Q3 2023 Netscout Systems Inc Earnings Call

Speaker 2: applications that are directly relevant to these customer success in their marketplaces. Our ability to win these deals and continue expanding our footprint with our customers is a testament to the strength of our platform offerings, established incumbency, and the ability to expand further within our customer base. Now about go-to-market activities.

Speaker 3: We also remain focused on driving business performance through go-to-market activities. During the quarter, we continue to attend more in-person events and collaborate with our partners. In November , we attended the AWS Reinvent Conference.

Speaker 4: where we showed NetScout's platform as well as our collaboration with AWS. At the event, we announced the successful interoperability between our Omni Cyber Intelligence and Amazon Web Services.

Speaker 5: Amazon Security Lake.

Speaker 6: By providing comprehensive network visibility, contextual cybersecurity investigation, and smart detection, on this cyber intelligence can pair with Amazon Security Lake to deliver advanced network detection and response insights, ultimately allowing companies to better manage threats across complex.

Speaker 7: hybrid cloud infrastructure. In line with this progress, we also continue to capture Mindshare with industry publications, winning two prestigious awards in recognition of our service assurance and cyber security solutions during the quarter.

Speaker 8: For service assurance, we received Frost and Salimam's 2022 Global Company of the Year award for our wireless network monitoring and service assurance solutions. Frost and Salimam presented us with this.

Speaker 9: recognition based on our compelling customer value proposition, customer experience, strong bank brand equity and overall solid performance.

Speaker 10: In addition,

Speaker 11: We received Security Today's 2022 Cybersecurity Award for Network Security.

Speaker 12: This recognition was based on the Arbor Edge Defense Solutions' ability to effectively stop both inbound and outbound threats, and in doing so to serve as both the first and last line of defense for organizations.

Speaker 13: Finally, I'd like to touch on our annual Engage Technology and User Summit. Usually, this event is held in April and I provide everyone with an event preview on our third quarter call, this one. However, this time to better align with our customers planning and budgeting cycles.

Speaker 14: We plan to hold the NGEIS 2023 Summit in October . Thus, I will provide everyone with an update on this event later this year as we move closer to its arrival.

Speaker 15: Thank you everyone. That concludes my remarks and I will now turn the call over to Jean. Thank you Michael and good morning everyone. I will review key metrics for our third quarter and first nine months of fiscal year 2023 and provide some additional commentary on our fiscal year 2023 outlook. As a reminder this review...

Speaker 16: fiscal year 2023. Focusing first on our quarterly performance, total revenue grew 2.8% year over year to $269.5 million. Product revenue grew 3.5% and service revenue grew 2% both on a year over year basis.

Speaker 17: At the end of the third quarter, our backlog was approximately $54 million, consisting of approximately $31 million of fulfilable orders and approximately $23 million of radio frequency propagation modelling projects. With most of the radio frequency propagation modelling amount categorized as deferred revenue from a financing?

Speaker 18: before they can convert to revenue.

Speaker 19: Gross profit margin was 80.5% in the third quarter, up 1.7 percentage points year over year. This quarter's gross margin was impacted by the acceleration of a high margin radiofrequency propagation modeling project that was expected to occur in our fourth quarter.

Speaker 20: Quarterly operating expenses increased 1.7% year over year, mostly due to the return of pre-pandemic activities, such as travel and events. We reported an operating profit margin of 35.5% compared with 33.2% in the same quarter last year.

Speaker 21: Diluted earnings per share was $1 compared with 89 cents in the same quarter last year, representing an increase of 12.4% year-over-year.

Speaker 22: Turning to slide 13, I'd now like to review key revenue trends by customer verticals and product lines. Please note that all comparisons here are on a year-over-year basis consistent with other remarks. In the first nine months of fiscal year 2023, our service provider customer vertical grew 9.3 percent while enterprise...

Speaker 23: the remaining 48%.

Speaker 24: Now turning to our product lines, for the first nine months of fiscal year 2023, our service assurance revenue increased by 8.1%, while our cybersecurity revenue increased by 1.4%, both on a year-over-year basis. During the same period, our service assurance product line accounted for approximately $1.5 million.

Speaker 25: concentrated in the US year over year, primarily due to the increase in 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 third quarter and first nine months of our fiscal year 2023.

Speaker 26: Slide 15 details our balance sheet highlights and free cash flow. We ended the third quarter with $416.2 million in cash, cash equivalents, and short and long-term marketable securities, representing an increase of $49.1 million since the end of the second quarter of fiscal year 2023.

Speaker 27: amount of 150 million dollars or approximately 4.6 million shares at a weighted average price per share of $32.97 from a debt perspective. We ended the third quarter of fiscal year 2023 with $200 million outstanding on our $800 million revolving credit.

Speaker 28: since March 31st, 2022. The DSO metric at the end of the third quarter of fiscal year 2023 was 69 days versus 76 days at the end of the third quarter of fiscal year 2022 and 64 days at the end of fiscal year 2022.

Speaker 29: Let's move to slide 16 for commentary on our outlook. I will focus my review on our non-GAAP targets for the fiscal year 2023.

Speaker 30: As Anil noted earlier, we are updating our non-GAAP outlook for fiscal year 2023 that was last presented on October 27, 2022 during our second quarter fiscal year 2023 earnings call. We now anticipate revenue in the range of $905 to $915 million. The midpoint of this range is the midpoint of the range.

Speaker 31: the midpoint by 8 cents and implying a low double digit year over year growth rate for our bottom line. This forecast utilizes an anticipated effective tax rate in the range of 20 to 22%. It also assumes between 73 and 74 million weighted average diluted shares outstanding which includes...

Speaker 32: modeling project leveraging library data which has an above-average gross margin when compared with similar projects. It is also due to the slower return of pre-pandemic travel related costs than was originally anticipated as well as continued cost management efforts.

That concludes my formal review of our financial results. Thank you and I'll now turn the call over to the operator for Q&A.

At this time, if you'd like to ask a question, please press star 1 on your telephone keypad. 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. We'll take our first question from Matt Hedberg from RBC Capital.

Oh great, thanks for taking my questions. Anil, strong results in the quarter, particularly service assurance. There's obviously a lot of concern about just general IT spending patterns for calendar 23. Can you start just by talking about your conversations with customers and executives and how do you think about prioritizing new projects this year?

Well, so far, Matt, thanks for the question. authorities.

Right now, we are still getting gathering data, and we are confident about our guidance for this year. And by the time we reach the end of the year, we will be able to get the data back to us

April , on the next conference call, I think we'll have a lot more detail and that will obviously influence the guidance for next year. Right now, we are not getting any direct indication from the customers about slowdowns and budget controls, but we hear other releases.

from NEMS and other players which indirectly point to that.

So right now we have sort of a latency attitude. Our customers are still very interested in our solution. Sometime in slower times there is more tool consolidation. So right now we are not in a position to really say how that next year is going to work out. Unfortunately we have three months.

to assess that and then we'll project our guidance accordingly.

Got it, thanks. And then maybe on your cyber business, growth is slowing a bit there, which candidly is consistent with a lot of the field work that we've done. Can you talk about why this might be and are there any things on a new product front in calendar 23 that might help that growth profile?

Yeah, so at that time in the cybersecurity area, we have, I mean, we introduced a new product.

about nine months ago. And it has a slow uptick, and there are some learnings from there. And also, you will see that there'll be some pickup when we do year-over-year numbers. The percentage will come slightly higher.

after Q4 in cybersecurity. But really the new product which we announced has a slower traction and we got a lot of customer input and I think it's going to pick up slightly more in Q4. But I think next year we should see much better results in cybersecurity.

Go thanks, Congress again, especially on the profitability side as well.

Thank you.

Thank you.

Our next question comes from James Fish from Piper Sandler.

Hey guys, congrats on the quarter here. Just wanted to touch on that mid eight figure service provider order a bit. You guys mentioned a little bit of a pull in from fiscal Q4. And we're backing in roughly based on your guide for the year, about 90 million of product revenue for fiscal Q4.

I mean obviously if that pull forward was not there, then our Q4 would have been bigger than what we are projecting. But on a full quarter basis, I think it was just normalized. So we got some advanced orders in Q3, one big advanced order in Q3 which...

made the Q3 bigger than expected. Yeah, maybe Anil, while she's kind of looking that up, for you, you mentioned kind of long-term objectives here. Can you just refresh us where we are on kind of those long-term objectives and how you're kind of thinking about those? And additionally, you mentioned on that deal that...

it's the first time that this customer purchased cybersecurity from NetScout. Do you have any sense to what the white space opportunity is or your current penetration of accounts is with security? Yeah, so I think basically we have, I mean current pair, so cybersecurity is a little bit confusing. We have an ongoing business with

this big order or a couple of big orders. And so in terms of

number of customers. I mean less than 5% of our service assurance customers who can use our cybersecurity product has been sold the cybersecurity product. So there is a lot of scope and this is only first nine months and so we are counting on much bigger growth from that source.

And from the DDoS business, flat to single digit up, and then additional stuff coming from the Omni cyber security. And that's what we are saying that while we did get a couple of big orders on this from existing customers, the penetration rate has been slow and we are putting more sales.

and relaunching that product in April , which will have a big impact next year.

Hi, Jim. This is Jean. In reference to the question that you were asking about the effect of orders that we received in Q3 versus Q4, I would say that the pull forward was probably close to 25 million with a little more than half of that being the radio frequency calibration modeling problem.

would represent still a 12% year-over-year growth from Q4 of 2022. And at the midpoint of guidance, we would have about a 6% year-over-year growth from FY22.

Very helpful. Thank you guys.

You're welcome.

Our last question comes from Kevin Lu from K. Lu & Co.

Hi, good morning. Anil, I just wanted to get some of your thoughts around kind of a capex cycle from the large tier one providers in North America. Could you just comment a bit on if you think Netscout has benefited disproportionately from kind of the outside spend they had on CBEDS spectrum deployment this year, and then whether there are any sort of emerging 5G use cases that you think will continue to carry the business forward?

And that has all settled down and we started seeing a lot of business initially in the calibration area. Some of it was in the backlog starting this year, which helped the revenue. And other is just more 5G spend. So we think that there is still a lot of spend to be done by the same customers.

for additional capacity in 5G area, but given some recent announcement of some names.

and infrastructure companies of potential slow down cap expanding. We are just having this wait and see attitude until April . So I think we'll be in a better position when we have our whateverhope…

We'll know much more about the budgets. Fortunately, our fiscal year is three months later than some of the other people's fiscal year, our customers. So at this point, I think we really, we did benefit from

All the investment we made, I mean almost 100 million years was spent on 5G technology over the last three, four years by us. And so that was, that's beginning to pay off. But how does this impact the macro environment next year remains to be seen.

Understood. And then just on cybersecurity, I was hoping you could elaborate on some of the learnings you've had as you've rolled out the new solutions. Is it more kind of additional product features that need to be added, integrations? I'm just kind of curious what the customer feedback has been.

Yeah, so I think basically as happens in the first year of the product, I mean, we get to gather a lot of information and competitive information and I think maybe our expectation was too high in the first year. I mean, we're going to do over $10-15 million in the first year of the product.

nine months of introduction so far. So I think overall that's the main thing. We are just fine tuning of our strategy at adding some feature sets and some of the comments we got from other customers. The integration with other security tools has actually gone very well.

and that was not the reason for it. It just takes time. The sales cycle in a new product takes longer than the other product. Also, sometimes, as I mentioned, the cybersecurity includes a new product as well as a traditional RBD-DOS business. Some of it is seasonal and there'll be some. In terms of cybersecurity.

some improvement on the percentage growth year over year versus the first nine months as the fourth quarter closes.

All right, great. Thanks for taking the questions and congrats on the survey, though.

Thank you.

We have reached our allotted time for Q&A. I will now turn the call back over to Tony for any additional or closing remarks.

Thank you operator and thank you all for joining us today. That concludes our call for the third quarter fiscal year 2053. Enjoy the rest of the day.

This does conclude today's program. Thank you for your participation. You may now disconnect.

Ta, mountain mash roundup

six the.

Not.

unHyped Up Up

you

new

What.

Two.

…

All.

illneselli. It's full of machines