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NETSCOUT Systems Reports Third Quarter Fiscal 2003 Financial Results

January 15, 2003

WESTFORD, Mass., Jan. 15 /PRNewswire-FirstCall/ -- NetScout Systems, Inc. (Nasdaq: NTCT), a leading provider of network performance management solutions, today announced financial results for its third quarter of fiscal year 2003.

Revenue for the third quarter of fiscal year 2003 was $18.2 million, compared to revenue of $17.9 million in the previous quarter and revenue of $21.5 million in the third quarter of fiscal year 2002. The net loss for the quarter was $328,000, or ($0.01) per basic and diluted share, compared to a net loss of $710,000, or ($0.02) per basic and diluted share for the previous quarter and compared to a net loss of $2.6 million, or ($0.09) per basic and diluted share in the third quarter of fiscal year 2002.

Pro forma net income for the third quarter of fiscal year 2003 was $10,000, or $0.00 per pro forma diluted share, versus pro forma net loss of $373,000, or ($0.01) per pro forma basic and diluted share in the previous quarter and compared to pro forma net income of $627,000, or $0.02 per pro forma diluted share in the third quarter of fiscal year 2002. Pro forma net income or loss excludes acquisition and stock-based compensation costs.

"Our new, Common Data Model, or CDM(TM) strategy continues to gain traction in the marketplace. Our customers are beginning to understand the opportunity to simplify their network management operations by using our nGenius(TM) solution for a growing range of network performance tasks. We were pleased with the feedback from the customers who attended our successful User Conference in November, representing more than 40 companies from around the world. Users expressed enthusiasm about our CDM(TM) Technology and told us that our products are on target to help them meet their needs for a unifying network performance management solution that reduces their total cost of network ownership," said Anil Singhal, President and CEO of NetScout Systems. "We announced two new products this quarter for network storage and security which support our CDM(TM) initiative to reduce management data and tool clutter in these related areas of infrastructure performance."

    Financial Highlights for the Third Quarter:
    * Total revenue increased sequentially 1% and decreased 15% from the third
     quarter of fiscal year 2002.  Product revenue increased 1% sequentially,
     and was down 23% from the third quarter of fiscal year 2002.  Service
     revenue increased 8% sequentially, and increased 19% from the third
     quarter of fiscal year 2002.  Royalty revenue decreased 25% sequentially
     and was down 50% from the third quarter of fiscal year 2002.
    * Gross margin was 75% of total revenue, up 1 point both sequentially and
     compared to the third quarter of fiscal year 2002.
    * Cash flow from operations was positive.
    * Cash and short and long-term marketable securities increased by $347,000
     to $70.3 million.
    * 53 new customers were added worldwide.
    * 286 customers made repeat purchases.
    * 41 orders over $100,000 were received.
    * Direct sales represented 49% of total revenue; reseller revenue
     represented 51% of total revenue.
    * International business comprised approximately 16% of total revenue in
     the third quarter.

    Product Highlights:
    * A new nGenius(R) Fibre Channel probe was released during the quarter
     expanding nGenius Performance Manager's LAN and WAN support to include
     storage area networks.  The probe monitors traffic flows across any
     number of 1Gbps or 2Gbps Fibre Channel links with multi-port
     configuration for single or aggregated views across multiple load-
     sharing or redundant links and packet capture and decode for complex,
     in-depth troubleshooting of problems such as multi-vendor
     interoperability.
    * A new patent-pending nGenius(R) Network Security Adaptor was also
     released during the quarter to help improve the dependability of
     network-based intrusion detection systems (NIDS).  The nGenius Network
     Security Adaptor allows NIDS sensors to be placed further out to the
     edge of the network and to focus on the most relevant data streams to
     help reduce false positives and false negatives that can arise from
     processing high volumes of traffic.

    Guidance:

NetScout's near term expectations are based on the continued climate of tight enterprise IT spending and the uncertain timing of the impact of improving general economic conditions. For the fourth quarter, the Company expects revenue to be $18 to $19 million dollars, GAAP earnings per share to be ($0.02) to ($0.01) and pro forma earnings per share to be ($0.01) to $0.00. We expect to be cash neutral in the quarter.

CONFERENCE CALL INSTRUCTIONS:

The Company invites shareholders to listen to its conference call today at 4:30 p.m. EST, 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 800-450-0785 (U.S.) and 612-332-0523 (International). A replay of the call will be available after 9:00 p.m. EST 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 669131.

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's offerings are based upon its nGenius(R) Performance Management System, an integrated solution 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 other network devices. The nGenius System helps organizations increase their return on infrastructure investments by optimizing the performance of their network and applications. NetScout is headquartered in Westford, Massachusetts and has offices in North America, Europe and Asia. Further information on the company is available on the World Wide Web at http://www.netscout.com.

Safe Harbor: 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(R) 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 September 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, nGenius, and the NetScout logo are registered trademarks of NetScout Systems, Inc. ART MIB, Because the network is the business and CDM Technology are trademarks of NetScout Systems, Inc. NetScout reserves the right, at its sole discretion, to make changes at any time in its technical information, specifications, and service and support programs.

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

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

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

                                                  December 31,      March 31,
                                                     2002            2002

    Assets
    Current assets:
       Cash and cash equivalents                    $30,346        $19,332
       Marketable securities                         24,938         44,849
       Accounts receivable, net                      10,635         12,932
       Inventories                                    3,140          3,698
       Deferred income taxes                          1,974          1,293
       Prepaids and other current assets              1,964          2,876

          Total current assets                       72,997         84,980

    Fixed assets, net                                 7,445          8,628
    Other intangible assets, net                        544          1,429
    Goodwill, net                                    28,839         28,770
    Deferred income taxes                             8,601          7,617
    Long-term marketable securities                  15,032          5,084
    Other assets                                       --              790

            Total assets                           $133,458       $137,298


    Liabilities and Stockholders' Equity
    Current liabilities:
       Accounts payable                              $1,495         $2,456
       Accrued compensation                           4,149          5,775
       Accrued other                                  1,964          2,715
       Income tax payable                               112            542
       Deferred revenue                              13,749         13,103

          Total current liabilities                  21,469         24,591

    Stockholders' equity:
       Common stock                                      34             34
       Additional paid-in capital                   108,735        107,529
       Deferred compensation                           (191)        (1,063)
       Treasury stock                               (26,366)       (25,755)
       Retained earnings                             29,777         31,962

          Total stockholders' equity                111,989        112,707

            Total liabilities and
             stockholders' equity                  $133,458       $137,298


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

                                             Three Months       Nine Months
                                                 Ended            Ended
                                              December 31,     December 31,
                                            2002     2001     2002     2001
    Revenue:
       Product                             $10,641  $13,879  $31,473  $36,567
       Service                               6,401    5,372   18,086   15,102
       License and royalty                   1,113    2,232    4,382    7,712
          Total revenue                     18,155   21,483   53,941   59,381

    Cost of revenue:
         Product (including stock-based
          compensation of $0, $0, $0
         and $1, respectively)               3,363    4,636   10,212   13,422
         Service (including stock-based
          compensation of $2, $2, $5
         and $6, respectively)               1,228      881    3,362    2,668
           Total cost of revenue             4,591    5,517   13,574   16,090

    Gross margin                            13,564   15,966   40,367   43,291

    Operating expenses:
       Research and development (including
        stock-based compensation of
       $46, $551, $779 and $1,642,
        respectively)                        4,050    4,884   12,834   14,480
       Sales and marketing (including
        stock-based compensation of $16
       $26, $54 and $83, respectively)       8,502    9,361   25,289   26,938
       General and administrative
        (including stock-based
        compensation
       of $2, $1, $5 and $5, respectively)   1,708    2,113    5,953    5,731
       Amortization of other intangible
        assets                                 272      359      816    1,077
       Amortization of goodwill               --      2,274     --      6,824
           Total operating expenses         14,532   18,991   44,892   55,050

    Loss from operations                      (968)  (3,025)  (4,525) (11,759)
    Interest income and other expenses,
     net                                       258      373      897    1,559
    Loss before benefit from income taxes     (710)  (2,652)  (3,628) (10,200)
    Benefit from income taxes                 (382)     (65)  (1,443)    (530)
    Net loss                                 $(328) $(2,587) $(2,185) $(9,670)

    Basic and diluted net loss per share    $(0.01)  $(0.09)  $(0.07)  $(0.33)

    Shares used in computing:
         Basic and diluted net loss per
          share                             29,940   29,478   29,870   29,476

    Supplemental information:
    Net loss                                 $(328) $(2,587) $(2,185) $(9,670)
    Stock-based compensation (as detailed
     in expense categories above)               66      580      843    1,737
    Amortization of goodwill and other
     intangible assets                         272    2,633      816    7,901
    Pro forma net income (loss) excluding
     acquisition and stock-based
       compensation costs                      $10     $626    $(526)    $(32)

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

    Shares used in computing pro forma
     diluted net income (loss) per share
        excluding acquisition and stock-
         based compensation costs           30,067   30,026   29,870   29,476

SOURCE NetScout Systems, Inc.

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