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NetScout Systems (NTCT): Navigating Challenges, Positioning for the Future
Published on September 24, 2024 | Ticker: NTCT

Business Overview

NetScout Systems, Inc. (NASDAQ:NTCT) is a leading provider of service assurance and cybersecurity solutions that help enterprises and service providers ensure the delivery of high-quality, mission-critical applications and services. The company's solutions are based on its pioneering deep packet inspection technology, which provides visibility and protection necessary to optimize network performance and safeguard digital business services.

NetScout has nearly four decades of experience in the industry, serving a diverse customer base that includes Fortune 500 companies, local, state, and federal government agencies, and service providers. The company's offerings enable customers to quickly identify and resolve issues that result in downtime, poor service quality, or compromised data, thereby reducing mean time-to-resolution and driving compelling returns on their technology investments.

The company's business is primarily divided into two segments: Service Assurance and Cybersecurity. The Service Assurance segment provides solutions that help customers gain visibility into network performance, application delivery, and end-user experience, while the Cybersecurity segment offers products and services to protect against distributed denial-of-service (DDoS) attacks and other cyber threats.

Financials

In the fiscal year ended March 31, 2024, NetScout reported annual revenue of $829.5 million, a decrease of 11.4% compared to the prior year. The company's annual net income was -$147.7 million, and its annual operating cash flow and free cash flow were $58.8 million and $52.5 million, respectively.

During the first quarter of fiscal year 2025, which ended on June 30, 2024, NetScout reported revenue of $174.6 million, a 17.3% decrease compared to the same period in the prior year. This decline was primarily attributable to approximately $37 million of backlog-related revenue that benefited the prior year's quarter. Excluding this factor, the company's revenue would have been relatively consistent year-over-year.

Quarterly Highlights

On the bottom line, NetScout reported non-GAAP diluted earnings per share of $0.28 for the first quarter of fiscal year 2025, which exceeded the company's expectations. This result was driven by continued cost management initiatives and an unrealized gain on a foreign investment, which partially offset the impact of lower revenue.

Segmental Performance

In the first quarter of fiscal year 2025, NetScout's Service Assurance revenue decreased by 20.1% year-over-year, while its Cybersecurity revenue decreased by 11.1%. The Service Assurance segment accounted for approximately 67% of the company's total revenue, while the Cybersecurity segment contributed the remaining 33%.

The decline in Service Assurance revenue was expected due to the higher level of backlog-related revenue recorded in the prior year's period. Customers in this segment continue to operate with increased spending scrutiny, though carriers are investing in their 5G initiatives at a more measured pace.

In the Cybersecurity segment, the revenue decline was also attributed to the challenging comparison to the prior year's backlog-related usage. However, NetScout remains confident in the growth potential of this segment as customers prioritize spending to protect against the expanding cyber threat landscape.

Geographic Breakdown

During the first quarter of fiscal year 2025, 57% of NetScout's revenue was derived from the United States, with the remaining 43% coming from international markets. No single customer accounted for more than 10% of the company's total revenue during this period.

Liquidity

As of June 30, 2024, NetScout had $407.2 million in cash, cash equivalents, short and long-term marketable securities, and investments, representing a decrease of $16.9 million since the end of the fourth quarter of fiscal year 2024. The company generated $37.2 million in free cash flow during the first quarter.

During the quarter, NetScout repurchased approximately 1.3 million shares of its common stock for $25 million, or an average price of $18.55 per share. The company currently has capacity in its share repurchase authorization and, subject to market conditions, intends to be active in the market during fiscal year 2025.

Regarding debt, NetScout repaid $25 million of credit facility debt during the first quarter and ended the period with $75 million outstanding on its $800 million revolving credit facility, which expires in July 2026.

Outlook

For fiscal year 2025, NetScout is reiterating its previously provided non-GAAP guidance. The company anticipates revenue in the range of $800 million to $830 million and non-GAAP diluted earnings per share within the range of $2.10 to $2.30, with the midpoint being consistent year-over-year.

The company's fiscal year 2025 non-GAAP guidance reflects the anticipated benefits associated with a recent restructuring program, which is expected to generate annual run-rate savings of approximately $25 million to $27 million, a portion of which will be realized in the remaining three quarters of the fiscal year.

For the second quarter of fiscal year 2025, NetScout expects revenue to be in the range of $185 million to $195 million and corresponding non-GAAP earnings per share in the range of $0.42 to $0.51. This guidance takes into account the year-over-year headwind of approximately $0.15 per share due to the reversal of incentive-related expenses in the prior year's second quarter.

Risks and Challenges

NetScout operates in a highly competitive and rapidly evolving technology landscape, which presents both opportunities and challenges. The company faces risks related to customer spending patterns, the pace of technological change, the ability to develop and introduce new products and services, and the potential for increased competition from larger, well-capitalized technology firms.

Additionally, the company's financial performance can be impacted by macroeconomic conditions, such as the ongoing global supply chain disruptions, inflationary pressures, and the risk of a potential recession, which could affect customer demand and spending priorities.

Conclusion

Despite the near-term challenges, NetScout remains well-positioned to capitalize on key technology trends, such as the evolution of digital transformation initiatives, the rapidly evolving cybersecurity threat landscape, and the 5G technology evolution. The company's focus on enhancing its Cybersecurity offerings, managing costs, and leveraging its Visibility Without Borders platform to address the performance, availability, and security needs of its customers positions it for long-term success.

As NetScout navigates the current market environment, the company's strong brand, differentiated solutions, and commitment to innovation should enable it to continue delivering value to its customers and shareholders.

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