NETSCOUT SYSTEMS, INC. — FY2019 Form 10-K
Reporting period: Fiscal year ended March 31, 2019. The filing also reports unaudited fourth-quarter results for the three months ended March 31, 2019; it is not a standalone calendar-year 2018 report.
Business context
NetScout provides network and application service-assurance and cybersecurity solutions, including DDoS protection, to enterprises, service providers and government customers. It reports one operating segment.
Financial performance
| Metric | FY2019 | FY2018 |
|---|---|---|
| Revenue | $909.9 million | $986.8 million |
| Product revenue | $467.3 million, down 10% | $520.4 million |
| Service revenue | $442.6 million, down 5% | $466.4 million |
| Gross profit / margin | $655.8 million / 72% | $714.9 million / 72% |
| Operating income (loss) | $(71.6) million | $(4.1) million |
| Net income (loss) | $(73.3) million; $(0.93) diluted EPS | $79.8 million; $0.90 diluted EPS |
| Cash from operations | $149.8 million | $222.5 million |
FY2019 non-GAAP net income was $109.2 million and diluted EPS was $1.38; these company-defined measures exclude specified acquisition, restructuring, impairment, divestiture and other items and are not substitutes for GAAP results.
For FY2019 Q4, revenue was $235.0 million, gross profit $176.5 million, net income $19.2 million and diluted EPS $0.24. FY2018 Q4 revenue was $235.2 million, net income $16.8 million and diluted EPS $0.20.
Liquidity, debt and capital
- Cash, cash equivalents and marketable securities totaled $487.0 million at year-end, up from $447.8 million.
- Long-term debt was $550.0 million, down from $600.0 million; the company repaid $50.0 million during FY2019. The $1.0 billion secured revolving facility expires January 2023; the company reported compliance with its covenants.
- Working capital was $421.3 million. Cash from operations was $149.8 million; capital expenditures were $23.4 million.
- Accounts-receivable days sales outstanding rose to 88 days from 78. The company repurchased 543,251 shares for $14.5 million under its program and withheld shares for employee tax obligations.
Changes, outlook and notable items
- Revenue fell 8%, primarily reflecting lower service-provider spending on service assurance and DDoS products, and the September 2018 divestiture of handheld network test tools (HNT). International revenue declined 12%; international sales were 39% of revenue versus 41%.
- Net loss reflected $35.9 million of HNT-related intangible impairment, $18.7 million of restructuring charges, a $9.5 million divestiture loss, higher interest expense, and a smaller tax benefit than in FY2018. FY2018 included a substantial benefit related to the Tax Cuts and Jobs Act.
- HNT was sold for $1.3 million cash plus potential milestone-based earnouts of up to $4.0 million. The company recognized a $0.8 million contingent-consideration asset at year-end.
- Management said existing cash, marketable securities, operating cash flow and available debt should cover working-capital and capital-expenditure needs for at least the next 12 months. No numerical FY2020 revenue or earnings guidance is provided in the supplied filing text. Management plans continued product and security investment, cost control and efficiency efforts.
- A court entered judgment in the Packet Intelligence patent case, including $5.75 million in jury damages, $2.8 million in enhanced damages, interest and running royalties through patent expiration (latest June 2022). NetScout is appealing and describes the loss as reasonably possible; its estimated range starts at zero and extends to the awarded amounts plus interest, costs and potential royalties.
- NetScout adopted revenue-recognition standard Topic 606 in FY2019. The company reported that adoption increased FY2019 revenue by $21.0 million and reduced the reported net loss by $16.6 million compared with the prior method; prior-year comparatives were not restated.
Important facts for investors to verify
- Whether service-provider demand and product revenue stabilize, and how much reported growth is affected by divestitures and Topic 606.
- Whether operating cash flow recovers and receivables/DSO improve, given the decline in cash from operations and DSO increase.
- Debt repayment capacity, floating-rate exposure and covenant headroom; the filing estimates a $2.3 million annual interest change for a 10% rate move at year-end debt levels.
- The outcome and potential continuing cost of the Packet Intelligence litigation, including royalties and appeal-related developments.
- Execution of restructuring and product-development plans, and any further impairments or changes in the value of the HNT earnout.