NetScout Systems, Inc. — Q1 FY2023 Form 10-Q
Reporting period: Three months ended June 30, 2022, compared with the three months ended June 30, 2021, unless otherwise noted. NetScout provides service assurance and cybersecurity solutions. The interim financial statements are unaudited.
Financial performance
| Metric | Q1 FY2023 | Q1 FY2022 |
|---|---|---|
| Revenue | $208.8 million | $190.3 million |
| Product revenue | $98.3 million | $82.0 million |
| Service revenue | $110.6 million | $108.3 million |
| Gross profit / margin | $151.1 million / 72% | $135.9 million / 71% |
| Operating loss | $9.1 million | $10.7 million |
| Net loss | $7.1 million; $0.10 per diluted share | $11.3 million; $0.15 per diluted share |
| Operating cash flow | $(12.5) million | $24.1 million |
| Cash, cash equivalents and marketable securities | $374.6 million at June 30, 2022 | $703.2 million at March 31, 2022 |
| Long-term debt | $200.0 million at June 30, 2022 | $350.0 million at March 31, 2022 |
Revenue increased 10%, led by 20% growth in product revenue, primarily from service-provider service assurance and security offerings. Service revenue grew 2%. U.S. revenue rose 31% to $134.8 million, while international revenue declined 15% to $74.0 million. Product and service gross margins each improved one percentage point, to 73% and 72%, respectively. Selling and marketing expense rose 16% to $76.3 million; operating expenses overall increased 9% to $160.2 million. The reported income tax benefit was $3.4 million.
Non-GAAP measures reported by the company included operating income of $24.5 million, net income of $18.1 million, diluted EPS of $0.24, and operating EBITDA of $29.8 million. These measures exclude specified items, including stock compensation and acquired-intangible amortization, and should be considered alongside GAAP results.
Cash, debt and liquidity
Cash and marketable securities declined $328.6 million during the quarter, chiefly reflecting $150.0 million for an accelerated share repurchase, $150.0 million of debt repayment, $10.8 million of tax withholding on vested restricted stock units, and $12.5 million of operating cash use. Investing activities provided $22.5 million, mainly from net sales and maturities of marketable securities. The company had $200.0 million outstanding on its $800.0 million revolving credit facility and stated that approximately $600 million of additional borrowing capacity was available at quarter-end. It reported compliance with credit-facility covenants and expects available liquidity and operating cash flows to fund obligations for at least the next 12 months.
Outlook, commentary and risks
- The filing provides no specific revenue, earnings, or cash-flow guidance for FY2023. Management expects to continue investing in capital expenditures and to manage costs while investing in business priorities.
- Management attributed the improved year-over-year net loss primarily to higher revenue and lower employee-related and material costs, partly offset by higher project-delivery costs, sales and marketing spending, commissions, travel, and restructuring expense.
- NetScout ceased sales, support on existing contracts, and professional services in Russia following Russia’s military operations in Ukraine. The company said the events had no material impact on the quarter’s financial statements, but sanctions could affect future revenue.
- COVID-19, economic conditions, customer spending, supply-chain and distribution effects remain uncertain. Management cited these as potential risks, while stating it believed liquidity was adequate.
- Two direct customers, AT&T and Verizon, each represented more than 10% of quarterly revenue. One direct customer exceeded 10% of accounts receivable at June 30.
- Product backlog was $64.5 million, down from $92.8 million at March 31. Management cautioned that backlog is generally not indicative of future sales; much of the balance related to late-quarter orders and radio-frequency propagation modeling projects.
- A patent-infringement case remains under appeal. NetScout said the risk of loss on post-suit and enhanced damages, interest and royalties remained “probable” for accounting purposes if the award survives the appeal and patent invalidation decisions; it viewed pre-suit damages as remote. The amended judgment included $2.25 million in post-suit damages, $1.1 million in enhanced damages, interest, and royalties through the relevant patents’ expiration.
- The quarter included $1.8 million in restructuring charges for terminating 18 employees; the related benefits are expected to be paid during FY2023. The company also had $4.5 million of deferred employer payroll taxes due by December 2022.
Important facts for investors to verify
- Whether product growth and U.S. strength continue, given the decline in international revenue and the concentration of revenue among two customers.
- Whether operating cash flow recovers after the quarter’s cash use, including the effect of deferred revenue and customer billing patterns.
- The final share count and settlement of the $150 million accelerated share repurchase, and the impact of continued buybacks on liquidity and shares outstanding.
- The status and potential financial exposure of the Packet Intelligence litigation and appeal.
- Progress on the radio-frequency propagation modeling projects, including timing of billable milestones and revenue recognition.