NetScout Systems, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended September 30, 2019 (the second quarter of fiscal 2020). Figures are unaudited; dollar amounts below are in millions unless stated otherwise.
Business context
NetScout provides service assurance and security solutions for service providers and enterprises. It reports one operating segment. Results reflect lower product sales, including the effect of the September 2018 divestiture of its handheld network test (HNT) tools business, and disruption in its international enterprise sales force following a reorganization.
Key financial metrics
| Metric | Three months ended Sept. 30, 2019 | Prior-year quarter | Six months ended Sept. 30, 2019 | Prior-year six months |
|---|---|---|---|---|
| Revenue | $216.4 | $223.8 | $402.4 | $428.9 |
| Product revenue | $102.8 | $110.8 | $178.5 | $207.7 |
| Service revenue | $113.6 | $113.0 | $224.0 | $221.2 |
| Gross profit / margin | $157.3 / 73% | $159.8 / 71% | $288.6 / 72% | $302.9 / 71% |
| Operating loss | $(7.3) | $(23.1) | $(31.7) | $(100.2) |
| Net loss | $(17.5) | $(26.4) | $(46.8) | $(88.9) |
| Basic and diluted loss per share | $(0.23) | $(0.34) | $(0.61) | $(1.12) |
- Margins and expenses: Quarterly gross margin improved two percentage points, while six-month gross margin rose one point. Six-month operating expenses fell 21% to $320.3 million, partly because the prior-year period included a $35.9 million intangible-asset impairment and a $9.2 million divestiture loss. Lower headcount and reduced acquired-intangible amortization also contributed.
- Cash flow: Operating activities generated $48.5 million in the six months, versus $32.7 million a year earlier. Investing activities provided $1.4 million; financing activities used $211.4 million, principally for $100.0 million of debt repayment and $100.0 million of share repurchases.
- Liquidity: At September 30, cash and cash equivalents were $245.1 million; marketable securities totaled $62.8 million. Combined cash and securities were $307.8 million, down $179.2 million from March 31, 2019.
- Debt: Long-term debt was $450.0 million, down from $550.0 million at March 31. The company had a $1.0 billion senior secured revolving facility maturing January 2023 and reported compliance with its covenants. The outstanding debt carried a 3.55% interest rate at quarter-end.
- Other balance-sheet items: Deferred revenue and customer deposits totaled $331.2 million; the company expects to recognize $234.2 million within 12 months. Operating lease liabilities totaled $78.6 million following adoption of the new lease standard.
Changes versus comparable periods
- Quarterly revenue declined 3%; product revenue fell 7%, while service revenue rose 1%. Six-month revenue declined 6%, driven by a 14% reduction in product revenue; service revenue increased 1%.
- Management attributed product weakness to lower enterprise-related sales and the HNT divestiture. Six-month international revenue decreased 6%; Asia revenue fell 29%. In the quarter, international revenue decreased 12%.
- Quarterly net loss narrowed by $9.0 million. Six-month net loss narrowed by $42.1 million, primarily because the prior-year comparison included the HNT impairment and divestiture loss. Both periods remained loss-making under GAAP.
- For additional context, management reported non-GAAP operating income of $31.6 million and non-GAAP net income of $21.4 million for the quarter; for the six months, non-GAAP operating income was $43.7 million and non-GAAP net income was $27.0 million. These measures exclude specified items and are not substitutes for GAAP results.
Outlook, risks and unusual items
- Management stated that cash, available debt, short-term marketable securities and expected operating cash flows should be sufficient for working capital and capital expenditures for at least the next 12 months. No specific revenue or earnings guidance is provided in the filing.
- Management plans to continue capital spending to support infrastructure. It also noted that cash may be used for acquisitions or investments in complementary businesses, products or technologies.
- NetScout recorded $0.3 million of restructuring charges in the six months and anticipated approximately $0.3 million of additional charges over the next six months.
- A patent-infringement judgment involving Packet Intelligence is under appeal. The company characterized the risk of loss as reasonably possible, not probable, and estimated potential exposure from $0 to the jury and enhanced damages awards, plus possible interest, costs and royalties on post-trial sales through patent expirations, the latest in June 2022.
- Other items to monitor include foreign-exchange exposure (partly hedged with $10.0 million of forward-contract notional value), variable-rate debt and the planned transition away from LIBOR after 2021. The filing reported no material changes to previously disclosed risk factors.
Most important facts for investors to verify
- Whether product revenue—especially enterprise and international sales—stabilizes after the reported declines and sales-force reorganization.
- Whether service growth and gross-margin improvement persist, and how much reported profitability depends on non-GAAP exclusions.
- Cash generation, deferred-revenue trends, and liquidity after debt repayment and share repurchases.
- Debt levels, interest-rate exposure and continued compliance with credit-facility covenants.
- Developments and potential financial exposure in the Packet Intelligence appeal, including any ongoing royalties.