NetScout Systems, Inc.

Ladies and gentlemen, thank you for standing by and welcome to NETSCOUT's first quarter fiscal year 2027 financial results conference call. At this time, all parties are in a listen-only mode. A question and answer session will follow the management team's prepared remarks. As a reminder, this call is being recorded. If you require operator assistance at any time, please press star zero. I would now like to turn the call over to Scott Dressel, NETSCOUT's VP of Corporate Finance. Scott, please go ahead.

Thank you, operator, and good morning, everyone. Welcome to NETSCOUT's first quarter fiscal year 2027 conference call for the period ended June 30, 2026. Joining me today are Anil Singhal, NETSCOUT's President and Chief Executive Officer, and Tony Piazza, NETSCOUT's Executive Vice President and Chief Financial Officer. Please note that this slide presentation 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 and the quarterly results page. As discussed in detail on slide number three, Today's conference call will include certain forward-looking statements about NetScout's views on expected results of future performance and business strategy. These statements speak only as of today's date and involve risks, uncertainties, and assumptions that may cause actual results to differ materially, including but not limited to those described in the company's filings with the Securities Exchange Commission, including our annual report on Form 1010, and Quarterly Reports on Form 10-Q. As discussed in detail in slide number four, today's conference call will also include discussion of certain non-GAAP financial measures that the company believes to be useful for investors. While this slide presentation includes both GAAP and non-GAAP results, other than revenue and balance sheet information, which are presented in accordance with GAAP, we'll focus our discussion on non-GAAP financial information 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 to the nearest GAAP measures are provided in the appendix of the slide presentation and today's financial results press release and on our website. I will now turn the call over to Anil for his prepared remarks.

Anil. Thank you, Scott, and good morning, everyone. We appreciate you joining us today. In the first quarter of fiscal year 2027, we delivered strong top and bottom line results, and the enterprises and service providers continue to rely on NETSCOT for mission-critical, high-fidelity visibility across increasingly complex digital environments. We executed well against our strategic priorities and believe we are in a good position to achieve our fiscal year 2027 objectives of investing in innovation, driving profitable growth, Expanding Margins, and Generating Solid Free Cash Flow. Service Assurance performed well, reflecting in part government-related demand, while cybersecurity delivered results consistent with the prior year. Overall, our first-part results reflect disciplined execution and keep us on track with our full-year outlook. Our investment innovations continue to use differentiated patented technologies that generate High Fatality AI Ready Smart Data. These capabilities provide customers with a trusted data foundation for advanced analytics, automation, and AI-enabled decision making across observability, AIOps, service assurance, cybersecurity, and DDoS attack protection solutions. In June, we reached an important milestone with the granting of our 750th patent, demonstrating the strength of our R&D engine and the durability of our technology modes around our smart data platform and AI-enabled applications. Digital complexity and fragmented visibility increase the need for trusted data, stronger resilience, and more efficient operations. We believe our portfolio helps customers manage that complexity, reduce risk, and improve efficiency, all of which reinforce the long-term growth potential of our business. With that context, let me turn to slide six for a brief review of our fiscal year 2010-27 financial performance for the period ending June 30, 2026. For the first quarter, total revenue increased by 13% to $210 million, compared with $187 million for the same period last year. We expanded both our gross and operating margins nicely in the quarter. The diluted earnings per share was $0.52 compared with $0.34 in the same period last year. Now let's turn to slide seven for some perspective on our business and some market insights. Starting with the review of our service-assured offerings, revenue grew approximately 20% year-over-year, benefiting in part from government-related orders, including orders that were received earlier than anticipated as the customer advanced their deployment plans. Growth also reflected sales of our newest innovation, including our OmniSensor and Streamr products, which make our high-fidelity metadata available in observability, cybersecurity, and AIOps platform across our partner ecosystem. This enables our customer to leverage the real-time visibility we provide to improve automated workflows and critical investigations across the business. Enterprise customers are turning to our service assurance solutions to close visibility gaps created by hybrid cloud, remote work, automation, and AI workloads. These environments are inherently complex, with more traffic paths, potential points of failure, and operational silos across network application, observability, and security teams. With greater exposure to downtime, there are consequences can be significant from an operational, legal, and financial standpoint. Our service providers and customers remain focused on reducing network cost and complexity. They are also working to improve automation across fixed, mobile, and edge environments. NETSCORE 5G observability solutions give customers end-to-end visibility for standalone 5G networks. They also support machine-critical applications and emerging use cases, including fixed wireless access, network slicing, and Immersive Services. Carrier spending remains disciplined. Even so, we continue to see opportunities for a solution to help customers improve efficiency and monetize next-generation network investments. Turning to cybersecurity, revenue increased approximately 1% year-over-year. We achieved that growth despite a typical comparison to prior year period, which grew in the high teens due to the timing of some large projects. Both our enterprise and carrier-approved customers' verticals grew modestly in the quarters, and we continue to view cybersecurity as an important long-term growth opportunity for NETSCAR. Our previously discussed May acquisition of digital DDoS attack protection business assets Together with our recently announced capacity expansion reflects a deliberate strategy to scale our cloud with greater control, efficiency, and speed. By bringing the platform back and infrastructure fully in-house, we have created the operational and architectural foundation to invest more quickly and efficiently in capacity. That work culminated in the doubling of our mitigation capability to 30 series terabits per second. It also gives us a tighter alignment between infrastructure and threat intelligence, faster innovation cycles, and improved margin potential through immediately accurate tracking revenues. These actions strengthen ArgoCloud as a more resilient, vertically integrated cloud platform. They also position NetCloud to help customers respond to the rapidly escalating scale and complexity of attacks while delivering consistent, high-performance protection for mission-critical, always-on digital environments. Turning to AI, we believe it is creating a long-term growth opportunity across our portfolio. It's also bringing service assurance and cybersecurity closer together as customers look for solutions that can automate workflows, support AI-enabled applications, and enlarge volumes of data across hybrid environments. These trends increase the need for unused visibility, observability, and cybersecurity. They also reinforce the value of NETSCOT smart data. With packet-level precision, automation, and analytics, our AI-ready smart data helps customers find root causes faster, improve efficiency, strengthen cyber resilience, and connect more effectively with broader observability, Security Operations, and Emerging Agentic AI Frameworks. Turning to customer gains, we saw continued demand across both service assurance and cybersecurity. In the quarter, we secured new customers and repeat business from existing customers for investing in new solutions, upgrades, and maintenance services. These gains demonstrate the continued relevance of our portfolio, the depth of our customer relationship, and the opportunity to expand across our install base. Highlights from the first quarter included the following. First, we completed multiple government agency-related deals in service assurance and cybersecurity with an aggregate value in the low eight digits that included our OmniSensor, OmniStreamer, and Cyber Intelligence solutions. And another agency selected NETCODE to support modernization and zero stress security at the edge. Second, we signed a multi-million dollar agreement with a long-standing international service provider restaurant. Third, customer expanded its NEXCOR cyber security portfolio to strengthen DDoS attack protection in response to a heightened threat environment. Third, we secured a seven-figure deal with a U.S. financial institution that included our ominous ClearSight sensor. This solution addresses visibility challenges in large, multi-cluster, Kubernetes deployment. The customer selected NETSCOT for our ability to deliver deep, actionable, real-time insight into system performance, health and cost drivers, or customer-facing banking application in virtual environments. With that, let's move on to slide number eight and review our outcome. With a solid start to the fiscal year, We remain focused on profitable growth, health-free cash flow generation, and long-term shareholder value. And we are reaffirming our full fiscal year 26-27 outlook. Customers remain disciplined in their overall spending, and we are managing the business with that environment in mind. At the same time, we see meaningful long-term opportunities in AIOPS, observability, service assurance, and cybersecurity, and DDoS attack protection. will continue to invest in innovation with a focus on advanced cybersecurity capabilities, adaptive DDoS protection, and using our data and intelligence to power AI-driven workflows in observability and service assurance, all aimed at enhancing resilience and service reliability for our customers. We'll also maintain disciplined cost management and a balanced approach to capital allocation to support attractive returns for our shareholders. Finally, we are looking forward to hosting customers and partners at our annual Engage Technology and User Summit in Texas in October. This year's theme is Moving from Proactive to Protective and reflects an important shift in our markets. Customers want to move beyond monitoring. They want to detect issues earlier, predict outcomes faster and more accurately, explain what's happening, and automate more decisions. Engage 2026 will demonstrate how NETSCOUT AI-ready smart data provides the trusted data foundations for that shift. That includes support for observability, cybersecurity, AIOps, and emerging agent incorporation, while also helping customers control costs and keep their data secure and on-premises. We'll feature our newest innovation, including a Genius Co-Pilot, will give user access to smart data in natural language. We'll also showcase evidence-driven cybersecurity incident response and AI-powered adaptive DDoS attack protection. With that, I will turn the call over to Tony for a review of our financial performance and our outlook.

Thank you, Anil, and good morning, everyone. We appreciate you joining us. I'll start by walking you through the key financial metrics for our first quarter of fiscal year 2027. After that, I'll share some additional commentary on our second quarter and full fiscal year 2027 financial outlook. As a reminder, other than revenue and balance sheet information, which are on a GAAP basis, this review focuses on our non-GAAP results. All reconciliations with our GAAP results appear in the presentation appendix. I will note the nature of any such comparisons accordingly. all comparisons on a year-over-year basis unless otherwise noted. Slide number 10 details the results for the first quarter of fiscal year 2027. Total revenue was $210.4 million, up 12.7% from the same period last fiscal year. The quarter benefited in part from government-related orders, including some that were awarded ahead of our expectations, positively impacting revenues Product revenue totaled $86 million, up 17.8% compared with the same prior year period. Service revenue was $124.4 million, an increase of 9.4% year over year. Benefiting from revenue contributed by the recently acquired Cloud DDoS business, and from favorable timing of certain service renewal orders compared to the prior year. For fiscal year 2027, we continue to expect service revenue to grow in the low single digits. We ended the first quarter with total product backlog of approximately $33 million, which included $28 million of fulfillable backlog.

In the first

The gross profit margin increased 190 basis points to 80.6%, reflecting higher product gross margin due to favorable product mix. Quarterly operating expenses were $126 million, up 4.6% year-over-year, primarily reflecting overhead costs associated with the recent DDoS acquisition, higher sales commissions on increased revenues. and the timing of variable incentive compensation expense. The operating margin improved 660 basis points to 20.8%, reflecting revenue growth, favorable product mix and disciplined expense management. We delivered net income of $38.6 million or diluted earnings per share of 52 cents, an increase over the year-ago quarter net income of $24.7 million, or $0.34 per diluted share. Let's turn to slide 11, where I will walk you through the key revenue trends by product lines and customer verticals. For the first quarter of fiscal year 2027, service assurance revenue increased by 19.7%, and cybersecurity revenue grew by 0.6%. During the same period, Service Assurance accounted for 67% of total revenue, and Cybersecurity accounted for the remaining 33%. As noted earlier, Service Assurance benefited in part from government-related orders, including some received earlier than expected, while Cybersecurity faced a more difficult comparison as the same quarter in the prior year grew approximately 18%. Turning to our customer verticals, for the first quarter, enterprise revenue grew by 19.1% and service provider revenue grew by 3.3%. During the same period, enterprise accounted for 63% of our total revenue and service provider accounted for the remaining 37%. Additionally, no customer accounted for more than 10% of our revenue for the first quarter of fiscal year 2027. Turning to slide 12, For the first quarter of fiscal year 2027, the U.S. represented 59% of revenue and international represented 41% of revenue. Slide 13 shows key balance sheet items and free cash flow for the period. We ended the first quarter of fiscal year 2027 with $668.5 million in cash, cash equivalents, and short and long-term marketable securities. compared with $705.1 million at the end of fiscal year 2026. Free cash flow was $44.3 million for the first quarter. The reduction in cash primarily reflects the May 1st acquisition of the DDoS assets of DigiCert, Inc., which we previously disclosed and discussed as a subsequent event on our Q4 FY26 earnings call. We did not repurchase shares during the first quarter and remain committed to our share repurchase program. Let's move to slide 14 for our fiscal year 2027 outlook and some additional color on the second quarter. As Anil noted earlier, we are reaffirming our fiscal year 2027 outlook provided last quarter. We continue to expect year-over-year growth in both revenue and earnings with the following assumptions for the full fiscal year. Revenue in the range of $885 to $915 million. Non-GAAP EPS in the range of $2.65 to $2.80. A non-GAAP effective tax rate of approximately 20% and weighted average diluted shares outstanding of approximately $74 to $75 million. For the second quarter, we expect revenue to be broadly consistent with the prior year period, reflecting the previously mentioned acceleration of orders into Q1 and a strong comparison with the prior year's second quarter when revenue grew nearly 15% and benefited from orders accelerated from the third quarter. As a result, we expect first-half revenue growth in the mid-single digits. We expect Q2 EPS to grow in the high single digits. driven in part by our engaged conference shifting from Q2 in the prior year to Q3 this fiscal year. In summary, we delivered a strong first quarter and solid start to our fiscal year. We remained focused on executing against our fiscal year 2027 objectives. Our capital allocation priorities remained consistent, investing in profitable growth, maintaining a strong financial position. and returning excess cash to shareholders over time, primarily through share repurchases. Longer term, we believe NETSCOUT is well positioned to support customers as their network, security and operations environments become more complex. Our experience in cybersecurity, service assurance and network observability, together with our AI-ready smart data platform, gives customers a trusted foundation for digital transformation and AI-enabled operations. That concludes my review of our financial results and outlook. Please note that we plan to attend the B. Reilly Consumer and TMT Conference in New York in September. We look forward to seeing some of you there. With that, let's open it up for questions. Operator?

Thank you. 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. In the interest of time, we ask that you please limit yourself to one question and one follow up. Our first question will come from Matt Hedberg with RBC Capital Markets. Please go ahead.

Hey, guys, this is Simran for Matt Hedberg. Congrats on the quarter. My first question is that you noted that Q1 benefited from like the government related orders that were received earlier than expected. Could you quantify or just give more color on how much got pulled in and how we should think about that impacting linearity for Q2 in terms of those orders?

Sure. So the orders that were pulled in were about $10 to $15 million, primarily government related. If I were to normalize the quarter, it would have grown in the mid single digits, which would be consistent with where we see the first half of the fiscal year and consistent with where our full year outlook.

Okay, cool. And then just on some of the traction around your innovations like sensor and streamer, how should we think about that contribution for the year and then just more generally what's resonating well with customers?

Well, so the first thing is that our service assurance growth will include that omnis revenues. That's how we are categorizing it right now. And so we have less than 10 customers of that solution already. And people are really hungry, and not just people, but AI algorithms can do a great job. But then you also need a great data set. So we see a Strong Demand for what we are doing and especially since this can be plugged in as a software module to our existing service assurance solution, one of the challenges we need to watch out for is what is the sales cycle looks like because these are big AI projects and those are the two dynamics we are managing right now.

So I believe we see a lot of excitement at the customer level. We see a solid pipeline for this area. But, I mean, customers are still experimenting. And so as they do that and decide on what their AI strategy is, then you'll probably start to see more. I think last quarter we said for the full year it was about $15 million for FY26. If I were to annualize the first quarter, it's growing nicely for the year, so we expect good contribution. But again, it's still small, so we'll update people as the year goes on.

Thank you. Our next question will come from Eric Spiger with B. Riley Securities. Please go ahead.

Yeah, congrats on a good quarter. Could you first comment? It sounds like federal accelerated. So can you comment a little bit about what you're expecting for federal as we enter the fiscal year end for Q2? And then your rest of world was down. Does that reflect slowing in the Middle East with the conflict going on there? Or how should we think of the and the rest of world business since that's been a growth driver in the past.

From a federal government perspective, it tends to run in the mid to high single digits as a percentage of total revenue. For Q1, it ran in the mid-teens area, so it was strong. We have a nice solid pipeline of federal deals. But as you know, with the federal government, it's all about magnitude and timing of funding. But we're optimistic about the federal government right now.

Just to be clear on that, I thought you said that you did not have any 10% customers vote federal in aggregate? And federal, is that to suggest that federal and aggregate was in the mid, did you say the mid single digits or did you say mid teens?

Mid teens. Yeah, so, you know, the federal revenue is made up of multiple customer and so no one customer, the whole thing. With regard to rest of world, from our perspective, it's really just timing of deals. We don't see any trends in that right now.

Very good. Thank you.

Thank you. Our next question will come from Kevin Lu with K. Lu and Company. Please go ahead.

Hi. Good morning, guys. Just on the cybersecurity side of things, I'm curious if you heard anything from customers the impact of the mythos model introduction and how fears over AI exploits and the like could affect things. I'm just wondering if that's either held up or maybe accelerated some deals and generally how you think that impacts deal cycles as we move forward.

I think there are two areas, Kevin. So first in the DDoS area, we had announced an option to our product called ADP. and which is basically AI enabled automation support and things like that for our DDoS solution. So that is going well and it's still already in the adoption cycle. On the cybersecurity, on the Omni side, we have not focused on that right now because we see a lot of demand on the service assurance side with AI, but at some point, will be able to use our omni-sensor and streamer solutions for security use cases also. But right now the focus is on AI and ADP on the DDoS side and on the service assurance side with AI.

Understood. And then maybe one for Tony. Just on the inventory increase in the quarter, it's kind of up to the highest levels we've seen in a few years. I'm just wondering if there's any particular driver of that and what sort of implications that might have for your product growth margin in terms of makeshift as we make our way through the year?

Yeah. So, as you know, there's some supply chain challenges out there resulting from these AI data that are built out, so some of the equipment is more challenging to get and the prices are increasing. We are working with our vendors that participate in our COTS program. So customers can buy the software from us and the hardware from the vendors to try to secure inventory and control the prices on that side. But additionally, NETSCOUT has purchased incremental inventory, which you saw because the inventory went up about $7 million in the quarter. to secure that inventory so that we can help mitigate any challenges that customers might have as they think about purchasing the equipment. Because although from an equipment perspective, it's not that significant for NETSCOUT because NETSCOUT is primarily a software vendor, customers may change their buying behaviors if they can't get the equipment and it could impact software. So what we're doing is working multiple solutions to proactively mitigate that issue for customers. And thus far we've been successful and we haven't experienced issues in that area. So that's what we're doing with the inventory.

Thank you. There are no further questions in the queue so I'd like to close out today's call. Thank you for joining, ladies and gentlemen, and we appreciate your participation. You may now disconnect.