NETSCOUT SYSTEMS, INC. — Form 10-Q Summary
Reporting period: Three months ended June 30, 2021 (the first quarter of fiscal 2022). Comparisons are with the three months ended June 30, 2020 unless otherwise stated. Amounts are in U.S. dollars.
Business context and results
NetScout provides service assurance and cybersecurity solutions to service providers and enterprises. It reports one operating segment. Revenue increased as product sales grew, while service revenue declined.
| Metric | Q1 FY2022 | Q1 FY2021 | Change |
|---|---|---|---|
| Revenue | $190.3 million | $183.8 million | Up 4% |
| Product revenue | $82.0 million | $71.7 million | Up 14% |
| Service revenue | $108.3 million | $112.1 million | Down 3% |
| Gross profit / margin | $135.9 million / 71% | $130.8 million / 71% | Profit up 4%; margin flat |
| Operating loss | $10.7 million | $14.5 million | Narrowed by $3.8 million |
| Net loss / diluted loss per share | $11.3 million / $0.15 | $17.4 million / $0.24 | Loss narrowed |
| Operating cash flow | $24.1 million | $44.9 million | Down $20.8 million |
Product growth was attributed to network performance management offerings for enterprise and service provider customers and DDoS offerings. Service revenue fell primarily due to service provider consolidation, discontinued product lines and renewal timing. International revenue increased 14% to $87.4 million; U.S. revenue decreased 4% to $102.9 million.
Non-GAAP results, which exclude specified items and are not GAAP measures, were operating income of $21.8 million and net income of $15.0 million, or $0.20 diluted EPS, compared with $20.6 million, $12.2 million and $0.17, respectively, in the prior-year quarter. Non-GAAP EBITDA from operations was $27.6 million versus $26.6 million.
Liquidity, debt and cash flow
At June 30, 2021, cash and cash equivalents were $487.2 million and short-term marketable securities were $6.7 million, totaling $493.9 million, up $17.4 million from March 31, 2021. Net cash provided by operations was $24.1 million; investing activities used $0.03 million and financing activities used $4.8 million. The year-over-year decline in operating cash flow reflected, among other factors, smaller cash inflows from receivables and increased cash outflows for accrued compensation and other expenses.
Long-term debt was $350.0 million, unchanged from March 31, 2021; the reported interest rate was 1.35%. The company stated that $345 million of additional capacity was available under its existing revolving facility at quarter-end and that it was compliant with credit covenants. It expected cash, operating cash flow and borrowing availability to cover obligations and planned spending for at least twelve months. On July 27, 2021, after quarter-end, NetScout amended and extended its facility to an $800 million secured revolving credit facility maturing July 27, 2026, and repaid and redrew the $350 million outstanding balance.
Material changes, outlook and risks
- Net loss narrowed by $6.1 million year over year. Management cited higher revenue and lower employee-related and legal expenses, partly offset by higher commissions, materials, contractor fees, inventory obsolescence, travel, advertising and conference costs.
- Management said it expects technology and project spending to resume as pandemic conditions improve, and plans to focus on product advancement, revenue growth, higher EPS and solid free cash flow in fiscal 2022. The filing provides no specific numeric guidance.
- COVID-19 effects remain uncertain. Management described elongated purchasing cycles during fiscal 2021 and continued monitoring of impacts on customers, employees, suppliers and distribution; it also cited cost controls and constrained discretionary spending and hiring.
- In the Packet Intelligence patent case, the appellate court had affirmed $2.25 million of post-suit damages and vacated the $3.5 million pre-suit award, remanding the matter on possible enhancement. The Supreme Court denied NetScout’s petition. NetScout considers the post-suit loss probable; estimated exposure includes damages, interest and royalties on post-trial sales. A possible enhancement is not reasonably estimable and is described as likely within $0–$2.8 million. The case remained on remand.
- NetScout changed an acquired trade name from indefinite-lived to an eight-year amortization period after reassessing its useful life; it reported no material income-statement impact. It also deferred $8.9 million of employer payroll taxes, with half due by December 2021 and half by December 2022.
- The company identified foreign-exchange and floating-rate debt exposure, and discussed the transition away from LIBOR. It reported no material changes to the risk factors in its FY2021 Form 10-K. Disclosure controls were assessed as effective, with no material change in internal control over financial reporting reported for the quarter.
Investor verification priorities
- Track the recovery and durability of product growth, service renewals, and the revenue mix by geography.
- Compare operating cash flow with earnings and monitor deferred revenue, receivables and accrued compensation for working-capital effects.
- Review debt outstanding, borrowing availability, covenant compliance and terms under the July 2021 credit agreement.
- Follow the Packet Intelligence remand, damages, royalties and any enhancement or settlement developments.
- Assess whether management’s qualitative fiscal 2022 expectations are progressing; the filing provides no numeric guidance.