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NETSCOUT Systems Reports Financial Results For Third Quarter Fiscal Year 2014

January 23, 2014

Q3 Revenue Up Year-over-Year; 21% GAAP; 20% Non-GAAP

Q3 Product Revenue Up Year-over-Year; 30% GAAP and Non-GAAP

Q3 EPS Up Year-over-Year: 58% GAAP; 39% Non-GAAP

WESTFORD, Mass.--(BUSINESS WIRE)--Jan. 23, 2014--

  Q3 FY 2014
GAAP   Non-GAAP
Revenue $110.4 million $110.6 million
Net income $17.3 million $21.0 million
Net Income per share   $0.41   $0.50

NetScout Systems, Inc. (NASDAQ: NTCT), an industry leader for advanced application and service assurance solutions, today announced financial results for its third quarter of fiscal year 2014 ended December 31, 2013.

“We are pleased to report very strong performance with our third quarter results. For the first time, our company has crossed the $100 million quarterly revenue milestone,” said Anil Singhal, President and CEO of NetScout Systems. “Our results this quarter were driven by key factors, including new product introductions for the Enterprise sector, expanded deployments by Service Providers, and increased traction with our complementary Packet Flow Switch product line.” Mr. Singhal added, “Also, during this quarter, we officially received a patent for our unique Adaptive Session Intelligence, or ASI. ASI is our intelligence software providing real-time and actionable operational intelligence to our customers. It represents significant inventions associated with next generation analytics and scalability that further enables service assurance and business intelligence.”

Total GAAP revenue for the third quarter was $110.4 million; non-GAAP revenue was $110.6 million. A reconciliation of GAAP and non-GAAP results is included in the attached financial tables.

Product revenue for the third quarter, on a GAAP and non-GAAP basis was $68.6 million. Service revenue on a GAAP basis was $41.8 million and non-GAAP service revenue was $42.0 million.

GAAP net income for the third quarter was $17.3 million, or $0.41 per diluted share. GAAP income from operations was $27.3 million. On a non-GAAP basis, net income for the quarter was $21.0 million, or $0.50 per diluted share, and non-GAAP income from operations was $32.9 million.

  • GAAP revenue increased 21% year-over-year and increased 20% sequentially. Non-GAAP revenue increased 20% year-over-year and increased 20% sequentially.
  • GAAP and non-GAAP product revenue increased 30% year-over-year and increased 31% sequentially.
  • GAAP operating margin was 25%, up six points from a year ago and up eight points sequentially. Non-GAAP operating margin was 30%, up four points from a year ago and up five points sequentially.
  • As of December 31, 2013, cash and cash equivalents and short and long-term marketable securities were $182.2 million, up $22.8 million from $159.4 million as of the end of the prior quarter.

Guidance:

With one quarter remaining, we are narrowing fiscal year 2014 guidance within the original range for GAAP and non-GAAP revenue. We expect GAAP revenue to be in the range of $391 million to $394 million and non-GAAP revenue to be in the range of $392 million to $395 million. We have narrowed GAAP net income per diluted share to be in the range of $1.12 to $1.14 and non-GAAP net income per diluted share to be in the range of $1.48 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 $0.5 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 $0.7 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: 31690767. A replay of the call will be available after 11:30 a.m. ET on January 23, 2014 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: 31690767.

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 inventory fair value adjustments, 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 29 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.

©2014 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 Nine Months Ended
December 31, December 31,
2013 2012 2013 2012
Revenue:
Product $ 68,561 $ 52,676 $ 163,895 $ 139,100
Service   41,867   38,891     120,435     113,373  
Total revenue   110,428   91,567     284,330     252,473  
 
Cost of revenue:
Product 14,534 12,182 36,117 32,582
Service   9,068   6,982     24,111     20,386  
Total cost of revenue   23,602   19,164     60,228     52,968  
 
Gross profit   86,826   72,403     224,102     199,505  
 
Operating expenses:

Research and development

18,348 15,352 50,951 44,630

Sales and marketing

32,425 30,105 96,184 86,997
General and administrative 7,929 8,539 22,367 22,071
Amortization of acquired intangible assets 860 846 2,571 2,077
Restructuring charges   -   (1 )   -     1,065  
Total operating expenses   59,562   54,841     172,073     156,840  
 
Income from operations 27,264 17,562 52,029 42,665
Interest and other expense, net   44   (104 )   (88 )   (576 )
 
Income before income tax expense 27,308 17,458 51,941 42,089
Income tax expense   10,014   6,320     19,511     16,033  
Net income $ 17,294 $ 11,138   $ 32,430   $ 26,056  
 
 
Basic net income per share $ 0.42 $ 0.27 $ 0.78 $ 0.62
Diluted net income per share $ 0.41 $ 0.26 $ 0.77 $ 0.62
Weighted average common shares outstanding used in computing:
Net income per share - basic 41,425 41,709 41,417 41,715
Net income per share - diluted 41,884 42,298 41,969 42,364
 

     
NetScout Systems, Inc.
Reconciliation of Current GAAP to Current and Historical Non-GAAP Financial Measures
(In thousands, except per share data)
   
Three Months Ended Nine Months Ended
December 31, December 31,
  2013     2012     2013     2012  
 
GAAP Revenue $ 110,428 $ 91,567 $ 284,330 $ 252,473
Deferred revenue fair value adjustment   140     400     419     671  
Non-GAAP Revenue $ 110,568   $ 91,967   $ 284,749   $ 253,144  
 
GAAP Gross profit $ 86,826 $ 72,403 $ 224,102 $ 199,505
Deferred revenue fair value adjustment 140 400 419 671
Inventory fair value adjustment - 249 - 249
Share-based compensation expense (1) 256 157 740 425
Amortization of acquired intangible assets (2) 837 959 2,480 3,861
Compensation for post combination services (4)   8     7     25     7  
Non-GAAP Gross profit $ 88,067   $ 74,175   $ 227,766   $ 204,718  
 
GAAP Income from operations $ 27,264 $ 17,562 $ 52,029 $ 42,665
Deferred revenue fair value adjustment 140 400 419 671
Inventory fair value adjustment - 249 - 249
Share-based compensation expense (1) 3,217 2,464 9,959 7,243
Amortization of acquired intangible assets (2) 1,697 1,805 5,051 5,938
Business development and integration expense (3) 78 543 482 1,374
Compensation for post combination services (4) 530 1,005 1,685 1,819
Restructuring charges   -     (1 )   -     1,065  
Non-GAAP Income from operations $ 32,926   $ 24,027   $ 69,625   $ 61,024  
 
GAAP Net income $ 17,294 $ 11,138 $ 32,430 $ 26,056
Deferred revenue fair value adjustment 140 400 419 671
Inventory fair value adjustment - 249 - 249
Share-based compensation expense (1) 3,217 2,464 9,959 7,243
Amortization of acquired intangible assets (2) 1,697 1,805 5,051 5,938
Business development and integration expense (3) 78 543 482 1,374
Compensation for post combination services (4) 530 1,005 1,685 1,819
Restructuring charges - (1 ) - 1,065
Income tax adjustments (5)   (1,941 )   (2,257 )   (6,034 )   (6,498 )
Non-GAAP Net income $ 21,015   $ 15,346   $ 43,992   $ 37,917  
 
GAAP Diluted Net income per share $ 0.41 $ 0.26 $ 0.77 $ 0.62
Share impact of non-GAAP adjustments identified above   0.09     0.10     0.28     0.28  
Non-GAAP Diluted net income per share $ 0.50   $ 0.36   $ 1.05   $ 0.90  
 
Shares used in computing non-GAAP diluted net income per share 41,884 42,298 41,969 42,364
 
 
(1 ) Share-based compensation expense included in these amounts
is as follows:
Cost of product revenue $ 62 $ 61 $ 174 $ 176
Cost of service revenue 194 96 566 249
Research and development 1,157 778 3,316 2,164
Sales and marketing 944 775 2,952 2,301
General and administrative   860     754     2,951     2,353  
Total share-based compensation expense $ 3,217   $ 2,464   $ 9,959   $ 7,243  
 
 
(2 ) Amortization expense related to acquired software and product
technology included in these amounts is as follows:
Cost of product revenue $ 837 $ 959 $ 2,480 $ 3,861
Operating expenses   860     846     2,571     2,077  
Total amortization expense $ 1,697   $ 1,805   $ 5,051   $ 5,938  
 
 
(3 ) Business development and integration expense included in
these amounts is as follows:
Cost of service revenue $ - $ - $ - $ -
Research and development - 15 - 15
Sales and marketing - - - -
General and administrative 78 528 482 1,359
Other income (expense), net   -     -     -     -  
Total business development and integration expense $ 78   $ 543   $ 482   $ 1,374  
 
 
(4 ) Compensation for post combination services included in these
amounts is as follows:
Cost of product revenue 5 3 17 3
Cost of service revenue 3 4 8 4
Research and development 209 389 703 1,203
Sales and marketing 39 25 115 25
General and administrative   274     584     842     584  
Total compensation for post combination services $ 530   $ 1,005   $ 1,685   $ 1,819  
 
 
 
(5 ) Total income tax adjustment is as follows:
Tax effect of non-GAAP adjustments above at 38% $ (2,149 ) $ (2,457 ) $ (6,685 ) $ (6,976 )
Tax impact of non-GAAP reconciling items in loss jurisdictions   208     200     651     478  
Total income tax adjustments $ (1,941 ) $ (2,257 ) $ (6,034 ) $ (6,498 )
 

         
NetScout Systems, Inc.
Consolidated Balance Sheets
(In thousands)
 
December 31, March 31,
2013 2013
 
Assets
Current assets:
Cash, cash equivalents and marketable securities $ 144,991 $ 137,268
Accounts receivable, net 74,263 73,900
Inventories 11,128 7,563
Prepaid expenses and other current assets   18,219     18,581  
 
Total current assets 248,601 237,312
 
Fixed assets, net 21,350 19,678
Goodwill and intangible assets, net 263,028 266,280
Deferred income taxes 5,629 9,211
Long-term marketable securities 37,222 16,823
Other assets   2,047     2,872  
 
Total assets $ 577,877   $ 552,176  
 
 
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 8,679 $ 10,161
Accrued compensation 32,327 31,585
Accrued other 7,775 8,370
Deferred revenue   102,010     95,055  
 
Total current liabilities 150,791 145,171
 
Other long-term liabilities 6,634 6,497
Deferred tax liability 991 941
Accrued long-term retirement benefits 1,578 1,757
Long-term deferred revenue   22,285     25,907  
 
Total liabilities   182,279     180,273  
 
Stockholders' equity:
Common stock 50 49
Additional paid-in capital 267,649 253,202
Accumulated other comprehensive income 2,521 671
Treasury stock, at cost (108,513 ) (83,480 )
Retained earnings   233,891     201,461  
 
Total stockholders' equity   395,598     371,903  
 
Total liabilities and stockholders' equity $ 577,877   $ 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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