NetScout Systems, Inc.

Ladies and gentlemen, thank you for standing by and welcome to NETSCOUT's second 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.

Thank you, operator, and good morning, everyone. Welcome to NETSCOUT's second quarter fiscal year 2024 conference call for the period ended September 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's 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 this 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 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 31st, 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 announcement described herein. Let's now move to slide 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 the GAAP. Reconciliation of all non-GAAP metrics with the applicable GAAP measures 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?

Thank you, Tony, and good morning, everyone. welcome and thank you all for joining us today we delivered second quarter revenue in line with the preliminary results announced in mid-october revenue was impacted by a slowing in order conversion rate in the second quarter related to industry and economic headwinds that we expect will persist in the second half of fiscal year 2024. in response to that these dynamics we initiated several actions to manage discretionary costs which more than offset the bottom line impact in the second fiscal quarter and should reduce the negative impact to our full fiscal year earnings per share outlook without compromising our longer-term objectives. We will provide more information on these market dynamics affecting our business as we review our performance and outlook. Let's turn to slide number six for a brief recap of our non-GAAP financial results for the second quarter and first half of our fiscal year to 2024. For the second quarter, financial results were in line with our preliminary expectation released on October 16th. Revenue for the quarter was $196.8 million, down 13.7% year-over-year due to the previously mentioned order conversion slowdown rate related to the industry and economic environment impacting our customer as well as a lower level of radio frequency propagation modeling project revenue compared to prior year. Despite the revenue decline, we delivered diluted earnings per share for the quarter of 61 cents an increase of 7% year-over-year as we benefited from several discretionary cost-saving actions that we initiated in response to the current environment. For the first half of fiscal year, or the period ended September 30, 2023, revenue for the first half was $407.9 million, down 6.6% year-over-year primarily for the reasons stated earlier that impacted our second fiscal quarter revenue. The corresponding diluted earning per shares of 92 cents was an increase of 13.6% year-over-year, which again benefited from the action taken during our second fiscal quarter. Finally, for the first half of the fiscal year, our cybersecurity revenue grew approximately 10% year-over-year due to growth in both our core DDoS and our newer Omni security solutions as customers prioritize spending on security solutions. This was more than offset by a decline of approximately 13% year-over-year in our service assurance revenue due to the reasons we mentioned earlier. Excluding radio frequency propagation modeling project revenue from the comparison, service owner revenue declined approximately 8% year over year. Now let's move to slide number seven for some further perspective on market and business insight. Starting with our enterprise customer vertical, in the first half of fiscal year 2024, enterprise revenue declined approximately 3% year over year as growth in our cybersecurity product line revenue was more than offset by a decline in our service assurance product line revenue. Toward the end of second quarter, our order flow through rates began to be affected by higher spending scrutiny and delayed project funding as customers navigated the evolving and challenging macroeconomic environment. This resulted in some pockets of softness across multiple enterprise sectors as deals were delayed or re-evaluated, most notably in the financial and healthcare sectors which were partially offset by growth in the government sector. Despite the current economic environment, we remain confident that our value proposition of providing enhanced cybersecurity solution and extending visibility to the edges of the network will continue to resonate with enterprise customers as they seek to protect their networks from attack, cover blind spots, address control challenges, and facilitate their leverage of off-premises and cloud solution as part of the digital transformation and new network architecture initiative. Moving to our service provider customer vertical. Revenue in the first half of the first year declined approximately 11% year over year, which was primarily attributed to the lower level of radio frequency propagation modeling project revenue. Excluding radio frequency propagation modeling project revenue from the comparison, the service provider customer vertical revenue declined approximately 3% year over year, as revenue growth in our cybersecurity product line, driven by the prioritization of security solution spending, was more than offset by a decline in our core service assurance product line revenue. Revenue in this vertical was also impacted by a slowing in demand flow through late in the second quarter. as higher spending scrutiny and delayed project funding was observed, likely due to the well-publicized capital sending constraint impacting service providers. Notably, most of the order delays in this vertical related to cable and international service providers. We anticipate North American service providers will follow a similar pattern in the second half of the fiscal year, given the recent news and customer interaction, which is reflected in our updated outlook. Despite the industry challenges in this vertical, we believe that as 5G adoption accelerates, new use cases advance, and 5G traffic volumes increase, our core visibility and cybersecurity solutions will be increasingly required. We remain prepared and ready to support carriers through this inevitable transition with our differentiated solutions. Michael will provide more insight regarding customer orders in our vertical, during his remarks. Now let's move to slide number eight to review our outlook. We adjusted our fiscal year 2024 outlook to account for the changed market environment. We reduced our revenue outlook by $80 million, assuming the midpoints of our original and updated revenue outlook ranges. This represents a combination of both service provider and enterprise-related opportunity in our pipeline that we believe may be delayed or revisited due to the current industry and economic headwinds as deals are increasingly scrutinized and take longer to close. We originally expected these opportunities as well as other factors to more than offset the approximately $60 million of lower radio frequency propagation modeling project revenue anticipated year-over-year. As I mentioned earlier, we took immediate action to prudently manage costs such as curtailing hiring, eliminating certain programs and events, and adjusting variable incentive compensation to reduce the negative impact to our full fiscal year earnings per share outlook without compromising our long-term objectives. Jean will provide a recap of the outlook in her remarks. Looking ahead, we are committed to delivering results in line with our updated outlook as we continue to execute on our strategic priorities and position NETSCOUT to deliver long-term stakeholder value. Despite the near-term headwinds, we believe that the longer-term demand trends driving our business remain intact as enterprises and service providers continue to require cybersecurity and service assurance solutions that deliver actionable visibility at scale. With our industry leading visibility without borders platform, strong customer relationship, and solid financial profile, we remain well positioned to play a critical role in enabling our customers to tackle the performance, availability, and security challenges of the increasingly complex connected digital world. 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. Thank you, Anil, and good morning, everyone.