NetScout Systems Inc. Q4 2023 Earnings Call

[music].

As a reminder, this call is being recorded Tony Piazza Senior Vice President of corporate finance and his colleagues that Nick Scott 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> fourth quarter and full fiscal year 2023 conference call for the period ended March 31 2023.

Joining me today are our Nielsen go net scouts, President and Chief Executive Officer, Michael Zorba dose net Scouts, Chief operating officer and Jean Bua.

<unk> Executive Vice President and Chief Financial Officer.

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 financial results the webcast itself and under financial information on the quarterly results page.

Moving 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 results of operations business strategy plans and objectives of management for future operations and other statements that are not.

Historical fact, you can identify forward looking statements by their use of forward looking words, such as anticipate believe plan will should expect or other comparable terms.

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 known risks uncertainties assumptions and other.

Factors, including but not limited to those described on this slide and in today's financial press release.

For more detailed description on the risk factors associated with the company. Please refer to the Companys annual report on Form 10-K for the <unk>.

All year ended March 31, 2022 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 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 the rationale 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 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 earn.

<unk> press release and on our website.

I'll now turn the call over to Neil for his prepared remarks.

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

We are currently 23 was a strong year for next week.

We met all of our top line and exceeded our bottom line financial objectives, while continuing to advance our strategic priorities to deliver high value solutions that enable our customer to succeed in today's increasingly complex digital work.

In fiscal year 'twenty to 'twenty three we delivered another year of total revenue growth, while also expanding operating margin improving diluted EPS performance and generating solid free cash flow on behalf of net Scott I would like to thank our employees customers and other stakeholders, who contributed to our success.

In fiscal year 2023.

Let's now turn to slide number six.

A brief recap of what non-GAAP financial reserves in the fourth quarter and full fiscal year 2023, as well as some strategic highlights from the <unk>.

Dean will provide more detail on the results later later in the call.

For the fourth quarter, we delivered revenue of approximately $208 million up nearly 9% year over year and diluted earning per shares of <unk> up more than 30% on a year over year basis.

For the fiscal year 2023, we delivered revenue of approximately $915 million representing growth of nearly 7% year over year supported by product revenue growth of nearly 10% and service revenue growth of more than 4%.

Our service assurance cybersecurity product lines, both contributed to our revenue growth on a year over year basis within nearly 9% and more than 1% revenue growth respectively.

We demonstrated strong operating leverage as we delivered $2.18 of diluted earnings per share for the full fiscal year to a deeper due to the growth of approximately 18% year over year and more than double that of what revenue growth rate over the same period.

Finally during our fiscal year 2023, we returned approximately $150 million back to our shareholders in the form of an accelerated share repurchase program and yes. It is.

Solid free cash flow of more than $145 million.

In fiscal year 'twenty to 'twenty three we also had one several technology initiatives that we expect to contribute to our revenue growth potential and currently 24 and beyond and Saturday is critical building blocks as we deliver on our mission as guardians of the connected world.

One of these advanced development of the next generation Omni cyber security solution that built on learning from the initial launch last fiscal year to better drive customer value.

And answering to the omni. It's obviously clarity solution include advanced network detection and response capabilities that produce analytic at the source leverage machine learning reduces wildfire as far as Dave and provide the ability to operate at greater scale.

This allows for better detection and mitigation and investigation capabilities through a differentiated approach compared with competing products.

We expect the next Gen based on omni solution to be a high value product upsell for existing customers, who already use our solutions dresses and Ken and as the return on investment by adding munis to address cyber security challenges leveraging the oddity installed infrastructure.

We expect that our enhanced and expanded omni it's offering will be available in the early summer.

We believe we are well positioned to expand our revenue in the second half of the fiscal year 2024.

We also have dwell up on Atlantic do New Ddos solutions.

Dynamic Ddos.

Solution.

<unk> to the threat landscape.

It evolved and automate the countermeasures used to address cyber attacks, including latest multi layer eidetic butter decks.

As mobile Ddos security this solution.

<unk> for Ddos capability capability.

Service provider currently leveraging their wireless networks.

Ill be available to protect their mobile networks to address that distributed correct.

Like our enhanced omni its average security solutions. These new solutions that are expected to increase our <unk> security revenue in the back half.

For fiscal year 'twenty 'twenty four.

Now, let's move to slide number seven for some further perspective on market and business insights.

And that service provider vertical revenue grew nearly 14% year over year for the full fiscal year 2023. This increase primarily due driven by higher revenue.

User related to argue our radio frequency propagation modeling project from tier one carriers in North America overall, both domestically and internationally, we continue to seek areas to invest in their fire related network deployment as well as other areas of their businesses for example, as <unk>.

<unk> transitioned from the propagation planning cycle and an initial five Standalone network Buildout. We believe we are well positioned to further support <unk> need to monitor their new <unk> network as traffic increases over these networks additions.

Additionally, we believe we are well positioned to expand our business with these carriers in other areas, including that internal idea operation and with our new mobile Ddos security solution.

In our enterprise customer vertical revenue was relatively flat for the full fiscal year 2000.

On a year over year basis, all the enterprises that have been under pressure from the macroeconomic environment. We continue believe that this customer segment represent an attractive growth opportunity for <unk> as highlighted in our recent publishing industry reports Andrew by its continued to regard solution that better predict.

The system and accelerate their digital transformation.

We remain focused on helping to address these needs by leveraging our growing suite of comprehensive offerings to provide enterprise customer with an integrated and differentiated platform for services.

With the short in the cyber security requirement.

By extending visibility to that use of the net growth, we help customers double blind spot and control challenges translating that leverage.

Let's lifting their leverage off Prem and cloud solution as part of their digital transformation initiatives and new network architectures Michael.

Michael will provide more insight into our industry, the search as well as customer agreements within our vertical during the remarks.

Now, let's move to slide number eight to review our outlook for fiscal year 'twenty 'twenty four we remain committed to operating our business with a balanced approach to revenue growth and profitability.

The mandates that then make microeconomic environment.

Based on our current view.

To continue to grow revenue and improve our margin and diluted EPS performance and generate solid free cash flow.

We entered the year with solid momentum and anticipate that the opportunity created by extending over quarter service assurance visibility, Duke our blind spot at the edges of that.

Network created by distributed architecture, as well, our new Ddos offerings, and our Nextgen base anomaly solution will more than offset lower grades.

UNC propagation modeling project revenue, which was at the high point in fiscal year <unk>.

At three <unk>.

<unk> will provide the details of our fiscal year 'twenty four 'twenty forward outlook in our remarks.

Longer term, we remain focused on driving forward towards our business objective by advancing our strategy to ensure the performance availability and security of mission critical infrastructure for our organization around the globe anytime anywhere as guardians of the connected world.

As a trusted brand with more than three decades in business and an advanced service assurance cybersecurity <unk> platform based on our scalable.

Package inspection technology leader.

And uniquely positioned to help our diverse primarily.

Primarily the fortune 500 customer base to capitalize on major technology trends, including expanding cyber security threats.

Mr transformation, and <unk> network evolution and succeed in today's increasingly distributed and complex digital world.

In summary, we are pleased with our fiscal year 'twenty two 'twenty three performance and excited about the opportunity we see for <unk> in fiscal year, 'twenty 'twenty four and beyond.

We look forward to sharing our progress and achievements with you add the new fiscal year and Ford with that I'll turn the call over to Michael. Thank you Angela and good morning, everyone. Slide 10 outlines the areas that I wont be covering today, starting with customer events.

And our service provider customer vertical and we remain focused on supporting both domestic and international carriers as they continue to advise that <unk> network build out. Additionally, we are expanding our relationships with these carriers beyond their mobile network related requirements by providing solutions for their critical.

Infrastructure as well.

Evolution demonstrates the value of our fall source solutions trusted brand and strong relationships with our customers and in <unk>.

Example, during the fourth quarter alone and the tier one North American carrier.

Placed additional orders with us for our service assurance solutions mounting to a low teens eight figure sum. These.

These orders spanned across several of our offerings, including <unk> radio frequency propagation modeling project fixed site monitoring and internal.

Clinical business solutions.

Now turning to our enterprise customer vertical during the fourth quarter and we received several low seven figure orders from both domestic and international and international government agencies for service assurance and cyber security solutions.

State of geopolitical environment, we have seen golar and less release funding for projects.

Diligent and defense focus initiatives.

As an example.

We have one brand new business with an international intelligence agency to bring the Ddos detection and mitigation solution on premises from the cloud to gain direct control of the critical solution.

This new customer purchased Ddos detection and mitigation solutions as well as an on site as well as an onsite engineered to help operate the solution.

We want this business in part due to the SME.

<unk> solutions et cetera.

Private providers. We believe there are further opportunities you discussed any of that.

And other agencies as well our ability to win these deals and continue to expand our footprint with both new and existing customers is a testament to our strong and reliable offerings scalability and brand reputation.

Now turning to our go to market activities, we remain focused on promoting our industrial leadership trusted brand and strong solutions through activities that include thought leadership marketing and industry events during the quarter immunity.

<unk> anniversary Ddos set intelligence report that shares net scouts unique insight.

On the state of security threats, and Spotlights Hall, our cyber security tools are more important than ever.

Notably the report highlights the Ddos attacks.

Thanks Sue.

In 2022, making up half of all Ddos attacks. So therefore also the report also shows that FX frequencies have increased tenfold since <unk> versus 42005.

Additionally, we released new research highlights.

Highlighting the ongoing importance of unified communication and collaboration or UCC platforms in the post pandemic world of hybrid work in this research we found that nearly 70% of respondents increased the number of <unk> tools used with 75% expected to support more platforms over there.

The next 12 months and the majority are indicating that collaboration platforms applications and tools are critical to their organizations current work environment.

This data validates the growing importance of our services service assurance and smart <unk> solutions for our customers.

You also continue to actively promote the value of our solutions.

To our customers by issuing a steady flow of press releases.

Our service assurance and cyber security solutions.

The other things articulated the strong return on investment of our solutions as validated by third parties. Finally, we continue to end and more.

More in person events to promote our brand and platform.

During our first feedstock fiscal quarter, we have.

Plan to participate in several high profile events, such as the Odyssey confidence Cisco live Dell technology World and Big five to name a few.

All at these events, we will interact with potential exits and customers showcasing <unk> service assurance cybersecurity platform and highlighting all operate many of the confidence sponsoring partners technology platform.

Technology platforms. Thank you everyone that concludes my remarks.

Geez.

Keith.

Thank you Michael and good morning, everyone I will review key metrics for our fourth quarter and full fiscal year 2023, and provide some additional commentary on our fiscal year 2024 outlook. As a reminder, this review focuses on our non-GAAP results unless otherwise stated and all reconciliations with GAAP reserve.

<unk> appear in the presentation appendix, regardless I will note the nature of any such comparison.

Slide number 12 details the results for the fourth quarter and our full fiscal year 2023, focusing first on our quarterly performance total revenue grew eight 8% year over year to $208 1 million.

Product revenue grew 11, 2% and service revenue grew seven 1% both on a year over year basis at the end of the fourth quarter, our backlog was approximately $50 million consisting.

Consisting of approximately $41 million also available orders and approximately $9 million of radio frequency propagation modeling project.

Majority of the radio frequency propagation modeling amount is recorded as deferred revenue in our financial statements. As a reminder, while fulfilling the orders can be converted into revenue. Upon shipment also selman the radio frequency propagation modeling projects required certain execution step in conjunction with the carriers timing.

Before they can convert to revenue growth.

Gross profit margin was 77, 6% in the fourth quarter quarterly operating expenses increased three 3% year over year, mostly due to the return of pre pandemic activities, such as travel and events.

We reported an operating profit margin of 15, 7% compared with 12, 4% in the same quarter last year diluted earnings per share was <unk> 38.

Compared with 2009 in the same quarter last year, representing an increase of 31% year over year.

For the full fiscal year 2023 revenue was $914 5 million, which was an increase of six 9% over the prior year product revenue grew nine 9% and service revenue grew four 1% over the prior year gross profit margin was.

77, 5% annual operating expenses increased four 3% from the prior year, primarily due to the return of pre pandemic expenses related to the resumption of in person events and travel.

We reported an operating profit margin of 22, 6% up one six percentage points over the prior fiscal year with a diluted earnings per share of $2 18.

And 18, 5% increase compared with the same period in the prior fiscal year.

Turning to slide 13, I'd like now to review key revenue trends by customer verticals and product line. Please note that all comparisons here on a year over year basis, consistent with other remark for the fiscal year 2023, our service provider customer vertical revenue grew 13, 7%.

Our enterprise customer vertical revenue growth, 4% during the same period, our service provider customer vertical accounted for approximately 52% of our total revenue, while our enterprise customer vertical accounted for the remaining 48%.

Now turning to our product line for the fiscal year 2023 service assurance revenue increased by eight 9%, while our cyber security revenue increased by one 4% during the same period, our service assurance product line accounted for approximately 74% of our total revenue.

While our cyber security product line accounted for the remaining 26%.

Turning to slide 14, which shows our geographic revenue mix in fiscal year 2023, our revenue was more concentrated in the U S year over year, primarily due to the increase in revenue related to radio frequency propagation modeling projects from tier one domestic carriers. Additionally, fourth.

No customer represented 10% or more of total revenue and in the full fiscal year 2023, one customer represented 10% or more of our total revenue.

Slide 15 details our balance sheet highlights and free cash flow. We ended the fourth quarter with $427 $9 million in cash cash equivalents and short and long term marketable securities representing an increase of $11 $7 million since the end of the third quarter of fiscal year 2023.

Free cash flow for the year for the quarter with $110 $6 million and 146.0 million for.

For the full fiscal year 2023 during the fourth quarter of fiscal year 2023, we repaid $100 million of our revolving credit facility debt and ended fiscal year 2023, with $100 million outstanding on our $800 million revolving credit facility, which expires in.

<unk> 2026.

Suddenly we currently anticipate deliver on delivering approximately 46% to 48% of a full year revenue outlook. During the first half of the fiscal year, assuming the midpoint of I'll provide an revenue range. The effective tax rate is expected to be between 2022%.

Zooming approximately 74 to 75 million weighted average diluted shares outstanding we expect non-GAAP diluted earnings per share to be between $2.20 and $2.32.

I'd also like to offer some color on the first quarter of fiscal year 2024, we currently anticipate revenue to be relatively flat compared to the first quarter of fiscal year 2023 with diluted EPS growing by 46 cents. This takes into consideration a lower volume of radio frequency public public.

Nation modeling project revenue compared to the first quarter of the prior year as well as reduced marketing expenses as we move our annual engage user conference from the first quarter.

Last fiscal year to a third quarter of fiscal year 2024 to better align with customers planning and budgeting vehicles.

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 Mitch Hedberg from that had brick with RBC capital markets.

Line is open.

Hey, you're not richer richer Madam <unk>.

Questions.

You've reached the point out around the Mac number I know you guys have long lead times that helps with visibility in the quarter note look really good but put anything to point out the environment anything from customer conversation through our budgeting.

New project priorities for the new year.

But overall B continue here was deeply about we are in a different fields of Mexico, where we have made a lot of investment and there are a lot of challenges the digital transformation.

So I think customer need visibility when during the times or at least in the U S. But.

<unk>.

Positive trend positive news about.

Spending on <unk>.

<unk> reflects on.

The challenges.

On the outlook I think right sizing for this year's radio propagation product projects. It looks really really strong really good.

And I think we see some incubated demand in that area. So most of the make up toward that at the low end of the guidance.

It will be because of those enterprise servers insurance and the omni security solution will potential upside in their data us because of what we have done on the.

Mobile mobile security and adaptive Ddos.

That's great. Thank you.

Yeah.

Our next question comes from Tim Fish Piper Sampler. Your line is open.

Mmm.

Acquainted on Virgin fish. Thanks for taking my question, the new Ddos solution. It seems like a pretty solid adjacent opportunity for the team. Obviously you just got it now so it's still very new but how is early feedback from the carrier has been in any way to think about maybe how were sizing the mobile market opportunity compared to the existing kind of <unk>.

Airline market opportunity.

Baccellieri fresh all sorts of everything the sales cycle time will be.

So the the toolbox, sometimes they get confused as one of the adapter Ddos, which as it.

Much higher.

Return rate and much shorter cycle times.

Mobile Ddos is is it going to take some time, so we're not counting on mobile Ddos as a bigger area. We are looking at adaptive Ddos under wireline site.

Big innovation, because most of the people in cloud renders.

Handling.

The matrix attack and the static Matt the deck Israeli application.

Slow and a large number of attacks, but a smaller sized and there is no real good technology in the market with scales.

To solving this problem so that way, we had expecting growth in the data area and that combined with the omni security with you the different Daddy on the enterprise.

<unk> why we will see growth in the security area of this year.

Got it that's really helpful. And then you know kind of related to the first question.

Sounds like last or any call. We talked about we had to wait and see mentality 75, G spending, but right now you're kind of sad you know you're you're expecting that to continue. So is this more a factor of carriers just prioritizing five G spending over other projects or do you think that the overall kind of service provider Capex spending has.

Just gotten better compared to what we were seeing last earnings call. Thank you yes.

Yeah, So capex spending I'm not sure we are very clear them that certainly in the U S. As in what has happened is internal to Netscout is there a lot of challenges when I would visit technology.

Had done like five G S.

There is a feeling that lambskin handle all of these things and so we have sort of pseudo competition from that which created confusion.

We have sorted it out and most of those people are partnering with US you might have seen a press release that are <unk>.

Talking about the partnership that was very different situation.

Then from like two years ago second thing is that we had looking at.

Lower end of the market with.

Digital Tech solution was and we are looking at some new but I've seen models, which will allow us to go a little bit down market.

So those people are also now launching their five do stuff beyond our top 10 customers derive most of the revenue. So those two factors are new.

What's this two years, even what's his last year.

Oh well thank you.

Thank you.

[laughter].

Our next question comes from Kevin Milk with came to and company. Your line is open.

Hi, Good morning, No I just wanted to follow up on some of the points you made on the on the site and your expectations for this can you just got a little bit more detail about some of the changes you've made either kind of product organization standpoint.

And I need to sort of early signs that gives you the added confidence that you can see some meaningful <unk>.

So I think there are many things to be announced that there were a lot of this.

Last months.

Sales kickoff very exciting time, despite some of the macro challenges, which can be with me whichever company and other people might fit but that I had to highlight the two highest level.

Things one is that.

As a BMA I mentioned that we integrated the advert business into engineering, just about 18 months ago.

Mid tier of the gaddy of market as people are migrating to <unk> and seconded some of us.

Competing with names.

Got it in a very different position and just to mention on the financial side I mean, we have done some great things on there.

They share buyback and.

And returning.

And even the last couple of years I think.

Beginning to pay off moving starting now.

You guys have a fair amount of backlog for.

Part of a year now is that I expected to continue throughout 24.

Really good but.

Right now it'll be about guidance sort of implies.

I mean in the backlog situation would be I don't know whether it'll be material.

Backlog that we've had over the last few.

Few years with the exception of last year and this year and as you add omnibus as it becomes more successful cyber security becomes more successful which is the difference in the range is in revenue, we would expect probably to be able to continue.

It appears we have no further questions I'll tell the program back to Tony Piazza for any additional remarks.