NetScout Systems, Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended December 31, 2019. The unaudited consolidated results cover NetScout’s service assurance and security solutions business, reported as one segment.
Financial performance
| Metric | Three months ended Dec. 31, 2019 | Prior-year quarter | Nine months ended Dec. 31, 2019 | Prior-year period |
|---|---|---|---|---|
| Revenue | $260.0 million | $246.0 million | $662.5 million | $674.9 million |
| Gross profit / margin | $194.4 million / 75% | $176.4 million / 72% | $483.0 million / 73% | $479.3 million / 71% |
| Operating income (loss) | $36.8 million | $(0.6) million | $5.1 million | $(100.8) million |
| Net income (loss) | $36.7 million | $(3.6) million | $(10.1) million | $(92.5) million |
| Diluted EPS | $0.49 | $(0.05) | $(0.13) | $(1.17) |
| Operating cash flow | Not presented for quarter | Not presented for quarter | $117.8 million | $69.5 million |
- Quarterly product revenue rose 7% to $143.3 million; service revenue rose 4% to $116.7 million. Product gross margin was 76% versus 70%; service gross margin was 73% versus 74%.
- For the nine-month period, product revenue fell 6% to $321.8 million and service revenue increased 2% to $340.7 million. Product gross margin improved to 72% from 68%; service gross margin was 74% in both periods.
- Nine-month non-GAAP net income was $81.6 million, or $1.07 per diluted share, compared with $57.3 million, or $0.72, a year earlier. The company’s non-GAAP measures exclude, among other items, acquired-intangible amortization, share-based compensation, restructuring, and specified acquisition/divestiture items; they are not GAAP substitutes.
Liquidity, debt and balance sheet
- At December 31, cash, cash equivalents and marketable securities totaled $346.5 million, down $140.5 million from March 31, 2019. Cash and cash equivalents were $287.7 million.
- Current assets were $654.0 million and current liabilities $384.1 million. Deferred revenue and customer deposits totaled $365.5 million; 71% was expected to be recognized within 12 months.
- Long-term debt was $450 million, down $100 million during the nine months. The debt is under a $1.0 billion senior secured revolving facility due January 2023; the company reported compliance with its covenants. The disclosed interest rate at December 31 was 3.30%.
- Operating cash flow of $117.8 million was more than offset by $236.6 million of financing outflows, including $125 million of share repurchases and $100 million of debt repayment. Investing cash outflow was $0.8 million, including $15.2 million of capital expenditures and $4.2 million for Eastwind, partly offset by net proceeds from marketable securities.
- Management said available cash, marketable securities, debt availability and expected operating cash flows should meet working-capital and capital-expenditure needs for at least 12 months. Capital expenditures were expected to continue through the remainder of fiscal 2020.
Material changes and management commentary
- Quarterly revenue increased 6%, led by network performance management offerings; DDoS revenue declined. U.S. revenue rose 10%, while international revenue declined 1%, with weakness in Asia and DDoS offerings.
- Nine-month revenue decreased 2%. Management attributed lower product revenue partly to the September 2018 divestiture of the handheld network test tools business and lower enterprise product sales. Maintenance contracts and renewals supported service growth.
- Nine-month GAAP net loss narrowed by $82.4 million. Management cited prior-year HNT-related intangible impairment of $35.9 million, divestiture loss of $9.2 million, higher prior-year restructuring charges, and lower employee-related costs. The comparison also includes a $26.7 million increase in income tax expense.
- The company repurchased 5.2 million shares for $125 million during the nine months; 9.2 million shares remained available under the repurchase authorization at December 31.
Outlook, unusual items and risks
- No specific revenue, earnings or margin guidance was provided in the filing. Management’s liquidity statement covers at least the next 12 months.
- Quarterly results included a tax benefit associated with new U.S. regulations affecting the company’s estimate of the Base Erosion Anti-Abuse Tax. Nine-month tax expense was $3.2 million despite a pretax loss; management cited foreign-subsidiary tax elections, stock-based compensation and the smaller pretax loss versus the prior year.
- The company reorganized its business units in the quarter, combining Service Assurance and Security into one reporting unit; it reported no resulting goodwill impairment. It recorded $0.5 million of current-year restructuring charges and anticipated approximately $0.1 million of additional charges over the next three months.
- Packet Intelligence patent litigation remains on appeal. Management characterized the loss risk as reasonably possible, with an estimated range from $0 to the jury and court awards, plus potential interest, costs and royalties on post-trial sales. The judgment includes running royalties through patent expiration, the latest date being June 2022.
- On February 5, 2020, after quarter-end, NetScout acquired cybersecurity company Gigavation for $8.0 million. The company also disclosed foreign-exchange and floating-rate debt exposure; it used currency forwards for hedging and reported no material historical sensitivity to a hypothetical 10% currency-rate change.
Important facts for investors to verify
- Whether quarterly product growth and improved product margins persist, given the mix-driven benefit from software-only sales and weaker DDoS offerings.
- How much of the nine-month GAAP improvement reflects sustainable operating performance versus prior-year impairment, divestiture and restructuring charges; review the non-GAAP reconciliations alongside GAAP results.
- Cash generation and capital allocation after $125 million of buybacks and $100 million of debt repayment, including the effect of remaining repurchase authorization on liquidity and leverage.
- Progress and potential exposure in the Packet Intelligence appeal, including ongoing royalties, interest and costs.
- Integration and performance of Eastwind and Gigavation, and the timing and financial effect of deferred revenue recognition.