Netscout Systems Inc (NTCT) Q4 2026 Earnings Call Transcript

Thank you for standing by, and welcome to the NETSCOUT's fourth quarter and full fiscal year 2026 Financial Results Conference call. At this time, all parties are in a listen-only mode. A question and answer session will follow the management team's prepared remarks. As a reminder, this call is being recorded. If you require operator assistance at any time, please press star zero. I will now like to turn the call over to Scott Dressel, NETSCOUT's VP of Corporate Finance. Scott, please go ahead.

Thank you, Operator, and good morning, everyone. Welcome to NETSCOUT's fourth quarter and full fiscal year 2026 conference call for the period ended March 31, 2026. Joining me today are Anil Singhal, NETSCOUT's President and Chief Executive Officer, and Tony Tiasa, NETSCOUT's Executive Vice President and Chief Financial Officer. Please note that a slide presentation accompanies our prepared remarks. You can advance the slides and the webcast viewer to follow our commentary. Both the slides and the prepared remarks can be accessed in multiple areas within our investor relations section of our website at www.netscout.com, including the IR landing page and the quarterly results page. As discussed in detail on slide number three, today's conference call will include certain forward-looking statements about Netscout's views on expected results of future performance and 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 filings with the Securities Exchange Commission that can be found in our annual report on Form 10-K and quarterly reports on Form 10-Q. 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 the slide presentation includes both GAAP and non-GAAP results, other than revenue and balance sheet information which are presented in accordance with GAAP, we will focus our discussion on non-GAAP financial information. These measures should not be considered in isolation from or as a substitute for financial information prepared in accordance with GAAP. Reconciliation of all non-GAAP metrics to the nearest GAAP measures are provided in the appendix of the slide presentation in today's financial results press release and on our website. I will now turn the call over to Anil for his prepared remarks.

Thank you, Scott, and good morning, everyone. We appreciate you joining us today. Nesco delivered strong fiscal year 2026 top and bottom line results driven by growth across both our cybersecurity and service assurance optics. Our performance in the fiscal year helped us achieve the key strategic objectives we laid out a year ago, including accelerating product innovation, driving annual revenue growth, and expanding margins. We also strengthened our innovation engine through the introduction of differentiated capability across the portfolio, including AI-ready smart data, expanded observability, enhanced edge visibility, and adaptive threat. We accomplished this in what continues to be a dynamic operating environment, underscoring the strength of our strategy and the consistency of our execution. These results have further reinforced our financial foundation and position NetScout to drive continued innovation, revenue growth, and margin improvement in fiscal year 2027. At the same time, we believe market trends across AI, observability, and network security are expanding our opportunity set and creating additional revenue for long-term value creation. With that context, let me turn to slide number six for a brief review of our fourth quarter and full fiscal year 2026 financial performance for the period ended March 31, 2026. For the post-quarter, total revenue was approximately $203 million compared with $205 million for the same period last fiscal year, which was in line with our expectation given the shift in customer order timing to the prior quarter as we discussed on our Q3 earnings cost their diluted earnings per share was 52 cents consistent with the same period last fiscal year for the first full fiscal year which is more representative of the business and the underlying market trends revenue increased by 4.5 percent to approximately 860 million dollars driven by growth in both our cyber security and service assurance offerings we expanded both our gross and operating margins year over year and deliver nearly 12% growth in diluted earning per share at $2.48, exceeding the high end of our guidance range. Now let's turn to slide number seven for some perspective on our business and some market insights. Starting with a review of our service assurance offerings, the revenue for the full fiscal year increased approximately 3% year over year, driven by growth in the enterprise customer vertical with strong contributions from both federal and non-federal government related spend must continue to rely on our service assurance solutions to advance their digital transformation initiatives in turn we are investing in innovation particularly with respect to observability and ai and to help our customer drive greater efficiency efficiency reduce risk and accelerate accelerate troubleshooting and lower costs an example of this innovation during the year is our omni sensor and omni streamer which work together as an integrated ai of solutions that transforms high fidelity network packet data into actionable intelligence also our sensor and streamer products include agentic ai interfaces that enable efficient and cost-effective integration with multi-vendor ai solutions which facilitate automation and reduces total cost of ownership for our customers among our carrier service service provider customers we continue to see measured 5g investment as they balance build out with monetization and we expect this to continue into our fiscal year 2027 at the same time emerging opportunities such as fixed wireless access 5g network slicing and ai initiate ai ops initiative has the potential to drive revenue and and cost efficiency for a communication service provider. We believe NetScout is well-positioned to support this transition. Our 5G observability solution provides end-to-end visibility for 5G standalone slices to support high-performance services such as immersive gaming and large-scale sporting events, as well as mission-critical application and services. Moving to our cybersecurity offerings, revenue for the full fiscal year increase approximately eight percent with growth across both our enterprise and service wider verticals cyber security continues to grow faster than the company average and is an increasingly important driver of a long-term revenue growth and margin expansion our latest ddos threat intelligence report which was released in march 2026 assesses the current global threat environment including newer AI-powered attacks. Foundational services such as DNS and NTB remain under persistent pressure, and recent botnet attacks on government, financial, and transportation infrastructure show how quickly to have critical services with either legacy tools or by using AI to increase the scale and sophistication of their attacks. Large coordinate attacks are outpacing traditional defenses and organizations increasingly turning to automated intelligent protections to keep up. NetScout is well-positioned to help customers protect their digital services. Many of our newest innovations support distributed detection and mitigation solutions to provide a more robust and resilient adaptive DDoS protection environment. Additionally, as noted in our earnings release, We just completed a tuck-in acquisition of the assets of DigiCert incorporation, DDoS protection business that brings the back-end infrastructure of our Azure cloud network to fully in-house. We believe this transaction provides us with greater control of the platform and a clearer path to scaling cloud-based services over time while providing immediate incremental recurring revenue in the cloud DDoS space. Before touching on some of our recent customer wins, I would like to briefly discuss AI and what we believe this new era would mean for NETSCOUT over time. We believe AI will create additional opportunities for both service assurance and cybersecurity by amplifying the need for network visibility and protection. As networks grow more complex and cyber threats increasingly leverage AI tools, we believe the need for adaptive real-time visibility and intelligence protection will continue to rise. This dynamics play directly to NETSCOT strengths. We have long been recognized for our packet-level approach to network detection, investigation, and response. Now, our patented deep packet inspection and metadata aggregation capabilities can generate complex, high-fidelity, AI-ready, smart data at scale that is purpose-built for advanced analytics like never before. More importantly, we are not competing with foundational AI models. Instead, we are leveraging our differentiated data and domain expertise to enable automation that integrates into our customers' broader observability and AI workflows, helping to enhance visibility and operationalize AI within those environments. From a financial perspective, we believe AI advancement could reinforce the durability of both our cybersecurity and service insurance businesses by supporting upgrade cycles and expanding use cases across our install base. Taken together, we view AI as a promising opportunity that enhances the value of what we already do best and extends our relevance within customer critical infrastructures over the long term as they develop and implement their broader ai strategies and initiatives turning to customer wins both in service assured and cyber security continue to be interaction in addition to new customer we continue to secure a significant amount of repeat business from loyal customers buying new solutions and upgrade along with maintenance services two wins from the fourth quarter were a mid seven figure deal with large European telecom that has been a long-time cyber security and service assurance customer. They have upgraded the DDoS protection with our adaptive DDoS offering and our distributed threat mitigation system to enhance that our adaptive DDoS mitigates all types of multi-vector attacks before they can impact critical services while TMS provides enterprise-level protection across both cloud and edge environments with physical and virtual platforms and multiple usage configurations this client also values our subscription model which includes support and maintenance and a flexible scale up and scale down approach to minimize license wastage a second deal in the low seven figures was with a new customer that is a global leader in chip manufacturing for a variety of interest rates, including automotive, mobile communications, and data centers. This contract included an ingenious solution to maintain traffic visibility and address system reliability issues across a network that spans multiple countries. They chose NETSCOT because of our reputation and ability to provide the critical solutions required to manage the complex interdependency of their networks and applications. With that, let's move to slide number 8 to review our outlook. In fiscal year 2026, we returned the business to revenue growth, improved margins, expanded profitability, delivered strong free cash flows, and continued to advance our broader capability across both cybersecurity and service assurance. Looking ahead, we are excited about the energy in front of us and are leaning into this momentum. We see significant opportunities over the long term to leverage NETCOR's deep expertise in cybersecurity and network observability together with our AI-ready data platform to help customers advance their AI and digital transformation initiatives, and to manage an increasingly complex digital environment where network performance, availability, and security are mission critical. We believe we are well positioned to drive profitable growth, generate strong free cash flow, and enhance long-term shareholder value. These growth dynamics are reflected in our fiscal year 2027 outlook, which Tony will review during his remarks. While we remain mindful of the microenvironment, ongoing career spending discipline, and demand trends across both enterprise and service provider customers our priorities remain clear we aim to drive sustained revenue growth by executing against a healthy pipeline with particular emphasis on cyber security and enterprise-led service assurance at the same time we'll continue to invest in new innovation across ai observability and ddos protection as well as maintain a disciplined in focus on cost management and a balanced capital allocation strategy. We are energized by what life has had and look forward to updating you on our progress throughout the year. With that, I will turn the call over to Tony for a review of our financial performance and our outlook for fiscal year 2027.

Thank you, Anil, and good morning, everyone. We appreciate you joining us today. I'll start by walking you through the key financial metrics for our fourth quarter in full fiscal year 2026. After that, I'll share some additional commentary on our fiscal year 2027 outlook. As a reminder, other than revenue and balance sheet information, which are on a GAAP basis, this review focuses on our non-GAAP results. All reconciliations with our GAAP results appear in presentation appendix i will note the nature of any such comparisons accordingly also as comparisons are on a year over year also all comparisons on a year-over-year basis unless otherwise noted slide number 10 details the results for the fourth quarter in full fiscal year 2026. focusing on our fourth quarter performance first total revenue was 203 million dollars down 1% from the same period last fiscal year. This reflects the impact of timing-related order shifts discussed on last quarter's earnings call, as certain orders originally expected in Q4 were pulled forward into Q3 as customers utilized remaining calendar year-end budgets. Product revenue totals $80.7 million, compared with $89.5 million last fiscal year, reflecting the timing and mix of certain orders across borders. Service revenue increased 5.9% year-over-year to $122.3 million, driven by underlying growth and favorable timing of service renewal orders and the mix associated with an enterprise license agreement. We ended the fourth quarter with total product backlog of approximately $50 million, dollars, which included $45.8 million of fulfillable backlog. This compares to total product backlog of approximately $33 million, including $25.1 million of fulfillable backlog at the end of the same period in 2025. Our gross profit margin was 79.7% in the fourth quarter, an increase of 0.5 percentage points from the same period in the prior year, reflecting higher product gross margin due to favorable product mix. Quarterly operating expenses were $117.9 million, up 2.4% year-over-year, primarily related to the timing of variable incentive compensation expense. Our operating margin was 21.6% compared with 23.1% in the same period last fiscal year. We delivered diluted earnings per share of $0.52 for both periods. Moving to the full fiscal year, 2026, revenue increased $4.5 million to $859.5 million. dollars. Product revenue increased 2.8 percent to 370.1 million dollars, and service revenue increased 5.7 percent to 489.3 million dollars. As mentioned earlier, and in prior quarters, product revenue was impacted by a year-over-year shift in the classification of revenue associated with an enterprise license agreement, reflecting the nature of the customer's composition mix. Service revenue correspondingly benefited from this classification shift, as well as the timing of renewals, including back maintenance. Gross profit margin rose 0.8 percentage points to 80.8%, driven by an increased product margin attributable to higher volume and a favorable product mix. Annual operating expenses increased 2.9% from the prior year. We reported an operating profit margin of 25.4%, up 1.7 percentage points compared to the prior year, based on higher revenue, enhanced product margin, gross margin, and disciplined cost management. The diluted per share increased nearly 12% to $2.48. since. Our annual non-GAAP effective tax rate was 19.9% compared to 19% in the prior year, which benefited from a valuation gain in a foreign investment with favorable tax treatment. Let's turn to slide 11, where I'll walk you through the key revenue trends by product lines and customer verticals. For the full fiscal year 2026, service assurance revenue increased by 2.6% and cybersecurity revenue grew by 7.8%. During the same period, service assurance accounted for approximately 64% of total revenue, and cybersecurity accounted for the remaining 36%. Cybersecurity continues to grow faster than the company average, and over time we expect it to become a larger portion of our mix, which should be a positive driver of growth. Turning to our customer verticals, for the full fiscal year 2026, Enterprise revenue grew by 5.4% and Service Provider revenue grew by 3.3%. During the same period, Enterprise accounted for approximately 58% of our total revenue and Service Provider accounted for the remaining 42%. Additionally, no customer accounted for more than 10% of our revenue for the quarter or the full fiscal year of 2026. Turning to slide 12, this shows our revenue mix between the United States and international markets. For the full fiscal year 2026, the United States represented 55% of revenue and international represented the remaining 45% of revenue. Slide 13 shows some key balance sheet items along with our free cash flow for the period. We ended fiscal year 2026 with $705.1 million in cash, cash equivalents, and short and long-term marketable securities, representing an increase of $212.7 million since the end of fiscal year 2025. Pre-cash flow was $150.1 million for the fourth quarter and a near record high of $285.4 million for the full fiscal year. During fiscal year 2026, we repurchased approximately 2.5 million shares of our common stock at an average price of $24.29 per share, for a total of approximately $61 million under our share repurchase program. From a debt perspective, at year-end, we had no outstanding balance on our $600 million revolving credit facility, which expires in October 2029. To briefly recap some other balance sheet items, accounts receivable net was $151.5 million, representing a decrease of $12.2 million since March 31, 2025. Bay sales outstanding at the end of the fourth quarter was 62 days, compared with 68 days in the same period in the prior year. This change in DSO in the fourth quarter reflects the timing and composition of bookings, as well as working capital enhancements initially. Let's move to slide 14 for our outlook. I will focus my remarks on our revenue and non-GAAP earnings per share targets for fiscal year 2027. As Anil noted, we expect to build on our current momentum by driving sustained revenue growth and expanding profitability. For fiscal year 2027, we anticipate revenue in the range of $885 million to $915 million and a non-GAAP diluted earnings per share in the range of $2.65 and $2.80, both representing year-over-year growth on the top and bottom lines. This outlook incorporates the DigiCert DDoF asset acquisition that Anil mentioned during his remarks, which is expected to be immediately accretive and assumes an initial annualized revenue run rate contribution of approximately $20 million, with a partial benefit for fiscal year 2027, given the May 1st transaction close. For the full fiscal year, we expect our non-GAAP effective tax rate to be approximately 20% and weighted average diluted shares outstanding of approximately 7.74 to 75 million shares. Our guidance reflects a growing contribution from our cybersecurity offerings and awareness of the trends in our service assurance offerings, including continued spending discipline in the carrier market, as well as the current dynamic macro environment. Additionally, I'd like to provide some color on the first quarter of fiscal year 2027. We expect revenue to grow in the mid-single digits range and earnings per share to increase at approximately twice the rate of revenue growth compared with the same quarter last fiscal year. So, in summary, we delivered on our fiscal year 2026 strategic objectives through new innovations, a return to revenue growth, and enhanced margins, resulting in strong performance for the fiscal year. Looking ahead to fiscal year 2027, we plan to build on this momentum by advancing innovation, sustaining revenue growth, further improving profitability, and continuing to generate strong free cash flow. Our capital allocation priorities remain consistent, investing in the business for profitable growth, maintaining a strong financial position, and returning excess capital to shareholders, primarily through share repurchases. We currently have capacity under our share and purchase authorization and subject to market conditions intend to be active in the market during fiscal year 2027. With a strong cash position, no drawn revolver, and ongoing free cash flow generation, we have meaningful flexibility to support our growth initiatives and shareholder returns with a clear focus on long-term value creation. That concludes my formal review of our financial results and outlook. I would also like to note that we will be participating in the annual Needham Technology, Media, and Consumer Conference, as well as the annual B. Riley Securities Institutional Investor Conference in May. I look forward to engaging with many of you there. With that, let's open it up for questions. Operator?

At this time, if you would like to ask a question, please press star 1 on your telephone keypad. If you wish to remove yourself from the queue, press star 2. In the interest of time, we ask that you limit yourself to one question and one follow-up. Our first question is from Matthew Hedberg with RBC Capital Markets. Your line is open.

Hey, guys. This is Sonika Merchant on for Matt Hedberg. Thanks for taking our question, and congrats on the quota. I guess to start, could you talk more about the broader macroeconomic landscape and what demand trends have been like? More specifically, are you seeing any uncertainties from carrots, AI supply chain dynamics, or the war in Iran? And has there been any impact to close rates as a result?

I think that there is a general concern about what could happen tomorrow but so far we have not seen a big impact we have a strong financial position we have partners who are supplying the hardware and we have been able to procure in advance so overall the impact on us and even the tariff impact was minimal so it has not been a big impact on us so far but we're still cautious about what could could happen because of what's happening But so far, the direct impact has been minimal on NETSCOT. And just one more thing, so yeah, people are always cautious and hold budgets, and that's why sometimes those are flushed in the December quarter, and we benefit from that. So I think overall, while our internal conditions and as a result of innovation, the external environment could get worse. Got it.

Thanks for the color there. And as a quick follow-up, could you tell us more about how the Fed business performed this quarter and any trends you're seeing there? Thanks.

So the Fed business was good for NetScout for the full fiscal year. Federal generally runs in the mid to high single digits of total revenue, and this year, fiscal year, ran at the high end of that particular range. And so we see good – we have a strong pipeline in the federal business, but it was really high for us in fiscal year 26. And so, therefore, one of the – one of the things we're cognizant in the service assurance business is if that trend starts to normalize back to what we've seen in the past. But right now, we're seeing good federal traction in a nice pipeline.

Okay, great. Thanks, guys.

Next to Eric Suffinger with D. Riley Securities.

Your line is open. yeah thanks for taking the question and uh and uh solid quarter very good um one can you just uh last last quarter you had um indicated that i think the sensor and streaming business was about 15 million uh can you for for the first three quarters of the fiscal year can you give us an update on that and then um we saw some uh legal actions taken against uh some of these large bot nets uh you know where the the government's cross-country uh kind of governments were shutting down some of these botnets i'm curious if you think that's going to reduce the uh the threat landscape and and our customers um uh responding at all to that in

terms of their their purchasing yeah so i think the business which you talked about about 15 million we were in the range somewhere between 10 and 15 and um and so this is the good news as we um just launched this solution um later in the later regarding the details just to be yes just just be clear are you saying you were you were 10 to 15 million for fiscal 20 fiscal 26 or or was that in the fourth quarter fiscal year 26 and it was in the second half mostly because the product was introduced only in at our engaged conference in October.

I think Eric, like Anil said, that's a relatively new product. We're pleased with the first year out here and we see opportunity even within some of our backlog there's some opportunity we already have in there. So we see the opportunity there. I think with regard to some of these sensors and streamers, which target bringing DPI to the observability space in the AI space. I think what we're finding is that there's tremendous interest in this right now. And so we're talking to customers about it, but customers are still trying to figure out what their AI strategy and execution is. And so we're working through that. So even though we've gotten some good initial traction and we see good opportunity, you know, it does take a little while for these cycles.

Another thing is there is an indirect impact because this strengthens our value proposition of a smart data company and it makes our core business more sticky because this runs our AI solution runs on the foundation of service assurance and DDoS solutions. As to your other question about government taking action on the DDoS I mean that was sort of backward looking I think these actions were too late for people to be able to be fully helped by that. So that will continue, hackers will keep finding new ways our product will be used in the initial stage at some point partly because of some of our innovations and other people who are helping the industry in cybersecurity area, the government will then identify and take some action. And this doesn't reduce the need of whatever solution, and it doesn't reduce the threat landscape, which we'll see in the coming years.

I think what we've seen in our threat reports and what's been highlighted by us and others is that AI is actually just accelerating threat landscape. So, I don't know that taking out any one party is going to impact the long-term trajectory of the ThreatLine.

Very good. Thank you very much.

And we will move next to Kevin Liu with Kaylou & Company. Your line is now open.

Good morning, guys. Just kind of on the topic of enterprise customers and what they're doing with AI, I'm curious, with a lot of your larger, more regulated players, what are you seeing them doing in in terms of kind of moving from pilots into more production use cases? And ultimately, do you feel Nutscout gets a lot of incremental workloads to kind of monitor and secure there? Or do you think it's more just kind of a shift in kind of what they monitor within their own networks?

Yeah, so Kevin, on the, I mean, obviously, monitoring the AI infrastructure is the extension of monitoring and protecting. So the new infrastructure, that's always incremental business. That's going to keep the core business growing. But the real AI opportunity for incremental revenue, besides that, is playing in the agentic AI space. Whereas our data either was not easy to consume by third parties, but even if it was consumed, it was not mixed with other data sets so easily. So, the promise of authentic AI driving automation is to be able to mix NETSCOT data with other data set to drive good outcomes. And in that set, we believe our data set may be the most important because it's only available from us in this current form at a scalable level, and yet it's a multiplier to the rest of the data set who generally tell you what is going wrong or what's happening but not necessarily provide the context of why and that's what why we do so i think it's going to highlight the value of our data beyond our existing customer and use cases uh which was a dream for like so many uh i mean last couple of decades and now it might come through with all the things happening in the ai

A quick follow up on that, you know, how quickly do you think kind of the AI use cases, you know, manifest? Is that within your fiscal 27 or kind of more beyond that?

And then just on the backlog that you're carrying today, you know, how much it's up meaningfully year over year and sequentially, so just wondering how much of that is kind of due to, you know, maybe supply chain constraints impacting your ability to ship versus just kind of timing of orders closed in the quarter? i let tony cover after i answered the first question about ai traction so i think we have to look at there is a lot of investment going on as you know part of the supply chain problem is because people buy buying a lot of hardware for the infrastructure but it's going to take some time but i feel that uh that the indirect impact on netcode core business is already happening For example, our AI solution runs as a software module on top of the existing deployments. So that makes those deployments more sticky, and even if the phase of adoption in terms of third-party solutions consuming our data, AI solutions consuming our data, it may take some time. I think it will have an impact on the court business in the short term and that's why we have provided this new guidance for the coming years.

And then Kevin on the backlog, it's really more about timing. It was some large orders that really came in at the end of the quarter and the customer didn't need them yet and so we've prioritized what had to go out. So it's really more timing. It didn't have anything to do really with any supply chain constraints.

All right. Great. Well, appreciate you guys taking the questions and congrats on a strong quarter at Outlook.

Thank you. This does conclude the Q&A session and it also concludes the conference call. Thank you for joining us today. You may disconnect at any time.