Business context and reporting period
NetScout Systems, Inc. filed this unaudited Form 10-Q for the quarter ended September 30, 2022, the second quarter of fiscal 2023. The company provides service assurance and cybersecurity solutions based on deep packet inspection technology. It reports one operating segment.
Financial performance
| Metric | Quarter ended September 30, 2022 | Year-over-year comparison |
|---|---|---|
| Revenue | $228.1 million | Up 8% from $211.9 million |
| Gross profit / margin | $170.4 million / 75% | Up 6%; margin down 1 percentage point |
| Operating income | $21.4 million | Up from $12.2 million |
| Net income / diluted EPS | $17.4 million / $0.24 | Up from $7.9 million / $0.11 |
Quarterly product revenue rose 10% to $111.8 million, led by cybersecurity, radio-frequency propagation modeling projects, and enterprise service assurance. Service revenue rose 5% to $116.3 million, primarily from maintenance contracts. Verizon represented more than 10% of quarterly revenue. Service assurance accounted for approximately 73% of revenue and cybersecurity 27%.
For the six months ended September 30, revenue was $436.9 million, up 9%; gross profit was $321.5 million, with a 74% margin, unchanged year over year. Operating income was $12.3 million versus $1.5 million, and net income was $10.3 million versus a $3.4 million loss. Diluted EPS was $0.14 versus a loss of $0.05.
Cash flow, debt and liquidity
Cash, cash equivalents and marketable securities totaled $367.1 million at September 30, down $336.1 million from March 31. Six-month operating cash flow was negative $2.4 million, compared with positive $47.3 million a year earlier; the filing cites lower deferred revenue and other working-capital movements as significant factors. Investing activities provided $14.9 million, while financing activities used $319.0 million.
The company spent $150 million on an accelerated share repurchase and repaid $150 million of borrowings. Long-term debt was $200 million at quarter-end, bearing interest at 4.12%. The $800 million revolving facility had approximately $600 million of incremental availability based on covenant levels; the company reported covenant compliance. Management expects cash, operating cash flow and facility availability to cover obligations, capital spending, debt service and working capital needs for at least the next 12 months.
Deferred revenue was $410.8 million, of which $287.3 million was expected to be recognized within 12 months. Total product backlog was $60.5 million, including $43.6 million of fulfillable backlog; management cautions backlog is not necessarily indicative of future sales.
Material changes, outlook and risks
- Six-month U.S. revenue grew 19% to $280.5 million, while international revenue declined 6% to $156.4 million. Management attributed overall growth primarily to radio-frequency modeling projects and cybersecurity offerings. Higher project delivery costs partly offset revenue gains.
- Six-month sales and marketing expense increased 9% to $142.4 million, notably due to events, travel, commissions and marketing; operating expenses overall increased 5%. The six-month gross margin remained flat year over year.
- A first-quarter restructuring affecting 18 employees resulted in $1.8 million of charges; substantially all related benefits were expected to be paid in fiscal 2023.
- Management provided no specific revenue or earnings guidance in the supplied filing text. It expects to continue capital investment and manage costs, while noting inflation and a potential recession could increase funding needs.
- The company cited uncertainty from COVID-19, the war in Ukraine, geopolitical tension, volatility, foreign exchange movements, rising interest rates and recession risk. It ceased business operations in Russia; these events had no material financial-statement impact for the six months reported. Verizon customer concentration and declining international revenue are also relevant to monitor.
- In the Packet Intelligence patent litigation, the company appealed an amended judgment that included $2.25 million in post-suit damages, $1.1 million in enhanced damages, interest and royalties through June 2022. NetScout said the risk of loss for the post-suit and enhanced award, interest and royalties remained probable if the award survives appeal and patent-claim invalidation proceedings; the filing text does not provide a clear accrued liability amount.
- Non-GAAP diluted EPS was $0.57 for the quarter and $0.81 for the six months, versus GAAP diluted EPS of $0.24 and $0.14, respectively. These company-defined measures exclude specified items and should be considered alongside GAAP results.
Important facts for investors to verify
- Whether operating cash flow improves, particularly as deferred revenue and working-capital balances change.
- Progress on radio-frequency modeling projects, associated delivery costs, backlog conversion and deferred revenue recognition.
- Revenue concentration in Verizon and the sustainability of U.S. growth amid weaker international results.
- Debt repayment plans, borrowing costs, revolving-credit availability and continued covenant compliance.
- Outcome and accounting treatment of the Packet Intelligence appeal, including any liability recorded.
- Effects of macroeconomic conditions, foreign-exchange movements and the Russia-related cessation of operations.