owners and the Management

 

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Owners, we may receive distributions significantly in excess of our tax liabilities and obligations to make payments under the tax receivable agreement. To the extent, as currently expected, we do not distribute such cash balances as dividends on shares of our Class A common stock and instead, for example, hold such cash balances or lend them to Foundation Technology Worldwide LLC, the Continuing Owners would benefit from any value attributable to such accumulated cash balances as a result of their ownership of Class A common stock following an exchange of their LLC Units for such Class A common stock. Our board of directors, in its sole discretion, will make any determination from time to time with respect to the use of any such excess cash so accumulated, which may include, among other uses, to acquire additional newly issued LLC Units from Foundation Technology Worldwide LLC at a per unit price determined by reference to the market value of the Class A common stock; to pay dividends, which may include special dividends, on its Class A common stock; to fund repurchases of its Class A common stock; to make payments under the tax receivable agreement; or any combination of the foregoing. We will have no obligation to distribute such cash (or other available cash other than any declared dividend) to our stockholders.

Our organizational structure, including the tax receivable agreement, confers certain benefits upon certain Continuing Owners and certain Management Owners, which benefits are not conferred on Class A common stockholders generally.

Our organizational structure, including the tax receivable agreement, confers certain benefits upon certain Continuing Owners and certain Management Owners, which benefits are not conferred on the holders of shares of our Class A common stock generally. In particular, we entered into the tax receivable agreement with Foundation Technology Worldwide LLC and the TRA Beneficiaries, which provides for the payment by us to the TRA Beneficiaries of 85% of the amount of tax benefits, if any, that we actually realize, or in some circumstances are deemed to realize, as a result of (i) all or a portion of McAfee Corp.’s allocable share of existing tax basis in the assets of Foundation Technology Worldwide LLC (and its subsidiaries) acquired in connection with the Reorganization Transactions, (ii) increases in McAfee Corp.’s allocable share of existing tax basis in the assets of Foundation Technology Worldwide LLC (and its subsidiaries) and tax basis adjustments in the assets of Foundation Technology Worldwide LLC (and its subsidiaries) as a result of sales or exchanges of LLC Units, (iii) certain tax attributes of the corporations McAfee Corp. acquired in connection with the Reorganization Transactions (including their allocable share of existing tax basis in the assets of Foundation Technology Worldwide LLC (and its subsidiaries)), and (iv) certain other tax benefits related to entering into the tax receivable agreement, including tax benefits attributable to payments under the tax receivable agreement. Although we will generally retain 15% of the amount of such tax benefits, this and other aspects of our organizational structure may adversely impact the future trading market for the Class A common stock.

We will not be reimbursed for any payments made to the TRA Beneficiaries under the tax receivable agreement in the event that any purported tax benefits are subsequently disallowed by the IRS.

If the IRS or a state or local taxing authority challenges the tax basis adjustments and/or deductions that give rise to payments under the tax receivable agreement and the tax basis adjustments and/or deductions are subsequently disallowed, the recipients of payments under the agreements will not reimburse us for any payments we previously made to them. Any such disallowance would be taken into account in determining future payments under the tax receivable agreement and may, therefore, reduce the amount of any such future payments. Nevertheless, if the claimed tax benefits from the tax basis adjustments and/or deductions are disallowed, our payments under the tax receivable agreement could exceed our actual tax savings, and we may not be able to recoup payments under the tax receivable agreement that were calculated on the assumption that the disallowed tax savings were available.

 

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Unanticipated changes in effective tax rates or adverse outcomes resulting from examination of our income or other tax returns could adversely affect our financial condition and results of operations.

We will be subject to income taxes in the United States, and our domestic and foreign tax liabilities will be subject to the allocation of expenses in differing jurisdictions. Our future effective tax rates could be subject to volatility or adversely affected by a number of factors, including:

 

   

changes in the valuation of our deferred tax assets and liabilities;

 

   

expected timing and amount of the release of any tax valuation allowances;

 

   

tax effects of equity-based compensation;

 

   

costs related to intercompany restructurings;

 

   

changes in tax laws, regulations, or interpretations thereof; or

 

   

lower than anticipated future earnings in jurisdictions where we have lower statutory tax rates and higher than anticipated future earnings in jurisdictions where we have higher statutory tax rates.

In addition, we may be subject to audits of our income, sales and other transaction taxes by U.S. federal, state, and local and foreign authorities. Outcomes from these audits could have an adverse effect on our financial condition and results of operations.

Risks Related to Our Class A Common Stock and this Offering

Our Sponsors and Intel will continue to have significant influence over us, including control over decisions that require the approval of stockholders, which could limit your ability to influence the outcome of matters submitted to stockholders for a vote.

We are currently controlled, and after this offering is completed will continue to be controlled, by our Sponsors and Intel. Upon completion of this offering, investment funds affiliated with our Sponsors will beneficially own 36.8% of the voting power of our outstanding Class A common stock and Class B common stock, on a combined basis (or 36.5% if the underwriters exercise in full their option to purchase additional shares), and Intel will beneficially own 40.9% of the voting power of our outstanding Class A common stock and Class B common stock, on a combined basis (or 40.5% if the underwriters exercise in full their option to purchase additional shares). As long as our Sponsors and Intel collectively own or control at least a majority of our outstanding voting power, they will have the ability to exercise substantial control and significant influence over our management and affairs and all corporate actions requiring stockholder approval, irrespective of how our other stockholders may vote, including the election and removal of directors and the size of our board of directors, any amendment of our certificate of incorporation or bylaws, or the approval of any merger or other significant corporate transaction, including a sale of substantially all of our assets. The concentration of voting power limits your ability to influence corporate matters and, as a result, we may take actions that you do not view as beneficial. As a result, the market price of our Class A common stock could be adversely affected. Even if their collective ownership falls below 50%, our Sponsors and Intel will continue to be able to strongly influence or effectively control our decisions.

Additionally, the interests of our Sponsors and Intel may not align with the interests of our other stockholders. Our Sponsors and Intel may, in the ordinary course of their respective businesses, acquire and hold interests in businesses that compete directly or indirectly with us. Our Sponsors and Intel each may also pursue acquisition opportunities that may be complementary to our business, and, as a result, those acquisition opportunities may not be available to us.

Certain of our directors have relationships with our Sponsors and Intel, which may cause conflicts of interest with respect to our business.

Three of our seven directors are affiliated with our Sponsors and Intel. Our directors who are affiliated with our Sponsors or Intel have fiduciary duties to us and, in addition, have duties to our Sponsors and Intel. As a

 

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result, these directors may face real or apparent conflicts of interest with respect to matters affecting both us and our Sponsors, whose interests may be adverse to ours in some circumstances.

We previously identified a material weakness in our internal control over financial reporting in recent periods, which we concluded as of the end of the first quarter of fiscal 2020 had been fully remediated, and if we fail to maintain proper and effective internal control over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act in the future, our ability to produce accurate and timely consolidated financial statements could be impaired, which could harm our results of operations, our ability to operate our business, and investor confidence.

In connection with the audit of our consolidated financial statements for fiscal 2018 and fiscal 2019, we and our independent registered public accounting firm identified a number of errors in our revenue recognition process that were immaterial to our consolidated financial statements, which led us to conclude we had a material weakness in our internal control over financial reporting. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our consolidated financial statements will not be prevented or detected on a timely basis. We did not maintain effective controls specifically over the accuracy of our revenue accounting and reporting, due to the lack of effective review necessary to ensure accurate reporting of revenue and deferred revenue. Additionally, this material weakness could have resulted in a misstatement of the aforementioned account balances or disclosures for the periods during which the material weakness was ongoing that would have resulted in a material misstatement to the annual or interim consolidated financial statements for such periods that would not have been prevented or detected.

We have taken numerous steps designed to address the underlying causes of the material weakness, primarily through the hiring of additional accounting and finance personnel with responsibility for revenue accounting and reporting with relevant accounting and financial reporting experience, reorganizing reporting and supervisory roles among our finance and accounting personnel, enhancing our training programs within our accounting and finance department, and enhancing our internal review procedures. As of the end of the first quarter of fiscal 2020, we concluded that the aforementioned material weakness had been fully remediated. However, our current efforts to maintain an effective control environment may not be sufficient to prevent future material weaknesses or significant deficiencies from occurring or to promptly remediate any such future material weaknesses or significant deficiencies.

As a public company, we are required to comply with the SEC’s rules implementing Sections 302 and 404 of the Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley Act”), which requires management to certify financial and other information in our quarterly and annual reports and provide an annual management report on the effectiveness of our controls over financial reporting. Although we are required to disclose material changes made in our internal controls and procedures on at least a quarterly basis, we are not required to make our first annual assessment of our internal controls over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act (including an auditor attestation on management’s internal controls report) until our annual report on Form 10-K for the fiscal year ending December 25, 2021.

To comply with the internal controls requirements of being a public company, we may need to undertake various actions as our business or applicable rules and regulations evolve, such as implementing new internal controls and procedures and hiring additional accounting or internal audit staff that have the requisite knowledge of U.S. GAAP. Testing and maintaining internal controls can be costly, challenging, and potentially divert our management’s attention from other matters that are important to the operation of our business.

If we identify future material weaknesses in our internal control over financial reporting, or if we are unable to comply with the demands that will be placed upon us as a public company, including the requirements of Section 404 of the Sarbanes-Oxley Act, in a timely manner, we may be unable to accurately report our consolidated financial results, or report them within the timeframes required by the SEC. We also could become

 

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subject to sanctions or investigations by the SEC or other regulatory authorities. In addition, if we are unable to assert that our internal control over financial reporting is effective, or if our independent registered public accounting firm is unable to express an opinion as to the effectiveness of our internal control over financial reporting, when required, investors may lose confidence in the accuracy and completeness of our financial reports, we may face restricted access to the capital markets, and our stock price may be adversely affected.

Moreover, no matter how well designed, internal control over financial reporting has inherent limitations. Therefore, internal control over financial reporting determined to be effective can provide only reasonable assurance with respect to financial statement preparation and may not prevent or detect all misstatements. Due to the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. These inherent limitations include the realities that judgments in decision-making can be incorrect, and that breakdowns can occur because of error or mistake. Further, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by management override of the internal controls. Additionally, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate due to changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. As such, we could lose investor confidence in the accuracy and completeness of our financial reports, which may have a material adverse effect on our reputation and stock price.

We are a “controlled company” under the Exchange’s rules and, as a result, qualify for certain exemptions from certain corporate governance requirements; you will therefore not have the same protections afforded to stockholders of companies that are subject to these governance requirements.

Because our Sponsors and Intel collectively control a majority of the voting power of our outstanding Class A common stock and Class B common stock on a combined basis, we are a “controlled company” within the meaning of the Exchange’s corporate governance standards. Under these rules, a company of which more than 50% of the voting power for the election of directors is held by an individual, group, or another company is a “controlled company” and may elect not to comply with certain corporate governance requirements, including the requirements that, within one year of the date of the listing of our Class A common stock, we have:

 

   

a board of directors that is composed of a majority of “independent directors,” as defined under rules;

 

   

a compensation committee that is composed entirely of independent directors; and

 

   

a nominating and corporate governance committee that is composed entirely of independent directors.

Our board of directors is composed of a majority of independent directors. However, we may utilize some or all of the other exemptions applicable to “controlled companies.” Accordingly, for so long as we are a “controlled company,” you will not have the same protections afforded to stockholders of companies that are subject to all of the Exchange’s corporate governance requirements. Our status as a controlled company could make our Class A common stock less attractive to some investors or otherwise harm our stock price.

Your percentage ownership in us may be diluted by future issuances of capital stock, which could reduce your influence over matters on which stockholders vote.

Pursuant to our amended and restated certificate of incorporation and amended and restated bylaws, our board of directors has the authority, without action or vote of our stockholders, to issue all or any part of our authorized but unissued shares of Class A common stock, including shares issuable upon the exercise of options, or shares of our authorized but unissued preferred stock. Issuances of Class A common stock or voting preferred stock would reduce your influence over matters on which our stockholders vote and, in the case of issuances of preferred stock, would likely result in your interest in us being subject to the prior rights of holders of that preferred stock.

 

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Our results of operations and the market price of our Class A Common Stock may be volatile.

Our quarterly results of operations are likely to fluctuate in the future. In addition, securities markets worldwide have experienced, and are likely to continue to experience, significant price and volume fluctuations. This market volatility, as well as general economic, market, or political conditions, could subject the market price of our shares to wide price fluctuations regardless of our operating performance. Our results of operations and the trading price of our shares may fluctuate in response to various factors, including:

 

   

actual or anticipated changes or fluctuations in our results of operations and whether our results of operations meet the expectations of securities analysts or investors;

 

   

actual or anticipated changes in securities analysts’ estimates and expectations of our financial performance;

 

   

announcements of new solutions, commercial relationships, acquisitions, or other events by us or our competitors;

 

   

general market conditions, including volatility in the market price and trading volume of technology companies in general and of companies in the IT security industry in particular;

 

   

changes in how current and potential customers perceive the effectiveness of our platform in protecting against advanced cyberattacks or other reputational harm;

 

   

network outages or disruptions of our solutions or their availability, or actual or perceived privacy, data protection, or network information breaches;

 

   

investors’ perceptions of our prospects and the prospects of the businesses in which we participate;

 

   

sales of large blocks of our Class A common stock, including sales by our executive officers, directors, and significant stockholders;

 

   

announced departures of any of our key personnel;

 

   

lawsuits threatened or filed against us or involving our industry, or both;

 

   

changing legal or regulatory developments in the United States and other countries;

 

   

any default or anticipated default under agreements governing our indebtedness;

 

   

adverse publicity about us, our products and solutions, or our industry;

 

   

effects of public health crises, such as the COVID-19 pandemic;

 

   

general economic conditions and trends; and

 

   

other events or factors, including those resulting from major catastrophic events, war, acts of terrorism, or responses to these events.

These and other factors, many of which are beyond our control, may cause our results of operations and the market price and demand for our shares to fluctuate substantially. While we believe that results of operations for any particular quarter are not necessarily a meaningful indication of future results, fluctuations in our quarterly results of operations could limit or prevent investors from readily selling their shares and may otherwise negatively affect the market price and liquidity of our shares. In addition, in the past, when the market price of a stock has been volatile, holders of that stock have sometimes instituted securities class action litigation against the company that issued the stock. If any of our stockholders brought a lawsuit against us, we could incur substantial costs defending the lawsuit. Such a lawsuit could also divert the time and attention of our management from our business, which could significantly harm our profitability and reputation.

 

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The Continuing Owners have the right to have their LLC Units exchanged for cash or (at our option) shares of Class A common stock and any disclosure of such exchange or the subsequent sale (or any disclosure of an intent to enter into such an exchange or subsequent sale) of such shares of Class A common stock may cause volatility in our stock price.

As of June 26, 2021, 271,230,699 shares of Class A common stock are issuable upon exchange of LLC Units and MIUs that are held by the Continuing Owners. Under the amended and restated limited liability company agreement of Foundation Technology Worldwide LLC (the “LLC Agreement”), subject to certain restrictions set forth therein, the Continuing Owners are entitled to have their LLC Units exchanged for cash or (at our option) shares of our Class A common stock. The holders of MIUs also have the right, from time to time and subject to certain restrictions, to exchange their MIUs for LLC Units, which will then be immediately redeemed for cash or shares of Class A Common Stock, at the option of the Company, based on the value of such MIUs relative to their applicable distribution threshold.

We cannot predict the timing, size, or disclosure of any future issuances of our Class A common stock resulting from the exchange of LLC Units or the effect, if any, that future issuances, disclosure, if any, or sales of shares of our Class A common stock may have on the market price of our Class A common stock. Sales or distributions of substantial amounts of our Class A common stock, or the perception that such sales or distributions could occur, may cause the market price of our Class A common stock to decline.

A significant portion of our total outstanding shares are restricted from immediate resale but may be sold into the market in the near future. This could cause the market price of our Class A common stock to drop significantly, even if our business is doing well.

Sales of a substantial number of shares of our Class A common stock in the public market could occur at any time. These sales, or the perception in the market that the holders of a large number of shares intend to sell shares, could reduce the market price of our Class A common stock. In connection with this offering, our officers, directors, the selling stockholders, and holders of 88% of our outstanding capital stock and securities convertible into our capital stock have entered into 75-day lock-up agreements with the underwriters. These shares will, however, be able to be resold after the expiration of the lock-up agreement as described in the “Shares eligible for future sale” section of this prospectus. We have also filed a Form S-8 under the Securities Act to register all shares of Class A common stock that we may issue under our equity compensation plans. In addition, our Sponsors and Intel have certain demand registration rights that could require us in the future to file registration statements in connection with sales of our stock they currently hold. See “Certain Relationships and Related Party Transactions—Recapitalization Transactions in Connection with our IPO—Registration Rights Agreement.” Such sales could be significant. Once we register these shares, they can be freely sold in the public market upon issuance, subject to the lock-up agreements described in the “Underwriting” section of this prospectus. As restrictions on resale end, the market price of our stock could decline if the holders of currently restricted shares sell them or are perceived by the market as intending to sell them.

If securities or industry analysts do not publish research or reports about our business, if they adversely change their recommendations regarding our shares or if our results of operations do not meet their expectations, our share price and trading volume could decline.

The trading market for our shares is influenced by the research and reports that industry or securities analysts publish about us or our business. We do not have any control over these analysts. In the event one or more securities analysts cease coverage of our Company or fail to publish reports on us regularly, we could lose visibility in the financial markets, which in turn could cause our share price or trading volume to decline. Moreover, if one or more of the analysts who cover us downgrade our stock, or if our results of operations do not meet their expectations, our share price could decline.

 

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We cannot guarantee the timing, amount, or payment of dividends on our Class A common stock.

We intend to fund any future dividends from distributions made by Foundation Technology Worldwide LLC from its available cash generated from operations. If McAfee Corp. decides to pay any other dividend on shares of our Class A common stock in the future, it would likely need to cause Foundation Technology Worldwide LLC to make distributions to McAfee Corp. and its wholly-owned subsidiaries in an amount sufficient to cover such dividend. If Foundation Technology Worldwide LLC makes such distributions to McAfee Corp. and its wholly-owned subsidiaries, the other holders of LLC Units will be entitled to receive pro rata distributions, as well as, in certain cases, the holders of MIUs. The timing, declaration, amount of, and payment of any such dividends will be made at the discretion of McAfee Corp.’s board of directors, subject to applicable laws, and will depend upon many factors, including the amount of the distribution received by McAfee Corp. from Foundation Technology Worldwide LLC, our financial condition, results of operations, capital requirements, contractual restrictions, general business conditions, and other factors that McAfee Corp.’s board of directors may deem relevant. Currently, the provisions of our Senior Secured Credit Facilities place certain limitations on the amount of cash dividends we can pay. Moreover, if as expected McAfee Corp. determines to initially pay a dividend following any quarterly distributions from Foundation Technology Worldwide LLC, there can be no assurance that McAfee Corp. will continue to pay dividends in the same amounts or at all thereafter. As a result, we cannot guarantee the timing, amount or payment of dividends on our Class A common stock.

A credit ratings downgrade or other negative action by a credit rating organization could adversely affect the trading price of the shares of our Class A common stock.

Credit rating agencies continually revise their ratings for companies they follow. The condition of the financial and credit markets and prevailing interest rates have fluctuated in the past and are likely to fluctuate in the future. In addition, developments in our business and operations could lead to a ratings downgrade for us or our subsidiaries. Any such fluctuation in the rating of us or our subsidiaries may impact our ability to access debt markets in the future or increase our cost of future debt which could have a material adverse effect on our operations, and financial condition, which in return may adversely affect the trading price of shares of our Class A common stock.

Provisions of our corporate governance documents could make an acquisition of our Company more difficult and may prevent attempts by our stockholders to replace or remove our current management, even if beneficial to our stockholders.

In addition to our Sponsors’ and Intel’s beneficial ownership of a controlling percentage of our common stock, our certificate of incorporation and bylaws, and the Delaware General Corporation Law (the “DGCL”) contain provisions that could make it more difficult for a third party to acquire us, even if doing so might be beneficial to our stockholders. These provisions include a classified board of directors and the ability of our board of directors to issue preferred stock without stockholder approval that could be used to dilute a potential acquiror. In addition, these provisions may frustrate or prevent any attempts by our stockholders to replace or remove our current management by making it more difficult for stockholders to replace members of our board of directors. Because our board of directors is responsible for appointing the members of our management team, these provisions could in turn affect any attempt to replace current members of our management team. As a result, you may lose your ability to sell your stock for a price in excess of the prevailing market price due to these protective measures, and efforts by stockholders to change the direction or management of the Company may be unsuccessful.

 

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Our certificate of incorporation designates courts in the State of Delaware as the sole and exclusive forum for certain types of actions and proceedings that may be initiated by our stockholders, and also provides that the federal district courts will be the exclusive forum for resolving any complaint asserting a cause of action arising under the Securities Act, each of which could limit our stockholders’ ability to choose the judicial forum for disputes with us or our directors, officers, stockholders, or employees.

Our certificate of incorporation provides that, subject to limited exceptions, the Court of Chancery of the State of Delaware will be the sole and exclusive forum for:

 

   

any derivative action or proceeding brought on our behalf;

 

   

any action asserting a claim of breach of a fiduciary duty owed by any of our directors, officers or other employees to us or our stockholders;

 

   

any action asserting a claim against us arising pursuant to any provision of the General Corporation Law of the State of Delaware, our certificate of incorporation or our bylaws;

 

   

any action to interpret, apply, enforce or determine the validity of our certificate of incorporation or bylaws; and

 

   

any other action asserting a claim against us that is governed by the internal affairs doctrine (each, a “Covered Proceeding”).

Our certificate of incorporation also provides that the federal district courts of the United States of America will be the exclusive forum for the resolution of any complaint asserting a cause of action against us or any of our directors, officers, employees or agents and arising under the Securities Act. However, Section 22 of the Securities Act provides that federal and state courts have concurrent jurisdiction over lawsuits brought the Securities Act or the rules and regulations thereunder. To the extent the exclusive forum provision restricts the courts in which claims arising under the Securities Act may be brought, there is uncertainty as to whether a court would enforce such a provision. We note that investors cannot waive compliance with the federal securities laws and the rules and regulations thereunder. This provision does not apply to claims brought under the Exchange Act.

Any person or entity purchasing or otherwise acquiring any interest in shares of our capital stock shall be deemed to have notice of and to have consented to these provisions. These provisions may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors, officers or other employees, which may discourage such lawsuits against us and our directors, officers and employees. Alternatively, if a court were to find these provisions of our certificate of incorporation inapplicable to, or unenforceable in respect of, one or more of the specified types of actions or proceedings, we may incur additional costs associated with resolving such matters in other jurisdictions, which could adversely affect our business and financial condition.

Our certificate of incorporation contains a provision renouncing our interest and expectancy in certain corporate opportunities, which could adversely impact our business.

Each of TPG, Intel Americas, Inc. and its affiliates, and Thoma Bravo, and the members of our board of directors who are affiliated with them, by the terms of our certificate of incorporation, will not be required to offer us any corporate opportunity of which they become aware and can take any such corporate opportunity for themselves or offer it to other companies in which they have an investment. We, by the terms of our certificate of incorporation, have expressly renounced any interest or expectancy in any such corporate opportunity to the extent permitted under applicable law, even if the opportunity is one that we or our subsidiaries might reasonably have pursued or had the ability or desire to pursue if granted the opportunity to do so. Our certificate of incorporation is not able to be amended to eliminate our renunciation of any such corporate opportunity arising prior to the date of any such amendment.

 

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TPG and Thoma Bravo are in the business of making investments in companies and any of TPG, Intel and Thoma Bravo may from time to time acquire and hold interests in businesses that compete directly or indirectly with us. These potential conflicts of interest could have a material adverse effect on our business, financial condition, results of operations or prospects if TPG, Intel Americas, Inc. and its affiliates, or Thoma Bravo allocate attractive corporate opportunities to themselves or their affiliates instead of to us.

 

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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements. Forward-looking statements are neither historical facts nor assurances of future performance. Instead, they are based on our current beliefs, expectations, and assumptions regarding the future of our business, future plans and strategies, and other future conditions. Forward-looking statements can be identified by words such as “anticipate,” “believe,” “estimate,” “expect,” “intend,” “may,” “plan,” “predict,” “project,” “target,” “potential,” “will,” “would,” “could,” “should,” “continue,” “contemplate,” and other similar expressions, although not all forward-looking statements contain these identifying words.

We may not actually achieve the plans, intentions, or expectations disclosed in our forward-looking statements, and you should not rely on our forward-looking statements in making your investment decision. Actual results or events could differ materially from the plans, intentions, and expectations disclosed in the forward-looking statements we make. Important factors that could cause actual results and events to differ materially from those indicated in the forward-looking statements include, among others, the following:

 

   

the efficiency and success of our transition to a pure-play Consumer cybersecurity company following the sale of our Enterprise Business;

 

   

plans to develop and offer new products and services and enter new markets;

 

   

our expectations with respect to the continued stability and growth of our customer base;

 

   

anticipated trends, growth rates, and challenges in our business and in domestic and international markets;

 

   

our financial performance, including changes in and expectations with respect to revenues, and our ability to maintain profitability in the future;

 

   

investments or potential investments in new or enhanced technologies;

 

   

market acceptance of our solutions;

 

   

the success of our business strategy, including the growth in the market for cloud-based security solutions, acceptance of our own cloud-based solutions, and changes in our business model and operations;

 

   

our ability to cross-sell and up-sell to our existing subscribers;

 

   

our ability to maintain and expand our relationships with partners and on commercially acceptable terms, including our channel and strategic partners;

 

   

the effectiveness of our sales force, distribution channel, and marketing activities;

 

   

the growth and development of our direct and indirect channels of distribution;

 

   

our response to emerging and future cybersecurity risks;

 

   

our ability to continue to innovate and enhance our solutions;

 

   

our ability to develop new solutions and bring them to market in a timely manner;

 

   

our ability to prevent serious errors, defects, or vulnerabilities in our solutions;

 

   

our ability to develop solutions that interoperate with our subscribers’ existing systems and devices;

 

   

our ability to maintain, protect, and enhance our brand and intellectual property;

 

   

our continued use of open source software;

 

   

our ability to compete against established and emerging cybersecurity companies;

 

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risks associated with fluctuations in exchange rates of the foreign currencies in which we conduct business;

 

   

past and future acquisitions, investments, and other strategic investments;

 

   

our ability to remain in compliance with laws and regulations that currently apply or become applicable to our business both domestically and internationally;

 

   

the attraction, transition, and retention of management and other qualified personnel;

 

   

economic and industry trend analysis;

 

   

litigation, investigations, regulatory inquiries, and proceedings;

 

   

the increased expenses associated with being a public company;

 

   

our estimated total addressable market;

 

   

the future trading prices of our Class A common stock;

 

   

the impact of macroeconomic conditions on our business, including the impact of the COVID-19 on economic activity and financial markets;

 

   

our expectation regarding the impact of the COVID-19 pandemic, including its geographic spread and severity, and the related responses by governments and private industry on our business and financial condition, as well as the businesses and financial condition of our subscribers and partners;

 

   

the adequacy of our capital resources to fund operations and growth;

 

   

our Sponsors’ and Intel’s significant influence over us and our status as a “controlled company” under the rules of the Exchange;

 

   

risks relating to our corporate structure, tax rates, and tax receivable agreement; and

 

   

the other factors identified under the heading “Risk Factors” appearing elsewhere in this prospectus.

The forward-looking statements in this prospectus represent our views as of the date of this prospectus. We undertake no obligation to update any forward-looking statements whether as a result of new information, future developments or otherwise.

 

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INDUSTRY AND MARKET DATA

This prospectus includes market data with respect to the computer software industry. In some cases we rely on and refer to market data and certain industry forecasts that were obtained from third-party surveys, market research, consultant surveys, publicly available information and industry publications and surveys, and in some cases, the information has been developed by us for purposes of this offering based on our existing data or data available from known sources or other proprietary research and analysis and is believed by us to have been prepared in a reasonable manner.

These sources of certain statistical data, estimates, and forecasts contained in this prospectus are the following independent industry publications or reports:

 

   

eMarketer, Global Commerce 2020, Ecommerce Decelerates amid Global Retail Contraction but Remains a Bright Spot, June 2020;

 

   

eMarketer, US Mobile Time Spent 2020, Lockdowns augment Gains in Time Spent with Mobile Devices, June 2020;

 

   

eMarketer, US Time Spent with Media 2020, Gains in Consumer Usage During the Year of COVID-19 and Beyond, April 2020;

 

   

Frost & Sullivan, Total Addressable Market (TAM) for the Global Consumer Cyber Security and Privacy Market, August 31, 2020;

 

   

ForgeRock, 2021 ForgeRock Consumer Identity Breach Report, The Year of the Great Digital Migration: How Usernames and Passwords Found Their Way Into the Crosshairs of Attackers, June 7, 2021;

 

   

Identity Theft Resource Center, Identity Theft Resource Center Reports 33 Percent Decrease in Data Breaches in the First Half of 2020, July 14, 2019 (https://www.idtheftcenter.org/identity-theft-resource-center-reports-33-percent-decrease-in-data-breaches-in-the-first-half-of-2020/);

 

   

IDC, New Media Market Model 1Q20 Deliverable, 12 June 2020;

 

   

IDC, Public Cloud Services Spending Guide Forecast Pivot, June 2020;

 

   

IDC, The State of U.S. Enterprise Mobile Workers: Information, Frontline, and Work from Home Trends in 2020, 28 July 2020;

 

   

IDC, Total Addressable Market (TAM) Calculator, 2020;

 

   

IDC, Worldwide Mobile Phone Forecast Update, 2020-2024, June 2020;

 

   

McAfee ATR Threats Report, April 2021;

 

   

RiskBased Security, 2020 Year End Data Breach QuickView Report, 2021; and

 

   

Statista, Global Consumer Survey - Average for 5 Countries (US, Japan, Germany, Australia, United Kingdom), 2018 & 2019.

TRADEMARKS, TRADE NAMES, AND SERVICE MARKS

We own or have rights to trademarks, trade names, and service marks that we use in connection with the operation of our business, including “McAfee,” the McAfee logo, “TunnelBear,” and various other marks. Solely for convenience, the trademarks, trade names and service marks referred to in this prospectus are listed without the ®, SM, and TM symbols, but we will assert our rights to our trademarks, trade names, and service marks to the fullest extent under applicable law.

 

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USE OF PROCEEDS

The selling stockholders will receive all of the net proceeds from this offering. We will not receive any of the proceeds from the sale of shares of Class A common stock offered by the selling stockholders. We will, however, bear the costs associated with the sale of shares by the selling stockholders, other than underwriting discounts and commissions. For more information, see “Certain Relationships and Related Party Transactions—Registration Rights Agreement,” “Principal and Selling Stockholders” and “Underwriters (Conflicts of Interest).”

 

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DIVIDEND POLICY

Foundation Technology Worldwide LLC expects to pay a cash distribution to its members on a quarterly basis at an aggregate annual rate of approximately $200 million. McAfee Corp. is expected to receive a portion of any such distribution through the LLC Units it holds directly or indirectly through its wholly-owned subsidiaries on the record date for any such distribution declared by Foundation Technology Worldwide LLC, which is expected to equal the number of shares of Class A common stock outstanding on such date. McAfee Corp. expects to use the proceeds it receives from such quarterly distribution to declare a cash dividend on its shares of Class A common stock. We intend to fund any future dividends from distributions made by Foundation Technology Worldwide LLC from its available cash generated from operations.

In addition, in connection with the consummation of the sale of our Enterprise Business to STG, we declared a one-time special dividend of $4.50 to holders of record of our Class A common stock as of August 13, 2021, paid on August 27, 2021. Purchasers of shares in this offering will not be entitled to receive such special dividend.

The timing, declaration, amount of, and payment of any such dividends will be made at the discretion of McAfee Corp.’s board of directors, subject to applicable laws, and will depend upon many factors, including the amount of the distribution received by McAfee Corp. from Foundation Technology Worldwide LLC, our financial condition, results of operations, capital requirements, contractual restrictions, general business conditions, and other factors that McAfee Corp.’s board of directors may deem relevant. Moreover, if, as expected, McAfee Corp. determines to initially pay a dividend following any quarterly distributions from Foundation Technology Worldwide LLC, there can be no assurance that McAfee Corp. will continue to pay dividends in the same amounts or at all thereafter.

 

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CAPITALIZATION

The following table sets forth our cash and cash equivalents and capitalization as of June 26, 2021 on an actual basis, as well as on a pro forma basis to reflect :

 

   

the consummation of the sale of our Enterprise Business to STG on July 27, 2021; and

 

   

the application of the proceeds from the sale of our Enterprise Business to STG, including (i) the declaration and payment of a one time special dividend of $4.50 per share to holders of record of Class A common stock as of August 13, 2021 and a one-time special cash distribution to FTW members and (ii) the repayment of $332 million of our First Lien USD Term Loan and €563 million of our First Lien EUR Term Loan in August 2021.

The pro forma information set forth in the table below is illustrative only. You should read this information together with our audited and unaudited consolidated and combined financial statements and related notes appearing elsewhere in this prospectus and the information set forth under “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

 

     As of June 26, 2021  
(in millions)    Actual     Pro Forma
Adjustments
    Pro Forma  

Cash and cash equivalents

   $ 420     $ 63 (6)    $ 483  
  

 

 

   

 

 

   

 

 

 

Long-term debt:

      

First Lien USD Term Loan

     2,717 (1)      (332 )(3)      2,385  

First Lien EUR Term Loan

     1,276 (2)      (673 )(3)      603  

Second Lien USD Term Loan

     —         —         —    

Revolving Credit Facility

     —         —         —    

Redeemable noncontrolling interests

     7,687       (1,710 )(4)      5,977  

Equity (deficit):

      

Class A common stock, $0.001 par value - 1,500,000,000 shares authorized, 166,004,840 shares issued and outstanding as of June 26, 2021

     —         —         —    

Class B common stock, $0.001 par value - 300,000,000 shares authorized, 265,376,691 shares issued and outstanding as of June 26, 2021

     —         —         —    

Additional paid-in capital

     (9,306     (747 )(4)      (10,053

Accumulated other comprehensive income (loss)

     (33     —         (33

Accumulated deficit

     (52     (475 )(5)      (527
  

 

 

   

 

 

   

 

 

 

Total deficit

     (9,391     (1,222     (10,613
  

 

 

   

 

 

   

 

 

 

Total capitalization

   $ 2,289     $  (3,937   $  (1,648
  

 

 

   

 

 

   

 

 

 

 

(1)

First Lien USD Term Loan of $2,717 million excludes discount and issuance costs of $33 million.

(2)

First Lien EUR Term Loan of $1,276 million excludes discount and issuance costs of $11 million.

(3) 

Represents prepayment of $332 million of First Lien USD Term Loan and €563 million of First Lien EUR Term Loan ($673 million using our June 26, 2021 exchange rate of 1.1951), representing a total of $1,005 million on our condensed consolidated balance sheet as of June 26, 2021, excluding related discount and issuance costs.

(4) 

Represents approximate paid distributions to LLC Unit holders ($1,710 million) along with dividend of $4.50 per share of Class A common stock based on Class A shares outstanding at June 26, 2021.

(5) 

Includes estimated $300 million in required corporate taxes and related payments and $175 million in customary transaction and one-time charges. This amount excludes gain on sale of Enterprise Business expected to be in excess of $2 billion, net of taxes.

(6) 

Includes the proceeds of $4.0 billion from sale of the Enterprise Business less the amounts described in footnotes (3), (4), and (5) above.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion and analysis of our financial condition and consolidated results of operations in conjunction with our condensed consolidated financial statements and the related notes appearing elsewhere in this prospectus. In addition to historical information, this discussion and analysis contains forward-looking statements that involve risks, uncertainties, and assumptions. See “Cautionary Note Regarding Forward Looking Statements.” Our actual results may differ materially from those anticipated in these forward-looking statements as a result of certain factors, including, but not limited to, those set forth in the “Risk Factors” section and elsewhere in this prospectus.

Organization

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. On October 21, 2020, the Corporation became the sole managing member and holder of 100% of the voting power of FTW due to the reorganization transactions. With respect to the Corporation and the Company, each entity owns nothing other than the respective entities below it in the corporate structure and each entity has no other material operations, assets, or liabilities. The Reorganization Transactions were accounted for as a reorganization of entities under common control. Refer to Note 1 in our audited consolidated financial statements included elsewhere in this prospectus for information about the reorganization transactions noted above.

Overview

As a global leader and trusted brand in cybersecurity for over 30 years, McAfee protects millions of consumers with one of the industry’s most comprehensive cybersecurity portfolios. Our award-winning products offer individuals and families protection for their digital lives. We meet the cyber security needs of consumers wherever they are, with solutions for device security, privacy and safe Wi-Fi, online protection, and identity protection, among others. Our mission is to protect all things that matter through leading-edge cybersecurity.

Our consumer-focused products protect consumers across the digital spectrum. Our Personal Protection Service provides holistic digital protection of the individual and family wherever they go under our Total Protection and LiveSafe brands. We achieve this by integrating the following solutions and capabilities within our Personal Protection Service:

 

   

Device Security, which includes our Anti-Malware Software and Secure Home Platform products, keeps consumer devices, including mobile and home-use, protected from viruses, ransomware, malware, spyware, and phishing.

 

   

Online Privacy and Comprehensive Internet Security, which includes our Safe Connect VPN, TunnelBear, and WebAdvisor products, help make Wi-Fi connections safe with our bank-grade AES 256-bit encryption, keeping personal data protected while keeping IP addresses and physical locations private.

 

   

Identity Protection, which includes our Identity Theft Protection and Password Manager products, searches over 600,000 online black markets for compromised personally identifiable information, helping consumers take action to prevent fraud.

Our go-to-market digitally-led omnichannel approach reaches the consumer at crucial moments in their purchase lifecycle including direct to consumer online sales, acquisition through trial pre-loads on PC OEM devices, and other indirect modes via additional partners such as mobile providers, ISPs, electronics retailers, ecommerce sites, and search providers. We have longstanding exclusive partnerships with many of the leading

 

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PC OEMs and continue to expand our presence with mobile service providers and ISPs as the demand for mobile security protection increases. Through these relationships, our consumer security software is pre-installed on devices on either a trial basis until conversion to a paid subscription, which is enabled by a tailored renewal process that fits the customer’s journey, or through a live version that can be purchased directly through the OEMs’ website. Our consumer go-to-market channel also consists of partners including some of the largest electronics retailers and ISPs globally.

Divestiture of Enterprise Business

On March 6, 2021, we entered into a definitive agreement (the “Purchase Agreement”) with a consortium led by Symphony Technology Group (“STG”) under which STG agreed to purchase certain of our Enterprise assets together with certain of our Enterprise liabilities (“Enterprise Business”), representing substantially all of our Enterprise segment, for an all-cash purchase price of $4.0 billion. The divestiture transaction closed on July 27, 2021. The divestiture of our Enterprise Business represents a strategic shift in our operations that will allow us to focus on our Consumer business. As a result of the divestiture, the results of our Enterprise Business were reclassified as discontinued operations in our consolidated statements of operations and thus excluded from both continuing operations and segment results for all periods presented. Starting in the first quarter of fiscal 2021, we began to operate as one reportable segment as the Enterprise Business comprised substantially all of our Enterprise segment. Results of discontinued operations include all revenues and expenses directly derived from our Enterprise Business, with the exception of general corporate overhead costs that were previously allocated to our Enterprise segment but have not been allocated to discontinued operations. The Enterprise Business, as specified in the Purchase Agreement, was reclassified as discontinued operations in our consolidated balance sheets, subject to changes set forth in the Purchase Agreement, which included amendments to the agreement in July 2021.

On July 27, 2021, we completed the sale of our Enterprise Business to STG for an all-cash purchase price of $4.0 billion. In connection with the transaction, we expect to recognize a gain in excess of $2 billion, net of taxes. As a direct result of the taxable gain on the Enterprise Business divestiture, we expect to realize certain tax benefits subject to our TRA and thus expect to record a TRA liability of between $170 million to $260 million.

Subsequent to the completion of the sale of the Enterprise Business, we notified our lenders of our intent to prepay approximately $1 billion of our indebtedness in August 2021. In connection with this prepayment, we expect to incur a loss on extinguishment of debt in Q3 2021 of approximately $10 million related to recognition of unamortized discount and deferred financing costs. We also terminated $150 million of our $250 million notional interest rate swap that had an expiration date of January 29, 2022. We expect to use a portion of the proceeds from the transaction to pay approximately $175 million in customary transaction expenses and other one-time charges.

Additionally, on August 3, 2021, the Board of Directors of McAfee Corp. declared a special one-time cash dividend of $4.50 per share of Class A common stock paid on August 27, 2021 to shareholders of record on August 13, 2021 (the “Special Dividend”). In connection with the declaration of the Special Dividend, the Board of Directors of McAfee Corp., as sole managing member of FTW, authorized FTW to declare a special one-time cash distribution to its members in the aggregate of approximately $2.8 billion (the “Special Distribution”). The Special Distribution resulted in the payment of approximately $1.7 billion to Continuing LLC Owners and approximately $1.1 billion to McAfee Corp. McAfee Corp. used a portion of its share of the Special Distribution to pay the Special Dividend to participating shareholders on August 27, 2021. Under the provisions of our equity plans, the Special Dividend is anticipated to constitute an equity restructuring under applicable accounting rules, which will require us to make certain adjustments to our outstanding equity awards. McAfee Corp. used approximately $0.8 billion of its share of the Special Distribution to pay the Special Dividend, and expects to use the remainder of the proceeds to pay up to $0.3 billion in required corporate taxes and related payments in connection with the transaction.

 

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We also expect to pay approximately $300 million in additional one-time separation costs and stranded cost optimization, a portion of which will be expenses paid by proceeds from the transaction. In connection with the divestiture of the Enterprise Business, we entered into a transition service agreement under which we will provide assistance to STG including, but not limited to, business support services and information technology services as well as a commercial services agreement under which we will provide certain product services and licensed technology.

Financial Highlights

For fiscal 2020 compared to fiscal 2019 we delivered the following:

 

   

Net revenue increased by 20% to $1.6 billion

 

   

Net loss increased 22% to $289 million

 

   

Loss from continuing operations increased 12% to a loss of $218 million

 

   

Adjusted EBITDA increased 43% to $651 million

 

   

Cash provided by operating activities increased by 53% to $760 million

 

   

Free cash flow increased by 64% to $714 million

For the six months ended June 26, 2021 compared to the six months ended June 27, 2020 we delivered the following:

 

   

Net revenue increased by 23% to $909 million

 

   

Net income increased by 552% to $202 million

 

   

Income from continuing operations increased by 1,610% to $151 million

 

   

Adjusted EBITDA increased by 32% to $417 million

 

   

Net cash provided by operating activities increased by 56% to $448 million

 

   

Free cash flow increased by 65% to $430 million

See “Non-GAAP Financial Measures” section for a description of adjusted EBITDA and free cash flow, and a reconciliation of these measures to the nearest financial measure calculated in accordance with GAAP.

COVID-19 Pandemic

The COVID-19 pandemic is having widespread, rapidly evolving, and unpredictable impacts on global society, economies, financial markets, and business practices. Federal, state and foreign governments have implemented measures to contain the virus, including social distancing, travel restrictions, border closures, limitations on public gatherings, work from home, and closure of non-essential businesses. To protect the health and well-being of our employees, partners, and third-party service providers, we have implemented work-from-home requirements, made substantial modifications to employee travel policies, and cancelled or shifted marketing and other corporate events to virtual-only formats for the foreseeable future.

The ultimate duration and extent of the impact from the COVID-19 pandemic depends on future developments that cannot be accurately forecasted at this time. These developments include the severity and transmission rate of the disease, the actions of governments, businesses and individuals in response to the pandemic, the extent and effectiveness of containment actions and vaccines, the impact on economic activity and the impact of these and other factors. We have experienced growth and increased demand for our solutions in recent quarters, which may be due in part to greater demand for devices or our solutions in response to the

 

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COVID-19 pandemic. We cannot determine what, if any, portion of our growth in net revenue, the number of our Direct to Consumer Customers, or any other measures of our performance during the fiscal 2021 compared to the fiscal 2020 was the result of such responses to the COVID-19 pandemic. See Risk Factors for further discussion of the possible impact of the COVID-19 pandemic on our business.

Fiscal Calendar

We maintain a 52- or 53-week fiscal year that ends on the last Saturday in December. The year ended December 29, 2018 is a 52-week year starting on December 31, 2017 and ending on December 29, 2018. The year ended December 28, 2019 is a 52-week year starting on December 30, 2018 and ending on December 28, 2019. The year ended December 26, 2020 is a 52-week year starting on December 29, 2019 and ending on December 26, 2020. Six months ended June 27, 2020 is a 26-week period starting on December 29, 2019 and ending on June 27, 2020. Six months ended June 26, 2021 is a 26-week period starting on December 27, 2020 and ending on June 26, 2021.

Key Operating Metrics

We monitor the following key metrics to help us evaluate our business, identify trends affecting our business, measure our performance, formulate business plans, and make strategic decisions. We believe the following metrics are useful in evaluating our business, but should not be considered in isolation or as a substitute for GAAP. Certain judgments and estimates are inherent in our processes to calculate these metrics.

We define Core Direct to Consumer Customers as active subscribers whose transaction for a subscription is directly with McAfee. These customers include those who (i) transact with us directly through McAfee web properties, (ii) are converted during or after the trial period of the McAfee product preinstalled on their new PC purchase, or (iii) are channel led subscribers who are converted to Core Direct to Consumer Customers after expiration of their subscription of our product initially purchased through our retail, ecommerce or PC OEM partners.

We define Trailing Twelve Months (“TTM”) Dollar Based Retention – Core Direct to Consumer Customers as the annual contract value of Core Direct to Consumer Customer subscriptions that were renewed in the trailing twelve months divided by the annual contract value for Core Direct to Consumer Customers subscriptions that were up for renewal in the same period. We monitor TTM Dollar Based Retention as an important measure of the value we retain of our existing Core Direct to Consumer Customer base and as a measure of the effectiveness of the strategies we deploy to improve those rates over time.

We define Monthly Average Revenue Per Customer (“ARPC”) as monthly subscription net revenue from transactions directly between McAfee and Core Direct to Consumer Customers, divided by average Core to Direct Consumer Customers from the same period. ARPC can be impacted by price, mix of products, and change between periods in Core Direct to Consumer Customer count. We believe that ARPC allows us to understand the value of our solutions to the portion of our customer base transacting directly with us.

 

     December 29,
2018
    December 28,
2019
    December 26,
2020
    June 27,
2020
    June 26,
2021
 

Core Direct to Consumer Customers (in millions)

     14.1       15.2       18.0       16.6       19.4  

TTM Dollar Based Retention—Core Direct to Consumer Customers

     93     97     100     98     100

 

     Fiscal Year Ended      Three Months Ended  
     December 29,
2018
     December 28,
2019
     December 26,
2020
     June 27,
2020
     June 26,
2021
 

Monthly ARPC

   $ 5.79      $ 5.96      $ 6.01      $ 6.06      $ 5.99  

 

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Non-GAAP Financial Measures

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

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

We regularly monitor adjusted operating income, adjusted operating income margin, adjusted EBITDA, and adjusted EBITDA margin to assess our operating performance. We define adjusted operating income as net income (loss), excluding the impact of amortization of intangible assets, equity-based compensation expense, interest expense and other, net, provision for income tax expense, foreign exchange (gain) loss, net, income (loss) from discontinued operations, net of taxes, and other costs that we do not believe are reflective of our ongoing operations. Adjusted operating income margin is calculated as adjusted operating income divided by net revenue. We define adjusted EBITDA as adjusted operating income, excluding the impact of depreciation expense plus certain other non-operating costs. Adjusted EBITDA margin is calculated as adjusted EBITDA divided by net revenue. We believe presenting adjusted operating income, adjusted operating income margin, adjusted EBITDA, and adjusted EBITDA margin provides management and investors consistency and comparability with our past financial performance and facilitates period to period comparisons of operations, as it eliminates the effects of certain variations unrelated to our overall performance. Adjusted operating income, adjusted operating income margin, adjusted EBITDA, and adjusted EBITDA margin have limitations as analytical tools, and you should not consider it in isolation or as a substitute for analysis of our results as reported under GAAP. Some of these limitations are:

 

   

although depreciation and amortization are non-cash charges, the assets being depreciated and amortized may have to be replaced in the future, and adjusted EBITDA does not reflect cash capital expenditure requirements for such replacements or for new capital expenditure requirements;

 

   

adjusted operating income and adjusted EBITDA do not reflect changes in, or cash requirements for, our working capital needs;

 

   

adjusted operating income and adjusted EBITDA do not reflect the significant interest expense, or the cash requirements necessary to service interest or principal payments, on our debt;

 

   

adjusted operating income and adjusted EBITDA do not reflect income tax payments that may represent a reduction in cash available to us; and

 

   

other companies, including companies in our industry, may calculate adjusted operating income and adjusted EBITDA differently, which reduce their usefulness as comparative measures.

Because of these limitations, you should consider adjusted operating income and adjusted EBITDA alongside other financial performance measures, including operating income (loss), net income (loss) and our other GAAP results. In evaluating adjusted operating income, adjusted operating income margin, adjusted EBITDA, and adjusted EBITDA margin, you should be aware that in the future we may incur expenses that are the same as or similar to some of the adjustments in this presentation. Our presentation of adjusted operating income, adjusted operating income margin, adjusted EBITDA, and adjusted EBITDA margin should not be construed as an inference that our future results will be unaffected by the types of items excluded from the calculation of adjusted operating income, adjusted operating income margin, adjusted EBITDA, and adjusted EBITDA margin. Adjusted operating income, adjusted operating income margin, adjusted EBITDA, and adjusted EBITDA margin are not presentations made in accordance with GAAP and the use of these terms vary from other companies in our industry.

 

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

 

     Fiscal Year Ended     Six Months Ended  
(in millions except percentages)    December 29,
2018
    December 28,
2019
    December 26,
2020
    June 27,
2020
    June 26,
2021
 

Net income (loss)

   $ (512   $ (236   $ (289   $ 31     $ 202  

Add: Amortization

     260       253       251       126       98  

Add: Equity-based compensation

     6       5       113       16       33  

Add: Cash in lieu of equity awards(1)

     5       3       1       1       —    

Add: Acquisition and integration costs(2)

     7       8       8       3       2  

Add: Restructuring charges(3)

     19       6       2       1       8  

Add: Management fees(4)

     7       11       28       4       —    

Add: Transformation(5)

     17       23       20       9       1  

Add: Executive severance(6)

     —         —         3       3       —    

Add: Interest expense and other, net

     308       296       307       149       118  

Add: Provision for income tax expense (benefit)

     29       38       5       (5     7  

Add: Foreign exchange loss (gain), net

     (30     (21     104       6       (15

Less: (Income) loss from discontinued operations, net of taxes

     104       41       71       (41     (51
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted operating income

     220       427       624       303       403  

Add: Depreciation

     28       29       28       14       14  

Less: Other expense

     (1     (1     (1     —         —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

   $ 247     $ 455     $ 651     $ 317     $ 417  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net revenue

   $ 1,161     $ 1,303     $ 1,558     $ 737     $ 909  

Net income (loss) margin

     (44.1 )%      (18.1 )%      (18.5 )%      4.2     22.2

Adjusted operating income margin

     18.9     32.8     40.1     41.1     44.3

Adjusted EBITDA margin

     21.3     34.9     41.8     43.0     45.9

See “Description of Non-GAAP Adjustments” section for an explanation of adjustments to non-GAAP measures and other items.

Adjusted Net Income and Adjusted Net Income Margin

We regularly monitor adjusted net income and adjusted net income margin to assess our operating performance. Adjusted net income assumes all net income (loss) is attributable to McAfee Corp., which assumes the full exchange of all outstanding LLC Units for shares of Class A common stock of McAfee Corp., and is adjusted for the impact of amortization of intangible assets, amortization of debt issuance costs, equity-based compensation expense, foreign exchange loss (gain), net, income (loss) from discontinued operations, net of taxes, and other costs that we do not believe are reflective of our ongoing operations. The adjusted provision for income taxes represents the tax effect on net income, adjusted for all of the listed adjustments, assuming that all consolidated net income was subject to corporate taxation for all periods presented. We have assumed an annual effective tax rate of 22%, which represents our long term expected corporate tax rate excluding discrete and non-recurring tax items. This amount has been recast for periods reported previously.

Adjusted net income margin is calculated as adjusted net income divided by net revenue. Adjusted net income and adjusted net income margin have limitations as analytical tools, and you should not consider it in isolation or as a substitute for analysis of our results as reported under GAAP. Some of these limitations are:

 

   

although amortization is a non-cash charge, the assets being amortized may have to be replaced in the future, and adjusted net income does not reflect cash capital expenditure requirements for such replacements or for new capital expenditure requirements;

 

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adjusted net income does not reflect changes in, or cash requirements for, our working capital needs;

 

   

other companies, including companies in our industry, may calculate adjusted net income differently, which reduce its usefulness as comparative measures.

Because of these limitations, you should consider adjusted net income alongside other financial performance measures, including net income (loss) and our other GAAP results. In evaluating adjusted net income and adjusted net income margin, you should be aware that in the future we may incur expenses that are the same as or similar to some of the adjustments in this presentation. Our presentation of adjusted net income and adjusted net income margin should not be construed as an inference that our future results will be unaffected by the types of items excluded from the calculation of adjusted net income and adjusted net income margin. Adjusted net income and adjusted net income margin are not presentations made in accordance with GAAP and the use of these terms vary from other companies in our industry.

The following table presents a reconciliation of our adjusted net income (loss) to our net income for the periods presented:

 

     Fiscal Year Ended     Six Months Ended  
(in millions except percentages)    December 29,
2018
    December 28,
2019
    December 26,
2020
    June 27,
2020
    June 26,
2021
 

Net income (loss)

   $ (512   $ (236   $ (289   $ 31     $ 202  

Add: Amortization of debt discount and issuance costs

     15       17       36       9       8  

Add: Amortization

     260       253       251       126       98  

Add: Equity-based compensation

     6       5       113       16       33  

Add: Cash in lieu of equity awards(1)

     5       3       1       1       —    

Add: Acquisition and integration costs(2)

     7       8       8       3       2  

Add: Restructuring charges(3)

     19       6       2       1       8  

Add: Management fees(4)

     7       11       28       4       —    

Add: Transformation(5)

     17       23       20       9       1  

Add: Executive severance(6)

     —         —         3       3       —    

Add: TRA adjustment(7)

     —         —         2       —         8  

Add: Other

     —         —         2       —         —    

Add: Provision for income taxes (benefit)

     29       38       5       (5     7  

Add: Foreign exchange loss (gain), net(8)

     (30     (21     104       6       (15

Less: (Income) loss from discontinued operations, net of taxes

     104       41       71       (41     (51
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted income (loss) before taxes

     (73     148       357       163       301  

Adjusted provision for income taxes(9)

     (16     32       79       36       66  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted net income (loss)

   $ (57   $ 116     $ 278     $ 127     $ 235  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net revenue

   $ 1,161     $ 1,303     $ 1,558     $ 737     $ 909  

Net income (loss) margin

     (44.1 )%      (18.1 )%      (18.5 )%      4.2     22.2

Adjusted net income (loss) margin

     (4.9 )%      8.9     17.8     17.2     25.9

See “Description of Non-GAAP Adjustments” section for an explanation of adjustments to non-GAAP measures and other items.

 

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Description of Non-GAAP Adjustments

Below are additional information to the adjustments for adjusted operating income, adjusted EBITDA, and adjusted net income:

 

  (1)

As a result of the Sponsor Acquisition, cash awards were provided to certain employees who held Intel equity awards in lieu of equity in FTW.

 

  (2)

Represents both direct and incremental costs in connection with business acquisitions, including acquisition consideration structured as cash retention, third party professional fees, and other integration costs.

 

  (3)

Represents both direct and incremental costs associated with our separation from Intel as well as subsequent costs incurred to realign toward our core business and realign staffing. It includes implementing our stand alone back office and costs to execute strategic restructuring events, including third-party professional fees and services, transition services provided by Intel, severance, and facility restructuring costs.

 

  (4)

Represents management fees paid to certain affiliates of our Sponsors and Intel pursuant to the Management Services Agreement. The Management Services Agreement has been terminated subsequent to the IPO and we paid a one-time fee of $22 million to such parties in October 2020.

 

  (5)

Represents costs incurred in connection with transformation of the business post-Intel separation. Also includes the cost of workforce restructurings involving both eliminations of positions and relocations to lower cost locations in connection with our transformational initiatives, strategic initiatives to improve customer retention, activation to pay and cost synergies, inclusive of duplicative run rate costs related to facilities and data center rationalization, and other one-time costs.

 

  (6)

Represents severance for executive terminations not associated with a strategic restructuring event.

 

  (7)

Represents the impact on net income of adjustments to liabilities under our tax receivable agreement.

 

  (8)

Represents foreign exchange gain (loss), net as shown on in our audited consolidated statement of operations and condensed consolidated statements of operations. This amount is attributable to gains or losses on non-U.S. Dollar denominated balances and is primarily due to unrealized gains or losses associated with our 1st Lien Euro Term Loan.

 

  (9)

Prior to our IPO, our structure was that of a pass-through entity for U.S. federal income tax purposes with certain U.S. and foreign subsidiaries subject to income tax in their respective jurisdictions. Subsequent to the IPO, McAfee Corp. is taxed as a corporation and pays corporate federal, state, and local taxes on income allocated to it from FTW. This amount has been recast for periods reported previously. The adjusted provision for income taxes and adjusted provision for income taxes now represent the tax effect on net income, adjusted for all of the listed adjustments, assuming that all consolidated net income was subject to corporate taxation for all periods presented. We have assumed an annual effective tax rate of 22%, which represents our long term expected corporate tax rate excluding discrete and non-recurring tax items.

Free Cash Flow

We define free cash flow as net cash provided by operating activities less capital expenditures. We consider free cash flow to be a liquidity measure that provides useful information to management and investors about the amount of cash generated by the business that can be used for strategic opportunities, including investing in our business, making strategic acquisitions, and strengthening the balance sheet.

 

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The following table presents a reconciliation of our free cash flow to our net cash provided by operating activities for the periods presented:

 

     Fiscal Year Ended     Six Months Ended  
(in millions)    December 29,
2018
    December 28,
2019
    December 26,
2020
    June 27,
2020
    June 26,
2021
 

Net cash provided by operating activities

   $ 319     $ 496     $ 760     $ 288     $ 448  

Less: Capital expenditures(1)

     (62     (61     (46     (28     (18
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Free cash flow(2)

   $ 257     $ 435     $ 714     $ 260     $ 430  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)

Capital expenditures includes payments for property and equipment and capitalized labor costs incurred in connection with certain software development activities.

(2)

Free cash flow includes $290 million, $281 million, and $268 million in cash interest payments for fiscal 2018, fiscal 2019, fiscal 2020, respectively, and $141 million and $101 million in cash interest payments for the six months ended June 27, 2020 and June 26, 2021, respectively.

Factors Affecting the Comparability of Our Results of Operations

As a result of a number of factors, our historical results of operations are not comparable from period to period and may not be comparable to our financial results of operations in future periods. Set forth below is a brief discussion of the key factors impacting the comparability of our results of operations.

Payments to Channel Partners

We make various payments to our channel partners, which may include revenue share, product placement fees and marketing development funds. Costs that are incremental to revenue, such as revenue share, are capitalized and amortized over time as cost of sales. This classification is an accounting policy election, which may make comparisons to other companies difficult. Product placement fees and marketing development funds are expensed in sales and marketing expense as the related benefit is received. Many of our channel partner agreements contain a clause whereby we pay the greater of revenue share calculated for the period or product placement fees. This may impact the comparability of our financial results between periods.

Under certain of our channel partner agreements, the partners pay us a royalty on our technology sold to their customers, which we recognize as revenue in accordance with our revenue recognition policy. In certain situations, the payments made to our channel partners are recognized as consideration paid to a customer, and thus are recorded as reductions to revenue up to the amount of cumulative revenue recognized from contracts with the channel partner during the period of measurement. Any payments to channel partners in excess of such cumulative revenue during the period of measurement are recognized as cost of sales or marketing expense as described above. As royalty revenue from individual partners varies, the amount of costs recognized as a reduction of revenue rather than as cost of sales or sales and marketing expense fluctuates and may impact the comparability of our financial statements between periods.

Impact of the Reorganization Transactions

McAfee Corp. is a corporation for U.S. federal and state income tax purposes. Following the Reorganization Transactions, FTW is the predecessor of McAfee Corp. for accounting purposes. FTW is and remains a partnership for U.S. federal income tax purposes and will therefore generally not be subject to any U.S. federal income taxes at the entity level in respect of income it recognizes directly or through its U.S. and foreign subsidiaries that are also pass- through or disregarded entities for U.S. federal income tax purposes. Instead, taxable income and loss of these entities flow through to the members of FTW (including McAfee Corp. and certain of its subsidiaries) for U.S. federal income tax purposes. Certain of FTW’s non-U.S. subsidiaries that are treated as pass-through or disregarded entities for U.S. federal income tax purposes are nonetheless treated as

 

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taxable entities in their respective jurisdictions and are thus subject to non-U.S. taxes at the entity level. FTW also has certain U.S. and foreign subsidiaries that are treated as corporations for U.S. federal income tax purposes and that therefore are or may be subject to income tax at the entity level. McAfee Corp. pays U.S. federal, state and local income taxes as a corporation on its share of the taxable income of FTW (taking into account the direct and indirect ownership of FTW by McAfee Corp.).

In addition, in connection with the Reorganization Transactions and the IPO, McAfee Corp. entered into the tax receivable agreement. Refer to “—Tax Receivable Agreement” below.

Impact of Purchase Accounting Related to Mergers and Acquisitions

Through April 3, 2017, the McAfee cybersecurity business, which we refer to as the Predecessor Business, was operated as a part of a business unit of Intel. Also prior to April 3, 2017, McAfee, Inc., which was then a wholly-owned subsidiary of Intel, was converted into a limited liability company, McAfee, LLC. Following such conversion, Intel contributed McAfee, LLC to FTW, a wholly-owned subsidiary of Intel. On April 3, 2017, Intel and its subsidiaries transferred assets and liabilities of the Predecessor Business not already held through FTW to FTW. Immediately thereafter on April 3, 2017, our Sponsors and certain of their co-investors acquired a majority stake in FTW, pursuant to the Sponsor Acquisition. Following the Sponsor Acquisition, our Sponsors and certain of their co-investors owned 51.0% of the common equity interests in FTW, with certain affiliates of Intel retaining the remaining 49.0% of the common equity interests. We have operated as a stand alone company at all times following the Sponsor Acquisition. As a result of the Sponsor Acquisition, we recorded all assets and liabilities at their fair value, including our deferred revenue and deferred costs balances, as of the effective date of the Sponsor Acquisition, which in some cases was different than the historical book values. Adjusting our deferred revenue and deferred costs balances to fair value on the date of the Sponsor Acquisition had the effect of reducing revenue and expenses from that which would have otherwise been recognized in subsequent periods. We also recorded identifiable intangible assets that are amortized over their useful lives, increasing expenses from that which would otherwise have been recognized.

In addition, we have made acquisitions and recorded the acquired assets and liabilities at fair value on the date of acquisition, which similarly impacted deferred revenue and deferred costs balances and reduced revenue and expenses from that which would have otherwise been recognized in subsequent periods. We also recorded identifiable intangible assets that are amortized over their useful lives, increasing expenses from that which would otherwise have been recognized.

 

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The accounting impact resulting from these acquisitions limits the comparability of our financial statements between periods. The table below shows the impact of purchase accounting on our financial statements.

 

     Fiscal Year Ended     Six Months Ended  
(in millions)    December 29,
2018
    December 28,
2019
    December 26,
2020
    June 27,
2020
    June 26,
2021
 

Impact of purchase accounting on net revenue

   $ (32   $ (1   $ —       $ —       $ —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Purchase accounting adjustments to cost of sales

     (14     (1     1       1       —    

Amortization of acquired and developed technologies

     107       107       108       54       49  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Impact of purchase accounting on cost of sales

     93       106       109       55       49  

Purchase accounting adjustments to operating expenses

     (1     (1     —         —         —    

Amortization of customer relationships

     153       146       143       72       49  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Impact of purchase accounting on operating expenses

     152       145       143       72       49  

Impact of purchase accounting on operating loss related to continuing operations

     (277     (252     (252     (127     (98

Impact of purchase accounting on operating loss related to discontinued operations

     (322     (252     (187     (99     (36
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total impact of purchase accounting

   $ (599   $ (504   $ (439   $ (226   $ (134
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Equity-Based Compensation

Upon consummation of the IPO in October 2020, we modified the terms of our unvested FTW RSUs, outstanding cash-settled restricted equity units (“CRSU”s), and outstanding management equity participation units (“MEPU”s) to permit settlement in the Company’s Class A common stock, par value $0.001 per share (“Class A common stock”) (collectively, “Replacement RSUs”) in lieu of cash settlement, at our election. No service or performance vesting terms were changed at the time of modification. All of our outstanding equity awards were probable of vesting and the change was accounted for as a Type I modification. In addition, we granted stock options with a strike price equal to the IPO price to certain holders of MEPUs with distribution thresholds not fully satisfied at the time of modification and, at the time of the grant, recognized expense for these options immediately. Refer to Note 12 to our audited consolidated financial statements included elsewhere in this prospectus for a detailed discussion of equity-based compensation.

During February 2020, we modified the terms of certain management incentive unit grants to provide for vesting subject to the satisfaction of certain conditions, which resulted in the recognition of $12 million incremental compensation expense for the modified awards at their modification date.

 

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The accounting impact resulting from the recognition of this equity-based compensation limits the comparability of our financial statements between periods. The table below shows the impact of all equity-based compensation on our financial statements:

 

     Fiscal Year Ended      Six Months Ended  
(in millions)    December 29,
2018
     December 28,
2019
     December 26,
2020
     June 27,
2020
     June 26,
2021
 

Cost of sales

   $ 1      $      $ 5      $      $ 2  

Sales and marketing

     1        1        23        1        7  

Research and development

     1        1        40               10  

General and administrative

     3        3        45        15        14  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total equity-based compensation expense from continuing operations

     6        5        113        16        33  

Discontinued operations

     22        20        200        3        45  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total equity-based compensation expense

   $ 28      $ 25      $ 313      $ 19      $ 78  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Composition of Revenues, Expenses, and Cash Flows

Net Revenue

We derive our revenue primarily from the sale of software subscriptions or royalty agreements, primarily through our indirect relationships with our partners or direct relationships with end customers through our website. We have various marketing programs with certain business partners who we consider customers and reduce revenue by the cash consideration given to these partners. Revenue is recognized as control of the promised goods or services are transferred to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for the promised goods or services.

Cost of Sales

Our total cost of sales include fees paid under revenue share arrangements, amortization of certain intangibles, transaction processing fees, the costs of providing delivery (i.e., hosting), support, which include salaries and benefits for employees and fees related to third parties, and technology licensing fees. We anticipate our total cost of sales to increase in absolute dollars as we grow our net revenue. Cost of sales as a percentage of net revenue may vary from period to period based on our investments in the business, the efficiencies we are able to realize going forward as well as due to the accounting for payments to channel partners discussed in Factors Affecting the Comparability of Our Results of Operations.

We expect the divestiture to lead to costs that were previously allocated to both segments to now be part of continuing operations which will have a dilutive impact on gross margins.

Operating Expenses

Our operating expenses consist of sales and marketing, research and development, general and administrative, amortization of intangibles, and restructuring charges.

We expect the divestiture to lead to costs that were previously allocated to both segments will be part of continuing operations which will have a dilutive impact on operating margins. We also expect to pay approximately $300 million in additional one-time separation costs and stranded cost optimization, a portion of which will be expenses paid using proceeds from the transaction. There was $43 million of stranded costs within income from continuing operations for the six months ended June 26, 2021.

 

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Sales and Marketing. Sales and marketing expenses consist primarily of product placement fees and marketing development funds, advertising and marketing promotions, salaries, commissions, benefits for sales and marketing personnel as well as allocated facilities and IT costs. Sales and marketing as a percentage of net revenue may vary from period to period based due to the accounting for payments to channel partners discussed in Factors Affecting the Comparability of Our Results of Operations.

Research and Development. Research and development expenses consist primarily of salaries and benefits for our development staff and a portion of our technical support staff, contractors’ fees, and other costs associated with the enhancement of existing products and services and development of new products and services, as well as allocated facilities and IT costs.

General and Administrative. General and administrative expenses consist primarily of salaries and benefits and other expenses for our executive, finance, human resources, and legal organizations. In addition, general and administrative expenses include outside legal, accounting, and other professional fees, and an allocated portion of facilities and IT costs.

Amortization of Intangibles. Amortization of intangibles includes the amortization of customer relationships and other assets associated with our acquisitions, including the Sponsor Acquisition in April 2017.

Restructuring Charges. Restructuring charges consist primarily of costs associated with employee severance and facility restructuring charges related to realignment of our workforce as well as certain costs to separate from Intel following our Sponsor acquisition.

Interest Expense and Other, Net

Interest expense and other, net primarily relates to interest expense on our outstanding indebtedness. In connection with the divestiture of the Enterprise Business, we entered into a transition service agreement under which we will provide assistance to STG including, but not limited to, business support services and information technology services.

Foreign Exchange Gain (Loss), Net

Foreign exchange gain (loss), net is primarily attributable to realized and unrealized gains or losses on non-U.S. Dollar denominated balances and is primarily due to unrealized gains or losses associated with our 1st Lien Euro Term Loan.

Provision for Income Tax Expense

McAfee Corp. is taxed as a corporation and pays corporate federal, state and local taxes on income allocated to it from FTW based upon McAfee Corp.’s economic interest in FTW. FTW is a pass through entity for U.S. federal income tax purposes and will not incur any federal income taxes either for itself or its U.S. subsidiaries that are also pass through or disregarded subsidiaries. Taxable income or loss for these entities will flow through to its respective members for U.S. tax purposes. FTW does have certain U.S. and foreign subsidiaries that are corporations and are subject to income tax in their respective jurisdiction.

We believe it is reasonably possible that subsequent to the closing of the sale of the Enterprise Business we will no longer have a cumulative loss incurred over the trailing three-year period. As a result, we could then consider subjective evidence, such as our projections for future growth, and may conclude that the valuation allowance against the net deferred tax assets of our domestic entities will no longer be required. A release of the valuation allowance would have the following impact in the period in which such release is recorded:

 

   

Recognition of certain deferred tax assets and corresponding discrete income tax benefit up to $125 million.

 

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Recognition of a long-term TRA liability and corresponding TRA expense of $170 million to $260 million, including the TRA liability recorded directly as a result of tax attributes utilized from the Enterprise Business divestiture. This TRA liability relates to net deferred tax assets that did not meet the probable recognition criteria as of December 26, 2020 and thus was not recorded in our consolidated balance sheet as of that date.

Income from Discontinued Operations, Net of Taxes

Following the agreement with STG, the results of our Enterprise Business were classified as discontinued operations in our audited consolidated financial statements and condensed statements of operations and excluded from continuing operations for all periods presented.

Results of Operations

The following tables set forth the consolidated statements of operations in dollar amounts and as a percentage of our total revenue for the periods indicated. The period-to-period comparison of results is not necessarily indicative of results for future periods.

 

     Fiscal Year Ended     Six Months Ended  
(in millions)    December 29,
2018
    December 28,
2019
    December 26,
2020
    June 27,
2020
    June 26,
2021
 

Net revenue

   $ 1,161     $ 1,303     $ 1,558     $ 737     $ 909  

Cost of sales

     386       391       444       209       232  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     775       912       1,114       528       677  

Operating expenses:

          

Sales and marketing

     348       299       348       140       174  

Research and development

     186       161       188       75       92  

General and administrative

     170       182       235       100       93  

Amortization of intangibles

     153       146       143       72       49  

Restructuring charges

     19       6       2       1       8  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     876       794       916       388       416  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

     (101     118       198       140       261  

Interest (expense) and other, net

     (308     (296     (307     (149     (118

Foreign exchange gain (loss), net

     30       21       (104     (6     15  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations before income taxes

     (379     (157     (213     (15     158  

Provision for income tax expense (benefit)

     29       38       5       (5     7  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations

     (408     (195     (218     (10     151  

Income (loss) from discontinued operations, net of taxes

     (104     (41     (71     41       51  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

   $ (512   $ (236   $ (289   $ 31     $ 202  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Less: Net income (loss) attributable to redeemable noncontrolling interests

     N/A       N/A       (171     N/A       136  
      

 

 

     

 

 

 

Net income (loss) attributable to McAfee Corp.

     N/A       N/A     $ (118     N/A     $ 66  
      

 

 

     

 

 

 

 

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     Fiscal Year Ended     Six Months Ended  
     December 29,
2018
    December 28,
2019
    December 26,
2020
    June 27,
2020
    June 26,
2021
 

Net revenue

     100.0     100.0     100.0     100.0     100.0

Cost of sales

     33.2     30.0     28.5     28.4     25.5

Gross profit

     66.8     70.0     71.5     71.6     74.5

Operating expenses:

          

Sales and marketing

     30.0     22.9     22.3     19.0     19.1

Research and development

     16.0     12.4     12.1     10.2     10.1

General and administrative

     14.6     14.0     15.1     13.6     10.2

Amortization of intangibles

     13.2     11.2     9.2     9.8     5.4

Restructuring charges

     1.6     0.5     0.1     0.1     0.9

Total operating expenses

     75.5     60.9     58.8     52.6     45.8

Operating income (loss)

     (8.7 )%      9.1     12.7     19.0     28.7

Interest (expense) and other, net

     (26.5 )%      (22.7 )%      (19.7 )%      (20.2 )%      (13.0 )% 

Foreign exchange gain (loss), net

     2.6     1.6     (6.7 )%      (0.8 )%      1.7

Income (loss) from continuing operations before income taxes

     (32.6 )%      (12.0 )%      (13.7 )%      (2.0 )%      17.4

Provision for income tax expense (benefit)

     2.5     2.9     0.3     (0.7 )%      0.8

Income (loss) from continuing operations

     (35.1 )%      (15.0 )%      (14.0 )%      (1.4 )%      16.6

Income (loss) from discontinued operations, net of taxes

     (9.0 )%      (3.1 )%      (4.6 )%      5.6     5.6

Net income (loss)

     (44.1 )%      (18.1 )%      (18.5 )%      4.2     22.2

Less: Net income (loss) attributable to redeemable noncontrolling interests

     N/A       N/A       (11.0 )%      N/A       15.0

Net income (loss) attributable to McAfee Corp.

     N/A       N/A       (7.6 )%      N/A       7.3

Comparison of Fiscal 2018 and Fiscal 2019

Net Revenue

 

     Fiscal Year Ended      Variance in  
(in millions except percentages)    December 29,
2018
     December 28,
2019
     Dollars      Percent  

Net revenue

   $ 1,161      $ 1,303      $ 142        12.2

Net revenue increased $142 million, or 12.2 % from $1,161 million during fiscal 2018 to $1,303 million during fiscal 2019. The increase in net revenue was primarily attributable to (i) a $127 million increase in revenue consistent with growth in the Core Direct to Customer subscriber base, increases in TTM Dollar Based Retention—Core Direct to Consumer Customers, increases in ARPC, and growth in Mobile & Internet Service Provider channel which is inclusive of the sales of TunnelBear and (ii) a $30 million increase due to a reduced impact of purchase accounting adjustments primarily relating to the Sponsor Acquisition compared to prior period. These increases were partially offset by a $15 million decrease related release of revenue under reserve for a single customer in connection with such customer’s right under certain circumstances to claw-back revenue from us within twelve months of payment.

Cost of Sales

 

     Fiscal Year Ended     Variance in  
(in millions except percentages)    December 29,
2018
    December 28,
2019
    Dollars      Percent  

Cost of sales

   $ 386     $ 391     $ 5        1.3

Gross profit margin

     66.8     70.0     

 

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Cost of sales increased $5 million, or 1.3%, from $386 million during fiscal 2018 to $391 million during fiscal 2019. The increase in cost of sales is primarily driven by $12 million in fair value adjustments to deferred revenue share in connection with purchase accounting primarily relating to the Sponsor Acquisition. This increase was partially offset by a reduction in various cost of sales expenses.

Operating Expenses

 

     Fiscal Year Ended      Variance in  
(in millions except percentages)    December 29,
2018
     December 28,
2019
     Dollars      Percent  

Sales and marketing

   $ 348      $ 299      $ (49      (14.1 )% 

Research and development

     186        161        (25      (13.4 )% 

General and administrative

     170        182        12        7.1

Amortization of intangibles

     153        146        (7      (4.6 )% 

Restructuring charges

     19        6        (13      (68.4 )% 
  

 

 

    

 

 

    

 

 

    

Total

   $ 876      $ 794      $ (82      (9.4 )% 
  

 

 

    

 

 

    

 

 

    

Sales and Marketing

Sales and marketing expense decreased $49 million, or 14.1%, from $348 million during fiscal 2018 to $299 million during fiscal 2019. The decrease in sales and marketing expense was primarily attributable to (i) a $28 million decrease in OEM partner expense, (ii) a $10 million decrease in employee expenses due to strategic initiatives in 2019, which resulted in a reduced headcount, and (iii) a $6 million decrease in external consulting primarily related to 2018 projects and a decrease in marketing and sales promotion expenses due to lower spend in 2019.

Research and Development

Research and development expense decreased $25 million, or 13.4%, from $186 million during fiscal 2018 to $161 million during fiscal 2019. The decrease in research and development expense was primarily attributable to (i) an $18 million decrease in employee expenses due to strategic initiatives in 2019, which resulted in a reduced headcount, and (ii) a decrease in other research and development expenses.

General and Administrative

General and administrative expense increased $12 million, or 7.1%, from $170 million during fiscal 2018 to $182 million during fiscal 2019. The increase in general and administrative expense was primarily attributable to a $12 million increase in legal counsel and external consulting expenses primarily for public offering preparation.

Amortization of Intangibles

Amortization of intangibles decreased $7 million, or 4.6%, from $153 million during fiscal 2018 to $146 million during fiscal 2019. The decrease is due to certain intangible assets becoming fully amortized in 2019.

Restructuring Charges

Restructuring charges decreased $13 million, or 68.4%, from $19 million during fiscal 2018 to $6 million during fiscal 2019. The decrease in restructuring charges was primarily attributable to (i) a $7 million decrease related to nonrecurring separation costs incurred in fiscal 2018 following the separation from Intel and (ii) a decrease in employee severance and benefits as a result of winding down of McAfee Acceleration Program (MAP) related headcount reduction initiatives in 2019 compared to 2018.

 

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Operating Income (Loss)

 

     Fiscal Year Ended     Variance in  
(in millions except percentages)    December 29,
2018
    December 28,
2019
    Dollars      Percent  

Operating income (loss)

   $ (101   $ 118     $ 219        (216.8 )% 

Operating income (loss) margin

     (8.7 )%      9.1     

Operating income (loss) increased $219 million, or 216.8%, from an operating loss of $101 million during fiscal 2018 to operating income $118 million during fiscal 2019. The overall net increase to operating income was primarily driven by (i) the $142 million increase in net revenue discussed above, (ii) a $28 million decrease in OEM partner expense due to lower shipments, and (iii) a $34 million decrease in employee expenses due to strategic initiatives in 2019, which resulted in a reduced headcount. These increases to operating income were partially offset by a $12 million increase in legal counsel and external consulting expenses primarily for public offering preparation.

Interest Expense and Other, Net

 

     Fiscal Year Ended      Variance in  
(in millions except percentages)    December 29,
2018
     December 28,
2019
     Dollars      Percent  

Interest (expense) and other, net

   $ (308    $ (296    $ 12        (3.9 )% 

Interest expense and other, net decreased $12 million, or 3.9%, from a $308 million expense during fiscal 2018 to $296 million expense during fiscal 2019. The decrease in interest expense and other, net was primarily attributable to the refinancing of certain of our indebtedness in fiscal 2018.

Provision for Income Tax Expense

 

     Fiscal Year Ended      Variance in  
(in millions except percentages)    December 29,
2018
     December 28,
2019
     Dollars      Percent  

Provision for income tax expense

   $ 29      $ 38      $ 9        31.0

Provision for income tax expense increased $9 million, or 31%, from $29 million expense during fiscal 2018 to $38 million expense during fiscal 2019. The increase in provision for income tax expense was primarily attributable to a $9 million increase in reserve for uncertain tax positions.

Discontinued Operations

 

     Fiscal Year Ended      Variance in  
(in millions except percentages)    December 29,
2018
     December 28,
2019
     Dollars      Percent  

Net revenue

   $ 1,248      $ 1,332      $ 84        6.7

Operating income (loss)

     (72      8        80        (111.1 )% 

Income (loss) from discontinued operations before income taxes

     (71      8        79        (111.3 )% 

Income tax expense

     33        49        16        48.5

Loss from discontinued operations, net of tax

     (104      (41      63        (60.6 )% 

Net revenue—Discontinued Operations increased $84 million, or 6.7%, from $1,248 million during fiscal 2018 to $1,332 million during fiscal 2019. The increase was primarily attributable to (i) a $79 million increase

 

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due to a reduced impact of purchase accounting adjustments primarily relating to the Sponsor Acquisition compared to prior period, and (ii) a $15 million increase in enterprise revenue driven by growth in our cloud security products due to our sales force integration efforts following our Skyhigh acquisition in the first quarter of fiscal 2018. These increases were partially offset by a $10 million decrease in revenue from certain legacy enterprise offerings.

Operating income (loss)—Discontinued Operations improved $80 million, or 111.1%, from an operating loss of $72 million during fiscal 2018 to an operating income of $8 million during fiscal 2019. The improvement in operating income was primarily attributable to (i) the increase in Enterprise revenue as discussed above, and (ii) $25 million decrease in employee expenses from lower headcount and a reduction in equity-based compensation and cash in lieu related to awards issued in connection with the Intel separation. These were partially offset by a $26 million increase in commissions expense due to increases in amortization of deferred commissions expense as deferred commissions balances continue to build subsequent to purchase accounting adjustments at the time of separation from Intel and subsequent to adoption of Accounting Standards Codification (“ASC”) 606.

Income tax expense—Discontinued Operations increased $16 million, or 48.5%, from $33 million during fiscal 2018 to a $49 million during fiscal 2019. The increase was primarily attributable to (i) a $4 million increase in reserve for uncertain tax positions and (ii) a $9 million increase in federal tax expense due to the impact of distributions through corporate subsidiaries.

Comparison of Fiscal 2019 and Fiscal 2020

Net Revenue

 

     Fiscal Year Ended      Variance in  
(in millions except percentages)    December 28,
2019
     December 26,
2020
     Dollars      Percent  

Net revenue

   $ 1,303      $ 1,558      $ 255        19.6

Net revenue increased $255 million, or 19.6%, from $1,303 million during fiscal 2019 to $1,558 million during fiscal 2020. The increase was primarily attributable to a combination of (i) increases in ARPC, (ii) higher Core Direct to Consumer Customer subscriber base from prior year, (iii) increase in TTM Dollar Based Retention—Core Direct to Consumer Customers, (iv) increased new subscribers from improvements in customer acquisition across channels combined with higher demand due to the accelerated shift to working from home as a result of the COVID-19 pandemic, (v) growth in our Mobile & Internet Service Provider channel, and (vi) increase in secure search revenue.

Cost of Sales

 

     Fiscal Year Ended     Variance in  
(in millions except percentages)    December 28,
2019
    December 26,
2020
    Dollars      Percent  

Cost of sales

   $ 391     $ 444     $ 53        13.6

Gross profit margin

     70.0     71.5     

Cost of sales increased $53 million, or 13.6%, from $391 million during fiscal 2019 to $444 million during fiscal 2020. The increase in cost of sales was primarily attributable to (i) a $46 million increase in revenue share expense and online transaction processing fees resulting from increases in Core Direct to Consumer Customer subscriber base, and (ii) a $5 million increase in equity-based compensation primarily due to expense relating to our Replacement RSUs recognized as a cumulative catch-up upon consummation of the IPO.

 

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Operating Expenses

 

     Fiscal Year Ended      Variance in  
(in millions except percentages)    December 28,
2019
     December 26,
2020
     Dollars      Percent  

Sales and marketing

   $ 299      $ 348      $ 49        16.4

Research and development

     161        188        27        16.8

General and administrative

     182        235        53        29.1

Amortization of intangibles

     146        143        (3      (2.1 )% 

Restructuring charges

     6        2        (4      (66.7 )% 
  

 

 

    

 

 

    

 

 

    

Total

   $ 794      $ 916      $ 122        15.4
  

 

 

    

 

 

    

 

 

    

Sales and Marketing

Sales and marketing expense increased $49 million, or 16.4%, from $299 million during fiscal 2019 to $348 million during fiscal 2020. The increase in sales and marketing expense was primarily attributable to (i) a $45 million increase in product placement fees and marketing development funds under agreements with certain OEM partners, primarily driven by increased PC shipments, (ii) a $22 million increase in equity-based compensation primarily due to expense relating to our Replacement RSUs recognized as a cumulative catch-up upon consummation of the IPO, and (iii) a $19 million increase in advertising expenses primarily due to online campaigns in 2020. These increases were partially offset by (i) a $16 million decrease in external consulting costs primarily related to strategic initiatives in 2019, (ii) a $6 million decrease in employee expenses primarily driven by a decrease in headcount, (iii) a $4 million decrease in travel expenses due to the COVID-19 pandemic and reduction in headcount, and (iv) a decrease in other sales and marketing expenses.

Research and Development

Research and development expense increased $27 million, or 16.8%, from $161 million during fiscal 2019 to $188 million during fiscal 2020. The increase in research and development expense was primarily attributable to a $39 million increase in equity-based compensation primarily due to expense relating to our Replacement RSUs recognized as a cumulative catch-up upon consummation of the IPO. These increases were partially offset by a $10 million decrease in employee expenses primarily driven by a decrease in headcount and a decrease in travel expenses due to the COVID-19 pandemic.

General and Administrative

General and administrative expense increased $53 million, or 29.1%, from $182 million during fiscal 2019 to $235 million during fiscal 2020. The increase in expense was primarily attributable to (i) a $42 million increase in equity-based compensation primarily due to expense relating to our Replacement RSUs recognized as a cumulative catch-up upon consummation of the IPO, and (ii) a $17 million increase in management fees due to the fee incurred upon termination of the management agreement at the time of IPO partially offset by management fee savings subsequent to the IPO. These increases were partially offset by a $9 million decrease in external consulting costs primarily related to strategic initiatives in 2019.

Amortization of Intangibles

Amortization of intangibles decreased $3 million, or 2.1%, from $146 million during fiscal 2019 to $143 million during fiscal 2020. The decrease was the result of certain assets recorded at the Sponsor Acquisition that have since fully amortized.

 

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Restructuring Charges

Restructuring charges decreased $4 million, or 66.7%, from $6 million during fiscal 2019 to $2 million during fiscal 2020. The decrease was a result of restructuring expenses recognized in 2019 related to staffing realignment.

Operating Income

 

     Fiscal Year Ended     Variance in  
(in millions except percentages)    December 28,
2019
    December 26,
2020
    Dollars      Percent  

Operating income

   $ 118     $ 198     $ 80        67.8

Operating income margin

     9.1     12.7     

Operating income increased $80 million, or 67.8%, from $118 million during fiscal 2019 to $198 million during fiscal 2020. The overall net increase to operating income was primarily driven by (i) the $255 million increase in net revenue discussed above, and (ii) a $25 million decrease in external consulting costs primarily related to strategic initiatives in 2019. These increases to operating income were partially offset by (i) a $108 million increase in equity-based compensation primarily due to expense relating to our Replacement RSUs recognized as a cumulative catch-up upon consummation of the IPO, (ii) a $46 million increase in revenue share expense and online transaction processing fees resulting from increases in Core Direct to Consumer Customer subscriber base, (iii) a $45 million increase in product placement fees and marketing development funds under agreements with certain OEM partners, primarily driven by increased PC shipments, and (iv) increases in other operating expenses discussed above.

Interest Expense and Other, Net

 

     Fiscal Year Ended      Variance in  
(in millions except percentages)    December 28,
2019
     December 26,
2020
     Dollars      Percent  

Interest (expense) and other, net

   $ (296    $ (307    $ (11      3.7

Interest expense and other, net increased $11 million, or 3.7%, from $296 million expense during fiscal 2019 to $307 million expense during fiscal 2020. The increase was primarily attributable to an increase in interest expense primarily due to the write off of deferred costs on the 2nd Lien Term Loan upon repayment and a portion of deferred costs on the 1st Lien USD Term Loan partially offset by a decrease in interest expense incurred after the repayment of the 2nd Lien Term Loan.

Provision for Income Tax Expense

 

     Fiscal Year Ended      Variance in  
(in millions except percentages)    December 28,
2019
     December 26,
2020
     Dollars      Percent  

Provision for income tax expense

   $ 38      $ 5      $ (33      (86.8 )% 

Provision for income tax expense decreased $33 million, or 86.8%, from $38 million expense for the year ended December 28, 2019 to $5 million expense for the year ended December 26, 2020. The decrease was primarily attributable to (i) a $22 million decrease due to change in reserve for uncertain tax positions due to an election to treat one of our subsidiary entities as a corporation for U.S. federal income tax purposes and (ii) a $7 million decrease in foreign provisions.

 

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Discontinued Operations

 

     Fiscal Year Ended      Variance in  
(in millions except percentages)    December 28,
2019
     December 26,
2020
     Dollars      Percent  

Net revenue

   $ 1,332      $ 1,348      $ 16        1.2

Operating income (loss)

     8        (46      (54      (675.0 )% 

Income (loss) from discontinued operations before income taxes

     8        (46      (54      (675.0 )% 

Income tax expense

     49        25        (24      (49.0 )% 

Loss from discontinued operations, net of tax

     (41      (71      (30      73.2

Net revenue—Discontinued Operations increased $16 million, or 1.2% from $1,332 million during fiscal 2019 to $1,348 million during fiscal 2020. The increase was primarily attributable to a $37 million increase due to a reduced impact of purchase accounting adjustments primarily relating to the Sponsor Acquisition, partially offset by a $21 million decrease in Enterprise revenue largely due to lower year on year billings over the prior 12 months due to the continued reorientation of our Enterprise business.

Operating income (loss)—Discontinued Operations decreased $54 million, or 675.0% from operating income of $8 million during fiscal 2019 to an operating loss of $46 million during fiscal 2020. The change in operating loss was primarily attributable to a $172 million increase in equity-based and cash in lieu of equity compensation primarily due to expense relating to our Replacement RSUs recognized as a cumulative catch-up upon consummation of the IPO. These increases in expenses were partially offset by (i) a $40 million decrease in depreciation and amortization largely as a result of certain assets recorded at the Sponsor Acquisition that have since fully amortized, (ii) a $38 million decrease employee expenses principally due to lower headcount as a result of strategic and transformational initiatives, in addition to decreased travel and event expenses partially related to the COVID-19 pandemic, (iii) a $23 million decrease in external consulting and marketing expenses primarily due to the completion of 2019 campaigns and strategic initiatives, (iv) the $16 million increase in revenue discussed above, and (v) a $16 million decrease in acquisition and integrations costs due to compensation relating to one of our acquisitions becoming fully earned in January 2020.

Income tax expense—Discontinued Operations decreased $24 million, or 49.0%, from $49 million for the year ended December 28, 2019 to $25 million for the year ended December 26, 2020. The decrease was primarily attributable to (i) a $4 million decrease due to change in reserve for uncertain tax positions due to an election to treat one of our subsidiary entities as a corporation for U.S. federal income tax purposes, (ii) a $10 million decrease in foreign provisions and (iii) a $10 million decrease due to outside basis differences in a consolidated subsidiary partnership.

Comparison of the Six Months Ended June 27, 2020 and June 26, 2021

Net Revenue

 

     Six Months Ended      Variance in  
(in millions except percentages)    June 27,
2020
     June 26,
2021
     Dollars      Percent  

Net revenue

   $ 737      $ 909      $ 172        23.3

The net revenue increase was primarily driven by (i) growth in Core Direct to Consumer Customers, (ii) increases in TTM Dollar Based Retention—Core Direct to Consumer Customers, (iii) increases in secure search revenue, and (iv) growth in Mobile and Internet Service Provider business.

 

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Net Revenue by Geographical Region

Net revenue by geographic region based on the sell-to address of the end-users is as follows:

 

     Six Months Ended  
(in millions except percentages)    June 27, 2020      % of Total     June 26, 2021      % of Total  

Americas

   $ 482        65.4   $ 601        66.1

EMEA

     175        23.7     213        23.4

APJ

     80        10.9     95        10.5
  

 

 

    

 

 

   

 

 

    

 

 

 

Total net revenue

   $ 737        100.0   $ 909        100.0
  

 

 

    

 

 

   

 

 

    

 

 

 

The Americas include the U.S., Canada and Latin America; EMEA includes Europe, the Middle East and Africa; APJ includes Asia Pacific and Japan.

Net revenue by geographic region in the first six months of fiscal 2021 showed growth in all geographies when compared to the corresponding periods in the prior year and we expect such percentages to remain relatively consistent in the near term.

Net Revenue by Channel

Direct to Consumer revenue is from customers who transact with us directly through McAfee web properties, including those converted after the trial period of the McAfee product preinstalled on their new PC purchase or converted subsequent to their subscription period purchased from another channel. Indirect revenue is driven by users who purchase directly through a partner inclusive of mobile providers, ISPs, electronics retailers, ecommerce sites, and search providers.

Net revenue by channel of the end-users is as follows:

 

     Six Months Ended  
(in millions except percentages)    June 27, 2020      % of Total     June 26, 2021      % of Total  

Direct to Consumer

   $ 575        78.0   $ 673        74.0

Indirect

     162        22.0     236        26.0
  

 

 

    

 

 

   

 

 

    

 

 

 

Total net revenue

   $ 737        100.0   $ 909        100.0
  

 

 

    

 

 

   

 

 

    

 

 

 

Percentage of net revenue by channel in the first six months of fiscal 2021 was similar to the corresponding periods in the prior year and we expect such percentages to remain relatively consistent in the near term.

Cost of Sales

 

     Six Months Ended     Variance in  
(in millions except percentages)    June 27,
2020
    June 26,
2021
    Dollars      Percent  

Cost of sales

   $ 209     $ 232     $ 23        11.0

Gross profit margin

     71.6     74.5     

The increase in cost of sales was primarily attributable to a $19 million increase in revenue share expense and a $4 million increase in transaction processing fees driven by increases in Core Direct to Consumer Customer subscriber base.

 

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Operating Expenses

 

     Six Months Ended      Variance in  
(in millions except percentages)    June 27,
2020
     June 26,
2021
     Dollars      Percent  

Sales and marketing

   $ 140      $ 174      $ 34        24.3

Research and development

     75        92        17        22.7

General and administrative

     100        93        (7      (7.0 )% 

Amortization of intangibles

     72        49        (23      (31.9 )% 

Restructuring charges

     1        8        7        700.0
  

 

 

    

 

 

    

 

 

    

Total

   $ 388      $ 416      $ 28        7.2
  

 

 

    

 

 

    

 

 

    

The increase in sales and marketing expense was primarily attributable to (i) a $13 million increase in marketing spend, (ii) a $10 million increase due to fluctuations in the amount of product placement fees and marketing development funds recorded as reductions of net revenue rather than sales and marketing expenses, and (iii) the increase in equity-based compensation expense discussed above.

The increase in research and development expense was primarily attributable to the increase in equity-based compensation expense discussed above and an increase in employee expenses.

The decrease in general and administrative expense was primarily attributable to a decrease in consulting costs and a decrease in rent expense due to expiring leases.

The decrease in amortization of intangibles was primarily attributable to assets that became fully amortized in March 2021.

The increase in restructuring charges is primarily the result of one-time termination benefits to the impacted employees, including severance payments and healthcare and other accrued benefits related to the workforce reduction that was initiated in December 2020.

Operating Income

 

     Six Months Ended     Variance in  
(in millions except percentages)    June 27,
2020
    June 26,
2021
    Dollars      Percent  

Operating income

   $ 140     $ 261     $ 121        86.4

Operating income margin

     19.0     28.7     

The operating income increase was primarily driven by (i) the $172 million increase in net revenue and (ii) the $23 million decrease in amortization expense discussed above, partially offset by (i) a $19 million increase in revenue share expense resulting from increases in Core Direct to Consumer Customer subscriber base, (ii) a $10 million increase in product placement fees and marketing development funds under agreements with certain OEM partners, primarily driven by changes in amounts recorded as reductions in revenue as discussed above in the factors affecting comparability, (iii) the increase in equity-based compensation discussed above, (iv) a $13 million increase in marketing campaigns, (v) the $7 million increase in restructuring expenses, and (vi) a $4 million increase in transaction processing fees.

Interest Expense and Other, Net

 

     Six Months Ended      Variance in  
(in millions except percentages)    June 27, 2020      June 26, 2021      Dollars      Percent  

Interest (expense) and other, net

   $ (149    $ (118    $ 31        (20.8 )% 

 

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The decrease in interest expense and other, net was primarily attributable to the payoff of our 2nd Lien Term Loan and the $300 million prepayment on our 1st Lien USD Term Note in the fourth quarter of 2020 in addition to a lower LIBOR rate, partially offset by $8 million in expense related to an adjustment in our liabilities under our tax receivable agreement.

Provision for Income Tax Expense

 

     Six Months Ended      Variance in  
(in millions except percentages)    June 27, 2020      June 26, 2021      Dollars      Percent  

Provision for income tax (benefit)

   $ (5    $ 7      $ 12        (240.0 )% 

The change in the provision for income tax benefit was primarily attributable to (i) a $13 million decrease in reserve for uncertain tax positions due to an election to treat one of our subsidiary entities as a corporation for U.S. federal income tax purposes in 2020 (ii) a $6 million increase in foreign tax expense related to our equity awards, partially offset by an $8 million decrease in reserve for uncertain tax positions due to a ruling in a foreign jurisdiction in 2021.

Discontinued Operations

 

     Six Months Ended      Variance in  
(in millions except percentages)    June 27,
2020
     June 26,
2021
     Dollars      Percent  

Net revenue

   $ 664      $ 677      $ 13        2.0

Operating income

     58        73        15        25.9

Income from discontinued operations before income taxes

     58        69        11        19.0

Income tax expense

     17        18        1        5.9

Income from discontinued operations, net of tax

     41        51        10        24.4

Net revenue—The increase in net revenue related to discontinued operations was consistent with increased billings when compared to the prior period.

Operating income—The improvement in operating income from discontinued operations was primarily driven by (i) the $13 million increase in net revenue, (ii) a $63 million decrease in amortization expense due to assets that were fully amortized in 2020 in addition to discontinuing amortization in March 2021 for Enterprise Business assets held for sale, (iii) a $26 million decrease in operating expenses primarily due to reduced headcount related to the reduction in force that was initiated in December 2020, (iv) an $11 million decrease in depreciation partially due to discontinuing depreciation in March 2021 for Enterprise Business assets held for sale, (v) an $11 million decrease in other sales and marketing expenses, and (vi) a $6 million decrease in limited travel caused by the COVID-19 pandemic. These increases were partially offset by (i) a $60 million increase in transformation and transition expenses comprised of consulting fees, legal fees, and other costs to facilitate the sale transaction and the separation of the Enterprise Business, including incremental costs associated with data disentanglement and acceleration of data migration to the clouds, (ii) the $42 million increase in equity-based compensation expense discussed above, and (iii) a $17 million increase in restructuring expenses related to the workforce reduction that was initiated in December 2020.

Income tax expense—Discontinued Operations was consistent for the two periods.

Quarterly Results of Operations and Other Financial and Operations Data

The following tables set forth selected unaudited quarterly results of operations and other financial and operations data for each of the eight three month periods presented below, as well as the percentage that each line item represents of net revenue. The information for each of these quarters has been prepared on the same basis as

 

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the audited annual consolidated financial statements included elsewhere in this prospectus and in the opinion of management, includes all adjustments, which include only normal recurring adjustments, necessary for the fair statement of our consolidated results of operations for these periods. This data should be read in conjunction with our consolidated financial statements and related notes included elsewhere in this prospectus. Our quarterly results of operations will vary in the future. These quarterly operating results are not necessarily indicative of our operating results for any future period. See “—Factors Affecting the Comparability of Our Results of Operations” for the key factors that impacting the comparability of our results of operations from period to period and future periods.

 

    Three Months Ended  
(in millions except per share data)   September 28,
2019
    December 28,
2019
    March 28,
2020
    June 27,
2020
    September 26,
2020
    December 26,
2020
    March 27,
2021
    June 26,
2021
 

Net revenue

  $ 322     $ 347     $ 354     $ 383     $ 395     $ 426     $ 442     $ 467  

Cost of sales

    95       99       99       110       112       123       116       116  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

    227       248       255       273       283       303       326       351  

Operating expenses:

               

Sales and marketing

    73       84       60       80       88       120       85       89  

Research and development

    40       37       38       37       35       78       44       48  

General and administrative

    50       53       58       42       43       92       48       45  

Amortization of intangibles

    36       36       36       36       36       35       36       13  

Restructuring charges

    —         1       1       —         —         1       8       —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    199       211       193       195       202  </