Business context and reporting period
NetScout Systems, Inc. filed this unaudited Form 10-Q for the quarter and nine months ended December 31, 2021 (fiscal 2022). The company provides service assurance and cybersecurity solutions for service-provider and enterprise networks. It reports one operating segment.
Financial performance
Amounts below are in millions, except per-share data and percentages.
| Metric | Quarter ended Dec. 31, 2021 | Year-over-year | Nine months ended Dec. 31, 2021 | Year-over-year |
|---|---|---|---|---|
| Revenue | $262.2 | Up 15% | $664.4 | Up 8% |
| Gross profit / margin | $201.7 / 77% | Up from $173.5 / 76% | $497.9 / 75% | Up from $450.7 / 73% |
| Operating income / margin | $55.5 / 21% | Up from $31.8 | $57.0 / 9% | Up from $21.1 |
| Net income | $47.7 | Up from $29.0 | $44.3 | Up from $7.9 |
| Diluted EPS | $0.64 | Up from $0.39 | $0.59 | Up from $0.11 |
Quarterly product revenue rose 26% to $144.4 million; service revenue increased 4% to $117.8 million. For the nine-month period, product revenue rose 18% to $328.0 million, while service revenue declined 1% to $336.4 million. Management attributed product growth chiefly to network performance management offerings; nine-month service softness reflected non-renewals associated with service-provider consolidation and discontinued product lines.
Nine-month operating cash flow was $140.4 million, versus $121.9 million a year earlier. Capital expenditures were $7.0 million. Cash, cash equivalents and marketable securities totaled $553.5 million at December 31, 2021, up $77.0 million from March 31, 2021. Current assets were $839.6 million and current liabilities $431.2 million. Deferred revenue and customer deposits totaled $419.0 million.
Long-term debt was $350.0 million, unchanged from March 31, 2021; the company refinanced the borrowing in July 2021 under a new $800 million revolving facility maturing in 2026. It reported $450 million of additional facility availability and compliance with the specified leverage covenant. Debt carried a 1.36% interest rate at December 31, 2021.
Material changes versus the prior comparable period
- Nine-month revenue growth was driven by products; gross margin improved two percentage points to 75%.
- Nine-month net income increased $36.4 million. Management cited higher revenue, lower intangible amortization, foreign-exchange expense and interest expense, among other factors. Higher sales and marketing costs, contractor fees, materials and obsolescence charges, and income tax expense partly offset those gains.
- Cash from operations rose $18.5 million, with deferred revenue growth a significant contributor; this was partly offset by higher receivables and lower accrued compensation and other expenses.
- Nine-month share repurchases were $35.7 million, compared with $3.3 million in the prior-year period.
Outlook, risks and unusual items
No quantified revenue or earnings guidance is provided in the filing. Management said it was focused on advancing products, growing revenue, enhancing EPS and generating free cash flow, and expects cash, operating cash flow and borrowing availability to fund obligations and planned spending for at least the next 12 months. It also plans capital spending for the remainder of fiscal 2022.
- Management continued to monitor COVID-19 effects on customers, suppliers, employees and the supply chain. It said project spending had resumed but pandemic and economic effects remained uncertain.
- Verizon exceeded 10% of revenue in both the quarter and nine-month period; two direct customers each exceeded 10% of accounts receivable at December 31, 2021.
- In the Packet Intelligence patent case, management assessed post-suit damages loss as probable, despite PTAB decisions invalidating the asserted claims in separate proceedings. The case remains on remand, with motions pending. Potential liability includes the post-suit award, interest and royalties; any damages enhancement is not reasonably estimable and was described as likely within $0–$2.8 million. Pre-suit damages loss was assessed as remote.
- A propagation-modeling project created $19.6 million gross balances in both deferred revenue and accounts receivable at quarter end; most related revenue was expected within 12 months. Product backlog was $55.2 million, but management cautioned backlog may not indicate future sales.
- The company reported a $0.6 million debt-extinguishment loss and a $0.8 million gain from final contingent consideration associated with the HNT tools divestiture. It also began amortizing an acquired trade name over eight years; management said the estimate change did not materially affect the income statement.
- Management stated that there were no material changes to the risk factors in its latest Form 10-K. Disclosure controls were deemed effective; no material change in internal control over financial reporting was reported.
Important facts for investors to verify
- Whether product growth and improving gross margins continue, and whether service revenue stabilizes.
- Cash-flow quality, particularly the contribution from deferred revenue and movements in receivables and accrued expenses.
- Progress and potential exposure in the Packet Intelligence litigation, including the effect of PTAB appeals and district-court proceedings.
- Revenue and receivable concentration involving Verizon and other large customers, and the timing and recognition of the propagation-modeling project.
- Debt covenant headroom, borrowing costs and use of available liquidity, including repurchases and any future acquisitions.
- The impact of tax-related discrete items and non-GAAP adjustments when assessing earnings trends against GAAP results.