Q3 2022 Netscout Systems Inc Earnings Call

Ladies and gentlemen, thank you for standing by and welcome to net Scouts third quarter of fiscal year 2022 financial results conference call.

At this time all parties are in a listen only mode until the Q&A session portion of the call.

As a reminder, this call is being recorded Tony Piazza Vice President of corporate finance and his colleagues at that Scout 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 Piazza to begin the company's prepared remarks.

Thank you operator, and good morning, everyone welcome to <unk> third quarter fiscal year 2022 conference call for the period ended December 31, 2021, joining me today are a nil Cingal net scouts, President and Chief Executive Officer, Michael Szabados Net Scouts chief.

<unk> officer, and Jean Bua, Netscape, 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 sections of our website at Www Dot net scout dot com, including the IR landing page under financial.

Our 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. 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.

Colfax.

You can identify forward looking statements by 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 <unk>.

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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 are described on this slide and in today's financial results press release as well as in the company's annual report on Form 10-K .

For the year ended March 31, 2021 on file with the Securities and Exchange Commission.

<unk> assumes no obligation to update any forward looking information contained in this communication or with respect to the announcements described herein.

Let's turn to slide number four which involves non-GAAP metrics. While this slide presentation includes both GAAP and non-GAAP to 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.

Are 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 they are also on our website.

I will now turn the call over to Neal for his prepared remarks, a nil.

Thank you Tony Good morning, everyone and thank you for thank you all for joining us today.

Let's begin on slide number six with a brief recap of what third quarter and first nine months non-GAAP results.

During the third quarter, we delivered strong performance across the board.

Higher quarterly sales margins and profitability were mainly driven by increased enterprise customer demand and.

And customize the acceleration novartis randomly within our service provider vertical.

<unk> $25 million to $30 million that were previously forecasted to I've got enough for one quarter.

As a result, we achieved strong top line growth with revenue increasing more than 14% year over year to $262 2 million product revenue grew more than 25% and service revenue grew more than 3% both on a year over year basis.

We exited the third quarter with your project backlog of approximately $30 million in unshipped orders.

Exclude radio frequency propagation modeling orders move.

Moving to our bottom line based on the third quarter's revenue performance and product mix and diluted earnings per share increased to 89 days from 66% a year ago.

Increase of approximately 35%.

On a year to date basis revenue in the first nine months of fiscal year 2020 doing because he has more than 7% to $664 $4 million. This was driven by product revenue growth of more than 17%, partially offset by 0.8% decline in service revenue.

And diluted earnings per share increased approximately <unk>, 9% to $1 56.

For the first nine months of the fiscal year. These comparator that all made on a year over year basis.

In summary, our strong third quarter performance is further demonstrated the financial strength of our business model.

This success combined with our year to date results had provided us with even greater clarity into our full fiscal year outlook and the confidence to update it.

I'll provide more details on all of this later in my remarks.

Let's now move to slide number seven for some further perspective on market and business insight.

Starting with markets, we continue to see digital connectivity, increasing around awards accelerated by the pandemic and longer term could technology brands.

<unk> now has more than three decades of experience, providing service assurance and cyber security solutions at the crossroads of Martin business performance and cutting edge technology.

Since our inception, we have developed a solid reputation for being innovative.

Delivering industry, leading solutions and cultivating close knit customer relationships.

Our our established mindshare and best in class solutions have positioned us well to capitalize on the world's growing connectivity.

To address the latest challenges our customers dealing with the new normal hybrid workforces edge connectivity and the ever expanding cyber security threat landscape. We recently released several new products, including smart edge monitoring and Armless cyber intelligence.

We're excited about the potential of every of these recently released products and services, which is starting to gain traction.

And we believe that this offering will further.

Further accelerate our business momentum in the next fiscal year and beyond.

We are also actively worked with many of our partners to better integrate our solutions into their ecosystems, and thereby enhance the overall quality and technical capabilities of the technology does Michael.

Michael will provide more context on this development during his remarks.

Now I would like to discuss our customer vertical to provide more perspective on our performance as well as the related trends that we're seeing.

For the first three quarters of fiscal year, we grew revenue in our service provider customer vertical by more than 7% year over year.

As mentioned earlier in the third quarter several service provider customer accelerated orders with us that were previously anticipated to occur in the fourth quarter of fiscal year 2022.

In terms of trends for this vertical we continue to see <unk> deployed globally and a radio frequency propagation modeling solution is being used and Daddy of planning.

Last week for example.

<unk> domestic areas lit up their <unk> networks, and the leverage mid band spectrum to deliver the solution.

Meanwhile, the latest FCC mid band spectrum auction in the U S decimated over $22 billion.

These events further underscore the industry steady progress and persistent interest and <unk> related initiatives.

We continue to win notable service provider deals in the third quarter, which included more fire related orders from tier one domestic and international carriers. We also won a second large radio broker radio frequency propagation modeling order from a tier one domestic areas as the organization continue.

To advance this <unk> network planning Michael.

Michael will comment on some of the service provider wins in his remarks.

Now moving to our enterprise customer vertical.

Revenue for this vertical grew by more than 7% year over year in the first three quarters of our fiscal year.

In line in line with our remarks from last quarter, we continued to see enterprise customer moving from the activity to proactively be in their execution.

As they restart projects previously delayed by the pandemic and adjustment to the new normal of today's operating environment.

Michael will highlight some of the customer wins, we achieved during the quarter in this vertical in his remarks.

Now, let's move to slide number eight to review our outlook.

Looking back on our business performance. So far we have delivered three quarters, a solid result, with strong business momentum importantly, our third quarter performance has demonstrated the financial strength of our business model and provided us with even greater clarity and confidence regarding our fiscal year <unk> forecast.

And on track to meet our financial objectives for the full fiscal year.

And after considering all these factors we have made the decision to update our full year guidance and raising our revenue midpoint and increasing our EPS outlook for the fiscal year 2022.

These updates reflect our expectations were lowered product revenue in the fourth quarter attributable to the previously mentioned acceleration of orders by customers and movement of revenue for our fourth quarter to our third quarter results.

It also reflects our expectation to end the fourth quarter with a product backlog of unshipped order similar to that of the third quarter Dean will provide additional color on a recap on the numbers in our remarks.

In conclusion, we have performed well year to date, our visibility has further improved and our business model has demonstrated significant financial strength.

We remain excited about our future growth prospects and I look forward to sharing our filed against vinyl.

<unk> reserves and our fiscal year 'twenty through 'twenty three outlook with everyone on our next earnings call with that I'll turn the call over to Michael.

Please turn to slide nine.

Thank you Amit and good morning, everyone.

<unk> lines.

The areas of Doug will be covering today.

Custom events, we continue to see momentum in our service provider customer vertical.

As <unk> mentioned, we received five G related orders from both domestic tier one as well as international carriers in the third quarter. All of these deals was a low eight figure order for a model for our <unk> solutions from a certain domestic tier one carrier, which represented a 35 five.

Is it order this carrier has placed with us.

The international market also continued to show momentum we received a mid seven figure order <unk> related solutions from an international carrier.

In the third quarter, which represents the second <unk> related order from this organization.

We also received a second low eight figure order from a domestic tier one carrier from additional radio frequency propagation modeling services as the carrier continues to plan its <unk> network buildup.

As these carriers increasingly look to integrate <unk> capabilities and further edmonds the competitiveness of their offering.

Our unique combination of market, leading solutions depth of experience responsive customer service and strong relationships continues to win us business in this service provider segment.

We have also continued to observe renewed momentum within our enterprise customer vertical as our nearest touched on earlier. These customers are now in the process of refocusing on those important projects that were either previously delayed due to the pandemic constraints or newly created as a result of the broad impact of the pandemic.

On underlying digital transformation trends to date.

We are well positioned to capitalize on this momentum and a robust suite of offerings is gaining traction with both existing and new enterprise customers. During the third quarter. For example, we want a low seven figure deal with a new customer that is a global household and consumer products company headquartered in the U S.

By demonstrating to their customers our ability to help.

Cross that protect its critical business services disruptions, we were able to win this deal after only a very short sales cycle.

Once the customers <unk> operations experienced a massive data center breakdown that IC operations management team realized they did not have the ability to resolve lateral and prevent such problems using existing tools.

This is another example of a rapidly growing and growing complexity within <unk> today.

It has been.

It has already reached the critical threshold that necessitates visibility at a larger scale than possible with conventional tools beyond. This example, and due to the result of similar challenges. We have won several noteworthy new clients, including a new agency in the U S Department of.

Defense.

These wins further demonstrate the highly differentiated nature of our approach as well as the depth and breadth of our offering.

Continued to serve us well in today's dynamic and constantly evolving digital economy.

Now turning to our go to market activities on this front, we remain focused on cultivating strong partnerships integrating solutions and preparing for our engage 2020 annual user technology summit from our partnership and integration perspective, we recently announced several new and continuing.

All operations to highlight a few in early November .

In 2021, we reported that AWS customers will now be able to use omni cyber intelligence or OCI integration with AWS security hub for Ed that visibility it security and migrating workloads to AWS.

Earlier. This month, we also announced a collaboration with AWS in support of LNG at.

The subsidiary of a worldwide low carbon energy supplier Angie to seamlessly migrate.

Workloads and service through the cloud in support of the company's digital transformation journey.

Finally at the end of the year, we announced a new ink.

Integration that <unk> Engineers, <unk> service assurance solution with service now operations management or <unk>.

And.

Visibility in <unk> helped our integration module is enabling and genius one to generate enhanced alerts to service now AUM.

With the context contextual launch capability for service triage.

We are excited about these partnerships. The people we are working with and the quality of our solution integrations, thus far through.

Through these collaborations we can help our customers navigate an increasingly connected and interdependent world with more confidence and protection. So they can focus on what matters most to their organizations looking ahead that Scott plans to host its customers and partners at its annual engage technology and user summit from.

April 25% to 28% this year in Orlando, Florida.

As an annual tradition. This event is event is a true highlight of the year.

I will let Scott.

And then engage 2022, we plan to showcase our cyber security service assurance and Ddos capabilities through presentations panel discussions demonstrations and hands on training. This event. We will also provide us with more opportunities to meet beat our user and partner communities to discuss and solicit feedback regarding our visibility without borders.

Offerings.

That concludes my prepared remarks, and I will now turn the call over to Jim.

Thank you Michael and good morning, everyone I will now review, our key third quarter and year to date fiscal year 2022 metric.

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 the results of our third quarter and year to date fiscal year 2022, focusing on the quarterly performance revenue grew 14, 6% over the same quarter in the prior year to $262 2 million.

Direct revenue grew 25, 6% and service revenue grew three 5% over the prior year's quarter.

Our third quarter fiscal year 2022, gross profit margin was 78, 8% up two percentage points over the same quarter last year, primarily attributable to product volume and mix, our third quarter software only revenue was 34% of our service assurance product revenue compare.

231% in the same period last fiscal year quarterly operating expenses increased three <unk>.

5% from the prior year, largely due to investments in sales and marketing we reported an operating profit margin of 33, 2% compared with 28, 2% in the same quarter last year diluted earnings per share was <unk> 89 cents compared with 66 cents in the same quarter.

Yeah.

Turning to slide 13, I would now like to review key revenue trends for the first nine months of fiscal year 2022 year to date the service provider customer vertical revenue grew approximately seven 4%, while the enterprise customer vertical grew approximately seven 7% approximate.

51% of total revenues for the first nine months of the fiscal year was generated from the service provider customer vertical while the remaining 14 bandwidth from the enterprise customer vertical.

Turning to slide 14, which shows our geographic revenue mix on a GAAP basis revenue by geography continues to be domestically weighted both domestic and international revenue increased on a year to date basis for both the third quarter and first nine months of the fiscal year. There was one customer that represented 10% or more.

Of total revenue.

Slide 15 details our balance sheet highlights and free cash flow, we ended the quarter with $553 5 million in cash cash equivalents and.

Short term and long term marketable securities representing an increase of $77 $7 million since the end of the second quarter free cash flow generated in the quarter was $93 million, we repurchased approximately $11 million or 409.

379 shares of our common stock in the quarter from a debt perspective as of the end of the third quarter, we had $350 million outstanding on our $800 million revolving credit facility, which expires in July 2026.

To briefly recap other balance sheet highlights accounts receivable net was $233 9 million up.

Up by $36 2 million since the end of March the DSO metric was 76 days versus 75 days at the end of the fiscal year 2021, and 70 days at the same time last year.

Moving to slide 16 for commentary on our outlook I will focus my review on our non-GAAP outlook.

As <unk> noted earlier in his remarks, we have updated our full year outlook, raising our revenue midpoint and increasing our EPS outlook for fiscal year 2022, we now expect fiscal year 2022 revenue to be in the range of $850 million to $855 million, assuming approximately 75 million weighted.

Average diluted shares outstanding we expect non-GAAP diluted earnings per share to be between $1 75.

And $1 78.

This update reflects our expectation for lower product revenue in the fourth quarter. As a result of the previously mentioned acceleration of product revenue of approximately $25 million to $30 million from the fourth quarter into our third quarter results and also reflects our expectation to end the fourth quarter with a product backlog.

<unk> of unshipped orders of approximately $30 million, which.

<unk> radio frequency propagation modeling projects and is similar to that backlog of the third quarter that concludes my formal review of our financial results I will now turn the call over to the operator to start Q&A.

At this time, if you would like to ask a question. Please press star and one on your telephone keypad, if you wish to remove yourself from Mchugh press the pound key.

Do ask that in the interest of time, you limit yourself to one question and one follow up.

We will take our first question from Matt Hedberg with RBC capital markets.

Oh, Hey, guys. Thanks for taking my questions.

That's on the quarter.

Neil.

Obviously theres a lot of positive this quarter and I guess I'm curious the acceleration in service provider deals. This quarter is it just a function of timing or was there anything else that that.

That caused some of these deals to accelerate this quarter.

Matt I think demand reason was that we had mentioned a little bit updates happening last quarter also.

The big Big Big deals often done by Big service provider customers.

With large orders.

<unk> had some challenges with many other vendors whether it be got hardware content because of supply chain problems and.

And as a result.

They wanted to use that year end budget and XP thing is the moat.

The most likely reason why our Q4 orders moved into Q3, so that's the effect, which has been happening, but it was more prominent.

And.

In the third quarter, because even though it's the third quarter for US is our fourth quarter fiscal quarter for all of them and that put a lot of pressure on us to ship things, but we had to do it because of customer satisfaction visas.

Got it that makes it that makes a ton of sense and then I think one question that we get from a lot of investors.

As potential questions about supply chain constraints.

It doesn't look like that impacted you this quarter or in your guidance, but any commentary on.

<unk>.

If that's something you guys think about just kind of given your global reach.

Well, yeah, we see it we see that also but there have not been detrimental to our revenue and orders and for example that there are challenges in disk drives we use a lot of disk drives for Becker regarding and everything.

So sometimes we have to pay more and so we have been managing our margin despite being some higher cost and so we have those broadcom, but since we don't make custom hardware.

But we do use a lot of hardware from third parties and otherwise and there have been people, who buy hardware from a preferred supplier.

And there we had to work with them to keep their inventory and half of them. There are people who buy directly from other vendors.

And those things have been delayed and as a result, some timing effects and the delay of the shipment of our orders also.

But overall I feel that the challenges we are facing also but they pale in comparison to many of the companies in our space.

Got it that makes a ton of sense. Thanks, thanks, and thanks everybody.

Thank you.

We will go next to James fish with Piper Sandler.

Hi, guys nice execution there.

On the guide it was another quarter in which you cite a pull in of deals I guess, what makes you think it's more of a pull in of deals.

Other than just rising demand or even an acceleration of the <unk> cycle.

Timeframe as deferred revenue also was materially higher than normal is there any way to think about also your total backlog sequentially, including radio frequency and really what I'm trying to understand is why wouldn't we have seen no larger guide raise here on the strength the last few quarters, the demand environment and upside to lead metrics.

Well the main reason is because we have.

We have the forecast.

And very credible forecast in December for the Q4.

So we see clear.

Canadian forecast for Q4 from the sales team as a result of what happened in Q3 and Thats. The primary reason like what all these big deals.

Eight digit deals we have.

Cliff.

The idea of which quarter. They generally will follow and that's what happened in this time that Oh.

Our forecast for Q4 for those very large customer has gotten slightly decreased in Q4 versus Q3.

So I'd be honest, David <unk> acceleration and that'll be great for us.

Yes, there is a lot of talk about <unk>, but.

We don't think that X by the acceleration.

Is that is the order.

The primary reason for this earlier than expected.

Hi, Jim This is gene I just wanted to comment on one of your observations about deferred revenue.

And put it in context of the backlog as you know from our Q disclosure our backlog was about I guess round numbers, 80% to $85 million at the end of Q2 in total the backlog going into Q out of exiting Q3, including radiofrequency calibration is.

$75 million and that is actually a portion of that youll see sitting in deferred revenue because one of our large carriers asked too as to please build them for.

The project before it was actually completed so you'll see the deferred revenue was up by 2000 $25 million due to that and Thats. One of the reasons why the DSO is at 76, because they invoice went out but the revenue hasnt been recognized yet.

That's really helpful and Keene on the security side, you know, obviously service insurance had a really good quarter in euro as much on the security element can you just give us an update on what percentage of revenue security represents for you today, what it grew year over year on the breakdown within Arbor online.

Clean service provider and enterprise.

So I would say that Alibaba is still roughly.

On our guidance, probably roughly just round numbers, 25% for the quarter. They grew in the mid teens and they grew mostly in service provider and were relatively flat in enterprise on a year over year basis. So overall growth is approaching the mid single digits and again, it's skewed mostly towards server.

Provider and in.

Enterprise tends to be flat on a year over year basis.

Helpful. Thanks, guys.

Yes. Thank you.

And we will go next to Kevin Liu with Kalo <unk> company.

Hi, good morning.

Just wanted to start on the service provider side as well.

Obviously, you had the prior C band auction announcement that is getting lit up by.

Your large tier ones and <unk> seen some benefit.

Your product revenue growth. So I'm wondering if you could kind of walk us through subsequent to the privacy that option how that sort of.

Benefited your business are flowed into it and what you expect following this latest round it mid band auctions.

So there are two factors Kevin one is there is that.

We are the incumbent in the <unk> space.

And so as they come out with <unk> and although we still have to go through the mechanics are winning the bid business. So our five gibbons.

Really extension of our <unk> incumbency and all the investments we have made so all the cat ESV, we're talking about Michael talked about.

Ideally doing <unk> expansion.

Our success in <unk>.

And that's about the previous spectrum in all of those the new spectrum.

And oftentimes requires new propagation delay of.

Solutions, and so we think that new spectrum that laid out.

It's going to affect our propagation.

Propagation based solution, which Michael talked about with regard to large orders and we have been working with.

So I look at if no.

And on a more software based solution for the propagation measurement.

Which would be applicable in more cost effective for them. So that's what I look at.

Existing spectrum moving forward <unk> as a result of our incumbency of our Newark.

For the planning purposes now on the new spectrum, we have decent second kind of others.

Got it and maybe switching over to the enterprise side of things you guys have seen kind of building momentum there over the course of the year as you look forward here.

You feel like this is kind of a good cadence in terms of where you want growth to be for this vertical or do you see further opportunity for acceleration.

Yes, we see that even though there was not a big contribution.

Of this.

In the in this year.

But all the projects we are the two big areas, we announced smart edge monitoring service assurance solution beyond the data center.

And omni cyber intelligence, which we feel is theyre just density with.

A big market a market size for us are both tracking very well.

And so while there is not much contribution to this because we just released them three to six months ago. There is lot of interest we already have quite a few customers and we think thats going to be a big driver for growth next year and the enterprise.

I might as well.

Yeah.

Just one other point I do believe that there is a growing need.

For our scaled solutions scalable visibility that other other tools cannot.

Cannot handle and that's because of the growing complexity and all these additional digital transformation moves.

It is inevitable for large customers to that.

Of it needing.

What kind of solutions that I see that trend.

Yeah.

Alright, well, that's really great to hear congrats on the strong quarter and thanks for taking the question.

Thank you.

And we have no further questions at this time I will turn it back to the speakers for any closing remarks.

Great. Thank you for joining us today. This now concludes our call have a nice day. Thank you.

Yes.

This does conclude today's program. We appreciate your participation and you may now disconnect.

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