Ladies and gentlemen, thank you for standing by, and welcome to NetScout's Fiscal Quarter and Fiscal Year 2024 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 First Quarter Fiscal Year 2024 Conference Call for the period ended June 30, 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 number 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 results 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, 2023, 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 number 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. Let's turn to Slide number 6 for a brief recap of our non-GAAP financial results for the first quarter of fiscal 2024.

We delivered solid financial performance in the first quarter of fiscal year and released several key product offerings since our last earnings call. Revenue was $211.1 million, representing year-over-year growth of over 1%.

We expanded both our gross margin and operating margins and grew our diluted EPS by nearly 30% year-over-year to deliver $0.31 per diluted share in the period.

We also accomplished several product milestones with the release of our next-generation solutions that have already been well received by customers, and that we expect to start contributing to revenue in the second half of the fiscal year.

This includes the release of our visibility with our broader platform that provides performance, security and availability across one common data framework.

By proactively identifying areas of complexity, fragility and risk, the platform unlocks insights at unparalleled scale to deliver the intelligence needed to increase visibility, improve agility and keep data and application secure. Additionally, we relaunched our OCI or Omnis Cyber Intelligence Solution.

This next generation of OCI is an advanced network detection and response for solution that uses highly scalable deep packet inspection and multiple threat detection matter at the source to detect threats in real time. OCI also applies historical investigation of high-fidelity network metadata and package.

In the face of rising cyber threats, OCI provides security teams with real-time package level visibility across their digital infrastructure and help identify threats earlier in the attack life cycle. OCI also quickens investigation by gathering network-based forensic evidence to reduce the Mean Time to Response.

OCI is a valuable tool for verifying the effectiveness and improving the existing cybersecurity ecosystem, ensuring compliance and lowering the risk of successful cyber-attacks. We also released our 2 new DDoS solutions. The first is adaptive DDoS, which helps protect enterprises from rapidly spreading and dynamic DDoS attacks.

It adapts to the evolving threat landscape and automated countermeasures used to address cyber-attacks, including the latest multi-vector dynamics attacks.

And the second is mobile security, which extends our powerful DDoS capability that service providers currently leverage in their wireline networks to now protect their mobile network and address their distributed threat surface. Now let's move to Slide number 7 for some further perspective on market and business.

Starting with our enterprise customer vertical. In the first quarter of fiscal year 2024, enterprise revenue grew nearly 13% year-over-year, driven by the expansion in both our cybersecurity and service assurance businesses.

We remain confident that our value proposition of extending visibility to the edges of the network will continue to resonate with enterprise customers seeking to cover blind spots, address control challenges and facilitate their leverage of off-premise and cloud solutions as part of their digital transformation and new network architecture initiatives.

Moving to our service provider customer vertical. As expected, revenue in the first quarter for this vertical declined approximately $0.09 year-over-year, 9% year-over-year, primarily due to the lower level of radio frequency propagation modeling project revenue, in the second quarter compared with the same quarter last year.

We continue to see a domestic and international carriers to invest in their 5G deployments. Notably, several carriers now have the spectrum and deployed stand-alone networks in certain markets and are ready to drive traffic over those network over 5G, once 5G required applications materialize.

We believe that as the 5G adoption advances and 5G traffic volumes increase, our core visibility in cybersecurity solutions will be required. We are prepared and ready to support carriers through this inevitable transition with our differentiated solutions. Michael will provide more insight regarding customer orders in a vertical during his remarks.

Now let's move to Slide number 8 to review our outlook. Looking ahead, we remain excited about the market opportunity we are seeing for both our existing and new solutions and are reiterating our fiscal year 2024 outlook.

We also continue to see the supply chain challenges that drove the increase in fulfillable backlog resolving and anticipate that fulfillable backlog will continue to return to more normalized levels.

We remain focused on operating the business with a balanced approach to driving revenue growth and profitability as we manage through the dynamic macro environment and position NetScout to deliver long-term sustainable value for our stakeholders as a guardians of the connected world.

Jean will provide additional color and a recap of the outlook and our numbers in our remarks. In summary, we delivered solid first quarter financial results and achieved several product milestones that establish a foundation of delivering our objectives for fiscal year 2024 and beyond.

We remain confident that NetScout is well positioned to help customers address the challenges and opportunities of today's digital world through our unique and expanding solutions. We look forward to sharing our progress with everyone throughout the remainder of our fiscal year. 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 Win highlights in the first quarter. In our enterprise customer vertical, our proven technology and long, productive partnerships with our install base of customers have always been a strong foundation for our business.

As customers continue to adapt, advance, and expand their IT strategies, they continue to depend on NetScout to ensure the success of these transitions. As an example, during the quarter, we won a mid-seven figure deal in service assurance order with a large US regional bank, in support of their datacenter transformation.

The opportunity arose from the bank's initiative to upgrade its infrastructure from on-premises to a distributed, co-lo based architecture. NetScout's solutions have been critical to several areas of the bank's business, including online banking and Unified Communications call centers.

Our long and productive partnership positioned NetScout to win the business, despite the competitive bidding process. Now, turning to the service provider customer vertical, we remain focused on supporting both our domestic and international carriers' 5G network evolutions.

We also continue to support our service providers in their security efforts as cyberattack incidents permeate, and threat surfaces continue to expand.

As an examples from the quarter, on the service assurance front, a long-standing Tier-1 North American carrier customer placed additional orders with us amounting to a mid-seven figure sum as they continue to advance their 5G projects.

On the security front, a mid-size international service provider customer placed a low-seven figure order for our Arbor products to upgrade their DDoS protection, replacing a competitor.

The main driver for this investment was to deliver a reliable so called "clean pipe," leveraging an integrated detection and mitigation solution, for their high value customer base. We won the order due to our superior technology, strong reputation, and positive references from the leaders in their sector.

These strengths, combined with our recent innovative new product offerings, should continue to drive customer interest in our best-in-class solutions in the rapidly evolving cybersecurity environment. Turning to go-to-market activities, we remain focused on promoting our industry leadership, trusted brand, next-generation solutions, and platform.

This included attending several high-profile events such as the RSA conference, Cisco Live, Dell Technology World, and Big 5G. In the second fiscal quarter, we plan to participate in VMware Explore and Black Hat, to name a few.

Looking ahead, NETSCOUT plans to host its customers and partners at our Annual Engage Technology and User Summit from October 2nd to October 5th this year in Orlando, Florida.

At Engage 2023, we'll demonstrate how our Visibility Without Borders Platform provides a unified approach to addressing the industry's most pertinent issues, including how performance, security, and availability challenges are multiplying and are often interconnected and overlapping.

We'll also highlight our next-generation Omnis Cyber Intelligence solution and our new DDoS products such as Adaptive DDoS and Mobile Security. Thank you, everyone. That concludes my remarks, and I will now turn the call over to Jean.

Thank you, Michael, and good morning, everyone. I will review key metrics for our first quarter of fiscal year 2024 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 number 12 details our first-quarter fiscal year 2024 results.

During the quarter, total revenue grew 1.1% percent year over year to 211.1 million dollars. Product revenue declined 3.7% percent and service revenue grew 5.4% percent, both on a year-over-year basis.

We ended the first quarter with backlog of approximately 16 million dollars, consisting of approximately 12 million dollars of fulfillable orders and approximately 4 million dollars of radio frequency propagation modeling projects.

We anticipate that backlog will return to historically normalized levels as global supply chain challenges appear to be subsiding and as radio frequency propagation modeling projects have led to the deployment of the 5G infrastructure needed for supporting business and consumer applications.

Our first-quarter fiscal year 2024 gross profit margin was 78.3 percent, up 3.8 percentage points over the same quarter last year. As you may recall, the prior year's quarterly gross margin was impacted by approximately 15 million dollars in radio frequency propagation modeling projects, which had an average gross margin of less than 30 percent.

Quarterly operating expenses increased 3.6 percent year over year, primarily attributable to increased sales headcount, travel, and events. We reported an operating profit margin of 14.0 percent, compared with 11.7 percent in the same quarter last year.

Diluted earnings per share was 31 cents, compared with 24 cents in the same quarter last year, an increase of 29.2 percent year over year. Turning to slide 13, I'd now like to review key revenue trends by customer verticals and product lines.

For the first quarter of fiscal year 2024, on a year-over-year basis, our enterprise customer vertical revenue grew 12.9 percent, while our service provider customer vertical revenue declined 9.3 percent.

During the quarter, our enterprise customer vertical accounted for 52 percent of our total revenue, while our service provider customer vertical accounted for the remaining 48 percent. Now, turning to our product lines.

In the first quarter of fiscal year 2024, our cybersecurity revenue increased by 9.9 percent and our service assurance revenue declined 2.4 percent, both on a year over year basis.

During the first quarter, the service assurance product line represented approximately 69 percent of total revenue, while our cybersecurity product line represented the remaining 31 percent. Turning to slide 14, which shows our geographic revenue mix. Compared to last year's first quarter, our revenue was less concentrated in the U.S.

due to the prior year's higher radio frequency propagation modeling project revenue. There were no customers representing 10% or more of our total revenue in the quarter. Slide 15 details our balance sheet highlights and free cash flow.

We ended the quarter with 390.5 million dollars in cash, cash equivalents, marketable securities, and investments, representing a decrease of 37.4 million dollars since the end of fiscal year 2023. Free cash flow for the quarter was a use of 24.3 million dollars.

From a debt perspective, we ended the first quarter of fiscal year 2024 with 100 million dollars outstanding on our 800-million-dollar revolving credit facility, which expires in July 2026. We currently have capacity in our share repurchase authorizations and, subject to market conditions, plan to be active in the market.

To briefly recap our other balance sheet highlights, accounts receivable, net, was 108.3 million dollars, a decrease of 35.6 million dollars since March 31, 2023.

The DSO metric at the end of the first quarter of fiscal year 2024 was 44 days, in line with the end of the first quarter of fiscal year 2023, and a decrease from 58 days at the end of our fiscal year 2023. 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.

As Anil noted earlier, we are reiterating our non-GAAP outlook for fiscal year 2024 that was presented during our May 4, 2023, fourth quarter and full fiscal year 2023 earnings call.

As a reminder, for fiscal year 2024, we continue to anticipate revenue in the range of 915 to 945 million dollars, which implies a low single digit growth rate at the midpoint of the range. The effective tax rate is anticipated to be in the range of 20 to 22 percent.

Assuming approximately 74 to 75 million weighted average diluted shares outstanding, we expect non-GAAP diluted earnings per share to be between $2.20 and $2.32, which implies a mid-single digit growth rate, at the midpoint of the range. I'd also like to offer some "color" on the first half of fiscal year 2024.

At the midpoint of our full fiscal year 2024 outlook ranges, for revenue we continue to anticipate delivering approximately 46 to 48 percent of our revenue outlook during the first half of the fiscal year.

For earnings per share, we anticipate delivering mid-single digit diluted EPS growth for the first half of the fiscal year, on a year-over-year basis. That concludes my formal review of our financial results. Thank you, and I'll now turn the call over to the operator for Q&A..

Thank you, and I'll now turn the call over to the operator for Q&A. At this time, if you would like to ask a question your telephone [Operator Instructions]. We'll take our first question from Matthew Hedberg with RBC Capital Markets..

Great congrats on Q1, Anil, maybe to start with you. Between your service assurance business, it was down obviously a little bit, and enterprise was up [indiscernible] growth. Can you give us a sense just on overall demand trends? Do you think there's been some form of stabilization? Obviously, you guys have delivered consistent results here.

But what are you hearing from customers out there from a buying perspective? And maybe where you most optimistic from a demand perspective as this year continues to progress?.

Yes. Thanks, Matt. So, I think first thing is the quarterly trend on service provider business usually has not been meaningful because of lumpy deals.

So, on a year-year over basis, there's not much change from what we talked about at the prospect at the last conference call You have heard some earnings and challenges in the service provider which sometimes tend to lengthen the sales cycle.

But overall, the biggest investment we have made on the product side this year is combining the Arbor and NetScout technology to create some new solutions.

We relaunched that OCI product, which we talked about as well as we announced new options and new features in the form of adapted DDoS and some other features in both the service provider side, which is the mobile security and as well as on the enterprise side.

So, we see that is we are expecting that to be a growth area and more so on the enterprise side this year, but also on the service provider side..

That's helpful. Actually, that was a segue into the next question on OCI in particular.

Maybe just a little bit more color on what that means from a product perspective, a go-to-market perspective, how material is that relaunch? And from a pipeline generation perspective, is that one of the bigger announcements kind of coming out of the cyber-attacks?.

Yes. So right now, since we just released – relaunched the product and announced it in April time frame, I think it does not have an impact on the one earlier, but we are expecting some improvement in that area quickly and hopefully have an impact on the second half.

The big change is that industry is really focused on mitigation of cyber threat, and there has been less and less focus on early detection, which we think is the key to success and to deal with cyber threats.

So that’s a big change that doing analytics at source to do more detection early in the life of the cyberattack is what we acquiring the differentiator in this NDR space and network detection and response. And that’s a change also from what we announced last year..

And we'll take our next question from James Fish with Piper Sandler..

Maybe just a follow-up on Matt's initial question. What are you guys seeing specifically with your Tier 1 North America carrier customers, given some of your competitors were kind of out there talking earlier this quarter about digestion and inventory stuffing? Just trying to understand how you guys feel about the pipeline in those large customers..

Well, if you take the radio frequency orders out of the picture and both the backlog and that, I think pipeline is good overall.

And -- but we don't just do business with Tier 1, but people call Tier 2 is also a big portion of the business where there are about 10 or so Tier 2 provider and also some of the cable companies like Charter and Comcast are getting into the 5G business.

And so, we think we are -- we can make up for some of the shortfalls if there is challenges on the service on the mobile -- traditional mobility provider side with some of these things which we can do.

And those are -- I mean, all the cable companies, all the top 4 or 5 cable operators are big customers of NetScout already both on the Arbor side and the fixed line side.

So that's what we are -- when we look at the overall service provider business, our mobility, both on the security side and on the service assurance side, I think we think that we are in good shape..

Got it. And Jean, for you. On the backlog side, first off, I appreciate the continued disclosure here as we start to normalize overall. But it sounds from last quarter pretty meaningfully.

Is this level of backlog of $16 million or so normal as we think about coming out of fiscal Q4 into fiscal Q1? Or what's giving the confidence in the outlook then is it seems like it's about half of your normal backlog if we compare it to long-term disclosures where it was somewhere around $25 million, $30 million in the past in fiscal Q4?.

Yes. Actually, if you look back over a long period of time, and I would say at least the 10 years, our average backlog has probably been closer to somewhere between $10 million to $15 million. It’s been as low as like $200,000. And if we – and just to reiterate, the backlog started growing in Q3, Q4, I believe, of FY ‘22.

And that was again due to the hardware issues that were in the supply chain. So, people were buying software. So, we see it – as we said in the comments, we see it normalizing back to somewhere probably between $10 million to $15 million. Obviously, we always like backlog. So, if we have the opportunity to continue, we would be very happy with that.

What gives us confidence to reiterate our revenue guidance is a few things. One, as I think you’ve seen in the headlines, the 5G infrastructure has been pretty much laid down.

And that actually I can point to all of the radio frequency propagation odelling projects that we had that the antenna is the capture of the signals, the RAN network that way is also getting established. So, for us, it’s less about the infrastructure build and more about the applications that will go over the 5G network.

And what we hear when we talk to various people in the industry is that hopefully, private networks within enterprise would be the first killer app. And that has been slower to start mostly due to the chip shortage.

So, we are hopeful that since the 5G infrastructure has been established, that the applications will start to come to bear production traffic, which is where our products are really needed.

And then as Anil said, in security, we have the relaunch of OCI, which, again, in talking to certain salespeople, they’ve seen at least pockets of sales and especially internationally, where they have a lot of opportunities where customers are really liking what we can do.

And then we have mobile security, which is being – which is launched, which has been something that’s been in development for a few years. And then as Anil also mentioned, the adapted DdoS. So, when we point to those areas, this is what we would give confidence to the range of $9.15 to $9.45 at this point..

I will take our last question from Kevin Liu with K. Liu & Company..

From a near-term perspective, given kind of the government business that typically hits in the September quarter.

Just wondering how that pipeline looks to you today and whether you expect any sort of meaningful uptick in that revenue this year versus last year?.

We actually had a good overall Q1 for government, including some federal. So right now, again, they are -- they use our big demand of our products, and it always is what gets funded. We probably would see right now being consistent on a year-over-year basis with what we had in Q2 of last year..

Got it.

And then just with all of the new security announcements that you guys have, do you expect that to contribute meaningfully to the second quarter results? Or would we still see kind of a more normal mix between your service provider and enterprise business? And then maybe longer term, just when do you think security starts to shift more materially in terms of the overall revenue mix here?.

Well, I think if we look at -- when we break out the security revenue, it includes DDoS, which is practically 100% of the security revenue last year, maybe a small single-digit percentage was from OCI. So with the 3-pronged strategy to grow the security business.

One is on the service provider side, grow it through the mobile security and some of the other initiatives we have announced on the enterprise -- so that's on the security DDoS side. On the enterprise DDoS side, adapted DDoS as one of the drivers to drive refresh to the new solution.

And third is OCI, which is in the enterprise security area, which is non-DDoS and which was, like I said, a very small number last year. So those are the 3 areas. And I think we expect growth in the security area this year to be much higher than the growth in the overall business..

And it appears that we have no further questions at this time. I will now turn the program back over to Tony Piazza for any additional or closing remarks..

Thank you, operator. This concludes our call for today. Thank you all for joining us and enjoy the rest of the day..

That concludes today's teleconference. Thank you for your participation. You may now disconnect..