Q1 2023 Netscout Systems Inc Earnings Call
And good morning, everyone.
Welcome and thank you all for joining us today.
Let's turn to slide number six for a brief recap of our non-GAAP financial results for the first quarter of our fiscal year 2023.
In the first quarter, we achieved a strong top and bottom line by top and bottom line performance extending over business momentum from last fiscal year into our current fiscal year 2023.
Revenue was $208 8 million, representing a year over year growth of nearly 10%.
Our strong revenue expansion was driven approximately by by approximately 20% product revenue growth and approximately 2% service revenue growth both on a year over year basis.
During the first quarter, our service assurance revenue grew by approximately 11%, while our security revenue grew by approximately 7% both on a year over year basis. As a result, we grew our diluted EPS by approximately 20% year over year to deliver 24 <unk> per.
Our diluted share in the period.
Now, let's move slide number seven for some further perspective on market and business insights.
On the security front, our new omni solution suite continues to gain recognition and traction in the marketplace as we further expanded its offerings.
For example, we recently launched the ominous Atlas intelligence feed for smarter automated ddos attack blocking.
The new innovative AI based solution, our omnis Aif is continuously updated and enables the instantaneous blocking up a large portion of ddos attacks, thus simplifying operations and minimizing risk for our customers' businesses.
In recognition of what ongoing cyber security focus we recently received a cyber Defense magazine Global Info SEC Award and for a market leader in network detection and response as well as the portraits Cyber Security award in the threat detection category.
Although the total contribution from our new omni solution within our security portfolio remains small.
Overall, our revenue this solution suite continues to show solid potential and we are seeing our customers network and security teams big need to understand the value of a shared visibility platforms.
Now, let's turn to our customer vertical for more business insight starting with our service providers.
Service provider revenue in the first quarter grew approximately 2000.
27% year over year, primarily driven by radio frequency propagation modeling related revenues.
We continue to seek areas to invest in that five year deployment as evidenced by the number of radio.
Frequency propagation modeling projects, we are working on.
During the first quarter. We also received additional fire related order from not from a not from both tier one domestic and international carriers.
Moving to our enterprise customer vertical revenue declined by approximately 5% year over year in the first quarter of our fiscal year 2023.
The decline was primarily due to the timing of enterprise customer order shipment.
We remain confident in the health of what discuss summit vertical. Despite these fluctuations in the near term.
Enterprises continue to demand best in class security solution as well as the solution that can help facilitate the acceleration of their digital transformation.
Michael will provide more insight regarding customer orders.
In our vertical during his remarks.
Now, let's move to slide let's move to slide number eight to review our outlook. Looking ahead, we remain excited about the market opportunity. We are seeing for both our existing and new solutions from both a financial and a business perspective, we remain confident.
Our underlying fundamentals and positioning despite the persistence of various macro headwinds.
As such we are reiterating our non-GAAP outlook for our full fiscal year 2023.
Jim will provide additional color and a recap of the numbers in other months in.
In summary, our first quarter performance has extended our momentum into the new fiscal year, while also providing us with a solid financial foundation going forward.
Additionally, we remain encouraged by our ability to help customers address the challenges and opportunities of today's digital world.
Actively through our unique solutions.
We look forward to sharing our progress with everyone throughout the remainder in the remainder of our fiscal year with that I'll turn the call over to Michael.
Thank you Amy and good morning, everyone Slide 10 outlines the areas I will be covering today, starting with customer events.
And our service provider customer vertical we continue to see <unk> related activity both in domestic and international in March for example, during the first quarter, we see mid seven figure orders with five G related elements tier one domestic carrier.
And then international carrier continues to advance their <unk> network deployment.
These follow on orders as both carriers had placed <unk> related orders with us in the past now.
Now turning to our enterprise customer vertical.
In the first quarter, we secured a low seven figure deal with a law enforcement agency for a large U S city or a combination of our service assurance and security solutions.
<unk> solutions in order to win this deal we collaborated with our customers network and security operations teams with <unk>.
Consequently, judged and evaluated our solutions with requirements for a more comprehensive insights and scalable deep packet inspection solution to meet visibility and security needs. The customer seems determined that our solutions are ideal, particularly when compared to our competitors solution that was only.
To fulfill.
Customers' requirements.
Our deployment for discussing that utilizes that.
<unk> data source service assurance analytics provided by our engineers, one stack as well as the network based detection and response capabilities of our new on this cyber intelligence stack.
We are excited by this deal, particularly because it demonstrates our both natural and security leveraging scalable deep packet inspection technology to create shared visibility platform.
We continue to see increasing customer interest in these types of use cases.
Our go to market activities.
Now turning to our go to market activities importantly, we have continued to prioritize attending in person events. We find these gathering support effective and efficient, allowing us to demonstrate our solutions and engage with existing and prospective customers for our second fiscal quarter. We plan to attend the Black hat conference, which takes place in Las Vegas.
And caters to the cyber security community.
We also plan to attend Vmware explore formerly formerly known as <unk>, which takes place in San Francisco and is focused on enterprise digital transformation as well as cyber security and these events, we will demonstrate on that Scott and our customers are extending our visibility platform and underlying deep packet inspection.
<unk> into adjacent areas ranging from cyber security to adaptive Ddos, we will also showcase our solutions are incorporating AI.
AI intelligence feed salary remote works.
<unk> service assurance challenges and enhancing AI ops analytics and more.
As O'neil mentioned, while our new cyber security solutions are already starting to receive recognition our existing solution in both security and service assurance.
Also changing further awareness.
For example in June Forrester published its total economic impact study on this AED.
Omission by Matt Scott. This report showed an impressive ROI of two.
201% or over three years effectively 15, black the solutions cost back solutions cost in just seven months.
We also recently awarded the digital Innovator award in the Enterprise digital transformation.
And it positions us permission from Intel X.
And analyst and adviser for our Enterprise service assurance solutions with that ill conclude my prepared remarks for today. Thank you everyone. I will now turn the call over to Jim. Thank you Michael and good morning, everyone. I will review key metrics for first quarter fiscal year 2020 train and provide some additional commentary on our fiscal.
In 2023 outlook.
Minder. This is Ian focuses on our non-GAAP results, unless otherwise stated and all reconciliations with our GAAP.
Presentation appendix, regardless I will note the nature of any such comparison.
Slide number 12 details our first quarter fiscal year 2020 trading results during the quarter total revenue grew nine 7% year over year to $208 8 million.
Product revenue grew 19, 9% and service revenue grew two 1% both on a year over year basis.
First quarter fiscal year 2020 trade growth gross profit margin was 74, 5% up <unk> three percentage points over the same quarter last year quarterly gross margin was impacted by the addition of approximately $15 million in.
In radio frequency propagation modeling project, which had an average gross margin of less than 30%.
Quarterly operating expenses increased nine 7% year over year, primarily attributable to the return to a pre pandemic environment, including more in person sales and marketing events as well as increased travel costs.
We reported an operating profit margin of 11, 7% compared with 11, 4% in the same quarter last year diluted earnings per share was <unk> 24 compared.
Compared with 2000 in the same quarter last year, an increase of 20% year over year.
Turning to slide 13, I would now like to review key revenue trends by customer vertical and product line.
For the first quarter of fiscal year 2023 on a year over year basis service provider customer vertical revenue grew 26, 9%, while our enterprise customer vertical revenue declined four 8% during the quarter, our service provider customer vertical accounted for 53% of our.
Total revenue, while our enterprise customer vertical accounted for the remaining 47%.
Now turning to our product lines in the first quarter of fiscal year 2023, and service assurance revenue increased by 11% year over year, while our security revenue increased by $6 seven.
During the first quarter to service assurance product line represented approximately 72% of total revenue, while our security product line represented the remaining 28%.
Turning to slide 14, with our geographic revenue mix in the first quarter, our revenue with more concentrated than usual in the U S. Due to increased tier one domestic carrier radio frequency propagation modeling project revenue also two customers represented 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 $374 6 million in cash cash equivalents and short and long term marketable securities representing a decrease of $328 6 million since the end of fiscal year 2022.
The decrease was primarily attributable to the two capital structure transactions, we initiated in the first quarter fiscal year 2023. The first transaction was the repayment of $150 million of debt.
On our revolving credit facility, while the second transaction was the execution of an accelerated share repurchase agreement to repurchase up to $150 million of our common stock through the accelerated share repurchase transaction. We received 70% of the estimated program shares upfront are approximate.
<unk> three 3 million shares we anticipate receiving the remaining 30% when the program concludes no later than the end of the third quarter of our fiscal year 2023.
Free cash flow for the quarter was negative $14 9 million from.
From a debt perspective, we ended the first quarter of fiscal year 2023, with $200 million outstanding on our $800 million revolving credit facility, which expires in July 2026.
To briefly recap our other balance sheet highlights accounts receivable net was $112 9 million.
A decrease of $35 $3 million since March 31, 2022, the DSO metric at the end of the first quarter fiscal year 2023 was 44 days versus 63 days at the end of the first quarter of fiscal year 2022, and 64 days at the end of our fiscal year 2020.
Two.
Let's move to slide 16 for commentary on our outlook I will focus my review on our non-GAAP targets for fiscal year 2020, as I noted earlier, we are reiterating our non-GAAP outlook for fiscal year 2023 that was presented during our May five 2022 fourth quarter and full fit.
Full year earnings call as a reminder for fiscal year 2023, we anticipate revenue in the range of $895 million to $925 million, which implies a mid to high single digit topline growth rate. The effective tax rate is anticipated to be in the range of 20% to <unk>.
<unk>, 2% with a current rate at the upper end of that range, assuming between 73, and 74 million weighted average diluted shares outstanding which includes the estimated impact of the $150 million accelerated share repurchase program with a partial offset for stock compensation.
<unk> dilution, we expect our non-GAAP diluted earnings per share to be between $1 97.
And $2 and three.
I'd also like to offer some color on the second quarter as we assess the opportunities in front of US. We currently anticipate mid single digit revenue and EPS growth rates on a year over year basis.
That concludes my formal review of our financial results. Thank you and I will now turn the call over to the operator for Q&A.
At this time, if you would like to ask a question. Please press star one on your telephone keypad.
As Tony yourself from the queue Breshkovsky BDO asking Andrew some time that you limit yourself to one question and one follow up we'll.
We will take our first question from Matt Hedberg with RBC.
Hey, it's Dan Bergstrom for Matt Hedberg, Thanks for taking our questions.
Youre here reiterating guidance for the year and nice to see maybe with a lot going on could you talk to some of the confidence points you have your own guidance for the year.
Then on the enterprise side could you drill down there a bit did you notice any changes in buying patterns any additional.
Scrutiny around deals there.
Maybe expanding upon Aneel statement, where he called out some timing of enterprise.
Customer order shipments.
So Matt.
Overall, I mean, I know there are a lot of anxiety about recession, and what's going on so far but luckily we are not seeing the impact on that on our pipeline auto business.
Enterprise business was very strong last year and some pull forward deals and all of those so I think this is just a timing in 19.
But.
Quarterly results versus the yearly gets skewed because of large deals. So at this point, we're not seeing.
Any impact really on from what is the macro headwind.
And as we see I mean, we feel still feel.
Good about the guidance range, we provided.
Great. Thanks, that's helpful and then with security Jean Thank you for that historical breakout nice to see something we were looking for just said just that said just on the seasonality here. It looks like your third quarter. The December calendar year quarter was seasonally strongest last year.
That's the type of cadence, we should look for unsecured here kind of that normal enterprise build through the year with the segment or is there anything else to keep in mind around enterprise seasonality.
For security.
Yes, as you pointed out there in the second half of a year.
Either Q3, Q4 is seasonally higher due to the timing of the calendar year budget companies. The only thing I would say is as the year progresses, and we continue to see traction in August .
You might be able to see a little more of an impact in Q4 than in Q3.
Okay, great. Thank you.
Okay.
Our next question comes from James Fish with Piper Sandler.
Hey, guys. Thanks for the questions.
Jean deferred revenue was down a bit more than normal this quarter, it looks like by about $40 million sequentially.
Was there was this related to product backlog or something else.
In the last few quarters, you actually gave us product backlog.
Could you give us not this quarter, including across I think you broke out core and radio frequency parts in the past.
Sure.
So deferred revenue is a function of two things one as you mentioned the use of the calibration project revenue the radio frequency propagation modeling that we started to execute on in this in this fiscal year as well as generally just the timing of multi year renewal orders.
We're we're very heavy in Q3, and Q4 and much lighter in Q1.
The product backlog as you recollect was about $110 million at the end of last fiscal year with about $60 million of that being calibration. So we used approximately $15 million this year.
This quarter, alright, and so of that we would have about $45 million left of calibration revenue to go through the.
Product.
To go through the product revenue line item, the shippable backlog, which goes through product revenue also.
We shifted the $50 million at the beginning of Q1, and then we built the backlog in that area back up to about $48 million. So total backlog at the end of Q1 still sits around $85 million.
Okay, Great I appreciate that.
So.
Also appreciate that security versus.
Service assurance, so I wont bug you on that question that you normally do gene.
Thank you.
Yes.
On the radio frequency side, great quarter bear, but how much longer of a tail do you guys expect.
RFP business to have versus we're starting to hear some of the core service assurance deployment and is there any way to think about how you guys are.
Getting the kind of gross margin on the year given the mix between RSP in the core service assurance. Thanks, guys.
But as we as we move more and more towards software side I mean, we can compensate for some of the.
Lower gross margins on calibration and service revenue.
Overall as our business grows.
<unk> topline growth.
And.
Opex line is generally similar to the previous year, except for the travel expenses deductible reset this will be balanced out and when we give the guidance on EPS and everything it does deal with most of the calibration.
I guess to be shipped this year.
So that's all built into the numbers, which we have provided for the guidance and just to add to that point, Tim gross profit you're correct, we'll be absorbing about $60 million of backlog is probably less than 40% margin. So I think we anticipate that our gross margin. This year on a year over year basis will be.
Relatively flat.
To potentially slightly up from the fall.
Gross profit margin of last year.
Very helpful. Thank you thanks James.
Okay.
Our final question comes from Kevin Liu.
<unk> company your.
Your line is open.
Hey, good morning, guys.
Could you talk a little bit about this what's the government pipeline looks for this quarter I think you would kind of expect them.
Seasonal strength you tend to see.
Sure.
So this quarter Q2, Q2, with the 930 government year.
Well again, we have excellent relationships with government.
Good news this year is that most of the projects that we have in our Q2 forecast have been funded.
Usually we have a lot of projects and some of them all funded or not funded I would say on a year over year basis, given just the state of the.
U S government at this point in purchasing and their focus I would think that our Q2 revenue will probably be similar to the Q2 of last year and maybe up from.
From that percentage.
Got it and then just in terms of the second half outlook for service provider spending it seems like many of the large tier ones domestically at least.
And we're heavily in the front half of the year. Just wondering how you guys think the second half progresses in terms of service provider mix and weather.
You'll continue to see more kind of work on the competition modeling side of it.
To change either tomorrow.
Traditional insurance our security deployments.
I think it could be more.
It's going to be much less calibration and mostly service assurance ardis and business in the second half.
<unk>.
This quarter.
Year over year growth was driven somewhat by the backlog. So we still have a lot of business in the pipeline with the service provider.
And I think no.
Enterprise look the breadth, but overall when.
When we at end of year will be.
It'll be in line with very similar breakdown between service provider and enterprise Tomorrow.
And.
Yes, I think so.
Basically there is beside.
I'd calibration and traditional service assurance.
There are some other things happening.
People are getting the <unk> spectrum, which is then area. So calibration is one of the book and very very low margin and then via service assurance, which is the other book end, but in between we have the land business. So as people are getting more <unk> do you expect them like anyone in that.
In India and other places.
We see.
Some much better business in the Atlanta area.
It has very similar margin profile as the agenda service assurance.
Business versus last year.
Okay.
I appreciate you taking my questions.
Sure. Thanks.
There are no further questions at this time I turn the call over to Tony for closing remarks.
Thank you operator, thank you everybody for joining us today that concludes our call for the day have a good day. Thank you bye.
Okay.
Yes.