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NETSCOUT Systems Reports Financial Results For Second Quarter Fiscal Year 2014

October 17, 2013

Q2 GAAP and Non-GAAP Revenue Up 9% Year-over-Year

Q2 GAAP and Non-GAAP Product Revenue Up 13% Year-over-Year

Q2 GAAP and Non-GAAP EPS Comparable Year-Over-Year

WESTFORD, Mass.--(BUSINESS WIRE)--Oct. 17, 2013-- NetScout Systems, Inc. (NASDAQ: NTCT):

  Q2 FY 2014
GAAP   Non-GAAP
Revenue $92.1 million $92.2 million
Net income $9.9 million $14.3 million
Net Income per share $0.24 $0.34

NetScout Systems, Inc. (NASDAQ: NTCT), an industry leader for advanced application and service assurance solutions, today announced financial results for its second quarter of fiscal year 2014 ended September 30, 2013.

“NetScout delivered a solid second quarter, reporting good results that were in line with our operating plan,” said Anil Singhal, President and CEO. “We are pleased to see notable growth of product revenue, augmented by keen customer interest in our newly released products. One of the more significant recent product developments is our nGeniusONE™ platform, a converged solution for network and application performance. nGeniusONE provides IT operations with a top-down, service-focused perspective of performance characteristics of all network and application elements associated with service delivery.” Mr. Singhal added, “We see growing demand for our intelligent, highly scalable packet flow monitoring switches—complementary products that simplify and streamline our customers’ network monitoring architectures. We believe our Unified Service Delivery Management strategy is increasing mind share across our enterprise and service provider markets as we continue to deliver unique product enhancements and technology.”

Total GAAP revenue for the second quarter was $92.1 million; non-GAAP revenue was $92.2 million. A reconciliation of GAAP and non-GAAP results is included in the attached financial tables.

Product revenue for the second quarter, on a GAAP and non-GAAP basis was $52.4 million. Service revenue on a GAAP basis was $39.7 million and non-GAAP service revenue was $39.8 million.

GAAP net income for the second quarter was $9.9 million, or $0.24 per diluted share. GAAP income from operations was $15.9 million. On a non-GAAP basis, net income for the quarter was $14.3 million, or $0.34 per diluted share, and non-GAAP income from operations was $22.6 million.

  • GAAP and non-GAAP revenue increased 9% year-over-year and increased 13% sequentially.
  • GAAP and non-GAAP product revenue increased 13% year-over-year and increased 22% sequentially.
  • GAAP operating margin was 17%, down three points from a year ago and up six points sequentially. Non-GAAP operating margin was 25%, down three points from a year ago and up eight points sequentially.
  • As of September 30, 2013, cash and cash equivalents and short and long-term marketable securities were $159.4 million, down $3.4 million from $162.8 million as of the end of the prior quarter.

Guidance:

For fiscal year 2014, we are reiterating the guidance we issued on April 25, 2013. We expect GAAP revenue to be in the range of $384 million to $399 million and non-GAAP revenue to be in the range of $385 million to $400 million. GAAP net income per diluted share is expected to be in the range of $1.06 to $1.16 and non-GAAP net income per diluted share between $1.40 and $1.50.

For fiscal year 2014, the non-GAAP net income per diluted share expectation excludes the acquisition accounting adjustment to fair value of approximately $0.6 million for deferred revenue, forecasted share-based compensation expenses of approximately $12.8 million, estimated amortization of acquired intangible assets of approximately $6.7 million, compensation for post combination services of approximately $2.6 million, business development charges of approximately $0.4 million, the related impact of these adjustments on the provision for income taxes of $8.8 million and a tax offset for tax impact of non-GAAP reconciling items in loss jurisdictions of approximately $0.4 million.

CONFERENCE CALL INSTRUCTIONS:

NetScout invites shareholders to listen to its conference call today at 8:30 a.m. ET, which will be webcast live through NetScout’s website at http://ir.netscout.com/phoenix.zhtml?c=92658&p=irol-irhome. 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: 82804101. A replay of the call will be available after 11:30 a.m. ET on October 17, 2013 for approximately one week. The number for the replay is (855)859-2056 for U.S./Canada and (404)537-3406 for international callers. The conference ID is: 82804101.

Use of Non-GAAP Financial Information

To supplement the financial measures presented in NetScout's press release in accordance with accounting principles generally accepted in the United States ("GAAP"), NetScout also reports the following non-GAAP measures: non-GAAP revenue, non-GAAP net income and non-GAAP net income per diluted share. Non-GAAP revenue eliminates the GAAP effects of acquisitions by adding back revenue related to deferred revenue revaluation. Non-GAAP net income includes the foregoing adjustment and also removes expenses related to the amortization of acquired intangible assets, stock-based compensation, restructuring, certain expenses relating to acquisitions including compensation for post-combination services and business development charges, net of related income tax effects. Non-GAAP diluted net income per share also excludes these expenses as well as the related impact of all these adjustments on the provision for income taxes.

These non-GAAP measures are not in accordance with GAAP, should not be considered an alternative for measures prepared in accordance with GAAP (revenue, net income and diluted net income per share), 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.

NetScout believes these non-GAAP financial measures will enhance the reader’s overall understanding of NetScout’s current financial performance and NetScout'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. NetScout believes that providing these non-GAAP measures affords investors a view of NetScout’s operating results that may be more easily compared to peer companies and also enables investors to consider NetScout’s operating results on both a GAAP and non-GAAP basis during and following the integration period of NetScout’s acquisitions. Presenting the GAAP measures on their own would not be indicative of NetScout’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.

NetScout 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.

About NetScout Systems, Inc.

NetScout Systems, Inc. (NASDAQ: NTCT) is the market leader in Unified Service Delivery Management enabling comprehensive end-to-end network and application assurance. For 28 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® and Sniffer® solutions are deployed at more than 20,000 of the world’s largest enterprises, government agencies, and more than 165 service providers, on over one million physical and 2,000 virtual network segments to assure the network, applications, and service delivery to their users and customers. For more information about NetScout go to 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, as amended, and other federal securities laws. Investors are cautioned that statements in this press release, which are not strictly historical statements, including without limitation, our financial guidance for fiscal 2014, 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, NetScout’s relationships with strategic partners, dependence upon broad-based acceptance of NetScout’s network performance management solutions, NetScout’s ability to achieve and maintain a high rate of growth, introduction and market acceptance of new products and product enhancements, 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 and the ability of NetScout to successfully integrate Psytechnics, Fox Replay, Simena, Accanto Systems and ONPATH Technologies, and achieve operational efficiencies. For a more detailed description of the risk factors associated with NetScout, please refer to NetScout’s Annual Report on Form 10-K for the fiscal year ended March 31, 2013 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.

©2013 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)
         
Three Months Ended
September 30,
Six Months Ended
September 30,
  2013     2012     2013     2012  
Revenue:
Product $ 52,357 $ 46,162 $ 95,334 $ 86,424
Service   39,740     38,383     78,568     74,482  
Total revenue   92,097     84,545     173,902     160,906  
 
Cost of revenue:
Product 11,810 10,330 21,583 20,400
Service   7,894     6,611     15,043     13,404  
Total cost of revenue   19,704     16,941     36,626     33,804  
 
Gross profit   72,393     67,604     137,276     127,102  
 
Operating expenses:
Research and development 16,638 15,201 32,603 29,278
Sales and marketing 31,559 26,743 63,759 56,892
General and administrative 7,457 6,975 14,438 13,532
Amortization of acquired intangible assets 857 645 1,711 1,231
Restructuring charges   -     1,153     -     1,066  
Total operating expenses   56,511     50,717     112,511     101,999  
 
Income from operations 15,882 16,887 24,765 25,103
Interest and other expense, net   (59 )   (116 )   (132 )   (472 )
 
Income before income tax expense 15,823 16,771 24,633 24,631
Income tax expense   5,940     6,861     9,497     9,713  
Net income $ 9,883   $ 9,910   $ 15,136   $ 14,918  
 
 

Basic net income per share

$ 0.24 $ 0.24 $ 0.37 $ 0.36

Diluted net income per share

$ 0.24 $ 0.23 $ 0.36 $ 0.35

Weighted average common shares outstanding used in computing:

Net income per share - basic

41,392 41,695 41,398 41,715

Net income per share - diluted

41,950 42,344 42,004 42,400

NetScout Systems, Inc.
Reconciliation of Current GAAP to Current and Historical Non-GAAP Financial Measures
(In thousands, except per share data)
      Three Months Ended
September 30,
  Six Months Ended
September 30,
2013   2012 2013   2012
 
GAAP Revenue $ 92,097 $ 84,545 $ 173,902 $ 160,906

Deferred revenue fair value adjustment

  139     133     279     271  
Non-GAAP Revenue $ 92,236   $ 84,678   $ 174,181   $ 161,177  
 
GAAP Gross profit $ 72,393 $ 67,604 $ 137,276 $ 127,102

Deferred revenue fair value adjustment

139 133 279 271

Shared-based compensation expense (1)

294 153 484 268

Amortization of acquired intangible assets (2)

824 1,485 1,643 2,902

Compensation for post combination services (4)

  9     -     17     -  
Non-GAAP Gross profit $ 73,659   $ 69,375   $ 139,699   $ 130,543  
 
GAAP Income from operations $ 15,882 $ 16,887 $ 24,765 $ 25,103
Deferred revenue fair value adjustment 139 133 279 271
Shared-based compensation expense (1) 3,930 2,532 6,742 4,779
Amortization of acquired intangible assets (2) 1,681 2,130 3,354 4,133
Business development and integration expense (3) 234 474 404 831
Compensation for post combination services (4) 711 442 1,155 814
Restructuring charges   -     1,153     -     1,066  
Non-GAAP Income from operations $ 22,577   $ 23,751   $ 36,699   $ 36,997  
 
GAAP Net income $ 9,883 $ 9,910 $ 15,136 $ 14,918
Deferred revenue fair value adjustment 139 133 279 271
Shared-based compensation expense (1) 3,930 2,532 6,742 4,779
Amortization of acquired intangible assets (2) 1,681 2,130 3,354 4,133
Business development and integration expense (3) 234 474 404 831
Compensation for post combination services (4) 711 442 1,155 814
Restructuring charges - 1,153 - 1,066
Income tax adjustments (5)   (2,308 )   (2,330 )   (4,093 )   (4,242 )
Non-GAAP Net income $ 14,270   $ 14,444   $ 22,977   $ 22,570  
 
GAAP Diluted Net income per share $ 0.24 $ 0.23 $ 0.36 $ 0.35
Share impact of non-GAAP adjustments identified above   0.10     0.11     0.19     0.18  
Non-GAAP Diluted net income per share $ 0.34   $ 0.34   $ 0.55   $ 0.53  
 
Shares used in computing non-GAAP diluted net income per share 41,950 42,344 42,004 42,400
 
 
(1)

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

 
Cost of product revenue $ 68 $ 66 $ 112 $ 115
Cost of service revenue 226 87 372 153
Research and development 1,263 742 2,159 1,386
Sales and marketing 1,163 808 2,008 1,526
General and administrative   1,210     829     2,091     1,599  
Total share-based compensation expense $ 3,930   $ 2,532   $ 6,742   $ 4,779  
 
 
(2)

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

 
Cost of product revenue $ 824 $ 1,485 $ 1,643 $ 2,902
Operating expenses   857     645     1,711     1,231  
Total amortization expense $ 1,681   $ 2,130   $ 3,354   $ 4,133  
 
 
(3)

Business development and integration expense included in these amounts is as follows:

 
Cost of service revenue $ - $ - $ - $ -
Research and development - - - -
Sales and marketing - - - -
General and administrative 234 474 404 831
Other income (expense), net   -     -     -     -  

Total business development and integration expense

$ 234   $ 474   $ 404   $ 831  
 
 
(4)

Compensation for post combination services included in these amounts is as follows:

 
Cost of product revenue 6 - 12 -
Cost of service revenue 3 - 5 -
Research and development 381 442 494 814
Sales and marketing 37 - 76 -
General and administrative   284     -     568     -  
Total compensation for post combination services $ 711   $ 442   $ 1,155   $ 814  
 
 
 
(5) Total income tax adjustment is as follows:
Tax effect of non-GAAP adjustments above at 38% $ (2,544 ) $ (2,608 ) $ (4,536 ) $ (4,520 )
Tax impact of non-GAAP reconciling items in loss jurisdictions   236     278     443     278  
Total income tax adjustments $ (2,308 ) $ (2,330 ) $ (4,093 ) $ (4,242 )

NetScout Systems, Inc.
Consolidated Balance Sheets
(In thousands)
 
September 30,
2013
March 31,
2013
 
Assets
Current assets:
Cash, cash equivalents and marketable securities $ 137,011 $ 137,268
Accounts receivable, net 55,672 73,900
Inventories 10,728 7,563
Prepaid expenses and other current assets   19,646     18,581  
 
Total current assets 223,057 237,312
 
Fixed assets, net 21,797 19,678
Goodwill and intangible assets, net 263,759 266,280
Deferred income taxes 8,065 9,211
Long-term marketable securities 22,438 16,823
Other assets   2,285     2,872  
 
Total assets $ 541,401   $ 552,176  
 
 

Liabilities and Stockholders' Equity

Current liabilities:
Accounts payable $ 8,719 $ 10,161
Accrued compensation 23,766 31,585
Accrued other 7,292 8,370
Deferred revenue   88,319     95,055  
 
Total current liabilities 128,096 145,171
 
Other long-term liabilities 6,670 6,497
Deferred tax liability 979 941
Accrued long-term retirement benefits 1,575 1,757
Long-term deferred revenue   21,294     25,907  
 
Total liabilities   158,614     180,273  
 
Stockholders' equity:
Common stock 50 49
Additional paid-in capital 263,887 253,202
Accumulated other comprehensive income 2,082 671
Treasury stock, at cost (99,829 ) (83,480 )
Retained earnings   216,597     201,461  
 
Total stockholders' equity   382,787     371,903  
 
Total liabilities and stockholders' equity $ 541,401   $ 552,176  

Source: NetScout Systems, Inc.

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

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