NETSCOUT SYSTEMS, INC. — Form 10-Q Summary
Reporting period: Quarter ended September 30, 2014 (the second quarter of fiscal 2015); financial statements are unaudited. Amounts below are in U.S. dollars.
Business context and financial performance
NetScout provides network, application and service assurance products and services to enterprise, government and telecommunications customers. It reports one operating segment.
| Metric | Three months ended September 30, 2014 | Six months ended September 30, 2014 |
|---|---|---|
| Revenue | $103.6 million; up 12% year over year | $211.5 million; up 22% |
| Gross profit / margin | $82.0 million / 79%; margin unchanged | $167.3 million / 79%; margin unchanged |
| Operating income | $18.6 million; versus $15.9 million | $38.2 million; versus $24.8 million |
| Net income | $11.2 million; versus $9.9 million | $22.7 million; versus $15.1 million |
| Diluted EPS | $0.27; versus $0.24 | $0.54; versus $0.36 |
| Operating cash flow | Not separately provided for the quarter | $29.0 million; versus $27.1 million |
Quarterly product revenue rose 11% to $58.0 million and service revenue rose 15% to $45.6 million. For the six-month period, product revenue increased 28% to $122.3 million and service revenue increased 13% to $89.1 million. Six-month revenue growth was led by U.S. sales, particularly in the service-provider sector.
At September 30, cash and cash equivalents were $79.0 million and marketable securities totaled $138.3 million, for combined liquidity of $217.3 million, down $1.5 million from March 31, 2014. The company had no borrowings under its $250 million revolving credit facility and reported compliance with its covenants. Current liabilities were $145.5 million, including $95.0 million of deferred revenue; total liabilities were $178.9 million.
Material changes and cash deployment
- Six-month operating income increased about 54% year over year, while gross margin remained 79%. Operating expenses rose 15% over the six-month period; general and administrative expense increased 37%, including higher employee, business-development, consulting and legal costs.
- Operating cash flow improved modestly, but cash and cash equivalents declined by $23.1 million during the six months. Cash used in investing was $25.6 million, including net purchases of marketable securities; financing used $26.8 million.
- The company spent $30.9 million on treasury-stock repurchases, including open-market purchases and shares withheld for employee taxes. Under a new $100 million authorization, $88.5 million remained available at quarter-end.
- Deferred revenue declined from $133.9 million at March 31 to $117.6 million at September 30. Management cited deferred-revenue reductions as a use of operating cash.
Outlook, risks and unusual items
- Management expects continued service-provider growth during fiscal 2015, continued service-revenue growth as the installed base expands, and gross margin to remain relatively flat. It expects cash and available securities plus operating cash flow to meet working-capital and capital-expenditure needs for at least 12 months. No formal numerical earnings or revenue guidance is provided.
- On October 13, 2014, after quarter-end, NetScout agreed to acquire Danaher’s communications business, including Tektronix Communications, Arbor Networks and certain Fluke Networks operations. The filing values the stock transaction at approximately $2.1 billion, based on the October 22 share price, and says Danaher shareholders would receive approximately 62.5 million NetScout shares. Closing was expected in the first half of fiscal 2016, subject to shareholder and regulatory approvals.
- Risks identified for the proposed acquisition include failure to obtain approvals or close, integration challenges and costs, disruption to customers or employees, potential asset write-downs, restrictions on other transactions, and substantial share dilution or selling pressure. A $55 million termination fee may apply in specified circumstances.
- Two direct customers each represented more than 10% of six-month revenue; no customer or channel partner exceeded 10% in the quarter. Foreign-exchange expense increased year over year. The company uses forward contracts to hedge certain foreign-currency operating costs.
- Management said current ordinary-course legal matters were not expected to have a significant adverse effect. The potential financial-statement impact of the newly issued revenue-recognition standard had not been determined.
Important facts for investors to verify
- Acquisition approval, closing timetable, final transaction terms, expected integration costs and resulting share dilution.
- Identity and continuing contribution of the two customers that each exceeded 10% of six-month revenue, and the sustainability of service-provider growth.
- Cash conversion and deferred-revenue trends, alongside continued repurchases and the remaining authorization.
- Reported GAAP results against management’s non-GAAP presentation: quarterly non-GAAP diluted EPS was $0.40 versus GAAP diluted EPS of $0.27; review the adjustments and tax effects used.