NETSCOUT Systems Reports Second Quarter Fiscal 2003 Financial Results

16 Oct 2002

WESTFORD, Mass., Oct. 16 -- NetScout Systems, Inc. (Nasdaq: NTCT), a leading provider of network performance management solutions, today announced financial results for its second quarter of fiscal year 2003.

Revenue for the second quarter of fiscal 2003 was $17.9 million, compared to revenue of $17.8 million in the previous quarter and revenue of $19.7 million in the second quarter of fiscal 2002. On a GAAP basis, the net loss for the quarter was $710,000, or ($0.02) per basic and diluted share, compared to a net loss of $1.1 million, or ($0.04) per basic and diluted share, for the previous quarter and compared to a net loss of $2.9 million, or ($0.10) per basic and diluted share, in the second quarter of fiscal 2002.

Pro forma net loss for the second quarter of fiscal 2003 was $373,000, or ($0.01) per pro forma basic and diluted share, versus pro forma net loss of $163,000, or ($0.01) per pro forma basic and diluted share, in the previous quarter and compared to pro forma net income of $271,000, or $0.01 per pro forma diluted share, in the second quarter of fiscal 2002. Pro forma net income excludes acquisition and stock-based compensation costs.

"Despite the challenging market conditions we continue to generate positive cash flow from operations and our results underscore the long-term strength and importance of our products in helping our customers improve the performance of their networks and increase ROI," said Anil Singhal, President and CEO of NetScout Systems. "We will be delivering new products at an increasing pace over the next few quarters. We are encouraged by our customers' enthusiasm with our new CDM(TM) strategy that provides a truly integrated solution reducing the need for multiple tools and controlling hidden costs. That customer enthusiasm is reflected in strong interest in our first upcoming User Forum scheduled in November, 2002."

    Financial Highlights for the Quarter:
    -- Total revenue was flat sequentially and decreased 9% from the second
       quarter of fiscal year 2002.  Product revenue increased 2%
       sequentially, and is down 14% from the second quarter of fiscal year
       2002.  Service revenue increased 4% sequentially, and increased 18%
       from the second quarter of fiscal year 2002.   Royalty revenue
       decreased 17% sequentially and was down 39% from the second quarter of
       fiscal year 2002.
    -- Gross margin was 74% of total revenue, down 2 points sequentially and
       flat compared to the second quarter of fiscal year 2002.
    -- Cash flow from operations was positive.
    -- Cash and short and long-term marketable securities increased by
       $300,000 in the second quarter to $70.0 million.
    -- 38 new customers were added worldwide contributing 20% of orders in the
       second quarter.
    -- Sales to 282 repeat customers were approximately 80% of orders in the
       second quarter.
    -- 47 large deals valued over $100,000 were placed in the second quarter.
    -- Direct sales represented 47% of total revenue; reseller revenue
       represented 53% of total revenue.
    -- International business comprised approximately 13% of total revenue in
       the second quarter.
    -- Competitive wins totaled over $3 million in the second quarter,
       involving approximately 29 deals against other leading network
       management vendors.

    Product Highlights:
    -- Two new gigabit probes were released during the quarter, the
       nGenius(TM) Gigabit Ethernet Aggregation Probe and the nGenius eight-
       port Gigabit Ethernet Probe for the fast growing gigabit Ethernet
       market.
    -- A new ATM OC-3/OC-12 probe was released during the quarter.
    -- Shortly after the end of the quarter a new storage area network
       solution began beta testing and is planned for general release by year-
       end.
    -- The long-standing agreement with Cisco Systems was extended to allow
       Cisco to continue shipping nGenius Real-Time Monitor as part of its
       CiscoWorks LAN Management Solution.

Guidance:

NetScout's near term expectations are based on the current climate of tight enterprise IT spending and the uncertain timing of the impact of improving general economic conditions. For the third quarter, the Company expects revenue and GAAP and pro forma earnings per share to show little change from the second quarter and we expect to be cash neutral in the quarter. Due to the uncertain economic climate, the Company is not able to give guidance beyond the third quarter. The Company expects to update guidance in its third quarter earnings release.

CONFERENCE CALL INSTRUCTIONS:

The Company invites shareholders to listen to its conference call today at 4:30 p.m. EDT, which will be webcast live through the Company's website at http://www.netscout.com/investors. Please log onto the website 15 minutes prior to the broadcast. Alternatively, shareholders can listen to the call by dialing 888-273-9891 (U.S.) and 651-224-7472 (International). A replay of the call will be available after 9:45 p.m. EDT this evening for approximately one week. The numbers for the replay are 800-475-6701 (U.S.) and 320-365-3844 (International). The access code is 655076.

About NetScout Systems, Inc.

NetScout Systems, Inc. (Nasdaq: NTCT) is a market leader and pioneer of integrated network performance management solutions for leading companies and service providers worldwide. NetScout serves the Global 5000 and counts among its customers Arvin Meritor, Blue Cross and Blue Shield of Massachusetts, Cable and Wireless, Cisco Systems, China Telecom, Fidelity Investments, Getronics, Goodyear Tire & Rubber, Nextel Communications, Samsung SDS, Siemens Health Services Corporation, StarBand Communications, Travelocity.com, Visa International and Wachovia Bank. NetScout's solutions are offered through its nGenius(TM) Performance Management System, an integrated suite of advanced monitoring and reporting applications that draw on the rich performance data generated by NetScout's real-time, application-aware probes, advanced intelligent software agents and network devices. The nGenius System helps organizations increase their return on infrastructure investments by optimizing the performance of their network, applications and content. NetScout is headquartered in Westford, Massachusetts and has approximately 360 employees, with offices in North America, Europe and Asia. Further information on the company is available on the World Wide Web at http://www.netscout.com.

Forward-looking statements in this release are made pursuant to the safe harbor provisions of Section 21E of the Securities Exchange Act of 1934. Investors are cautioned that statements in this press release which are not strictly historical statements, including the plans, objectives and future financial performance of NetScout, constitute forward-looking statements which involve risks and uncertainties. Actual results could differ materially from the forward-looking statements. Risks and uncertainties which could cause actual results to differ include, without limitation, risks and uncertainties associated with the company's strategic relationships with Cisco Systems and other partners, dependence upon broad-based acceptance of the company's network performance management solutions, the company's ability to achieve and maintain a high rate of growth, introduction and market acceptance of new products and product enhancements such as the delivery of nGenius product platform probes and software solutions, and the implementation of the Company's CDM(TM) technology strategy, the ability of NetScout to take advantage of service provider opportunities, competitive pricing pressures, reliance on sole source suppliers, successful expansion and management of direct and indirect distribution channels, and dependence on proprietary technology, as well as risks associated with a continued climate of tight IT spending, and risks of further slowdowns or downturns in economic conditions generally and in the market for network performance management solutions specifically. For a more detailed description of the risk factors associated with the company, please refer to the company's Annual Report on Form 10-K for the fiscal year ended March 31, 2002, and its quarterly report on Form 10- Q for the quarter ended June 30, 2002 on file with the Securities and Exchange Commission. NetScout assumes no obligation to update any forward-looking information contained in this press release or with respect to the announcements described herein.

NetScout is a registered trademark, and the NetScout logo, nGenius, nGenius Performance Manager, CDM, nGenius Capacity Planner, nGenius Application Service Level Manager, nGenius Real-Time Monitor and nGenius Probe are trademarks of NetScout Systems, Inc.

The Company's condensed consolidated statements of operations and balance sheets are attached.

                            NetScout Systems, Inc.
                            Condensed Consolidated
                                Balance Sheets
                                (In thousands)
                                 (Unaudited)

                                                    September 30,    March 31,
                                                          2002         2002

    Assets
    Current assets:
       Cash and cash equivalents                       $26,921        $19,332
       Marketable securities                            37,978         44,849
       Accounts receivable, net                         10,201         12,932
       Inventories                                       3,098          3,698
       Deferred income taxes                             1,418          1,293
       Prepaids and other current assets                 1,152          2,876

          Total current assets                          80,768         84,980

    Fixed assets, net                                    7,889          8,628
    Goodwill and other intangible assets,
     net                                                29,655         30,199
    Deferred income taxes                                8,968          7,617
    Long-term marketable securities                      5,070          5,084
    Other assets                                           -              790

            Total assets                              $132,350       $137,298


    Liabilities and Stockholders' Equity
    Current liabilities:
       Accounts payable                                 $1,611         $2,456
       Accrued compensation                              3,825          5,775
       Accrued other                                     2,211          2,715
       Income tax payable                                  346            542
       Deferred revenue                                 12,350         13,103

          Total current liabilities                     20,343         24,591

    Stockholders' equity:
       Common stock                                         34             34
       Additional paid-in capital                      108,437        107,529
       Other comprehensive income                           55            -
       Deferred compensation                              (258)        (1,063)
       Treasury stock                                  (26,366)       (25,755)
       Retained earnings                                30,105         31,962

          Total stockholders' equity                   112,007        112,707

            Total liabilities and
             stockholders' equity                     $132,350       $137,298

                            NetScout Systems, Inc.
               Condensed Consolidated Statements of Operations
                                (In thousands)
                                 (Unaudited)


                                          Three Months Ended  Six Months Ended
                                              September 30,    September 30,
                                             2002     2001     2002      2001
    Revenue:
       Product                             $10,511  $12,263  $20,832  $22,688
       Service                               5,946    5,031   11,685    9,730
       License and royalty                   1,480    2,438    3,269    5,480
          Total revenue                     17,937   19,732   35,786   37,898

    Cost of revenue:
         Product                             3,475    4,336    6,849    8,786
         Service (including stock-based
          compensation of $1, $2, $3
          and $4, respectively)              1,160      870    2,134    1,787
           Total cost of revenue             4,635    5,206    8,983   10,573

    Gross margin                            13,302   14,526   26,803   27,325

    Operating expenses:
       Research and development (including
        stock-based compensation
       $46, $549, $733 and $1,091,
        respectively)                        3,982    4,983    8,784    9,596
       Sales and marketing (including
        stock-based compensation of $16
       $29, $37 and $58, respectively)       8,316    8,487   16,787   17,577
       General and administrative
        (including stock-based
        compensation
       of $2, $2, $4 and $4, respectively)   2,138    1,904    4,245    3,618
       Amortization of other intangible
        assets                                 272      359      544      718
       Amortization of goodwill                -      2,275      -      4,550
           Total operating expenses         14,708   18,008   30,360   36,059

    Loss from operations                    (1,406)  (3,482)  (3,557)  (8,734)
    Interest income and other expenses,
     net                                       326      499      639    1,186
    Loss before benefit from income taxes   (1,080)  (2,983)  (2,918)  (7,548)
    Benefit from income taxes                 (370)     (38)  (1,061)    (465)
    Net loss                                 $(710) $(2,945) $(1,857) $(7,083)

    Basic and diluted net loss per share    $(0.02)  $(0.10)  $(0.06)  $(0.24)

    Shares used in computing:
         Basic and diluted net loss per
          share                             29,865   29,444   29,834   29,441

    Supplemental information:
    Net loss                                 $(710) $(2,945) $(1,857) $(7,083)
    Stock-based compensation (as detailed
     in expense categories above)               65      582      777    1,157
    Amortization of goodwill and other
     intangible assets                         272    2,634      544    5,268
    Pro forma net income (loss) excluding
     acquisition and stock-based
       compensation costs                    $(373)    $271    $(536)   $(658)

    Pro forma diluted net income (loss)
     per share, excluding
        acquisition and stock-based
         compensation costs                 $(0.01)   $0.01   $(0.02)  $(0.02)

    Shares used in computing pro forma
     diluted net income (loss) per share
        excluding acquisition and stock-
         based compensation costs           29,865   29,785   29,834   29,441

    Contacts:
     Catherine Taylor
     Director of Investor Relations
     NetScout Systems, Inc.
     978-614-4286
     IR@netscout.com
               
SOURCE NetScout Systems, Inc.

Web site: http://www.netscout.com

CONTACT: Catherine Taylor, Director of Investor Relations of
NetScout Systems, Inc., +1-978-614-4286, IR@netscout.com