Business context and reporting period
NetScout Systems, Inc. filed this unaudited Form 10-Q for the first quarter of fiscal 2020, the three months ended June 30, 2019. The company sells service assurance and security solutions, including products and related support and professional services.
Financial results and liquidity
Amounts are in U.S. dollars; financial statement amounts below are in millions except per-share data.
| Metric | Q1 FY2020 | Q1 FY2019 |
|---|---|---|
| Revenue | $186.0 | $205.1 |
| Gross profit / margin | $131.3 / 70.6% | $143.1 / 69.8% |
| Operating loss | $(24.4) | $(77.1) |
| Net loss | $(29.3) | $(62.5) |
| Diluted loss per share | $(0.38) | $(0.78) |
| Operating cash flow | $49.5 | $25.5 |
Product revenue fell 22% to $75.7 million; service revenue rose 2% to $110.3 million. GAAP product and service gross margins were 64% and 75%, respectively. The company also reported non-GAAP operating income of $12.1 million and non-GAAP net income of $5.6 million, versus $7.4 million and $2.1 million, respectively, a year earlier; these measures exclude specified items and should be considered alongside GAAP results.
At June 30, cash and cash equivalents were $353.7 million and marketable securities totaled $89.4 million, for combined liquidity of $443.2 million. Current assets were $675.9 million and current liabilities $349.6 million. Long-term debt was $500.0 million, down $50.0 million during the quarter; the company repaid a further $50.0 million on August 6, 2019. It reported compliance with credit-facility covenants. The $1.0 billion senior secured revolving facility matures in January 2023.
Changes versus the prior comparable period
- Revenue declined 9%, primarily reflecting the September 2018 divestiture of the HNT tools business, weaker product sales to service providers and enterprise customers, and disruption in international enterprise sales following a sales-force reorganization.
- Gross margin increased about one percentage point, while gross profit declined 8% as lower revenue outweighed reduced costs.
- Net loss narrowed by $33.2 million, largely because the prior-year quarter included a $35.9 million intangible-asset impairment charge related to the HNT business.
- Operating cash flow increased by $24.0 million to $49.5 million. Cash and marketable securities declined $43.8 million from March 31, mainly reflecting debt repayment and share repurchases, partly offset by operating cash flow.
Outlook, commentary, risks and unusual items
- Management said constrained service-provider spending and elongated purchasing cycles continued to weigh on results. It also cited international enterprise sales-force disruption. No specific revenue or earnings guidance was provided in the filing.
- Management believes cash, available debt, marketable securities and future operating cash flow will meet anticipated working-capital and capital-expenditure needs for at least 12 months. It expects to continue capital investment and may consider acquisitions or investments.
- The company adopted the lease accounting standard effective April 1, 2019, recording approximately $68.2 million of right-of-use assets and $83.2 million of lease liabilities at adoption; management reported no material effect on operations, cash flow, liquidity or debt-covenant compliance.
- The effective tax rate was 1.7%, versus 23.5% a year earlier. The quarter included approximately $6.0 million of tax expense related to elections treating certain foreign subsidiaries as U.S. branches for federal tax purposes.
- NetScout appealed a patent-infringement judgment in the Packet Intelligence case on June 12, 2019. The company assessed the loss as reasonably possible, not probable, and estimated potential exposure from $0 to the jury and enhanced damages awarded, plus interest, costs and possible post-trial royalties. The judgment includes a running royalty through patent expirations, the latest in June 2022.
- The Eastwind acquisition closed April 3, 2019 for estimated consideration of $5.2 million, including $1.0 million held in escrow. HNT divestiture earnout consideration is contingent on milestones and had a fair value of $0.2 million at quarter-end.
- The company repurchased 1.30 million shares for $33.2 million under its repurchase program during the quarter; 13.06 million shares remained authorized for repurchase at June 30.
Important facts for investors to verify
- Whether product demand and service-provider purchasing cycles improve, and whether the international enterprise sales-force reorganization stabilizes sales.
- The durability of operating cash flow and liquidity after debt repayments, repurchases and planned capital expenditures.
- Developments in the Packet Intelligence appeal, including possible damages, interest and ongoing royalty exposure.
- Future tax effects of the subsidiary tax elections and any material changes in the effective tax rate.
- Progress integrating Eastwind and performance against the HNT divestiture earnout milestones.