Netscout Systems Inc (NTCT) 2004 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to NetScout quarter operating results conference call. At this time all participants are in a listen-only mode. Later we will be conducting a question and answer session and instructions will be given to you at that time. As a reminder, this conference call is being recorded.

With us today is Netscout's President and CEO, Mr. Anil Singhal. The company's Chief Financial Officer, Mr. David Sommers; also with Mr. Singhal is NetScout's Director of Investor Relations, Ms. Cathy Taylor.

At this time for opening remarks, I would like to turn the call over to Mr. Singhal. Please go ahead sir.

Thank you and good afternoon everyone. Welcome to NetScout first quarter of fiscal year 2004 conference call. I will begin our call today with a brief overview of our financial results achieved this quarter followed by assembly of operating highlights for this quarter.

David will then review our financial results for the quarter in greater details. First let me turn the call over to Cathy Taylor, Director of Investor Relations, who will read the Safe Harbor Statement.

Thank you Anil. During the course of this conference call, we will be providing you with the discussion of factors we currently anticipate that may influence our results going forward. Before doing so we want to emphasize that these forward-looking statements may involve judgment and that individual judgment may vary. Forward-looking statements include expressed or implied statements regarding future economic and market conditions, revenues, profitability, growth, delivery and market acceptance of NetScout products.

It should be clearly understood that the projections on which we base our guidance and our perception of the factors influencing those projections are highly likely to change over time. Although those projections and the factors influencing them will likely change, we will not necessarily inform you when they do. Our company policy is to provide guidance only at certain points in the year such as during the quarterly earning call. We do not plan to otherwise update that guidance. Actual results may differ materially from what we say today and no one should assume later in the quarter that the comments we provide today are still valid. These and other specific factors could change causing our projections not to be achieved.

Specific risks and uncertainties are discussed in NetScout's form 10K for the year ended March 31st 2003 on file with the Securities and Exchange Commission. During this conference call we will also disclose various non-GAAP financial measures as defined by SEC regulation G. The most directly comparable GAAP financial measures and a reconciliation of the differences between the GAAP financial measures and the non-GAAP financial measures can be found on our earnings release dated July16, 2003 which is posted on our website at www.netscout.com/investors and with that I will now turn the call back over to Anil Singhal our Chief Executive Officer.

Thank you Cathy. Our results for the quarter were disappointing with our revenues down 12% or about $2m from both last quarter and our guidance. Our pro forma loss of 1 cent per share was at the low end of the EPS chain. However that performance was improved by 2 cents a share after tax benefit from capitalized costs with development costs.

Looking into the second quarter, we are encouraged by early signs of revenue growth. As we have seen a stronger sales pipeline along with those orders that were deferred out of this quarter. We are also confident that the recent lead of our significant new product will create additional momentum for the second half of this fiscal year. Our revenue for this quarter was $15.6m compared to last quarter's revenues of $17.7m. On a GAAP basis, the net loss for the quarter was $552,000 or 2 cents loss per share compared to a net loss of $354,000 or 1 cent loss per share for the previous quarter.

Our pro forma net loss for the quarter was $233,000 or 1 cent per share versus a pro forma net loss of $27,000 or 0 cents per share in the previous quarter. Our (indiscernible) cash flow (indiscernible) from the operations for the quarter. Our balance sheet is still debt free and flat cash grew by $1.9m bringing us to a cash balance of $73.2m. This was driven by strong accounts receivable management this quarter.

Our news this week, we announced major upgrades to our ingenious performance management product line, including Performance Manager 2.0. And (indiscernible) across our entire current flow product line. These new products complete the delivery of our CDM strategy, which we [Inaudible] a year ago.

They are the culmination of our largest single development effort today, in which we integrate the three applications into one, to provide the broadest network and application performance management functionality in the market, in a fully integrated solution.

All of the new products are based on our patent branded CDM technology. Our single ingenious solution now provides industry leading recording capabilities, broad network device coverage, integrated, (indiscernible) active and passive response and analysis, new proactive power alarming functions and virtually unlimited scalability through a completely new distribued architect

As part of a continuing strategy to deliver increasing value to our customers, we are offering Performance Manager 2.0, as a free upgrade to current maintenance customers. We have also completed the integration of performance data from leading infrastructure devices into our solution, supporting our partnership with Foundry, Extreme and Cisco.

We also announced a new product offering this week, called Ingenious Express. Express is the lowest cost offering with full CDM functionality, ease of implementation and fast time to where I look at this target, targeted primarily at new customers and additional market segments. These market segments include customers with little or no formal network performance management, middle market enterprises and [Inaudible] units of large enterprises. We expect Express to have shorter sales cycles, and be more user friendly due to its lower price point, smallerfootprint, short learning curve and ease of deployment.

Express offers a feature set, which is not available in any product in the market today and at a lower cost. These features include, network and application marketing, troubleshooting, response time analysis, subject level management, fault prevention and package analysis.

With its broad functionality, customers will be able to rely on Express for all their network performance management tasks, avoiding or reducing the pressure of management tools that are common in enterprises today and Express can seamlessly migrate to a full implementation of our ingenious performance management system as the customers' needs grow, preserving the customer's investment in both time and money.

During the beginning of this quarter, we introduced an important enhancement to our groundbreaking storage idiom equity management solution. These enhancements extends a rich statistical framework of ingenious idiom architecture further into the current blind spots of SAN performance and continuation issues, including monitoring and reporting for different types of business related storage traffic, monitoring for proactive troubleshooting and SAN configuration anomalies.

We moved to further extend our leadership and influence in the development of SAN performance management technology, by joining the Storage Network Industry Association. In joining, we are conforming our commitment to the development of standards and technologies that reduce the complexity of managing storage idiom networks.

As we have done for LAN and WAN managers, SAN managers will be able to realize significant operational and cost advantages over development of floor based performance management options, for storage traffic across the extended enterprise network.

With the rollout of a new CDM based ingenious product line, I believe we have set the pace for revenue growth, increased market share and profitability in the future. As we have in the past, we'll continue to manage our expenses conservatively, in order to remain cash flow positive. We look forward to sharing success stories about Performance Manager 2.0 and Ingenious Expres with you in the coming quarter. With that I'll return the call over to David.

Thank you Anil. I would now like to review our quarterly financial results. Our jet results are contained in the financial statements included with our press release. I'll explain the difference between our pro forma earnings and our GAAP earnings in some detail. This discussion will be principally based on a pro forma basis, which means that I will be excluding non-cash charges to cost and expense that derive principally from our acquisition of Netpoint Networks in July of 2000. In the future, we plan to report only on a GAAP basis since the difference between our pro forma and GAAP results will become small beginning with this September quarter.

Revenue for the first fiscal quarter of 2004 was $15.6m a decrease of 12% over last quarter and 13% below first quarter of fiscal 2003. Our products revenue decreased this quarter down 16% from last quarter and down 16% verses a year ago. Service revenue was up 2% over last quarter and up 14% year-over-year. License and royalty revenue was down 50% from last quarter and down 77% from a year ago in large part due to lower volume and pricing for fiscal sale of ingenious monitor software. Revenue from our direct sales force was up 45% up from 41% of revenue last quarter. We sell our revenue correspondingly with 55% of total revenue compared to 59%.

We continue to expand our foreign channel sales program and have forged a partnership with Shevalea [ph] Network Solutions Limited, one of the leading network solution providers in Honk Kong. Shevalea [ph] Network Solutions will resell NetScouts offering both directly and through its network and channel partners.

Also during this quarter, we added 21 new customers worldwide representing 10% of total orders. Among some of our largest new customers are Admini [ph] Staff, American Isuzu Motors, Federal Express Pacific, Henry Shine, Rolex and Sybase in Hong Kong. We had 246 repeat customers this quarter representing 90% of order volume for the quarter. We have 33 deals, over $100,000 this quarter and three customers with deals greater than $500,000. Competitive wins totaled $1.7m in the quarter involving approximately 15 deals against other leading network management numbers principally network associates.

Turning now to our vertical markets. During the quarter we saw continued support from the financial services sector representing 34% of orders, with orders coming from mix of investment banks, commercial banks and transaction processors. Even though we have several large financial services deals, which were delayed out of the quarter. This was followed by strong showing in the government sector with 23% of orders. We also have significant orders from medical, manufacturing and telecommunication sectors.

We are pleased again this quarter with our high levels of business from the government sector. Among our government customers were the US Coast Guards, [Los Alamos] Animals Labs, Financial and Security Agency, The Federal Reserve, the Veterans Administration, Jet Prepulsion Labs, The State of Montana, Colorado Division of Wild Life and internationally The Japanese Ministry of Trade and Industry.

Jet Prepulsion Laboratory was a repeat customer. JPL is our NASA lead center for robotic exploration of the solar system. They recently expanded their use of our solution to increase visibility into the data and applications being delivered across the Multi Gigabit Internal Network. This network supports the delivery of information gathered by JPL cameras, sensors and telescopes to NASA scientists as well as supporting communications with spacecraft engaged in deep space exploration.

JPL is using the Ingenius solution to proactively assure the performance of network services by performing world time monitoring and troubleshooting of performance. As well as base lining and trending of bandwidth requirements for mission critical applications.

The Colorado division of Wildlife is among NetScout's new customers. The division is a state government agency that manages and protects Colarado's 960 wildlife species. The agency selected NetScout as a means of deploying a centralized network performance management solution, enabling them to manage their network of 16 --- sorry, 18 offices.

The Division was concerned about application slowdowns across their network particularly with their e-mail systems and they have no way of troubleshooting the problem to figure out why the slowdowns were occurring. Within days of deploying our solution they were able to determine the cause of the problem and fix it.

They're now using our solution to monitor the impact of new applications of the network. This was a competitive win for us. The Division chose our ingenious solution because it provides a more integrated, network wide, distributive monitoring solution, enabling them to centralize the management of their network from their Denver headquarters.

Outside the government sector Verizon Information Services was another large win for us. Verizon Information Services is the world's leading print and on-line directory publisher, with operations in 14 countries and annual revenues of more than $4.3b. They've been a loyal customer of ours for five years with 80 probes deployed nationwide, supporting 106 locations in the U.S.

Verizon's primary use of Ingenious is assuring the performance of their applications, including proprietary applications, which support their publishing business. They also use Ingenious news stand because of the ease with which customized reports can be generated for C-level audiences.

Turning back now to our financial picture, our gross profit for the quarter was $1.8m down 12% sequentially and down 13% year-over-year. Gross margin was 75% in the quarter down 1 point over last quarter and down 1 point over last year.

We expect to remain within our gross margin target range of 72% to 75% going forward. Our revenue from International sales was 22% of total revenue, down from 25% last quarter. Pro forma operating expenses were $12.6m down 9% from last quarter and down 14% year-over-year, due primarily to $1.1m of capitalized software development costs. And also due to the expense controls that remain in place.

Pro forma operating expenses are calculated by deducting $47,000 of stock base compensation costs, and $272,000 of amortization of goodwill and intangible assets from the GAAP operating expenses of $12.9m. Within Pro forma operating expenses research and development was 26% of revenue, sales and marketing was 50% of revenue, and G&A was 11%.

When revenue growth returns we expect to return to our target business model expense to revenue ratios. Pro forma net loss for the quarter was 22 ---sorry, $233,000 versus a pro forma of net loss of $27,000 last quarter and up from a pro forma loss of $163,000 a year ago. Pro forma net loss excludes acquisitions stock base compensation costs that are part of our GAAP results.

The cost and expense amounts associated with these items are disclosed and parenthesis on the face of the GAAP income statement in our press release and summarized with supplemental information at the bottom of our statement. We believe these non-GAAP financial measures have enhanced your overall understanding of our current financial performance and our prospects for the future. We use these non-GAAP financial measures for the purpose of analyzing and managing our business. Specifically we believe the non-GAAP financial measures have provided useful information to both management and investors by excluding certain charges that we believe are not indicative of our core operating results. In addition we believe that the investment community has historically used our non-GAAP financial results to evaluate our financial performance, and we've historically reported both GAAP and non-GAAP results to the community.

However, next quarter we plan to stop reporting on a pro-forma basis and report only on a GAAP basis going forward, because the amount of cost and expense removed from our GAAP statements to construct our pro-forma results is expected to be small from Q2 forward.

Those GAAP costs and expenses excluded from our pro-forma net loss for the first quarter, are approximately $1000 from cost, $39,000 from R&D, $7000 from sales and marketing. The amortization of acquisition costs of $272,000 was also removed to calculate pro-forma earning. Our GAAP net loss for the quarter was $552,000.

Turning now briefly to key balance sheet measures. Cash and marketable securities are at $73.2m, up $1.9m from last quarter and up $3.5m from the same period in fiscal 2002, mainly due to positive cash flow from operations due to strong accounts receivable management. Accounts receivable net of allowances were $8.6m compared to $11.9m last quarter. Day sales outstanding were 49 days for the quarter, down from 59 days in the prior quarter and within our target range of 45 to 55 days. Inventories were $2.4m down 20% from last quarter and down 34% year-over-year. And now for our guidelines. We are only issuing guidance for the September quarter. Our near term expectations are based on the current climate of [Tight] enterprises IT spending, and the uncertain timing of the impact of improving general economic conditions, and on our view of our sales pipeline.

And now for our second quarter, we expect revenue to be in the range of $17m to $18m, we expect our GAAP loss per share to be in the range of -2 to 0 cents per share, and we expect to be slightly cash negative in the quarter at the lower end of our guidance range.

This is the conclusion of our guidance. We plan to provide further guidance at the end of each quarter and our succeeding conference calls. We do not plan to, and disclaim any obligation to provide updates to this information even though our expectations may change during the quarter.

And now Anil and I will take your questions, please go ahead operator.

Thank you. Ladies and gentlemen if you wish to ask a question please press star then 1 on your touch-tone phone, you will hear a tone indicating you have been placed in queue. You may remove yourself from queue at any time by pressing the pound key. And if you are using a speaker phone, please pick up your handset before pressing the numbers, and once again if you have a question, please star 1 at this time.

And our first question comes from Kimberly Caughey's line, and your line is open.

I just have a question on headcount. Do you have an end-of-the-quarter headcount for me?

Our headcount Kim, was about flat, we ended with 343.

Okay. And as you're probably aware, Network Associates reported that Sniffer(ph) has been doing particularly bad, down 22% from where they had anticipated- and I guess you guys demonstrated some wins against them, but do you think that's more indicative of their product line issues or just of the environment altogether?

Well, I think a couple of things. First of all, like we mentioned in our pre-announcement call, what it was this quarter are not indicative of any such slow down in this market. There is tremendous interest, and I think the biggest difference is in between what we are doing and what Network Associates is doing and we are clearly focused in this sphere. And they are more focused on the security sphere so, and so I think not a big surprise that they'll be in - doing not as good in those areas, but we see a lot of customer interest in what -the types of thing we are doing and hopefully with the seating strategy we can broaden that.

Okay. And a final question-during the pre-announcement call you had said that some bigger sales controls and I guess, monitoring people's pipelines weren't quite what you had anticipated them to be. You have taken steps, more steps to tighten up the process?

I cannot- we may have given you a misimpression of what we said in the preliminary call. What we meant to convey was that, because of preparation for the new product rollouts that we've now announced, that with sales, despite our good controls- we think we have good controls on the pipeline management- that the sales force was distracted and that that may have caused some-may have been part of the cause for deals that got delayed out of the quarter.

Okay.

We are, of course very concerned about our- the predictability-reliability of our guidance, and so we continue to look for ways to improve the reliability of our forecasting in our guidance, and so to that extent we are currently taking additional steps. But the (indiscernible) never had anything to do with individual sales pipeline control.

Okay. Great.

Thanks for your questions.

And our next question comes from the line of Richard Sherman with Janney Montgomery Scott and your line is open sir.

Yes. Hi and my question is on the following. David do you have the fiscal percent contribution on the quarter?

5% I believe. Yes 5%

And do you have a breakdown geographically?

We do. Hold on a second. We were---make sure I got the right numbers here---22% of orders came from international and 78% from domestic, and of that 22%, 8% was in Asia, the balance in Europe.

So you say, of that 22%, just to make sure I understand, 8% of that was in Asia and the other 14%?

That's correct.

Okay. All right. When you--- with the express release, and now that you've just announced, who do you position that against competitively in the market? Would you believe that lower-end product could (indiscernible) again?

I don't think it's going to be in multiple areas maybe half the total monitoring segment, analyzer segment, the people who are buying the products and one days, two days, or people who are not sure weather they want to invest in something big. And with Express we expect them to give a taste of everything we do and the value of that quickly at an affordable price. I think it's going to be whole broad range of network management. This is all the things which we outlined David, for network monitoring to service level management and it will probably be competitively with marketable vendors not just Network Associates.

Okay and will that support the security, functionality on a card? Would you be able to put intrusion to texture and not the back of the Express?

Well it can be but that's not how it's positioned right now. But yes it can. We can buy an option and then we'll be able to do that.

Good okay. And then lastly the (inaudible) I think was announced as a partner recently. How did they perform in the quarter?

We don't disclose specific partner numbers Rich. The mentioned data continues to work well with this but I don't have any thing else to tell you.

Okay those are my questions, thank you.

Okay thanks for your questions.

Once again ladies and gentlemen if you do have a question please press star 1 at this time. And we do have a follow up question from Kim Caughey with Parker Hunter. Ma'am your line is open.

Thank you, I was wondering the express and ingenious express seems like a really interesting product and lets say you try it and you decide that not only do you like it but you need more. Do you have a migration path from express to full blown ingenious?

Yes not only the migration part Kim but you can buy additional stuff and they still can work together. So you don’t even have to replace what you baught – it just merges with the full blown system.

OK, Great. Do you have any average selling price for express. For at least a proportion comparable to, you know full-blown nGenius and some probes. And I understand every body is different but just to give us, you know an idea of where it falls in the spectrum.

Well then the lift rate for express is in the 72 to 90K rate.

Okay.

Depending on the type of network you have. And the full-blown nGenius system is any where from $100,000 to $1m depending on the size of the network. And so that's why you see lot of these in 100K to all the way to 500 to, 600K range.

Sure, okay great.

And ladies and gentlemen if you do wish to ask a question please press star then 1 on your touch-tone phone. And there are no further questions in queue. Please continue.

Alright well thank you very much for your coming and for your interest in our conference call. We look forward to talking to you again at the end of our next quarter.

And ladies and gentlemen this conference will be available for replay after 7 p.m. central time today until July 30th at midnight. You may access the AT&T Executive Playback Service at any time by dialing 1-800-475-6701 and entering the access code 690-911. International participants may dial 1-320-365-38 or 4. And again those numbers are 1-800-475-6701 and access code 690-911 and international 1-320-365-38 or 4.

That does conclude our conference for today. Thank you for your participation and for using the AT&T Executive Teleconference Service. You may now disconnect.