Sequentially;
New nGenius Products Drive Strong Software Revenue Growth and Expand Gross
Margins;
Real-Time URL Monitoring and Response Time Added to nGenius
WESTFORD, Mass., Jan. 18 /PRNewswire/ -- NetScout Systems, Inc.
(Nasdaq: NTCT), the leading provider of infrastructure performance management
solutions, today announced financial results for its third quarter of fiscal
2001 ended December 31, 2000.
Revenue for the third quarter of fiscal 2001 was $32.5 million, a 42%
increase over revenue of $22.8 million for the same period a year earlier, and
a sequential increase of 13% over revenue of $28.8 million for the second
quarter of fiscal 2001. Pro forma net income for the third quarter of fiscal
2001 was $5.2 million, or $0.17 per diluted share, compared to $4.5 million,
or $0.16 per diluted share, for the same quarter last year. Pro forma net
income excludes non-cash amortization of intangible assets and stock-based
compensation. Weighted average diluted shares for the third quarter of fiscal
2001 were 30.6 million, compared to 28.2 million for the third quarter of
fiscal 2000, and 30.2 million for the second quarter of fiscal 2001.
On a GAAP basis, net income for the quarter was $2.7 million, or $0.09 per
diluted share, compared to net income of $4.4 million, or $0.16 per diluted
share for the third quarter of fiscal 2000.
"I am pleased to report that NetScout produced outstanding results in the
quarter across all fronts," said Anil Singhal, CEO of NetScout Systems. "Our
earnings grew to a record level and our cash grew by more than $7 million in
this quarter. This was fueled in part by expansion of our gross margins
from a strong start with nGenius(TM) software sales. We also grew revenue to
a new record, with a 13% sequential increase. Sequential revenue from both
direct and reseller sales rose dramatically."
Singhal added, "In operations, we progressed as planned on a number of
strategic initiatives, such as the initial delivery of nGenius into worldwide
markets, the further integration of NextPoint products into the nGenius suite,
increasing our direct sales with the continued expansion of our worldwide
sales infrastructure, and an aggressive broadening of our new product
initiatives. Our competitive position in the marketplace also strengthened
over the last quarter. The broadening of our nGenius system is a major reason
for this. We are very pleased with these results and with the progress made in
extending our lead as the only broad solution capable of maximizing
application performance, minimizing network downtime, and improving both
operational and cost efficiencies associated with network infrastructures."
THIRD QUARTER HIGHLIGHTS:
Software revenue increased significantly as a result of very positive
response to the new nGenius software products both domestically and overseas.
This included strong initial sales of the new Real-Time Monitor(TM), Capacity
Planner(TM) and Applications Service Level Manager(TM) products. Some
customers opted to order more than one solution, giving early indication of a
strong acceptance of NetScout's broad, integrated solutions approach to
infrastructure performance management. Real-Time Monitor, Capacity Planner
and Applications Service Level Manager combine NetScout's core applications
monitoring and probe technologies with the newer active agent and reporting
technologies that were acquired with NextPoint Networks in July.
The new, nGenius Probe(TM) with URL response time monitoring started
shipping in the third quarter. The addition of real-time URL traffic
monitoring adds first-to-market capabilities in proactive detection and
troubleshooting of Web site problems and errors that slow site performance,
interfere with access to content, and diminish site satisfaction for web
users. This URL monitoring will be extended to all of NetScout's high
performance, 8000 Series probes in the fiscal fourth quarter. It complements
the application response time data gathered by NetScout probes and web
transaction response time measurement accomplished by NetScout's new, active
agent technology. AmericanGreetings.com purchased the nGenius probe to monitor
the performance of its Web site, including analysis of URL traffic, URL
response times and changes in Web site activities.
The number of new accounts doubled from last quarter, signing a record 80
new customers worldwide. New enterprise accounts included
AmericanGreetings.com, CMP Publications, Equant Integration Services,
ChoicePoint Services and Online Investments. New service provider accounts
included Winstar Broadband Services, Connexim, Accessing.net, and Tuka.
Ongoing business from our installed base was approximately 65% of product
revenue. This included, among others, repeat orders from Northern Light
Technology, Computer Sciences Corporation, Datek Online, Nextel
Communications, Cable and Wireless, and Exenet Technologies.
Direct sales increased from 27% of revenue in the second quarter to 31% of
revenue in the third quarter. The company has continued to invest in growing
our direct sales while strengthening our relationships with the Cisco field
force, worldwide.
Business channeled through Cisco Systems remained strong, representing 44%
of revenue during the quarter versus 55% in the previous quarter. This
remained within the historical range of 42% to 58%. During the quarter, Cisco-
channeled wins were announced with TDS Telecom, Arthur Andersen, Continental
Airlines, and Blue Cross & Blue Shield of Massachusetts.
Reseller revenue grew from 18% of revenue in Q2 to 25% of revenue in Q3.
This growth was seen with both domestic and overseas partners, both in
increased sales with many top producers, as well as through new channel
partners signed on across the globe. We operate our channel program with our
partners on a "sell to end-user" order basis.
International business comprised approximately 25% of total revenue. In
our Europe, Middle East and Africa (EMEA) markets, ongoing business with our
established multinational clients was good. Momentum continued in expanding
our installed base across the EMEA and in penetrating new Asia Pacific
markets. International response to nGenius was as positive as in our domestic
market.
OUTLOOK:
NetScout reiterates its goal of continuing to achieve above-average growth
in the network management industry. We believe the long-term market
opportunity for NetScout is increasing. Demand for our solutions continues to
be strongest in the post build-out phase, when customers move their attention
to quality of service, extracting the full potential from their existing
infrastructures, and controlling their infrastructure growth. At the same
time, we see a continued strengthening of our competitive position in the
marketplace. Our customers' increased attention to operational efficiencies
and cost effectiveness now includes a market-wide deployment of pilot voice
over IP (VoIP) applications. We are already addressing the next wave of
performance management challenges in the converged network infrastructure that
our clients will encounter with VoIP and multimedia.
We will introduce VoIP capabilities into our probes this quarter, to be
followed by a series of enhancements through 2001. In this quarter, we will
also be releasing multiple value-added features, enhanced scalability and even
tighter integration within the entire nGenius product suite. We continue to
make major investments to extend our leadership position in network,
application and content monitoring for ultra high-speed networks which include
Packet Over Sonet, ATM, Multi-Gigabit and Storage Area Network environments.
In addition, NetScout became a member of the 10 Gigabit Alliance, which
includes many infrastructure vendors.
GUIDANCE:
In the third quarter, order flow showed a moderate impact from slowdowns
in IT spending similar to those widely-observed in the networking and broader
technology markets. This moderate impact was focused mainly where NetScout
products were bundled as part of a larger infrastructure purchase. The
company saw some of its customers increase their attention to cost
efficiencies and take a more cautious approach with IT spending. This resulted
in a lengthening of sales cycles for some orders; however, there was no
meaningful permanent loss of business or perceived loss of intention to place
future orders by these customers.
NetScout remains committed to exceeding the industry's growth rate.
Because of potentially lengthening sales cycles, and the reduced visibility
cited by many infrastructure vendors, we are cautious in evaluating the
prospects for top line growth over the next two quarters. Like other
companies in the network infrastructure industry, our visibility to near term
growth is reduced from that of prior quarters. NetScout does not forecast
overall economic growth and its impact on customers' network infrastructure
spending. Based principally on widely-discussed economic projections, the
company anticipates a slowdown in revenue growth to a range of 2% to 4%
sequentially for the next two quarters. NetScout expects top line growth to
return to the long-term target range of 8-10% sequentially in the second half
of calendar 2001.
Over the next few quarters, gross margins are expected to be in the middle
of the business model range, described below. The company plans to continue
to grow investments in sales, research and development with the expectation
that more normal, healthy market conditions will resume within a few quarters.
Therefore, operating expenses are expected to expand to the top of the range
or slightly beyond; this will result in a small contraction of operating
margins during the slowdown. Margins are expected to return to the targeted
ranges once market growth returns to more normal levels and our continued
investments begin to bear additional fruit. The company cannot predict the
exact timing of a resumption of more normal market conditions.
Consistent with NetScout's business model, the company's longer-term financial
objectives remain as follows: sequential quarterly revenue growth at or above
9%; gross margins between 70% and 73%; operating expenses between 48% and 53%;
and operating income between 18% and 20%.
CONFERENCE CALL INSTRUCTIONS:
To participate in today's conference call at 5:45 p.m. (ET), interested
parties may listen via Webcast that will be broadcast through the Company's
Web site, www.netscout.com, or dial (913) 981-5507. Please log on to the Web
site at least 15 minutes prior to the broadcast. The call will be replayed
from 8:45 p.m. (ET), this evening, through midnight, Thursday, January 25.
The replay number is (719) 457-0820, with a confirmation code 488229. The
call will also be audio-archived on the Company's Web site.
ABOUT NETSCOUT SYSTEMS:
NetScout Systems, Inc. is the 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,
Amazon.com, Webhire, Intel Online, Fidelity Investments and Sun Microsystems.
NetScout's nGenius (TM) Performance Management System is a solutions-based
system offering advanced monitoring and reporting applications suites 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 340 employees, with offices in North
America, Europe and Asia. Further information on the company is available on
the World Wide Web at 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
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 indirect distribution channels, the integration of NextPoint
Networks 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, 2000, and Quarterly Report on 10-Q for the quarter ended September
30, 2000, as amended, 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.
The Company's condensed consolidated statements of income and balance
sheets are attached.
NetScout Systems, Inc.
Condensed Consolidated Statements of Income
(In thousands, except per share amounts)
(Unaudited)
Three Months Ended Nine Months Ended
Dec. 31, Dec. 31, Dec. 31, Dec. 31,
2000 1999 2000 1999
Revenue:
Product $24,064 $14,584 $62,615 $40,939
Service 4,994 3,348 13,398 8,912
License and royalty 3,415 4,910 10,448 12,366
Total revenue 32,473 22,842 86,461 62,217
Cost of revenue:
Product (including stock-based
compensation
of $0, $1, $1 and $2,
respectively) 7,647 5,389 21,004 15,290
Service (including stock-based
compensation
of $6, $10, $7 and $29,
respectively) 964 422 2,416 1,242
Total cost of revenue 8,611 5,811 23,420 16,532
Gross margin 23,862 17,031 63,041 45,685
Operating expenses:
Research and development
(including stock-
based compensation of $513, $12,
$1,044 and $107,
respectively) 4,125 2,322 11,036 7,022
Sales and marketing (including
stock-based
compensation of $67, $66, $180
and $189, respectively) 10,798 7,370 29,775 20,121
General and administrative
(including stock-
based compensation of $5, $4, $8
and $11,
respectively) 2,558 1,334 6,500 3,421
Amortization of intangible
assets 2,617 - 5,283 -
In-process research and
development - - 268 -
Total operating expenses 20,098 11,026 52,862 30,564
Income from operations 3,764 6,005 10,179 15,121
Interest income, net 930 833 3,072 1,609
Income before provision for
income taxes 4,694 6,838 13,251 16,730
Provision for income taxes 2,024 2,467 7,038 6,031
Net income $2,670 $4,371 $6,213 $10,699
Basic net income per share $0.09 $0.17 $0.22 $0.53
Diluted net income per share $0.09 $0.16 $0.21 $0.40
Shares used in computing:
Basic net income per share 29,107 25,796 28,196 20,249
Diluted net income per share 30,594 28,154 29,621 26,562
Supplemental information:
Net income excluding acquisition
and stock-based
compensation costs (1) $5,197 $4,464 $13,027 $11,037
Diluted net income per share
excluding acquisition and $0.17 $0.16 $0.44 $0.42
stock-based compensation costs
Shares used in computing diluted
net income per share
excluding acquisition and stock-
based compensation costs 30,594 28,154 29,621 26,562
(1) Net income excluding acquisition and stock-based compensation costs
assumes an effective tax rate of 35.0% which represents
the effective tax rate before factoring in non-deductible costs related
to the acquisition of NextPoint and stock-based compensation costs.
NetScout Systems, Inc.
Condensed Consolidated Balance Sheets
(In thousands)
(Unaudited)
December 31, March 31,
2000 2000
Assets
Current assets:
Cash and cash equivalents $62,173 $48,515
Marketable securities - 21,807
Accounts receivable, net 17,455 10,390
Inventories 4,824 3,131
Refundable income taxes 123 1,899
Deferred income taxes 1,304 1,022
Prepaids and other current assets 2,644 3,728
Total current assets 88,523 90,492
Fixed assets, net 7,039 5,657
Intangible assets, net 44,074 -
Deferred income taxes 4,651 599
Total assets $144,287 $96,748
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $4,326 $2,789
Accrued compensation 5,267 3,673
Accrued other 2,120 2,448
Customer deposits - 78
Deferred revenue 10,559 6,638
Total current liabilities 22,272 15,626
Stockholders' equity:
Common stock 33 31
Additional paid-in capital 105,478 67,366
Deferred compensation (4,070) (636)
Treasury stock (25,306) (25,306)
Retained earnings 45,880 39,667
Total stockholders' equity 122,015 81,122
Total liabilities and
stockholders' equity $144,287 $96,748
SOURCE NetScout Systems, Inc.
Web site: http: //www.netscout.com
CONTACT: Peggy Flynn, Director of Corporate Relations of NetScout Systems, Inc., 978-614-4162, flynnp@netscout.com, or Scott Solomon, Vice President of Sharon Merrill Associates, Inc., 617-542-5300, ssolomon@investorrelations.com