NETSCOUT Systems Reports First Quarter Fiscal 2002 Financial Results

19 Jul 2001

WESTFORD, Mass., July 19 /PRNewswire/ -- NetScout Systems, Inc. (Nasdaq: NTCT), a leading provider of network performance management solutions, today announced financial results for the first quarter of its fiscal year 2002. Revenue and income were within the ranges the company announced on July 6, 2001.

Revenue for the first quarter of fiscal 2002 was $18.2 million, compared to revenue of $25.2 million for the same period last year. Pro forma net loss for the three months ended June 30, 2001 was $929,000, or ($0.03) per basic and diluted share, compared to pro forma net income of $4.4 million, or $0.16 per diluted share, for the same period last year. Pro forma net loss excludes non-cash amortization of goodwill and other intangible assets and stock-based compensation. Weighted average basic shares for the three-month period ended June 30, 2001 were 29.4 million, compared to 28.0 million diluted shares for the same period in fiscal 2000.

On a GAAP basis, the net loss for the quarter was $4.1 million, or ($0.14) per basic and diluted share, compared to net income of $4.3 million, or $0.15 per diluted share for the same period last year.

"Despite the long sales cycles still prevalent among many customers, there are compelling reasons for our customers to implement our solutions as soon as their IT spending constraints ease," said Anil Singhal, President and CEO of NetScout Systems. "Our nGenius products deliver unique, critical capabilities that enable IT organizations to achieve the high reliability, high performance and lowered cost objectives mandated by their organizations."

"Some customers are now indicating that they intend to resume major projects that have been on hold, which include our products," Mr. Singhal added, "Our solutions are highly effective in helping to further leverage existing infrastructure investments and enable more successful introduction of new technologies, such as IP telephony and network storage. Providing a high return on investment-through substantial, proactive controls over asset utilization, infrastructure growth, performance and uptime-is what places NetScout products high on the priority list as budget dollars become available."

Highlights for the first quarter included:

-- The addition of NetScout's nGenius Real-Time Monitor, NetScout's next generation real-time monitoring software solution, to Cisco's CiscoWorks2000 Routed WAN and LAN Management Solutions. This reinforces NetScout's strategic relationship with Cisco for real-time performance management technology.

-- The announcement of a sales transition where Cisco would discontinue reselling NetScout probes and refer its customers to purchase directly from NetScout. Over time, support will also be transitioned. In the announcement, Cisco and NetScout also reaffirmed their technology partnership in support of managing next-generation network environments.

-- Approximately 40 new customers worldwide. New accounts included, among others: Provident Mutual Life, Delmonte Corporation, Virtual ESI-Prime, Telecel, Bundeswehr, and Heleba.

-- Continued strength in ongoing business from our existing customers, totaling approximately 90 percent of total revenue. Companies such as TRW, John Deere, Genuity, TeleGlobe Communications, Credit Suisse First Boston, British Telecom, and UTA Telecom continued to expand their use of NetScout solutions through the addition of both new probes and software products.

-- Direct sales at 31 percent of revenue, slightly higher than last quarter. Cisco-channeled sales at 52 percent of total revenue, also slightly higher than last quarter; the Cisco-channeled portion of total revenue includes 16 percent of total revenue related to royalties from Cisco's resale of our real-time monitoring software. Other channel partners accounted for 17 percent of total revenue, down from 20 percent in the fourth quarter. This decrease was primarily a result of lower sales in continental Europe and Asia Pacific markets.

-- International business comprised approximately 20 percent of product revenue, level with last quarter. Spending in the UK was strongest, partly due to deployments still taking place through US multinationals.

-- Major new releases from our suite of nGenius Performance Management Software products: nGenius Capacity Planner v3.0 and nGenius Application Service Level Manager v3.0. In addition, we added the nGenius NewsStand to our nGenius reporting architecture, which enables customized, newspaper-style report generation via Web-based distribution.


The Company believes that opportunities remain strong. NetScout remains committed to maintaining its leadership position in pioneering performance management and integrated solutions for high speed, complex and mission critical network environments. The Company recently announced its multi-port Gigabit probe, another industry first that continues NetScout's expansion of probe products to meet customer needs for managing their investments in higher speed links. This offering is to be soon followed by additional new probes for OC3/OC12 Packet Over Sonet and ATM environments. NetScout also continues its technology and engineering exchanges as part of its strategic relationship with Cisco. The Company is working aggressively to provide additional enhancements to its nGenius product line and is developing additional support for assuring effective management of QoS, VoIP and Storage applications by the end of this fiscal year. As NetScout emerges from the temporary sales disruption caused by the conclusion of Cisco's reselling of probes, the Company expects that its maturing, expanded sales force will successfully assume direct access to the large base of Cisco customers now relying on NetScout technology, and propel those relationships forward more aggressively.


NetScout's expectations looking forward are based on widely reported economic forecasts that foresee the current difficult economic conditions continuing through the end of calendar 2001. However, NetScout anticipates that the current slowdown in network management spending by many large enterprises will begin to ease over the next quarter, as they begin to forecast a normalization of their own businesses over the next several quarters and resume high priority IT projects including the use of our products. Based on these assumptions, NetScout expects quarterly sequential revenue growth in the range of 7% to 10%, off the lower revenue base of the fiscal first quarter, for the next several quarters. NetScout continues to take significant actions to control discretionary spending and headcount in order to maintain level operating expenses. NetScout expects to be profitable on a pro forma basis through the balance of the fiscal year and to improve pro forma financial performance to return to historical profitability levels next fiscal year.

As a result of the Cisco relationship change, NetScout has revised its long term business model ranges to the following: gross margins between 72 percent and 75 percent, operating expenses between 50 percent and 55 percent of revenue, and operating margins of 18 percent to 20 percent. This revision effectively increases gross margin objectives by 2 percentage points, increases operating expenses by 2 percentage points, in sales and marketing, while operating margin objectives remain unchanged. NetScout expects to return to these business model objectives in fiscal 2003.

The Company invites shareholders to listen into a conference call today at 5:30 p.m. EDT, which will be Webcast live through the Company's Website at Please log on to the Web site 15 minutes prior to the broadcast. The numbers for the call are 800-289-0468 for U.S./Canada and 913-981-5517 for International callers. A replay of the call will be available after 8:00 p.m. EDT this evening for approximately one week. The number for the replay is 888-203-1112 for U.S./Canada, and 719-457-0820 for International callers. The access code is 563313.

About NetScout Systems

NetScout Systems, Inc. is a leading provider of infrastructure performance management solutions for leading companies and service providers worldwide. NetScout serves approximately half of the Fortune 500 and counts among its customers 3M Corporation, AT&T, Datek Online, Bristol-Myers Squibb,, Webhire, Intel Online, Fidelity Investments and Sun Microsystems. NetScout's solutions are offered through its nGenius (TM) Performance Management System, an integrated solutions-based suite of advanced monitoring and reporting applications that draw on the rich performance data generated by NetScout's real-time, application-aware probe suite, 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

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 infrastructure 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, 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 of slowdowns or downturns in economic conditions generally and in the market for infrastructure 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, 2001, on file with the Securities and Exchange Commission.

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

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

                                                    June 30,        March 31,
                                                       2001              2001

    Current assets:
       Cash and cash equivalents                       $60,566        $61,382
       Accounts receivable, net                          7,957         11,753
       Inventories                                       8,288          8,653
       Refundable income taxes                           2,966          2,412
       Deferred income taxes                             1,342          1,374
       Prepaids and other current assets                 3,058          3,126

          Total current assets                          84,177         88,700

    Fixed assets, net                                    7,408          6,937
    Goodwill and other intangible assets,
     net                                                38,915         41,549
    Deferred income taxes                                4,846          4,894

           Total assets                               $135,346       $142,080

    Liabilities and Stockholders' Equity
    Current liabilities:
       Accounts payable                                 $2,177         $4,220
       Accrued compensation                              3,740          5,013
       Accrued other                                     2,035          1,749
       Deferred revenue                                  9,804         10,053

        Total current liabilities                       17,756         21,035

    Stockholders' equity:
    Common stock                                            33             33
    Additional paid-in capital                         106,462        106,354
    Deferred compensation                               (2,834)        (3,409)
    Treasury stock                                     (25,306)       (25,306)
    Retained earnings                                   39,235         43,373

       Total stockholders' equity                      117,590        121,045

       Total liabilities and
        stockholders' equity                          $135,346       $142,080

                            NetScout Systems, Inc.
                 Condensed Consolidated Statements of Income
                   (In thousands, except per share amounts)

                                                      Three Months Ended
                                                            June 30
                                                    2001              2000
       Product                                     $10,425           $17,761
       Service                                       4,699             3,976
       License and royalty                           3,042             3,432
          Total revenue                             18,166            25,169

    Cost of revenue:
         Product                                     4,450             6,094
         Service (including stock-based
         of $2 and $0, respectively)                   917               595
           Total cost of revenue                     5,367             6,689

    Gross margin                                    12,799            18,480

    Operating expenses:
       Research and development
        (including stock-based
         compensation of $542 and
         $10, respectively)                           4,613             2,572
       Sales and marketing (including
       compensation of $29 and $60,
        respectively)                                9,090             8,727
       General and administrative
        (including stock-
       based compensation of $2 and $2,
        respectively)                                1,714             1,594
       Amortization of goodwill and other
        intangible assets                            2,634               --
           Total operating expenses                 18,051            12,893

    Income (loss) from operations                   (5,252)            5,587
    Interest income, net                               687             1,034
    Income (loss) before provision for
        income taxes                                (4,565)            6,621
    Provision for income taxes                        (427)            2,317
    Net income (loss)                              $(4,138)           $4,304

    Basic net income (loss) per share               $(0.14)            $0.16
    Diluted net income (loss) per share             $(0.14)            $0.15
    Shares used in computing:
         Basic net income (loss) per
          share                                     29,407            26,762
         Diluted net income (loss) per
          share                                     29,407            27,954

    Supplemental information:
    Pro forma net income (loss) excluding
     acquisition and stock-based
       compensation costs                            $(929)           $4,376

    Pro forma diluted net income (loss)
     per share excluding acquisition                $(0.03)            $0.16
     and stock-based compensation

    Shares used in computing pro forma
     diluted net income (loss) per
     share excluding acquisition and
     stock-based compensation costs                 29,407            27,954

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SOURCE NetScout Systems, Inc.
CONTACT: Peggy Flynn, Director of Corporate Relations of NetScout Systems, Inc., +1-978-614-4162,; or Bill Zima, Associate Director of Thomson Financial-Carson Group, 212-510-9261,, for NetScout Systems, Inc.