Earnings Call Transcript - NTCT Q1 2022

Tony Piazza, Vice President of Corporate Finance

Thank you, operator, and good morning, everyone. Welcome to NETSCOUT’s first quarter fiscal year 2022 conference call for the period ended June 30, 2021. 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. Moving to Slide number 3. Today’s conference call will include forward-looking statements. These statements may be prefaced by words such as anticipate, believe and expect and will cover a range of topics that are not strictly historical facts such as our financial outlook, our market opportunities and market share, key business initiatives and future product plans along with their potential impact on our financial performance. These forward-looking statements involve risks and uncertainties, and actual results could differ materially from those 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 31, 2021. 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 4, 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.

Anil Singhal, President and Chief Executive Officer

Thank you, Tony. Good morning, everyone, and thank you for joining us. Let’s begin on Slide number 6 with a brief recap of our first quarter non-GAAP results. We had a solid start to the fiscal year. First quarter revenue increased more than 3% to $190.3 million compared with the same quarter last year. Strong product revenue growth in both the service assurance and cybersecurity product lines more than offset lower service revenue and drove our revenue increase, while contributing to our strong diluted earnings per share performance. Diluted earnings per share increased more than 17% to $0.20 compared with the same quarter last year. Let us move to Slide 7 for some further perspective as we review business insights and market trends. In our service provider vertical, revenue grew approximately 10% compared with the same quarter last year. This growth was partially attributable to a large domestic cable operator investing in their 5G core and edge environment solutions. We also benefited from an international carrier customer accepting completion of an implementation earlier than expected, as we recognized revenue a quarter earlier than planned. During the quarter, we also received a low-eight-figure Radio Frequency Propagation Modeling order from a Tier-1 North American carrier as they progress their 5G network planning. We anticipate that we will be able to complete these projects by the end of our fiscal year. Within the service provider market, we have started seeing some momentum around 5G network advancements globally. Turning to our enterprise customer vertical, revenue declined approximately 1% compared with the same quarter last year. Low-single-digit revenue growth in the service assurance area was offset by a mid-single-digit decline in the enterprise security area, primarily attributable to reduced spending from the financial institution sector compared to the same quarter in the earlier year. Despite the relatively flat overall enterprise and customer vertical performance in the first quarter, we see opportunity in this vertical for the full fiscal year as customer accelerate cloud migration and cybersecurity investments. The ability of our solutions to provide visibility and protection during a cloud transition and in hybrid or multi-cloud environments gives customers the control and confidence required to innovate. Some recently launched solutions, which include Smart Edge Monitoring and Omnis Cyber Investigator will help address these visibility and security needs. Our Smart Edge Monitoring solution uses an innovative approach, that combines smart data analytics and synthetic transaction testing, to assist in early identification and rapid resolution of performance issues to protect the digital experience from anywhere. This unique solution gives IT teams complete visibility and insight to assure the highest-quality end-user experience in any network or application, regardless of where employees perform their job. We believe our new products will gain greater traction as our sales team resumes traveling, conduct in-person customer meetings and complete proof of concepts that demonstrate the value of our solutions in reducing mean-time-to-resolution of issues while saving time and expense.

Michael Szabados, Chief Operating Officer

Thank you, Anil, and good morning, everyone. Slide 10 outlines the areas I will cover. In the service provider customer vertical, we continue to see some momentum around 5G globally. Some customers continue their planning, with Radio Frequency Propagation Modeling projects, while others are starting initial deployments. During the quarter, we won a couple of low-seven-figure deals in the large domestic cable operator space where they are using both our service assurance and cybersecurity solutions as they build out their 5G core data centers or protect their edge environments. Internationally, we won a low-seven-figure deal with a mobile carrier in Asia, related to the core to RAN service assurance visibility for their initial rollout of 5G. We successfully won these deals due to our superior technology, comprehensive solutions, and incumbency, despite the competitive bid processes used in some of these transactions. In the enterprise customer vertical, we continue to gain traction with existing as well as new customers. Within the pharmaceutical sector, we closed two low-seven-figure deals with two leading pharmaceutical manufacturers. First, with a long-standing customer that leverages our solutions for visibility of all the network traffic related to their manufacturing operations. Our proactive application visibility is trusted to ensure operations run smoothly by identifying and assisting in mitigating service disruption. This customer also deploys our cybersecurity solutions given the unwelcomed interest from bad actors due to the Company’s trade secrets and medical importance. Second, a new customer purchased our service assurance solutions to replace an incumbent’s product to gain superior visibility as they transition their hybrid infrastructure and advance their digital transformation. This deal was won during a highly competitive bid process. Both wins demonstrate the critical value of our comprehensive and powerful solution in winning deals by leveraging our incumbency and in securing new customers. In terms of go-to-market activities, we continue to focus on advancing our cybersecurity and public cloud brand awareness. Beyond marketing campaigns, we are also attending leading trade shows to showcase our brand and solutions. Later this month, NETSCOUT will attend the virtual version of Black Hat 2021 and later this year we will attend the AWS Re:Invent conference in Las Vegas.

Jean Bua, Executive Vice President and Chief Financial Officer

Thank you, Michael, and good morning, everyone. I will review key metrics for our first quarter along with our outlook. As a reminder, this review focuses on our non-GAAP results unless otherwise stated, and all reconciliations to our GAAP results appear in the presentation appendix. Slide number 12 details our results for our first quarter of fiscal year 2022. Revenue grew 3.5% over the same quarter in the prior fiscal year to $190.3 million. Product revenue grew 14.3% and service revenue declined 3.4% over the prior fiscal year’s quarter. The decline in service revenue is due to non-renewals associated with service provider consolidation and discontinued product lines. Our first quarter fiscal year 2022 gross profit margin was 74.2%, down 0.4 percentage points over the same quarter last fiscal year as inventory associated with discontinued products was reserved. Quarterly operating expenses increased 2.4% from the prior fiscal year, largely due to variable sales compensation and increased costs associated with our first quarter sales kickoff and Engage events. We reported an operating profit margin of 11.4% compared with 11.2% in the same quarter last fiscal year. Diluted earnings per share was $0.20, up 17.6% from the same period last fiscal year. Turning to Slide 13, I’d like to review key revenue trends for the first quarter. In the service provider customer vertical, revenue grew 9.6% while the enterprise customer vertical declined 1.1%. Approximately 54% of total revenue was generated from the enterprise customer vertical with the remainder from the service provider customer vertical.

Anil Singhal, President and Chief Executive Officer

Well, our big federal quarter is actually the coming quarter and so we have a lot of orders in the pipeline. But as always, the federal spending and last minute spending is still up for grabs. So we are looking for a good Fed quarter. And normally, Q1 is not a good Fed quarter, but Q2 is a good Fed quarter being the end of the fiscal year. So I’m not sure, Jean, what we had in this quarter, but I think big orders for Fed are expected in the coming quarters.

Jean Bua, Executive Vice President and Chief Financial Officer

The Federal sector this quarter, on a quarter-over-quarter basis went down in the single millions of dollars. So ranging from $2 million to $4 million less this quarter than in Q1 of last year.

Anil Singhal, President and Chief Executive Officer

So this one quarter is not the trend overall. We think the service assurance growth for the year will be close to twice the rate of service assurance growth in the year. So as we talked about single-digit overall growth, security growth will be much, much higher than that. I think it’s just a timing. There are some big deals in different quarters. The one-quarter trend. And so there is no real issues related to what is happening in the competitive environment. It’s just the timing of the deals. And sometimes in Q1 last year may have been better for some reasons. But overall trend this year is that we are going to see higher growth trends in cybersecurity even though some of the new products may not hit the mark if we are not able to do trials, because of COVID issues internationally. Also, cybersecurity is almost – a much larger percentage of our business is international. And as you know, we have a lot of pandemic-related issues. So overall, you will see that our cybersecurity growth will be higher than the overall growth and it could be as much as two times the service assurance growth this year.

Jean Bua, Executive Vice President and Chief Financial Officer

Arbor declined this quarter due to most of the U.S. and financials, as you point out, probably the decline was, again, probably around somewhere between $3 million to $5 million in overall revenue. And then as Anil said, it’s mostly due to the timing of deals. Going forward, Arbor focuses on DDoS, and there are some new products coming out, which would include mobile security. And as we’ve talked about in the past, Arbor is a Cadillac. So they do well in the large institutions that are enterprise and then they do well in service providers. And then going forward, with the security products that Anil and team are rolling out, the anticipated growth of that is probably the difference between the different ranges in our guidance.

Anil Singhal, President and Chief Executive Officer

Yes. So we have announced our Smart Edge monitoring solution last year and for remote sites. And unfortunately, most of the remote site people went home because of the pandemic. So we got a lot of input from our customers that they are looking for similar capability for work-from-home users. So this now the revised Smart Edge Monitoring solution, which we sort of re-announced and we had a recent press release, is basically provide the same functionality, which was available in the data center and the remote site to the work-from-home user, which is that if you have an IT problem, is it your carrier, is it your cloud provider, is it your laptop or is it your VPN? And we are the only solution in the market that can quickly do triage for that. This also requires trials and POCs, but it’s still with existing customers and is incremental to our existing solution. So I think, yes, there is a – we are counting on some traction in that area in the coming quarters.

Tony Piazza, Vice President of Corporate Finance

Thank you, operator. This now concludes our call. Thank you for joining us today and have a great day.