Business Context and Reporting Period
NetScout Systems, Inc. provides network, application and service-assurance products and services to enterprise, government and telecommunications customers. This Form 10-K reports the fiscal year ended March 31, 2015, with comparative results for fiscal 2014 and 2013; it is not a standalone fiscal 2014 fourth-quarter filing. The filing also reports the three months ended March 31, 2015 as the latest quarter.
Financial Results and Position
| Metric | FY2015 | FY2014 | Change |
|---|---|---|---|
| Revenue | $453.7 million | $396.6 million | +14% |
| Product revenue | $272.9 million | $234.3 million | +16% |
| Service revenue | $180.8 million | $162.4 million | +11% |
| Gross profit / margin | $359.1 million / 79% | $312.1 million / 79% | Profit +15%; margin flat |
| Operating income / margin | $96.8 million / 21% | $78.0 million / 20% | Income +24% |
| Net income | $61.2 million | $49.1 million | +25% |
| Diluted EPS | $1.47 | $1.17 | +26% |
| Operating cash flow | $106.9 million | $110.9 million | Down $4.0 million |
Fourth-quarter FY2015 revenue was $119.4 million versus $112.3 million a year earlier; net income was $20.9 million versus $16.7 million, and diluted EPS was $0.50 versus $0.40.
At March 31, 2015, cash, cash equivalents and marketable securities totaled $264.9 million, working capital was $149.7 million, and total assets were $669.0 million. Current liabilities were $187.6 million and the current ratio was approximately 1.8x. No debt was outstanding under the $250 million revolving credit facility; the company reported compliance with its covenants. Operating cash flow was partly offset by $51.7 million of share repurchases and $12.8 million of capital expenditures. Accounts-receivable days sales outstanding increased to 61 from 47.
Material Changes Versus the Prior Period
- Growth was led by service-provider product sales, which increased $26.8 million; product growth also reflected a 6% increase in units shipped and a 7% increase in average selling price.
- U.S. revenue rose 15%; international revenue rose 13% and represented 23% of total revenue, down from 24%.
- General and administrative expense rose 54% to $47.3 million, primarily reflecting higher business-development and acquisition-related spending. The company recorded $12.0 million in acquisition-related costs.
- Foreign-exchange expense contributed to net other expense of $1.8 million, compared with $0.2 million the prior year. The effective tax rate fell to 35.6% from 36.9%.
- Cash and marketable securities increased $46.1 million, while operating cash flow declined by $4.0 million, including a significant adverse working-capital impact from receivables.
Outlook, Commentary and Risks
Management expected continued service-provider and general-enterprise product revenue growth in FY2016 and single-digit service-revenue growth. It expected gross margin to remain relatively flat and operating margin to stay within historical ranges. These are directional expectations, not quantified company-wide revenue or earnings guidance.
At the filing date, the proposed Reverse Morris Trust acquisition of Danaher’s Communications Business—including Tektronix Communications, Fluke Networks and Arbor Networks—remained pending, with closing expected in the first half of NetScout’s FY2016. The transaction contemplated issuance of 62.5 million NetScout shares; existing shareholders were expected to own about 40.5% of the combined company on a fully diluted basis. NetScout cited expected expansion in scale and adjacent markets, but anticipated synergies and integration costs were not quantified. For the combined business, management projected first-year operating cash flow of $200–$250 million and capital expenditures below 5% of combined revenue.
Key risks include failure or delay of the transaction, integration and synergy execution, dilution and potential share sales, assumed pension obligations, replacement of Danaher-provided services, and possible tax-indemnity exposure. If specified termination conditions applied, NetScout could owe Danaher a $55 million fee. Standalone business risks include variable order timing and long sales cycles, customer and channel concentration, intense technology competition, reliance on certain sole-source components, international and foreign-exchange exposure, cybersecurity and product-quality risks, and dependence on retaining skilled personnel. Management said current legal proceedings were not expected to have a significant adverse effect. The filing reports an unqualified audit opinion and effective internal control over financial reporting.
Important Facts for Investors to Verify
- Confirm the transaction’s actual closing status, final consideration and dilution, as well as realized integration costs, synergies and acquired-business performance.
- Track receivables, collections and DSO after the increase to 61 days, and assess whether operating cash flow recovers.
- Compare subsequent revenue, margins and service growth with management’s FY2016 expectations; distinguish GAAP results from non-GAAP measures.
- Review customer concentration: two direct customers each represented more than 10% of FY2015 revenue; the filing text does not identify them in the supplied excerpt.
- Monitor liquidity needs, acquisition financing and debt covenants, along with the foreign-exchange and tax exposures disclosed in the filing.