Q3 2020 Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to Netscouts third quarter fiscal year 2020 results conference call. At this time all parties starting to listen only mode until the question and answer portion of the call.
As a reminder, this call is being recorded Tony Peay also vice President of corporate finance and his colleagues that netscout or on the line with US today. If you require operators that's going to any time. Please press star and zero I would now like to turn the call over to Tony Peay also to begin the company's prepared remarks. Please go ahead.
Great. Thank you operator, and good morning, everyone welcome to Netscouts third quarter fiscal year 2020 conference call for the period ended December 31st 2019, joining me today, our Nielsen call Netscouts, President and CEO , Michael Szabados Netscouts she.
Operating officer, and Jean Netscouts, 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 in the prepared remarks can be accessed in multiple areas within the Investor Relations section of our website at www Dot netscout dots.
Including the IR landing page under financial results, the webcast itself and under financial information on the quarterly results page.
Moving on to slide number three today's conference call will include forward looking statements. These statements may be preface by words, such as anticipate believe unexpected and will cover a range of topics that are not strictly historical facts, such as our financial guidance, our market opportunities and market share Ki bin.
Mr initiatives in future product plans, along with their potential impact on our financial performance. 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, which I described.
On this slide and into these financial results press release as well as in the Companys annual.
Poor on Form 10-K for the year ended March 31st 2019, and subsequent quarterly reports on Form 10-Q 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 announcement described herein.
Let's turn to slide number four which involves non-GAAP metrics.
Well this slide prison presentation includes both GAAP and non-GAAP results unless otherwise stated financial information discussed on todays conference call will be on a non-GAAP basis only.
This rationale the rationale for providing non-GAAP measures along with the limitations of relying solely on those measures is described 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 a gap. Additionally, as a result of the sale of the agent T. tools business will provide certain organic non yeah performance trends, which removes H.M.T. tools revenue for compare.
Ability purposes.
Reconciliations of all non-GAAP metrics with the applicable GAAP measure are provided in the appendix of this slide presentation in todays earnings press release and they are also on our website.
I will now turn the call over to Anil for his prepared remarks Anil [noise].
Thank you Tony Good morning, everyone and thank you for joining us.
Let's begin on slide number six with a brief recap of a quarterly non-GAAP dessert.
From a financial perspective, we delivered strong third quarter fiscal year, two going deeper and deeper format with boards revenue earnings bloodshed exceeding the high end up what expectations for the quarter.
Revenue for the quarter, adding could be six but said over the same quarter last year at going under $60.1 million.
The quarter benefited from year over year, Gaut, inboard that what's that it's going to and enterprise wide because.
We exceeded our expectation or they have any primarily due to the acceleration of said with ride to office said was right at transaction that we originally expected to occur next quarter.
I think but but she had about 73 cents, which increased more than 60 cents, 60% compared with the same quarter last year <unk>.
We exceeded our oneq, but she had expect they tend to do that good software only to have any of that benefited our gross margin as well as our best <unk> corporate tax classifications and got produce a sector management initiative that added incremental benefits in the Florida.
From a strategic perspective, we continue to I'd want to a broader initiatives at a steady base and have begun combining elements of I said with the Jordan and security technologies, the bride and that get <unk> capabilities to a customer that leverage that sense off what offerings.
We believe this combination for white, something unique and rather well in that marketplace.
On a go to market initiatives, we couldn't do you need to showcase our broad exit at major industry event and believed that our sales for the integration has stabilized and the times and the themes I beginning to bear right Blaine and gained what direction.
Moving to slide seven for itself, what the perspective, as we review business highlights.
You know what's that is why they're vertical revenue grew 8% compared with the same quarter last year in the quarter me that night revenue from India had one north American Gadhia that continues to evolve this nation die nationwide Fiveg network.
The second Fiveg related orders from this gadhia this fiscal year, Michael will elaborate further on decided that transaction in his remarks.
During the quarter. We also that plays that have any from a couple of large orders from international Gadhia that continue to have all that for d. as the networks. These deals, but a continuation of our relationship with these get is that they're most every day value of our visibility solution and a incumbency and they've all their networks.
Finally, as I said earlier that I just wanted to run because also benefited from the exhibition of revenue associated with that transaction that we originally expected to occur next quarter.
I'm pleased to recognize the revenue idly by this timing related.
It but as it is timing related that it does not ought to do that would have any expectation for this for the fiscal year.
We see customer that one thing that for the I'd be netbooks in international geographies, including Latin America, Europe , and at the Middle East and parts of Asia. We also continue to work closely with about North American and Asian customers add they advised that fiveg initiatives.
While we are pleased to see some leading gadhia the accelerated that fiveg initiatives. We believe that five view that long term opportunity and drive it up for growth that will benefit our business in numerous with especially as edge computing becomes more mainstream.
We are looking forward to showcasing got five you said was that driven solutions at mobile World Conference in Barcelona, Spain next month.
Starting go at enterprise World because revenue goes he puts into what the same quarter last year border on it and that's where the government customers can do you need good rod that digital transformation as security initiatives.
Michael did highlight some of these Vince doing that his remarks, but I must say the value of what visibility solutions at customers transition to the cloud.
We also believed that the boss disruption that we experienced from the international sites over this was they Eddie organization into its worthy Gov.
It is now primarily behind us.
Both words, because our customers that are adopting our software only form factor and he thought active avenue in this area during the quarter with 42, but then there was that with the short end product revenue coming from these off it only products.
Finally, we continue to I'd want to what security initiative, and recently announced side what flight siteline be sending that they live over the next generation Nobody does visibility in protection by service providers and large enterprises.
There is an example of how the the combination of Flex service assurance and security technologies going that unique value for out of a customer.
I would show good this broad I get that is they've gone to the next month in Las Vegas, Nevada, Mike of elaborate further on this during his remarks.
Now, let's move on to slide number eight to review our outlook.
We remain excited about the opportunities we have thing and I would I believe due to capitalize on that.
What was behind US the view of what pipeline and that AIDEA, because the propagation modeling projects that expected reduces revenue in the fourth quarter, we have noting anatomy and got what revenue guidance to advantage of $900 million to $910 million, which implies a single low single digit organic growth there or what.
Last year, and increasing our earnings but she had guidance to a range of $1.51 cents, a $1.56 and that's extending to these by merely reflects benefits associated with decks in Islam. They just they simplification and get to list active management benefits such as it essentially the budget.
And we have really they end up like this because you're going to be going be and start to look little fiscal year going to be drawn do one.
Got excited about that Vance, we see in front of west such as Fiveg digital transformation security and business analytics. We believe that these venture advantage <unk> benefit us in the future and that's what's your transition from dealing with the headwinds that we have experienced over the past few years. There we're seeing growth again in the business.
I look forward to shaving or progress with you as you finished this fiscal year and look for the future I was done that boy knocking on the call over to Mike OLED display.
Thank you Aneel and good morning, everyone Slide 10 outlines the areas that I will cover in the service provider vertical we continue to gain traction in fiveg as evidenced by an additional high sevens who have been.
For more money 20, fiveg deployments from the same north American sous vide to that they seemed <unk> earlier this fiscal year.
The base of the Buildout is strong and the continuation of orders from these provide to demonstrates the value for solutions as well as our incumbency.
In the enterprise verticals at a large financial institution customer we won a low seven figure series service excellence deal.
<unk> the opportunity at almost as a result of the customers did you talk transformation initiative in this situation.
We displaced an incumbent competitors at the local and regional head office locations as they standardized on Netscout solution across the enterprise. The all what encompass deploying go solutions in 13, the regional heads off he says more than 50, <unk> remote local offices it into data centers as well as into that.
East and West co locations to support that he interconnects to the cloud.
Our strong product strategy and close collaboration with both the network and applications teams is whats acute this win for us or cloud capabilities and all the alignment to the customers initiatives for cloud and virtualization position Netscout as the superior solution and led to the decision to standardize on Netscout that goes into.
The price.
In the security space or audible automotive Vito solutions continue to lead you know a large enterprise customer base, because we can provide robust and simple to configure and at that protection as well as network like invite visibility using an attack which is not the case as a service alternatives for example.
And then another large financial institutions to be closed an increment on expansion opportunity into high six the bigger range demonstrating gosh, the bar and continued <unk> in a fast evolving threat landscape. We also added a low seven figure deployment do are already messy of installed base at the major cloud player.
And your revenues from these customers continued to be strong as they expand expanded their business and have been of solely to the beat costs to move for our solutions.
In terms of go to market activities, we continue to participate in key industry events, and we let them do major shows over the coming weeks.
We will participate in.
The mobile World Congress confidence in Barcelona.
Maybe on highlighting on Fiveg capabilities, and we will shed on insights and early experience in this space.
Also participating Odyssey in sympathy school that'd be will focus on a new ddas product called oddball sideline sent enough.
As announced last week, combining <unk> and Netscout core technologies.
Product will provide I SBC the deep understanding of of the services their customers use as well as allow them to detect a broader range of application Leo threats to enable a new breed of visibility and SEC you do value added services.
Finally, we will host our annual engage technology and use of summit in Hollywood, Florida. In April we are currently in food recruiting men mode and are expecting to exceed last year's results record attendance. We are excited about showcasing go solutions and engaging the Dod customers. At this event that concludes my prepared remarks, and I will now.
During the during the call over to gene.
Thank you Michael and good morning, everyone. I will review key metrics thought third quarter. After first nine months well year to date fiscal 2020 performance, along with our guidance for the remainder of the fiscal year. As a reminder, this if you focus is on a non-GAAP results unless otherwise stated all reconciliations without GAAP results appear in the presentation.
Index. In addition, due to the sale of the agent Tito's business in mid September of 2018, I will highlight certain revenue trend on an organic non-GAAP basis, which removes HNT tools revenue for the applicable carried reference.
Regardless I will note the nature of any such comparison [noise].
Slide number 12 details our results for fiscal third quarter and year to date 2020 performance focusing on the quarterly performance revenue grew 5.6% over the same quarter in the prior year to $260.1 million product revenue grew 6.9% and service revenue grew.
4.1% over that five years quarter.
Third quarter fiscal year 2020 gross profit margin was 77.8% up 2.2 percentage points over the same quarter last year contributing to the improved margin was the strong software only sales at 42% of service assurance revenue as compared to 14% in the third quarter.
<unk> of the pioneer quarterly operating expenses decreased 1.7% from the prior year, primarily due to continued cost controls and head count management, we reported an operating profit margin of 27.3%, where the diluted earnings per share to 73 cents.
Turning to slide 13, I'd like to a few key revenue trends for the first nine months of the year for the first nine months of fiscal year 2020 . The service provider customer vertical revenue grew approximately 4% while the enterprise vertical declined approximately 3% after moving their revenue impact of the divested.
He tools business approximately 52% of total revenue was generated from the service provider vertical with the remainder from the enterprise.
Turning to slide 14, which shows that geographic revenue mix on a GAAP basis revenue by geography was relatively consistent with the first three quarters of the prior year. Additionally, there were no customers in the quarter or the first nine months of the year that represented 10% on more revenue.
[noise] slide 15 details our balance sheet highlights and free cash flow. We ended the quarter with cash cash equivalents short term marketable securities and long term marketable securities of $346.5 million.
An increase of $38.7 million since the end of the second quarter.
Cash flow generated in the quarter was $63.2 million during the quarter. We purchased approximately approximately 1 million shares about common stock at a cost of $25 million or an average price of $24, a 91 cents per share.
The first three quarters of this fiscal year, we haven't spent approximately $125 million to our shareholders. We anticipate continuing to be active in the market, depending on market conditions and subject to daily trading volumes and price consideration.
With that perspective perspective as of the ended the third quarter, we have $450 million outstanding on our $1 billion revolving credit facility.
To briefly recap other balance sheet highlights accounts receivable net was $244.9 million up by 40.6 million [noise].
End of September Dsos were 77 days versus 88 days at the end of fiscal year 2019, and 91 days at the same time last year. The decrease in the Dsos in the third quarter. If this year compared with a third quarter over the prior year is primarily attributable to strong collection activities.
Moving to slide 16 for guidance ill focus my review on our non-GAAP guidance. As a reminder, we sold the agency tools business in September 2018, and it can truly $18 million to last year's revenue prior to the completion of the sale accordingly, the impact of the divestiture she'd be taken into consideration.
When comparing fiscal years 2019 in 2020, especially for the first two quarters of both years.
Consistent with the Nielsen months' with one quarter remaining in the system here, we have now fiscal year 2020 revenue guidance to a range of 900 million to $910 million, which implies low single digit organic growth.
We expect on non-GAAP tax rate to be in the range of 20% to 22% after the issuance of regulations by the U.S. treasuries that clarified the treatment of certain items related to the tax cotton jobs Act that was passed in December of 2017.
Assuming approximately 76 million shares outstanding Ive to updating for our recent share repurchase activities. We are expecting to deliver earnings growth in the high single to low teens range, where the diluted earnings per share between $1.51 cents and $1.56 cents compared with prior years performance.
That concludes my formal review of our financial results and we can now turn the call over just documenting.
[noise]. This time, if you would like to ask your question. Please press star and one on your Touchtone phone.
MS yourself from the question Q by pressing the pound key again that is star and one.
Well take our first question from Matt Hedberg with RBC capital markets.
Oh, Hey, guys, great. Thanks for taking my questions.
Maybe a neal on the on the North America service provider you noted an additional seven figure when for Fiveg monitoring.
I'll take this is the second.
Sure.
Within this fiscal year for this for this for this occur or this [noise].
Which is great.
I guess I'm wondering based on historic Buildout trends, how much more capacity might this service provider have for additional orders.
Such as this as they continue to build out there Fiveg network.
Yeah for this Matt I don't think about this this provider I.
There's a lot more capacity next year, but.
This is being board to other opportunities in the U.S. So that's a big said because there's establishes our satellite would be below even though we don't talk with the names or other vendors know that we won this.
And lending against the competition and so this house so see meant our their deals next year.
In fiscal year during due on Fiveg delay that big Lardo credibility blood. This I live to fight the solution.
So while I don't see big order from them up dismiss next if I think this is this is something which is going to have you had a bus in all of the places.
And Oh Fiveg is going to be deployed.
Great now, it's really great to hear some of the [noise].
The Fiveg momentum I know, we've talked about this last couple of quarters. It really seems like it's starting to come through now. So that's great. I know you talked about it being a long term benefit for you guys.
And then maybe as a follow up on the service assurance side.
You noted a record 42% of revenue for at least from software only transitions transactions.
Which is also really good to hear I know we've been talking about this for the last several years you know if you're to look forward you know the next couple of years and what might that mix look like.
You don't work in that mix go I guess is what I'm wondering and then maybe secondarily I know we've talked historically about the competitive landscape for software only transactions you can you remind us again.
Where are you guys certain.
Part of landscape looks like there are on the surface or inside.
So I'd up on the first part that Matt rehab only about one third.
Offer business.
I thought I would say, maybe 40, but some of the business, which is the residual <unk> service provider is dominated by.
Software solution. That's when we introduced this was the automotive business.
Just started doing that and I'm I started off putting this off yourself in model Enterprise was let's talk a little later so the big reason for the 42 person is because of these big Garda on Fiveg and a higher contribution to service provider.
So long term I think this trend can span all to the areas.
And you don't know the timing, but the goal is to get into the sixties 60, 70% year over the next a couple of years.
As to the competitive landscape I mentioned that into buys I mean V.
What challenge has been as a market leader to grow the market size.
Not really gone buddies and most of the data competition.
As.
I want and I was size each of them.
And that has been price competition in the biased.
Gosh, we that'd be needed mode higher margins than other compared to does what my small that some of that not even public.
And this off with model has completely solve that problem. So at the same time whenever they acknowledge it done like Fiveg and days competition from them.
Let's see if competition from there we have seen that draw to what life. When I started to five years. So I I didn't think <unk> competition.
Is our number one number two issue at the same time, you do need competition to grow them out to get size.
And we do asking the interest of time that you limit yourself to one question and one follow up well take our next question from Alex Kurtz.
Please go ahead.
Yeah. Thanks, just a follow up on that previous question. So until you said the goal is 60%.
Of your service provider business to be suffer only next couple of years did I understand that correctly not about 60% of their total business.
Total business.
At the door do business like I said, we maybe already that in 60, but I don't know a there would be goes up 42% of or if this quarter is a big portion is dominated by service provider whatever thing was.
One of the reason, we don't have any success in enterprise and and then fiber because the odd but business, which is almost 60% of the remaining business.
Is that we introduced much later like diver business. We just introduced just six months ago. So long term weird thing. If this trend continues our goal is the 60, 70% range of their door doesn't have any thoughts of is by the.
Okay, and just to the unit economics around these offer only deals until you look at this large fiveg deal that you just did I think there's always been a question of like.
The gross profit dollars kind of washout between traditional.
Appliance deal versus this offer only deals or any way to kind of guidance through that like would you say like it was a net net net push on that front.
Are they order on the does.
That is outcome you have on is that gross profit for me go up and they have gone up into bye bye bye.
Must buy what was happening and ER and downtime on the U.S. service provided by Oh on on Fourg. So I think overall I feel that improve competitiveness anything could either that deal size people don't is there I wanted to white Bundy unit that this much money to spend.
And so amended Matt that's the budget and so if you can have more units it created pervasiveness.
And make sort of solution more sticky so I think long term benefit I mean, when we talk award of a guidance next year. If he does what growth is going to be in spite of the fact that you and it's a unit prices are coming down.
And so it's a good study that you can drive growth, even though prices are coming down and that has a multi blank effect when need be as good. Okay. Just just to finish then would you say within.
You ended up capturing more dollars.
This offer only solution than you would have with a traditional appliance.
Yeah like because that I gave you remember we had analysis only $5 million being five year to be a few years ago.
That that gaddy it has done pop that money in the previous lobbyists.
Yeah, It's a it's a net positive on all fronts.
Typically van.
People have this kind of pricing well I'm in combined with the best technology, they tend to get rid of weather compared to the consolidated at the market So as a.
The agenda I think that's come up they're really not that net spend is actually goes down but the spend on its got goes up.
We will take our next question from Eric Martinuzzi with Lake Street.
Please go ahead.
Curious about the service revenue line historically, if I look back to your normal seasonal patterns you guys take a breather sequentially between Q3 in Q4.
It's seasonal pattern expected to repeat itself and that's why 20.
Hi, Eric This is chain, yes. As you said Q3 is generally a highest service revenue quarter due to it being acquainted with a calendar year and so on a revenue basis. Some Q3 into Q4, there has historically been a slight step down I think we entered.
The paid that Q4 service revenue will still show growth over Q4 of the pioneer.
Okay, and then based on that backing into other products side.
It does you know we are anticipating growth here, it's nice to see Netscout back in product revenue growth mode. You believe this is sustainable I'm not looking for for guidance for 2021, but just.
From a year on year perspective, ex HNT is product now kind of comfortably back in a a growth mode.
Yeah, I think that you can see their trend lines from last year, I mean single digit growth from it.
And this double digit in deposits I think you can see that trend. So I think all the investments we have made even during tough times.
Have you have seen mentored ever leadership improved margins. So I think Viet expecting this trend to continue.
Next year.
And we'll be able to share that guidance with your next what.
Our next question will come from Chad Bennett with Craig Hallum.
Please go ahead.
Chad Your line is open.
Maybe you can go to the next when the.
And we'll take our next question from Kevin Lowe with Cowen.
And company.
Hi, good morning.
First question just with the completion of these larger public is slowing project.
Speak either historically or maybe as you look in your pipeline what sort of opportunities does that kind of naturally feed into and you know how confident you are in your abilities that kind of grow on top of this as you look for the next few quarters.
I think drug him or did you say I definitely it does not really clear the output.
You have to augment liberation of yeah, I think that calibration.
Our data being a big ones with regard to let alone last year I don't think that's going to be out that tie ought to be glad that usually into our lead phases of fiveg deployments. So that what the good we expect order on the other friends on the go to say not done that eight you access side.
And in a big ought to be in next year, and which is actually better than from a margin perspective.
So we don't expect that that kind of calibration diebold to see if I mean, yeah. As we had last year, but they'd be revenue contribution some of it in the next year, we got the daughter from last year.
Got it and then you talked about some of the digital transformation opportunities that helped us grow the enterprise business.
Looking at the pipeline going forward, what sort of use cases do you see driving enterprise adoption and you know what is the prospects for continued on the enterprise side of business.
I think the biggest thing is that is that as be bring a dual mode and mode on submission they have more and more challenges of Fingerpointing and root cause analysis is it me or did it doesn't provider and I what brought against Momenta Lynsey edging those are the those issues.
And so.
If people want to have savings by moving Opexa I get big saving from moving to the cloud and digital transformation.
They wanted to make sure they have not negated by.
Because issues I said visit showed as issues and so by using over solution.
They are able to enjoy the benefits of digital transformation bedard wedding aboard the prevention funds.
So the digital transformation adoption and the exhibition.
That actually has a of other growth and ER and in the enterprise.
And again that is star and wanted to ask a question.
As a moment to allow any further questions to Q.
And we appear to have no further questions at this time.
I apologize, we do have a question from James fish.
Go ahead.
Hey, guys congrats on a quarter and the large when one do we didnt hear a whole lot on barber or security revenue compared to service assurance.
Is there still pressure coming in Arbor, all where the growth rates in this quarter.
I think it was slightly down from.
From in general what it says the service assurance and we still see some lingering effect so dog night vision changes.
And we see because the those changes winding down this year and the effect of the combined product we announced this end and other products last quarter for this base to pick up next year.
Got it and then maybe you know on sort of timing of core deals how should we think about.
Core.
Serves insurance deals, especially related to obviously, there's a big spectrum auction in June .
Power carriers look into kind of purchase you'd or had or after that that partner.
Yeah, I think so they have not been that's totally waiting for the auction to complete to do that they already have blends I look at Fiveg is that part of my need people want to spend and then and they look at all the.
Are they innovations we have done Javier helping them in the lab of incumbency that'd be novation, how the spend the money. Some of it gets spent on fiveg, some get to expand or spend and afforded you expansion because the body part of the network for Fourg and Fiveg has gone.
So we look at it or what a lot of our leadership in Fiveg.
Antibody incumbency in Fourg when combined with the.
But I just by way of of Ah.
Our software I love, what that though the unique position I like we ever but it before so I think that that's the of what I see is that he's done a lot of people asking that's what.
<unk> big meant even outside of U.S. or fiveg.
And and I think that's going to do or whatever you have us what's that was the show to the business instead of is right and next year.
And we appear to have no further questions at this time, so I'll turn it back to the speakers for any closing remarks.
Great. Thank you very much that concludes our call for today, we appreciate everybody joining and hope everybody has a great day. Thank you.
This does conclude today's program. Thank you for your participation you may now disconnect.
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