Q1 2024 NetScout Systems Inc Earnings Call
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Ladies and gentlemen, thank you for standing by and welcome to not scalps first quarter fiscal year 2024 financial results Conference call.
At this time all parties are in a listen only mode until the question and answer portion of the call.
As a reminder, this call is being recorded.
Piazza Senior Vice President of corporate finance and his colleagues at that Scout are on the line with us today.
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> first quarter fiscal year 2024 conference call for the period ended June 32023, joining.
Joining me today are Anil Cingal net scouts, President and Chief Executive Officer, Michael <unk>, <unk>, Chief operating Officer, and Jean Bua, Net Scouts Executive Vice President and Chief Financial Officer.
There is a slide presentation that accompanies our prepared remarks, you can advance the slides in the webcast viewer to follow our commentary.
Both the slides and the prepared remarks can be accessed in multiple areas within the Investor Relations section of our website at www Dot net dot com, including the IR landing page under financial 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 results of operations business strategy plans and objectives of management for future operations and other statements that are not here.
Auricle 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, we caution listeners not to place undue reliance on any forward looking statements included in the 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 factors, including but not limited to those described on this slide and in today's financial results press release.
For 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 fiscal year ended March 31, 2023 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.
<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 should not be considered in isolation from or as a substitute for financial information prepared in accordance with GAAP.
Reconciliation of all non-GAAP metrics with the applicable GAAP measure are provided in the appendix of the slide presentation in today's earnings press release and on our website.
I'll now turn the call over to Neal for his prepared remarks.
Yeah.
Thank you Tony 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.
Yeah 2024.
We delivered solid financial performance in the first quarter of fiscal year end review released several key product offerings since our last earning calls.
When he was $211 1 million representing growth of over 1%.
We expanded both our gross margin and operating margin and grew over diluted EPS by nearly 30% year over year to deliver 31 cents per diluted share in the period.
We also accomplished several product milestone with the release of our next generation solutions that have already been well received by customers and that we expect to start contributing to revenue in the second half of the fiscal year.
This includes the release of our visibility with our border platform that provides performance security and availability across one common data framework.
By proactively identifying areas of complexity for agility and risk the <unk>.
<unk> unlocks insights and badlands skill to deliver the intelligence needed to increase visibility improve agility and keep data and applications to get it.
Additionally, we realized what omni side, but.
OCI, our omni cyber intelligence solution.
This next generation of RCI than that.
Advanced network detection and response solution that uses highly scalable deep packet inspection and multiple threat detection method at the source to detect threats in real time.
See I also applied historical investigation of hybrid entity network that could be a metadata and factors.
In the face of rising cyber attacks with CA provides security teams with real time packet level visibility across their digital infrastructure and helps identify threats earlier in that life cycle.
Oh I see I also forgot the investigation by gathering network based forensic evidence to reduce the mean time to response.
See I is a valuable tool for verifying the effectiveness and improving the existing cyber security ecosystem, ensuring compliance and lowering the risk of successful cyber attacks.
We also released our two newer Ddos solutions. The first is adapted Ddos, which helps protect enterprises from rapidly spreading and then make ddos attacks. It adapts to the evolving threat landscape and automate countermeasures used to address cyber attacks, including the latest multi vector barrick by their decks.
And the second is mobile security, which extends our powerful ddos capability that said risk weighted current deleveraging their wireless network networks do not protect mobile that Brooklyn at rents that distributor attack surface.
Now, let's move to slide number seven for some further perspective.
With respect to end market.
And business.
Starting with our enterprise customer vertical in the first quarter of fiscal year 'twenty 'twenty four enterprise revenue grew nearly 13% year over year driven by the expansion in both of our cyber security and services businesses, we remain confident that our value proposition of extending visibility to the edges of the network.
We'll continue to resonate with enterprise customers seeking to grow our blind spots address control challenges and facilitate their leverage of off premise and cloud solutions as part of their digital transformation and new network guys get back to that initiative.
Moving to our service provider customer vertical as expected revenue in the first quarter for this vertical declined approximately 9% year over year and 9% year over year, primarily primarily due to that lower level of radio frequency propagation modeling project revenue in the second quarter compared with the same quarter.
Last year.
We continue to see a domestic and international cat. He has invested in their five year deployment, notably several good years now have the spectrum and deployed Standalone net Brooklyn in certain markets and are ready to drive traffic over those networks over five D. Yeah, one five D required applications materialized.
We believe that the five D adoption advantage that adds if I did the adoption of advanced here and fight the traffic volumes to increase our core visibility and cyber security solutions will be required we are prepared and ready to support gadhia through this inevitable transition with our differentiated solutions microwave provide more insight.
Regarding customer orders in a vertical during his remarks.
Now, let's move to slide number eight to review of our outlook.
Looking ahead, we remain excited about the market opportunity, we are seeing for both our existing and new solutions and are reiterating our fiscal year 'twenty directly for the outlook.
We also continue to see the supply chain challenges that drove the increase in full fulfill liberal backlog resolving and anticipated that athletes who live in backlog will continue to return to more normalized levels.
We remain focused on operating the business with a balanced approach to driving revenue growth and profitability.
We managed through that dynamic macro environment and position <unk> to deliver long term sustainable value for our stakeholders.
Ideas of the connected World Gmail.
Jean will provide additional color on the V cap off the outlook.
Numbers in their remarks.
In summary, we delivered solid fourth quarter financial results and achieved several product milestone that establish air fired foundation, delivering our objectives for fiscal year, 'twenty 'twenty four and beyond really.
We remain confident that <unk> is well positioned to help customers address the challenges and all but do you need to deduct two days he still got through our unique and expanding solutions.
Look forward to sharing our progress with everyone throughout the remainder of our fiscal year.
With that I'll turn the call over to Michael Thank.
Thank you Danielle and good morning, everyone I'd like to provide some areas that I would be covering today, starting with its first of all I mean I've been highlights in the first quarter.
You know the enterprise customer vertical our proven technology.
These partnerships with our installed base customers have always been a strong foundation for our business as customers adapt.
Adapt advance and expand that IV strategies continues to depend on that Scott to ensure the success of these transitions.
An example, during the quarter, we won a mid seven figure deal.
In service assurance with a large U S regional bank in support of their datacenter transformation.
Opportunity arose from the bank's initiative to upgrade its infrastructure for <unk>.
From on premises to.
D C V J code will be <unk> architecture.
That's got solution solutions have been critical to set out all areas of the bank's business, including online banking and unified communications and others.
Our long and productive partnership position, that's got to window business, despite competitive busy bidding process.
Now turning to the service provider customer vertical we remain focused on supporting both our domestic and international carriers five G natural evolutions.
We also continued to support our service providers in the secondary tiers.
As cyber attacks.
So sorry for that I can see that spring meet and threats surfaces and continue to expect.
As an example from the quarter on the service issues shrunk, our long standing tier one north American carrier Augusta or at least additional orders with us amounting to a mid seven figure sum as they can.
Continuing to address that.
Right.
On the second easy front, a midsized international service provider customer placed a low seven figure order for automotive product to upgrade their ddos protection, replacing a competitor.
The main driver for this investment was to deliver a reliable so called clean biked, leveraging an integrated detection and mitigation solution.
High value cost of movies beyond the order due to our superior technology strong reputation and positive references from the leaders in the sector.
These strengths combined with our recent email meet the new product offerings should continue to drive customer interest you know best in class solutions in the rapidly evolving cyber security environment.
Don't need to go to market activities have you do you mean, a focus on promoting our industrial leadership trusted brand next generation solutions and platform.
This included attending several high profile events, such as the Odyssey confluence Cisco live Dell technology World and Big five weeks.
<unk>.
In the second fiscal quarter, we plan to participate in B M that explore and black hat to name a few.
Looking ahead <unk> plans to host these customers and partners at our annual engage technology and user summit from October 2nd after the fifth.
Yeah.
In Orlando.
Orlando, Florida.
And then engage 'twenty to 'twenty three we will demonstrate how our visibility without borders platform provides a unified approach to addressing the industry's most spirits issues, including called performance security and availability challenges are mostly fly and often interconnected and overlapping.
We will also highlight our next generation on the cyber intelligence solution and.
New Ddos products, such as adaptive Ddos and mobile security.
Thank you everyone that concludes my remarks, and I will now turn the call over to Jim.
Thank you Michael and good morning, everyone I will review key metrics for our first quarter of fiscal year 'twenty 'twenty four 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 our GAAP results.
Appear in the presentation appendix, regardless I will note the nature of any such comparison.
Slide number 12 details our first quarter fiscal year 2024 results during the quarter total revenue grew one 1% year over year to $211 1 million.
<unk> revenue declined three 7% and service revenue grew five 4% both on a year over year basis. We ended the first quarter with backlog of approximately $16 million consisting of approximately $12 million of fulfill a border and approximately $4 million of radio free.
Quincy propagation modeling project, we anticipate that backlog will return to historically normalized levels as global supply chain challenges appear to be subsiding and as radio frequency propagation modeling projects have led to the deployment of the <unk> infrastructure needed for supporting business and consumer applications.
Patients.
Our first quarter fiscal year 2024, gross profit margin was 78, 3% up three eight percentage points over the same quarter last year as you may recall the prior year's quarterly gross margin was impacted by approximately $15 million in radio frequency propagation model.
<unk> project, which had an average gross margin of less than 30%.
Operating expenses increased three 6% year over year, primarily attributable to increased sales head count travel and events.
Reported an operating profit margin of 14% compared with 11, 7% same quarter last year diluted earnings per share was 31 cents compared with 24 cents in the same quarter last year, an increase of 29, 2% year over year.
Turning to slide 13, I would now like to review key revenue trends by customer verticals and product lines for the first quarter of fiscal year 2024 on a year over year basis enterprise customer vertical revenue grew 12, 9%, while our service provider customer vertical revenue declined nine.
3% during the quarter, our enterprise customer vertical accounted for 52% of our total revenue, while our service provider customer vertical accounted for the remaining 48%.
Now turning to our product lines in the first quarter of fiscal year 2020 for cyber security revenue increased by nine 9% and our service assurance revenue declined two 4% both on a year over year basis. During the first quarter. The service assurance product lines represented approximately.
69% of total revenue, while our cyber security product line represented the remaining 31%.
Turning to slide 14, which shows our geographic revenue mix compared to last year's first quarter. Our revenue was less concentrated in the U S. Due to the prior year's higher radio frequency propagation modeling project revenue there were no customers, representing 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 $395 million in cash cash equivalents marketable securities and investments representing a decrease of $37 $4 million since the end of fiscal year 2023.
Free cash flow for the quarter was a use of $24 $3 million from a debt perspective, we ended the first quarter of fiscal year 2024, with $100 million outstanding on our 800 million dollar revolving credit facility, which expires in July 22006, we current.
May have capacity in our share repurchase authorizations and subject to market conditions and plan to be active in the market.
To briefly recap of other balance sheet highlights accounts receivable net was $108 $3 million a decrease of $35 $6 million. Since March 31, 2023, the DSO metric at the end of the first quarter of fiscal year 2024, with 44 days in line with the end of the.
The first quarter of fiscal year, 2023, and a decrease from 58 days at the end of our fiscal year 2023.
Let's move to slide 16 for commentary on our outlook I will focus my review on our non-GAAP targets for fiscal year 'twenty 'twenty four.
And then Neal noted earlier, we are reiterating our non-GAAP outlook for the fiscal year 2024 that was presented during our May 4th 2023 fourth quarter and full fiscal year 2023 earnings call. As a reminder for fiscal year 2024, we continue to anticipate revenue in the <unk>.
<unk> of $915 million to $945 million, which implies a low single digit growth rate at the midpoint of the range. The effective tax rate is anticipated to be in the range of 20% to 22% assuming 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, which implies a mid single digit growth rate at the midpoint of the range.
I'd also like to offer some color on the first half of fiscal year 2024 at the midpoint of our full fiscal year 'twenty 'twenty four outlook ranges for revenue, we continue to anticipate delivering approximately 46% to 48% of our revenue outlook during the first half.
Of the fiscal year.
For earnings per share, we anticipate delivering mid single digit diluted EPS growth for the first half of the fiscal year on a year over year basis.
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 would like to ask a question. Please press star one on your <unk>.
Telephone keypad.
If you wish to remove yourself from the queue Press star two.
We do ask in the interest of time that you limit yourself to one question and one follow up.
Yeah.
We will take our first question from Matt Hedberg with RBC capital markets.
Great. Good morning, guys. Thanks, Thanks for the thanks for the time and congrats on Q1.
Neil maybe to start with you.
Queen Your service assurance business it was down obviously, a little bit and enterprise was up.
So nice growth.
Can you give us a sense just on an overall demand trends do you think theres been some form of stabilization. Obviously you guys have delivered consistent results here, but what are you hearing from customers out there from a buying perspective, and maybe where are you most optimistic from a demand perspective as this year continues to progress.
Yeah. Thanks, Matt. So so I think first thing is the quarterly trend on service writer business is usually has not been meaningful because of the lumpy deals on a year to year over basis Theres not much change from what we talked about at the prospect that are at the last conference call you have heard some.
<unk> earnings and LNG is in the service provider with sometimes tend to lengthen.
Lengthened the sales cycle.
But overall the biggest investment we have made on the product side. This year is combining the iron but in net core technology to create some new solutions, we relied that we'll see a product, which we talked about as well as.
We announced a new any new options and new features in the pharma or adapt with Ddos and some other features in both the service provider side.
<unk>, which is the mobile security and as well as on the enterprise side.
We see that it is it is we are we are expecting that to be a growth area and more so on the enterprise side this year.
But also on the service provider side.
That's helpful actually that that was a segue into the next question on OCI in particular.
Maybe just a little bit more color on.
What that means from a product perspective go to market perspective, how material is that re launch and.
From a pipeline generation perspective.
Is that one of the bigger announcements kind of coming out of the cyber side.
Yeah, So bad right now since we just released a really liked the product.
And announced it in after is dying for them I think it does not had an impact on the blend of alere, but we are expecting.
Some improvement in that area quickly and hopefully have an impact on the second half. The big change is that industry is really focus on litigation of cyber threat.
And there has been less and less focus on.
Oddly detection, which we think is the key to success and to deal with cyber threat. So that's a big change there doing analytic answers to do more detection early in the life of the cyber attack.
Is what we are calling the differentiator in this and DSP the network detection in this one and Thats. The change also from what we announced last year.
Thanks, guys congrats on the quarter.
Thanks, Matt.
And we will take our next question from James Fish with Piper Sandler.
Hey, guys. Thanks for the question, maybe just a follow up on my initial question.
What are you guys seeing specifically with your tier one North America carrier customers.
Given some of your competitors work, what kind of out there talking earlier this quarter about.
Digestion and inventory stuffing just trying to understand how you guys feel about the pipeline and in those large customers.
Well, if you take the the radio frequency orders out of the Big Chip.
And in both the backlog and that I think by Blaine. This is good overall and but we don't just do business with tier one but with people call tier two is also a big portion of the business, where there are about 10 or so are there to provide it and also some.
So the cable companies like charter and Comcast.
Getting into the five day business and so are we seeing we had a weekend makeup for some of the shortfalls are if there is challenges on the service right on the mobile traditional mobility provider side.
With ER visit some of these things, which we can do and those are all the cable companies all the top floor of water five cable operators.
Estimates of Mexico already bought on the IR website in the fixed line side. So that's what we have when we look at the overall overall service provider business.
Mobility, both on the security side and on the service I Shouldnt say I think we think that we had.
We are in good shape.
Got it and then gene for you on the backlog side first of all I. Appreciate the continued disclosure heroes.
To normalize overall, but.
It sounds from March quarter pretty meaningfully.
This level of backlog of $60 million or so normal as we think about coming out of fiscal Q4 into fiscal Q1, or what's giving the confidence in the outlook that is it seems like it's about half of your normal backlog, if we compare it to long term disclosures.
It was somewhere around $25 $30 million in the past.
In fiscal Q4.
Yes.
Actually if you look back over a long period of time and I would say.
At least the 10 years, our average backlog has probably been closer to somewhere between $10 million to $15 million, it's been as low as like 200000, and if we and just to reiterate the backlog started growing in Q3 Q4, I believe of FY <unk>.
<unk> two and that was again due to the hardware issues that were in the supply chain. So people were buying software. So we see it as we said in the.
Comment, we see it normalizing back to somewhere probably between $10 million to $15 million.
Obviously, we always like backlog. So if we have the opportunity to continue we would be very happy with that.
What gives us confidence to reiterate our revenue guidance is a few things one as.
As I think you've seen in the headlines the <unk> infrastructure has been pretty much laid down.
And that actually.
I can point to all of the radio frequency propagation modeling projects that we had that the antennas the capture of the signals. The ran network that way is also getting.
Getting established so for us it's less about the infrastructure build and more about the applications that will go over the <unk> network and what we hear when we talk to various people in the industry is that hopefully private networks within enterprise would be the first killer app and that has been slow.
Sure to start mostly due to the chip shortage. So we're hopeful that since the <unk> infrastructure has been established that the applications will start to.
<unk> start to come to bear production traffic, which is where our products are really needed and then as Aneel said in security.
We have the relaunch of OCI, which again in talking to certain salespeople. They have seen at least pockets of sales and especially internationally, where they have a lot of opportunities where customers are really liking. What we can do and then we have mobile security, which is being which is launched which has been something that's been in development.
For a few years and then as Aneel also mentioned the adapted Ddos. So when we point to those areas. This is what we would give confidence to the range of $9 15 to 945 at this point.
Very helpful. Thank you James.
Thank you Jim.
Yes.
And we'll take our last question from Kevin Lee with <unk> <unk> company.
Hey, good morning.
From a near term perspective, given kind of the government business that typically hits in the September quarter, just wondering how that pipeline looks today and whether you expect any sort of meaningful uptake.
That revenue this year.
Just as last year.
We actually had a good overall.
Q1 for government, including some federal so right now again, you know they they all they use is a big demand of our products and it always is.
Get funded you probably would see right now being consistent on a year over year basis.
With what we had in Q2 of last year.
Got it and then just with all of the new Treaty announcements that you guys have.
Do you expect that to contribute meaningfully to the quarter results or would we still see kind of a more normal mix between your service provider enterprise business.
And then maybe longer term.
When do you think security starts to shift more materially in terms of the overall revenue next year.
Well I think if you look at when we break out security revenue.
They include Ddos, Richard practically 100%.
The security revenue last year maybe.
A small single digit percentage was from OCI.
With.
Our three pronged strategy to grow the security business one is on the service provider side.
No it through the mobile security Enzo the other initiative, we have announced on the enterprise.
So that's on the security Ddos side on the enterprise Ddos side adaptive does as it is.
One of them as one of the drivers to drive refresh of the news to the new solution and thirdly, OCI, which is in the enterprise.
Security area, which is non Ddos and which was like I said very small number last year. So those are the three areas and I think.
We expect growth in the security area this year to be much higher than the growth in the overall business.
Alright, thanks for taking the question.
Thank you.
And it appears that we have no further questions. At this time I will now turn the program back over to Tony Piazza for any additional or closing remarks.
Thank you operator. This concludes our call for today. Thank you all for joining us and enjoy the rest of the day.
That concludes today's teleconference. Thank you for your participation you may now disconnect.
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