NETSCOUT Systems Reports Strong Results for Second Quarter Fiscal 2002

18 Oct 2001
       Company Delivers on Forecasted Profitability and Revenue Goals;
        Sequential Revenue Grows 9% as nGenius Product Sales Rise 18%

WESTFORD, Mass., Oct. 18 /PRNewswire/ -- NetScout Systems, Inc. (Nasdaq: NTCT), a leading provider of network performance management solutions, today announced financial results for its second quarter of fiscal 2002 ended September 30, 2001.

Revenue for the second quarter of fiscal 2002 was $19.7 million, a 9 percent increase over revenue of $18.2 million from the previous quarter. Pro forma net income was $271,000, or $0.01 per pro forma diluted share, versus a pro forma net loss of $929,000, or ($0.03) per pro forma diluted share, in the previous quarter. Pro forma net income and loss excludes non-cash amortization of goodwill and other intangible assets and stock-based compensation. Weighted average pro forma diluted shares for the three-month period ended September 31, 2001 were 29.8 million, compared to weighted average pro forma shares of 29.4 million for the three-month period ended June 30, 2001.

On a GAAP basis, the net loss for the quarter was $2.9 million, or ($0.10) per basic and diluted share, versus a sequential net loss of $4.1 million, or ($0.14) per basis and diluted share for the previous quarter.

"Our second quarter results reflect the strong performance of our maturing sales force and the heightened appeal of NetScout's network management products in today's tight economic environment," said Anil Singhal, President and CEO of NetScout Systems. "We have delivered the top line growth which we forecasted, and returned to pro forma profitability after our first quarterly loss in seven years. Another key fundamental driver of our underlying financial performance is the high priority enterprises are giving our products when allocating their constrained budget dollars."

    BUSINESS HIGHLIGHTS:

     * NetScout achieves profitability as total revenue grew 9% sequentially
       to $19.7 million.
     * Product revenue rose 18% sequentially to $12.3 million.
     * Service revenue grew 7% sequentially to $5.0 million.
     * Gross margins expanded to 74% sequentially from 70%.
     * Momentum increased from our expanded direct sales organization.  Direct
       sales grew to 35% of total revenue and the number of large deals valued
       over $100,000 nearly doubled from the previous quarter.
     * Competitive wins totaled over $1 million, involving large deals against
       leading vendors of both probe and software products.  Investments in
       technology leadership continued with the announcement of new Multi-Port
       Gigabit and Packet-Over-SONET probes, and significant enhancements to
       nGenius Real-Time Monitor(TM).
     * Transition of Cisco customers to direct or reseller relationships
       began.  All deals in process were successfully transitioned.  Second
       quarter revenue included between $1 and $2 million in business
       transitioned from Cisco.  Cisco-channeled revenue accounted for 40% of
       total revenue, down from 52%.  NetScout sales personnel participated in
       closing the majority of that revenue.
     * More than 40 new accounts signed.  Repeat orders comprised
       approximately 80% of total revenue.  New and repeat orders were
       received from customers including Air Products and Chemicals, Fortis,
       Inc., Masergy Communications, NorCom Incorporated, Regence BlueCross
       BlueShield of Oregon, The Intelligent Choice International, and
       Wachovia Bank.

    OUTLOOK

Commenting on the company's business outlook, Singhal said, "We are extremely optimistic about our position to capture emerging opportunities in the network management market. Our expanded sales force has been able to drive home the ROI advantage of our nGenius solutions with increasing success, resulting in competitive wins and a substantial increase in large orders. We continue to believe that the revenue growth we demonstrated this quarter is indicative of our long term growth prospects."

NetScout remains committed to maintaining its leadership in pioneering integrated network performance management solutions for global, mission-critical networks, and to expanding those solutions to meet its customers' broader network management requirements. The Company is pursuing new strategic initiatives in technology, distribution and service, including strategic partnership development, which will provide the impetus for wider use of its network management solutions. In addition, the Company expects to continue to benefit from the transition of probe customer relationships from Cisco to its direct sales force.

GUIDANCE

NetScout's near term expectations are based on external economic forecasts and the economic uncertainty caused by recent world events. Long term, NetScout expects its prospects will be driven by the continued growth of global, high-speed network usage and the expanding applicability of its network management solutions to those networks. Accordingly, NetScout expects that, over the long term, quarterly sequential growth will continue to be in the range of 7 to 10 percent, and that profitability will increase to its target business model range detailed below. In the short term, the Company is cautious about the global impact of recent political and economic uncertainty on its customers' business performance and their IT spending. Nevertheless, the Company is confident that the demonstrated ROI value of its nGenius solutions will allow the Company to continue to grow revenue and to maintain profitability in the short term.

NetScout's long term business model remains: gross margins between 72 and 75 percent, operating expenses between 50 and 55 percent of revenue, and operating margins of 18 to 20 percent.

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. Please log onto the website 15 minutes prior to the broadcast. Alternatively, you can access the conference call via telephone at 800-829-0786 for U.S./Canada and 913-981-5515 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 595241.

About NetScout Systems

NetScout Systems, Inc. (Nasdaq: NTCT) is a market leader and pioneer of integrated infrastructure performance management solutions for leading companies and service providers worldwide. NetScout serves a major portion of the Fortune 500 and counts among its customers AmericanGreetings.com, ArvinMeritor, Blue Cross and Blue Shield of Massachusetts, Cable and Wireless, Cisco Systems, China Telecom, Fidelity Investments, Getronics, Goodyear Tire & Rubber, Hold Brothers, Nextel Communications, Northwest Airlines, Optimus Telecommunications, Samsung SDS, Siemens Health Services Corporation, Starband Communications, Travelocity.com, and Wachovia Bank. 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 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 integrated 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, and its quarterly report on Form 10-Q for the quarter ended June 30, 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 Statements of Operations
                   (In thousands, except per share amounts)
                                 (Unaudited)

                                              Three Months        Six Months
                                                 Ended               Ended
                                               September 30,     September 30,
                                              2001     2000     2001     2000
    Revenue:
       Product                             $12,263  $20,790  $22,688  $38,551
       Service                               5,031    4,427    9,730    8,404
       License and royalty                   2,438    3,602    5,480    7,033
          Total revenue                     19,732   28,819   37,898   53,988

    Cost of revenue:
         Product                             4,336    7,262    8,786   13,356
         Service (including stock-based
          compensation of $2, $0, $4
          and $1, respectively                 870      857    1,787    1,452
           Total cost of revenue             5,206    8,119   10,573   14,808

    Gross margin                            14,526   20,700   27,325   39,180

    Operating expenses:
       Research and development (including
        stock-based compensation of
        $549, $521, $1,091
        and $531, respectively)              4,983    4,339    9,596    6,911
       Sales and marketing (including
        stock-based compensation
        of $29, $53, $58 and $113,
        respectively)                        8,487   10,250   17,577   18,977
       General and administrative
        (including stock-based
        compensation of $2, $2, $4 and $4,
        respectively)                        1,904    2,349    3,618    3,943
       Amortization of goodwill and other
        intangible assets                    2,634    2,666    5,268    2,666
       In-process research and development    --        268     --        268
           Total operating expenses         18,008   19,872   36,059   32,765

    Income (loss) from operations           (3,482)     828   (8,734)   6,415
    Interest income and other expenses,
     net                                       499    1,108    1,186    2,142
    Income (loss) before provision for
     (benefit from) income taxes            (2,983)   1,936   (7,548)   8,557
    Provision for (benefit from) income
     taxes                                     (38)   2,697     (465)   5,014
    Net income (loss)                      $(2,945)   $(761) $(7,083)  $3,543

    Basic net income (loss) per share       $(0.10)  $(0.03)  $(0.24)   $0.13
    Diluted net income (loss) per share     $(0.10)  $(0.03)  $(0.24)   $0.12
    Shares used in computing:
         Basic net income (loss) per share  29,444   28,585   29,441   27,561
         Diluted net income (loss) per
          share                             29,444   28,585   29,441   28,955

    Supplemental information:
    Pro forma net income (loss) excluding
     acquisition and stock-based
     compensation costs                       $271   $3,454    $(658)  $7,830

    Pro forma diluted net income (loss)
     per share excluding acquisition
     and stock-based compensation costs      $0.01    $0.11   $(0.02)   $0.27

    Shares used in computing pro forma
     diluted net income (loss) per
     share excluding acquisition and
     stock-based compensation costs         29,785   30,182   29,441   28,955


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

                                             September 30,        March 31,
                                                  2001              2001

    Assets
    Current assets:
       Cash and cash equivalents                $44,744        $61,382
       Marketable securities                     15,095            --
       Accounts receivable, net                  10,410         11,753
       Inventories                                6,497          8,653
       Refundable income taxes                    2,503          2,412
       Deferred income taxes                      1,269          1,374
       Prepaids and other current assets          3,764          3,126

          Total current assets                   84,282         88,700

    Fixed assets, net                             8,363          6,937
    Goodwill and other intangible assets, net    36,281         41,549
    Deferred income taxes                         5,522          4,894

           Total assets                        $134,448       $142,080


    Liabilities and Stockholders' Equity
    Current liabilities:
       Accounts payable                          $3,298         $4,220
       Accrued compensation                       4,052          5,013
       Accrued other                              2,371          1,749
       Deferred revenue                           9,891         10,053

        Total current liabilities                19,612         21,035

    Stockholders' equity:
       Common stock                                  34             33
       Additional paid-in capital               106,486        106,354
       Deferred compensation                     (2,224)        (3,409)
       Treasury stock                           (25,750)       (25,306)
       Retained earnings                         36,290         43,373

        Total stockholders' equity              114,836        121,045

       Total liabilities and
        stockholders' equity                   $134,448       $142,080

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SOURCE NetScout Systems, Inc.
Web site: http: //www.netscout.com
CONTACT: Peggy Flynn, Director of Corporate Relations of NetScout Systems, Inc., +1-978-614-4162, flynnp@netscout.com; or Bill Zima, Associate Director of Thomson Financial-Carson, +1-212-510-9261, bill.zima@tfn.com, for NetScout Systems, Inc.