Q2 2023 Netscout Systems Inc Earnings Call
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Ladies and gentlemen, thank you for few do buy in bulk computing that scout second quarter fiscal year 2023 financial results Conference call. At this time all parties are in a listen only mode until the question and answer portion of the call.
Remind you this call is being recorded Tony Piazza Senior Vice President of corporate Finance and his colleagues at net scout are on the line with US today. If you require operator assistance at any time, Please press star zero.
Now I'd 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> second quarter fiscal year 2023 conference call for the period ended September 30th 2022, joining me today are nil Cingal net scouts, President and Chief Executive Officer, Michael Szabados Net Scouts chief.
<unk> officer, and Jean Bua at Netscape, Executive Vice President and Chief Financial Officer.
There's a slide presentation that accompanies our prepared remarks, you can advance the slides in the webcast viewer to follow our commentary both the slides and the prepared remarks can be accessed in multiple areas within the Investor Relations section of our website at Www Dot net scout dot com, including the IR landing page under final.
<unk> 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 of our position.
<unk> of operations business strategy plans and objectives of management for future operations and other statements that are not historical facts you can identify forward looking statements by their use of forward looking words, such as anticipate believe plan will should expect or other <unk>.
Parable term.
We caution listeners not to place undue reliance on any forward looking statements included in this presentation, which speak only as of today's date. These forward looking statements involve risks and uncertainties and actual results could differ materially from the forward looking statements due to known and unknown risks uncertainties assumptions and other fab.
Actors, including but not limited to those described on this slide and in today's financial results press release.
For a more detailed description of the risk factors associated with the company. Please refer to the company's annual report on Form 10-K for the finance fiscal year ended March 31, 2022 on file with the Securities Exchange Commission net.
<unk> assumes no obligation to update any forward looking information contained in this communication or with respect to the announcements described herein.
Let's now turn to slide number four which involves non-GAAP metrics. While this slide presentation includes both GAAP and non-GAAP results unless otherwise stated financial information discussed on today's conference call will be on a non-GAAP basis only.
<unk> now for providing non-GAAP measures along with the limitations of relying solely on those measures is detailed on this slide and in today's press release. These measures measures should not be considered in isolation from or as a substitute for financial information prepared in accordance with GAAP.
Reconciliations of all non-GAAP metrics with the applicable GAAP measures are provided in the appendix of the slide presentation in today's earnings press release and on our website I will now turn the call over to Neil for his prepared remarks and Dell.
Yeah.
Thank you Tony and good morning, everyone welcome and thank you all for joining us today.
Let's now turn to slide number six for a brief recap of our non-GAAP financial results in the second quarter and the first half of our fiscal year 'twenty two 'twenty three.
Focusing first on the second quarter of fiscal year 'twenty to 'twenty three we delivered strong financial results and drove progress at Cabela's.
Our strategic growth priorities during the quarter importantly, this included further expanding our cyber security business.
Our revenue expansion was driven by 10% product revenue growth.
And more than 5% service revenue growth both on a year over year basis.
Of note, our cyber security and service assurance product lines continued to grow in the quarter on a year over year basis.
With this revenue growth and operating leverage we delivered 50 cents per diluted share in the second quarter of fiscal year, 'twenty 'twenty, three representing diluted earning per share growth of approximately 21% ear over to you.
Now moving on to the first half of our fiscal year 'twenty two 'twenty three.
During the media revenue was $436 9 million growing by nearly 9% year over year.
This increase was driven by product revenue growth of more than 14% and service revenue growth of nearly 4%. During the same period cyber security revenue grew by 14 Bucks and why it said with a a show this revenue grew by more than 6% oil.
All comparisons are on a year over year basis.
Finally, we delivered 81 since our diluted earnings per share in the first half of the fiscal year 'twenty to 'twenty, three representing diluted earning per share growth of approximately 21% year over year.
Now, let's move to slide number seven for some.
Further perspective on marketing market and business insight.
Starting on the cyber security front, we recently released our Ddos threat Intelligence report for the first half of 2022 in it we highlighted many of the current trends and challenges within this critically important area. A report finding their most state how adept and sophisticated cyber criminals have become.
Leveraging new Ddos attack vectors, and then I'd add Mccullough, you said direct them to bypass organization defense measures.
The report also highlighted the significant geopolitical implications of today's D does that do.
Attackers and chart. Many of these bad actors that openly embracing online activation to cause disruption.
Geopolitical unrest through the high profile Ddos attack campaigns.
It gives me the what state of that lateral but increased visibility and defensibility. We play important role in this ecosystem and remain confident in what I believe to help customers navigate these challenges while also capitalizing on the opportunities of today's digital world.
In line with this trend.
<unk> Omni suite of cyber intelligence product has continued to gain traction although it still only accounts for a small portion of our revenue stream. During the second quarter. For example, one of our large customers continue to integrate with the <unk> platform by incorporating omnis into their current installed installation.
Great.
Additionally, we continue to innovate in the cybersecurity area, introducing new solutions like ours, but insight to help address the evolving threat landscape.
Combined with adverse eight lane this solution can dramatically enhance and extend the company's capabilities and threat detection service delivery and network operator visibility.
Nonetheless, the gun.
Customer verticals, where more business inside starting with our service provider.
Service provider revenue increased by 11% year over year in the first half of fiscal year 'twenty 'twenty three.
This increase was primarily due driven by higher revenue related to radio frequency frequency propagation modeling project one from tier one carriers in North America.
Importantly, we continue to seek areas to invest in their <unk> deployment.
For planning purposes, as well as Standalone build out where these guys are the same the same guy. He is also starting to dip like a much healthier traffic.
You know about antibody customer vertical revenue grew by approximately 6% year over year in the first half of fiscal year 'twenty three.
This top line expansion was driven by growth in both our cyber security and service the Jordan business line as enterprises continue to demand best in class cybersecurity solution.
And as well as visibility solutions capable of helping them to better protect their systems and facilitate the acceleration of their digital transformation.
Michael will provide more insight regarding customer wins within the vertical during his remarks.
Now, let's move to slide number eight to review our outlook.
Looking ahead, we plan to continue managing of our operations prudently, taking a balanced approach to revenue growth and profitability.
Within this context, we are reiterating our fiscal year 'twenty three outlook that we shared with you in early August when it was first quarter earnings call.
As a reminder, this outlook that against revenue in the range of $895 million to $925 million and non-GAAP EPS in the range of $1 91.
Due to dollar tree for fiscal year 'twenty two 'twenty three.
David will provide additional color around our outlook in our remarks.
In summary, we delivered solid results in the second quarter and first half of our fiscal year 'twenty, you're going to see we are driving clear progress toward our strategic priorities and we then man excited about both service assurance and Ddos security solutions as well as our new and innovative omni solution.
With a unique and powerful platform deep industry expertise and established customer base, we are well positioned to help customers address the challenges or opportunities of today's increasingly connected and complex digital work.
We look forward to sharing of our progress with everyone throughout the remaining of the fiscal year with that I'll turn the call over to Michael.
Neil.
Everyone.
Slide 10 outlines the areas that I will be covering today.
Thank you Ms custom events.
And our service provider customer vertical we continue to expand our installed base by leveraging both our incumbency and rich portfolio of.
Offerings to better support for advisers as they steadily advanced the <unk> build out as an example during the quarter. We received a mid seven figure order from a tier one north American carrier that has consistently increased their <unk> related purchasing from us.
This order was a combination of additional of radio frequency propagation modeling service issuance for the radio access network and other <unk> related products in the migration and capacity expansion of their network. Importantly in addition to leveraging our solutions within their mobile business. This customer is also.
Utilizing our service excellence platform within the corporate it systems.
You know an enterprise customer vertical received a low eight figure order from a large north American health insurance organization during the second quarter.
Last year discussing would be placed a seven figure order with us for services for ethical solutions and this quarter. They added a full omnis cybersecurity suite and additional service assurance solution to further utilize our platforms integrated capabilities. These are convenience or shared visibility platform.
The power of our deep packet inspection at scale, we continue to see.
Enterprise solutions funded and get attention among our customers.
We continue to see an increased awareness on ddos attacks.
Capacity expansion stemming from the rapid growth in the application to epic and the increasingly dense geopolitical situation around the world for example in the second quarter.
<unk> received a mid seven figure order from a large global financial institution that is based in the U S. And he is also a longstanding customer.
The extent that Ddos mitigation capacity and upgrade their key data centers 200 gigabit capacity.
In terms of go to market activities during the quarter. We continued to add 10 more in person events, which provided us with additional opportunities to engage with our customers and demonstrate our platform is unique and innovative capabilities. For example, we recently attended the Black Hat conference one of the world's leading side.
Trade shows as well as explore our confidence for digital transformation and cybersecurity.
These high profile events, we engaged with new prospects and existing customers to demonstrate the power of our platform for integrated disability and cybersecurity looking ahead, we plan to attend the upcoming AWS re invent conference in November .
Where we will showcase <unk> platform as well as our collaboration with AWS.
We have also continued to enhance our customer value proposition by collaborating with other major technology companies and have recently announced set at all of these initiatives through these collaborations we can help our customers to better address the go ahead.
Is it a digital world.
An example is a joint strategy initiated with Ericsson and Swisscom, which was officially announced by Ericsson in October .
Through these collaborations we delivered what is believed to be the world's first solution for.
<unk> cloud based backup data processing by leveraging the strengths of each organization. This solution can deliver meaningful improvements in network service assurance analytics, and cyber and cyber security.
For example, this solution combines any sense that Scott and that's Scott's technologies to address the challenges of providing end to end monitoring and securing five Jean networks than in <unk>.
Modified and adequate to the environment.
As a result, swisscom is utilizing the solution as newly deployed cloud native Tls encrypted <unk> network as well as <unk> existing services to assure the delivery.
Yeah.
Going forward, we aim to continue leveraging the strength of our platform to help our customers navigate and capitalize on emerging opportunities into this increasingly connected world. Thank you everyone that concludes my prepared remarks, and I will not turn the call over to Jean Thank you Michael and good morning, everyone I will review key.
<unk> for our second quarter and first half of fiscal year 2023, and provide some additional commentary on our fiscal year 2023 outlook. As a reminder, this review focuses on our non-GAAP results unless otherwise stated and all reconciliations within our GAAP results appear in the presentation appendix, regardless I will note the nature of it.
Such comparison slide.
Slide number 12 details the results for the second quarter and first half of our fiscal year 2023, focusing on our quarterly performance total revenue grew seven 6% year over year to $228 $1 million.
Product revenues grew 10% and service revenue grew five 4% both on a year over year basis at the end of the quarter. Our total backlog was approximately $80 million consisting.
Consisting of approximately $45 million of available orders and approximately $35 million of radio frequency propagation modeling projects with nearly $20 million of the radio frequency propagation modeling amount categorized as deferred revenue from an accounting perspective.
As a reminder, while fulfilling the orders are those we believe can be readily converted into revenue. Upon shipment also selman the radio frequency propagation modeling projects require certain execution steps in conjunction with the carriers timing before they can convert to revenue.
<unk> profit margin was 76, 8% in the second quarter down one point.
Five percentage points year over year. This quarters gross margin was impacted by approximately $15 million of radio frequency propagation modeling projects, which had an average gross margin of less than 30% quarterly operating expenses increased two 2% year over year, mostly due to the <unk>.
Turn of pre pandemic activities, such as in person events and travel and partially due to a competitive employment market. We reported an operating profit margin of 23, 7% compared with 22, 3% in the same quarter last year diluted earnings per share was fifth.
Seven cents clarifying earliest statements I'll repeat that diluted earnings per share was <unk> 57, compared with 47 in the same quarter last year, representing an increase of 21, 3% year over year.
Turning to slide 13, I would now like to review key revenue trends by customer verticals and product lines. Please note that all comparisons here on a year over year basis, consistent with our other remarks for.
For the first six months of fiscal year 2023, our service provider customer vertical revenue grew 11%, while our enterprise customer vertical revenue grew six 4% during the same period, our enterprise customer vertical accounted for approximately 51% of our total revenue.
Provider customer vertical accounted for the remaining 49%.
Now turning to our product lines for the first half of fiscal year 2023, our cyber security revenue increased by 14, 3%, while our service assurance revenue increased by six 6% during the same period, our service assurance product line accounted for approximately 73% of our total revenue.
While our cyber security product line accounted for the remaining 27%.
Turning to slide 14, which shows our geographic revenue mix in the first half of fiscal year 2023, our revenue with more concentrated than usual in the U S. Primarily due to higher revenue related to radio frequency propagation modeling projects from tier one domestic carriers. Additionally, one.
Customer represented 10% or more of our total revenue in the second quarter and the first half of our fiscal year 2023.
Slide 15 details our balance sheet highlights and free cash flow. We ended the second quarter with $367 $1 million in cash cash equivalents and marketable securities represented a decrease of seven $5 million since the end of the fiscal sorry since the end of the first quarter fiscal year 2023.
Free cash flow for the quarter was $7 1 million as a reminder, with regard to share repurchase program activity, we entered into an accelerated share repurchase agreement in our first quarter fiscal year 2023 to repurchase $150 million of our common stock we received approximately 70%.
Of the total shares estimated to be repurchased pursuant to the ASR agreement in our first quarter or approximately three 3 million shares.
We anticipate receiving the remaining approximately 30% of the program shares when the program concludes no later than December 31, 2022 from a debt perspective, we ended the second quarter of fiscal year 2023, with $200 million outstanding on our $800 million revolving credit.
<unk>, which expires in July 2026.
To briefly recap of other balance sheet highlights accounts receivable net was $139 1 million, representing a decrease of $9 $1 million. Since March 31, 2022, the DSO metric at the end of the second quarter of fiscal year 2023 was 52 days versus 64 days.
As at the end of the second quarter of the prior year and 64 days at the end of our fiscal year 2022.
Let's move to slide 16 for commentary on our outlook I will focus my review on our non-GAAP targets for fiscal year 2023.
We are reiterating our non-GAAP outlook for fiscal year 2023 that was last presented during our first quarter fiscal year 2023 earnings call on August four 2022.
<unk> for fiscal year 2023, we anticipate revenue in the range of $895 million to $925 million, which.
Which implies a mid to high single digit top line growth rate.
<unk> tax rate is anticipated to be in the range of 20% to 22%.
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 dilution, we expect non-GAAP diluted earnings per share to be beaten.
$1, 97, and $2 and three.
To reiterate and clarify from previous comments, it's $1 97, and $2.03 for the earnings per share guidance.
I'd also like to offer some color on the second half of our fiscal year 2023, assuming the midpoint of our revenue outlook range. We currently anticipate that our remaining fiscal year 2023 revenue will be nearly evenly split between our third and fourth quarters with expectations for our third quarter revenue to be one.
One to two percentage points higher than our fourth quarter revenue in the skew between third quarter and fourth quarter with regards to the second half earnings per share assuming the midpoint of our non-GAAP EPS range. We currently anticipate receiving approximately 60% in the third quarter and approximately 40.
<unk> in the fourth quarter as we have discussed previously our third quarter gross margin will contain a higher product mix of radio frequency propagation modeling project activities, which has a lower gross margin.
That concludes my formal review of our financial results before we transition to Q&A I'd like to quickly note that our upcoming IR conference participation is listed on slide 17, Thank you and I'll now turn the call over to the operator for Q&A.
At this time, if you would like to ask a question. Please press the star and one on your telephone keypad, if you wish to remove yourself from the queue. Please press the pound key we do ask in the interest of time that you limit yourself to one question and one follow up we'll take our first question from Matt Hedberg with RBC. Your line is now open.
And for Matt Hedberg, Thanks for taking our questions.
Consistency in the quarter here, you're reiterating guidance for the year, which is nice to see Jean Thanks for the added color on expectations for the second half just there.
With a lot going on maybe could you talk to some of your confidence points for the second half.
Sure I think as we mentioned in our earlier.
Earlier comments that we've been seeing good activity across a wide variety of the trends that we participate in the trends being five G. So we have some <unk> projects that have come in some tier ones. We have still calibration that we are executing on which is in part of the backlog in the enterprise we have been seeing.
<unk> digital transformation and some customers going through what I would call a not necessarily a refresh but may be a reconsideration phase.
Things they had purchased in the past that didn't work out as well in this much more complicated digital environment and then finally within security as mentioned, we have been updating the roadmap and coming out with new products that have no talked about as well as the.
Portfolio of solutions now that works well for five G digital transformation the threat of cyber security as you note the backlog in the shippable portion and that is again is the portion that was not available we're not able to be shipped at the end of the quarter, but probably has already been shift shipped and will convert.
Revenue was still consistent with the prior years prior quarters entering backlog. The only thing that changed was the execution of calibration. So when we look forward to the end of this year at this point, we are comfortable with reaffirming our revenue ranges.
That's great and then could you talk to the federal business in the quarter with the fiscal year and I think you've previously commented to most of those projects being funded.
I think Jean is looking at this Matt.
It was better than last year, but that's because last year was not that good at it. So I mean, there is still uncertainty in terms of.
The project by Jerry Tsai timing end of the fiscal year with just over.
But since it's not a big portion of our total revenue.
This is probably not the other.
Other factors, which could impact things in the future and then the federal business.
Yeah, just to add Thomson some numeric to that I would say basically the service revenue in the U S. Federal government. So the portion that is support has been consistent on a year over year basis, which is good which means that they are still using our products and they still want to use it still want to.
We have support on those product revenue was probably slightly flat with what it was in Q2. So overall on a dollar basis. It was relatively consistent with prior years Q2, that's the U S Federal government piece.
Right.
Okay.
We will take our next question from James Fish with Piper Sandler Your line is now open.
Hey, guys wanted to follow up on.
A question before that before that.
Trying to understand how you guys are thinking about.
Order growth.
The back half of the year.
Jim Thanks for the question. So I think there the other dynamic plays out on the business. In addition to the.
Very good backlog, we had entering this year.
When we look at the networking peers.
They are mostly infrastructure companies and we have a trailing effect onboard spending cart spending opportunities once the network build out is done then you use stools.
So I think if we see some headwinds on the macroeconomic side.
We'll probably see that and we'll update that at the end of the fiscal year. So we feel comfortable with that.
<unk>, which we have.
That allows us to manage this and with all the other pipeline and other information that visibility we have.
And despite some of the things you are seeing in.
At this point feel comfortable with the guidance.
Okay.
That's helpful Aneel.
Obviously still elevated backlog I'll agree but.
How are you guys thinking about that backlog.
Turning to kind of normalize supply chain does.
To open up as it by fiscal year end of 'twenty four earlier or later and then Jean.
Hum.
Why is flowing through this quarter in service revenue is something that happens almost every year we have back.
Back maintenance people that sign up for contracts after their original due date and so any period of service that you've provided.
Flows right through revenue at that time, So I think in Q3 of last year, we had some back a lot of back maintenance or some back maintenance Q2 of this year I would say the delta between the.
The Delta in back maintenance was probably may be attributed to about $5 million.
Yeah.
Okay, and then on the backlog timing like when we go back to but I think the historical range was about $25 30 million historically.
At around AED today, I guess, what are you guys thinking about it as like a six quarter or eight quarter kind of timeframe.
But I think overall it will be somewhere in between because of.
Hopefully higher growth because of our cyber security initiatives. So some of the new initiatives, even though this year, we feel comfortable with the guidance.
A lot of the new things have not really significantly contributed to this and we are agenda feeling that cyber security.
Is less.
I don't do a macro economic challenges than service assurance.
The investment we made last year so our.
Our plan is that our backlog will be.
Somewhere in between the traditional one which we had like you talked about 30 or $40 million.
To the elevated one mainly because of calibration I mean calibration business.
It's still possible this year, but didn't know if it will.
Be it the size of.
What it was last year, so it's hard to predict what the.
Backlog is going to be like this are lower or higher in the next 18 months, but I think when we talk about the guidance for next year.
It'll reflect of insights into that.
Helpful guys. Thank you.
Thank you.
We will take our next question from Kevin Liu with K Lula <unk> Company. Your line is now open.
Hi, Good morning, just wanted to clarify some comments around kind of the macroeconomic impact on your business have you guys seen anything to date in terms of delays or project cancellations.
That are concerning at all and then just wondering with cyber security, maybe being a little bit more insulated, whether you're expecting your service provider business to hold up fairly well.
And overall I think we see a gavin that.
So far at least we have not seen any any delays, which has got to my attention any big deals or anything and how this changes over the next three four months, we'll see but we are still benefiting here and there from the.
We have very little supply chain matter.
Because being a public company and the way we package our software and we have some partners we take care of that so we think that and we might even in this environment.
Might benefit from <unk>.
Supply chain, that's coming from.
Vendors to us in this last quarter or.
So right now I think we are not seeing those effects, but like I said earlier that we.
We'll have to really watch it then and make and when we provided the guidance for next fiscal year, we will keep that into about like sofa. Luckily we are not seeing.
Any real issues.
We keep hearing in other earnings calls.
But fortunately we are not seeing anything so far.
Understood that steady here and then.
On the expense side of things you guys talked about you know things starting to return to.
Pre pandemic types of spend within personal activities, just wondering as we look out to next year and maybe in the future.
Do you feel like this is kind of a more normalized baseline that should recur from year to year or do you think theres, even more kind of interest and activities that will continue to pick up.
I would say that.
The amount of travel.
Travel.
Is not as high as we would have originally thought in this fiscal year. So next year I could see where some travel wood wood.
We populate in the AR in the P&L also depending on economic times and as everyone. A lot of people have experienced significant compensation rate increases we would have to see if that occurs in our next fiscal year also borrowing.
That those two off the top of my head I don't see any other operating expenses that would come through and so as the company generates incremental revenue we will continue to have.
Traditionally strong flow through to operating margin and our earnings per share.
This does conclude today's program. Thank you for your participation you may disconnect at any time.
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