NetScout Systems, Inc. — Form 10-Q Summary
Reporting period: First quarter of fiscal 2015, the three months ended June 30, 2014; unaudited. Comparisons are with the three months ended June 30, 2013, unless otherwise noted. Dollar amounts are in millions except per-share data.
Business context and results
NetScout provides network, application and service assurance products and services. It reports one operating segment. Revenue grew 32% to $107.9 million, with growth led by service-provider product sales.
- Product revenue was $64.4 million, up 50%; service revenue was $43.5 million, up 12%.
- U.S. revenue increased 37% to $86.0 million; international revenue increased 15% to $21.8 million. Asia revenue grew 72% to $6.7 million.
- Two direct customers each represented more than 10% of quarterly revenue, compared with one in the prior-year quarter.
Financial performance and liquidity
- Profitability: Gross profit was $85.3 million, up 31%, and gross margin was 79%, unchanged overall. Product gross margin rose to 79% from 77%; service gross margin declined to 80% from 82%.
- Operating expenses increased 17% to $65.7 million. Operating income rose to $19.6 million from $8.9 million.
- Net income was $11.5 million, versus $5.3 million; diluted EPS was $0.27, versus $0.12. The effective tax rate was 41.1%, versus 40.4%.
- Management’s non-GAAP measures showed net income of $15.2 million and diluted EPS of $0.36, compared with $8.7 million and $0.21. These measures exclude specified acquisition-related, amortization and share-based compensation items and are not GAAP measures.
- Cash flow: Operating cash flow was $28.2 million, up from $18.6 million. Investing activities used $30.6 million, mainly reflecting purchases of marketable securities; financing activities used $10.7 million, largely for share repurchases. Cash and cash equivalents decreased $13.1 million during the quarter.
- Liquidity and debt: Cash, cash equivalents and marketable securities totaled $234.4 million at June 30, up from $218.8 million at March 31, 2014. No amounts were drawn on the $250 million revolving credit facility; the company reported compliance with its covenants. Current liabilities were $141.7 million, including $101.9 million of deferred revenue.
- Share repurchases totaled $12.2 million in financing cash flows. A new authorization of up to $100 million was approved in April; $99.7 million remained available at quarter-end.
Changes, outlook, risks and other notable items
- Product growth reflected a $21.0 million increase in service-provider revenue, higher units shipped and a 5% increase in average selling price. Service revenue growth came from new and renewed maintenance contracts and premium support.
- Management expected continued service-provider growth and service revenue growth, and gross margin to remain relatively flat. It expected operating cash flow to increase with higher collections, partly offset by higher cash operating expenses; fiscal 2015 capital expenditures were expected to be in line with prior years. Management stated available liquidity and expected operating cash flows should cover anticipated needs for at least 12 months. The filing provides no specific full-year revenue or earnings guidance.
- Foreign-exchange exposure primarily relates to operating expenses in several currencies; the company uses forward contracts for hedging and not speculation. Two direct customers exceeded 10% of revenue, creating customer concentration to monitor.
- Simena acquisition-related contingent purchase consideration was $4.4 million at quarter-end; a separate contractual non-compliance liability was reduced to zero. Management said ordinary-course legal matters were not expected to have a significant adverse effect.
- The company had not determined the financial-statement impact of the new revenue recognition standard, effective for it beginning April 1, 2017. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether service-provider product growth and the reported 53% increase in product units shipped continue in subsequent quarters.
- Whether service revenue growth offsets the decline in service gross margin and whether overall gross margin remains near 79%.
- Customer concentration, deferred-revenue trends, and cash conversion as revenue and collections change.
- The pace and funding of the $100 million repurchase authorization and any competing cash needs, including acquisitions and capital expenditures.
- Future effective tax rates, contingent acquisition payments, and the eventual impact of adopting the new revenue recognition standard.