NetScout Systems, Inc. — Form 10-Q Summary
Business context and reporting period: The filing covers the three months ended June 30, 2017, NetScout’s first quarter of fiscal 2018. The company provides network performance, service assurance and cybersecurity solutions. Results are reported in one operating segment.
Financial performance
Amounts below are in millions of dollars except per-share data. Comparisons are with the three months ended June 30, 2016.
| Metric | Q1 FY2018 | Prior-year quarter | Change / context |
|---|---|---|---|
| Revenue | $225.8 | $269.0 | Down 16% |
| Product revenue | $114.8 | $164.6 | Down 30%; management attributed the decline principally to service-provider spending moderation |
| Service revenue | $110.9 | $104.4 | Up 6%, primarily from maintenance contracts |
| Gross profit / margin | $159.2 / 71% | $181.9 / 68% | Profit down 12%; margin up 3 percentage points |
| Operating expenses | $192.7 | $192.7 | Essentially flat despite lower revenue |
| Operating loss | $(33.6) | $(10.8) | Worsened |
| Net loss / diluted loss per share | $(24.2) / $(0.27) | $(9.0) / $(0.10) | Loss increased by $15.2 million |
| Non-GAAP operating income | $14.5 | $43.1 | Down from prior year; excludes specified acquisition, amortization, stock compensation and other items |
| Non-GAAP net income / diluted EPS | $7.6 / $0.08 | $26.3 / $0.28 | Non-GAAP measures are not substitutes for GAAP results |
| Cash provided by operating activities | $52.6 | $37.7 | Up $14.9 million, aided by receivables collections |
Liquidity, debt and balance sheet
- Cash, cash equivalents and marketable securities totaled $409.7 million at June 30, down $55.0 million from March 31, 2017. Cash and cash equivalents alone were $261.7 million.
- Long-term debt was $300.0 million, drawn on an $800 million senior secured revolving facility due July 2020. NetScout reported compliance with its debt covenants. The facility’s borrowing availability is subject to its terms and covenants.
- Current assets were $704.9 million and current liabilities were $402.2 million. Deferred revenue and customer deposits totaled $358.7 million, including current and long-term balances.
- Operating cash flow was offset by $105.4 million of financing cash use, including $100.0 million of share repurchases and $5.4 million of tax withholding on vested restricted stock units.
Material changes and management commentary
- Service-provider customers reduced spending on service assurance products by approximately $37 million year over year. Product revenue fell $49.8 million overall; service revenue growth partially offset the decline.
- Management said future revenue mix is expected to be more balanced between service-provider and enterprise customers, reflecting anticipated moderation in service-provider spending and anticipated enterprise growth. It cautioned that large project timing will affect quarterly results.
- Management expects service revenue to grow with the installed base and maintenance contracts, tempered by price erosion when larger support agreements renew.
- Management stated that cash balances, available debt, short-term investments and expected operating cash flows should cover working capital and capital expenditure needs for at least the next 12 months. It expects operating cash flow to increase with anticipated higher revenues, partly offset by cash operating expenses. Capital expenditures are expected to continue supporting infrastructure.
- Management disclosed no numerical revenue or earnings guidance in the provided filing text. It noted that acquisitions or investments may use cash and that issuing additional equity or debt, if needed, could dilute shareholders.
Risks, contingencies and unusual items
- NetScout identified service-provider spending, quarterly timing of large projects, competition, product acceptance, international expansion, acquisition integration and expense management among factors affecting results. It said there were no material changes to the risk factors in its fiscal 2017 Form 10-K.
- The company reported no off-balance-sheet arrangements. Management said ordinary-course legal proceedings were not expected to have a material adverse effect.
- Contingent acquisition-related liabilities included $4.8 million for Simena and $660,000 held in escrow relating to Avvasi. Subject to valid indemnification claims, the Avvasi escrow was due to be paid to the seller on August 21, 2017.
- NetScout adopted share-based compensation guidance in April 2017; a $1.4 million excess tax benefit reduced tax expense and increased quarterly income by the same amount, or $0.02 per share. Despite this benefit, the company reported a GAAP net loss.
- Revenue standard Topic 606 was scheduled for adoption on April 1, 2018. Management expected a reduction in deferred revenue at adoption and a greater proportion of product revenue recognized upon delivery; the ultimate impact remained under evaluation.
- Goodwill and intangible assets were substantial: $1.72 billion and $906.3 million, respectively, at June 30, 2017. Intangible amortization was $28.2 million for the quarter.
Important facts for investors to verify
- Whether service-provider demand stabilizes and enterprise growth offsets the product-revenue decline, including the impact of large-project timing.
- Whether operating cash flow remains strong as receivables and deferred revenue change; quarterly collections supported cash generation.
- The pace and accounting impact of Topic 606 adoption, particularly deferred revenue, product-revenue timing and sales-commission capitalization.
- The continued affordability of the $300 million debt balance and share repurchases, including covenant headroom and floating-rate exposure.
- The composition and exclusions in non-GAAP results, and whether those measures obscure the deterioration in GAAP operating and net results.