Q3 2024 NetScout Systems Inc Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to net Scouts third 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 up to call.
As a reminder, this call is being recorded.
Tony Piazza Senior Vice President of Finance and his colleagues that scout 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 net Scouts third quarter fiscal year 2024 conference call for the period ended December 31, 2023, joining me today are until Cingal net Scouts, President and Chief Executive Officer, Michael <unk> net scouts.
Chief operating officer, and Jean Bua, Net Scouts executive Vice President and Chief Financial Officer.
Tony Piazza: There is a slide presentation that accompanies our prepared remarks, you can advance the slides in the webcast viewer to follow our commentary.
Jean A. Bua: 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.
Jean A. Bua: 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 or position results of operations business strategy plans and objectives of management for future operations and other statements that are not historical.
Jean A. Bua: The 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 this presentation, which speaks 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.
Jean A. Bua: Factors, including but not limited to those described on this slide and in today's financial results press release.
Tony Piazza: For a more detailed description of the risks and factors associated with the company. Please refer to the company's annual report on Form 10-K for the financial year, ending March 31, 2023 on file with the Securities and Exchange Commission.
Tony Piazza: <unk> assumes no obligation to update any forward looking information contained in this communication or with respect to the announcements described herein.
Tony Piazza: Let's now turn to slide number four which involves non-GAAP metrics.
The 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.
Tony Piazza: 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.
Tony Piazza: These measures should not be considered in isolation from or as a substitute for financial information prepared in accordance with GAAP.
Tony Piazza: Reconciliations of all non-GAAP metrics with the applicable GAAP measures are provided in the appendix of the slide presentation in today's earnings press release and on our website I will now turn the call over to Anil for his prepared remarks.
Anil: Thank you Tony and good morning, everyone and welcome and thank you all for joining us today.
Anil: At a high level, we delivered third card Ted.
Revenue and non-GAAP EPS ahead of expectations due to the timing of the customer year end budget spending and our continued cost containment efforts.
Anil: Or the micro environment remains challenging with constrained customer spending and elongated sales cycles.
Anil: Continuing to see strength in our cyber security business.
Anil: We delivered double digit revenue growth during the first nine months of fiscal year 'twenty 'twenty four at our services business continues to face headwinds.
Tony Piazza: Primarily due to the theater, one U S gaddy, a capital constrained environment.
Tony Piazza: Accordingly, our enterprise customer vertical were relatively flat for this we'd add while our service provider customer vertical is creating the majority of the revenue pressure.
Tony Piazza: Given the macro that mix, we anticipate delivering full fiscal year 2024 revenue at the low end of our previously disclosed outlook ranges, while our cost containment efforts and other activities should position us to deliver non-GAAP EPS for the full fiscal year at the higher end of our previously disclosed outlook.
Relatively in line with the last fiscal year EPS.
Tony Piazza: Lower revenue base, yet or what are you seeing.
Tony Piazza: We will provide more specifics during our remarks.
Tony Piazza: With that as a backdrop, let's turn to slide number six for a brief recap of our non-GAAP financial results for the third quarter and first nine months of fiscal year 'twenty 'twenty four.
Tony Piazza: For the third quarter of fiscal year 'twenty 'twenty four R&D revenue was ahead of expectations at approximately $218 million due to the timing of cash due at year end budget spending on a year over year basis. This was down approximately 19% as growth in the cyber security product line, only partially offset that.
Tony Piazza: A decline in the service of Jordan product line.
Tony Piazza: Previously mentioned.
Tony Piazza: non-GAAP diluted earnings per share for the quarter was 73.
Tony Piazza: Which exceeded our expectations due to higher revenue and lower cost than we previously anticipated. This was a decrease of 27% year over year, primarily related to lower revenue, partially offset by continued cost containment efforts and other activities.
Tony Piazza: For the first nine months of fiscal year 2024 are the period ended December 31st.
Tony Piazza: 2023 revenue was $636 million down approximately 11% year over year. During this period, our cyber security revenue grew more than 13%, but was more than offset by a service assurance service revenue decline of approximately 20% both on a year over year.
Tony Piazza: Yeah.
Tony Piazza: Excluding radio frequency propagation modeling project revenue from the comparison that.
Tony Piazza: With revenue.
Tony Piazza: As such our revenue declined approximately 13% year over year.
Tony Piazza: non-GAAP diluted earnings per share for the first nine months was $1 65.
Down approximately 9% year over year as they impact our lowered revenue was partially offset by cost containment efforts and a lower share count.
Tony Piazza: Now, let's move to slide number seven for some further perspective on market and business insights.
Starting with the enterprise customer vertical in the first nine months of fiscal year 'twenty 'twenty four enterprise revenue is essentially flat year over year as revenue growth in our cyber security product lines, offset and middle digit percentage decline in our service assurance product line revenue.
Tony Piazza: And then to re market, Florida flow through rates continued to be affected by highest spending scrutiny and delayed project funding as customer have navigated the current macroeconomic environment.
Tony Piazza: Power some sectors grew year to date, such as government and financial while others like the healthcare sector.
Notably softer.
We expect our enhanced cyber security solution and ability to expand the visibility to the edge will continue to resonate with our customers.
Tony Piazza: These solutions help protect customers networks from attack covered blind spot.
Tony Piazza: Addressed address control challenges and facilitate the leverage leverage off off premises and cloud solution within digital transformation and new network architecture initiative.
Tony Piazza: Moving to our service provider customer vertical revenue in the first nine months of the fiscal year declined approximately 22% year over year, excluding radio frequency propagation modeling project revenue from the comparison that service provider customer vertical revenue declined approximately 13% year.
Tony Piazza: Over the year as revenue growth in our cyber security product line was more than offset by a decline in our core service assurance product line revenue.
Tony Piazza: The service provider market remains challenging, especially for the U S. A USDA service provider give us capital spending trends, which is causing intense spending scrutiny and delayed project quantity.
Tony Piazza: This dynamic appears to be impacting the finalization of <unk>, new calendar year budgets and funding and funding.
Tony Piazza: Funding as well.
Tony Piazza: We expect the challenging market dynamics to persist for the remainder of the fiscal year and likely into the next fiscal year.
Tony Piazza: We believe that as <unk> adoption accelerates new use cases into us and fire geographic volume increases at our core visibility in cyber security solution will be increasingly required.
We remain prepared and ready to support cat years through this in the inevitable transition with our differentiated solutions.
Tony Piazza: Despite the current selling environment, we are encouraged by the interest in our new offerings like ominous as these interactions with our cyber.
Tony Piazza: Cyber security solution, particularly of our ddos offering, including adaptive Ddos and mobile security.
Michael: Michael will provide more insight regarding customer orders in a vertical during his remarks.
Michael: Now, let's move to slide number eight to review our outlook looking ahead, taking into consideration the current environment for the full fiscal year 'twenty 'twenty four we expect revenue will be at the low end of our previously disclosed revenue outlook range or approximately $840 million.
Michael: We anticipate delivering non-GAAP EPS at the higher end of our previously disclosed EPS outlook range as we continue to benefit from our cost containment efforts and other activities.
Michael: Is this what our non-GAAP EPS.
EPS relatively in line with last fiscal year EPS on lower revenue year over.
Michael: Year over year.
Michael: Dean will provide a recap of the outlook in her remarks.
Michael: Despite the continuation of near term headwinds, we believe that the fundamental long term demand trends remain intact, what Mexico as enterprises service provider to glad industry, leading cyber security and service assurance solutions, such as ours to deliver actionable visibility at scale.
Dean: We remain focused on leveraging our industry, leading visibility without borders platform to help customers tackle the performance availability and cyber security challenges of the increasingly complex connected digital where.
We expect the continued execution of this strategy will enable us to deliver sustainable value for our shareholders.
Dean: We look forward to sharing of our progress with everyone at the conclusion of our fiscal year with that I will turn the call over to Mike.
Thank you Neal and good morning, everyone.
Mike: Slide 10 outlines the areas that I will be covering today, starting with cost of living highlights in the third quarter.
Mike: In our enterprise customer vertical during the quarter, we displaced a competitor.
Mike: In a low seven.
Mike: Did you figure seven.
Mike: Seven figure order from <unk>.
Tony Piazza: A leading domestic insurance company, which is a new logo for us the opportunity related to our service assurance solution.
To address data center and hybrid cloud visibility we won this deal due to us.
Tony Piazza: Apologies that address incumbent vendors shortfalls, and our strong reputation as an industry leader. We believe that there are more opportunities on the horizon to support this new cost to move it further service assurance deployments as well as potential cybersecurity solutions given its strong explicit interest in this area as well.
Tony Piazza: Turning to our service provider customer vertical a tier one European carrier renewed a multiyear agreement with us.
A mid seven figure order that included both Serbia service assurance solutions.
Tony Piazza: <unk> network evolution as well as cybersecurity solutions. The order included our recently released mobile security solution.
Leverages, our innovative mobile stream and sideline offerings to detect ddos attacks on the mobile network product derived from our market leading solutions generally deployed in the fixed line network. We want this opportunity due to our proven technology and strong longstanding incumbents.
Tony Piazza: The relationship we've discussed it as Ed as we advance these new mobile security solution.
Tony Piazza: Encouraged by the high interest in this offering.
Tony Piazza: We are actively engaged in multiple discussions in addition to a handful of trials across the service provider landscape.
Tony Piazza: Now in terms of go to market activities recently.
Tony Piazza: And that was the launch of adaptive Ddos for Arbor edge defense to protect Isps and enterprises from so called DNS wanted to torture attacks as we enhance our solutions with new.
Tony Piazza: New technologies.
Tony Piazza: Additionally, we plan to attend mobile World Congress.
And see in Barcelona in late February when we will be meeting with existing and prospective customers. Our focus will be on sharing our latest service assurance AI and ml analytics and cyber security solutions related to <unk> network visibility and cyber security requirements that concludes my remarks.
Tony Piazza: Thank you everyone I will now turn the call over to gene for a review of our financials.
Gene Smith: Thank you Michael and good morning, everyone I will review key metrics for our third quarter and first nine months of fiscal year 2024, 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.
Gene Smith: All appear in the presentation appendix, regardless I will note the nature of any such comparisons.
Gene Smith: Slide number 12 details the results for the third quarter and first nine months of our fiscal year 2024, focusing first on our quarterly performance total revenue was $218 $1 million down.
Down 19, 1% year over year product revenue was $95 8 million a decrease of 35, 9% while service revenue was $122 $2 million up one 8% both on a year over year basis.
Gene Smith: Yeah.
Gross profit margin was 81, 8% in the third quarter up one three percentage points year over year, primarily attributable to higher service revenue and lower variable incentive compensation expense as compared to the last fiscal year.
Tony Piazza: Quarterly operating expenses decreased five 2% year over year, primarily due to cost containment efforts, including reduced variable incentive compensation operating expenses for the quarter included our engage user and technology event, which had historically occurred in our first quarter.
Gene Smith: Reported an operating profit margin of 29% compared with 35, 5% in the same quarter last year diluted earnings per share was <unk> 73.
Gene Smith: Compared to $1 in the same quarter last year.
Gene Smith: Turning to slide 13, I will review key revenue trends by customer verticals and product line. Please note that all comparisons here on a year over year basis, consistent with our other remarks for the first nine months of fiscal year 2020 for enterprise customer vertical revenue was effectively flat service.
Gene Smith: <unk> customer vertical revenue decreased 22, 1% during the same period, our enterprise customer vertical accounted for approximately 54% of our total revenue, while our service provider customer vertical accounted for the remaining 46%.
Gene Smith: Turning to our product lines for the first nine months of fiscal year 2020 for cyber security revenue increased by 13, 5%, while last quarter insurance revenue decreased by 19, 7% during the same period, our service assurance product line accounted for approximately.
Gene Smith: 68% of our total revenue, while our cyber security product line accounted for the remaining 32% turning to slide 14. This shows our geographic revenue mix in the first nine months of fiscal year 2024, 59% of our revenue is derived from the United States with the remaining 41% provided by <unk>.
Tony Piazza: International market as expected the mix 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 revenue. This fiscal year also no customer represented 10% or more of our total revenue in the third quarter.
Tony Piazza: For the first nine months of the fiscal year.
Tony Piazza: Slide 15 details our balance sheet highlights and free cash flow. We ended the third quarter with $331 million in cash cash equivalents short and long term marketable securities and investments representing a decrease of $2 $5 million since the end of the second quarter of fiscal year 2002.
Gene Smith: For free cash flow for the quarter was $12 $7 million during the third quarter, we repurchased a total of approximately 706000 shares of our common stock for an aggregate purchase price of approximately $18 8 million an average price of $26 66.
Gene Smith: Sure.
Gene Smith: From a debt perspective, we ended the third quarter of fiscal year 2024, with $100 million outstanding on our $800 million revolving credit facility, which expires in July 2026.
Gene Smith: To briefly recap other balance sheet highlights accounts receivable net was $221 $6 million representing.
Gene Smith: Representing an increase of $77 $7 million since March 31, 2023, the DSO metric at the end of the third quarter of fiscal year 2020 before it was 90 days versus 69 days at the end of the third quarter of fiscal year 2023, and 58 days at the end of fiscal year 2020.
Gene Smith: The higher DSO metric in the third quarter of this fiscal year was due to the timing and composition of bookings.
Let's move to slide 16 for commentary on our outlook I will focus my review on our non-GAAP targets for fiscal year 2024.
Gene Smith: As noted earlier, we are updating our outlook for fiscal year 2024, which was last presented on November 2nd 2023 during our second quarter fiscal year 2020 earnings call. We now anticipate revenue to be approximately $840 million at the low end of our previously disclosed range we <unk>.
Tony Piazza: Anticipate non-GAAP diluted earnings per share to now be within the range of $2 15.
Gene Smith: To $2 in 2000 and.
Tony Piazza: This is towards the upper end of our previously disclosed disclosed range as we benefit from continued cost management efforts as well as a lower tax rate and share count the effective tax rate is expected to be at the lower end of our range of 20% to 22% as we finalize the tax impacts related to legislation associated.
With the capitalization of R&D costs, our weighted average diluted shares outstanding is assumed to be between 72, and 73 million shares which includes the impact of our recent share repurchase activity.
Tony Piazza: 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.
Tony Piazza: At this time, if you would like to ask a question. Please press star one on your telephone keypad.
Tony Piazza: If you wish to remove yourself from the queue Press Star Q.
Tony Piazza: We do ask that in the interest of time, please limit yourself to one question and one follow up.
Tony Piazza: We will take our first question from Matt Hedberg with RBC capital markets.
Matt Hedberg: Hey, good morning, guys. Thanks for taking my questions.
Aneel.
Matt Hedberg: You noted in your prepared remarks.
You see some of the pressure on service provider spending I think you said you think some of that could do.
Matt Hedberg: A drift into next year, but that <unk> could start to improve some spending trends there I guess I'm wondering as you talk to customers I think we've always been sort of curious on what that spark could be on <unk>.
Matt Hedberg: What are what are some things that you're hearing from customers that gives you sort of the confidence in some of those trends could start to reverse as something maybe with consumer broadband.
Matt Hedberg: On the wireless side, just just anything that youre kind of seeing or that kind of gives you the thought that those trends that could start to improve.
Matt Hedberg: Yeah. Thanks, Matt So I think maybe we can talk about our strategy for next year at a high level rather than some of the estimates from Veeva because.
Matt Hedberg: We're still finalizing their budget.
Matt Hedberg: And we keep hearing different stories at different time, even though I've met with almost all of the tier one.
Matt: Again, he has in the last six months. So what we're looking at it is that with the niche product line, we have our data while theres a lot of pressure on capital spending on the service such resolution Baidu is very good for AI ops type and automation applications. So that's one direction, we're talking to them.
Appeal to a different idea of audience in the customer base and use our incumbency and second is reducing our dependency on.
Matt: The service assurance service provider business.
And so the combination of those things.
<unk> takes off in other words, there could be some upside but that.
Tony Piazza: Basically what we are looking at because I think it's weak it's not deterministic what's going to happen to the capital spending on the traditional service assurance part of our service provider business.
Tony Piazza: Got it that's helpful. And then you noted on this a second ago I guess.
Tony Piazza: Double clicking on the cyber business, which seems to be doing quite well.
Tony Piazza: Are there things that you know.
Tony Piazza: Relative to expectations are doing a bit better than.
Tony Piazza: Maybe just to just to double click on that because it feels like theres a lot of good things happening kind of below the some of the topline growth estimates that we're seeing there so.
Tony Piazza: So if you are.
Tony Piazza: I mentioned in the past that we then integrate the outerwear business. So in high level, we have said with the children's business, which is like.
Tony Piazza: 65% of the business and that we have service provider spending challenges as a bigger and bigger issue than we have thought about business, which also have a stickier.
Tony Piazza: Our service provider Enterprise and then ominous was introduced just last year and still taking some time to afford direction. So.
Tony Piazza: Our business was integrated into next out roughly two years ago, and we are signing so you're seeing that effect on this from a technology point of view of the blending that DPA technology either to the Ddos market. So typically ddos is for volumetric attack and we have introduced something called adaptive.
Michael Smith: <unk>, which is really application layer attacks he talked about Michael talked what BNS dive bar tour to every day and Thats driving a this growth this year and hopefully this will continue next year.
Michael Smith: Thank you very much appreciate the color.
Michael Smith: Yeah.
Michael Smith: Thank you.
Our next question will come from Jim Fish with Piper Sandler.
Hey, guys. Thank you this is quentin on for Jim.
Quentin: Maybe double clicking on that second question there we've heard from both you and other vendors in the space about the acceleration of those ddos attacks that have occurred. This year can you talk about any relationship you've seen between the piece on the volume of these attacks and your cyber performance in the past and.
Quentin: As we look towards fiscal 'twenty five.
Michael Smith: This is something that could kind of reaccelerate, our continued to accelerate security growth.
Michael Smith: Customers may be nearing the upper end of capacity and are in need for an upgrade.
Michael Smith: Yeah sure. So first thing I wanted to mention that on our website.
Michael Smith: The publisher report, which talks about how that backs out morphing and and like that our tax called carpet bombing attack, which is Neal.
Michael Smith: Basically you instead of attacking a sidebar you basically attack multiple devices and customer network is very hard to detect.
Michael Smith: And then the DNS, what does that Dr. Jeff Stag, whether youll bring down their DNS outerwear, then nobody can do anything. So these are the two areas, we introduce new functionality. So yes at that site, increasing but we are now handling new kinds of attacks, which we call adaptive Ddos and rethink.
Michael Smith: They are going to be that there is a lot of interest in that plus odd ball business was more service provider business that Scott had lot of enterprise business. So as we combined the sales forces we have.
Scott: Seeing traction on the enterprise portion of Ddos, which is about 80 a day product.
Scott: She is different than in the past.
Scott: It makes a lot of sense and then maybe for Neal for you in your prepared remarks, you talked about benefiting from the year end budget flush.
Neal: It sounds like this was more on that cyber side, but can you walk through or any verticals or segments, specifically that benefited from this flush compared to last year. Thank you.
Neal: Yeah, maybe deemed can add to this but this was not necessarily by Jeff, let's maybe some of the orders from Q4 went into Q3 and so we didn't see this traditional budget flush with athene and the buyers, especially after the COVID-19.
Jean: Jean anything like that.
Youre correct.
Jean: When we had given a color for Q3, we were not sure whether the customers would be using their calendar year 2023 budgets or start using there.
Gene Smith: Calendar year 2020 for budget tends to skew between our Q3 and our Q4 and so what we found was that they did use their 2023 budget, which is our fiscal calendar fiscal year 'twenty Q3, a year.
Gene Smith: Thanks, guys I appreciate it.
Gene Smith: Jonathan.
Gene Smith: Our next question will come from Kevin Liu with Kale with company.
Gene Smith: Hi, good morning.
I wanted to ask about kind of your early expectations for next fiscal year, specifically on the cyber security side, given what youre seeing in terms of the pipeline build for new products versus some of the growth coming from the RV side of the business how.
Gene Smith: How should we think about you know what.
Gene Smith: The mix of business on cyber security and ultimately should we expect that to accelerate growth or do you think it will stay pretty consistent with what you've seen over the past 12 months.
Gene Smith: Yeah. So this one was much higher growth versus in the past and like I mentioned some of that.
Gene Smith: Integration of technology. So the new product resulted in that I also wanted to add that we also have a product called Omniture security, which is.
Tony Piazza: In the Mds space and so when we talked what security revenue.
Michael Smith: We will include both of them. This year are miskito tea is not big depths of bulk of that growth is because of liver. So we think that our security growth will be better.
Michael Smith: We need to be better than the services or the next day, it also and hence our the percentage of.
Michael Smith: Security might go higher than but we should be able to provide some guidance on this in the next earnings call.
Michael Smith: Understood and then Youll could you also elaborate a little bit on kind of the opportunities outside of tier one service provider as we move into this current calendar year.
Matt Hedberg: Just wondering if you believe there is enough opportunity there to help offset some of the declines that might be coming from the capital spending side.
Michael Smith: Cool.
Michael Smith: Yes, if you could just talk about that.
Michael Smith: The challenge.
Michael Smith: As Gavin is and that there are cheaper price incumbent on the lower end of the market beyond the top 10, or 20, where we already are coverage. So IC and services you will end up we get opportunities via <unk> takes off in terms of user plane much faster.
Tony Piazza: And doing something with the mobile security area are applying some of our solution to AI use cases like a heavy user bandwidth fiber which is the.
Fiber over the F D D edge, which is.
Tony Piazza: <unk> recently announced.
Tony Piazza: So those are the trends, which are going to be but I think going after that below tier one or where we are not incumbent ice's hard because there are a lot of regional vendors and there is very big price competition.
Tony Piazza: Yeah.
Tony Piazza: Got it that's helpful. Thanks for taking my questions.
Tony Piazza: Sure.
This does conclude the question and answer questions on today's call. So I'd like to turn the call back over to Tony for any additional or closing remarks.
Tony Piazza: Thank you operator that concludes our call for today. Thank you all for joining us.
Tony Piazza: The rest of the day.
Tony Piazza: Thank you ladies and gentlemen, this does conclude today's program and we appreciate your participation.
Tony: You may disconnect.
Tony: Hi.
Tony: Hmm.
Tony: Okay.
Tony: Hum.
Tony: Okay.
Tony: Hum.
Tony: Hum.
Tony: [music].
Tony: Hum.
Hmm.
Tony:
Tony: [music].
Tony: Hum.
Tony: Yes.
Tony: Oh.
Tony: [music].
Tony: Okay.
Tony: [music].
Tony: Hum.
Tony: Hmm.
Tony: [music].
Tony:
Tony: Okay.
Tony: [music].
Tony: Uh huh.
Tony: Hum.
Tony: [music].
Tony: Hum.
Tony: Okay.
Tony: Mhm.
Tony: [music].
Hum.
Tony: Uh-huh.
[music].
Tony: Okay.
Tony: [music].
Tony: Mhm.
Tony: Hum.
Tony: Hum.
Tony: Oh.
Tony: [music].
Tony: Hum.