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NetScout Systems Reports Financial Results for Third Quarter Fiscal Year 2013

NetScout Systems, Inc. (NASDAQ: NTCT):

    Q3 FY 2013
GAAP     Non-GAAP
Revenue $91.6 million     $92.0 million
Net income $11.1 million $15.3 million
Net Income per share     $0.26     $0.36
 

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 2013 ended December 31, 2012.

“We are happy to report another strong quarter. As we proceed through fiscal year 2013, we are pleased to continue our double digit growth rates. Our third quarter contributed bookings growth of 20% over the same quarter last year. On a year-to-date basis we have made good progress against our goals, achieving 15% revenue growth over last year while our product revenue has grown by 22%,” said Anil Singhal, President and CEO of NetScout. “Additionally, during the quarter we further strengthened our product lineup by adding scalable packet flow switching technology with our acquisition of ONPATH Technologies, Inc. Our Unified Service Delivery Management strategy continues to resonate with our customers as we continue to deliver product enhancements and technology through acquisitions and in-house development.” Finally, Mr. Singhal said, “Based on our solid nine month results and in anticipation of executing in our fourth quarter, we are tightening our annual revenue guidance range and raising non-GAAP EPS guidance that we provided at the beginning of fiscal year 2013.”

Total GAAP revenue for the third quarter was $91.6 million; non-GAAP revenue was $92.0 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 $52.7 million. Service revenue on a GAAP basis was $38.9 million and non-GAAP service revenue was $39.3 million.

GAAP net income for the third quarter was $11.1 million, or $0.26 per diluted share. GAAP income from operations was $17.6 million. On a non-GAAP basis, net income for the quarter was $15.3 million, or $0.36 per diluted share, and non-GAAP income from operations was $24.0 million.

Financial Highlights:

For the third quarter:

  • GAAP revenue increased 10% year-over-year and increased 8% sequentially. Non-GAAP revenue increased 10% year-over-year and increased 9% sequentially.
  • GAAP and non-GAAP product revenue increased 15% year-over-year and increased 14% sequentially.
  • GAAP service revenue increased 4% year-over-year and increased 1% sequentially. Non-GAAP service revenue increased 5% year-over-year and increased 2% sequentially.
  • GAAP operating margin was 19%, down two points from 21% a year ago and down 1 point sequentially. Non-GAAP operating margin was 26%, down three points from 29% a year ago and down two points sequentially.
  • As of December 31, 2012 cash and cash equivalents and short and long-term marketable securities were $136.7 million, down $98.9 million from $235.6 million as of the end of the prior quarter due to debt retirement of $62.0 million, the acquisition of ONPATH and stock buyback activity. Since March 31, 2012 cash and securities decreased $76.8 million.

In addition:

During the quarter NetScout acquired privately held ONPATH based in Marlton, NJ, which provides scalable packet flow switching technology for high-performance networks for the aggregation and distribution of network traffic for data, voice, video testing, monitoring, performance management, and cybersecurity deployments. The acquisition of ONPATH builds on the prior acquisition of Simena, adding industry-leading ultra low latency, modular and high density network monitoring switching solutions.

Guidance:

We are reiterating fiscal year 2013 guidance for GAAP and non-GAAP revenue but narrowing it with one quarter remaining. We expect GAAP revenue to be in the range of $346 million to $351 million, while non-GAAP revenue will be in the range of $347 million to $352 million. We have narrowed GAAP net income per diluted share to be in the range of $0.92 to $0.96, and raised non-GAAP net income per share to be between $1.28 and $1.32.

For fiscal year 2013, the non-GAAP net income per diluted share expectation excludes the acquisition accounting adjustment to fair value of approximately $1.2 million for deferred revenue, forecasted share-based compensation expenses of approximately $9.7 million, estimated amortization of acquired intangible assets of approximately $7.5 million, inventory fair value adjustment of approximately $500 thousand, compensation for post combination services of approximately $2.5 million, restructuring charges of approximately $1.1 million, business development charges of approximately $1.4 million and the related impact of these adjustments on the provision for income taxes of $8.6 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: 86124564. A replay of the call will be available after 11:30 a.m. ET on January 17 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: 86124564.

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 and loss on early extinguishment of debt, 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 148 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 2013, and the expected effect of the acquisition of ONPATH Technologies, Inc., 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, 2012 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
December 31,
Nine Months Ended
December 31,
  2012     2011     2012     2011  
Revenue:
Product $ 52,676 $ 46,005 $ 139,100 $ 113,616
Service   38,891     37,292     113,373     105,601  
Total revenue   91,567     83,297     252,473     219,217  
 
Cost of revenue:
Product 12,182 10,731 32,582 27,439
Service   6,982     6,508     20,386     19,273  
Total cost of revenue   19,164     17,239     52,968     46,712  
 
Gross profit   72,403     66,058     199,505     172,505  
 
Operating expenses:
Research and development 15,352 13,593 44,630 36,073
Sales and marketing 30,105 27,518 86,997 81,144
General and administrative 8,539 6,564 22,071 20,135
Amortization of acquired intangible assets 846 565 2,077 1,541
Restructuring charges   (1 )   372     1,065     372  
Total operating expenses   54,841     48,612     156,840     139,265  
 
Income from operations 17,562 17,446 42,665 33,240
Interest and other expense, net   (104 )   (1,208 )   (576 )   (2,442 )
 
Income before income tax expense 17,458 16,238 42,089 30,798
Income tax expense   6,320     6,207     16,033     11,317  
Net income $ 11,138   $ 10,031   $ 26,056   $ 19,481  
 
 
Basic net income per share $ 0.27 $ 0.24 $ 0.62 $ 0.46
Diluted net income per share $ 0.26 $ 0.24 $ 0.62 $ 0.46
Weighted average common shares outstanding used in computing:
Net income per share - basic 41,709 41,523 41,715 42,126
Net income per share - diluted 42,298 42,303 42,364 42,815

 
 
NetScout Systems, Inc.
Reconciliation of Current GAAP to Current and Historical Non-GAAP Financial Measures
(In thousands, except per share data)
               
Three Months Ended
December 31,
Nine Months Ended
December 31,
  2012     2011     2012     2011  
 
GAAP Revenue $ 91,567 $ 83,297 $ 252,473 $ 219,217
Deferred revenue fair value adjustment   400     118     671     158  
Non-GAAP Revenue $ 91,967   $ 83,415   $ 253,144   $ 219,375  
 
GAAP Gross profit $ 72,403 $ 66,058 $ 199,505 $ 172,505
Deferred revenue fair value adjustment 400 118 671 158
Inventory fair value adjustment 249 - 249 -
Shared-based compensation expense (1) 157 98 425 298
Amortization of acquired intangible assets (2) 959 1,215 3,861 3,412
Business development and integration expense (3) - 6 - 10
Compensation for post combination services (4)   7     -     7     -  
Non-GAAP Gross profit $ 74,175   $ 67,495   $ 204,718   $ 176,383  
 
GAAP Income from operations $ 17,562 $ 17,446 $ 42,665 $ 33,240
Deferred revenue fair value adjustment 400 118 671 158
Inventory fair value adjustment 249 - 249 -
Shared-based compensation expense (1) 2,464 2,170 7,243 6,117
Amortization of acquired intangible assets (2) 1,805 1,780 5,938 4,953
Business development and integration expense (3) 543 1,781 1,374 3,885
Compensation for post combination services (4) 1,005 168 1,819 168
Restructuring charges   (1 )   372     1,065     372  
Non-GAAP Income from operations $ 24,027   $ 23,835   $ 61,024   $ 48,893  
 
GAAP Net income $ 11,138 $ 10,031 $ 26,056 $ 19,481
Deferred revenue fair value adjustment 400 118 671 158
Inventory fair value adjustment 249 - 249 -
Shared-based compensation expense (1) 2,464 2,170 7,243 6,117
Amortization of acquired intangible assets (2) 1,805 1,780 5,938 4,953
Business development and integration expense (3) 543 1,780 1,374 4,253
Compensation for post combination services (4) 1,005 168 1,819 168
Restructuring charges (1 ) 372 1,065 372
Loss on extinguishment of debt (5) - 690 - 690
Income tax adjustments (6)   (2,257 )   (2,299 )   (6,498 )   (5,598 )
Non-GAAP Net income $ 15,346   $ 14,810   $ 37,917   $ 30,594  
 
GAAP Diluted Net income per share $ 0.26 $ 0.24 $ 0.62 $ 0.46
Share impact of non-GAAP adjustments identified above   0.10     0.11     0.28     0.25  
Non-GAAP Diluted net income per share $ 0.36   $ 0.35   $ 0.90   $ 0.71  
 
Shares used in computing non-GAAP diluted net income per share 42,298 42,303 42,364 42,815
 

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

Cost of product revenue

$ 61 $ 49 $ 176 $ 137

Cost of service revenue

96 49 249 161

Research and development

778 600 2,164 1,702

Sales and marketing

775 775 2,301 2,152

General and administrative

  754     697     2,353     1,965  

Total share-based compensation expense

$ 2,464   $ 2,170   $ 7,243   $ 6,117  
 

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

 

Cost of product revenue

$ 959 $ 1,215 $ 3,861 $ 3,412

Operating expenses

  846     565     2,077     1,541  

Total amortization expense

$ 1,805   $ 1,780   $ 5,938   $ 4,953  
 

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

 

Cost of service revenue

$ - $ 6 $ - $ 10

Research and development

15 1,353 15 1,411

Sales and marketing

- 179 - 305

General and administrative

528 243 1,359 2,159

Other income (expense), net

  -     (1 )   -     368  

Total business development and integration expense

$ 543   $ 1,780   $ 1,374   $ 4,253  
 

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

 

Cost of product revenue

3 - 3 -

Cost of service revenue

4 - 4 -

Research and development

389 168 1,203 168

Sales and marketing

25 - 25 -

General and administrative

  584     -     584     -  

Total compensation for post combination services

$ 1,005   $ 168   $ 1,819   $ 168  
 

(5) Loss on extinguishment of debt included in this amount is as follows:

 

       

Interest and other income (expense), net

$ -   $ 690   $ -   $ 690  
 

(6) Total income tax adjustment is as follows:

Tax effect of non-GAAP adjustments above at 38%

$ (2,457 ) $ (2,689 ) $ (6,976 ) $ (6,350 )

Discrete tax adjustment

 

200

    390     478     752  

Total income tax adjustments

$ (2,257 ) $ (2,299 ) $ (6,498 ) $ (5,598 )

       
 
NetScout Systems, Inc.
Consolidated Balance Sheets
(In thousands)
 
December 31,
2012
March 31,
2012
Assets
Current assets:
Cash, cash equivalents and marketable securities $ 126,160 $ 196,872
Accounts receivable, net 61,908 69,795
Inventories 7,427 8,021
Prepaid expenses and other current assets   24,046     14,999  
 
Total current assets 219,541 289,687
 
Fixed assets, net 18,077 16,457
Goodwill and intangible assets, net 268,684 225,069
Deferred income taxes 11,755 17,892
Long-term marketable securities 10,540 16,644
Other assets   3,523     2,008  
 
Total assets $ 532,120   $ 567,757  
 
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 9,151 $ 7,539
Accrued compensation 29,016 23,050
Accrued other 11,628 10,009
Deferred revenue   90,567     93,493  
 
Total current liabilities 140,362 134,091
 
Deferred tax liability 2,467 1,410
Other long-term liabilities 4,414 7,175
Accrued long-term retirement benefits 1,818 1,990
Long-term deferred revenue 22,717 18,722
Long-term debt   -     62,000  
 
Total liabilities   171,778     225,388  
 
Stockholders' equity:
Common stock 49 48
Additional paid-in capital 248,694 237,289
Accumulated other comprehensive income 1,450 212
Treasury stock, at cost (76,759 ) (56,032 )
Retained earnings   186,908     160,852  
 
Total stockholders' equity   360,342     342,369  
 
Total liabilities and stockholders' equity $ 532,120   $ 567,757  

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