NETSCOUT SYSTEMS, INC. — Q1 FY2024 Form 10-Q
Reporting period: Three months ended June 30, 2023; unaudited. Comparisons are with the three months ended June 30, 2022 unless otherwise noted. NetScout sells network service-assurance and cybersecurity solutions to service-provider and enterprise customers.
Financial performance
| Metric | Q1 FY2024 | Q1 FY2023 | Change |
|---|---|---|---|
| Revenue | $211.1 million | $208.8 million | Up 1% |
| Gross profit / margin | $160.7 million / 76% | $151.1 million / 72% | Profit up $9.6 million; margin up 4 points |
| Operating loss | $4.7 million | $9.1 million | Loss narrowed $4.4 million |
| Net loss | $4.2 million; $0.06 per diluted share | $7.1 million; $0.10 per diluted share | Loss narrowed $2.9 million |
| Operating cash flow | $(22.4) million | $(12.5) million | Cash use increased $9.9 million |
Product revenue fell 4% to $94.7 million, while service revenue rose 5% to $116.5 million. Cybersecurity revenue increased 10% to $65.1 million; service-assurance revenue declined 2% to $146.1 million. International revenue grew 12% to $83.2 million, while U.S. revenue declined 5% to $127.9 million. No customer or channel partner exceeded 10% of revenue in the quarter; AT&T and Verizon each exceeded that threshold in the prior-year quarter.
GAAP operating expenses increased 3% to $165.4 million, including higher employee-related costs and general and administrative expenses; no restructuring charge was recorded, versus $1.8 million a year earlier. GAAP results included $14.3 million of acquired-intangible amortization and $19.8 million of share-based compensation. On the company’s non-GAAP basis, operating income was $29.6 million versus $24.5 million, non-GAAP net income was $22.7 million versus $18.1 million, and diluted non-GAAP EPS was $0.31 versus $0.24. These non-GAAP measures exclude specified costs and should be considered alongside, not instead of, GAAP results.
Cash, debt and liquidity
- Cash, cash equivalents, marketable securities and investments totaled $390.5 million at June 30, down $37.4 million from March 31, 2023. Cash and cash equivalents alone were $332.7 million.
- Operating cash use was $22.4 million; investing activities used $19.1 million and financing activities used $13.4 million. Capital expenditures were $2.0 million. Cash use included $13.4 million of tax withholding on vested restricted stock units.
- Long-term debt was $100 million, unchanged from March 31; the outstanding borrowing carried a 6.25% interest rate at quarter-end. The $800 million revolving facility matures July 2026, with $700 million of incremental availability reported at June 30. The company stated it was in compliance with its covenants.
- Current and long-term deferred revenue and customer deposits totaled $405.2 million, down from $441.3 million at March 31. The company expects to recognize $282.8 million, or 70%, within the next 12 months.
Changes, outlook and risks
- Management attributed the higher gross margin and narrower net loss primarily to lower costs associated with radio-frequency propagation modeling projects, revenue growth, and higher interest income. Increased employee-related costs partially offset these improvements.
- Total product backlog declined to $15.6 million at June 30 from $44.4 million at March 31; fulfillable backlog fell to $12.1 million from $41.1 million. Backlog includes orders that may be rescheduled or canceled with little or no penalty and is not necessarily indicative of future sales.
- No numerical quarterly or annual earnings guidance is provided in the supplied filing text. Management said cash, securities, operating cash generation and available revolver capacity should fund obligations, capital spending, debt service and working capital for at least the next 12 months. It is managing discretionary spending and hiring while continuing selected investments.
- Management cited uncertainty around geopolitical events, inflation, interest rates, foreign exchange, supply chains and recession risk. It also identified competition, customer spending and project timing as factors that could affect results. The filing reported no material changes to the risk factors in the FY2023 Form 10-K.
- A patent-infringement case involving legacy products remains on appeal. The district court’s amended judgment includes $2.3 million of post-suit damages, $1.1 million of enhanced damages, interest and royalties through patent expiration; enforcement is stayed pending appeal. Management considers the risk of loss on the post-suit and enhanced damages probable if the award survives the appeal and patent-claim invalidation proceedings; it considers pre-suit damages remote.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Key facts for investors to verify
- Whether service growth and cybersecurity demand can offset continued weakness in product revenue and service-provider project activity.
- Whether the sharp sequential backlog decline affects upcoming revenue, given the company’s warning that backlog is not a reliable standalone sales indicator.
- Drivers of operating cash use, including compensation accruals and deferred revenue movements, and the pace of cash generation in subsequent quarters.
- Debt pricing, covenant headroom and actual availability under the revolving facility as borrowing margins reset with leverage.
- Developments in the patent litigation appeal and the resulting potential liability.
- The sustainability of reported non-GAAP improvement relative to GAAP losses and the excluded compensation and amortization costs.