Q3 2025 NetScout Systems Inc Earnings Call
Speaker Change: Ladies and gentlemen, thank you for standing by and welcome to NETSCOUT's third 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.
Speaker Change: As a reminder, this call is being recorded. Tony Piazza, NETSCOUT's WDCFO, and his colleagues at NETSCOUT are on the call 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.
Tony Piazza: Thank you, operator, and good morning, everyone. Welcome to NETSCOUT's third quarter fiscal year 2025 conference call for the period ended December 31st, 2024.
Speaker Change: 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.
Speaker Change: Anil Singhal, Michael Szabados, Anil Singhal, Michael Szabados, Anil Singhal, Michael Szabados,
There is a slide presentation that accompanies our prepared remarks.
Speaker Change: 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
Speaker Change: 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.
Speaker Change: 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.
Speaker Change: 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 the Securities and Exchange Commission.
Speaker Change: NETSCOUT assumes no obligation to update any forward-looking information except as required by law. Let's now turn to slide number four, which involves non-GAP metrics.
Speaker Change: While this slide presentation includes both GAP and non-GAP results, unless otherwise stated,
Speaker Change: Financial information discussed on today's conference call will be on a non-GAAP basis only. The rationale for providing non-GAAP measures along with the limitations of relying solely on those measures is detailed on this slide and in today's press release.
Speaker Change: These measures should not be considered in isolation from or as a substitute for financial information prepared in accordance with the GAP.
Speaker Change: Reconciliations of all non-GAAP metrics will be 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?
Anil Singhal: Thank you, Tony, and good morning everyone. Welcome and thank you all for joining us today.
Anil Singhal: We delivered Q3 fiscal year 2025 revenue and earnings results that exceeded our expectations with strong performance across both our cybersecurity and service assurance product lines.
Anil Singhal: These results reflect solid execution and the strength of our differentiated solution in addressing the evolving needs of our customers.
Anil Singhal: It's important to note that certain customer orders initially anticipated in the fourth quarter were instead received in the third quarter as customers leveraged a calendar year end budget.
Anil Singhal: While the timing accelerated certain revenues into Q3, the contribution of these early orders has reinforced our confidence in achieving our full fiscal year 2025 goals and expectations.
Anil Singhal: As we capitalize on the opportunity to address the complexity of today's market, we remain confident in our ability to deliver value and meet our customers' cybersecurity and service assurance needs now and into the future.
Anil Singhal: Let's turn to slide number 6 for a brief recap of our non-GAAP financial results for the third quarter and first nine months of FY 2025.
Anil Singhal: For the third quarter, revenue was approximately $252 million, up approximately 16% compared to the prior year period. This performance was driven by strong results in both our cybersecurity and service assurance product lines.
Anil Singhal: Diluted earnings per share was 94 cents for the third quarter which was up approximately 29% from previous year.
Anil Singhal: For the first nine months of the fiscal year 2025, or the period ended December 31, 2024, revenue was approximately $618 million, down approximately 1% year-over-year, reflecting the impact of previously disclosed headwinds.
Anil Singhal: This included unusually high levels of backlog-related revenue and the test optimization business diversions that both benefited the prior year's results and affected the comparison.
Anil Singhal: The corresponding diluted earnings per share for the first 9 months of FY2025 was $1.70, an increase of approximately 3% year over year.
Anil Singhal: Now let's move to slide number 7 for some further perspective on business and market insights.
Anil Singhal: Starting with our Service Assurance offering, revenue in the third quarter increased approximately nine percent, driven by the acceleration of a large service provider order previously expected in our fourth quarter.
Anil Singhal: For the first nine months of the fiscal year 2025, service assurance revenue was down approximately 5 percent, primarily due to the previously discussed backlog and temperature-related headwinds.
Anil Singhal: In the service provider customer vertical of a service assurance business, carriers continue to invest in 5G initiatives at a measured pace as they manage investments against monetization opportunities.
Anil Singhal: On the enterprise front, customers are seeking solutions capable of better advancing their digital transformations and extending visibility to the edges of their network. Our new edge solutions are gaining attraction in this area.
Anil Singhal: Moving to our cybersecurity offering, revenue in the third quarter increased approximately 29% and increased approximately 7% for the first nine months for the fiscal year 2025.
Anil Singhal: Cybersecurity continues to represent a solid growth opportunity for NetScout, as customers prioritize spending to protect themselves from the expanding cyber-threat landscape.
Anil Singhal: Accordingly, we continue to enhance our cybersecurity offering with solutions like Adaptive DDoS.
Anil Singhal: For example, we recently announced that our Arbor ITFense and Arbor Enterprise Manager products are now updated with artificial intelligence and machine learning technology as part of our adaptive DDoS protection solution to combat AI-enabled DDoS threats.
Michael Szabados: Michael will provide more insight regarding customers in our operating areas during remarks.
Speaker Change: Now let's move to slide number eight to review your outline.
Speaker Change: Given our strong performance in the third quarter, along with the acceleration of certain orders, we now have increased visibility and confidence in achieving our full fiscal year 2025 financial objectives.
Speaker Change: As such, with one quarter remaining in the fiscal year, we are updating our FY 2025 outlook, narrowing the ranges while maintaining the midpoint from the previous guidance for revenue and non-GAAP net income per share.
Speaker Change: Jean will provide additional color in our outlook in her remarks.
Jean Bua: Looking ahead, we remain focused on executing effectively as we position the company for the fiscal year 2026 and beyond.
Jean Bua: At the same time, we continue to leverage the strength of our Visibility Without Borders platform to enable customers to address the performance, availability and security challenges inherent into this complex digital landscape.
Jean Bua: We look forward to sharing our progress with everyone at the conclusion of our fiscal year. With that, I'll turn the call over to Michael. Thank you, Anil, and good morning, everyone. Slide 10 outlines the area I will be covering today, starting with Q3 customer win highlights.
Jean Bua: Starting with our service assurance offerings, one notable in this quarter
Jean Bua: in the Service Providers customer segment was a high-teen, 8-figure order from a long-standing Tier 1 North American carrier customer for 5G-related solutions as they further expand their network capacity.
Jean Bua: In the enterprise customer vertical of our services transferring, we are seeing a growing need for network visibility at the edges of our customers' networks.
Jean Bua: One notable deal was a multi-year Enterprise License Agreement order, ELA it's called,
Jean Bua: with an aggregate value in the mid-teen 8-figure range with additional amounts in the low 7-figure range. This win was from a leading domestic healthcare provider customer who had grown through acquisition and attempted with limited success.
Jean Bua: to address user experience challenges at its remote clinics and physician offices using competitor and homegrown solutions.
Jean Bua: The customer applies to roll out our visibility solutions to thousands of locations over multiple years and phases during the ELA period.
Jean Bua: Shifting to our cybersecurity offering, we won a mid-7-figure order from a long-standing North American cable operator.
Jean Bua: This customer purchased our new Arbor Distributed Threat Mitigation System, or DTMS, solution that allows them to dynamically allocate their DDoS mitigation capacity to protect the emerging new edges of the network.
Jean Bua: In terms of go-to-market activities, we continue to actively promote our offerings to both existing and prospective customers at key industry events.
Jean Bua: In early December, we participated in the AWS re-invent conference in Las Vegas, where we demonstrated how NETSCOUT's visibility, resiliency, and security solutions
Jean Bua: combined with the value of our smart data unlock the power of our exceptional user experience in the AWS cloud ecosystem.
Jean Bua: We partnered with Palo Alto Networks to demonstrate the power of NASCARD's smart data to take threat detection and response to the next level to protect and secure multi-cloud and high-risk cloud environments.
Jean Bua: We plan to be an active participant in the Mobile World Congress in Barcelona.
Jean Bua: in early March, where we will present our latest innovations for enhancing our smart data to accelerate service provider efforts in the 5G, NetOps, AIOps, and mobile network security.
Jean Bua: At the same time, we will have a NETSCOUT team at the 2025 IMSS-HIMSS Global Conference in Las Vegas.
Jean Bua: where we will demonstrate Onetcast's visibility and security solutions are protecting the performance and availability of essential healthcare networks, applications, and services for some of the world's leading healthcare organizations.
Jean Bua: And finally, in late April, we will be attending the RSA Conference 2025 in San Francisco, where we will showcase how NETSCOUT's visibility with our borders platform
Jean Bua: combines our ingenious performance management, Arbor DDoS protection, and Omnis network security solutions to provide end-to-end security, performance, and availability for the world's most powerful digital ecosystem.
Jean Bua: That concludes my remarks. Thank you everyone. I will now turn the call over to Jean.
Jean Bua: Thank you, Michael, and good morning, everyone. I will review key metrics for our third quarter and first nine months of fiscal year 2025.
Jean Bua: and provide some additional commentary on our fiscal year 2025 outlook.
Jean Bua: 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 comparisons. Additionally, all comparisons are on a year-over-year basis unless otherwise noted.
Jean Bua: Slide number 12 details the results for the third quarter and first nine months of fiscal year 2025.
Jean Bua: Focusing on our quarterly performance, total revenue for the third quarter of fiscal year 2025 was $252 million, up 15.6%.
Jean Bua: Product revenue was $128.2 million, an increase of 33.8%, while service revenue was $123.8 million, an increase of 1.3%.
Jean Bua: Gross profit margin was 82.8% in the third quarter, up one percentage point. Quarterly operating expenses increased 3.2%.
Jean Bua: Accordingly, we reported an operating profit margin of 35.6% compared with 29% in the same quarter last year.
Jean Bua: Diluted earnings per share was $0.94, which included an unrealized loss on a foreign investment of approximately $0.07. This was up 28.8% from $0.73 in the same quarter last year.
Jean Bua: Turning to slide 13, I will review key revenue trends by product lines and customer verticals. Please note that all comparisons here are on a year-over-year basis consistent with our other remarks.
and Anil Singhal.
Jean Bua: For the first nine months of fiscal year 2025, our service assurance revenue decreased by 5.5 percent.
Jean Bua: while our cyber security revenues grew by 7.4%. As a reminder, we entered the prior fiscal year with approximately $50 million of backlog, which we did not get the benefit of this fiscal year. During the same period,
Jean Bua: Our service assurance product line accounted for approximately 65% of our total revenue while our cyber security and product lines accounted for the remaining 35%.
and Anil Singhal.
turning to our customer verticals.
Jean Bua: For the first nine months of fiscal year 2025, our enterprise customer vertical revenue grew 3.7%, while our service provider customer vertical revenue decreased 7.2%.
Jean Bua: During the same period, our enterprise customer vertical accounted for approximately 57% of our total revenue, while our service provider customer vertical accounted for the remaining 43%.
Turning to slide 14, this shows our geographic revenue mix.
for the first nine months of fiscal year 2025.
Jean Bua: 59% of our revenue was derived from the United States, with the remaining 41% provided by international markets.
Jean Bua: Also, one customer represented 10% or more of our total revenue in the 3rd quarter, as well as for the first 9 months of FY 2025.
Slide 15 details certain balance sheet and pre-cash flow items.
Jean Bua: We ended the third quarter with $427.9 million in cash, cash equivalents, short- and long-term marketable securities and investments.
Jean Bua: representing an increase of $3.8 million since the end of fiscal year 2024.
Jean Bua: Free cash flow for the quarter was $39.6 million. We currently have capacity in our share repurchase authorization and, subject to market conditions, intend to be active in the market during fiscal year 2025.
Jean Bua: From a debt perspective, we entered the third quarter of fiscal year 2025 with $75 million outstanding on our $600 million revolving credit facility, which expires in October 2029.
Jean Bua: In the fourth quarter of fiscal year 2025, we intend to fully repay the outstanding $75 million of debt.
Jean Bua: Briefly recap other balance sheet items. Accounts receivable net was $214.6 million, representing an increase of $22.5 million since March 31st, 2024. The DSO metric at the end of the third quarter of fiscal year 2025 was 75 days versus 90 days for the same period in the prior year, and 81 days at the end of fiscal year 2024.
Jean Bua: The lower DSO metric in the third quarter of this fiscal year was due to the timing and composition of bookings.
and Anil Singhal.
Speaker Change: Let's move to slide 16 for commentary on our outlook. I will focus my review on our non-GAAP targets for fiscal year 2025.
Speaker Change: As Anil noted earlier, with one quarter remaining in the fiscal year, we are narrowing our FY2025 outlook ranges while maintaining the revenue and non-GAAP diluted earnings per share midpoints that were presented in October 2024 during our second quarter earnings call for FY2025.
Speaker Change: For fiscal year 2025, we now anticipate revenue in the range of $810 million to $820 million. Additionally, we now anticipate non-GAAP diluted earnings per share within the range of $2.15.
to $2.25.
Speaker Change: The full-year effective tax rate is expected to be approximately 20%.
Speaker Change: Our weighted average diluted shares outstanding is assumed to be approximately 73 million shares, which incorporates our year-to-date share repurchase activity, but does not assume any further repurchase activity.
Speaker Change: That concludes my formal review of our financial results. Thank you, and I'll now turn the call over to the operator for questions.
Speaker Change: At this time, if you would like to ask a question, please press star 1 on your telephone keypad. If you wish to remove yourself from the queue, press star 2. We do ask, in the interest of time, that you limit yourself to one question and one follow-up.
Speaker Change: And we will take our first question from Matthew Hedberg with RBC Capital Markets. Please go ahead.
Speaker Change: Hey, good morning guys. This is Mike Richards on for Matt. Thanks for taking the questions.
Speaker Change: It was great. It was great to see the strength in the quarter. I think coming into the quarter, we kind of expected a muted...
Anil Singhal, Jean Bua, Anil Singhal, Michael Szabados
Speaker Change: and, you know, what service providers are looking to spend on, and then just like a broader update on your views in the IT spending environment.
Speaker Change: Yeah, I think the overall business has stabilized, but I think that on the service provider side, it was many of the service provider customers, their fiscal year starts.
Speaker Change: in January and so we always have this battle sometime, sometime we get our Q4 business in Q3 so that big order we're talking about was basically think of it instead of getting X plus Y in two quarter we got both X plus Y
and so that's basically no big...
Speaker Change: strategic reason is just that they had more confidence and they had more budget available this year and that was mainly the reason but there is a lot of activity in the
Speaker Change: Spend is not it's not backed by spend right now, but there's a lot of activity in the 5g cloud area and Slicing at other things which Netscout has invested a lot
Speaker Change: but has not hit the revenue stream right now, so we expect that will be the reason for spend in the next fiscal year.
Speaker Change: Great. And then you guys seemed excited about an emerging opportunity in fixed wireless. So I was just wondering if you could provide an update there and maybe where we are in that journey.
Speaker Change: I think it's still early. We have evaluation going on with three or four customers right now and our solution is ready but the amount of money spent on this
Speaker Change: It could be huge because of the amount of traffic, so we are looking at some other creative way of looking at VIP traffic.
Speaker Change: as a way to to manage the situation and so at this point we don't have any success to report in that area but they continue to be interest in the all top three or four customers of NETSCOUT.
and Anil Singhal. Thank you.
Awesome, thanks guys and congrats again. Thank you.
Speaker Change: Thank you and we will take our next question from Kevin Liu with K Liu and Company. Please go ahead.
and Anil Singhal.
Speaker Change: Hey, good morning guys and congrats as well on the strong performance here in the third quarter
Speaker Change: Maybe just to go back to the service provider side of things, you know, it certainly sounds like, you know, budgets have stabilized and we might be at the start of kind of a new upswing in spending there. As you look out for the rest of this calendar year, is that something that you guys are seeing and hearing from your customers?
Speaker Change: as well, and then maybe just touch on, you know, some of these newer areas we're spending on. In particular, this large order, is that more tied to some of the legacy projects they've had going on, or are you actually seeing them invest in kind of new areas of monetization?
Speaker Change: Yeah, so I look at Gavin is that I think business has sort of stabilized and you will see some swings because a large order from quarter to quarter.
Speaker Change: But next year, I mean we are counting on our existing customer, but not necessarily growing in the traditional mobile service assurance area, but there are opportunities in cyber security We have a product in the AI area, which we have talked about in the previous Previous calls
Speaker Change: and, as the earlier question indicated, there could be a span in the fixed wireless area and slicing and other areas of 5G.
Speaker Change: There is some interest in utilities on the private 5G area, so we look at our investment in the service provider area in 4G and 5G, not necessarily delivering in the growth in the traditional area, but in other areas as I just talked about.
Speaker Change: Got it. And maybe just on your cybersecurity products, you know, very strong growth here in the third quarter. How did that split out between kind of enterprise versus service provider for Q3 specifically? And then as you look at your pipelines moving forward, do you think you can continue to accelerate, you know, your overall growth rate relative to what you've shown over the past nine months?
Jean Bua: Yeah, so Tony is checking us. I don't have the breakdown right now on this, but overall... Go ahead, Jean.
Jean Bua: So, Kevin, your question is, in security, service provider and enterprise for the quarter, how do they grow?
Jean Bua: On a quarter-over-quarter basis, service providers grew in close to the mid-twenties, and enterprise grew close to the mid-thirties percentage-wise.
So, again,
Yeah, go ahead, go ahead.
Jean Bua: Sorry, I was going to just have you elaborate on that and kind of, you know, the future outlook there, whether you can sustain, you know, growth rates anywhere near these levels or how you're thinking about that.
Jean Bua: Well, that was the quarterly one. As you know, the year-to-date is in the 7% or so range, overall aggregate.
Jean Bua: But we hope that we can do much better in this area. A lot of the growth...
Jean Bua: is in the DDoS area. As you know, we announced a new product in this area, Omni Cyber Security.
Jean Bua: And there is a lot of interest, we have a lot of evaluation going on, but that is not a big contributor to this year's growth. So next year, we expect growth from that area and as we share our guidance in the next quarter, for the next fiscal year, we'll highlight that.
All right, sounds great. Really appreciate you taking the questions.
Thank you. Thank you.
Tony Piazza: Thank you and it appears that we have no further questions at this time. I will now turn the program back to Tony for any additional or closing remarks.
Tony Piazza: Excellent, thank you operator. This will conclude our call for today. Thank you for joining us and enjoy the rest of the day.
Speaker Change: Thank you. This does conclude today's presentation. Thank you for your participation. You may disconnect at any time.
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