Q2 2021 Netscout Systems Inc Earnings Call
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Please standby your program it sounds like again.
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[laughter], ladies and gentlemen, thank you for standing by and welcome to Netscouts second quarter 2021 financial results Conference call. At this time all parties are in a listen only mode until the question and answer portion of the call.
As a reminder, this call is being recorded Tony Piavitsa, Vice President of corporate finance and his colleagues at Netscout are on the line with us today.
If you require operator assistance at any time, Please press star zero.
I would now like to turn the call over to Tony Peay also to begin the company's prepared remarks.
Thank you operator, and good morning, everyone welcome to Netscouts second quarter fiscal year 2021 conference call for the period ended September Thirtyth 2020, joining me today are Anil Singhal, Netscouts, President and Chief Executive Officer, Michael's overdose Netscouts chief.
Adding officer, and Jean Bua, Netscouts, Executive Vice President and Chief Financial Officer.
There is 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 Dot Netscout dot com, including the IR landing page.
35% compared with the same beat it last year.
Both service providers security revenue grew in depth water, but but we're more than offset by a decline in spending in the U S government's sector with him.
Impacted enterprise revenue.
Walker benefited from our focus on cost control as well as the pandemic related travel distinction.
Let's move to slide seven for some further perspective on the business.
And the service provider verdict revenue grew 40% compared with the same last year.
We continue to work with our service provider customer on that all the LD evolution project internationally and on their Y D project domestically and inserted agent brilliant.
Given that five Gabriel about is one of our cabinet for future growth I want to provide some insight into where we see the market right now and how it may wall.
Currently many north.
Gary Sapphire gossiping utilizing therefore genetically.
The service has operated on what is called non stand alone <unk> network overtime.
And that will lead to brand new stand alone <unk> networks to support future use cases, and ultimately a lot larger volume of traffic.
These standalone fight the networks will be soft theater virtual installation given that there will be more distributed at that in order to deliver on the promise of enhanced bandwidth.
Highest speed and low latency to support by Euk's. It light industrial automation telemedicine autumn autonomous transportation and drawings arguments and what Joviality gave me and the internet of things.
Last year, we discuss a few projects vivant related to the radio frequency propagation modeling or calibration, which is a precursor to fight the provider's plan out their network based on signal data collected.
From Netcode perspective, although we participate in all phases of idea of evolution from planning development deployment and monitoring we believe that will see the largest benefit want the standard the networks are deployed and tracked back to get familiar with those networks.
Therefore, we see <unk> as a bigger revenue opportunity for our next fiscal year and beyond yet images R&D investment not in.
In the short term of a fight the roadmap investment of leadership will be one of the <unk>, particularly over an income is b and for driving over for the user clean monitoring business.
Michael will highlight some of this quarter satisfied customer demands during is the Max.
And the enterprise vertical revenue declined approximately 14% over the same quarter last year. This one.
Primary.
We were able to lower expanding in the present government sector in a second quarter with declined more than 60%.
And Vsbn's Lee mentioned, despite having a solid pipeline of user approved project and the federal government sector, the timing and magnitude of funding for these initiatives has been challenging to predict in the current environment.
Removing federal government revenue from the comparison enterprise revenue would have grown in the low single digits in the quarter.
Even the water declining enterprise, even with this August decline in the Enterprise Avenue.
Multicolored grown 1% a year two days as strong performers in our security offerings has offset muted.
Government spending.
And this vertical customers continued to advise the digital transformation plowed migration of security initiative initiated with even greater ldlc as a result of the dynamic and the new normal operating with Remotivate for a bit and interacting with their customers and and more virtual fashion as they look to address speed agility and costs.
On the security front the tech landscape continues to rise rapidly and the pandemic has to be a bit more opportunity for bad actors.
Rest organization given the distributed operations.
Last month's issue with our first half Glen be taught it have intelligence report it's highlighted alzheimers.
Exploiting defend army through the radicals.
Radical changes a ddos attack methods, they're using.
The report discuss how cyber criminals launched with a heartbreaking ddos attacks on online platforms and other services is crucial during the pandemics and an increasingly kind of connected water.
These attacks targeted E Commerce education platform financial services and healthcare services.
Might be right back with sharpness Foster hydrating and more complex.
These new methods put pressure on security being as they have less time to react with different their organisation system, making that much more difficult and highlighting the need to have strong ddos detection in mitigation solution like almost.
Certainly played on an important part is a strong performance on a security solution that quarter and year to date Michaels and highlight some of other enterprises advantage related to this advance during his remarks.
Now, let's move to slide number eight to the reviewer outlook.
Our business and operate business and operations have proven to be largely resilient as we navigate the global pandemic and macroeconomic uncertainty.
This is due to our relevant solutions trusted.
Prostate brand.
Customer relationships dedicated team and solid financial profile.
That we are not immune from the index of COVID-19 global pandemic.
We value it outlook for the remainder of the fiscal year, we remain cautious given the uncertainty around the pandemic and the resulting macroeconomic environment.
Is a mix has caused elongated budget cycles, making their timing magnitude and funding for deals difficult to predict which you anticipate will negatively impact traditionally strong second half of the fiscal year financial reserves.
As a result, we now expect it's going to be a 2021 revenue decline in the mid to upper single digits on a person bids basis compared with fiscal year 2020.
Despite the revenue decline via committed to delivering and one non-GAAP earnings per share in line with our fiscal year 2000 currently non-GAAP earnings per share as we continue to prudently manager will cost structure.
And clothing.
With that I believe it is tyler customer visibility and security needs, while insuring the safety and productivity of our team as we agreed with our store.
In Delaware table reserved and disruption in uncharted COVID-19 environment.
We appreciate the continued dedication and support of our employee and other stakeholders as we navigate that global panhandlers.
With long term market trends in akhmatova, such as digital transformation cloud migration increase type of track and filed in network network as well position has diabetes. So the connected world when we much from this bill was prices.
I look forward to sharing on progress with you as a fiscal year continues to one four.
I will now turn the call over to make them that for his remarks.
Thank you and good morning, everyone Slidell outlines the areas agriculture.
First the cost of Living's, starting with customer movements is O'neill mentioned, our service behind the vertical is solid growth in the quarter as we continue to see <unk> expansions.
National customer base and five G trials in North America, as we have a <unk> investment cycles will kick in.
A notable internal <unk> been in the quarter was a multi use H figures software and support for a major European carriers.
A longstanding loyal customers that provided mid seven figures of revenue in the quarter the investment unable to carry her to extend their <unk> capacity in positions them to transition to <unk> solutions in the future.
On the <unk> front beyond the law too.
Two seven figure user trial with a tier one north American carrier.
To explore a standalone so called five genus book it.
It is still over the days for North American Standalone <unk> visibility project, but this is a good sign for progress.
All these zemel Street the trust in our brand.
The strength and value for solutions and the importance of our incumbency with our loyal customer base.
And the enterprise vertical service sexual solutions has continued to be highly relevant and are producing important new logos for us in the financial healthcare and other sectors.
During the quarter, one you Louisville and deal with one was with a large domestic medical provider with over 1000 words and more than one and a half million patient visits annually.
This was a low to mid seven figure deal to implement our visibility platform in a fully virtualized deployment with extensions into the cloud for these providers patient management system, the scale and completeness of our solution as well as the expertise of what team what is the deal over multiple competitors with partial.
Solutions.
On the international front.
Another new new logo and competitive in was a low seven figure deal with a major stock exchange that neither the faster and more reliable solution to triage and troubleshoot application problems. They selected our service subsequent solution because authorities data source and strong analytical capabilities, which solve the challenges is.
Replace the major competitor solution that was falling short for their expectations.
Both of these cases executives new customers as a result of a reputation as a trusted leader is service experience innovative as reliable solutions, but we have also identified ketose opportunities extend his relationships in these deals as we leverage you across selling capabilities to our integrated sales team.
On the second front dispense both the service provider and enterprise vertical.
We continued to extraneous growing interest in a ddos protection, especially as the sophistication in volume of ethics grew quickly as we outlined in our first half of 2020 threat Intelligence report, which only referenced earlier.
During the quarter, we successfully thwarted extortionate X large use customers, prompting even more attention on this space and solutions sect. This level of protection.
Wires unpublished deployment, such as onboard HD solution, both for rapid spontaneous and sophisticated Lee a seven protection.
To demand the demand for our ADB solutions that increased due.
Due to the large customer due to lodge customers redesigning their infrastructure.
Now settling info for remote work for the long haul after the initial rush to shore up defenses and depend on it started.
This trend is exemplified in the mid 60 with the deal with the large insurance company.
Domestic Lee and the low seven figure deal with a leading international exchange.
Excited about our ability to provide the solutions to our customers.
Two of Outrange unified worldwide Salesforce in.
In terms of go to market activities, we continue to build a blender strategically critical partner, leading virtualization and cloud providers.
In October we participate participate in the annual <unk> event as Technology Alliance partners that were more than 150000 participants that joined the virtual event over the 10 days duration. The presenters I shook his our internet applications performance performance management, and troubleshoot and capabilities in Vms.
Virtualized on plan and AWS AWS cloud deployment.
Also recently or AWS migration ISP partner competency has been approved by the meaning of AWS 35 to customers that NASCAR has been vetted validated and verified against the eyeball and the AWS will promote NASCAR through the end of your sponsorship program on.
On the security front during the quarter Andrea a global these two which leader.
In technology ranked Netscape onboard as the top and largest vendor in the ddos market highlighting our new second investments in on visibility.
And that analytics finally, as a leader in our industry is O'neil discussed in September published a semiannual affect intelligence report a report was picked up by approximately 50 publications advance theaters into five languages as a threat intelligence report is considered an industry about a report.
That concludes my prepared remarks, and I will now turn the call over to Jean.
Thank you Michael and good morning, everyone will receive key second quarter and first half fiscal year 2021 matrix and our outlook.
<unk> interview focuses on a non kastenbaum, otherwise painting, and all reconciliations or not gasping appeared presentation.
Simon the trial detailed our results for a second order and first half of fiscal year 2021, focusing on the quarterly performance revenue declined.
1% over the same quarter in the prior year to $205 3 million.
Product revenue decline 10, 5% of service by many declined.
Over the prior year quarter, a second quarter of fiscal year 2021, gross profit margin was 74, 7% down 1.9 percentage points over the same quarter last year, Katie product next month's, notably increased radiofrequency pacification modeling project.
Lightning in much lower gross margin.
Our software on a sales or 27% of segments insurance product revenue compared with 20% in the second quarter of the prior year.
<unk> operating expenses decreased $15, 4% prior year, primarily into continued cost controls and pandemic located travel restriction, we've reported and operating profit margin of 19, 12% compared with 14.6% in the same quarter last year is indeed.
Per share with 38 cents.
28.
I'm quarter last year.
Turning to slide 17, I'd like to maybe a key revenue trend for the first half of the year.
Six months since the year 2021 second provide a customer vertical revenue declined to talk only 8% financed private further conclude approximately one.
And service provider enterprise periodicals, each contributing at approximately 50% to total revenue for the first six months of the fiscal year.
Turning inside 14 with sales tax geographic revenue next time gap painted revenue by chaos, painless, 58%, Indiana, 842% internationally, the retail customers and a quarter of the first half of the year at represented 10% of more of revenue.
515 detail our balance sheet highlight free cash flow, we ended the quarter with cash cash equivalents short term marketable security and how long term marketable securities of 427 $8 million, which is an increase at $1.3 million and at the end of the first quarter free cash.
<unk> generated in the quarter was eight $3 million, we did not repurchase shares on the stock during the quarter.
From a desk perspective as of the end of the second quarter, we had $450 million outstanding an hour 1 billion revolving credit facility.
Constantly one five times cushion against outgrowth leveraged company, providing potential borrowing capacity needed Ah revolve.
Shopping credit facility expires in January of 2023, and has no acquired principal payments until maturity.
To briefly recap other balance sheet highlights accounts receivable net one 169 7 million.
Downside 43 $8 million at the end of March Dsos was 65 eight.
73 days at the end of fiscal year $2000.
At 79 days at the same time last year improvement in the <unk>.
Quarter of this year compared to the second quarter of the pie is primarily attributable to the timing of order it's within the quarter.
Moving can slide 16 file for outlook on a non cash perspective as of now stained in his remarks for fiscal year 2021, we expect revenue to decline in the mid to say upfront single digits on a percentage basis compared to fiscal year 2020, Despite lower revenue, we anticipate delivering annual Ernie.
Per share in line with our fiscal year 2020 earnings per share number as they continue to prudently manage our cost structure.
On the second half of the fiscal year, we anticipate that the remaining earnings per share performance should be equally more equally distributed between allosteric at cost fiscal quarter. It and it was tennis prior fiscal year, given the current pandemic conditions and our cost management, Okay, we anticipate that third quarter operating expense.
It will be in line with our second quarter operating expensive adult.
I also want to comment on a few capital structure related items for fiscal year 2021, we expect the tax rate to be approximately 2020%. Additionally, we expect per diluted share that standing for the year to be approximately 74 million chair.
That concludes my form overview of our financial results.
Only transition to Q&A I'd like to quickly announced at our upcoming conference participation is listed on slide.
I'll now turn the call over to the App.
At this time, if you would like to ask a question. Please press star one on your Touchtone phone, if you wish to remove yourself from the queue press. The pound key we do ask in the interest of time that you limit yourself to one question and one follow up will.
We will take our first question today from Kevin deals with Gabriel and company. Your line is open.
Hi, good morning.
Purple as in Harry.
Talk about some of the deals Elon getting I was wondering if you could elaborate more so just in terms of what you're actually seeing the.
The pipeline building have you still been able to grow that both on the enterprise and service.
Service providers side.
Just.
From the perspective of deals pushing out we kind of government vertical aside what exactly do you think your customers are waiting for in order to move forward with some of these opportunities.
Thanks for the question Kevin So I think there are two areas one is.
Certain industries, where that is.
Unpredictable.
Timing.
Whether they will go over a certain projects in the pipeline.
On the top of that it's hospitality industry.
And and.
And the federal government a lot of uncertainty around back so that's perfect for number one.
One is elongated sales cycle and build us into buckets. One is we released some new products, especially in the security Smith and.
Normally during the budget cycle, we have to evaluate them and that required somebody to go in and install deck.
And that has been difficult and that extent sales cycle and second thing is people who are new logos, even though we had some successes a lot of interest in about new software based offerings, especially in the enterprise but.
New logo was the first time buyers also has to go through the cycle of verification entrance and back has slowed down. So those are those are the factors, which are mostly all related.
Restart only counting on this year, which has changed.
Got it and then just quickly in the past you talked about enterprises kind of emerging as an interesting opportunity for taiji.
Are you still seeing that trend about anything you can talk about in terms of how large of an opportunity you see that over the coming years.
And I see that as a forlorn opportunity. So if you had been talked about I think in the last year and partly this year.
Revenue, we see some pre deployment opportunities like integration with that small and that.
Then next step will be <unk> using the solution for the use of land monitoring.
And.
We are into RG phases of that.
Much later than that will be participating in private feisty.
Cloud vendors and and the areas will have to leave those efforts also the icy that as a more private feisty and motivate longer term opportunity.
And then the <unk>.
That's helpful. Thank you for taking the question.
Sure.
Our next question comes from James Fish with Piper Sand-blind. Your line is open.
Hey, guys.
And you're all doing well.
On the security side years ago, your carrier customers on additional capacity and now we're starting to hear from you guys that we're seeing larger.
And more attacks are we starting to get to a point, where beef carrier customers are going to need to add more capacity with arbor.
I think they have.
I mean, they will need but I think they have quite a good capacity I think when we talk about security that are good product, which we have one at four the service providers. Sorry, then as it is for the enterprise site.
Been expert being a much bigger enterprise business was desirable VX seen lot of opportunity in that area visit protocol AED.
And which basically looks at application later back which is the new setup attacked rhexis.
On for empty right.
Entry to the cloud and then it gets into traveling Cygnus drives the cloud. So that's a big area of growth via pounding on and we have released couple of solutions and it started to go to market initiative, which has been setup.
Slowed down because people.
People not being able to produce speedy trial.
So while there'll be V C. Some steady state business Thundercat USA as a growth area for security Ddos for the enterprise with application letter that forecast layer seven attack and a new product, we had announced at a our user conference.
Jimmy aside but investigator.
Thanks, VP more opportunity.
In through those products in Andrew Bright sector, and then some time next year similar functionality will be needed for mobility provider both of our <unk> and those are the things. So they are doing a somewhat different than.
The past revenue.
Revenue growth area more capacity in the garage.
Got it and then Jean for you can you give us some color between within Arbor across enterprises and carrier like where do you typically do and also abilities appeared fairly strong is there a good amount of product backlog that extra Gibson confidence here.
There are trends are.
Could be a little bit better than you are expecting or were you just see in greater attach a additional services.
Alba.
I guess, we can talk about that date.
Generally in service provider.
And a good second corner and compensate flat on a year over year basis and enterprise.
For the.
Year to date for the year to date they grew.
Very strongly.
<unk> I have about a 30% increase.
And it's mostly in the areas, where they again clay.
Very large institutions like financial institutions of the government.
They continue to do well and offered given that.
The Ddos added security nature.
Federal because of the.
Integration of the sales force that has many more opportunities now with the service assurance in any of the issues that they had more than a year ago with understanding their territory that behind them. So obvious that done pretty well for the first half of this year.
And then on the billing as being stronger I mean is it is it more product backlog in your.
The normal or was it a greater cost of additional services this quarter.
Let me just check one second it's mostly.
I would say for the product and I look at it.
They're pretty very strongly and.
In queue to Annette.
Hate growth rate.
It is eight of them.
Got it thank you.
You're welcome.
Again that is star and one for your questions today will contact you and Eric Martinez in West Lake Street to your line is open.
Yeah, just a clarification on a full year revenue guy.
Trying to put some numbers around the mid.
Simple.
This is downsides a person.
4% to 9%.
Perfect between those two.
Uhm.
I would say I always think of Miss David.
For the sex and then the offer single make it as seven to nine.
So my range would be 49, okay.
Okay.
And then.
Historically, the September quarter would be a good quarter for Netscape with the federal business are we looking at something that's just.
I believe that in.
To the main.
It's just a lumpy or is this essentially killed projects.
Pending new appropriations Covid.
Snap back in December or are we looking at a multi quarter.
Issue in your view.
I think it would be a longer term I don't think it's going to snap back in December and and federal government Dfc and projects, even without Covid interpart they never die.
Some pain loss for two years, so I think that their budgets approved the effort electric partner, but something magically changing the fiscal year.
I think is unlikely.
Okay.
Q count your commentary on the non-GAAP earnings for the business.
You guys have always done a good job on the cost me.
Done a good job of being able to hit your non-GAAP earnings targets on an annual basis, you did see a decline in cute too.
I think it was 15 or 16% in the operating expense I Gotta believe part of that is just let's see any less conferences covid, but.
Where.
What are our cost structure points of leverage is you're trying to manage to that non-GAAP EPS charges.
So the first one would obviously be the condition.
Condition of the pandemic and the amount of travel that the sales once located.
And Q3 I don't.
Give them doing incrementally more travel and they get into too.
The other letters that we have for the rest of the year generally a head count.
The back filling of any nutrition off there a second investment areas that we'd like to make an sales whether we continue without a sentimental delayed at an estimate and they wanted the larger levers goes down to basically variable incentive compensation, which isn't this form and a sales force obviously, a commission which is a function.
Revenue off of the rest of the population the incentive compensation that commentary the achievement of earnings per share.
Target on an annual basis and resources available to achieve those earnings per share.
Chip and last question for me too.
The services revenue historically, we would see an uptick here, but we're not.
Well I guess, we are in historic times or certainly not in normal times, you had a negative comp and the services revenue Q too and I would guess based on the product sales in the prior quarters.
Probably looking at negative comps in Q3 and Q for the service to this revenue can you give us some insight.
Two three services revenue is that up sequentially overshare expectation that it could be down sequentially.
I would say service revenue is fairly based in which would violate generally very accurate on that.
Asking.
The new address.
I'd say around with our model.
One thing.
E.
I'm looking at the midpoint I would say service revenue.
It's going to be relatively consistent.
Revenue that we achieved in FY 2020.
As you pointed out to two of this year.
Last year was actually pretty flat landscape had about a 10 million dollar.
Catch of revenue due to a later signing on a renewal but for the full year I would I would look at an estimate that service revenue will be generally flat.
Last year's level.
But that's helpful. Thanks for taking my questions.
Okay.
And it does appear that we have no further questions. At this time I would now like to turn the call back to our speakers for any additional remarks.
That concludes our call for today, we appreciate everybody joining us and have a great day.
As conclude today's program. Thank you for your participation you may disconnect at any time.