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NETSCOUT Systems Reports Record Revenue and Pro Forma Earnings For Third Quarter Fiscal 2001

January 18, 2001

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

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