NetScout Systems, Inc. — FY2021 Form 10-K Summary
Reporting period: Fiscal year ended March 31, 2021, compared primarily with the year ended March 31, 2020. Although the request metadata refers to “2020 Q4,” this filing is an annual report for FY2021, not a standalone quarterly filing.
Business context
NetScout provides network and application performance monitoring, service assurance, and cybersecurity products and services to enterprises, service providers, and government customers. Its offerings include nGeniusONE and network visibility products, Arbor-branded DDoS protection, and advanced threat analytics. The company reports one operating segment.
Key financial metrics
| Metric | FY2021 | FY2020 | Change |
|---|---|---|---|
| Total revenue | $831.3 million | $891.8 million | Down $60.5 million, or 7% |
| Product revenue | $377.7 million | $438.3 million | Down 14% |
| Service revenue | $453.6 million | $453.5 million | Approximately flat |
| Gross profit / gross margin | $609.2 million / 73% | $649.6 million / 73% | Profit down 6%; margin approximately flat |
| Operating income / margin | $37.1 million / 4.5% | $17.6 million / 2.0% | Income increased $19.5 million |
| Net income (loss) | $19.4 million | $(2.8) million | Improved $22.2 million |
| Diluted GAAP EPS | $0.26 | $(0.04) | Improved $0.30 |
| Operating cash flow | $213.9 million | $225.0 million | Down $11.1 million |
| Cash, cash equivalents and marketable securities | $476.5 million | $389.1 million | Up $87.4 million |
| Long-term debt | $350.0 million | $450.0 million | Down $100.0 million |
FY2021 non-GAAP diluted EPS was $1.70 versus $1.57 in FY2020; the company’s non-GAAP measures exclude specified costs and other items and should be considered alongside GAAP results. Investing activities provided $24.7 million, while financing activities used $118.3 million. Capital expenditures were $12.0 million.
At year-end, current assets were $722.5 million and current liabilities were $411.3 million. Deferred revenue and customer deposits totaled $373.1 million, including $269.8 million expected to be recognized over the next 12 months. The $1.0 billion secured revolving facility had $350 million drawn and $336 million of incremental availability based on covenant levels. NetScout reported compliance with its debt covenants.
Material changes versus FY2020
- Revenue fell 7%, primarily because of lower network performance management sales to enterprise and service-provider customers. U.S. revenue declined 11%; international revenue was approximately flat and rose to 42% of total revenue from 39%.
- Product gross margin rose to 75% from 72%, while service gross margin declined to 72% from 74%. Total gross margin remained approximately 73%.
- Operating expenses declined 9% to $572.1 million. Lower travel and event spending, commissions, legal expenses, and other costs contributed to the improvement in GAAP operating income and net income.
- Net income improved despite lower revenue, supported by expense reductions, including COVID-related reductions in travel and in-person events. Operating cash flow decreased modestly year over year.
- Cash and marketable securities increased, while debt declined following $100 million of repayments. Share repurchases under the program were $3.3 million, versus $175.0 million in FY2020.
- Combined product backlog was $27.9 million at March 31, 2021, down from $29.4 million a year earlier; management cautions that backlog is not necessarily indicative of future sales.
Outlook, commentary and risks
Management said COVID-19 and the resulting macroeconomic environment elongated customer purchasing cycles and affected FY2021 revenue. For FY2022, it expected technology and project spending to resume as conditions normalized, with priorities of advancing products, growing revenue, improving EPS, and generating solid free cash flow. The filing provides no specific FY2022 revenue or earnings guidance. Management expected available cash, operating cash flow, and revolver capacity to cover obligations, capital spending, debt service, and working capital for at least 12 months.
Key risks include continued pandemic or economic disruption and customer spending delays; intense competition and the need to innovate; cybersecurity incidents or product vulnerabilities; reliance on certain sole-source suppliers and channel partners; international, foreign-exchange, privacy, regulatory, and tax exposures; and debt, covenant, interest-rate, and LIBOR transition risks. The company also identifies execution risks in acquisitions, product development, and retaining skilled employees.
Contingency: In the Packet Intelligence patent case, the appeals court vacated $3.5 million of pre-suit damages and affirmed $2.25 million of post-suit damages. The Supreme Court denied NetScout’s petition for certiorari. NetScout considered the post-suit loss probable; interest and royalties on post-trial sales may also be owed. Any enhancement was not reasonably estimable, but management said it was likely within $0–$2.8 million.
Other notable items: NetScout deferred $8.9 million of employer payroll taxes under the CARES Act, with half due by December 2021 and half by December 2022. The auditor issued unqualified opinions on the financial statements and internal controls. Revenue recognition, specifically identifying distinct performance obligations in customer contracts, was identified as a critical audit matter.
Important facts for investors to verify
- Whether product demand and purchasing cycles recover, particularly in network performance management, and whether cybersecurity service growth offsets any weakness.
- Whether cost reductions are sustainable and translate into improved GAAP profitability and cash generation as travel and customer events resume.
- The amount and timing of final liability in the Packet Intelligence case, including ongoing royalties and any damages enhancement.
- Debt repayment plans, revolver availability and covenant headroom, and the transition from LIBOR-based borrowing rates.
- Conversion of deferred revenue and backlog into recognized revenue, and collection trends, including the disclosed 75-day DSO.
- Potential effects of foreign exchange, tax-asset valuation allowances, and the $8.9 million payroll-tax deferral on future results and cash flows.