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NETSCOUT Systems Reports Financial Results for Third Quarter Fiscal Year 2010

January 21, 2010

GAAP and Non-GAAP Revenue up 18% SequentiallyGAAP Net Income up 21% Sequentially; Non-GAAP Net Income up 14% Sequentially

WESTFORD, Mass., Jan 21, 2010 (BUSINESS WIRE) -- NetScout Systems, Inc. (NASDAQ: NTCT)

Q3 FY 2010
GAAP Non-GAAP
Revenue $70.7 million $70.9 million
Net income $8.5 million $10.3 million
Net Income per share $0.20 $0.25

NetScout Systems, Inc. (NASDAQ: NTCT), an industry leader for advanced network and service assurance solutions, today announced financial results for its third quarter of fiscal year 2010, ended December 31, 2009.

Total GAAP revenue for the third quarter of fiscal year 2010 was $70.7 million, and non-GAAP revenue was $70.9 million. Non-GAAP revenue excludes the purchase accounting adjustment to reduce the acquired Network General deferred revenue to fair value. Product revenue was $40.8 million on a GAAP and non-GAAP basis. Service revenue was $29.9 million on a GAAP basis and $30.1 million on a non-GAAP basis.

GAAP net income for the quarter was $8.5 million, or net income per diluted share of $0.20. GAAP income from operations was $13.8 million. On a non-GAAP basis, net income was $10.3 million, or $0.25 per diluted share, and non-GAAP income from operations was $16.7 million. Non-GAAP income from operations excludes the purchase accounting adjustment to reduce the acquired Network General deferred revenue to fair value, as well as share-based compensation expenses and amortization of acquired intangible assets. Non-GAAP net income excludes these effects as well as their related impact on the provision for income taxes. A reconciliation of GAAP to non-GAAP results is included in the attached financial tables.

"Our sequentially stronger third quarter results were consistent with the full year guidance that we issued in April and revised in October last year, reflecting our normal bookings seasonality and the beginning of an improving economic climate. We saw strong orders from telecommunications service providers, primarily wireless carriers, making that vertical our largest bookings contributor for the first time. Telecommunications combined with our other high growth verticals - financial services and government - accounted for seventy percent of total bookings. Driven by these verticals, we have seen a strengthening of our twelve month pipeline," said Anil Singhal, President and CEO of NetScout Systems. "We are focused on extending our competitive advantage across our major verticals and will continue to invest to accelerate growth. We are dedicated to building market share with new products for the wireless service provider and financial markets together with expanding our market reach through a larger sales force. As we invest for future long term growth we remain committed to managing expenses prudently to maintain our strong margins and cash flow."

Third Quarter Financial Highlights:

  • GAAP revenue decreased 2% year-over-year and increased 18% sequentially. Non-GAAP revenue decreased 4% year-over-year and increased 18% sequentially.
  • GAAP product revenue decreased 5% year-over-year and increased 33% sequentially. Non-GAAP product revenue decreased 6% year-over-year and increased 33% sequentially.
  • GAAP service revenue increased 3% year-over-year and sequentially. Non-GAAP service revenue decreased 3% year-over-year and increased 2% sequentially.
  • GAAP operating margin was 20% up 2 points from 18% a year ago and flat sequentially. Non-GAAP operating margin was 24%, down 1 point from 25% a year ago and sequentially.
  • As of December 31, 2009, total cash and cash equivalents and short and long-term marketable securities were $151.3 million, up $8.5 million from $142.8 million as of the end of the prior quarter.

 

Company Highlights:

In the third quarter NetScout released two new software products: nGenius(R) Subscriber Intelligence and nGenius Virtual Agent.

  • Recently we announced the availability of nGenius Subscriber Intelligence, a new software module targeted at wireless service providers for monitoring data traffic on next generation mobile IP networks. nGenius Subscriber Intelligence provides mobile operators a comprehensive session-oriented view of the subscribers' experience for voice, video and data services as mobile data traffic continues to skyrocket.
  • During the quarter we began shipping nGenius Virtual Agent software, extending service delivery visibility into applications contained within virtual computing environments. nGenius Virtual Agent works with our widely deployed nGenius Probe technology, providing high-performance packet-flow monitoring and analysis capabilities deeper into the data center and private clouds -- enabling the IT organization to regain end-to-end visibility of application traffic from within virtual servers.

 

Guidance

For the fiscal year ending March 31, 2010, NetScout is today narrowing the revenue guidance range and raising the low end of the guidance range for net income per diluted share. GAAP revenue is now expected to be in the range of $259 to $262 million and non-GAAP revenue between $260 million to $263 million. This guidance implies that fourth quarter GAAP and non-GAAP revenue will be in the range of $70 million to $73 million. For fiscal year 2010, GAAP net income per diluted share is now expected to be in the range of $0.69 to $0.73 and non-GAAP net income per diluted share is expected to be between $0.88 and $0.92. Accordingly, implied fourth quarter GAAP net income per diluted share will be in the range of $0.18 and $0.22 and non-GAAP net income per diluted share is expected to be between $0.22 and $0.26. The fiscal year 2010 non-GAAP revenue expectation excludes the Network General purchase accounting adjustment of approximately $1.3 million that reduces Network General's deferred revenue to fair value and the non-GAAP net income per diluted share expectation excludes the deferred revenue purchase accounting adjustment, as well as share-based compensation expenses of approximately $5.5 million, amortization of acquired intangible assets of approximately $5.9 million, and the related impact of these adjustments on the provision for income taxes of $4.8 million.

Use of Non-GAAP Financial Information

To supplement the financial measures presented in the Company's press release in accordance with accounting principles generally accepted in the United States ("GAAP"), the Company also presents non-GAAP measures relating to revenue, income from operations, net income and net income per diluted share which were adjusted from amounts determined based on GAAP to exclude the purchase accounting adjustment representing the fair value of Network General's deferred revenue, share-based compensation expenses, amortization of acquired intangible assets, as well as the related income tax effects.

These non-GAAP measures are not in accordance with GAAP, should not be considered an alternative for measures prepared in accordance with GAAP, and may have limitations in that they do not reflect all of NetScout's results of operations as determined in accordance with GAAP. These non-GAAP measures should only be used to evaluate NetScout's results of operations in conjunction with the corresponding GAAP measures. The presentation of non-GAAP information is not meant to be considered superior to, in isolation from or as a substitute for results prepared in accordance with GAAP.

The Company believes these non-GAAP financial measures enhance the reader's overall understanding of NetScout's current financial performance and the Company's prospects for the future by providing a higher degree of transparency for certain financial measures and providing a level of disclosure that helps investors understand how the Company plans and measures its own business. The Company believes that providing these non-GAAP measures affords investors a view of the Company's operating results that may be more easily compared to peer companies and also enables investors to consider the Company's operating results on both a GAAP and non-GAAP basis during the period where GAAP results are affected by the Company's acquisition of Network General. Presenting the GAAP measures on their own would not be indicative of the Company's core operating results. Furthermore, NetScout believes that the presentation of non-GAAP measures when shown in conjunction with the corresponding GAAP measures provide useful information to management and investors regarding present and future business trends relating to its financial condition and results of operations.

As discussed above, Company management regularly uses supplemental non-GAAP financial measures internally to understand, manage and evaluate its business and to make operating decisions. These non-GAAP measures are among the primary factors that management uses in planning and forecasting future periods.

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://cts.businesswire.com/ct/CT?id=smartlink&url=http%3A%2F%2Fwww.netscout.com%2Finvestors&esheet=6151028&lan=en_US&anchor=http%3A%2F%2Fwww.netscout.com%2Finvestors&index=2&md5=20e1d1f58a014e5d05621872c3912389. Alternatively, people can listen to the call by dialing 866-701-8242 for U.S./Canada and 763-416-6912 for international callers and using conference ID: 50944837. A replay of the call will be available after 7:30 p.m. ET on January 21 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: 50944837.

About NetScout Systems

NetScout Systems, Inc. is the market leader in Unified Service Delivery Management enabling comprehensive end-to-end network and application assurance. For 25 years, NetScout has delivered breakthrough packet-flow technology that provides trusted and comprehensive real-time network and application performance intelligence enabling unified assurance of the network, applications and users. These solutions enable IT staff to predict, preempt and resolve network and service delivery problems while facilitating the optimization and capacity planning of the network infrastructure. NetScout nGenius(R) and Sniffer(R) solutions are deployed at more than 20,000 of the world's largest enterprises, government agencies, and service providers, on over 740,000 network segments to assure the network, applications, and service delivery to their users and customers. More information about NetScout Systems is available at http://cts.businesswire.com/ct/CT?id=smartlink&url=http%3A%2F%2Fwww.netscout.com&esheet=6151028&lan=en_US&anchor=http%3A%2F%2Fwww.netscout.com&index=3&md5=61cef9378156c76589e226e2ccec90c1.

Safe Harbor

Forward-looking statements in this press release are made pursuant to the safe harbor provisions of Section 21E of the Securities Exchange Act of 1934, as amended, 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 slowdowns or downturns in economic conditions generally and in the market for advanced network and service assurance solutions specifically, 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, successful expansion and management of direct and indirect distribution channels and dependence on proprietary technology. 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, 2009 and subsequent Quarterly Reports on Form 10-Q 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.

©2010 NetScout Systems, Inc. All rights reserved. NetScout and the NetScout logo and nGenius are registered trademarks of NetScout Systems, Inc.

NetScout Systems, Inc.
Condensed Consolidated Statements of Operations
(In thousands, except per share data)
(Unaudited)
Three Months Ended Nine Months Ended
December 31 December 31
2009 2008 2009 2008
Revenue:
Product $ 40,774 $ 42,940 $ 99,796 $ 117,370
Service 29,941 29,110 88,672 84,148

Total revenue

70,715 72,050 188,468 201,518
Cost of revenue:
Product 9,924 10,755 25,472 33,158
Service 5,481 5,271 14,974 15,551
Total cost of revenue 15,405 16,026 40,446 48,709
Gross profit 55,310 56,024 148,022 152,809
Operating expenses:
Research and development 9,181 9,900 27,069 30,208
Sales and marketing 26,328 25,219 69,806 75,017
General and administrative 5,475 7,149 15,309 19,760
Amortization of acquired intangible assets 490 490 1,471 1,471
Total operating expenses 41,474 42,758 113,655 126,456
Income from operations 13,836 13,266 34,367 26,353
Interest and other income (expense), net (862 ) (1,267 ) (2,296 ) (4,448 )
Income before income tax expense 12,974 11,999 32,071 21,905
Income tax expense 4,433 4,064 11,207 7,531
Net income $ 8,541 $ 7,935 $ 20,864 $ 14,374
Basic net income per share $ 0.21 $ 0.20 $ 0.52 $ 0.37
Diluted net income per share $ 0.20 $ 0.20 $ 0.50 $ 0.35
Weighted average common shares outstanding used in computing:
Net income per share - basic 40,684 39,334 40,463 39,164
Net income per share - diluted 42,041 40,506 41,657 40,707
NetScout Systems, Inc.
Reconciliation of GAAP to Non-GAAP Financial Measures
(In thousands, except per share data)
(Unaudited)
Three Months Ended Nine Months Ended
December 31 December 31
2009 2008 2009 2008
GAAP Revenue $ 70,715 $ 72,050 $ 188,468 $ 201,518
Product deferred revenue fair value adjustment 13 239 31 1,850
Service deferred revenue fair value adjustment 196 1,863 1,174 9,169
Non-GAAP revenue $ 70,924 $ 74,152 $ 189,673 $ 212,537
GAAP Gross profit $ 55,310 $ 56,024 $ 148,022 $ 152,809
Deferred revenue fair value adjustment 209 2,102 1,205 11,019
Shared-based compensation expense (1) 78 84 247 231
Amortization of acquired intangible assets (2) 995 995 2,985 3,002
Integration expense (3) - 37 - 323
Non-GAAP Gross profit $ 56,592 $ 59,242 $ 152,459 $ 167,384
GAAP Income from operations $ 13,836 $ 13,266 $ 34,367 $ 26,353
Deferred revenue fair value adjustment 209 2,102 1,205 11,019
Shared-based compensation expense (1) 1,207 1,222 3,774 3,601
Amortization of acquired intangible assets (2) 1,485 1,485 4,456 4,473
Integration expense (3) - 281 - 1,370
Non-GAAP Income from operations $ 16,737 $ 18,356 $ 43,802 $ 46,816
GAAP Net income $ 8,541 $ 7,935 $ 20,864 $ 14,374
Deferred revenue fair value adjustment 209 2,102 1,205 11,019
Shared-based compensation expense (1) 1,207 1,222 3,774 3,601
Amortization of acquired intangible assets (2) 1,485 1,485 4,456 4,473
Integration expense (3) - 281 - 1,370
Income tax adjustments (4) (1,102 ) (1,934 ) (3,585 ) (7,776 )
Non-GAAP Net income $ 10,340 $ 11,091 $ 26,714 $ 27,061
GAAP Diluted Net income per share $ 0.20 $ 0.20 $ 0.50 $ 0.35
Share impact of non-GAAP adjustments identified above 0.05 0.07 0.14 0.31
Non-GAAP Diluted net income per share $ 0.25 $ 0.27 $ 0.64 $ 0.66
Shares used in computing non-GAAP diluted net income per share 42,041 40,506 41,657 40,707
(1)

Share-based compensation expense included in these amounts
is as follows:

Cost of product revenue $ 27 $ 27 $ 84 $ 80
Cost of service revenue 51 57 163 151
Research and development 291 278 911 889
Sales and marketing 493 532 1,594 1,573
General and administrative 345 328 1,022 908
Total share-based compensation expense $ 1,207 $ 1,222 $ 3,774 $ 3,601
(2)

Amortization expense related to acquired software and product
technology included in these amounts is as follows:

Cost of Product Revenue $ 995 $ 995 $ 2,985 $ 3,002
Operating expenses 490 490 1,471 1,471
Total amortization expense $ 1,485 $ 1,485 $ 4,456 $ 4,473
(3)

Integration expense included in these amounts is as follows:

Cost of product revenue $ - $ - $ - $ 141
Cost of service revenue - 37 - 182
Research and development - 69 - 246
Sales and marketing - 77 - 276
General and administrative - 98 - 525
Total integration expense $ - $ 281 $ - $ 1,370
(4) Reflects the tax effect of non-GAAP adjustments above at the statutory rate of 38%
NetScout Systems, Inc.
Condensed Consolidated Balance Sheets
(In thousands)
(Unaudited)
December 31 March 31
2009 2009
Assets
Current assets:
Cash and cash equivalents $ 66,524 $ 82,222
Marketable securities 49,412 24,162
Accounts receivable, net 57,650 39,827
Inventories 8,728 6,850
Refundable income taxes 6,788 8,389
Deferred income taxes 2,897 2,796
Prepaid expenses and other current assets 4,667 4,939
Total current assets 196,666 169,185
Fixed assets, net 11,604 13,848
Goodwill 128,177 128,177
Acquired intangible assets, net 55,154 59,610
Deferred income taxes 32,713 34,941
Long-term marketable securities 35,349 29,528
Other assets 1,813 1,445
Total assets $ 461,476 $ 436,734
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 8,484 $ 6,385
Accrued compensation 17,884 23,156
Accrued other 5,020 5,407
Income taxes payable 6,196 1,702
Long-term debt, current portion 10,000 10,000
Deferred revenue 72,584 70,815
Total current liabilities 120,168 117,465
Other long-term liabilities 632 771
Accrued long-term retirement benefits 1,586 1,330
Long-term deferred revenue 12,914 8,937
Long-term debt, net of current portion 71,856 82,500
Total liabilities 207,156 211,003
Stockholders' equity:
Common stock 45 45
Additional paid-in capital 200,943 192,844
Accumulated other comprehensive loss (1,835 ) (1,461 )
Treasury stock (28,939 ) (28,939 )
Retained earnings 84,106 63,242
Total stockholders' equity 254,320 225,731
Total liabilities and stockholders' equity $ 461,476 $ 436,734

SOURCE: NetScout Systems, Inc.

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

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