Q2 2025 NetScout Systems Inc Earnings Call

Operator: Please press star, Miro.

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Operator: Ladies and gentlemen, thank you for standing by and welcome to NetScout's second quarter fiscal year 2025 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.

Speaker Change: Ladies and gentlemen, thank you for standing by and welcome to not Scouts second quarter fiscal year 2025 financial results Conference call.

Speaker Change: 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 Tony Piazza not scalps Deputy CFO and his colleagues at not scout or 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 companies.

Operator: Tony Piazza, NetScout's deputy CFO, and his colleagues at NetScout are on the line with us today. If you require operator assistance at any time, please press star zero.

Tony Piazza: I would now like to turn the call over to Tony Piazza to begin the companies for paper marks. Thank you, operator, and good morning, everyone. Welcome to NetScout's second quarter fiscal year 2025 conference call for the period ended September 30, 2024. Joining me today are Anil Singhal, NetScout's president and chief executive officer, Michael Szabados, NetScout's chief operating officer, and Jean Bua, NetScout's executive vice president and chief financial officer. There's 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.netscout.com, including the IR landing page under financial results, the webcast itself, and under financial information on the quarterly results page.

Speaker Change: Prepared remarks.

Tony Piazza: Thank you operator, and good morning, everyone.

Tony Piazza: Welcome to <unk> second quarter fiscal year 2025 conference call for the period ended September 32020 for joining.

Tony Piazza: 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 facts. Actual results could differ materially from any forward-looking statements. These statements speak only as of today's date and involve risks and uncertainties, including but not limited to those described on this slide and in today's financial results press release, which are available on the investor relations section of our website, as well as in the company's most recent annual report on Form 10-K and subsequent SEC filings on file with this Curious and Exchange Commission.

Tony Piazza: 10-K, and subsequent SEC filings on file with the Securities and Exchange Commission.

Tony Piazza: NetScout assumes no obligation to update any forward-looking information, except as required by law.

Tony Piazza: <unk> assumes no obligation to update any forward looking information, except as required by law.

Tony Piazza: Now, let's turn to slide number four, which involves presentation includes both gap and non-gap results. Unless otherwise stated, financial information discussed on today's conference call will be based on a non-gap 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 form or as a substitute for financial information prepared in accordance with a GAAP. Reconciliation 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.

Tony Piazza: Now, let's move let's turn to slide number four which involves non-GAAP metrics.

Tony Piazza: While this slide presentation includes both GAAP and non-GAAP results unless otherwise stated financial information discussed on today's conference call will be based on non-GAAP based on a non-GAAP basis only the.

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. These.

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.

Anil Singhal: I will now turn the call over to Anil for his prepared remarks. Anil. Thank you, Tony, and good morning, everyone. Welcome and thank you all for joining us today. We delivered Q2 fiscal year 2025 revenue and earning results in line with our expectations as we continue to position NetScout to remain in the market. During the quarter, we really several products and product enhancement aligned with key technology trends that help address our customer cyber security and service insurance needs, including our AI ready smart data solutions. We also had a strong turnout and interest in our recent annual engaged technology and use the summit that we attribute to our customer answers for our current and upcoming portfolio of solutions.

Speaker Change: I'll now turn the call over to Neal for his prepared remarks Anil.

Neal: Thank you Tony and good morning, everyone welcome and thank you all for joining us for that.

Neal: We delivered Q2 fiscal year 2025 revenue, earning results in line with our expectations as we continue to position <unk> got to win in the market.

Neal: We remain confident that our differentiated solutions are well positioned to address our customers' cyber security and services ensure their needs well into the future during.

Neal: During the quarter, we released several products and product enhancements are aligned with key technology trends that help address our customers' cyber security and services for their needs, including over a a very smart data solutions.

We also had a strong turnout and interest in our recent annual engage technology and user summit that we are too attributor customer enthusiasm for whatever current and upcoming portfolio of solutions.

Anil Singhal: Looking ahead, we remain focused on executing against our full fiscal year 2025 non-GAAP expectations as we capitalize on the opportunity to navigate the challenges of the current market environment. Let's turn to slide number six for a brief recap of our non-GAAP financial results for the second quarter and first half of our fiscal year 2025. For the second quarter, revenue was approximately $191 million, down approximately 3% compared to the prior year period. The comparison was impacted by two items that benefited the prior year period. Approximately $11 million or backlog related revenue and approximately $3 million for now for the now devastated test optimization business.

Neal: Looking ahead, we remain focused on executing against our one fiscal year 'twenty 25, non-GAAP expectations as we capitalize on the opportunity and navigate the challenges of the current market environment.

Speaker Change: Let's turn to slide number six with a brief recap of our non-GAAP financial results for the second quarter and first half of our fiscal year 'twenty five.

Anil Singhal: Normalizing for those Q2 revenue would have grown at a mid-single digit percentage. The all day running for share was 47 for the second quarter, which will down approximately 23 cents or 14 cents from the prior year. As we previously noted, this includes an approximately 15 cents had been from the reversal of incentive rates related expenses that benefited last year's Q2. Normalizing for this Q2 earnings would have been slightly higher year over year, even after absorbing the two cents effect from an unbilized foreign investment loss. For the first half of the fiscal year or the six months period ended September 30, 2024, revenue was approximately $366 million, down approximately 10% year over year.

Anil Singhal: Primarily due to the unusually high levels of backlog-related revenue that benefited last year, as well as the aforementioned test optimization devastation. Normally, normalizing for this factor, our first half revenue would have grown low single digits year over year due to solid order for no growth. The corresponding diluted earnings per share for the first half of 75 cents was a decrease of approximately 18 cents year over year. Normally, normalizing for the previously mentioned incentive-related expense had been the loan. Our first half EPS would be relatively consistent year over year as cost management measures and againness on a foreign investment had to offset the revenue had been impact.

Speaker Change: What the previously mentioned incentive related expense headwind alone our first half EPS would be relatively consistent year over year as cost management measures and again on the foreign and the rest of it helped to offset the revenue headwind impacts.

Anil Singhal: Now, let's move to slide number seven for some further perspective on business and market insights. Starting with our service of assurance offerings, revenue for the first half of his career 2025 was down approximately 13% year over year. The decline was largely attributable to the backlog related revenue headwind and the constraint spending environment primarily from the service buy and the element of the market. Importantly, though, carriers continue to invest their 5G initiatives domestically and internationally at a measured pace as they manage investments against monetization opportunities. On the enterprise one, we also speed spending scrutiny but maintain traction and remain confident that as customers advance the digital transformation initiatives, NetScout is well positioned to be an additional business by leveraging our value proposition of extending visibility to the edges of the network.

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

Speaker Change: Starting with our service assurance offerings revenue for the first half of fiscal year 'twenty 'twenty fly was down approximately 13% year over year decline was largely attributed to the bulk backlog related revenue headwinds and the constrained spending in my mind, primarily from the service element of the market.

Speaker Change: Importantly, though Gary is continue to invest there five initiatives domestically and internationally at a measured pace as they manage investments against monetization opportunities.

Speaker Change: On the interim restaurant, we also to be spending scrutiny, but maintain traction and remain confident that that customer to advance their digital transformation initiatives that thought is well positioned to win additional business by leveraging our value proposition of extending visibility to the edges of the network.

Anil Singhal: Additionally, as customers advance their AI initiative, we believe our new AI, the high quality smart data, will be invaluable to ensure unique and deep insights critical for enabling organizations to improve decision making and optimize the user experience. Moving to our cyber security offering, revenue in the second quarter increased approximately 3% and was down approximately 4% for the first half, primarily due to the backlog-related headwind. Cyber security continued to present a strong growth opportunity for NetScout as customers prioritized spending to protect themselves from the expanding cyber threat landscape. This was validated by our recently its first half 2024 threat intelligence report where we highlighted that the surge in data attacks and active with activity continues to threaten critical global infrastructure including banking, financial services, government and utilities.

Speaker Change: Additionally, as customer that wanted the Ria initiative, we believe our new AI there the high quality smart beta will be invaluable to ensure an unique and deep insight because I think that's what.

Speaker Change: Enabling organizations to improve decision, making and optimize the use of user experience.

Speaker Change: Moving to our cyber security offering revenue in the second quarter increased approximately 3% and was down approximately 4% for the first half primarily due to the backlog related headwinds.

Cyber is going to continue to represent a strong growth opportunity for nexstar as customers prioritize spending to protect themselves from the expanding cyber threat landscape.

Michael Szabados: The report points to a dramatic 43% increase in the number of application layer attacks and a 30% increase in volume metric attacks. Michael will provide more insight regarding customer wins in the roughening areas during the remarks.

Anil Singhal: Now let's move to slide number 8 to review our outlook. Looking ahead, we are reaffirming our full year 2020-5 non-GAAP revenue and EPS outlook. Jane will provide a recap of the outlook in the remarks. As we navigate both the opportunities and challenges of the current market environment, we remain focused on executing against our full fiscal year 2025 expectations, and we advance our strategic practice. These include enhancing our cyber security offerings to meet growing customer needs, give us the expanding cyber threat landscape and continue to prudently manage first. During the first half of the fiscal year, we completed the majority of the previously announced voluntary separation program.

Anil Singhal: We expect this to have a benefit of approximately 25 million dollars of analyzed cost reduction, a portion of which will be recognized during fiscal year 2025. Long-term, we remain committed to leveraging our visibility without bought a platform to help customer address the performance, availability and security challenges of the complex digital world. We look forward to sharing our progress with everyone throughout the remainder of our fiscal year.

Michael Szabados: With that, I'll turn the call over to Michael. Thank you, only, and good morning, everyone. So I turn on five to eight years, I will be covering today. It's starting with YouTube customary in highlight. His quote that I will begin by focusing on a high single digit eight single combination of orders from a leading global financial institution, a spanned boat, or service assurance, and cybersecurity device. This has been a long-standing customer of ours. We use as our service assurance solutions to manage the performance of their networks, and customer-facing applications in order to ensure the quality of their customers' experience.

Speaker Change: And customer facing applications in order to ensure the quality of their customers' experience. They left unaddressed diagnostic solutions to product to protect the availability of their infrastructure against ddos attacks to prevent disruption to their digital services.

Michael Szabados: They leverage your cybersecurity to solutions, to brought up, to protect the availability of their infrastructure against dealers' attacks, to prevent destruction to their digital services. In both protocols, they upgraded and expanded our solutions to ensure they had the most current technological capabilities, such as adaptivity of the security, to ensure and secure their network. They were awarded this additional business due to our proven technology, outstanding customer support, and trusted long-standing relationship.

Speaker Change: In both product lines, they upgraded and expanded our solutions to ensure they have the most current technological capabilities such as adaptive Ddos is acuity to assure and secured that network.

Speaker Change: I wanted to show a business due to our proven technology.

Speaker Change: Sending customer support and trust that long standing relationship and a long standing relationship.

Michael Szabados: Turning to our group code to one activity is now. As all you see, the reason we release our first half, the 2020-40-dust threat intelligence report, the report provided a signal to get insight into the evolving cybersecurity landscape, averaging our visibility into nearly half of all internet traffic. Additionally, since our last release call, we have an out-several property address.

Speaker Change: Turning to our go to market activities not as all of you just need the recently released our first half 'twenty 'twenty four Ddos threat Intelligence report the report robot that seemed to get an insight into the evolving cyber security landscape leveraging on visibility into nearly half of all internet traffic.

Speaker Change: Additionally, since our last earnings call, we have announced several products that does.

Michael Szabados: This includes the release of our foundation. This is AI Insights' assumption to deliver high quality actionable AI that is streaming smart data, based on deep packet inspection technology, to feed our customers, AI initiatives, and enable critical insights and outcomes. We also announced an update of our advanced scalable deep packet inspection based on this cybersecurity experience. That's where the detection and is found for NDR.1, which now has additional behavioral analytics to enable early detection of advanced threats.

Speaker Change: This includes the release of our Omnis AI insights solution to deliver high quality extra novel AI that the streaming smart data based on deep inspection technology feed our customers.

Speaker Change: Our initiatives and enable critical insights and outcomes.

Speaker Change: We also announced an update an update of what advanced scalable deep packet inspection based on these sites, yes, natural gas detection and response for Andy our platform, which now has additional behavior analytics to enable early detection of advanced threats.

Speaker Change: Finally, we recently hosted our annual engage definitely its technology and user summit in.

Michael Szabados: Finally, we recently hosted our annual Engage Technology in using some in our internet access. It was another success in the event with strong attendance and interest in our new technology initiatives. At the show, we highlighted our upgraded legacy and new solutions. And showcase how our highly curated data circuits of security, observability, and service assurance problems faster, when integrated with AI of smartphones from our industry-related partner network, including Sponk and ServiceNow, who presented these results and engaged with our customer attendees.

Speaker Change: In Arlington, Texas.

It was another successful event with strong attendance and interest in our new technology initiatives.

Speaker Change: At the show, we highlighted our upgrade of legacy and new solutions.

Speaker Change: And showcased how our highly curated data sets get solved security all observe ability at service issues problems faster.

Michael Szabados: We also conducted our typical combination of presentations, panel discussions, so we'll show them observations and answer to any.

Michael Szabados: Thank you, everyone. That concludes my remarks, and I will now turn the call over to Dean. Thank you, Michael.

Jean Bua: I'm demoting everyone. I will review key metrics for our second quarter in the first half of fiscal year 2025, and provide some additional commentary and office clear 2025's outlook. As we remind, there was this review focuses on our non-GAAP results on less otherwise stated, and all of our considerations with our GAAP results appeared in the presentation appendix. Regardless, I will note the nature of any such comparisons. Additionally, all comparisons on a year-over-year basis for less otherwise. Slide number 12 details the results for the second quarter and first half of the fiscal year 2025, focusing on our quarterly performance. Total revenue for the second quarter of fiscal year 2025 was $191.1 million, down 0.9%. As Anil shared, Q2 fiscal year 2025 revenue would have grown at a mid-single-digit percentage when normalizing for the $11 million in backlog usage and $3 million from the disposition of our test optimization business that took place last year.

Jean Bua: Part of the revenue of $81 million was up 0.6% year over year. Service revenue was $110.1 million, a decrease of 5.3%, which rose primarily due to the timing of the renewal of a large customer's maintenance contract that is expected to close in Q3. Roseprofit margin was 79.7% in the second quarter, down 0.6% to points. Quarterly operating expenses increased by 0.2% in comparison to the prior fiscal year, which benefited from the reversal of incentive related expenses. Normalizing for this, operating expenses would have declined mid-single digits, primarily attributable to cost management initiatives, including the voluntary separation program.

Jean Bua: We reported an operating profit margin of 23.1% in Q2 fiscal year 2025 compared with 28% in the same quarter last year. I alluded earnings for share with 47 cents, which included an unrealized loss on a foreign investment of approximately 2 cents. This was down 23% from 61 cents in the same quarter last year due to the incentive-related expense reversals in the prior period, as well as the unrealized investment loss.

Speaker Change: In the same quarter last year.

Speaker Change: Diluted earnings per share was 47 cents, which included an unrealized loss on a foreign investment of approximately two cents. This was down 23% from 61 cents in the same quarter last year due to the incentive related expenses, Brussels and the prior period as well as the unrealized.

Speaker Change: Minimal loss.

Jean Bua: Turning to slide 13, I will review key revenue trends by product lines and customer referrals. Please note that all comparisons here are on a year or a year basis consistent with our other remarks. As a reminder, we entered the prior fiscal year with approximately 48 million dollars of backlog, which we did not get the benefit of this fiscal year. For the first half of fiscal year 2025, our service assurance revenue decreased by 13.5%, while our service security revenue decreased by 3.9%. During the same period, our service assurance product line accounted for approximately 65% of our total revenue, while our service security product line accounted for the remaining 35%.

Speaker Change: Turning to slide 13, I will review key revenue trends by product lines and customer verticals. Please note that all comparisons here on a year over year basis consistent without other small as a reminder, we entered the prior fiscal year with approximately $48 million of backlog, which we did not get the benefit of this fifth.

Speaker Change: School year for the first half of fiscal year 2025, our service assurance revenue decreased by 13, 5%, while our cyber security revenue decreased by three 9%. During the same period of service assurance product line accounted for approximately 65% of our total revenue while our.

Speaker Change: Cyber security product line accounted for the remaining 35%.

Jean Bua: Turning to our customer verticals for the first half of fiscal year 2025, our enterprise customer vertical revenue was consistent, while our service provider customer vertical revenue decreased 22.2%. During the same period, our enterprise customer vertical accounted for approximately 60% of our total revenue, while our service provider customer vertical accounted for the remaining 40%. Turning to slide 14, this shows our geographic revenue miss for the first half of fiscal year 2025. 58% of our revenue was derived from the United States, with the remaining 42% provided by international markets.

Speaker Change: Turning to our customer verticals for the first half of fiscal year, 'twenty 25 enterprise customer vertical revenue was consistent while our service provider customer vertical revenue decreased 22, 2% during the same period, our enterprise customer vertical accounted for approximately 60% of our total.

Speaker Change: Revenue, while our service provider customer vertical accounted for the remaining 40%.

Speaker Change: Turning to slide 14. This shows our geographic revenue mix for the first half of fiscal year 2025, 58% of our revenue was derived from the United States with the remaining 42% provided by international market.

Jean Bua: Also, no customer represented 10% or more of our total revenue in the second quarter or the first half of fiscal year 2025.

Speaker Change: So no customer represented 10% or more about total revenue in the second quarter for the first half of fiscal year 2025.

Speaker Change: So year to date unrealized gain will be evaluated at the fiscal year progresses as its value and therefore impact to our envelope fluctuate.

Speaker Change: Our fiscal year 2025, non-GAAP guidance also reflects the anticipated benefits associated with the previously mentioned voluntary separation program restructuring actions and ongoing cost management initiatives in conjunction with these actions we recorded a GAAP restructuring charge for the <unk>.

Speaker Change: First half of fiscal year 2025 attributable to one time separation payments of $19 million $2 4 million of which was in the second quarter, we expect to record an additional restructuring charge of approximately $6 $6 million in the third quarter of fiscal year 'twenty to 'twenty five.

Speaker Change: Maryland for severance costs associated with the remaining implementation of the current B S. P.

Speaker Change: We expect that these actions will generate annual run rate savings of approximately $25 million of which approximately $19 million will be realized in fiscal year 2025 due to the timing of these actions.

Speaker Change: Finally, I would like to provide some color for the second half of fiscal year 2025, consistent with the expectations that we shared on our last earnings call. We anticipated a revenue skew up approximately 45% in the first half of fiscal year and 55% in second half of the fiscal year, we expect to remain.

Speaker Change: <unk> 55 per cent of the full fiscal year's revenue to be essentially split evenly between the third and fourth quarters. We also expect the corresponding non-GAAP earnings per share to be split evenly between the third and fourth quarters.

Speaker Change: That concludes my formal review of our financial results before we transition to Q&A I'd like to quickly note that our upcoming IR conference participation is listed on slide seven.

Speaker Change: Thank you and I'll now turn the call over to the operator for questions.

Speaker Change: Okay.

Speaker Change: Thank you.

Speaker Change: As a graphic.

Speaker Change: And also the odd boost for those at much better than a mobility. So because of that I think there'll be potential investment on Mexico.

Unnamed Speaker: And if I could just ask one last one, you know, any update on your AI ops strategy as it relates to how much contribution you expect from, you know, some of the leading partners that you talked about versus what you might be focused on directly. Yeah, this is very early. We have seen a lot of interest, a lot of discussions are going on with the customer and partners, but we don't expect much impact from that disease.

Speaker Change: Okay, and if I could just ask one last one.

Speaker Change: Any update on your AI ops strategy as it relates to how much contribution you expect from some of the leading partners.

Speaker Change: You talked about versus what you guys might be focused on directly.

Yeah. This is this is very early yet, but you have seen a lot of interest a lot of discussions that are going on with that customer and partner, but we don't expect much impact from that disease.

Unnamed Speaker: This is Scalia for me, I ops. Thanks for taking the question. Yes. Thank you.

Speaker Change: Fiscal year, but EMEA ops.

Speaker Change: Got it thanks for taking the questions.

Speaker Change: Yeah.

Speaker Change: Yeah.

Speaker Change: Thank you ended.

Operator: And it appears that there are no further questions at this time.

Speaker Change: And it appears there are no further questions at this time I will now turn the program back to Tony Piazza.

Tony Piazza: I will now turn the program back to Tony Piazza. Thank you, operator.

Tony Piazza: Thank you operator that concludes our financial results call for today. Thank you for joining us and enjoy the rest of the day.

Operator: That concludes our findings and results. Call for today. Thank you for joining us, and enjoy the rest of the day. Thank you.

Speaker Change: Thank you. This does concludes today's presentation. Thank you for your participation you may disconnect at any time.

Operator: This does conclude today's presentation. Thank you for your participation. You may disconnect at any time.

Speaker Change: Yeah.

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