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NETSCOUT Systems Reports Financial Results for Third Quarter of Fiscal 2007

January 25, 2007

Revenue up 6% Sequentially

WESTFORD, Mass., Jan 25, 2007 (BUSINESS WIRE) -- NetScout Systems, Inc. (NASDAQ: NTCT), a leading provider of network and application performance management solutions, today announced financial results for its third quarter of fiscal year 2007.

Total revenue for the third quarter of fiscal year 2007 was $26.5 million, up 6% year-over-year. Net income was $2.0 million, an increase of 5% on a year-over-year basis, leading to net income per diluted share of $0.06. Operating income, which included stock-based compensation expense of $357,000 and amortization of acquired intangible assets of $143,000, was $1.9 million in the third quarter of fiscal 2007, representing an operating margin of 7%.

 

"We are pleased with our financial results in the third quarter with revenue and EPS at the high end of our previously issued guidance," said Anil Singhal, President and CEO of NetScout Systems. "During the quarter we released enhancements to our nGenius Performance Management Solution targeted at the wireless service provider market for deployment in their revenue generating, customer facing networks. We expect the wireless service provider segment to continue to provide significant opportunity with our new product focus. Looking ahead we expect the strength we saw in the third quarter will continue through next quarter and accelerate going forward. In addition, we remain confident in our EPS growth target of 40% in fiscal year 2008."

Financial and Company Highlights for the Third Fiscal Quarter 2007:

  • Total revenue increased 6% year-over-year and 6% sequentially.
  • Operating margin was 7% of total revenue, down 2 points year-over-year and down 3 points sequentially.
  • Cash and short and long-term marketable securities increased by $4.4 million to $95.1 million in the third quarter.
  • During the quarter NetScout provided enhancements to its nGenius Performance Management Solution targeted at wireless service providers' revenue generating, customer facing networks. NetScout's carrier-class capabilities will give service providers requisite deep visibility into IP traffic to accurately plan for capacity expansion and to reduce Mean Time to Restore by rapidly troubleshooting IP service degradations.
  • NetScout introduced nGenius Performance Manager for NetFlow that supports Cisco's NetFlow and IP SLA by combining nGenius Performance Manager with nGenius Collector appliances in a cost effective solution.
  • NetScout's nGenius Performance Manager and nGenius Analytics received IBM's "Ready for IBM Tivoli Software" validation with the integration of the nGenius Solution with IBM Tivoli NetView.
  • NetScout received Frost & Sullivan's 2006 Customer Value Enhancement Award, recognizing innovation in the network performance monitoring & management category.
  • During the quarter NetScout increased its presence in the growing Asia Pacific region with a new office in Australia and a channel partnership agreement with Tenfold Network Solutions Pty. serving the Australia and New Zealand markets. In addition NetScout expanded coverage in the Middle East with a channel partnership with Equinox International based in Dubai.

Guidance:

For the fourth quarter of fiscal year 2007, the Company expects total revenue to be in the range of $26.5 million to $27.5 million and net income per diluted share to be in the range of $0.04 to $0.05. Included in forecasted net income per diluted share is a non-recurring charge of $0.03 per share relating to a retirement and advisory agreement for the Company's outgoing Founder and Chairman, Mr. Narendra Popat. The Company expects a fourth quarter operating margin of 7 to 8 percent which would equate to a 12 to 13 percent operating margin if the non-recurring charges related to Mr. Popat's agreement, which account for a five point reduction in operating margin, were excluded. The Company reiterates its long-range guidance for net income per diluted share growth of 40% in fiscal year 2008.

CONFERENCE CALL INSTRUCTIONS:

The Company invites shareholders to listen to its conference call today at 4:30 p.m. ET, which will be webcast live through the Company's website at http://www.netscout.com/investors. Alternatively, people can listen to the call by dialing 866-701-8242 for U.S./Canada and 706-634-5113 for international callers and using conference ID: 6233829. A replay of the call will be available after 7:30 p.m. ET on January 25 for approximately one week. The number for the replay is 800-642-1687 for U.S./Canada and 706-645-9291 for international callers. The conference ID is: 6233829.

About NetScout Systems, Inc.

NetScout Systems, Inc. (NASDAQ: NTCT) is a market leader and pioneer of integrated network and application performance management products and solutions that assure critical business services across the enterprise. More than 3200 organizations worldwide have deployed NetScout's nGenius(R) Performance Management System to increase their return on infrastructure investments by optimizing the performance of networks and applications according to business priorities. NetScout is headquartered in Westford, Massachusetts and has offices worldwide. Further information is available 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 and other federal securities laws. 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 relationships with strategic 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, the ability of the Company 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, and risks of 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, 2006 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.

(C)2007 NetScout Systems, Inc. All rights reserved. NetScout and the NetScout logo, nGenius, and Quantiva are registered trademarks of NetScout Systems, Inc. Other brands, product names and trademarks are property of their respective owners.

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


                                     Three Months    Nine Months Ended
                                         Ended
                                      December 31       December 31
                                   ----------------- -----------------
                                      2006     2005     2006     2005
                                   -------- -------- -------- --------
Revenue:
   Product                         $16,366  $16,274  $46,351  $46,389
   Service                          10,133    8,637   28,803   25,489
   License and royalty                   -        -        -      184
                                   -------- -------- -------- --------
      Total revenue                 26,499   24,911   75,154   72,062
                                   -------- -------- -------- --------

Cost of revenue:

     Product (1) (2)                 4,528    4,754   12,766   13,680
     Service (1)                     1,416    1,175    3,998    3,609
                                   -------- -------- -------- --------
       Total cost of revenue         5,944    5,929   16,764   17,289
                                   -------- -------- -------- --------

Gross margin                        20,555   18,982   58,390   54,773
                                   -------- -------- -------- --------

Operating expenses:

   Research and development (1)      4,782    4,380   13,690   13,633
   Sales and marketing (1)          11,253   10,054   32,112   29,608
   General and administrative
    (1)                              2,571    2,266    6,913    6,762
   Amortization of other acquired
    intangible assets                   39       39      116      110
   In-process research and
    development                          -        -        -      143
                                   -------- -------- -------- --------
       Total operating expenses     18,645   16,739   52,831   50,256
                                   -------- -------- -------- --------

Income from operations               1,910    2,243    5,559    4,517
Interest income and other
 expenses, net                         917      687    3,004    1,770
                                   -------- -------- -------- --------
Income before income tax expense
 and cumulative effect of
 accounting change                   2,827    2,930    8,563    6,287
Income tax expense                     844    1,043    2,973    2,294
                                   -------- -------- -------- --------
Income before cumulative effect
 of accounting change                1,983    1,887    5,590    3,993
Cummulative effect of accounting
 change, net of taxes of $42             -        -       69        -
                                   -------- -------- -------- --------
Net income                          $1,983   $1,887   $5,659   $3,993
                                   ======== ======== ======== ========

Basic net income per share           $0.06    $0.06    $0.18    $0.13
Diluted net income per share         $0.06    $0.06    $0.17    $0.13
Shares used in computing:
     Basic net income per share     31,735   31,106   31,626   30,972
     Diluted net income per
      share                         33,026   31,736   32,925   31,600


(1) Share-based compensation
 expense included in these amounts
 are as follows:
    Cost of product revenue            $10       $-      $30       $-
    Cost of service revenue             12        -       37        -
    Research and development           135       73      366      215
    Sales and marketing                140       24      442       68
    General and administrative          60       49      202       57
                                   -------- -------- -------- --------
        Total share-based
         compensation expense         $357     $146   $1,077     $340
                                   ======== ======== ======== ========

(2) Amortization expense related
 to acquired software included in
 theses amounts are as follows:
     Cost of Product Revenue          $104     $104     $312     $296

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


                                                 December 31 March 31,
                                                       2006      2006
                                                 ----------- ---------

Assets
Current assets:
   Cash and cash equivalents                        $70,151   $61,676
   Marketable securities                             14,130    19,810
   Accounts receivable, net                          16,468    16,765
   Inventories                                        4,426     2,816
   Refundable income taxes                              300       985
   Deferred income taxes                              2,909     2,896
   Restricted cash                                        -     1,339
   Prepaids and other current assets                  3,285     3,119
                                                 ----------- ---------

      Total current assets                          111,669   109,406

Fixed assets, net                                     8,069     7,577
Goodwill                                             36,561    36,561
Acquired intangible assets, net                         586     1,015
Capitalized software development costs, net             211       312
Deferred income taxes                                 5,050     4,889
Long-term marketable securities                      10,813     5,979
Other assets                                             71        16
                                                 ----------- ---------
        Total assets                               $173,030  $165,755
                                                 =========== =========


Liabilities and Stockholders' Equity
Current liabilities:
   Accounts payable                                  $2,799    $2,727
   Accrued compensation                               7,211     8,635
   Accrued other                                      2,365     2,325
   Income tax payable                                   936         -
   Deferred acquisition payment - Quantiva                -     1,339
   Deferred revenue                                  21,369    21,382
                                                 ----------- ---------

      Total current liabilities                      34,680    36,408

Other long-term liabilities                           1,054     1,157
Long-term deferred revenue                            1,606     1,599
                                                 ----------- ---------
       Total liabilities                             37,340    39,164
                                                 ----------- ---------

Stockholders' equity:
   Common stock                                          36        35
   Additional paid-in capital                       120,394   120,057
   Accumulated other comprehensive loss                 (54)     (122)
   Deferred compensation                                  -    (4,434)
   Treasury stock                                   (27,890)  (26,490)
   Retained earnings                                 43,204    37,545
                                                 ----------- ---------

      Total stockholders' equity                    135,690   126,591
                                                 ----------- ---------

        Total liabilities and stockholders'
         equity                                    $173,030  $165,755
                                                 =========== =========

SOURCE: NetScout Systems

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

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