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spk01: Ladies and gentlemen, thank you for standing by and welcome to NETSCOUT's first quarter 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. If you require operator assistance at any time, please press star zero. I would now like to turn the call over to Tony Piazza to begin the company's prepared remarks.
spk04: Thank you, operator, and good morning, everyone. Welcome to NETSCOUT's first quarter fiscal year 2022 conference call for the period ended June 30th, 2021. Joining me today are Anil Sankal, NETSCOUT's President and Chief Executive Officer, Michael Zabados, 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 to slide number three, 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. 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 announcement 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 this slide presentation, in today's earnings press release, and they are also on our website. I will now turn the call over to Anil for his prepared remarks. Anil? Thank you, Tony.
spk06: Good morning, everyone, and thank you for joining us. Let's begin on slide number six 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 earning per share performance. Diluted earnings per share increased more than 17% to 20 cents compared with the same quarter last year. Let's move to slide seven 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 the 5G core and H 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 one North American carrier as they progress their 5G network planning. We anticipate that we'll 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 advancement globally. Michael will discuss how this means during his remarks. 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 customers 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 includes SmartEdge Monitoring and OmniCyber Investigator, will help address this visibility and security needs. Our SmartEdge 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 solution in reducing mean time to resolution of issues while saving time and expense. Michael will highlight some of the customer wins we experienced in this vertical during the quarter in his remarks. In the longer term, we see potential opportunity emerging in the enterprise customer vertical for 5G utilization as enterprises and governments look to leverage 5G technology in private networks through network slices and at the edge. NETSCOUT is one of the only handful of vendors that have both service provider and enterprise knowledge in providing both scale and functionality. This should serve us and our customers well as 5G advancements unfold in the future. Now let's move to slide number eight to review our outlook. With one quarter behind us, we are off to a solid start to the fiscal year. As the world continues to emerge from the pandemic, we remain focused on meeting our customer needs for service assurance and cybersecurity solutions that solve some of the connected world's toughest challenges. As we advance our new service assurance and omni-cyber security solutions and resume normal customer interaction selling these solutions, we believe sales will accelerate toward the second half of the fiscal year. We also believe we will build greater momentum with our NetScout Without Borders initiative that is focused on expanding our business with existing customers by leveraging our incumbency to access both existing and new budgets, acquiring new customers through new consumption choices, and expanding our reach into high-value adjacencies such as expanded cybersecurity and big data analytics that can leverage our smart data. We remain committed to delivering within the non-GAAP fiscal year 2022 outlook that was provided on our May 6, 2021 earnings call, which calls for low single-digit revenue growth and enhanced diluted earnings per share at the midpoint of our outlook. Jean will recap the numbers during her remarks. Finally, I'm proud to announce that we recently issued our inaugural environmental, social, and governance ESG report, which is available in the company section of our website at www.netscout.com. While ESG is a growing area of interest for a diverse set of stakeholders, This principle has always been part of who we are at NETSCOUT. To obtain greater insight into how we think about ESG and our efforts in the area, I invite you to explore this new report and join us as we strive to increase our positive impact on the world. I look forward to sharing our progress with you as the fiscal year progresses. I will now turn the call over to Michael for his remarks.
spk05: Thank you, O'Neill, and good morning, everyone. So I can outline the areas that 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 want a couple of 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 and protect that edge environment. Internationally, we won a low seven-figure deal with a mobile carrier in Asia related to the core to rent service assurance visibility for the initial rollout of 5G. We successfully won these deals due to our superior technology, comprehensive solutions, and incumbency, despite the competitive big process used in some of these transactions. In the enterprise customer vertical, they 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 created to their manufacturing operations. Our proactive application visibility is trusted to ensure operations run smoothly by identifying and assisting in mitigating service disruptions. This customer also deploys our cybersecurity solutions, even with unwelcome interest from bad actors due to a company's trade secrets, secrets, and medical importance. Second, a new customer expected their 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 for a comprehensive and powerful solution in winning deals by leveraging our incumbency and executing 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 be attending the AWS re-invent conference in Las Vegas. At the Black Cat event, we will showcase our Omni cybersecurity and Arbor DDoS solutions as well as host presentations addressing the threat of triple extortion being used by ransomware gangs. During these events, we will demonstrate how our visibility and cybersecurity solution can be leveled, detect, investigate, and respond to these threats, and reduce mean time to resolution and cost while fostering collaboration between IT and security operations teams. At the AWS re-invent conference, we will support our partnership with AWS and showcase our visibility tools that can be leveraged in the cloud environment. That concludes my prepared remarks. I will now turn over the call to Jean.
spk02: 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. Regardless, I will note the nature of any such comparison. Slide number 12 details our results for our first quarter of fiscal year 2022. Revenue grew 3.5% over the same format in the prior fiscal year to $193 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 engaged 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 with 20 cents, 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. Turning to slide 14, which shows our geographic revenue mix on a gap basis. Revenue by geography continues to be domestically weighted, but international revenue increased compared to the same quarter in the prior year. There was no customer that represented 10% or more of revenue in the quarter. Slide 15 details our balance sheet highlights and free cash flow. We ended the quarter with cash, cash equivalents, and short-term and long-term marketable securities of $493.9 million, which is an increase of $17.5 million since the end of the fourth quarter of fiscal year 2021. Free cash flow generated in the quarter was $21.5 million. We currently have capacity on our share repurchase authorization and, depending on market conditions, plan to be active in the market. We did not repurchase any of our common stock during the first quarter of the fiscal year. From a debt perspective, as of the end of the first quarter, we had $350 million outstanding on our revolving credit facility. On July 27, 2021, we leveraged the favorable financing market environment to amend and extend our revolving credit facility. The amended $800 million revolving credit facility extends the maturity from January 2023 to July 2026, increases financial flexibility, and lowers financing costs. To briefly recap other balance sheet highlights, accounts receivable net was $146.2 million, down by $51.5 million since the end of March. DSOs were 63 days versus 75 days at the end of fiscal year 2021, and 57 days at the same time last year. The increase in the DSOs in the first quarter of this year compared with the first quarter of the prior year is primarily attributable to the timing of when orders were received in the quarters. Let's move to slide 16 for commentary on our outlook. I will focus my review on our non-GAAP outlook. As Anil noted in his earlier comments, we are reiterating the non-GAAP outlook that was presented on our May 6, 2021 earnings call. For fiscal year 2022, the expected revenue range is 835, to $865 million, which implies low single-digit growth. The anticipated effective tax rate is expected to be between 21% and 23% as we incorporate the impact from the recent UK tax legislation change, increasing their tax rate from 19% to 25%. Assuming approximately 75 million weighted average diluted shares outstanding, The non-GAAP diluted earnings per share range is expected to be between $1.71 and $1.77. The GAAP diluted net income per share range has been updated to account for certain charges, including the impact of the amendment of our revolving credit facility. I'd also like to offer some color on the non-GAAP outlook for the first half of the fiscal year. As we assess the opportunities in front of us, we currently anticipate approximately 1.5% revenue growth with corresponding mid-single-digit diluted earnings per share growth compared to the first half of the prior fiscal year. 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 17. Thank you, and I'll turn the call over to the operator to start Q&A.
spk01: And at this time, if you would like to ask a question, please press star 1 on your touchtone phone. If you wish to remove yourself from the queue, press the bound key. We do ask, in the interest of time, that you limit yourself to one question and one follow-up. And we will take our first question from Matt Hedberg with RBC Capital Markets. Your line is now open.
spk00: Hi, this is Anashtha from Matt Hedberg. Thanks for taking my question. Could you talk about how the federal vertical performed in the quarter and do you see any benefits as Fed spending picks up?
spk06: 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 spend is still up for the 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. I'm not sure, Dean, what we had in this quarter, but I think big orders for Fed are expected in the coming quarter.
spk02: The federal sector this quarter, on a quarter-over-quarter basis, was down in the single millions of dollars, so ranging from $2 million to $4 million less this quarter than in Q1 of last year.
spk00: Got it. And if I could ask one more, did you mention anything on software-only mix?
spk02: So the software, what we've been calling software only, which is the transition of customers from hardware appliances to COTS or to just buying software from us, for the quarter was about 32%. It was 40% in Q1 of last year, which was predominantly due to the financials and government dynamics this quarter versus last quarter. And last year, for the full fiscal year, we ended the software-only portion at about 34%.
spk01: Got it. Thank you. And we will take our next question from Jane. I apologize. We'll take our next question from Eric Martinezzi with Lake Street. Your line is now open.
spk03: On the services revenue, it was down sequentially a little bit more than I would have thought. Is that tied to, is that just a lagging indicator tied to weak product sales a year ago?
spk02: Eric, there's a few things going on in there. One is there was a comparison, a difficult comparison, about $1 million where we had back maintenance in Q1 of last year. The other item is, as I mentioned in the script, service provider consolidation, one of the two largest carriers combined, and they're reassessing their renewals on all of their equipment as they rationalize their network deployment. And then we've talked in the past about some ancillary product lines, such as Loop, and as those product lines continue to not be sold, certain customers do not renew on their service revenues.
spk03: Okay, and then how should we think about it for the September quarter? Is Q1 a base from which we grow?
spk02: I would say those dynamics continue at this point into Q2 and that there are programs in place that sales are wanting to re-incentivize certain customers as well as just looking at other areas where they can improve the service revenue renewal focus. For the full year, it would appear at this point that we'll probably be flat, maybe down slightly 1% in service revenue at the midpoint of guidance.
spk03: Gotcha. Thanks for taking my question.
spk07: Sure.
spk01: And we will take our next question from James Fish with Piper Sandler. Your line is now open.
spk07: Thank you. Good morning, guys. um good morning um so you guys call that enterprise security weakness and you know obviously we've been hearing strengths across the board given what's going on in the the attack environment much like what we had about seven years ago now and and really some of the strongest budget and technically we've actually come across in a long long time I guess why is NetScout not seeing that strength? Is it a competitive thing that the financial institutions specifically are shifting towards others in your space, or is it just the flow through of running out of the pipeline from last year? And then, Gene, any way to think about the mix for NetScout with service assurance versus Arbor, as well as Arbor enterprise versus service provider to help us with what's going on with the enterprise Arbor weakness here?
spk06: James, let me just cover high level and maybe Gene can add some commentary. So this one quarter is not the trend. Overall, we think that service assurance as cyber security 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 the timing. There are some big deals in different quarters, the one-quarter trend. So there's no real issues related to what's happening in the competitive environment. It's just the timing of the deals, and sometime a Q1 last year may have been better for some reason. But overall trend this year is that we are going to see higher growth than in cybersecurity, even though some of the new products uh may not hit the mark if if we are not able to do trials because of uh covet issues international also cyber security 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 cyber security growth will be higher than the overall growth and could it could be as much as two times the service assurance growth this year
spk07: Gene, any color on the mix there?
spk02: So what I would say is Auburn 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 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 provider. And then going forward with the security products that Anil and team are rolling out, they anticipated growth. on that is probably the difference between, you know, the different ranges in our guidance.
spk07: Understood. Just one more for me, if you've got a sec. One of your networking peers actually called out earlier product orders due to supply chain shortages, and it does seem like you guys had some more net pull and effect this quarter, especially as you left guidance changed, despite the product upside here and an eight-figure large deal that we were talking about. Is it fair to think about that net pull-in effect of a couple of million, and that's kind of the difference between where the street is here for total revenue in fiscal Q1 and versus fiscal Q2 that we got the upside on?
spk02: Yes, I would say it's not related to the supply chain. It is related to one of the Asian providers that has been rolling out their 4G network over a few years now. and they completed one of their projects involving our solution in this quarter rather than last quarter. I'm sorry, this quarter rather than next quarter. And as you stated, it's probably somewhere between, say, $2 million to $4 million that was pulled forward from Q2 over Q1. And so if you normalize
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