NETSCOUT SYSTEMS, INC. — FY2013 Form 10-K
Business context and reporting period. NetScout provides hardware and software for network and application performance management and service assurance to enterprises, government agencies, and telecommunications providers. This annual report covers the fiscal year ended March 31, 2013; the filing also reports the quarter ended that date. Fiscal-year comparisons are with FY2012 unless noted. All dollar amounts below are in U.S. dollars.
Financial performance
| Metric | FY2013 | FY2012 | Change |
|---|---|---|---|
| Revenue | $350.6 million | $308.7 million | +14% |
| Product revenue | $198.7 million | $168.1 million | +18% |
| Service revenue | $151.8 million | $140.5 million | +8% |
| Gross profit / margin | $276.5 million / 79% | $243.0 million / 79% | +14% profit; margin flat |
| Operating income | $64.5 million | $53.7 million | +20% |
| Net income | $40.6 million | $32.4 million | +25% |
| Diluted EPS | $0.96 | $0.76 | +26% |
| Operating cash flow | $95.4 million | $68.3 million | +$27.1 million |
FY2013 operating margin was approximately 18.4% versus 17.4% in FY2012; net margin was approximately 11.6% versus 10.5%. The effective tax rate was 36.3% in both years.
Quarter ended March 31, 2013: Revenue was $98.1 million versus $89.5 million in the prior-year quarter; net income was $14.6 million versus $12.9 million, and diluted EPS was $0.34 versus $0.30.
Liquidity, debt, and cash flow
- Cash, cash equivalents, and marketable securities totaled $154.1 million at March 31, 2013, down $59.4 million year over year. Working capital was $92.1 million, compared with $155.6 million.
- Operating cash flow of $95.4 million was offset by $21.7 million used in investing and $91.0 million used in financing. Major cash uses included $62.0 million of debt repayment, $51.3 million for acquisitions, and $27.4 million for share repurchases; figures may not net directly because cash flows also included other activity.
- There was no debt outstanding at year-end. The company retained a $250 million revolving credit facility, expandable to $300 million, maturing in November 2016; it reported compliance with facility covenants.
- Management said existing liquidity and anticipated operating cash flows should cover working capital and capital expenditure needs for at least the next 12 months.
Material changes and management outlook
- Growth came from both product and service revenue. Product growth reflected increases in general enterprise and service-provider sales, partly offset by lower government-enterprise sales. Service-provider customers were expected to remain an important growth driver.
- International revenue was 25% of total revenue, unchanged as a share from FY2012; Europe revenue rose 30% to $42.9 million. Direct-channel revenue rose 25%, while indirect-channel revenue increased 3%.
- Research and development expense rose 24% to $61.5 million, reflecting higher headcount, incentives, and acquisition-related costs. Total operating expenses rose 12% to $212.0 million.
- Acquisitions of ONPATH and Accanto cost approximately $51.8 million in total. ONPATH expanded packet-flow switching; Accanto added voice-service monitoring. Acquisition-related amortization, integration expenses, and a $1.1 million restructuring charge affected results. Goodwill was $202.5 million and acquired intangible assets were $63.8 million; the company reported no impairment indicators in its annual assessments.
- Management expected continued revenue growth in FY2014, single-digit service-revenue growth, and gross margin to remain relatively flat. It provided no specific numerical revenue or earnings guidance in the supplied filing text.
- Quarterly results can vary with sales-cycle timing, customer spending, product acceptance, shipments, and seasonal buying patterns; historically, bookings have been stronger in the third and fourth fiscal quarters.
Risks, contingencies, and unusual items
- Key risks include competition and rapid technological change; dependence on distribution partners and skilled employees; integration of acquisitions; economic and public-sector budget pressures; international, currency, and regulatory exposure; and reliance on sole- or limited-source hardware components.
- A California Attorney General investigation continues regarding potential state and federal antitrust violations tied to a former employee and third parties in FY2012 sales to state agencies. NetScout said it received no benefit, was cooperating, and had been told the Department of Justice did not intend to act against it; an immaterial liability was accrued.
- At year-end, contingent acquisition consideration was $5.1 million, with a further $0.2 million contingent contractual non-compliance liability. Claims by former Accanto employees were settled and the company’s immaterial share was paid.
- There were $37.2 million of operating-lease obligations and $46.6 million of total contractual obligations. The company had $370,000 of unrecognized tax benefits and related accrued interest; timing of any settlement was uncertain.
- The company repurchased 999,499 shares for $23.5 million under its repurchase program during FY2013; it did not declare cash dividends and did not anticipate dividends in the foreseeable future.
Important facts for investors to verify
- Whether FY2014 growth expectations were achieved, particularly in service-provider and enterprise markets, and whether service revenue grew at the expected single-digit rate.
- How the ONPATH and Accanto acquisitions contributed to revenue, cash generation, integration costs, and future amortization; assess goodwill and intangible-asset assumptions.
- Whether operating cash flow remains strong after FY2013’s favorable working-capital movements, including accrued compensation and prepaid-tax changes.
- Developments in the California antitrust investigation, contingent obligations, and tax examinations.
- Changes in liquidity, repurchases, and use of the revolving facility. The filing reports effective disclosure controls and internal control over financial reporting; ONPATH was excluded from management’s control assessment because it had been acquired late in the year.