Ladies and gentlemen, thank you for standing by, and welcome to NetScout's Fourth Quarter and Full Fiscal Year 2023 Financial Results Conference Call. At this time, all participants are in a listen-only mode until the question-and-answer portion of the call. As a reminder, this call is being recorded.

Tony Piazza, Senior Vice President of Corporate Finance and his colleagues at NetScout are on the line with us today. [Operator Instructions] I would now like to turn the call over to Tony Piazza to begin the company's prepared remarks..

Thank you, operator, and good morning, everyone. Welcome to NetScout's Fourth Quarter and Full Fiscal Year 2023 Conference Call for the period ended March 31, 2023.

Joining me today are Anil Singhal, NetScout's President and Chief Executive Officer; Michael Szabados, NetScout's Chief Operating Officer; and Jean Bua, NetScout's Executive Vice President and Chief Financial Officer. There's a slide presentation that accompanies our prepared remarks.

You can advance the slides in the webcast viewer to follow our commentary.

Both the slides and the prepared remarks can be accessed in multiple areas within the Investor Relations section of our website at www.netscout.com, including the IR landing page under financial results, the webcast itself and under financial information on the quarterly results page. Moving to Slide #3.

Today's conference call will include forward-looking statements. Examples of forward-looking statements include statements regarding our future financial performance or position, results of operations, business strategy, plans and objectives of management for future operations and other statements that are not historical fact.

You can identify forward-looking statements by their use of forward-looking words such as anticipate, believe, plan, will, should, expect, or other comparable terms. We caution listeners not to place undue reliance on any forward-looking statements included in this presentation, which speak only as of today's date.

These forward-looking statements involve risks and uncertainties, and actual results could differ materially from the forward-looking statements due to known and unknown risks, uncertainties, assumptions and other factors, including, but not limited to, those described on this slide and in today's financial press release.

For a more detailed description on 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, 2022, on file with the Securities and Exchange Commission.

NetScout assumes no obligation to update any forward-looking information contained in this communication or with respect to the announcements described herein. Let's now turn to Slide #4, which involves non-GAAP metrics.

While this slide presentation includes both GAAP and non-GAAP results, unless otherwise stated, financial information discussed on today's conference call will be on a non-GAAP basis only.

The rationale for providing non-GAAP measures along with the limitations of relying solely on those measures is detailed on this slide and in today's press release. These measures should not be considered in isolation from or as a substitute for financial information prepared in accordance with GAAP.

Reconciliations of all non-GAAP metrics with the applicable GAAP measures are provided in the appendix of the slide presentation in today's earnings press release and on our website. I will now turn the call over to Anil for his prepared remarks.

Anil?.

Thank you, Tony, and good morning, everyone. Welcome, and thank you all for joining us today. Fiscal year 2023 was a strong year for NetScout.

We met our top line and exceeded our bottom line financial objectives while continuing to advance our strategic priorities to deliver high-value solutions that enable our customers to succeed in today's increasingly complex digital world.

In fiscal year 2023, we delivered another year of total revenue growth while also expanding operating margin, improving diluted EPS performance and generating solid free cash flow. On behalf of NetScout, I would like to thank our employees, customers and other stakeholders who contributed to our success in fiscal year 2023.

Let's now turn to Slide #6 for a brief recap of our non-GAAP financial results in the fourth quarter and full fiscal year 2023 as well as some strategic highlights from the year. Jean will provide more detail on the results later in the call.

For the fourth quarter, we delivered revenue of approximately $208 million, up nearly 9% year-over-year and diluted earnings per share of $0.38, up more than 30% on a year-over-year basis.

For the fiscal year 2023, we delivered revenue of approximately $915 million, representing growth of nearly 7% year-over-year, supported by product revenue growth of nearly 10% and service revenue growth of more than 4%.

Our service assurance cybersecurity product lines both contributed to our revenue growth on a year-over-year basis with nearly 9% and more than 1% revenue growth, respectively.

We demonstrated strong operating leverage as we delivered $2.18 of diluted earnings per share for the full fiscal year 2023, growth of approximately 18% year-over-year and more than double that of our revenue growth rate over the same period.

Finally, during our fiscal year 2023, we returned approximately $150 million back to our shareholders in the form of an accelerated share repurchase program and generated solid free cash flow of more than $145 million initiatives that we expect to contribute to our revenue growth potential in 2024 and beyond and serve as critical building blocks as we deliver on our mission "Guardians of the Connected World," Enhancement to the Omnis Cybersecurity Solution include advanced network detection and response capabilities that produce analytics at the source, leverage machine learning, reduces and investigation capability through a differentiated approach compared with competing products.

We expect the next generation Omnis Solution to be a high-value product up-sell for existing customers who already use our solutions, trust us and can enhance the return on investment by adding ones to address cybersecurity challenges, leveraging their already installed infrastructure.

We expect that our enhanced and expanded Omnis offering will be available in the early summer. We believe we are well positioned to expand our Omnis revenue in the second half of the fiscal year 2024. We also have developed and are launching 2 new DDoS solutions.

First Dynamic DDoS, which is a solution that adapts to the threat landscape as it evolves and automates the counter like our enhanced Omnis cybersecurity solutions, these new solutions are expected to increase our Arbor security revenue in the back half of fiscal year 2024.

Now let's move to Slide #7 for some further perspective on market and business insights. In our service provider vertical, revenue grew nearly 14% year-over-year for the full fiscal year 2023.

This increase was primarily driven by higher revenue than user related to audio or radio frequency propagation modeling projects from Tier 1 carriers in North America. Overall, both domestically and internationally, we continue to see carriers invest in their 5G-related network deployment as well as other areas of their businesses.

For example, as carriers transition from the propagation planning cycle and initial 5G stand-alone network build-outs, we believe we are well positioned to further support carrier's need for these networks.

Additionally, we believe we are well positioned to expand our business with these carriers in other areas, including their internal IT operations and with our new mobile DDoS security solution. In our enterprise customer vertical revenue was relatively flat for the full fiscal year 2023 on a year-over-year basis.

Although enterprises have been under pressure from the macroeconomic environment, we continue to believe that this customer segment represents an attractive growth opportunity for NetScout.

As highlighted in our recent published industry reports, Enterprise continued to require solutions that better protect their system and accelerate their digital transformation.

We remain focused on helping to address these needs by leveraging our growing suite of comprehensive offerings to provide enterprise customers with an integrated and differentiated platform for service assurance and cybersecurity requirements.

By extending visibility to the edges of the network, we help customers cover blind spots and address control challenges, facilitating their leverage of off-prem and cloud solution as part of their digital transformation initiatives and new network architectures.

Michael will provide more insight into our industry research as well as customer wins within our vertical during his remarks. Now let's move to Slide #8 to review our outlook.

For fiscal year 2024, we remain committed to operating our business with a balanced approach to revenue growth and profitability as we manage the dynamic macroeconomic environment. Based on our current view, we expect to continue to grow revenue, improve our margins and diluted EPS performance and generate solid free cash flow.

We entered the year with solid momentum and anticipate that the opportunity is created by extending our core service assurance visibility to cover blind spots at the edges of the network created by distributed architecture as well as our new DDoS offerings and our next-generation Omnis Solution will more than offset lower radio frequency propagation modeling project revenue, which was at a high point in fiscal year 2023.

Jean will provide the details of our fiscal year '24 outlook in our remarks.

Longer term, we remain focused on driving forward towards our business objectives by advancing our strategy to ensure the performance, availability and security of mission-critical infrastructure for organization around the globe anytime anywhere as guardians of the connected world.

As a trusted brand with more than 3 decades in business and an advanced service assurance and cybersecurity platform based on our scalable de-packet inspection technology, we remain uniquely positioned to help our diverse primarily Fortune 500 customer base to capitalize on major technology trends, including expanding cybersecurity threats, digital transformation and 5G network evolution and succeed in today's increasingly distributed and complex digital world.

In summary, we are pleased with our fiscal year 2023 performance and excited about the opportunity we see for NetScout in fiscal year 2024 and beyond. We look forward to sharing our progress and achievements with you as the new fiscal year unfold. With that, I'll turn the call over to Michael..

Thank you, Anil, and good morning, everyone. Slide 10 outlines the areas that I will be covering today starting with customer events. In our service provider customer vertical, we remain focused on supporting both our domestic and international carriers as they continue to advance their 5G network build-outs.

Additionally, we are expanding our relationships with these carriers beyond their mobile network related requirements by providing solutions for their critical IT infrastructure as well. This evolution demonstrates the value of our Power for solutions, trust the trend and strong relationships with our customers.

As an example, during the fourth quarter, a long-standing Tier 1 North American carrier placed additional orders with us for our service assurance solutions amounting to a low teens 8-figure sum.

These orders spend across several of our offerings, including 5G-related radio frequency propagation modeling projects, fixed line monitoring and internal critical business solutions. Now turning to our enterprise customer verdict.

During the fourth quarter, we received several low 7-figure orders from both domestic and internal and international government agencies for service assurance and cybersecurity solutions. With the current state of geopolitical environment, we have seen governments release funding for projects related to intelligence and defense focused initiatives.

As an example, we won brand-new business with an international intelligence agency to bring their DDoS detection and mitigation solution on-premises from the cloud to gain direct control of the critical solution.

This new customer purchased our DDoS detection and mitigation Solutions as well as an on-site as well as an on-site engineer to help operate the solution. We won this business in part due to their familiarity with NetScout solutions that were leveraged by the prior provider.

We believe there are further opportunities with this customer as they represent other agencies as well. Our ability to win these deals and continue to expand our footprint with both new and existing customers is a testament to our strong and reliable offerings, scalability and brand reputation. Now turning to our go-to-market activities.

We remain focused on promoting our industry leadership, trusted brand and strong solutions through activities that include thought leadership, marketing and industry events.

During the quarter, we released our fifth anniversary DDoS Threat Intelligence Report that shares NetScout 's unique insight on the state of security threats and spotlights our cybersecurity tools are more important than ever. Notably, the report highlights direct-path attacks surge in 2022, making up half of all DDoS attacks.

The report also shows that attack frequencies have increased tenfold since NetScout 's first reported in 2015. Additionally, we released new research highlights highlighting the ongoing importance of unified communication and collaboration or UC&C platforms in the post-pandemic world of hybrid work.

In this research, we found that nearly 17% of respondents increased the number of UC&C tools used with 75% expected to support more platforms over the next 12 months, and the majority indicating that collaboration platforms, applications and tools are critical to their organization's current work environment.

This data validates the growing importance of our service experience and smart edge monitoring solutions for our customers.

We also continue to actively promote the value of our solutions to our customers by issuing a steady flow of press releases on our major service assurance and cybersecurity solutions, which, among other things, articulated the strong return on investment of our solutions as validated by third bodies.

Finally, we continue to attend more in-person events to promote our brand and platform. During our first fiscal quarter, we have our plan to participate in several high-profile events such as the ADA conference, Cisco Life, Dell Technology World and Big 5 to name a few.

At these events, we will interact with potential existing customers showcasing NetScout service assurance and cybersecurity platform and highlighting all of our in many of the conference sponsoring partners technology platform. technology platforms. Thank you, everyone. That concludes my remarks, and now you will now turn over the call to Jean..

Thank you, Michael, and good morning, everyone. I will review key metrics for our fourth quarter and full fiscal year 2023 and provide some additional commentary on our fiscal year 2024 outlook.

As a reminder, this review focuses on our non-GAAP results unless otherwise stated, and all reconciliations with our GAAP results appear in the presentation appendix. Regardless, I will note the nature of any such comparisons. Slide #12 details the results for the fourth quarter and our full fiscal year 2023.

Focusing first on our quarterly performance, total revenue grew 8.8% year-over-year to $208.1 million. Product revenue grew 11.2% and service revenue grew 7.1%, both on a year-over-year basis.

At the end of the fourth quarter, our backlog was approximately $50 million, consisting of approximately $41 million of fulfillable orders and approximately $9 million of radio frequency propagation modeling projects. The majority of the radio frequency propagation modeling amount is reported as deferred revenue in our financial statements.

As a reminder, while fulfillable orders can be converted into revenue upon shipment or fulfillment, the radio frequency propagation modeling projects require certain execution steps in conjunction with the carrier's timing before they can convert to revenue.

Gross profit margin was 77.6% in the fourth quarter, quarterly over year, mostly due to the return of pre-pandemic activities such as travel and events. We reported an operating profit margin of 15.7% compared with 12.4% in the same quarter last year.

Diluted earnings per share was $0.38 compared with $0.29 in the same quarter last year, representing an increase of 31% year-over-year. For the full fiscal year 2023, revenue was $914.5 million, which was an increase of 6.9% over the prior year. Product revenue grew 9.9% and service revenue grew 4.1% over the prior year. Gross profit margin was 77.5%.

Annual operating expenses increased 4.3% from the prior year, primarily due to the return of prepandemic expenses related to the resumption of in-person events and travel.

We reported an operating profit margin of 22.6%, up 1.6 percentage points over the prior fiscal year with diluted earnings per share of $2.18, an 18.5% increase compared with the same period in the prior fiscal year. Turning to Slide 13. I'd like now to review key revenue trends by customer verticals and product lines.

Please note that all comparisons here are on a year-over-year basis, consistent with our other remarks. For the fiscal year 2023, our service provider customer vertical revenue grew 13.7%, while our enterprise customer vertical revenue grew 0.4%.

During the same period, our service provider customer vertical accounted for approximately 52% of our total revenue, while our enterprise customer vertical accounted for the remaining 48%. Now turning to our product line. For the fiscal year 2023, our service assurance revenue increased by 8.9%, while our cybersecurity revenue increased by 1.4%.

During the same period, our service assurance product line accounted for approximately 74% of our total revenue, while our cybersecurity product line accounted for the remaining 26%. Turning to Slide 14, which shows our geographic revenue mix. In fiscal year 2023, our revenue was more concentrated in the U.S.

year-over-year, primarily due to the increase in revenue related to radio frequency propagation modeling projects from Tier 1 domestic carriers. Additionally, in the fourth quarter, no customer represented 10% or more of total revenue and in the full fiscal year 2023, one customer represented 10% or more of our total revenue.

Slide 15 details our balance sheet highlights and free cash flow. We ended the fourth quarter with $427.9 million in cash, cash equivalents and short- and long-term marketable securities, representing an increase of $11.7 million since the end of the third quarter of fiscal year 2023.

Free cash flow for the year -- for the quarter was $110.6 million and $146.0 million for the full fiscal year 2023.

During the fourth quarter of fiscal year 2023, we repaid $100 million of our revolving credit facility debt and ended fiscal year 2023 with $100 million outstanding on our $800 million revolving credit facility, which expires in July 2026. We did not repurchase any of our common stock under our share repurchase program during the fourth quarter.

For the full fiscal year 2023, we repurchased a total of approximately 4.6 million shares of our common stock for an aggregate of approximately $150 million through an accelerated share repurchase program. We currently have capacity in our share repurchase authorization and subject to market conditions planned to be active in the market.

To briefly recap our other balance sheet highlights, accounts receivable net was $143.9 million, representing a decrease of $4.4 million since March 31, 2022. The DSO metric at the end of the fourth quarter of fiscal year 2023 was 58 days versus 64 days at the end of the fourth quarter of fiscal year 2022.

Let's move to Slide 16 for commentary on our outlook. I will focus my review on our non-GAAP targets for fiscal year 2024. For fiscal year 2024, we currently anticipate revenue in the range of $915 million to $945 million, which implies a low single-digit growth rate at the midpoint.

Additionally, we currently anticipate delivering approximately 46% to 48% of our full year revenue outlook during the first half of the fiscal year, assuming the midpoint of our provided revenue range.

The effective tax rate is expected to be between 20% and 22%, assuming approximately 74 million to 75 million weighted average diluted shares outstanding, we expect non-GAAP diluted earnings per share to be between $2.20 and $2.32. I'd also like to offer some color on the first quarter of fiscal year 2024.

We currently anticipate revenue to be relatively flat compared to the first quarter of fiscal year 2023 with diluted EPS growing by $0.04 to $0.06.

This takes into consideration a lower volume of radio frequency propagation modeling project revenue compared to the first quarter of the prior year as well as reduced marketing expenses as we move our annual Engage user conference from the first quarter last fiscal year to our third quarter of fiscal year 2024 to better align with customers' planning and budgeting cycles.

That concludes my formal review of our financial results. Before we transition to Q&A, I'd like to quickly note that our upcoming IR conference participation is listed on Slide 17. Thank you, and I'll now turn the call over to the operator to a Q&A..

[Operator Instructions] We'll take our first question from Mitch Hedrick from Matt Hedrick with RBC Capital Markets..

It's Dan Bergstrom for Mitch Hedrick. Anything to point out around the macro? I know you guys have long lead times, that helps with visibility.

And the quarter and outlook were really good, but anything to point out from the environment, anything from customer conversations around budgeting new project priorities for the new year?.

Well, overall, we continue here positively about -- we are in a different phase of NetScout, where we have made a lot of investment and there are a lot of challenges with digital transformation. And so I think customers need visibility even during tough times. So at least in the U.S.

part, we are seeing positive trends, positive news about spending on NetScout. And so our guidance reflects all the challenges we could potentially face. And so we feel quite good at this point, and it remains to be seen how the year progresses..

And then on the outlook, I think rightsizing for this year's radio propagation product projects, it looks really, really strong, really good. Maybe growth in kind of that mid-single-digit area much better margins on an apples-to-apples comparison.

Just could you outline some of the key growth areas here for fiscal year '24?.

So I think some of the challenges which we have faced in service provider spending has been sort of smooth out right now, and we think the strategy spending will continue, and it won't get any worse than last year. The growth we are looking at is to make up for the propagation delay is on the enterprise side.

We had an early launch of our security solution Omnis security, and it didn't go very well last year. There are some challenges. There was higher expectations. There were some organization issues. So we think that, that area will pick up substantially this year. And second is, as you saw the growth last year was not that great in the enterprise sector.

And I think we see some increased demand in that area. So most of the makeup for that at the low end of the guidance will be because of those enterprise service assurance, and the Omnis security Solution with potential upside in the DDoS because of what we have done on the mobile security and adaptive data..

Our next question comes from Jim Fish with Piper Sandler..

This is Quinton on for Jim Fish. So the new DDoS solution seems like a pretty solid adjacent opportunity for the team. Obviously, you just got announced, so it's still very new.

But how is the early feedback from the carrier has been? And then any way to think about maybe how we're sizing the mobile market opportunity compared to existing kind of wireline market opportunity?.

So the first thing is that we have got some early feedback, and this is an upgrade to existing customer solutions and partially a refresh also. So we think the sales cycle time will be much shorter than going to a new customer, I'll be visiting several customers in Europe where we have a very big presence on the DDoS side.

So the 2 parts, sometimes they get confused. One is the Adaptive DDoS, which has a much higher return rate and much shorter cycle time. Mobile DDoS is going to take some time. So we're not counting on Mobile DDoS as a bigger area. We are looking at Adaptive DDoS on the wireline side.

It's a big innovation because most of the people and cloud vendors are handling volumetric attacks and this direct-path attack is really application layer slow and large number of attacks, but of smaller size. And there's no real good technology in the market which scales to solving this problem.

So that's where we are expecting growth in the DDoS area. And that, combined with the Omnis security, which is a different area and the enterprise is why we will see growth in the security area this year..

And then kind of related to the first question. It sounds like last earnings call, we talked about we had a wait-and-see mentality for the 5G spending. But right now, you kind of said you're expecting that to continue.

So is this more a factor of carriers just prioritizing 5G spending over other projects? Or do you think that the overall kind of service provider CapEx spending has just gotten better compared to what we were seeing last earnings call?.

Yes. So CapEx spending, I'm not sure we are very clear on that, certainly, in the U.S., what has happened is internal to NetScout is there were a lot of challenges.

Whenever there's a technology term, a turn like 5G and new changes are happening like in this case, our 5G encryption and virtualization, there is a feeling that NEMs can handle all these things. And so we have sort of pseudo competition from that, which created confusion.

We have sorted it out and most of the -- those people are now partnering with us. You might have seen a press release from Ericson and Swisscom talking about the partnership. That was a very different situation than from like 2 years ago.

Second thing is that we are looking at lower end of the market where our original tech solution was, and we are looking at some new pricing models, which will allow us to go a little bit down market. And so those people are also now launching their 5G stuff beyond the top 10 customer, we derive most of the revenue.

So those 2 factors are new versus 2 years even versus last year..

Our next question comes from Kevin Liu with K. Liu & Company..

Anil, I just wanted to follow up on some of the points you made on this side and your expectations for this year.

Can you just go in a little bit more detail about some of the changes you made either from a product or organization standpoint? And any sort of early signs that give you the added confidence that you could see some meaningful growth this year?.

So I think there are many things we announced at last month's sales kickoff, a very exciting time. And despite some of the macro challenges, which we -- which our company and other people might face. But that to highlight that the 2 highest level things.

One is that as a BMA mentioned that we integrated the Arbor business into engineering, just about 18 months ago. and a sales organization was marked about 18 months to 2 years ago. And there, we still have remnants of some challenges on there. And second thing is there were some learnings on the Omnis security.

I think perhaps our expectations were too high in the first year. So all those have been mitigated, and then that combined with some new ideas in the DDoS area is where we are feeling very good about the cybersecurity portion and as well as the enterprise revenue.

On the service provider side, as I mentioned, there are some pricing things we are looking at, which makes our solution more competitive at the mid-tier of the carrier market as people are migrating to 5G.

And second is some of our concerns about competing with NEMs have been now converted into potential partnerships, meaning that they are not against us, and we have much better chance of pushing with the business. And those are the things which have evolved over the last 12 months. So yes, we are concerned about macroeconomic challenges.

At the same time, NetScout is in a very different position. And just to mention on the financial side, I mean, we have done some great things on the share buyback and returning some of the debt and improve our margins over time over the last 4, 5 years by completely becoming a software company.

So I think all these strength investments in the past few years and even the last couple of years are, I think, beginning to pay off moving -- starting now..

Understood. And then just to your point on moving kind of down market with some new pricing models, does that kind of imply more subscription-based software type models? Or just wanted to understand that? And more generally, just from a visibility standpoint, you guys have carried a fair amount of backlog for the better part of a year now.

Is that expected to continue throughout '24?.

Well, right now, we have to make up for some of the backlog which we have last year. So yes, I think we should grow backlog, assuming all the external conditions are reasonably good. But right now, we -- our guidance sort of implies I mean in the backlog situation, I don't know whether it will be material. Go ahead, Jean..

I think at the low end of the guidance, we probably will have the normal backlog that we've had over the last few years with the exception of last year and this year.

And as you said, Omnis becomes more successful, the cybersecurity becomes more successful, which is the difference in the ranges in revenue, we would expect probably to be able to continue to build and/or increase backlog as we get towards the higher end of the revenue guidance range..

And on the other stuff, Kevin, you mentioned on other part of the question that, yes, we now have an alternate way of buying the product, which is a subscription model. So that is one of the options as we go a little bit down market..

It appears we have no further questions. I'll turn the program back to Tony Piazza for any additional remarks..

Thank you, everybody, for joining us today. That concludes our call. Enjoy the rest of the day..

This does conclude today's program. Thank you for your participation, and you may disconnect at any time..