NetScout Systems, Inc. — Q1 FY2013 Form 10-Q
Reporting period: Three months ended June 30, 2012; filed August 3, 2012. NetScout provides network service assurance and application performance management products and services. Amounts below are in U.S. dollars; financial statement figures are in millions unless indicated otherwise.
Financial performance
| Metric | Q1 FY2013 | Prior-year quarter | Change |
|---|---|---|---|
| Revenue | $76.4 | $63.3 | +21% |
| Product revenue | $40.3 | $29.5 | +36% |
| Service revenue | $36.1 | $33.8 | +7% |
| Gross profit / gross margin | $59.5 / 78% | $49.4 / 78% | +20% gross profit |
| Operating income / operating margin | $8.2 / 10.8% | $4.3 / 6.8% | +91% operating income |
| Net income / net margin | $5.0 / 6.6% | $2.4 / 3.8% | +109% net income |
| Diluted EPS | $0.12 | $0.06 | +100% |
| Operating cash flow | $36.1 | $4.8 | +$31.4 |
Product growth reflected higher sales across service provider, financial, government and general enterprise customers. Units shipped rose 43%, while average selling price declined about 1%. Service revenue growth mainly came from maintenance contracts. Product gross margin was 75% versus 74%; service gross margin remained 81%.
- Operating expenses increased 14% to $51.3 million, led by higher research and development and sales and marketing costs, including employee costs, commissions and event expenses.
- The effective tax rate estimate for FY2013 was 36.3%, versus 34.5% for FY2012; quarterly tax expense was $2.9 million versus $1.5 million.
- Management-reported non-GAAP diluted EPS was $0.19 versus $0.13, and non-GAAP net income was $8.1 million versus $5.5 million. These measures exclude specified acquisition, stock compensation, amortization, restructuring and tax effects; they are not substitutes for GAAP results.
Liquidity, cash flow and debt
- Cash, cash equivalents and marketable securities totaled $239.2 million at June 30, up $25.7 million from March 31. Current assets were $270.7 million and current liabilities $125.6 million.
- Operating cash flow of $36.1 million benefited substantially from receivables collections: accounts receivable provided $30.9 million of cash in the cash-flow statement, and days sales outstanding fell to 45 from 65 at March 31. Cash generation also reflected working-capital timing and higher earnings.
- Investing cash outflow was $10.5 million, including $2.7 million of capital expenditures; financing cash outflow was $7.9 million, including $6.4 million for treasury-stock purchases and $1.5 million of Simena contingent consideration.
- Debt outstanding was $62.0 million under a $250 million revolving facility maturing November 2016; the stated rate was 1.50% at June 30. The company reported covenant compliance. No scheduled principal repayment during the facility’s five-year term was described.
Changes, outlook and risks
- Bookings increased 27% year over year, with growth across verticals; backlog was $11.1 million, down from $13.0 million at March 31. Management cautioned that unshipped orders may be cancelable and backlog may not convert to revenue.
- Management expected revenue growth to accelerate in service providers, citing LTE deployments, and expected operating cash flow to increase with anticipated revenue and collections, partly offset by higher cash operating costs. No formal numerical revenue or earnings guidance was provided.
- Management stated existing liquidity and expected operating cash flows should cover anticipated needs for at least 12 months. Cash may also be used for acquisitions; insufficient liquidity could lead to additional debt or equity financing and potential shareholder dilution.
- NetScout acquired certain Accanto Systems assets, technology and employees on July 20, 2012, after quarter-end. The purchase-price allocation was still in progress. The company also reported $4.6 million of current-quarter revenue directly attributable to the Simena and Replay acquisitions.
- All remaining auction-rate securities, totaling $19.3 million, were redeemed at par during the quarter; NetScout held none at June 30 and reversed a $190,000 valuation reserve.
- A California Attorney General investigation continued into potential antitrust violations involving a former employee and third parties in fiscal 2012 state-agency sales. NetScout said it was cooperating, had accrued an immaterial liability, and had been informed the Department of Justice did not intend to act against the company; no charges or proceedings against NetScout had been initiated.
- The filing revised prior-year cash-flow presentation for inventory transfers to fixed assets, deemed immaterial: operating cash flow for the June 2011 quarter was adjusted from $6.3 million to $4.8 million, with an offsetting investing-cash-flow adjustment and no effect on earnings or EPS.
Important facts for investors to verify
- Whether strong cash flow and lower receivables days persist, given the substantial working-capital contribution this quarter.
- Whether bookings, backlog and LTE-related demand convert into recognized revenue, especially given backlog cancellation rights.
- The continuing effects of acquisitions on revenue, margins, integration costs, contingent consideration and potential dilution or use of cash.
- Developments in the California investigation and the sufficiency of the accrued liability.
- Quarterly debt balance, floating-rate exposure, covenant compliance and remaining share-repurchase authorization.