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NetScout Systems Reports Financial Results for Second Quarter Fiscal Year 2017

October 27, 2016 7:34 AM

WESTFORD, Mass.--(BUSINESS WIRE)-- NetScout Systems, Inc. (NASDAQ: NTCT), a leading provider of business assurance, a powerful combination of service assurance, cybersecurity, and business intelligence solutions, today announced financial results for its second quarter of fiscal year 2017 ended September 30, 2016.

“NetScout delivered good second-quarter results and made important progress on major new product initiatives,” stated Anil Singhal, NetScout’s president and CEO. “Our second-quarter 2017 revenue performance reflected solid enterprise-related service assurance growth and excellent top-line results at Arbor Networks. This, however, was mostly offset by a decline in the service provider service assurance revenue due to the timing and magnitude of a very large project in the same period last year. Most importantly, we launched our new InfiniStreamNG real-time information platform. We are now able to deliver new and enhanced analytics along with complementary products that address the service assurance, cybersecurity and business intelligence requirements of our customers around the world.”

Singhal concluded, “Service provider spending continues to be constrained primarily due to their focus on investment return for their LTE networks. As a result, the timing and magnitude of certain service provider orders remains fluid as we approach their calendar year-end budgeting timeframes. Fortunately, our competitive position with major mobile operators and MSOs worldwide is very strong. Our ability to invest in innovation and deliver compelling solutions will play an important role in continuing to differentiate NetScout in the marketplace, assist our customers with their digital transformation challenges, and drive strong performance over the longer term.”

Notable second-quarter and recent operational highlights include:

Q2 FY17 Financial Results

As a reminder, NetScout acquired Danaher’s Communications Business in mid-July 2015. Accordingly, the Company’s second-quarter fiscal year 2016 results reflect an approximately two and one-half month contribution from the acquired assets.

Total revenue (GAAP) for the second quarter of fiscal year 2017 was $272.0 million. Non-GAAP total revenue for the second quarter of fiscal year 2017 was $283.3 million. A reconciliation of GAAP and non-GAAP results is included in the attached financial tables.

Product revenue (GAAP) for the second quarter of fiscal year 2017 was $168.9 million, which was approximately 62% of total revenue. On a non-GAAP basis, product revenue for the second quarter of fiscal year 2017 was $174.9 million, which was approximately 62% of total non-GAAP revenue. Service revenue (GAAP) for the second quarter of fiscal year 2017 was $103.2 million, or approximately 38% of total revenue. On a non-GAAP basis, service revenue for fiscal year 2017’s second quarter was $108.4 million, which was approximately 38% of total non-GAAP revenue.

NetScout’s income from operations (GAAP) was $0.8 million in the second quarter of fiscal year 2017. The Company’s GAAP operating profit margin was 0.3%. Second-quarter fiscal year 2017 non-GAAP EBITDA from operations was $67.0 million, or 23.6% of non-GAAP quarterly revenue. Second-quarter fiscal year 2017 non-GAAP income from operations was $58.0 million. NetScout’s non-GAAP operating margin for the second quarter of fiscal year 2017 was 20.5%.

Net loss (GAAP) for the second quarter of fiscal year 2017 was $1.3 million, or $0.01 per share (diluted). On a non-GAAP basis, net income for the second quarter was $36.4 million, or $0.39 per share (diluted).

As of September 30, 2016, cash and cash equivalents, and short and long-term marketable securities were $303.4 million, compared with $334.9 million as of June 30, 2016. During the second quarter of fiscal year 2017, NetScout repurchased 929,009 shares of its common stock at an average price of $28.62 per share, totaling approximately $26.6 million in the aggregate. As of September 30, 2016, NetScout had approximately 6.9 million shares available for repurchase under its existing common stock repurchase plan that authorized the repurchase of up to 20 million shares of its common stock.

First-Half FY17 Financial Results

Highlights for the first two quarters of fiscal year 2017 included:

Guidance:

NetScout fiscal year 2017 guidance reflects the Company’s progress to date, share repurchase activity during the first half of fiscal year 2017, updated assumptions to certain anticipated acquisition-related adjustments to revenue and to various costs and expenses, and its plans for the second half of the fiscal year:

Conference Call Instructions:

NetScout will host a conference call to discuss its second-quarter fiscal year 2017 financial results today at 8:30 a.m. ET. This call will be webcast live through NetScout’s website at http://ir.netscout.com/phoenix.zhtml?c=92658&p=irol-irhomedf. Alternatively, people can listen to the call by dialing (785) 424-1051. The conference call ID is NTCTQ217. A replay of the call will be available after 12:00 p.m. ET on October 27, 2016 for approximately one week. The number for the replay is (800) 753-8591 for U.S./Canada and (402) 220-0686 for international callers.

Use of Non-GAAP Financial Information:

To supplement the financial measures presented in NetScout's press release in accordance with accounting principles generally accepted in the United States ("GAAP"), NetScout also reports the following non-GAAP measures: non-GAAP total revenue, non-GAAP product revenue, non-GAAP service revenue, non-GAAP income from operations, non-GAAP operating margin, non-GAAP EBITDA from operations, and non-GAAP EBITDA from operations margin, non-GAAP net income, and non-GAAP net income per share (diluted). Non-GAAP revenue eliminates the GAAP effects of acquisitions by adding back revenue related to deferred revenue revaluation, and revenue impacted by the amortization of intangible assets. Non-GAAP income from operations includes the aforementioned revenue adjustments and also removes expenses related to the amortization of acquired intangible assets, stock-based compensation, certain expenses relating to acquisitions including inventory fair value adjustments, depreciation costs, compensation for post-combination services and business development and integration costs. Non-GAAP EBITDA from operations includes the aforementioned items related to non-GAAP income from operations and also removes non-acquisition-related depreciation expense. Non-GAAP operating margin is calculated based on the non-GAAP financial metrics discussed above. Non-GAAP net income includes the aforementioned items related to non-GAAP income from operations, net of related income tax effects. Non-GAAP diluted net income per share also excludes these expenses as well as the related impact of all these adjustments on the provision for income taxes. Investors are encouraged to review the related GAAP financial measures and the reconciliation of these non-GAAP financial measures to their most directly comparable GAAP financial measures included in the attached tables within this press release.

These non-GAAP measures are not in accordance with GAAP, should not be considered an alternative for measures prepared in accordance with GAAP (revenue, net income and diluted net income per share), and may have limitations in that they do not reflect all of NetScout’s results of operations as determined in accordance with GAAP. These non-GAAP measures should only be used to evaluate NetScout’s results of operations in conjunction with the corresponding GAAP measures. The presentation of non-GAAP information is not meant to be considered superior to, in isolation from or as a substitute for results prepared in accordance with GAAP.

NetScout believes these non-GAAP financial measures will enhance the reader’s overall understanding of NetScout’s current financial performance and NetScout's prospects for the future by providing a higher degree of transparency for certain financial measures and providing a level of disclosure that helps investors understand how the Company plans and measures its own business. NetScout believes that providing these non-GAAP measures affords investors a view of NetScout’s operating results that may be more easily compared to peer companies and also enables investors to consider NetScout’s operating results on both a GAAP and non-GAAP basis during and following the integration period of NetScout’s acquisitions. Presenting the GAAP measures on their own would not be indicative of NetScout’s core operating results. Furthermore, NetScout believes that the presentation of non-GAAP measures when shown in conjunction with the corresponding GAAP measures provides useful information to management and investors regarding present and future business trends relating to its financial condition and results of operations.

NetScout management regularly uses supplemental non-GAAP financial measures internally to understand, manage and evaluate its business and to make operating decisions. These non-GAAP measures are among the primary factors that management uses in planning and forecasting.

About NetScout Systems, Inc.

NetScout Systems, Inc. (NASDAQ: NTCT) is a leading provider of business assurance – a powerful combination of service assurance, cybersecurity, and business intelligence solutions – for today’s most demanding service provider, enterprise and government networks. NETSCOUT’s Adaptive Service Intelligence (ASI) technology continuously monitors the service delivery environment to identify performance issues and provides insight into network-based security threats, helping teams to quickly resolve issues that can cause business disruptions or impact user experience. NETSCOUT delivers unmatched service visibility and protects the digital infrastructure that supports our connected world. To learn more, visit www.netscout.com or follow @NETSCOUT on Twitter, Facebook, or LinkedIn.

Safe Harbor

Forward-looking statements in this release are made pursuant to the safe harbor provisions of Section 21E of the Securities Exchange Act of 1934 and other federal securities laws. Investors are cautioned that statements in this press release, which are not strictly historical statements, including without limitation, the statements related to the financial guidance for NetScout; the delivery of new and enhanced analytics along with complementary products that address customer requirements; the timing and magnitude of certain service provider orders that remain fluid; and that our ability to invest in innovation and deliver compelling solutions will play an important role in continuing to differentiate NetScout in the marketplace, assist our customers with their digital transformation challenges, and drive strong performance over the longer term, constitute forward-looking statements which involve risks and uncertainties. Actual results could differ materially from the forward-looking statements due to known and unknown risk, uncertainties, assumptions and other factors. Such factors include slowdowns or downturns in economic conditions generally and in the market for advanced network and service assurance solutions specifically; the volatile foreign exchange environment; the Company’s relationships with strategic partners and resellers; dependence upon broad-based acceptance of the Company’s network performance management solutions; the presence of competitors with greater financial resources than we have, and their strategic response to our products; our ability to retain key executives and employees; lower than expected demand for the Company’s products and services; and the ability of NetScout to successfully integrate the merged assets and the associated technology and achieve operational efficiencies. For a more detailed description of the risk factors associated with the Company, please refer to the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2016 and the Company’s subsequent Quarterly Report on Form 10-Q, which are on file with the Securities and Exchange Commission. NetScout assumes no obligation to update any forward-looking information contained in this press release or with respect to the announcements described herein.

©2016 NetScout Systems, Inc. All rights reserved. NetScout and the NetScout logo are registered trademarks or trademarks of NetScout Systems, Inc. and/or its subsidiaries and/or affiliates in the USA and/or other countries.

NetScout Systems, Inc.
Condensed Consolidated Statements of Operations
(In thousands, except per share data)
(Unaudited)
Three Months Ended Six months ended
September 30, September 30,
2016 2015 2016 2015
Revenue:
Product $ 168,873 $ 174,899 $ 333,462 $ 228,492
Service 103,175 86,211 207,538 133,361
Total revenue 272,048 261,110 541,000 361,853
Cost of revenue:
Product 56,647 75,421 116,474 87,919
Service 27,863 24,766 55,070 33,564
Total cost of revenue 84,510 100,187 171,544 121,483
Gross profit 187,538 160,923 369,456 240,370
Operating expenses:
Research and development 61,046 65,896 121,597 83,954
Sales and marketing 76,706 79,153 158,294 117,245
General and administrative 31,527 41,301 62,454 51,400
Amortization of acquired intangible assets 17,559 9,843 35,131 10,652
Restructuring charges (105 ) - 1,929 -
Total operating expenses 186,733 196,193 379,405 263,251
Income (loss) from operations 805 (35,270 ) (9,949 ) (22,881 )
Interest and other expense, net (2,430 ) (828 ) (5,334 ) (974 )
Loss before income tax benefit (1,625 ) (36,098 ) (15,283 ) (23,855 )
Income tax benefit (359 ) (28,183 ) (5,019 ) (23,609 )
Net loss $ (1,266 ) $ (7,915 ) $ (10,264 ) $ (246 )
Basic net loss per share $ (0.01 ) $ (0.09 ) $ (0.11 ) $ -
Diluted net loss per share $ (0.01 ) $ (0.09 ) $ (0.11 ) $ -
Weighted average common shares outstanding used in computing:
Net loss per share - basic 91,919 91,410 92,628 66,232
Net loss per share - diluted 91,919 91,410 92,628 66,232

NetScout Systems, Inc.
Consolidated Balance Sheets
(In thousands)
September 30, March 31,
2016 2016
(unaudited)
Assets
Current assets:
Cash, cash equivalents and marketable securities $ 294,720 $ 338,714
Accounts receivable and unbilled costs, net 240,599 247,199
Inventories 52,860 58,029
Prepaid expenses and other current assets 76,879 96,536
Total current assets 665,058 740,478
Fixed assets, net 64,003 62,033
Goodwill and intangible assets, net 2,712,708 2,763,409
Long-term marketable securities 8,675 13,361
Other assets 9,341 13,562
Total assets $ 3,459,785 $ 3,592,843
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 45,853 $ 43,969
Accrued compensation 65,226 82,303
Accrued other 29,454 34,136
Deferred revenue and customer deposits 282,045 296,648
Total current liabilities 422,578 457,056
Other long-term liabilities 7,936 7,539
Deferred tax liability 259,625 285,359
Accrued long-term retirement benefits 31,493 31,378
Long-term deferred revenue 64,201 68,129
Long-term debt 300,000 300,000
Total liabilities 1,085,833 1,149,461
Stockholders' equity:
Common stock 115 114
Additional paid-in capital 2,666,997 2,642,745
Accumulated other comprehensive loss (1,705 ) (1,501 )
Treasury stock, at cost (564,581 ) (481,366 )
Retained earnings 273,126 283,390
Total stockholders' equity 2,373,952 2,443,382
Total liabilities and stockholders' equity $ 3,459,785 $ 3,592,843

NetScout Systems, Inc.
Reconciliation of Current GAAP to Current and Historical Non-GAAP Financial Measures
(In thousands, except per share data)
(Unaudited)
Three Months Ended Three Months Ended Six Months Ended
September 30, June 30, September 30,
2016 2015 2016 2016 2015
GAAP Product Revenue $ 168,873 $ 174,899 $ 164,589 $ 333,462 $ 228,492
Product deferred revenue fair value adjustment 3,130 3,107 1,345 4,475 3,107
Delayed transfer entity adjustment (1) - 633 - - 633
Amortization of acquired intangible assets (3) 2,869 2,028 2,877 5,746 2,028
Non-GAAP Product Revenue $ 174,872 $ 180,667 $ 168,811 $ 343,683 $ 234,260
GAAP Service Revenue $ 103,175 $ 86,211 $ 104,363 $ 207,538 $ 133,361
Service deferred revenue fair value adjustment 5,218 14,945 4,783 10,001 14,945
Non-GAAP Service Revenue $ 108,393 $ 101,156 $ 109,146 $ 217,539 $ 148,306
GAAP Revenue $ 272,048 $ 261,110 $ 268,952 $ 541,000 $ 361,853
Product deferred revenue fair value adjustment 3,130 3,107 1,345 4,475 3,107
Service deferred revenue fair value adjustment 5,218 14,945 4,783 10,001 14,945
Delayed transfer entity adjustment (1) - 633 - - 633
Amortization of acquired intangible assets (3) 2,869 2,028 2,877 5,746 2,028
Non-GAAP Revenue $ 283,265 $ 281,823 $ 277,957 $ 561,222 $ 382,566
GAAP Gross Profit $ 187,538 $ 160,923 $ 181,918 $ 369,456 $ 240,370
Product deferred revenue fair value adjustment 3,130 3,107 1,345 4,475 3,107
Service deferred revenue fair value adjustment 5,218 14,945 4,783 10,001 14,945
Inventory fair value adjustment - 12,773 - - 12,773
Delayed transfer entity adjustment (1) - 535 - - 535
Share-based compensation expense (2) 1,511 921 993 2,504 1,396
Amortization of acquired intangible assets (3) 13,253 16,835 13,246 26,499 17,593
Business development and integration expense (4) (68 ) 225 158 90 225
Compensation for post-combination services (5) 381 2,079 144 525 2,079
Acquisition related depreciation expense (6) (12 ) 87 165 153 87
Non-GAAP Gross Profit $ 210,951 $ 212,430 $ 202,752 $ 413,703 $ 293,110
GAAP Income (Loss) from Operations $ 805 $ (35,270 ) $ (10,754 ) $ (9,949 ) $ (22,881 )
Product deferred revenue fair value adjustment 3,130 3,107 1,345 4,475 3,107
Service deferred revenue fair value adjustment 5,218 14,945 4,783 10,001 14,945
Inventory fair value adjustment - 12,773 - - 12,773
Delayed transfer entity adjustment (1) - 383 - - 383
Share-based compensation expense (2) 11,678 7,503 8,132 19,810 12,098
Amortization of acquired intangible assets (3) 30,812 26,678 30,818 61,630 28,245
Business development and integration expense (4) 2,977 14,544 3,669 6,646 17,906
Compensation for post-combination services (5) 2,867 21,661 1,715 4,582 21,682
Restructuring charges (105 ) - 2,034 1,929 -
Acquisition related depreciation expense (6) 666 1,177 1,359 2,025 1,177
Non-GAAP Income from Operations $ 58,048 $ 67,501 $ 43,101 $ 101,149 $ 89,435
GAAP Net Loss $ (1,266 ) $ (7,915 ) $ (8,998 ) $ (10,264 ) $ (246 )
Product deferred revenue fair value adjustment 3,130 3,107 1,345 4,475 3,107
Service deferred revenue fair value adjustment 5,218 14,945 4,783 10,001 14,945
Inventory fair value adjustment - 12,773 - - 12,773
Share-based compensation expense (2) 11,678 7,503 8,132 19,810 12,098
Amortization of acquired intangible assets (3) 30,812 26,678 30,818 61,630 28,245
Business development and integration expense (4) 2,977 14,544 3,669 6,646 17,906
Compensation for post-combination services (5) 2,867 21,661 1,715 4,582 21,682
Restructuring charges (105 ) - 2,034 1,929 -
Acquisition related depreciation expense (6) 666 1,177 1,359 2,025 1,177
Loss on extinguishment of debt (7) - 55 - - 55
Income tax adjustments (8) (19,544 ) (50,868 ) (18,528 ) (38,072 ) (54,420 )
Non-GAAP Net Income $ 36,433 $ 43,660 $ 26,329 $ 62,762 $ 57,322
GAAP Diluted Net loss Per Share $ (0.01 ) $ (0.09 ) $ (0.10 ) $ (0.11 ) $ -
Share impact of non-GAAP adjustments identified above 0.40 0.56 0.38 0.78 0.86
Non-GAAP Diluted Net Income Per Share $ 0.39 $ 0.47 $ 0.28 $ 0.67 $ 0.86
Shares used in computing non-GAAP diluted net income per share 92,716 91,967 94,008 93,337 66,811

NetScout Systems, Inc.
Reconciliation of Current GAAP to Current and Historical Non-GAAP Financial Measures - Continued
(In thousands, except per share data)
(Unaudited)
Three Months Ended Three Months Ended Six Months Ended
September 30, June 30, September 30,
2016 2015 2016 2016 2015
(1 ) Delayed transfer entity adjustment included in these amounts
is as follows:
Product revenue $ - $ 633 $ - $ - $ 633
Cost of product revenue - (98 ) - - (98 )
Sales and marketing - (152 ) - - (152 )
Other income (expense) - (383 ) - - (383 )
Total delayed transfer entity adjustment $ - $ - $ - $ - $ -
(2 ) Share-based compensation expense included in these amounts
is as follows:
Cost of product revenue $ 266 $ 167 $ 195 $ 461 $ 269
Cost of service revenue 1,245 754 798 2,043 1,127
Research and development 3,872 2,572 2,633 6,505 4,062
Sales and marketing 3,726 2,240 2,611 6,337 3,643
General and administrative 2,569 1,770 1,895 4,464 2,997
Total share-based compensation expense $ 11,678 $ 7,503 $ 8,132 $ 19,810 $ 12,098
(3 ) Amortization expense related to acquired software and product
technology, tradenames, customer relationships included in these
amounts is as follows:
Total revenue adjustment $ 2,869 $ 2,028 $ 2,877 $ 5,746 $ 2,028
Cost of product revenue 10,384 14,807 10,369 20,753 15,565
Operating expenses 17,559 9,843 17,572 35,131 10,652
Total amortization expense $ 30,812 $ 26,678 $ 30,818 $ 61,630 $ 28,245
(4 ) Business development and integration expense included in
these amounts is as follows:
Cost of product revenue $ (68 ) $ 131 $ 158 $ 90 $ 131
Cost of service revenue - 94 - - 94
Research and development - 256 - - 256
Sales and marketing 24 271 10 34 1,254
General and administrative 3,021 13,792 3,501 6,522 16,171
Total business development and integration expense $ 2,977 $ 14,544 $ 3,669 $ 6,646 $ 17,906
(5 ) Compensation for post-combination services included in these
amounts is as follows:
Cost of product revenue $ 113 $ 328 $ 42 $ 155 $ 328
Cost of service revenue 268 1,751 102 370 1,751
Research and development 768 8,262 793 1,561 8,283
Sales and marketing 720 7,472 1,006 1,726 7,472
General and administrative 998 3,848 (228 ) 770 3,848
Total compensation for post-combination services $ 2,867 $ 21,661 $ 1,715 $ 4,582 $ 21,682
(6 ) Acquisition related depreciation expense included in these
amounts is as follows:
Cost of product revenue $ (32 ) $ 46 $ 117 $ 85 $ 46
Cost of service revenue 20 41 48 68 41
Research and development 488 802 872 1,360 802
Sales and marketing 67 125 146 213 125
General and administrative 123 163 176 299 163
Total acquisition related depreciation expense $ 666 $ 1,177 $ 1,359 $ 2,025 $ 1,177
(7 ) Loss on extinguishment of debt included in these
amounts is as follows
Interest and other income/(expense), net $ - $ 55 $ - $ - $ 55

Total loss on extinguishment of debt

$ - $ 55 $ - $ - $ 55
(8 ) Total income tax adjustment included in these
amounts is as follows:
Tax effect of non-GAAP adjustments above $ (19,544 ) $ (50,868 ) $ (18,528 ) $ (38,072 ) $ (54,493 )
Tax impact of non-GAAP reconciling items in loss jurisdictions - - - - 73
Total income tax adjustments $ (19,544 ) $ (50,868 ) $ (18,528 ) $ (38,072 ) $ (54,420 )

NetScout Systems, Inc.
Reconciliation of Current GAAP to Current and Historical Non-GAAP Financial Measures - Non-GAAP EBITDA
(In thousands, except per share data)
(Unaudited)
Three Months Ended Three Months Ended Six Months Ended
September 30, June 30, September 30,
2016 2015 2016 2016 2015
GAAP Income (loss) from operations $ 805 $ (35,270 ) $ (10,754 ) $ (9,949 ) $ (22,881 )
Previous adjustments to determine non-GAAP income from operations 57,243 102,771 53,855 111,098 112,316
Non-GAAP Income from operations 58,048 67,501 43,101 101,149 89,435
Depreciation excluding acquisition related 8,929 6,183 7,997 16,926 9,602
Non-GAAP EBITDA from operations $ 66,977 $ 73,684 $ 51,098 $ 118,075 $ 99,037

NetScout Systems, Inc.
Reconciliation of GAAP Financial Guidance to Non-GAAP Financial Guidance
(Unaudited)
(In millions, except EPS)
FY 2017
Low High
GAAP revenue $ 1,165 $ 1,215
Deferred revenue fair value adjustment 24 24
Amortization of intangible assets 11 11
Non-GAAP revenue $ 1,200 $ 1,250
GAAP Net Income $ 46 $ 69
Deferred revenue fair value adjustment 24 24
Amortization of intangible assets 123 123
Share-based compensation expenses 37 37
Business development expenses 10 10
Compensation for post-combination services 4 4
Acquisition-related depreciation expense 3 3
Restructuring costs 2 2
Related impact of adjustments on income tax (75 ) (75 )
Non-GAAP Net Income $ 174 $ 197
Average Weighted Shares 93 93
GAAP EPS $ 0.49 $ 0.74
Non-GAAP EPS $ 1.87 $ 2.12

NetScout Systems, Inc.

Investors

Andrew Kramer, 978-614-4279

Vice President of Investor Relations

[email protected]

or

Media

Donna Candelori, 408-571-5226

Senior Public Relations Manager

[email protected]

Source: NetScout Systems, Inc.

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