NETSCOUT SYSTEMS, INC. — FY2014 Form 10-K
Reporting period: Fiscal year ended March 31, 2014. The filing also reports the quarter ended March 31, 2014, corresponding to fiscal Q4; this is not a calendar-year 2013 Q4 report.
Business context
NetScout sells network, application and service-assurance hardware and software, plus support and related services, to enterprise, service-provider and government customers. It reports one operating segment. The company highlighted its nGeniusONE unified performance-management platform, launched in FY2014, and growth in LTE-related service-provider business.
Financial performance and liquidity
| Metric | FY2014 | FY2013 | Change |
|---|---|---|---|
| Revenue | $396.6 million | $350.6 million | +13% |
| Product revenue | $234.3 million | $198.7 million | +18% |
| Service revenue | $162.4 million | $151.8 million | +7% |
| Gross profit / gross margin | $312.1 million / 79% | $276.5 million / 79% | +13% gross profit |
| Operating income | $78.0 million | $64.5 million | +21% |
| Net income | $49.1 million | $40.6 million | +21% |
| Diluted EPS | $1.17 | $0.96 | +22% |
| Operating cash flow | $110.9 million | $95.4 million | +$15.5 million |
Product gross margin rose to 78% from 77%; service gross margin declined to 79% from 81%. The effective tax rate was 36.9%, versus 36.3%. Net cash used in investing activities was $76.6 million, including $13.1 million in capital expenditures; financing activities used $32.0 million, including $34.3 million for treasury-stock purchases.
Cash, cash equivalents and marketable securities totaled $218.8 million at year-end, up $64.7 million. Working capital was $115.8 million, versus $92.1 million. Debt was zero; the company had a $250 million revolving credit facility, maturing in November 2016, with no borrowings outstanding. It reported compliance with facility covenants.
Fiscal Q4: Revenue was $112.3 million versus $98.1 million in the prior-year quarter; net income was $16.7 million versus $14.6 million, and diluted EPS was $0.40 versus $0.34.
Material changes versus prior year
- Revenue growth was led by products: management cited 18% product growth, including 22% growth in service-provider product revenue and 11% growth in enterprise product revenue.
- U.S. revenue increased 16%; international revenue increased 5% and represented 24% of total revenue, compared with 25% in FY2013.
- Operating expenses increased 10% to $234.1 million, including higher R&D and sales-and-marketing spending. FY2014 had no restructuring charge, compared with $1.1 million in FY2013.
- Operating cash flow improved, with receivables days sales outstanding falling to 47 from 68. Inventory increased to $12.6 million from $7.6 million.
- NetScout repurchased approximately 1.0 million shares for $28.8 million under its existing program. After year-end, the board authorized an additional repurchase program of up to $100 million.
Outlook, risks and contingencies
- Management expected continued service-provider revenue growth and accelerated general-enterprise growth in FY2015; it expected single-digit service-revenue growth and gross margins to remain relatively flat. It also expected operating cash flow to increase, with higher revenue collections partly offset by higher cash operating expenses. These are expectations, not guaranteed results.
- Management stated that available cash, marketable securities and expected operating cash flows should cover anticipated working capital and capital expenditures for at least 12 months. FY2015 capital expenditures were expected to be in line with recent years.
- Key risks include quarterly revenue volatility and lengthy sales cycles; intense competition and rapid technology change; reliance on indirect channels and sole-source or limited suppliers for certain components; customer spending and government-budget uncertainty; international, foreign-exchange and regulatory risks; cybersecurity and product-error exposure; and the ability to retain skilled staff and successfully integrate acquisitions.
- One direct customer accounted for more than 10% of FY2014 revenue; no indirect channel partner exceeded 10%. The filing reports $9.0 million of billed but uncollected transactions for which both receivables and deferred revenue were not recognized on the balance sheet, versus $1.0 million a year earlier.
- Year-end contingent liabilities included $4.3 million of Simena-related contingent purchase consideration and $49,000 for contractual non-compliance. Contractual obligations totaled $47.0 million, including $34.2 million of operating leases. Management said ordinary-course legal proceedings were not expected to have a significant adverse financial effect.
Important facts for investors to verify
- Whether nGeniusONE adoption and service-provider/LTE wins sustain the growth rates management described.
- Whether customer concentration, the increase in uncollected billed transactions, and receivables performance remain manageable.
- Whether margins hold as service costs and operating expenses rise, and how the effective tax rate affects earnings.
- How management deploys its substantial cash balance, including the newly authorized $100 million buyback and any acquisitions.
- Whether contingent consideration, supplier constraints, customer spending variability, and other disclosed risks change materially after the reporting date.