Q2 2024 NetScout Systems Inc Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to <unk> second quarter of fiscal year 2024 financial results Conference call.
At this time all parties already listen only mode until the question and answer portion of the call.
As a reminder, this call is being recorded.
<unk> senior Vice President of corporate finance and his colleagues at Netscout are on the line with us today.
If you require operator assistance at any time, please press stars zero.
I would now like to turn the call over to Tony Piazza speaking the company's prepared remarks.
Thank you operator, and good morning, everyone.
Welcome to Netscout second quarter of fiscal year 2024 conference call for the period ended September 30th 2023, joining me today are Neil Cingal, Netscout, President and Chief Executive Officer, Michael <unk>, Netscape's, Chief operating officer.
Gene do at Netscape, Executive Vice President and Chief Financial Officer.
There's a slide presentation that accompanies our prepared remarks, you can advance the slides and the webcast viewer to follow our commentary both the slides and the prepared remarks can be access in multiple areas within the Investor Relations section of our website at www Dot Netscape dot com, including the I R landing.
You tend to 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.
<unk> is a forward looking statements include statements regarding regarding our future financial performance or position results of operations business strategy plans and objectives of management for future operations and other statements that are not historical fact.
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 this presentation, which speak only as of today.
Date these.
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 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 31st 2023 on file with the Securities and Exchange Commission.
Netscout assumes no obligation to update any forward looking information contained in this communication or with respect to the announcement described herein.
Let's now move to slide four.
Which involves non-GAAP metrics, while this slide presentation includes both gap 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.
As 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 the gap.
Reconciliation for all non-GAAP metrics with the applicable GAAP measures are provided in the appendix of the slide presentation and today's earnings press release and on our website.
I will now turn the call over to a nail for his prepared remarks nope.
Thank you Tony and good morning, everyone.
You're welcome and thank you all for joining yesterday.
We believe what second quarter revenue in line with the preliminary results and I was in <unk> Goodbye.
He was impacted by a slowing in order to convey getting paid in the second quarter related doing destined economic headwinds that we expect will further assist in the second half of fiscal year 2024.
And the sponsor these dynamics reinitiated several access to manage discretionary cost more than offset a bottom line impact in the second second fiscal quarter.
Deal with the negative impact or full fiscal year are nice, but she had outlook.
[noise] excuse me.
Okay.
Without compromising about longer term objectives.
Provide more information on this market dynamics affecting other business as the review Overperformance in outlook.
Let's turn to slide number six what a brief recap of non-GAAP financial aid, that's what the second quarter and flushed high for the fiscal year 2024.
For the second quarter financially that's what in line with our bare you'd expect based on the leaves on October 16th.
Revenue for the quarter was $196.8 million down 13.7% year over the.
The previously mentioned, an audio convergence slowdown rate related to the industry and economic environment impacting with customers as well as at a lower level off radiofrequency propagation modeling project Avenue compared to last.
To be priority it.
Despite the revenue decline, where do you live with diluted earnings per share for the quarter of 61 cents.
An increase of 7% a year already yet as we benefited from several disputation any cost saving actions that'd be initiated in response to the current environment.
For the first time for fiscal year or.
The beat it ended September 2023.
Avenue for that cause I have any for the first half was $179 million down 6.6% year over there yet primarily for that either stripes state that earlier that impacted our second physical coworkers Avenue.
The corresponding dilute it I'd buy shares of 92 cents was an increase of 13.6% year over there yet bigger game benefited from the accent. They can during the our second fiscal quarter.
Finally for the first half of the physical yet I worked I would say good deed Avenue grew approximately 10% of your over the Ah Doo Doo Doo Doo growth in both are about God Ddos, Anna what nah newer omni security solutions as customer Brian de spending on security solutions.
This was more than offset by a decline of proximately, 13% year over the and now like I said, we submitted Avenue.
Is that it doesn't show doesn't avenue due to the reasons you mentioned earlier.
Excluding radio frequency propagation modeling projected avenue from the comparison so.
With a children's Avenue declined approximately 8% year over there yet.
Now, let's do most laid number seven plus some further perspective on my Kid.
And if there's nothing in sight.
Starting with about enterprise set got somebody vertical in the first half of a fiscal year 2024, and debated Avenue declined approximately 3% a year over the as the routine to establish security product land Avenue was more than offset by a decline into et cetera. They showed his product land Avenue.
Yeah.
Do at the end of second quarter order flow to race began to be affected by highest spending scrutiny and debate project funding at the estimate navigated that golfing.
Sadly getting macroeconomic environment.
Does it resulted in sub buckets of softness across multiple Andrew bisect us Ah deals were delayed or evaluate it most notably in the financial and health care sectors.
Right you are partially offset by growth in the government sector.
Despite the current economic environment, we remain confident in better value proposition of providing in hindsight, but they're good dissolution and extending visibility do their ideas of their network will continue to resonate with enterprise customers and they seek to protect their networks from attack covered blind spot address then drove the challenges and.
Dad elaborate give off parameters and cloud solution as part of their digital transformation and you and you have to work out and get that gets initiative.
Moving to a web service by to the best of them I'd be like what they called.
Had avenue in the first half of the first year declined approximately 11% a year over yet, but just bramley primarily attribute it.
Do the lower level of radio frequency propagation modeling projects Avenue.
Excluding radiofrequency propagation modeling projected avenue from the comparison that satisfied customers vertical Avenue declined approximately 3% year over the as it Avenue growth in our cyber security product line. They run by the prioritization of security solution spending, but more than offset by a declining of of course.
They show their product lines Avenue.
Had avenue in this in this vertical was also impacted by a slowing in demand floor-through at late in the second quarter as highest spending scrutiny and debate project funding was observed likely due to the well publicized gap extending constrained impacting service providers.
Notably most of the other day lives in this vertical related to Gamble and international service provider.
Anticipate north North American service by I didn't really follow a similar pattern in the second half of the fiscal year, even though he said news and customer interaction, which is reflected in the updated outlook.
Despite the increase in Dusty challenges in this vertical we believe that as as five gig adoption actually new.
You will get that advice and fight the traffic volume increase our God visit began cyber security solutions will be increasingly any quack, we remain prepared and ready to support gadhia through this inevitable transition with a a differentiate their solutions.
We provide more insight regarding customer August they never vertical during his remarks.
Now, let's move to slide nobody had to review at outlook.
We had just stayed our fiscal year 20 going before outlook doggone for the genes might gets environment.
Reduce over Avenue outlook by $80 million, assuming the midpoint of about or the email and updated Avenue outlook vantages.
Didn't they come with a combination of both service fighter and enterprise related opportunity you never biplane that we believe may be delayed already be there is dead due to the current industry and economic headwinds as deicide increasingly scrutinized and take longer to close.
We originally expected these opportunities as well as other factors do more than offset approximately $60 million of lower radiofrequency frequency of propagation modeling projected avenue anticipated ear over yet.
As I mentioned earlier.
We took immediate action to prudently manage costs, such as curtailing hiring eliminating certain programs and even and adjusting video will incentive compensation do reviews that negative impact too full fiscal year earnings by shared outlook without compromising a long term objective.
Jean will provided ikat bugged out looking at remarks.
Looking ahead, we have committed to delivering deserves in line without updated outlook as he continued to act as you go down to a a strategic priorities and physician Doctor delivered long term stakeholder value is.
Despite the neocons headwind, we believe that the longer term demand demand trends driving our business. They may in fact enterprises in service by their continued to glad cyber security and services children solutions that deliberate actionable visibility escape.
With our industry, leading visibility without borders flak from strong customer relationship and solid financial profile, we remain well positioned to play a critical role in enabling and everything of our customers to attack of the performance availability and security challenges of the increasingly complex connected beach Delaware.
We look forward to sharing or progress with everyone throughout the remainder of fiscal year with that I've done the call over to Michael. Thank you and good morning, everyone July 10 outlines of the areas that I will be covering today. So I think the cost of moving highlights in the second quarter.
You know an enterprise customer vertical we experience seven old Eagles.
Costume associates at cross platform solutions tend to be seeing more of which we believe that he dates the power of that Scotts unified portfolio and support a strategy. For example, a federal agency pleased multi solution order, it's still telling me to seven figures with us in the second quarter. These older Wisconsin.
[noise] solutions across so service issuance availability and security product portfolio.
In which are only solution was a significant portion of disorder.
We have a longstanding relationship disgusted mode, and our province proven technology and historical performance continue to win I'll, just repeat business as they deploy all of new and legacy solutions more broadly feeding that organization.
I'm turning off to our service so I've just got some a vertical but he main focus.
On supporting carry a as far as five G network evolutions as well as their security efforts to cyber attacks.
Incidents accelerates and test surfaces continued to expand to be continued to see cat. He was investing five G. In other areas will beat at a slower pace and two smaller sizes given the current environment.
During the second quarter, a longstanding dean one north American carrier cost of at least.
A follow on orders.
Accounting is too high seven figures. These orders for our survey instruments solution both for their mobile network to five G and read you access network as well as for that business Itu systems.
Didn't mean excited about continuing to guardino relationship Disgusts me as a trusted partner that cross that organization and natural ecosystem.
Turning to our go to market activities since our last stoning Scalzi had on seven all product advancement. This includes the release of adaptive details for the attack mitigation system and ran in that addicts Forecaddie aggregation. Additionally revealed the recent total economic impact study completed by.
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Horrible deed hospitalization solution delivered the return on investment to over 200 per cent during the study period.
We also announced different yeah, cheap Amazon web services.
R E. W. S security competency for our advanced N D. A product on these cyber intelligence or C. I.
In the category of Tad detection that response.
In addition, these.
Issue dollar first had so many 20 twenty-two eats at intelligence report I liked him to continue rising cyber criminal activities that he fought revealed that approximately 7.9 million Ddos attacks took place in the first half of the year, a 31 per cent increase year over year you also.
Sure the latest environmental social and governments governance reporting.
Report demonstrating progress in this important area.
Finally in early October Behold.
The whole set of our customers and partners at our annual engaged technology technology and use it in Orlando, Florida. It wasn't all those successful event, which included a combination of presentations panel discussion solution demonstrations and hands on training legislation and attendance and sees more than 50 per cent.
Yeah that must be getting strong interest and loyalty Emily about users.
During the event to showcase the visibility without.
Boorda's platform and how it provides a unified that through which to addressing the industry's most bullshit issues and important value proposition is the performance and security challenges of the industry are multiplying and that often interconnected and overlapping.
At the event you also announced a next generation data export technology dog. It at its E. I ops solutions learning more advanced than any of these platforms and data leagues to extend our smart data food food.
Thank you everyone that concludes my remarks, and I've not done to call over to Jean.
Thank you Michael and good morning, everyone. I will leave you key metrics for a second order in first half of fiscal year 2024, and provide some additional commentary on our fiscal year 2024 outlet.
A reminder, this review focuses on our Non-catholics out unless otherwise stated and all reconciliation without gas. They sell it appeared in your presentation appendix, regardless I won't know what the nature of any such comparison.
Slide number 12 details I always tell us for a second quarter and first half of fiscal year 2024, focusing on quarterly performing total revenue declined 13.7% a year to $196.8 million product revenue declined 28 per cent.
And so this way then you was flat so funny game over here and face it.
A second quota fiscal year 2024, gross profit margin like 80.3 per cent up 3.5 percentage points over the same quarter last year. The increase was primarily attributable to lower levels of radio frequency propagation modeling project cost this quarter.
Compared with last year and a reduction in variable incentive confrontation as a reminder, radiofrequency propagation modeling projects tend to have significantly lower close margin than all other products due to the labor intensive nature of those projects Cordery operating expenses decreased 15 point.
One per cent you over a year, primarily related to cost reductions associated with variable incentive compensation and certain events we.
We reported an operating profit margin of 28%.
With 23.7% in the same quarter last year diluted earnings per share was 61 cents compared with 57 cents in the same quarter last year, an increase of 7% you over here and we took the actual T V screen.
Mentioned to offset the impact of the revenue decline.
Finally, I wanted to note that in the last month of the second quarter, we divested the test lab automation portion of our test optimization business to spire and approximately $8 million. This business was not material to netscape's overall financial profile.
Strategic to the company's called offering we believe that the sale to Spiling places that business with a better aligned owner.
[noise], forming standpoint, the test optimization revenue contribution yea to date.
Documentary $6 million and we expect his absence to be a headwind proximately this same level and year over year comparison.
School year 2020 by.
Turning to slide 13, I'd now like to a Yankee revenue trends by customer verticals and product line.
For the first half of fiscal year 2024.
Over your basis enterprise customer vertical revenue declined 2.9%, while our service provider customer vertical decline 10.6 per cent during the first half of the fiscal year enterprise customer vertical accounted for 53 per cent of total revenue well our service provider customer vertical account.
<unk> for the remaining 47 per cent.
Now turning to our product lines in the first half of fiscal year 2024, Ah Cyber security revenue increased 10.4%, while our service assurance revenue decreased 13.1 per cent both on a year over year basis. During the first half of the fiscal year Ah service assurance.
<unk> Klein represented approximately 68% of total revenue well outside the security private client represented the remaining 32%.
Turning to slide 14, which shows at geographic revenue mix and the first half of the fiscal year, 60% of our revenue is derived from the United States with the remaining 40% provided by international market. It makes between domestic and international market shifted from the same period last year, partially due.
To lower tier one domestic carrier radio frequency propagation modeling project revenues. This fiscal year also no customers represented 10% or more of a total revenue in the second quarter or for the first half of the fiscal year.
515 details a balance sheet highlights and free cash flow, we ended the quarter with $332.6 million in cash cash equivalents short and long term marketable securities and investment representing a decrease of $95.3 million since the end of the fiscal year 2023.
Free cash flow for the quarter was he use of $27.9 million during the second quarter really purchased a total of approximately 1.1 million shares of common stock for an aggregate purchase price of approximately $31.2 million or an average price of $27.90 per share.
Yeah.
Some of that perspective, we ended the second quarter of fiscal year 2024, $100 million outstanding on our $800 million revolving credit facility, which expires in July 20th 26.
To breathe briefly recap other balance sheet highlights accounts receivable and that was $152.6 million an increase of $8.7 million since March 31st 2023.
D S. L metric at the end of the second quarter of fiscal year 2024 was 69 days versus 52 days at the end of the second quarter of fiscal year 2023, and 58 days at the end of our fiscal year 2023, the higher D. S. L metric was due to the timing and composition of bookings.
Moving to slide 16 for commentary on our outlook I will focus my view on our non-GAAP targets for fiscal year 2024.
<unk> noted earlier, we updated our fiscal year 2024 outlook on October 16th 2023 for the full fiscal year 2024, we know anticipate revenue in the range of 840 million to $860 million. The effective tax rate is anticipated to be in the range of 20.
T 222 per cent, assuming between 73 and 74 million weighted average diluted shares outstanding which includes the impact of our second quarter share repurchase activity, we expect non-GAAP diluted earnings per share to now be between $2.
And $2.20.
I'd also like to offer some color on the third quarter of the fiscal year, starting with your revenue Avenue mentioned deals in the pipeline may take longer to close and may be influenced by the timing of customer budget cycles based on the calendar years, meaning.
The last calendar quarter of 2023, using that budget would hit a Q3 fiscal year and its budgets for 2024 were being used it would hit a Q1 2024 fiscal year. Therefore, we anticipate approximately 23% to 24% of the 800.
50 million dollar mid point of our revenue outlook could take place in the third quarter with regard to diluted earnings per share third quarter E. P. S will be impacted by the anticipated timing of revenue as well as the cost of our engage event, which took place in the third quarter of fiscal year 2024 verse.
Historically, a curling in our first fiscal quarter.
We anticipate third quarter E. P. S to be approximately 17 to 18 per cent of the $2.10 mid point of our EPS outlook.
That concludes my formal review of our financial felt before we transition to Q&A I'd like to quickly note that our upcoming IR confidence participation is listed on slide 17. Thank you and I will now turn the call over to the operator Q&A.
At this time, if you would like to ask a question. Please press star one on your telephone keypad.
If you wish to remove yourself from the queue Press Star Q.
We do ask in the interest of time actually please limit yourself to one question and one follow up.
Our first question will come from <unk> with RBC capital market your.
Your lineup.
Hey at Stanford or for Matt Hedberg appreciate.
Question.
Can you hear me.
Yeah Yeah.
Okay, great say, the spreading environments and kind of not great all year, but you guys fairly insulated from pressures and service provider over much of the first half I appreciate the commentary on the call, but just wondering if you could provide any further color on maybe what change in the environment or what you view as change and then really when that emerged in the quarter.
Well I as you mentioned mad that that we started noticing this towards the end of the second quarter, but a V C science of Big layoffs, If you look at.
222 of the big Bellwether of Ah Nims, Ericsson and Nokia and the only thing big layoffs and cutbacks. So all these assignments of this will continue for some time and but none of it is impacting it's back there by competition or anything so everything.
The the the sales cycle has lengthened and these projects that important but they they should happen sometime in the next 12 months.
Okay, Great and then maybe a little more on the two segments.
Curious, how you categorize enterprise demand outside of the financial and health care and vertical as you call those out as soft sounds like federal is strong.
And then maybe on the service provider side sounds like much of the softness was in international markets, you're assuming that occurs in North America.
I hope for the second half, but you're not seeing it <unk> is that correct.
I think basically as we mentioned magenta by the service provider deals are very lumpy and one big order an internet show again.
Again Boulevard is that sort of thing is mainly international cable, but gable is a lot of USA even cable providers.
Are doing five G N mobility now so I think the the things are intertwined and read thing that is just the timing of who is affected when and and actually it looks like we are seeing Arlene international but it just the timing of the August.
Which which the fourth us.
Makes it look like it just the.
International versus USC went in the first half.
Yeah, So just to add onto it and now had said in the service provider and international there is a large Asian carrier that we do business with and they have more more like delayed their purchase as opposed to eliminated. It. So that's probably why you see the international service provider being decree.
<unk> going forward given the comments made about the constraints that you see in the North American carriers. The sales force has Ah adjusted their projects and the timing of their projects, which contribute significantly to the change in revenue that we reported.
Okay and also just has one final thing cause it's usually you know it's the fed quarter. The federal government did very well desk. What are we grew a little between 25% to 30% for the quarter and on a year to date basis square up.
Between 40 to 50 per cent and for the first half of the year versus the first half of last year.
That's great. Thanks.
Thank you.
Our next question will come from James Fish Piper Sandler Your line is open.
Alright, thanks for the questions working off that bans question there.
Understanding budgets are tight and you're seeing delayed and pushups, but I I guess based on your seasonal Guy here Jean what makes you guys confident that this comes back in the March quarter based on the seasonality, we typically see I I guess, let's give him a sales force confidence that it hits in March instead of some time and.
Physical 25 is it really embezzled much much larger pick up in in March core than we've seen historically even to hit the the reduced got here.
So the sales force has you know we have a long term relationships with all of the carriers and.
The as I mentioned the change in the budget was a surprise showing up and probably actually in the later part of September in our quarter. What the sales force believes is and talking to each of our sales each of our customers and going through a detailed.
List of.
Carriers, they believed that the projects have either been delayed or they've been right sized at this point Q3 has historically been our lodger quarter recently and that has been mostly do with budget flushes and I think the question of whether it will be in our queue three.
Are you using a 2023 remaining a budget or budget flash or in a Q1.
Is something that we're dealing with and the timing right now in your question is could it slipped further out of physical 2024 at this point and Salesforce doesn't see that and they have significantly changed what their original expectations were.
One more thing to add damn stools like Jimmy saying is that we have seen this dynamic play out there has been times, where you afford has been bigger than Q3, and because many of out gaddy a customers.
Using their fiscal years starting in January so when these kind of things happen, sometimes by different startup bring we have the opposite impact that instead of using budget for less for it and the last in the December.
December quarter, B B R I would've projects up.
Funded by the new budget coming into the new fiscal year. So we have seen that we had a couple of big Daddy is in the past and and that's what a V.
And dissipating this time, depending on what happened with good three yeah, and just to be clear in case I wasn't when I said Q1, I'm thinking Q1 calendar year. So Q1 calendar years Hawk you for and as we've discussed in the past you know Q3 against the customer's budget flushes and Q4.
Is the last quarter of that our sales teams can get into accelerators into.
Into their commissions and other incentive compensation. So they usually have a high incentive to try to close those deals using the new year's budget in our physical keyboard.
Helpful color guys can can you guys just walk us through how you're thinking been about gross margins as as they were pretty strong this quarter or obviously.
We don't have a R T projects going on but how are you thinking about gross margins versus opex for the back half of the year is it seems like despite the revenue headwind for this current quarter that you're embedding actually a fairly massive sequential uptick in opex I'm about 20 to 25 million I guess really the core of my question is why.
I wouldn't cost they kind of near these levels, excluding the engage confidence that you guys just toasted.
So in Q3, we see the gross margin, probably approaching 70, 879% and Q4 being closer to 80% or higher.
Operating expenses are flat in Q3, a year over year due to the engage event some head count edition and most of that has been offset by the change in variable incentive compensation. When you go out to queue for we would see that there would be a.
A decrease in operating expenses, mostly due to the change in variable incentive compensation such that for the full year, we would anticipate that our full year operating expenses could be down on a year over year basis by as much as five per cent.
Got it thanks guys.
Thank you for him.
Our next question will come from <unk> with Cailloux and company. Your line is open.
Hi, Good morning, just wanting to touch on the surface about your business is small you mentioned cable as an area weakness always curious what percentage of your business. That's represented either over the first half her last.
Last year and then what are some of the.
Types of projects that are being delayed where we can look for those to come back potentially.
Yeah. So we don't break out I mean, most of the cable business is part of the enterprise that visit.
<unk> Ah 30, spaghetti or vertical.
In the U S and largely all of the cable business is that so I don't have the breakdown of the cable works as a total because we don't report that but the types of projects data projects in the security area.
And a ddos area Omni security is yeah, DNS prediction there are a lot of security type projects that a lot of availability type project and the cable.
And so it's also a lot of people out of using ER No cable also Ah Ah having that on five G initiatives. So is there a project related to that so they all traditional things except there are there have been more.
More focus on the cable side in the recent past and that's Y V C. The impact this time.
[noise] understood and just kind of parse through the demand environment is there any noticeable change in priorities between kind of your service assurance portfolio versus a cyber security.
Yeah, I think like for many of the vendors that if you look at any companies who have multiple fill the void.
Because I have multiple solutions that we see that the cyber security project and.
And get hired right dilation, especially when.
Spending and stuff and.
That's why you saw an uptick.
In that area, but the service assurance for the fun stuff.
Alright, thanks for taking my questions.
Yeah.
Thank you.
Does conclude b Q and a portion of today's call and I would now like to turn the call over to Tony for any additional calling from Vermont.
[noise]. Thank you operator.
That concludes our call for today. Thank you all very much for joining us.
Have a good rest of the day.
Thank you ladies and gentlemen, this concludes today's Netscout second quarter of fiscal year 2024 financial results Conference call you.
You may disconnect at anytime.
[noise] [music].