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spk03: Ladies and gentlemen, thank you for standing by and welcome to NETSCOUT's first quarter fiscal year 2024 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, Senior 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 2024 conference call for the period ended June 30th, 2023. Joining me today are Anil Singhal, 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 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 fact. 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 the 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, including but not limited to those described on this slide and in today's financial results press release. For more detailed description of the risk factors associated with the company, please refer to the company's annual report on Form 10-K for the fiscal year ended March 31, 2023, 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 now 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. Reconciliation of all non-GAAP metrics with the applicable GAAP measure are provided in the appendix of the slide presentation in today's earnings press release and on our website. I will now turn the call over to Anil for his prepared remarks. Anil?
spk00: Thank you, Tony, and good morning, everyone. Welcome and thank you all for joining us today. Let's turn to slide number six for a brief recap of our non-GAAP financial results for the first quarter of fiscal 2024. We delivered solid financial performance in the first quarter of fiscal year and released several key product offerings since our last earning call. Revenue was $211.1 million representing year-over-year growth of over 1%. We expanded both our gross margin and operating margin and grew our diluted EPS by nearly 30% year-over-year to deliver 31 cents per delivery share in the period. We also accomplished several product milestones with the release of our next generation solutions that have already been well received by customers and that we expect to start contributing to revenue in the second half of the fiscal year. This includes the release of our Visibility Without Borders platform that provides performance, security, and availability across one common data framework. By proactively identifying areas of complexity, fragility, and risk, the platform unlocks insights at unparalleled scale to deliver the intelligence needed to increase visibility, improve agility, and keep data and applications secure. Additionally, we relaunched our OmniCyber OCI or OmniCyber Intelligence solution. This next generation of OCI is an advanced network detection and response solution that uses highly scalable deep packet inspection and multiple threat detection method at the source to detect threats in real time. OCI also applies historical investigation of high fidelity network packet metadata and packets. In the face of rising cyber threats, OCI provides security teams with real time packet level visibility across the digital infrastructure and helps identify threats earlier in the attack lifecycle. OCI also quickens investigation by gathering network-based forensic evidence to reduce the mean time to response. OCI is a valuable tool for verifying the effectiveness and improving the existing cybersecurity ecosystem, ensuring compliance and lowering the risk of successful cyber attacks. We also released our two new DDoS solutions. The first is adaptive DDoS, which helps protect enterprises from rapidly spreading dynamic DDoS attacks. It adapts to the evolving threat landscape and automates countermeasures used to address cyber attacks, including the latest multi-vector direct path attacks. And the second is mobile security, which extends our powerful DDoS capability that service providers currently leverage in their wireless networks to now protect their mobile network and address that distributed threat surface. Now let's move to slide number seven for some further perspective on market and business. Starting with our enterprise customer vertical. In the first quarter of fiscal year 2024, enterprise revenue grew nearly 13% year over year, driven by the expansion in both our cybersecurity and service assurance businesses. We remain confident that our value proposition of extending visibility to the edges of the network will continue to resonate with enterprise customers seeking to cover blind spots, address control challenges, and facilitate their leverage of off-premise and cloud solutions as part of the digital transformation and new network architecture initiatives. Moving to our service provider customer vertical. As expected, revenue in the first quarter for this vertical declined approximately 9% year over year, primarily due to the lower level of radio frequency propagation modeling project revenue in the second quarter compared with the same quarter last year. We continue to see domestic and international carriers invest in their 5G deployments. Notably, several carriers now have the spectrum and deployed standalone networks in certain markets and are ready to drive traffic over those networks over 5G once 5G-required applications materialize. We believe that as the 5G adoption advances and 5G traffic volumes increase, our core visibility and cybersecurity solutions will be required. We are prepared and ready to support carriers through this inevitable transition with our differentiated solutions. Michael will provide more insight regarding customer orders in a vertical during his remarks. Now let's move to slide number eight to review our outlook. Looking ahead, we remain excited about the market opportunity we are seeing for both our existing and new solutions and are reiterating our fiscal year 2024 outlook. We also continue to see the supply chain challenges that drove the increase in fulfillable backlogs resolving and anticipate that a full-level backlog will continue to return to more normalized levels. We remain focused on operating the business with a balanced approach to driving revenue growth and profitability as we manage through the dynamic microenvironment and position NETSCOUT to deliver long-term sustainable value for our stakeholders as the guardians of the connected world. Jean will provide additional cover and a recap of the outlook and numbers in her remarks. In summary, we deliver solid first quarter financial results and achieve several product milestones that establish a foundation for delivering our objectives for fiscal year 2024 and beyond. We remain confident that NETSCOT is well positioned to help customers address the challenges and opportunities of today's digital world through our unique and expanding solutions. We look forward to sharing our progress with everyone throughout the remainder of our fiscal year. With that, I'll turn the call over to Michael.
spk01: Thank you, Anirang. Good morning, everyone. My series that I will be covering today, starting with customer highlights in the first quarter. In our enterprise customer vertical, our proven technology and long productive partnerships with our install-based customers have always been a strong foundation for our business. As customers continue to adapt, advance and expand their IT strategies, they continue to depend on NETSCAR to ensure the success of these transitions. As an example, during the quarter, we won a mid-seven-figure deal in service assurance with a large U.S. regional bank in support of their data center transformation. The opportunity arose from the bank's initiative to upgrade its infrastructure from on-premises to a distributed colo-based architecture. NETSCOUT solutions have been critical to several areas of the bank's business, including online banking and unified communications and others. Our long and productive partnership positioned NETSCOUT to win the business despite competitive bidding process. Now, turning to the service provider customer vertical, we remain focused on supporting both our domestic and international carriers' 5G network evolutions. We also continue to support our service providers in their security efforts as cyber attack incidents permeate and threat surfaces continue to expand. As an example from the quarter on the service sessions front, a long-standing tier one North American carrier customer placed additional orders with us amounting to a mid-seven figure sum as they continue to advance their 5G projects. On the security front, a mid-sized international service provider customer placed a low seven-figure order for our Arbor products to upgrade their DDoS protection, replacing a competitor. The main driver for this investment was to deliver a reliable, so-called clean pipe, leveraging an integrated detection and mitigation solution for the high-value customer base. We won the order due to our superior technology, strong reputation, and positive references from the leaders in their sector. These strengths, combined with our recent innovative new product offerings, should continue to drive customer interest in our best-in-class solutions in the rapidly evolving cybersecurity environment. Turning to go-to-market activities, we remain focused on promoting our industry leadership, trusted brand, next generation solutions, and platform. This included attending several high-profile events, such as the RSA Conference, Cisco Live, Dell Technology World, and Big 5, Big 5G. In the second fiscal quarter, we've learned to participate in VMware Explorer and Black Hat, to name a few. Looking ahead, NETSCOUT plans to host its customers and partners at our annual Engage Technology and User Summit from October 2nd to October 5th. in Orlando, Florida. And Engage 2023 will demonstrate how our Visibility Without Borders platform provides a unified approach to addressing the industry's most pertinent issues, including how performance, security, and availability challenges are multiplying and are often interconnected and overlapping. We'll also highlight our next generation Omni Cyber Intelligence solution, and our new DDoS products, such as adaptive DDoS and mobile security. Thank you, everyone. That concludes my remarks, and I will now turn the call over to Jean.
spk02: Thank you, Michael, and good morning, everyone. I will review key metrics for our first quarter of fiscal year 2024 and provide some additional commentary on our fiscal year 2024 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. Regardless, I will note the nature of any such comparisons. Slide number 12 details our first quarter fiscal year 2024 results. During the quarter, total revenue grew 1.1% year over year to $211.1 million. Product revenue declined 3.7% and service revenue grew 5.4%, both on a year-over-year basis. We ended the first quarter with backlog of approximately $16 million, consisting of approximately $12 million of fulfillable orders and approximately $4 million of radio frequency propagation modeling projects. We anticipate that backlog will return to historically normalized levels as global supply chain challenges appear to be subsiding and as radio frequency propagation modeling projects have led to the deployment of the 5G infrastructure needed for supporting business and consumer applications. Our first quarter fiscal year 2024 gross profit margin was 78.3%, up 3.8 percentage points over the same quarter last year. As you may recall, the prior year's quarterly gross margin was impacted by approximately $15 million in radio frequency propagation modeling projects, which had an average gross margin of less than 30%. Quarterly operating expenses increased 3.6% year over year, primarily attributable to increased sales headcount, travel, and events. We reported an operating profit margin of 14% compared with 11.7% in the same quarter last year. Diluted earnings per share was 31 cents compared with 24 cents in the same quarter last year, an increase of 29.2% year-over-year. Turning to slide 13, I'd now like to review key revenue trends by customer verticals and product lines. For the first quarter of fiscal year 2024, on a year-over-year basis, our enterprise customer vertical revenue grew 12.9%, while our service provider customer vertical revenue declined 9.3%. During the quarter, our enterprise customer vertical accounted for 52% of our total revenue, while our service provider customer vertical accounted for the remaining 48%. Now, turning to our product lines, in the first quarter of fiscal year 2024, our cybersecurity revenue increased by 9.9%, and our service assurance revenue declined 2.4%, both on a year-over-year basis. During the first quarter, the service assurance product line represented approximately 69% of total revenue, while our cybersecurity product line represented the remaining 31%. Turning to slide 14, which shows our geographic revenue mix, compared to last year's first quarter, our revenue was less concentrated in the U.S. due to the prior year's higher radio frequency propagation modeling project revenue. There were no customers representing 10% or more of our total revenue in the quarter. Slide 15 details our balance sheet highlights and free cash flow. We ended the quarter with $390.5 million in cash, cash equivalents, marketable securities, and investments, representing a decrease of $37.4 million since the end of fiscal year 2023. Free cash flow for the quarter was a use of $24.3 million. From a debt perspective, we ended the first quarter of fiscal year 2024 with $100 million outstanding on our $800 million revolving credit facility, which expires in July 2026. We currently have capacity in our share repurchase authorizations and subject to market conditions plan to be active in the market. To briefly recap our other balance sheet highlights, accounts receivable net was $108.3 million. a decrease of $35.6 million since March 31st, 2023. The DSO metric at the end of the first quarter of fiscal year 2024 was 44 days, in line with the end of the first quarter of fiscal year 2023, and a decrease from 58 days at the end of our fiscal year 2023. Let's move to slide 16 for commentary on our outlook. I will focus my review on our non-GAAP targets for fiscal year 2024. As Anil noted earlier, we are reiterating our non-GAAP outlook for the fiscal year 2024 that was presented during our May 4th, 2023 fourth quarter and full fiscal year 2023 earnings call. As a reminder for fiscal year 2024, we continue to anticipate revenue in the range of 915 to 945M dollars, which implies a low single digit growth rate at the mid point of the range. The effective tax rate is anticipated to be in the range of 20 to 22%, assuming approximately 74 to 75M weighted average diluted shares outstanding. We expect non gap diluted earnings per share to be between 2 dollars and 20 cents and 2 dollars and 32 cents, which implies a mid single digit growth rate at the mid point of the range. I'd also like to offer some color on the 1st, half of fiscal year 2024 at the mid point of our full fiscal year 2024. outlook ranges for revenue, we continue to anticipate delivering approximately 46 to 48 percent of our revenue outlook during the first half of the fiscal year. For earnings per share, we anticipate delivering mid-single digit diluted EPS growth for the first half of the fiscal year on a year-over-year basis. That concludes my formal review of our financial results. Thank you, and I'll now turn the call over to the operator for Q&A.
spk03: 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. We do ask, in the interest of time, that you limit yourself to one question and one follow-up. Thank you. We'll take our first question. from Matt Hedberg with RBC Capital Markets.
spk05: Great. Good morning, guys. Thanks for the time, and congrats on Q1. Anil, maybe to start with you, between your service insurance business, it was down, obviously, a little bit, and enterprise was up. Saw nice growth. Can you give us a sense just on overall demand trends? Do you think there's been some form of stabilization? Obviously, you guys have delivered consistent results here, but What are you hearing from customers out there from a buying perspective? And maybe where are you most optimistic from a demand perspective as this year continues to progress?
spk00: Yeah, thanks, Matt. So I think first thing is the quarterly trend on service provider business usually has not been meaningful because of lumpy deals. So on a year-over-year basis, there's not much change from what we talked about at the prospect at the last conference call. you have heard some earnings and challenges in the service provider which sometimes tend to lengthen the sales cycle. But overall, the biggest investment we have made on the product side this year is combining the Arbor and NETSCORE technology to create some new solutions. We relaunched that OCI product, which we talked about, as well as we announced new options and new features. in the form of adaptive DDoS and some other features in both the service provider side, which is the mobile security, and as well as on the enterprise side. So we see that as we are expecting that to be a growth area, more so on the enterprise side this year, but also on the service provider side.
spk05: That's helpful. Actually, that was a segue into the next question on OCI in particular. Maybe just a little bit more color on what that means from a product perspective, go-to-market perspective. How material is that relaunch? And, you know, from a pipeline generation perspective, is that one of the bigger announcements kind of coming out of the cyber side?
spk00: Well, so right now, since we just released, relaunched the product and announced it in April timeframe, I think it has not had an impact on the funnel yet, but we are expecting some improvement in that area quickly and hopefully have an impact on the second half. The big change is that industry is really focused on mitigation of cyber threat, and there has been less and less focus on early detection, which we think is the key to success and to deal with cyber threat. So that's a big change that doing analytical source to do more detection early in the life of the cyber attack is what we are calling the differentiator in this NDR space and network detection and response. And that's a change also from what we announced last year.
spk05: Thanks, guys. Congrats on the quarter.
spk00: Thanks.
spk03: Thanks, Matt. And we'll take our next question from James Fish with Piper Sandler.
spk07: Hey, guys. Thanks for the question. Maybe just to follow up on Matt's initial question, What are you guys seeing specifically with your Tier 1 North America carrier customers, given some of your competitors were kind of out there talking earlier this quarter about digestion and inventory stuffing? Just trying to understand how you guys feel about the pipeline in those large customers.
spk00: Well, if you take the radio frequency orders out of the picture, and both the backlog and that. I think pipeline is good overall, but we don't just do business with Tier 1, but people call Tier 2 is also a big portion of the business where there are about 10 or so Tier 2 providers, and also some of the cable companies like Charter and Comcast are getting into the 5G business. And so we think we can make up for some of the shortfalls if there is challenges on the service provider, on the traditional mobility provider side with some of these things which we can do. And those are, I mean, all the cable companies, all the top four or five cable operators are big customers of NETSCOT already both on the harbor side and the fixed line side. So that's what we are, when we look at the overall service provider business, our mobility, both on the security side and on the service assurance side, I think we think that we are in good shape.
spk07: Got it. And Gene, for you, on the backlog side, you know, first off, appreciate the continued disclosure here as we start to normalize overall, but You know, it sounds from last quarter pretty meaningfully. Is this level of backlog of $16 million or so normal as we think about coming out of fiscal Q4 into fiscal Q1? Or what's giving the confidence and the outlook then as it seems like it's about, you know, half of your normal backlog if we compare it to long-term disclosures where it was, you know, somewhere around $25 million, $30 million in the past in fiscal Q4s? Thanks.
spk02: Yeah. Actually, if you look back over a long period of time, and I would say, you know, at least the 10 years, our average backlog has probably been closer to somewhere between 10 to 15 million. It's been as low as like 200,000. And if we, and just to reiterate, the backlog started growing in Q3, Q4, I believe, of FY22. And that was, again, due to the hardware issues that were in the supply chain, so people were buying software. So we see it, as we said in the comments, we see it normalizing back to somewhere probably, you know, between 10 to 15 million. Obviously, we always like backlogs, so if we have the opportunity to continue, we would be very happy with that. What gives us confidence to reiterate our revenue guidance is a few things. One, as I think you've seen in the headlines, the 5G infrastructure has been pretty much laid down. And that actually can point to all of the radio frequency propagation modeling projects that we had, that the antennas, the capture of the signals, the RAN network that way is also getting established. So, for us, it's less about the infrastructure build and more about the applications that will go over the 5G network. And what we hear when we talk to various people in the industry is that hopefully private networks within enterprise would be the first killer app. And that has been slower to start, mostly due to the chip shortage. So, we are hopeful that since the 5G infrastructure has been established that the applications will start to start to come to bear production traffic, which is where our products are really needed. And then, as Anil said, in security, we have the relaunch of OCI, which again, in talking to certain salespeople, They've seen at least pockets of sales, and especially internationally, where they have a lot of opportunities where customers are really liking what we can do. And then we have mobile security, which has launched, which has been something that's been in development for a few years. And then, as Anil also mentioned, the adapted DDoS. So when we point to those areas, this is what we would give confidence to the range of 915 to 945 at this point.
spk07: Very helpful. Thank you, Jean.
spk02: You're welcome.
spk03: Thank you, Jim. And we'll take our last question from Kevin Liu with K. Liu & Company.
spk06: Hey, good morning. From a near-term perspective, given kind of the government business that typically hits in the September quarter, just wondering how that pipeline looks to you today and whether you expect any sort of meaningful uptick in that revenue this year versus last year.
spk02: We actually had a good overall Q1 for government, including some federal. So right now, again, the users are a big demand of our products, and it always is what gets funded. We probably would see right now being consistent on a year-over-year basis with what we had in Q2 of last year.
spk06: Got it. And then just with all of the new security announcements that you guys have, do you expect that to contribute meaningfully to the second quarter results, or would we still see kind of a more normal mix between your service provider and enterprise business? And then maybe longer term, just when do you think security starts to shift more materially in terms of the overall revenue mix here?
spk00: Well, I think if you look at when we break out the security revenue, it includes DDoS, which is practically 100% of the security revenue last year. Maybe a small single-digit percentage was from OCI. So with the three-pronged strategy to grow the security business, one is on the service provider side, grow it through the mobile security and so the other initiative we have announced, On the enterprise DDoS, so that's on the security DDoS side. On the enterprise DDoS side, adaptive DDoS as one of the drivers to drive refresh to the new solution. And third is OCI, which is in the enterprise security area, which is non-DDoS, and which was, like I said, a very small number last year. So those are the three areas, and I think the We expect growth in the security area this year to be much higher than the growth in the overall business.
spk06: All right. Thanks for taking the question.
spk00: Sure. Thank you.
spk03: And it appears that we have no further questions at this time. I will now turn the program back over to Tony Piazza for any additional or closing remarks.
spk04: Thank you, Operator. This concludes our call for today. Thank you all for joining us, and enjoy the rest of the day.
spk03: That concludes today's teleconference. Thank you for your participation. You may now disconnect.
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