Please stand by. Your program is about to begin. If you need audio assistance during today's program, please press star zero. Ladies and gentlemen, thank you for standing by. And welcome to NetScout's first quarter fiscal 2026 financial results conference call. At this time, all parties are in a listen-only mode until the question-answer portion of the call. As a reminder, this call is being recorded.

Paul Canavan, AVP, Corporate Finance, and his colleagues at NetScout are on the line with us today. if you require operator assistance at any time please press star zero i would now like to turn the call over to paul canavan to begin the company's prepared remarks uh thank you margo and good morning everyone welcome to net scout's first quarter fiscal year 2026 conference call for the period ended june 30th 2025. joining me today are nielsen gall net scouts president and Chief Executive Officer, and Tony Piazza, NetScout's Executive Finance 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 as discussed in detail on slide number three today's conference call will include certain forward-looking statements about net scout's views on expected results of future performance and go forward business strategy these statements speak only as of today's date and involve risks uncertainties and assumptions that may cause actual results to differ materially including, but not limited to, those described in the company's most recent annual report on Form 10-K and subsequent filings with the Securities and Exchange Commission. As discussed in detail on slide number four, today's conference call will also include discussion of certain non-GAAP financial measures that the company believes to be useful for investors. 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 financial results 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 to the nearest GAAP measures are provided in the appendix of the slide presentation, in today's financial press release, and on our I will now turn the call over to Anil for his preparation.

Thank you, Paul, and good morning, everyone. Thank you all for joining us today. We delivered a solid start to fiscal year 2026, with Q1 performance reflecting strong execution and positive momentum across both our top and bottom lines growth in our cyber security and service assurance product line supported these results as we continue to position NETSCOT for long-term success in the market let's turn to slide number six to review some non-GAAP financial highlight fiscal year 2026 revenue was approximately 187 million dollar representing a seven percent year over year increase driven by strong growth in our cyber security area and the timing of orders received we expanded both our gross and operating profit margins during the quarter and delivered non-gap diluted earning per share of 34 cents and increase of approximately 21 percent year over year this result reflects the benefit of restructuring and cost management initiative that we executed in the past fiscal year as As such, these effects will begin to normalize in our year-over-year comparisons starting in the second quarter. Now let's move to slide number seven for some perspective on our business and some Starting with our service assurance offering, revenue in the first quarter increased approximately 1% year-over-year. The growth was driven by our enterprise customer vertical, which offset a decline in our service provider customer vertical. In the service assurance space, our enterprise customers are investing in digital transformation initiatives, AI ops, and enhanced visibility at the network edge. We experience solid growth across most of our major sectors in this work customer. On the service provider side, we continue to see both domestic and international carriers invest in 5G related initiatives. They are proceeding at a major pace, aligning investment with clearly defined monetization opportunities such as fixed wireless access and private 5g while we remain mindful for our ongoing macro economic uncertainty we believe netcode is well positioned to capture further opportunities by delivering differentiated value in this evolving environment this was this was recently demonstrated at the tm forum's neural knock catalyst where our omnis ai insight solution showcased how high-value network data can derive closed-loop automation and self-healing of networks. This provided strong validation of our ability to support AI-driven operations in complex 5G environments, reinforcing our role as a technology partner for next-generation telecom transformation. Moving to our cybersecurity operating, revenue in the first quarter increased approximately 18 percent year over year driven by strong strong growth in both our enterprise and service provider must continue to prioritize spending in this area as they seek to protect themselves against an increasingly complex and expanding cyber threat landscape we believe cyber security continues to represent a strong growth opportunity for net scout and we continue to advance our portfolio with new innovations in this area for example we recently announced new AI-backed enhancements to our Netscourt and Netscourt Arbor Enterprise Manager adaptive distributed denial of service attack solutions to help customers further automate operations, enhance defense, and improve reporting. These powerful enhancements are designed to leverage AI and our Atlas intelligence. Feed to automate defenses against an expanding array of attack vectors enabling customers to mitigate up to 80 percent of all DDoS attacks without the need for further analysis. We also announced that our OmniCyber is with the NIST Zero Trust Security Framework. We believe this further reinforces our product offerings and strengthens our relevance as a strategic partner for the U.S. federal agencies in both service assurance cyber security finally we introduced adaptive threat analytics a key enhancement to our ominous network detection response or ndr solution it empowers sock analysts with faster smarter incident response through continuous packet capture and enrich metadata this innovation improves our competitive edge in the market where speed and precision in threat response for solution continue to gain strong traction with customers seeking to enhance both visibility and cybersecurity capabilities, leading to robust multi-solution wins across three verticals. Notably, we secured a high seven-figure order earlier than anticipated with the U.S. government agency that has been a longstanding and loyal customer. This order consisted of both service-assured and cybersecurity solutions, including our new omnis ai and cyber intelligence products this customer values our solution for the smart data we provide which they are leveraging to enhance user experience and support ai driven operations and initiatives we also won a low seven figure deal with major latin american financial institution institution where we replace two incumbent vendors in a competitive situation focus on online banking applications. This customer purchased both service-assured and cybersecurity solutions and is exploring our Omnis AI products. Our clear differentiator was our integrated platform and user experience visibility with valuable smart. These wins demonstrate the value of our innovative and integrated solutions, solid reputation, and strong customer relationships, which help organizations address the performance, availability, and security needs of the connected digital world. Additionally, they reflect the momentum we are building as we continue to execute our strategy. With that, let's now move to slide number eight to review our outlook. Looking ahead, we remain cautiously optimistic amid ongoing macroeconomic uncertainty. Our focus remains firmly on driving product innovations, returning to annual revenue growth, and enhancing margin through discipline cost management. Based on the first quarter plan, we are reaffirming our fiscal year 2022-26 revenue and non-GAAP EPS outlook. Tony will provide a recap of the outlook in his remarks. Looking ahead, during the second quarter, we are hosting our customers and partners at our annual Engage Technology and User Summit in late September. Engage 2025 will be showcasing both our existing solutions as well as our latest AIOps innovations. We'll demonstrate how our highly curated data drives improved business outcomes across key ecosystems focusing on cybersecurity as well as network and service observability. We'll also be highlighting how our solution provides protection against modern-day DDoS attacks with our AI-powered ARBA DDoS protection. Longer term, we are committed to empowering our customers to meet the demand of today's connected, complex digital landscape by delivering mission-critical solutions that address performance, ensure availability, and safeguard security.

We look forward to sharing our progress with you throughout the remainder of our fiscal years with that I'll turn the call over to Tony thank you Anil and good morning everyone thank you for joining us I'll start by walking you through the key financial metrics for the first quarter of fiscal year 2026 after that I'll share some additional commentary on our outlook for the remainder of the fiscal year including some color on our expectations for q2 as a reminder this review focuses on our non-gap results unless otherwise stated and all reconciliations with our gap results appear in the presentation appendix i will note the nature of any such comparisons accordingly all comparisons are on a year-over-year basis unless otherwise noted now let's turn to slide number 10 which details the results of the first quarter over our fiscal year 2026 total revenue for the first quarter increased seven percent to 186.7 million dollars product revenue increased 19.3 percent to 73 million while service revenue increased 0.3 percent to 113.8 million dollars gross profit margin increased by 1.6 percentage points to 78.7% in the first quarter, primarily driven by product volume and mix. Quarterly operating expenses were relatively consistent year over year as the final quarter of benefit from the prior year's restructuring helped offset higher employee-related expenses, commissions, and professional fees. Accordingly, we reported an operating profit margin of 14.2% compared with 8% in the same quarter last year. Diluted earnings per share was $0.34, up 21.4% from $0.28 in the same quarter last year. Both the current and prior year's quarters included unrealized gains related to a foreign investment. In the current quarter, this resulted in a benefit of approximately $0.03 per share compared to a benefit of approximately $0.10 per share in the same quarter last year. Turning to slide 11, I will review key revenue trends by product lines and customer verticals. Please note that all comparisons here are on a year-over-year basis consistent with our other remarks. For the first quarter of fiscal year 2026, service assurance revenue increased by 1.4%, while cybersecurity revenue grew by 18.3%. During the same period, our service assurance product line accounted for approximately 63% of our total revenue, and our cybersecurity product line accounted for the remaining 37%. Turning to our customer verticals, for the first quarter of fiscal year 2026, our enterprise customer vertical revenue grew 17.7%, while our service provider customer vertical revenue decreased 5.6%. During the same period, our enterprise customer vertical accounted for approximately 59% of our total revenue, while our service provider customer vertical accounted for the remaining 41%. Turning to slide 12, this slide shows our revenue split between the United States and the international markets. For the first quarter of fiscal year 2026, 54% of our revenue was generated from the United States with the remaining 46% coming from international markets. Additionally, no single customer accounted for 10% or more of our total revenue during the first quarter. Slide 13 outlines select balance sheet items alongside free cash flow for the period. We ended the first quarter of Fiscal Year 2026 with $543.5 million in cash, cash equivalents, short and long-term marketable securities, and investments, representing an increase of $51 million since the end of Fiscal Year 2025. free cash flow for the quarter was 71.7 million dollars during the first quarter we repurchased approximately 761 thousand shares of our common stock for approximately 15 million dollars at an average share price of 19 dollars and 72 cents per share we currently have capacity under our share repurchase authorization and subject to market conditions intend to remain active in market through the rest of fiscal year 2026 from liquidity perspective we have no outstanding balance on our 600 million revolving credit facility as of june 30th 2025 which expires in october 2029 to briefly recap other balance sheet items accounts receivable net was 92.2 million dollars representing a decrease of 71.5 million dollars since March 31st 2025. Days sales outstanding or DSO at the end of the first quarter of fiscal year 2026 was 41 days compared with 63 days in the same period in the prior year. This improvement in the DSO in the first quarter reflects the timing and composition of bookings. Let's move to slide 14 for commentary on our outlook. I will focus my remarks on our non-GAAP targets for fiscal year 2026. As Anil noted earlier, we are reaffirming our non-GAAP outlook for fiscal year 2026 that we presented during our fourth quarter in full fiscal year 2025 earnings call in May. As a reminder, for our fiscal year 2026, we continue to anticipate revenue in the range of $825 million to $865 million and non-GAAP diluted earnings per share within the range of $2.25 to $2.40. The full year effective tax rate is expected to be approximately 20%. Our weighted average diluted shares outstanding are assumed to be approximately 74 million shares, which does not incorporate any future share repurchase activities. I would also like to note that on August 4th, we successfully completed the sale of our entire previously disclosed foreign investment for the equivalent of approximately 12 million dollars. Our outlook anticipated that this investment would have a relatively neutral impact on our full fiscal year financial performance, which remains the case as a result of this transaction. Finally, let me now provide some color for our second quarter expectations. We currently anticipate year-over-year second quarter revenue growth in the range of four to six percent. In terms of non-GAAP earnings per share, we anticipate a range of 43 cents to 45 cents for the quarter. This outlook reflects several key factors. The shift in timing of our engaged customer event, which will occur in Q2 this fiscal year versus Q3 last fiscal year. The normalization of operating expenses in Q2 as benefits from the prior year's restructuring actions lapse. And the impact of the sale of our previously disclosed foreign investment in Q2, which will offset the gain recorded in Q1 and is expected to have a relatively neutral impact on our full fiscal year outlook. That concludes my formal review of our financial results. Before we transition to Q&A, I'd like to quickly note that our upcoming IR conference participation is listed on slide 15. Thank you, and I'll now turn the call over to the operator for questions.

Thank you. At this time, if you would like to ask a question, please press star one on your telephone keypad. If you wish to remove yourself from the queue, press star two. We do ask in the interest of time that you limit yourself to one question and one follow-up question. We'll take our first question from Matt Hedberg, RBC Capital Markets. Please go ahead.

Hey, guys. This is Demeron on for Matt Hedberg. Congrats on the quarter. So just to start ask, could you talk a little bit about what you are seeing in the macro environment relative to 90 days ago, and can you give a little bit more color on the outlook around the service provider spending in fiscal year 26 and compare it to what you were seeing this time last year?

So, thanks for your question. So, if you're talking about the external environment related to tariffs, I think is jury still out, and we are not seeing any effect at this point. Also, as I mentioned on our last call that we have more of, let's say, mostly a software business which is less impacted by tariffs. So we are still remains to be seen whether they will have any serious impact this fiscal The second thing on question of service provider spending, I would not look at the quarter over quarter comparison in any serious way because of lumpy deals in service provider. We think that it's too early to compare this year with last year. Overall, the spending climate looks very similar to what we saw last year.

Okay, great. And then just one more from me. Can you talk a little bit more about the security portfolio this year? What keeps it going? Where Are you seeing the most demand around the newer products like mobile security, adaptive DDoS, distributed threat mitigation? Yeah, any color on that would be great.

So the biggest thing, as we have talked about over the last couple of years, the Arbor DDoS business is fully integrated into NetScout, the main business. As a result, we are cross-breeding some of the technologies, like we are bringing scalable DPI to the DDoS world, which results in adaptive DDoS and other feature sets which were not previously available and are big differentiators, even though we are already a big leader and incumbent in this market. So that's one area, and that's obviously the biggest portion and the biggest area of growth also. So we have some traction on the OCI product, which is basically in the NDR space, but we are repositioning that into what we call post-incident response. And third area is that even our new AI sensor product, which sends curated data to third parties, is not only useful for observability, but also used for cybersecurity use cases with partnership with Splunk and likes of Palo Alto. So we think that that's a big area of growth, which has, we have made a big advancement in that area. Plus my spending climate is much better versus service assurance.

Great, thanks guys. Our next question comes from Kevin Lu with Kay Lu and Company. Please go ahead.

Hi, good morning guys. How did a nice start to the year here? First question, I just wanted to ask about how, you know, spending amongst your federal government customers trended within the first quarter. It did sound like you guys got a nice deal that came in earlier than expected.

And then as you look towards, you know, the September quarter, any initial thoughts on whether you'd expect, you know, kind of the usual federal government budget flush and maybe put that in context for kind of the trillion-dollar-plus defense bill for next fiscal year as well and how that could benefit you yeah so i'll let tony tony maybe give uh add to what my commentary is okay i mean so yeah we had a good uh good quarter and pipeline looks good and it's possible that we will get more as we enter exit this fiscal year but as you know

the timing is always of suspect so we have a good line of sight for the federal area exactly happened yeah so kevin i would say fed was strong in the quarter it grew mid-teens but um and we see opportunity in this particular area um as you as we alluded to in the uh prepared remarks we did have an order come in earlier so that was some of the strength in the quarter but we do see a lot of opportunity in the federal area but as you know it's always subject to subject to the approvals and the timing of those orders given everything going on in the federal government but we're cautiously optimistic for that sector right now.

Understood and then more generally just with the strength you're seeing on the enterprise side of the business right now can you speak to you know how much of a contributor kind of these investments in AI data centers is impacting that or whether there are other kind of strong secular growth drivers that can help sustain that trend moving forward?

So I think the biggest change which has not impacted the revenue stream yet is that our service assurance market which was more of a niche market where we had almost 40 50 market share is getting expanded into the larger observability market and so where our data is even more useful so i think it's getting legitimacy to what we used to do in the scalable dpi and smart telemetry area and we have made corresponding product improvements into this by using this product called omnis ai insights which some of it will

contribute to revenue this year also so that's the biggest most interesting thing going for us that that um ai is is making some of the things uh which are very important uh into the mainstream and indirectly increasing our market size which was one of the challenge and kevin i would say that um it's it's early on for this product and we're seeing good uh interest and momentum it did have some contribution because as we said uh in the prepared remarks that we did highlight a customer that did invest in it, but it's small at this point, but we see opportunity in this area.

Got it. And maybe just one last one, you know, with the passage of the tax bill last month, wondering, you know, what you're hearing from some of your service provider customers at this point in terms of, you know, potential incremental investments they're making in their network and how that could translate in a business for you.

We have not heard anything specific from this year so far. And even in the past when the changes happened that didn't necessarily translate into more or less business for us.

Got it. Thanks for taking the questions and good luck joining you too.

Thank you.

Thank you. And this concludes our call. We thank you for joining us today. Have a wonderful day.