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spk03: Ladies and gentlemen, thank you for standing by, and welcome to NETSCOUT's third 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 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 third quarter fiscal year 2024 conference call for the period ended December 31st, 2023. Joining me today are Anil Singhal, NETSCOUT's president and chief executive officer, Michael Zabados, NETSCOUT's Chief Operating Officer, and Gene 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 this presentation which speaks 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 a more detailed description of the risks factors associated with the company, Please refer to the company's annual report on Form 10-K for the financial 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 the 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. Reconciliations 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?
spk00: Thank you, Tony, and good morning, everyone. Welcome and thank you all for joining us today. At a high level, we deliver third quarter revenue and non-GAAP EPS ahead of our expectations due to the timing of the customer year-end budget spending and our continued cost containment efforts. However, the microenvironment remains challenging with constrained customer spending and elongated sales cycle. We continue to see strength in our cybersecurity business where we deliver double-digit revenue growth during the first nine months of fiscal year 2024. Our service assurance business continues to face headwinds. primarily due to the Tier 1 US carrier capital constraint environment. Accordingly, our enterprise customer vertical was relatively flat for this period, while our service provider customer vertical is creating the majority of the revenue pressure. Given the macro dynamics, we anticipate delivering full fiscal year 2024 revenue at the low end of our previously disclosed outlook range, While our cost containment efforts and other activities should position us to deliver non-GAAP EPS for the full fiscal year at the higher end of our previously disclosed outlooks are relatively in line with the last fiscal year's EPS on a lower revenue base year over year. We'll provide more specifics during our remarks. With that as a backdrop, let's turn to slide number six for a brief recap of our non-GAAP financial results for the third quarter and first nine months of our fiscal year 2024. For the third quarter of fiscal year 2024, Ranu's revenue was ahead of our expectations at approximately $218 million due to the timing of customer year-end budget spending. On a year-over-year basis, this was down approximately 19% as growth in the cybersecurity product line only partially offset a decline in the service assurance product line, the reasons previously mentioned. Non-GAAP diluted earnings per share for the quarter was 73 cents, which exceeded our expectations due to higher revenue and lower costs than we previously anticipated. This was a decrease of 27% year-over-year, primarily related to lower revenue, partially offset by continued cost containment efforts and other activities. For the first nine months of fiscal year 2024, or the period ended December 31st, 2023 revenue was 626 million dollars down approximately 11 percent year over years during this period our cyber security revenue grew more than 13 percent but was more than offset by a service assurance service revenue decline of approximately 20 percent both on a year-over-year basis excluding radio frequency propagation modeling project revenue from the comparison service revenue decline approximately 13% year-over-year. Non-GAAP diluted earnings per share for the first nine months was $1.65, down approximately 9 cents year-over-year, as the impact of low revenue was partially offset by cost containment efforts and a lower share count. Now let's move to slide number seven for some further perspective on market and business insights. starting with the enterprise customer vertical. In the first nine months of fiscal year 2024, enterprise revenue was essentially flat year over year, as revenue growth in our cybersecurity product lines offset a middle-digit percentage decline in our service assurance product line revenue. In the enterprise market, flow-through rates continued to be affected by higher spending scrutiny and delayed project funding as customers navigated the current macroeconomic environment. However, some sectors grew year to date, such as government and financial, while others, like the healthcare sector, were notably softer. We expect our enhanced cybersecurity solution and ability to expand visibility to the edge will continue to resonate with our customers. These solutions help protect customers' networks from attack, cover blind spots, address control challenges, and facilitate the leverage of off-premises and cloud solution within digital transformation and new network architecture initiatives. Moving to our service provider customer vertical. Revenue in the first nine months of the fiscal year declined approximately 22% year over year. Excluding radio frequency propagation modeling project revenue from the comparison, the service provider customer vertical revenue declined approximately 13% year over year as revenue growth in our cybersecurity product line was more than offset by a decline in our core service assurance product line revenue. The service provider market remains challenging, especially for the U.S. Tier 1 service provider given capital spending constraints, which is causing intense spending scrutiny and delayed project funding. This dynamic appears to be impacting the finalization of carriers' new calendar year budgets and funding as well. We expect the challenging market dynamics to persist for the remainder of the fiscal year and likely into the next fiscal year. However, we believe that as 5G adoption accelerates, new use cases advance, and the 5G traffic volume increases, our core visibility and cybersecurity solution will be increasingly required. We remain prepared and ready to support carriers through this inevitable transition with our differentiated solutions. Despite the current selling environment, we are encouraged by the interest in our new offerings like Omnis and recent traction with our other cybersecurity solution, particularly our DDoS offering, including adaptive DDoS and mobile security. Michael will provide more insight regarding customer orders in our verticals during his remarks. Now let's move to slide number eight to review your outlook. Looking ahead, taking into consideration the current environment for the full fiscal year 2024, we expect revenue will be at the low end of our previously disclosed revenue outlook range, or approximately $840 million. We anticipate delivering non-GAAP EPS at the higher end of our previously disclosed EPS outlook range as we continue to benefit from our cost containment efforts and other activities. This would put our non-GAAP EPS relatively in line with last fiscal year EPS on lower revenue year over year. Jean will provide a recap of the outlook in her remarks. Despite the continuation of near-term headwinds, we believe that the fundamental long-term demand trends remain intact for NETSCOUT as enterprises and service providers require industry-leading cybersecurity and service assurance solutions such as ours to deliver actionable visibility at scale. Accordingly, we remain focused on leveraging our industry-leading Visibility Without Borders platform to help customers tackle the performance, availability, and cybersecurity challenges of the increasingly complex connected digital world. We expect the continued execution of this strategy will enable us to deliver sustainable value for our shareholders. We look forward to sharing our progress with everyone at the conclusion of our fiscal year. With that, I will turn the call over to Michael. Thank you, Anil, and good morning, everyone.
spk01: Slide 10 outlines the areas that I will be covering today, starting with customer win highlights in the third quarter. In our enterprise customer vertical, during the quarter, we displaced the competitor to win a low $7. a seven-figure order from a leading domestic insurance company, which is a new logo for us. The opportunity related to our service assurance solution being that to address data center and hybrid cloud visibility. We won this deal due to our superior technology that addressed incumbent vendor shortfalls and our strong reputation as an industry leader. We believe that there are more opportunities on the horizon to support this new customer with further service assurance deployments, as well as potential cybersecurity solutions, given strong explicit interest in this area as well. Turning to our service provider customer vertical, a Tier 1 European carrier renewed a multi-year agreement with us and made a mid-seven figure order that included both service assurance solutions to advance their 5G network evolution, as well as cybersecurity solutions. The order included our recently released mobile security solution that leverages our innovative mobile stream and sideline offerings to detect DDoS attacks on the mobile network, a product derived from our market-leading solution generally deployed in the fixed sign network. We want this opportunity due to our proven technology and strong, long-standing income-based relationship with this customer. As we advance this new mobile security solution, we are encouraged by the high interest in this offering as we are actively engaged in multiple deal discussions in addition to a handful of trials across the service provider landscape. Now, in terms of go-to-market activities, recently we announced the launch of adaptive DDoS for Arbor Edge Defense to protect ISPs and enterprises from so-called DNS water torture attacks as we enhance our solutions with our new technologies. Additionally, we plan to attend Mobile World Congress MWC in Barcelona in late February, where we will be meeting with existing and prospective customers. Our focus will be on sharing our latest service assurance, AI and ML analytics, and cybersecurity solutions related to 5G network visibility and cybersecurity requirements. That concludes my remarks. Thank you, everyone. I will now turn the call over to Jean for a review of our financial review.
spk02: Thank you, Michael, and good morning, everyone. I will review key metrics for our third quarter and first nine months 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 the results for the third quarter and first nine months of our fiscal year 2024. Focusing first on our quarterly performance, total revenue was $218.1 million, down 19.1% year over year. Product revenue was $95.8 million, a decrease of 35.9%. while service revenue was $122.2 million, up 1.8%, both on a year-over-year basis. Gross profit margin was 81.8% in the third quarter, up 1.3 percentage points year-over-year, primarily attributable to higher service revenue and lower variable incentive compensation expense as compared to the last fiscal year. Quarterly operating expenses decreased 5.2% year-over-year, primarily due to cost containment efforts, including reduced variable incentive compensation. Operating expenses for the quarter included our Engage user and technology event, which had historically occurred in our first quarter. We reported an operating profit margin of 29%, compared with 35.5% in the same quarter last year. Diluted earnings per share was 73 cents compared to $1 in the same quarter last year. Turning to slide 13, I will review key revenue trends by customer verticals and product lines. Please note that all comparisons here are on a year-over-year basis, consistent with our other remarks. For the first nine months of fiscal year 2024, our enterprise customer vertical revenue was effectively flat. Our service provider customer vertical revenue decreased 22.1%. During the same period, our enterprise customer vertical accounted for approximately 54% of our total revenue, while our service provider customer vertical accounted for the remaining 46%. Turning to our product lines, for the first nine months of fiscal year 2024, our cybersecurity revenue increased by 13.5%, while our service assurance revenue decreased by 19.7%. During the same period, our service assurance product line accounted for approximately 68% of our total revenue, while our cybersecurity product line accounted for the remaining 32%. Turning to slide 14, this shows our geographic revenue mix. In the first nine months of fiscal year 2024, 59% of our revenue was derived from the United States, with the remaining 41% provided by international markets. As expected, the mix between domestic and international markets shifted from the same period last year, partially due to lower Tier 1 domestic carrier radio frequency propagation modeling project revenue this fiscal year. Also, no customer represented 10% or more of our total revenue in the third quarter or for the first nine months of the fiscal year. Slide 15 details our balance sheet highlights and free cash flow. We ended the third quarter with $330.1 million in cash, cash equivalents, short and long-term marketable securities and investments, representing a decrease of $2.5 million since the end of the second quarter of fiscal year 2024. Free cash flow for the quarter was $12.7 million. During the third quarter, we repurchased a total of approximately 706,000 shares of our common stock for an aggregate purchase price of approximately $18.8 million, or an average price of $26.66 per share. From a debt perspective, we entered the third quarter of fiscal year 2024 with $100 million outstanding on our $800 million revolving credit facility, which expires in July 2026. To briefly recap other balance sheet highlights, accounts receivable net was $221.6 million, representing an increase of $77.7 million since March 31, 2023. The DSO metric at the end of the third quarter of fiscal year 2024 was 90 days versus 69 days at the end of the third quarter of fiscal year 2023 and 58 days at the end of fiscal year 2023. the higher DSO metric in the third quarter of this fiscal year was due to the timing and composition of bookings. 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 updating our outlook for fiscal year 2024, which was last presented on November 2nd, 2023, during our second quarter fiscal year 2024 earnings call. We now anticipate revenue to be approximately $840 million at the lower end of our previously disclosed range. We anticipate non-GAAP diluted earnings per share to now be within the range of $2.15 to $2.20. This is toward the upper end of our previously disclosed range as we benefit from continued cost management efforts as well as a lower tax rate and share count. The effective tax rate is expected to be at the lower end of our range of 20 to 22% as we finalize the tax impacts related to legislation associated with the capitalization of R&D costs. Our weighted average diluted shares outstanding is assumed to be between 72 and 73 million shares, which includes the impact of our recent share repurchase activity. 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 that in the interest of time, you please limit yourself to one question and one follow-up. We'll take our first question from Matt Hedberg with RBC Capital Markets.
spk06: Hey, good morning, guys. Thanks for taking my questions. Anil, you noted in your prepared remarks, you know, obviously some of the pressure on service provider spending. I think you said you think some of that could drift into next year, but that 5G could start to improve some spending trends there. I guess I'm wondering, you know, as you talk to customers, we've always been sort of curious on what that spark could be on 5G. What are some things that you're hearing from customers that gives you some of the confidence that some of those trends could start to reverse? Something maybe with consumer broadband, anything on the wireless side, just anything that you're kind of seeing there that kind of gives you the thought that those trends there could start to improve.
spk00: Thanks, Matt. So I think maybe we can talk about our strategy for next year at a high level rather than some of the estimates from people because they're still finalizing their budget. And we keep hearing different stories at different times, even though I've met with almost all of the tier one carriers in the last six months. So what we are looking at is that with this Omnis product line, we have our data, while there is a lot of pressure on capital spending on the service assurance solution, but it is very good for AI ops type and automation applications. So that's one direction we are talking to them. appeal to a different audience in the customer base and user incumbency. And second is reducing our dependency on the service assurance, service wider business. And so with the combination of those things, if 5G takes off, in other words, there could be some upside. But that's basically what we are looking at because I think it's not deterministic what's going to happen to the capital spending on the traditional service assurance part of our service provider business. Got it.
spk06: That's helpful. And then, you know, you noted Omnis a second ago. I guess just double-clicking on the cyber business, which seems to be doing quite well. You know, are there things that, you know, relative to expectations are doing, you know, a bit better? And maybe just to double-click on that, because it feels like there's a lot of good things happening kind of even below some of the top-line growth estimates that we're seeing there.
spk00: So we have mentioned in the past that we didn't integrate the Arbor business. So in high level, we have service assurance business, which is like 65% of the business. In that, we have service providers spending challenges as a bigger issue. Then we have the Arbor business, which also have a service provider enterprise. And then Omnis was introduced just last year and still taking some time for traction. So Arbor business was integrated into NETSCOUT roughly two years ago, and we are seeing the effect from a technology point of view of rebranding the DPI technology to the DDoS market. So typically DDoS is for volumetric attack, and we have introduced something called adaptive DDoS, which is really application layer attacks. He talked about, Michael talked about DNS water torture attack, and that's driving this growth this year, and hopefully this will continue next year. Thank you very much. Appreciate the call. Sure.
spk03: Thank you. Our next question will come from Jim Fish with Piper Sandler.
spk07: Hey, guys. Thank you. This is Quinton on for Jim. Maybe double-clicking on Matt's second question there, we've heard from both you and other vendors in the space about the acceleration of those DDoS attacks that have occurred this year. Can you talk about any relationship you've seen between the pace or the volume of these attacks and your cyber performance in the past? And as we look towards fiscal 25, is this something that could kind of re-accelerate or continue to accelerate security growth as customers may be nearing of their operand of capacity and are in need for an upgrade?
spk00: Yeah, sure. So first thing I want to mention that on our website, we publish a threat report which talks about how the attacks are morphing and like there are attacks called carpet bombing attack, which is new, which is basically you instead of attacking a server, you basically attack multiple devices in customer's network. It's very hard to detect. And then there's a DNS-WATCHAR.JET tag where you bring down a DNS server, then nobody can do anything. So these are the two areas we introduce new functionality. So yes, attacks are increasing, but we are now handling new kinds of attacks, which we call adaptive DDoS. And we think there is a lot of interest in that. Plus, Arbor business was more service provider business. NETSCOUT had a lot of enterprise business. So as we combine the sales forces, we are seeing traction on the enterprise portion of DDoS, which is our AED product, which is different than in the past.
spk07: Makes a lot of sense. And then maybe, you know, for Anil, for you and your prepared remarks, you talked about benefiting from the year-end budget flush. You know, it sounds like this was more on that cyber side, but can you walk through any verticals or segments specifically that benefited from this flush compared to last year? Thank you.
spk00: Yeah, maybe Jean can add to this, but this was not necessarily budget flush. Maybe some of the orders from Q4 went into Q3, and so we didn't see this traditional budget flush, which we have seen in the past, especially after COVID. Jean, anything you'd like to say?
spk02: No, you are correct, Anil. When we had given our color for Q3, we were not sure whether our customers would be using their calendar year 2023 budgets or start using their calendar year 2024 budgets, hence the skew between our Q3 and our Q4. And so what we found was that they did use their 2023 budget, which is our fiscal calendar, fiscal year Q3 year. Thank you, Tess. Appreciate it.
spk03: Our next question will come from Kevin Lu with K. Lu Company.
spk05: Hi, good morning. Just wanted to ask, you know, about kind of your early expectations for next fiscal year, you know, specifically on the cybersecurity side, given what you're seeing in terms of pipeline build for new products versus, you know, some of the growth coming from the hardware side of the business. How should we think about, you know, what the mix of business on cybersecurity and ultimately, you know, Should we expect that to accelerate growth or do you think it'll stay pretty consistent with what you've seen over the past 12 months?
spk00: Yeah, so this one was much higher growth versus in the past. And like I mentioned, some of the integration of technology, some of the new product resulted in that. I also want to add that we also have a product called Omni Security, which is in the NDR space. And so when we talk about security revenue, We will include both of them. This year, Omni Security has not picked up, so bulk of the growth is because of our work. So we think that security growth will be better, continue to be better than the service assurance next year also, and hence the percentage of security might go higher, but we should be able to provide some guidance on this in the next earnings call.
spk05: understood and then anil could you also elaborate a little bit on kind of the opportunities outside of tier one service provider as we move into this current calendar year um just wondering if you believe there's enough opportunity there to you know help offset some of the declines that might be coming from the capital spending side uh yeah if you could just uh talk about that i think i think the challenge is kevin is in that there are cheaper price incumbents
spk00: on the lower end of the market, beyond the top 10 or 20 where we already are coverage. So I see in service assurance the bigger opportunities 5G takes off in terms of user plane much faster and are doing something with the mobile security area or applying some of our solution to AI use cases like heavy user bandwidth, air fiber, which is like the fiber over FTTH, which is AT&T recently announced. And so those are the trends which are going to be, but I think going after that below tier one or where we are not incumbent, I see it's hard because there are a lot of regional vendors and there is very big price competition.
spk05: That's helpful. Thanks for taking the question.
spk00: Sure.
spk03: This does conclude the question and answer portion of today's call. So I'd like to turn the call back over to Tony for any additional or closing remarks.
spk04: Thank you, operator. That concludes our call for today. Thank you all for joining us, and enjoy the rest of the day.
spk03: Thank you, ladies and gentlemen. This does conclude today's program, and we appreciate your participation. You may disconnect at this time.
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