Ladies and gentlemen, thank you for standing by and welcome to NetScout's Fourth Quarter and Full Fiscal Year 2022 Financial Results Conference Call. At this time, all parties are in a listen-only mode until the question-and-answer portion of the call. As a reminder, this call is being recorded. Tony Piazza, Vice President of Corporate Finance, and his colleagues at NetScout are on the line with us today. I would now like to turn the call over to Tony Piazza to begin the company's prepared remarks.

Thank you, operator, and good morning everyone. Welcome to NetScout's fourth quarter and full fiscal year 2022 conference call for the period ended March 31st, 2022. Joining me today are Anil Singhal, NetScout's President and Chief Executive Officer; Michael Szabados, NetScout's Chief Operating Officer; and Jean Bua, NetScout's Executive Vice President and Chief Financial Officer. There is a slide presentation that accompanies our prepared remarks. You can advance the slides in the webcast viewer to follow our commentary. Both the slides and the prepared remarks can be accessed in multiple areas within the Investor Relations section of our website at www.netscout.com, including the IR landing page under financial results, the webcast itself and under financial information on the quarterly results page. Moving on to slide number three, today's conference call will include forward-looking statements. Examples of forward-looking statements include statements regarding our future financial performance or position, results of operations, business strategy, plans and objectives of management for future operations and other statements that are not historical facts. You can identify forward-looking statements by their use of forward-looking words such as anticipate, believe, plan, will, should, expect, or other comparable terms. We caution listeners not to place undue reliance on any forward-looking statements included in this presentation which speak only as of today's date. These forward-looking statements involve risks and uncertainties, and actual results could differ materially from the forward-looking statements due to known and unknown risks, uncertainties, assumptions, and other factors, which are described on this slide and in today's financial results, press release as well as in the company's Annual Report on Form 10-K for the year ended March 31st, 2021, on file with the Securities and Exchange Commission. NetScout assumes no obligation to update any forward-looking information contained in this communication or with respect to the announcements described herein. Let's turn to slide number four, which involves non-GAAP metrics. While this slide presentation includes both GAAP and non-GAAP results, unless otherwise stated, financial information discussed on today's conference call will be on a non-GAAP basis only. The rationale for providing non-GAAP measures along with the limitations of relying solely on those measures, is detailed on this slide and in today's press release. These measures should not be considered in isolation from, or as a substitute for, financial information prepared in accordance with GAAP. Reconciliations of all non-GAAP metrics with the applicable GAAP measures are provided in the appendix of the slide presentation in today's earnings release and on our website. I will now turn the call over to Anil for his prepared remarks.

Thank you, Tony, and good morning everyone. Welcome and thank you all for joining us today. I'm pleased to report that we met all our objectives for fiscal year 2022 and delivered a solid performance on multiple fronts. In line with our NetScout without borders strategy, we increased our existing customer business, forged new customer relationships, and advanced our cybersecurity agenda. These successes led to total revenue growth driven by high single-digit product revenue growth, continued margin expansion, improved diluted EPS performance, and a strong free cash flow generation on a year-over-year basis. On behalf of NetScout, I would like to thank our employees, customers, and other stakeholders who contributed to our success in fiscal year 2022. Let's now turn to slide number six for a brief recap and more detail on our fourth quarter and full fiscal year 2022 non-GAAP results. For the fourth quarter, revenue was $191.2 million and diluted earnings per share was $0.29, both exceeding our objective for the quarter. For the full fiscal year 2022, we delivered $855.6 million in revenue. This represents a total revenue growth of approximately 3% year-over-year. Our product revenue growth rate was over 8% year-over-year, more than double that of our total revenue growth rate. Notably, we ended fiscal year 2022 with a substantial backlog of approximately $50 million in unshipped orders, which excludes approximately $60 million in radio frequency propagation modeling orders, which we expect to recognize as revenue in fiscal year 2023. Turning to margins, gross margin was 77.4%, up 100 basis points year-over-year, while our operating margin was 21%, up 20 basis points year-over-year. Our enhanced margin profile delivered diluted EPS of $1.84 in the fiscal year. This represented approximately 8% diluted EPS growth, more than twice that of our total annual revenue growth, on a year-over-year basis. Finally, we generated strong free cash flow of more than $285 million in our fiscal year 2022. Let's now move to slide number seven for some further perspective on market and business insights. Starting with our enterprise customer vertical, revenue grew more than 10% year-over-year for the full fiscal year 2022. Additionally, all key industry sectors in this vertical grew on an annual basis. These customers are increasingly focused on cybersecurity solutions and the acceleration of their digital transformations as they emerge from the pandemic and adjust to the new normal of today's operating environment. As a result, we continue to see spending momentum in this vertical. Michael will highlight some of the enterprise customer wins we achieved in the fourth quarter during his remarks.

Thank you, Anil, and good morning everyone. Slide 10 outlines the areas that I will be covering today, starting with customer wins. In our enterprise customer vertical, we won a mid-seven figure deal in the fourth quarter with a large global healthcare customer. This customer was focused on enhancing its infrastructure to gain greater visibility and avoid disruptions as it prepares for the dramatic increase in business that it expects to occur following the pandemic. As part of this transaction, we provided a comprehensive solution combining our new Omnis cybersecurity and smart edge monitoring products with our service assurance solutions. Separately, we won a high six-figure order from a large defense industry customer that had acquired a new division. After acquiring the division, this customer recognized the need for a stronger service assurance solution during the integration process. Notably, this is the second integration project that we have completed for this customer, and we won this deal on the back of our strong performance on the initial project. This customer has more divisions to upgrade beyond these first two. Turning now to our service provider customer vertical. As mentioned earlier, we are still in the early innings of 5G, and during the fourth quarter, we received additional radio frequency propagation modeling orders from two Tier 1 domestic carriers as they advanced their 5G network planning. The combined size of these orders was an eight-figure number in the mid-teens range, and we expect to recognize the revenue associated with these projects in our fiscal year 2023 as the projects are completed. We also received a mid-seven figure 5G-related order from a Tier 2 domestic carrier in the fourth quarter as the carrier continued to roll out its 5G network.

Thank you, Michael, and good morning everyone. I will review key metrics for our fourth quarter and full fiscal year 2022 as well as comment on our fiscal year 2023 outlook. As a reminder, this review focuses on our non-GAAP results unless otherwise stated, and all reconciliations with our GAAP results appear in the presentation appendix. Slide number 12 details the results for our fourth quarter and full fiscal year 2022. Focusing first on quarterly performance, as discussed on last quarter's earnings conference call, we experienced an acceleration of approximately $25 million to $30 million of orders in our third quarter that were previously expected in our fourth quarter. Accordingly, given our strong third quarter, fourth quarter revenue declined 10.4% year-over-year to $191.2 million. We also ended the fourth quarter with a backlog of approximately $50 million in unshipped orders, including approximately $60 million of radio frequency propagation modeling orders, which we expect to recognize as revenue in fiscal year 2023. Total backlog was more than $100 million. Our fourth quarter fiscal year 2022 gross profit margin was 77.6%, up 0.4 percentage points over the same quarter last year, primarily attributable to product mix. Our fourth quarter software-only revenue was 45% of our service assurance product revenue, compared to 34% in the same period in the prior fiscal year. Quarterly operating expenses increased 6.5% from the prior year, primarily attributable to increased travel and sales compensation costs. We reported an operating profit margin of 12.4% compared with 22.4% in the same quarter last year. Diluted earnings per share was $0.29, compared with $0.49 in the same quarter last year. For the full fiscal year 2022, revenue was $855.6 million, which was an increase of 2.9% over the prior year. Product revenue grew 8.6% while service revenue declined 1.8% over the prior year. Gross profit margin was 77.4%, an increase of one percentage point over the prior year. Software-only sales were 39% of service assurance product revenue in the full fiscal year versus 33% last fiscal year, resulting in higher margins overall. Annual operating expenses increased 4.2% from the prior year, primarily due to investments in sales and marketing. We reported an operating profit margin of 21.0%, up 0.2 percentage points over the prior fiscal year, with diluted earnings per share of $1.84, an 8.2% increase compared with the same period in the prior year.

Yes. Thank you. It's actually Matt Swanson on for Matt. Jean, it was great to see the acceleration in the FY 2023 guidance. Can you just maybe talk through some of the puts and takes of the current macro environment? It's obviously a complicated scenario that we're in right now as you kind of think through that acceleration and what's giving you the confidence in that?

Sure. So, from a revenue perspective, we have seen software solutions take advantage of some of the other supply chain-related issues. And so we saw an acceleration in Q3 and Q4. And as you can see from the backlog, we have over $100 million entering FY 2023. That gives us very good visibility to the first half of the year. We also believe that the Omnis products, the security products that we are entering have been very well received by our customers so far, and we have some sales of the Omnis cybersecurity product in fiscal year 2022, albeit immaterial. So, we believe that will be a very good growth area for us in 2023 as salespeople come back to in-person sales and can do proofs of concepts and those types of things. We also do — when I think about the gross margin, we will have much more calibration in the gross margin in the revenue, which will affect the gross margin. As we've talked about in the past, a lot of the 5G radio frequency propagation modeling projects are still looking at where these carriers want to put their antennas initially. So, it's still very labor-intensive. I anticipate that the radio frequency propagation modeling of $60 million revenue will carry probably a 50% gross profit margin. And then when I go down through operating costs through the cost structure, I'd anticipate that there's about $45 million to $50 million of costs that are coming back into the cost structure due to travel, in-person events, general inflation, and the very competitive labor market that we're in. We have long-tenured employees, who are very loyal to NetScout and as you know, we've never really done any kind of volumetric layoff. So, we still have all that talent in-house. So, when I go down through operating margin, the operating earnings per share from operations should increase probably in the mid-single digits. And then we are doing those two capital structure activities. We have over $700 million worth of cash, which gives us over $300 million of excess cash. And given how long it takes to execute the shares in the market, we're taking half of that excess cash and doing an accelerated share repurchase. And then because of the rising interest rates and the fact that our debt instrument is a revolver, which means I can bring it up or bring it down, draw down the money whenever we need it. We're going to pay off that debt and then look in the future as to any other debt capital allocation that's needed in the form of M&A or maybe a second share repurchase. So, in those financials, the operating leverage combined with those two financial transactions is giving the EPS the growth rate that we'll see in FY 2023.

So, first of all, we just introduced this just about three to four months ago, and we already have 20 customers. The confidence is coming from the fact that we'll be targeting our existing customers. We are building the second floor of the building; we already have the foundation and the first floor. The speed of traction is going to be much better than would be normally with a brand new solution. We are using a lot of the building blocks in the company, Salesforce, different common engineering organization, common go-to-market model. Yes, we have some overlay people. So, that's giving us confidence. We believe that the market we are addressing outside of DDoS NDR, network detection response is underserved and is a big need in the market with several bigger players exiting the market for one reason or another. So, all these things combined with what we have seen the traction already gives us good confidence that we'll have a higher growth rate in the cybersecurity business than our total growth rate next year.

We also had a very successful customer event last week and had a lot of conversations with our security partners, and we can use that to corroborate our earlier analysis that it's a very strong sentiment from them.

Hey guys. Congrats on a really good-looking quarter and good into the fiscal year here. I just want to circle back on the guide though. It's been quite a few years since NetScout was able to grow this rate and historically, we haven't had this amount of product backlog. It’s nice to see that building with about quarters worth of product. But can you say what gives you confidence in hitting this type of growth rate given it's really a quarter's worth of product? And second, are you seeing carriers and large enterprises actually ordering earlier than anticipated given the supply chain was?

Yes. Jean covered some of these, James. But just to reiterate, yes, we had in Q3 a lot of multi-million dollar orders from both service providers and a couple of enterprise customers who accelerated their order because we are one of the few software companies who can handle bigger-sized orders due to the size of our deployment. Our confidence is coming from the investments we made in the last 18 months and introducing Omnis Security and toward the end of the year, we plan to introduce something in the big data space. Most of this, or hardly any of this, as Jean mentioned, is immaterial to last year's numbers. So, we'll see some growth from that as we just noticed at our recent user conference. There's significant customer interest, especially from existing customers who believe that we have very compelling technology, with the added benefit that the cost of ownership is lower than the competition because they can utilize some of the hardware they have already purchased with us to run this new software.

There's another factor in the number of new customers building and growing faster over the last several quarters. This gives us a lot of additional capacity to grow.

Hi, good morning guys. Let me add my congrats on the quarter and outlook as well. Just wanted to touch on more of the product backlog as well. As you look at that product backlog coming into this year, would you expect to maintain that for at least maybe in the first half or even throughout the year, given the ongoing supply chain challenges for your customers? Or do you expect that to work out fairly quickly?

Well, our goal is to maintain that, but it also depends on the timing of orders next year and the overall situation. There was an unusual situation regarding unshipped orders and calibration projects that take longer to execute. It's possible we get more calibration orders next year and maintain a similar situation with more orders coming in toward the end of the year. Our goal is to continue to have much better visibility than in the past as we aim for a higher growth number.

The free cash flow conversion was impressive this quarter, with $152 million, and the conversion was greater than 200%. I would estimate that between $40 million to $50 million in free cash flow came from increased multiyear renewals and customer prepayments. In FY 2023, we anticipate having more than $200 million in free cash flow, with a conversion rate probably between 125% to about 145% of non-GAAP income.

That concludes our prepared remarks. Thank you very much for joining us today and enjoy the rest of the day.

This does conclude today's program. Thank you for your participation. You may disconnect at this time. Have a great day.