NetScout Systems Q2 2025 Earnings Call Transcript

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Provided by Quartr
October 24, 2024

Key Takeaways

  • Negative Sentiment: NetScout reported Q2 revenue of $191.1 million, down 2.9% year-over-year, and non-GAAP EPS of $0.47, a 23% decline due to prior-year incentive reversals and an unrealized foreign investment loss.
  • Positive Sentiment: The company reaffirmed its full-year non-GAAP guidance of $800 million–$830 million in revenue and $2.10–$2.30 in EPS, reflecting confidence in hitting its targets.
  • Positive Sentiment: NETSCOUT introduced several product enhancements, including AI-ready smart data solutions like Omnice AI Insights and advanced DPI upgrades for its NDR platform.
  • Positive Sentiment: Cost-management actions, including a voluntary separation program, are expected to generate approximately $25 million of annualized savings, with $19 million recognized in FY 2025.
  • Positive Sentiment: Cybersecurity revenue grew about 3% in Q2, driven by strong demand for DDoS protection amid a reported 43% surge in application-layer attacks and expanding cyber threat concerns.
AI Generated. May Contain Errors.
Earnings Conference Call
NetScout Systems Q2 2025
00:00 / 00:00

There are 7 speakers on the call.

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. Tony Piazza, NETSCOUT's Deputy CFO and his colleagues at NETSCOUT are on the line with us today.

Operator

I would now like to turn the call over to Tony Piazza to begin the company's prepared remarks.

Speaker 1

Thank you, operator, and good morning, everyone. Welcome to NETSCOUT's Q2 fiscal year 2025 conference call for the period ended September 30, 2024. Joining me today are Anil Sankal, NETSCOUT's President and Chief Executive Officer Michael Szabados, NETSCOUT's Chief Operating Officer and Gene Bua, NETSCOUT's Executive Vice President and Chief Financial Officer. There is a slide presentation that accompanies our prepared remarks. You can advance the slides in the webcast viewer to follow our commentary.

Speaker 1

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. Moving on to Slide number 3. 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 fact. Actual results could differ materially from any forward looking statements.

Speaker 1

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 ks and subsequent SEC filings on file with the Securities and Exchange Commission. NETSCOUT assumes no obligation to update any forward looking information except as required by law. Now, let's move let's turn to Slide number 4, which involves non GAAP metrics. While this slide presentation includes both GAAP and non GAAP results, unless otherwise stated, financial information discussed on today's conference call will be based 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 1

These measures should not be considered in isolation from or as a substitute for financial information prepared in accordance with GAAP. 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?

Speaker 2

Thank you, Tony, and good morning, everyone. Welcome and thank you all for joining us today. We delivered Q2 fiscal year 2025 revenue and earnings results in line with our expectations as we continue to position NetScout to win in the market. We remain confident that our differentiated solutions are well positioned to address our customers' cybersecurity and service assurance needs well into the future. During the quarter, we released several product enhancement aligned with key technology trends that help address our customers' cybersecurity and service assurance needs, including our AI ready smart data solutions.

Speaker 2

We also had a strong turnout and interest in our recent annual Engage Technology and User Summit that we attribute to our customer enthusiasm for our current and upcoming portfolio of solutions. Looking ahead, we remain focused on executing against our full fiscal year 2025 non GAAP expectations as we capitalize on the opportunity and navigate the challenges of the current market environment. Let's turn to Slide number 6 for a brief recap of our non GAAP financial results for the Q2 and first half of our fiscal year twenty twenty five. For the Q2, revenue was approximately $191,000,000 down approximately 3% compared to the prior year period. The comparison was impacted by 2 items that benefited the prior year period.

Speaker 2

Approximately $11,000,000 of backlog related revenue and approximately $3,000,000 for the now devastated test optimization business. Normalizing for those, Q2 revenue would have grown at a mid single digit percentage. Diluted earnings per share was $0.47 for the 2nd quarter, which was down approximately $0.23 or $0.14 from the prior year. As we previously noted, this includes an approximately $0.15 headwind from the reversal of incentive based 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 $0.02 effect from an unrealized foreign investment loss.

Speaker 2

For the first half of the fiscal year or the 6 months period ended September 30, 2024, revenue was approximately $366,000,000 down approximately 10% year over year, primarily due to the unusually high levels of backlog related revenue that benefited last year as well as the aforementioned test optimization divestiture. Normalizing for these factors, our first half revenue would have grown low single digits year over year due to solid order flow growth. The corresponding diluted earnings per share for the first half of $0.75 was a decrease of approximately $0.18 year over year. Normalizing for the previously mentioned incentive related expense headwind alone, our first half EPS would be relatively consistent year over year as cost management measures and a gain on a foreign investment had to offset the revenue headwind impact. Now let's move to Slide number 7 for some further perspective on business and market insights.

Speaker 2

Starting with our service assurance offerings, revenue for the first half of fiscal year twenty twenty five was down approximately 13% year over year. The decline was largely attributable to the backlog related revenue headwind and the constrained spending environment primarily from the service provider element of the market. Importantly though, carriers continue to invest their 5 gs initiatives domestically and internationally at a measured pace as they manage investments against monetization opportunities. On the enterprise front, we also see spending scrutiny, but maintain traction and remain confident that as customers advance their digital transformation initiatives, Netskot is well positioned to win additional business by leveraging our value proposition of extending visibility to the edges of the network. Additionally, as customers advance their AI initiative, we believe our new AI ready, 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.

Speaker 2

Moving to our cybersecurity offering, revenue in the Q2 increased approximately 3% and was down approximately $0.04 for the first half, primarily due to the backlog related headwind. Cybersecurity continued to present a strong growth opportunity for NetScout as customers prioritize spending to protect themselves from the expanding cyber threat landscape. This was validated by our recently released first half twenty twenty four Threat Intelligence report, where we highlighted that the surge in DDoS attacks and activist activity continues to threaten critical global infrastructure, including banking, financial services, government and utilities. The report points to a dramatic 43% increase in the number of application layer attacks and 30% increase in volumetric attacks. Michael will provide more insight regarding customer wins in our operating areas during his remarks.

Speaker 2

Now let's move to Slide number 8 to review our outlook. Looking ahead, we are reaffirming our full year 2025 non GAAP revenue and EPS outlooks. Jain will provide a recap of the outlook in her 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 as we advance our strategic priorities. These include enhancing our cybersecurity offerings to meet growing customer needs, given the expanding cyber threat landscape and continue to prudently manage cost.

Speaker 2

During the first half of the fiscal year, we completed the majority of the previously announced voluntary separation program. We expect this to have a benefit of approximately $25,000,000 of annualized cost reduction, a portion of which will be recognized during fiscal year 2025. Long term, we remain committed to leveraging our Visibility Without Borders 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. With that, I'll turn the call over to Michael.

Speaker 3

Thank you, Anil, and good morning, everyone. Slide 10 outlines the areas I will be covering today, starting with Q2 customer win highlights. This quarter, I will begin by focusing on a high single digit, 8 figure combination of orders from a leading global financial institution that spans both our service assurance and cybersecurity product lines. This has been a long standing customer of ours who uses 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. They leverage our cybersecurity solutions to protect the availability of their infrastructure against TDoS attacks to prevent disruption to their digital services.

Speaker 3

In both product lines, they upgraded and expanded our solutions to ensure they have the most current technological capabilities such as adaptive DDoS and security to assure and secure their network. We were awarded this additional business due to our proven technology, outstanding customer support and trusted long standing relationship. Turning to our growth go to market activities now. As Arvind stated recently released our first half 2020 for TDUS Threat Intelligence report. The report provides us significant insight into the evolving cybersecurity landscape, leveraging our visibility into nearly half of all Internet traffic.

Speaker 3

Additionally, since our last earnings call, we have announced several product advancements. This includes the release of our Omnice AI Insights solution to deliver high quality actionable AI ready 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 cyber intelligence, network detection and response for NDR platform, which now has additional behavior analytics to enable early detection of advanced threats. Finally, we recently hosted our annual engage technology and use some in Arlington, Texas. It was another successful event with strong attendance and interest in our new technology initiatives.

Speaker 3

At the show, we highlighted our upgraded legacy and new solutions and showcased how our highly curated data set can solve security, observability and services as well as faster when integrated with AI ops platforms from our industry leading partner network, including Splunk and ServiceNow, who co presented this with us and engaged with our customer attendees. We also conducted a typical combination of presentations, panel discussions, social demonstrations and hands on training. Thank you, everyone. That concludes my remarks and I will now turn the call over to Dean.

Speaker 4

Thank you, Michael, and good morning, everyone. I will review key metrics for our second quarter and first half of fiscal year twenty twenty five and provide some additional commentary on our fiscal year 2025 outlook. As a reminder, this review focuses on our non GAAP results unless otherwise stated, and all reconciliations with our GAAP results appear in the presentation appendix. Regardless, I will note the nature of any such comparisons. Additionally, all comparisons are on a year over year basis unless otherwise noted.

Speaker 4

Slide number 12 details the results for the Q2 to first half of fiscal year twenty twenty five. Focusing on our quarterly performance, total revenue for the Q2 of fiscal year 2025 was $191,100,000 down 2.9%. As Anil shared, our Q2 fiscal year 2025 revenue would have grown at a mid single digit percentage when normalizing for the $11,000,000 in backlog usage and $3,000,000 from the disposition of our test optimization business that took place last year. Product revenue of $81,000,000 was up 0.6% year over year. Service revenue was 110,100,000 dollars a decrease of 5.3 percent, which was primarily due to the timing of the renewal of a large customer's maintenance contract that is expected to close in Q3.

Speaker 4

Gross profit margin was 79.7 percent in the 2nd quarter, down 0.6 percentage points. Quarterly operating expenses increased 5.2% 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. We reported an operating profit margin of 23.1 percent in Q2 fiscal year 2025 compared with 28% in the same quarter last year. Diluted earnings per share was $0.47 which included an unrealized loss on a foreign investment of approximately $0.02 This was down 23% from $0.61 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 4

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. As a reminder, we entered the prior fiscal year with approximately $48,000,000 of backlog, which we did not get the benefit of this fiscal year. For the first half of fiscal year twenty twenty five, our service assurance revenue decreased by 13.5%, while our cybersecurity revenue decreased by 3.9%. During the same period, our service assurance product line accounted for approximately 65% of our total revenue, while our cybersecurity product line accounted for the remaining 35%.

Speaker 4

Turning to our customer verticals. For the first half of fiscal year twenty twenty five, our enterprise customer

Speaker 1

vertical revenue was consistent, while

Speaker 4

our service 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 mix. For the first half of fiscal year twenty twenty five, 58% of our revenue was derived from the United States with the remaining 42% provided by international markets. Also, no customer represented 10% or more of our total revenue in quarter or the first half of fiscal year twenty twenty five.

Speaker 4

Slide 15 details certain balance sheet and free cash flow items. We ended the 2nd quarter with $401,900,000 in cash, cash equivalents, short and long term marketable securities and investments, representing a decrease of $22,300,000 since the end of fiscal year 2024. Free cash flow for the quarter was a use of $5,800,000 During the Q2 of fiscal year 2025, we repurchased approximately 14,000 shares of our common stock for approximately $257,000 or an average price of $18 per share. We currently have capacity in our share repurchase authorization and subject to market conditions intend to be active in the market during the balance of the fiscal year. From a debt perspective, we ended the Q2 of fiscal year 2025 with $75,000,000 outstanding on our revolving credit facility.

Speaker 4

In October, we leveraged the favorable financing market environment to amend and extend our credit facility. The amended revolving credit facility reduces the facility size from $800,000,000 to $600,000,000 and extends the maturity from July 2026 to October 2029, while maintaining financial flexibility and lowering financing costs. To briefly recap other balance sheet items, accounts receivables net was $118,600,000 representing a decrease of $73,500,000 since March 31, 2024. The DSO metric at the end of the Q2 of fiscal year 2025 was 53 days versus 69 days for the same period in the prior year and 81 days at the end of fiscal year 2024. The lower DSO metric in the Q2 of this fiscal year was due to the timing and composition of bookings.

Speaker 4

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. As Anil noted earlier, we are reaffirming our non GAAP outlook for fiscal year 20 25 that was presented during our July 25, 2024 Q1 earnings call. As a reminder, for fiscal year 2025, we anticipate revenues in the range of $800,000,000 to $830,000,000 Additionally, we continue to anticipate non GAAP diluted earnings per share within the range of $2.10 to $2.30 with the midpoint consistent year over year. The full year effective tax rate is expected to be approximately 20%.

Speaker 4

Our weighted average diluted shares outstanding is assumed to be approximately 73,000,000 shares, which incorporates our recent share repurchase activity, but does not assume any further repurchase activity. Finally, given that we are only halfway through the fiscal year, any further impact associated with the previously mentioned foreign investment, which currently reflects a year to date unrealized gain will be evaluated as the fiscal year progresses as its value and therefore impact to our outlook fluctuates. 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 in the first half of fiscal year twenty twenty five attributable to one time separation payments of $19,000,000 $2,400,000 of which was in the 2nd quarter. We expect to record an additional restructuring charge of approximately $600,000 in the Q3 of fiscal year 2025, primarily for severance costs associated with the remaining implementation of the current BSP.

Speaker 4

We expect that these actions will generate annual run rate savings of approximately $25,000,000 of which approximately $19,000,000 will be realized in fiscal year 2025 due to the timing of these actions. Finally, I would like to provide some color for the second half of fiscal year twenty twenty five. Consistent with the expectations that we shared on our last earnings call, we anticipated a revenue SKU of approximately 45% in the first half of fiscal year and 55% in the second half of the fiscal year. We expect the remaining 55% of the full fiscal year's revenue to be essentially split evenly between the 3rd and 4th quarters. We also expect the corresponding non GAAP earnings per share to be split evenly between the 3rd 4th quarters.

Speaker 4

That concludes my formal review of our financial results. Before we transition to Q and A, I'd like to quickly note that our upcoming IR conference participation is listed on Slide 17. Thank you. And I'll now turn the call over to the operator for questions.

Operator

Thank you. We will take our first question from Matthew Hedberg with RBC Capital Markets. Please go ahead.

Speaker 5

Hey, good morning. This is Mike Richards on for Matt. Thanks for taking the question. Maybe just more broadly to start, are you guys seeing things stabilize in the environment? And then given that you expect an even split between Q3 and Q4 revenue, which usually shows a seasonally strong Q3, do you think you could get some boost from a December budget flush this year that you're maybe not factoring in?

Speaker 2

Thanks. Yes. I think that's why we have a guidance range and to account for those kinds of upsides. And yes, usually, we benefit from the budget plus because we work with very big companies, large carriers. And that's why often the Q3 is actually better than Q4 in terms of booking.

Speaker 2

Yes, we are looking to that and we are working on several opportunities.

Speaker 5

Got it. And then maybe is there anything notable to call out in cybersecurity in terms of what's driving growth and then maybe how that's tracking against your internal expectations and getting to that double digit growth that you guys are aiming towards?

Speaker 2

Yes. So we have we have made a slight pivot at about 6 months ago in terms of our positioning to cover some of the gaps in cybersecurity solutions in the market, which is more around the analytics part, which we have some of the best technology in the DPI area. So that's going very well. Traction is little slow, but we are looking over the next 6 to 12 months, I think we're going to see this attached to some of our customer, and we have also come up with some interesting ideas on how we can position our OCI or Omnis Cyber Intelligence solution in the DDoS space, which was not in the plant last year.

Speaker 5

Great. Thanks guys.

Operator

Yes. Thank you. And we will take our next question from Kevin Liu with K. Liu and Company. Please go ahead.

Speaker 6

Hi, good morning guys. Nice quarter here. Maybe just to start off with Verizon has started talking about moving towards standalone 5 gs in the near future. I'm wondering if you can talk through some of the puts and takes on how that either increases your opportunity as they do things like network slicing versus any risk you might see if they start to deprecate some of the more legacy 4 gs networks?

Speaker 2

Well, there is continue to be kept in the consolidation in the market both in Europe and there so it does affect some of our business. But overall, I think the vendors are introducing slicing this year. We are announcing a new release. I don't see big potential in the short term on private 5 gs or standalone. But slicing is both a revenue opportunity for our customer as well as for us because slicing is an optional module in our solution, which doesn't require new hardware upgrade, but it's a software solution.

Speaker 2

So yes, we are looking for initial 2 or 3 customers in the U. S. Very interested in leveraging that functionality.

Speaker 6

Got it. And then also just on the carrier front, there seems to be more talks on their part about this convergence of mobile and fiber broadband. I'm wondering if you have solutions to address kind of those latter piece of that or if there's anything in kind of the pipeline that you could do in order to help carriers as we move down that strategy?

Speaker 2

Yes. So there are 2 kinds of carriers, people who are monitoring user plan and those people will obviously drive more business with us as fixed wireless initiatives take over in U. S. And elsewhere. And we are counting on that for next year.

Speaker 2

For people who are not monitoring user plans, they are largely not impacted from a revenue point of view for us. But our top 5 or 6 big customers are all very interested, and we think that there'll be uptick in the dramatic uptick in the fixed wireless traffic. And also the ARPUs for those are much better than their mobility. So because of that, I think there'll be potential investment on NetScout.

Speaker 6

Great. And if I could just ask one last one. Any update on your AIOps strategy as it relates to how much contribution you expect from some of the leading partners that you talked about versus what you guys might be focused on directly?

Speaker 2

Yes. 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 this year, this fiscal year from AIOps.

Speaker 6

Got it. Thanks for taking the questions.

Speaker 1

Sure.

Operator

Thank you. And it appears that there are no further questions at this time. I will now turn the program back to Tony Piazza.

Speaker 1

Thank you, operator. That concludes our financial results call for today. Thank you for joining us and enjoy the rest of the day.

Operator

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

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