NETSCOUT SYSTEMS, INC. — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended December 31, 2022. Financial statements are unaudited; comparisons are with the corresponding 2021 periods. Dollar amounts below are in millions unless stated otherwise.
Business context and results
NetScout provides service assurance and cybersecurity solutions to service providers and enterprises. It reports one operating segment. Management cited cloud migration, cybersecurity, analytics and 5G as business trends. Verizon represented more than 10% of revenue in both comparison periods.
| Metric | Quarter ended Dec. 31, 2022 | Year-over-year change | Nine months ended Dec. 31, 2022 | Year-over-year change |
|---|---|---|---|---|
| Revenue | $269.5 | +3% | $706.4 | +6% |
| Gross profit / margin | $212.7 / 79% | $201.7 / 77% | $534.3 / 76% | $497.9 / 75% |
| Operating income | $63.8 | +$8.3 | $76.0 | +$19.1 |
| Net income | $52.6 | +$4.9 | $62.9 | +$18.6 |
| Diluted EPS | $0.72 | vs. $0.64 | $0.86 | vs. $0.59 |
| Operating cash flow | Not separately provided | — | $43.9 | vs. $140.4 |
For the nine-month period, product revenue rose 10% to $359.5 million, primarily from radio-frequency propagation modeling projects; service revenue increased 3% to $346.9 million, mainly from maintenance contracts. U.S. revenue grew 16% to $461.7 million, while international revenue declined 8% to $244.8 million. The quarter’s gross margin improvement reflected lower product costs; year-to-date gross margin rose one percentage point.
Financial position, liquidity and capital allocation
- At December 31, 2022, cash, cash equivalents and marketable securities totaled $416.2 million, down $287.0 million from March 31, 2022. Cash and cash equivalents alone were $352.0 million.
- Operating cash flow for the nine months fell $96.5 million year over year, including effects from lower deferred revenue cash inflows and increased accounts receivable.
- Long-term debt was $200.0 million, down from $350.0 million at March 31, 2022; the reported interest rate was 5.39%. Cash and securities exceeded debt by approximately $216.2 million.
- The $800 million revolving credit facility had $600 million of incremental availability at quarter-end. NetScout reported covenant compliance and expects liquidity to cover obligations, capital spending, debt service and working capital needs for at least 12 months.
- Financing cash outflows included $150.0 million of debt repayment and $150.0 million of share repurchases under an accelerated repurchase program. The company repurchased 4.55 million shares at an average $32.97 per share during the nine months.
- Deferred revenue and customer deposits totaled $444.9 million; the company expected to recognize 71% within the next 12 months.
Changes, outlook and risks
- Nine-month net income increased to $62.9 million, with revenue growth and lower acquired-intangible amortization among the contributors. Higher project delivery costs, sales and marketing spending, travel, commissions and foreign-exchange expense partly offset improvement.
- Management said it was managing costs and discretionary spending while continuing investment in areas supporting the business. It plans further capital expenditures during fiscal 2023. The filing provides no specific numeric revenue or earnings guidance.
- Management identified macroeconomic uncertainty, including inflation, rising interest rates, recession risk, foreign-exchange volatility, geopolitical tension, the Ukraine war and COVID-19 impacts. NetScout ceased sales, support and professional services in Russia; it reported no material financial-statement impact for the nine months.
- Total product backlog was $30.9 million at December 31, down from $92.8 million at March 31; fulfillable backlog was $30.4 million. The company cautioned that backlog is not necessarily indicative of future sales and customers may reschedule or cancel orders with little or no penalty.
- A patent dispute with Packet Intelligence remains on appeal. The amended judgment includes $2.25 million in post-suit damages, $1.1 million in enhanced damages, interest and royalties; it is stayed pending appeal. NetScout considers loss on the post-suit and enhanced award probable if it survives the appeal and patent invalidations. The ultimate exposure is uncertain.
- NetScout recorded $1.8 million of restructuring charges for a reduction of 18 employees; substantially all related benefits were expected to be paid by fiscal year-end. No material changes to the previously disclosed risk factors were reported.
Key facts for investors to verify
- Whether revenue growth from radio-frequency modeling projects continues and how project costs affect product margins and cash conversion.
- Whether the reduced operating cash flow and lower backlog reverse in subsequent quarters; monitor deferred revenue and receivables.
- Debt interest costs, covenant headroom and actual use of the remaining revolving-credit availability.
- Developments in the Packet Intelligence appeal, including potential damages, royalties and accounting treatment.
- Customer concentration, international revenue trends, and the effects of macroeconomic conditions and Russia-related restrictions.
- Share repurchase pace and its effect on liquidity and share count; distinguish GAAP results from management’s non-GAAP measures, which exclude specified expenses including stock compensation and acquired-intangible amortization.