Netscout Systems Inc (NTCT) 2004 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to NetScout's fourth 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 is being recorded. With us today is NetScout's President and CEO, Mr. Anil Singhal, he is accompanied by NetScout's Chief Financial Officer, Mr. David Sommers; also with Mr. Singhal is NetScout's Director of Investor Relations Ms. Catherine Taylor. At this time for opening remarks I'd like to turn the conference over to Mr. Singhal, please go ahead sir.

Thank you and good afternoon everyone. Welcome to NetScout's fourth quarter of fiscal year 2004 conference call for the period ended March 31. I will begin our call today with a brief overview of our financial results achieved this quarter followed by assembly of our operating highlights for the recent quarter, and past fiscal year. David will then review our financial results for the quarter and fiscal year in greater defense. 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 the factors we currently anticipate and they influence our results going forward. Before doing so, we want to emphasize these forward-looking statements may involve judgment and that individual judgments may vary. Forward-looking statements include expressed or implied statements regarding future economic and market conditions, revenue, profitability, growth, delivery, and market acceptance of NetScout products. It should be clearly understood that the projections in which we face our guidance and our perception of the factors influencing those projections are likely to change over time. Although those projections and 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 earnings call. We do not plan to otherwise update that guidance. The 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 Form 10-Q for the quarter ended December 31, 2003 on file with the Securities and Exchange Commission. And with that I will now turn the call back over to Anil Singhal, our Chief Executive Officer.

Thank you Cathy. We are quite pleased with our financial performance this quarter and overall with the improvement of our business has been seeing each successive quarter of fiscal year 2004. For the third consecutive quarter, we saw both total revenue and product revenue grow sequentially supported by stronger order flow. Revenue for this quarter was $19.5m compared to last quarter's revenue of $18.9m. Over the past few quarters, we have been experiencing increased sales activity and improvement in our pipeline in the quality as well as quantity of these. Our visibility has improved over the past couple of quarters and as a result, we are more comfortable than in recent years adding into our seasonally slow first quarter. Turning to the bottom line, as we have anticipated, we had higher expenses this quarter resulting in a loss of $177,000 or $0.01 loss per share compared to last quarter's profit of $184,000 or $0.01 per share. In the first calendar quarter, we had higher operating expenses resulting from increased benefit cost. The seasonal effect of payroll taxes and higher sales commissions. However, once again we had monthly cash flow from operations with cash increasing by $1.7m to a total of $75.5m. Now turning to highlights of the fourth quarter. We continue to deliver increased value to our customers by expanding the functionality of our nGenius solutions through upgrades to nGenius performance manager and in our . We released new feature for monitoring the performance of IP multi color scientific based application and recognizing an emerging needs among those customer base, we announced availability of the nGenius Express Linux appliance a server with Red Hat Enterprise Linux operating system and preinstalled with nGenius performance manager. During the quarter, we also added performance monitoring and reporting features to our Fiber Channel for virtual storage area network technology. We are forced to market with these enhanced features to our storage growth. We work with our partners Cisco to expand and troubleshooting through building switch port similar to what we already have in place for 10/100 and Gigabit LAN network. From a full fiscal 2004 perspective, we delivered on most of the goals we established 12 months ago. Early in the year, we delivered on the CDM1 and TDM1 as part of the first phase of CDM strategy by unifying all the features and functions of network performance management disciplines into a single product. We expanded the rich data we collected with our and included data collected from a wider range of network devices and sources such as routers, switches, and software agents and integrated that data into seamless real-time and historical reporting.

We work closely with our partners Cisco, Foundry, and Extreme and in the future we plan to broaden network device coverage with other device vendors. We met our customers' requirement to reduce clutter in the network by delivering a signal network management solution that is easy to use, that has managed our network more efficiently while providing significant cost savings. During the fiscal year, we entered into the second phase of our CDM strategy called CDM tools bringing to market product enhancement that showed our customers that our solution provides and other important -- important areas of network management. That is performance and traffic flow data that is gathered by our CDM technology can be used as an information source for other vendors' application such as security, billing, marketing, and simulation. To cite an example in the area of security a workflow detector blade available as an option in our probe is used as an interface for intrusion detection and network surveillance applications. Also in securities, we are developing application programming interfaces that provide interfaces with indigenous probe to mine data for anomalous behavior detection and we are developing a product for Network Forensics. In the area of billing, we are seeing global deployments of our solutions for usage-based billing system to control infrastructure cost. And in the area of modeling and simulation, we are working on joint solutions with our partner Opnet on some large projects for federal government agencies. Both CDM1 and CDM2 dramatically reduced the total cost of ownership for our customers while delivering the best ROI for the network and application infrastructure investment. While CDM1 provides Dot performance data analysis and presentation function in the form of a single indigenous performance manager application, CDM2 offers a universal data source in the form of indigenous probes. Together they offer a single application, a single box in the solutions for multiple management needs, multiple network types, and multiple traffic sites. These management needs include real time monitoring, trouble shooting, vertical analysis, response time monitoring, capacity planning and reporting and service level management. These needs are further extended to our partners in the modeling security and usage-based building areas. The network types include OC-3,OC-12/ATM Packet over SONET, MPLS, BLS, Gigabit, Ethernet, SAN or VAN regardless of the infrastructure vendor or supplier and the traffic types include bad data, web voice, Multicast, Multimedia, and any other enterprise application. In summary, we believe that the significant investments we have been making in the CDM technology and the indigenous products set for the last two or three years will position us to take market share from our competitors as we enter our fiscal year 2005 this month. With the CDM based products already in place for several quarters now, our sales force is ready to fully capitalize on the underlying value proposition of CDM. Despite the tough economic climate during the last three years, we managed to further strengthen our solid cash position without shedding precious human resources and without curtailing important development, training, and growth projects. Today, NetScout is in one of the strongest positions ever in its recent history and is ready to build on successes we have begun to demonstrate in the last couple of quarters. We would like to thank our employees, customers, partners, and stakeholders for the support in fiscal 2004. And we look forward to sharing our success stories and new initiatives with all of you in this new fiscal year. With that, I'll turn the call over to David.

Thanks Anil. I would now like to review our quarterly financial results. Those results are contained in the financial statements included with our press release. Revenue for the fourth fiscal quarter of 2004 was $19.5m an increase of 3% over last quarter and 10% over the fourth quarter at fiscal year 2003. Our product revenue increased 5% over the last quarter and increased 15% from a year ago. Service revenue was up 1% over the last quarter and up 14% year-over-year. License and royalty revenue was up 8% from last quarter, but down 56% from year ago due in large part to lower volume pricing for Cisco sale of our indigenous real-time monitor software. Revenue from our direct sales force was 48% of total compared to 54% last quarter. Reseller revenue correspondingly was 52% of total revenue compared to 46%. During this quarter, we added 39 new customers worldwide, representing 10% of total orders compared to 15% in the third quarter. Among some of our largest customers are America West, Cingular Wireless, Visa of Singapore, and Hubble. We had 283 repeat customers this quarter, representing 90% of order volume. Some of our largest repeat customers include Air Force base, Cummins, Target, Verizon Information Services, Kaiser Permanente, the US Coast Guard, Continental Airlines, and Vodafone. We had 58 customers with order volume over $100,000 this quarter, including two customers with order volume greater than $1m. Competitive wins were up again this quarter, with orders more than $4m in the fourth quarter involving approximately 22 deals against other leading network management vendors. Turning now to our vertical markets, we saw continued success in the financial services sector, representing 43% of order dollar volume, with orders coming in from a mix of investment banks, commercial banks, and transaction processes. This was followed by the government sector, with 16% of orders and the high tech sector with 8%. We also had significant orders from the healthcare, consumer, and telecommunication sectors. Among our large deals, we had a repeat banking customer, BankNorth, the largest bank headquartered in New England. BankNorth typically represents a typical NetScout customer relationship where the customer makes an initial investment in our solution that is followed by larger repeat orders. BankNorth initially purchased Performance Manager and a large handful of probes to monitor the core of their network for initial visibility and troubleshooting. Last quarter, they tripled the number of probes in their network to enable them to do broad application monitoring, capacity planning, and reporting all the traffic between their data centers, branches, and corporate offices throughout New England for their critical customer-facing applications such as Internet banking and ATMs. This is particularly important to the banks now because they are beginning to implement quality of service in their network and are using nGenius to tract the performance of the new service levels as deployment progresses. After the QS rollout, BankNorth is planning a broad Voice-over-IP implementation based on Avaya's voice solution. The bank is planning to use NetScout's new Avaya Voice-over-IP support to manage their voice performance in the context of overall network application management. This quarter, NetScout became a premier member of Avaya's DevConnect Program and we've already begun joint sales efforts. Another large deal this quarter came from Vodafone in Germany. This is the second stage of a roll out of nGenius in their customer service network using wireless application protocol. Historically, Vodafone had used network-troubleshooting products from a larger competitor. However, their new application response time monitoring and recording requirements let them to select NetScout for their new implementation, a significant competitive win. Vodafone is an example of the trend that we're seeing. Large wireless service providers are beginning to use our solution in their customer-facing networks to ensure the delivery of applications such as text messaging, Voice-over-IP, and Web services. Vodafone is one of several such deals this quarter. Also in the quarter, our new focus on federal business opportunities has yielded a very large order from a National Intelligence Agency that we won in conjunction with our partner, Opnet. The agency has large fluctuating bandwidth requirements on their network, driven by applications that are critical to both combat operations and senior policy decision-making. Our solution was selected to provide an understanding of bandwidth consumption as they plan for network upgrades and to deliver real-time monitoring proactive performance management, and rapid problem resolution. Turning back to the financial picture, our gross profit for the quarter was $14.9m, up 4% sequentially and up 11% year-over-year. Gross margin was 76% in the quarter, flat both sequentially and year-over-year, slightly above our gross margin target range of 72% to 75%. Revenue from international sales was 23% of total, up from 18% last quarter.

Operating expenses in total were $15.7m, up 12% from last quarter, and up 11% year-over-year. The increase quarter-over-quarter was due to several factors, including increased benefit cost, the seasonal effect of employer payroll taxes, and higher sales commissions because of high revenues. The net after-tax loss for the quarter was $177,000 versus a net after-tax profit of $184,000 last quarter, and versus a net after-tax loss of $355,000 a year ago.

Turning now to key balance sheet measures. Cash and marketable securities are $75.5m, an increase of $1.7m from last quarter, and up $4.2m year-over-year. Accounts receivable, net of allowances were $10.9m compared to $9.5m last quarter, and $11.9m a year ago. Days sales outstanding were 49 days for the quarter, up from 45 days in the prior quarter, and within our target range of 45 days to 55 days. Inventories were $3.4m, up 13% from last quarter and year-over-year. And now for our guidance, we are only issuing guidance for the June quarter today, which is a seasonally slow quarter for us. We expect first quarter revenue to be in the range of $19m to $20m. We expect the GAAP loss per share in the range of zero to minus $0.01 per share, and we expect to be cash neutral in the quarter. This is the conclusion of our guidance. We plan to 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. Emmy, please go ahead.

Ladies and gentlemen, if you wish to ask a question, please press star and then one on your touchtone phone. You will hear a tone indicating that you have been placed in queue. You may remove yourself form queue at any time by pressing the pound key. If you are using a speakerphone, please pick up the handset before pressing the numbers. Once again, if you have a question, please press star one at this time. One moment please for the first question, and our first question is from the line of Eric Martinuzzi from Craig-Hallum. Please go ahead.

Hi, this is Eric Martinuzzi from Craig-Hallum. Congratulations on the quarter gentlemen.

Thank you, Eric.

My question has to do first of with the customer base, you mentioned sort of a returning strength on the financial services. Do you expect that to continue throughout the -- or at least through your current visibility, the 43% of the business that came from the financial sectors, that's something you expect in Q1?

I think, we expect the business to be good in that phase whether it's exactly 43%, or around that, it's not sure. But, we see continuing improvement in that area from what we are seeing in the next two quarters.

And about the government sector, now you are seeing additional, would you expect to see that same strength in Q1?

Eric, the government business is somewhat seasonal. We were encouraged by the strength of the business in our March quarter and we are focused on it and trying to grow our participation in significant government opportunities and network management. So, we do expect to see continued strength there and larger contributions we hold than we've seen from that sector in the past.

Okay. You talked about the momentum in your business. Based on your projections, is your pipeline -- as you built your Q1 projections, is your pipeline larger than it has been in recent past or about the same size?

Well, we don't talk in awful lot about the specifics about the pipeline and the backlog. Remarks that Anil made about the quality and the activity in the pipeline, I think, that characterize our confidence going forward. We do have a very good visibility going into the June quarter. But as we've mentioned, the June quarter is our seasonally slow quarter, principally because it's the first quarter of our fiscal and quarter year, and we do significant kickoff activities with the sales force that does cause some distraction every year, significant, but an important activity. So, it is the seasonally slow quarter for us, but the guidance that we gave, which is essentially as you can tell flat with the actuals for the -- the fourth quarter indicates, I think, some degree of our confidence were up about our ability to manage through that seasonally slow time.

Thank you.

Thank you.

Our next question is from the line of Joe Craigen from Needham and Company. Please go ahead.

Thank you. Good afternoon.

Hi Joe.

Could you walk us through the Channel program that you just announced? Can you walk us through what that program is, what changes you're making, and kind of where you are in the process?

I think it's a high level -- we can talk about. There is really no big change in the format of the general program, and we're -- we just continue to look for new channel partners. We've put people in sales. We directly work with channel. There is increased interest in the channel area because of the margins we can provide through our product with other infrastructure products to sell. But there is no specific big changes we're making to the channel programs other than maybe, and David you want to...?

The significant change is, as Anil said it, is really is a change in the structure of the way we've done business with a number of our partners. We're extending that structure to our entire channel program and tuning the channel programs, so that we now have different levels of value delivery marketing, and go to market delivery with our channels -- higher-level channel partners and with the smaller ones. And one other things that we're going to be introducing, which is not a new concept in the marketplace, of course, is MDF funding in conjunction with our larger channel partners, and we expect that that will fall through significantly. We hope additional joint marketing activities with those large partners and cement and strengthen our relationships with them.

And with that MDF extra expenses, what would we think about in terms of the impact on the financial structure?

Well, as a matter of fact, we won't see much impact on the financial structure because we're treating -- we're planning to treat those MDF expenses as revenue reductions rather than as expenses. So, in essence, they will not even run through the income statement.

Okay. And David, I guess here more broadly, you know, in thinking about when the operating leverage kind of kicks in here, is this something we should be thinking about for a kind of early '05, late second half-year, or when should we be thinking about that kicking in?

Well, we expect it to start to kick as we enter the year. You shouldn't expect to see a substantial uptick in flow through, but you should expect to see steady margin improvements throughout the year based on the fact that we do expect to resume growth. And we've not shown that in the quarter-to-quarter sequential, but I think in the year-over-year numbers, you'll see that we're projecting some significant upside. Having said that, we're going to be investing modestly in growth initiatives, and initiatives support growth as we go through the year. So, there'll be an increase in expenses, but we've always committed to our investors that we'll flow through the value in terms of operating leverage of our revenue growth to the bottom line. We think it's prudent, given the opportunities in the marketplace in front of us, particularly with the strength of our product line and our strategy that's in place, and some of the competitive landscape for us to perhaps be a little aggressive in the marketplace, and make some of those investments earlier in the year, and that'll gain some of the operating leverage in the short-term, but we think it'll level it further beyond that short-term period. I hope that helps.

Yes. Thank you.

Thanks.

Now, we've a question from the line of Kim Caughey from Parker/Hunter. Please go ahead.

Hello. I've two questions. First, there seems to be an outsized growth in the sales and marketing in absolute dollars and percentage looking back the past compared to this quarter. Did you hire new sales people, or did you participate in more marketing programs in the quarter? And I've a follow-up question.

What we have been investing modestly in the sales force. Part of what happened to drive sales and marketing expense up is that at the end of our quarter year, which ended in March, the incentives that we put in place for high performing sales people begin to kick in and as sometimes happens, it's sometimes hard to anticipate the exact mix of those things and we try, although we try to approve, so that we don't have a spike up. That doesn't always work properly, so we did in fact have an acceleration of sales incentive compensations in the fourth quarter due to the performance. And that performance was uneven across the sales force as always it happens. The top performing people hit their accelerator zen and did very well. And we are very pleased about that. So, that's really the driver of the sales incentive or the sales and marketing expenses.

Okay. So, it should drop back down to normal levels in the next quarter?

Yes. Having said that just a reminder that we did start hiring gently and we are going to hiring gently in the sales force. It is our intent to add about 10% to the total sales force, field sales force, that's the quarter carrying direct account facing sales force.

And do you have a number - - do you release the number of that quarter -- currently?

Yes. I think we said in the past we were about at 45, so you can add 5 or so.

Okay. My other question has to do with federal business opportunities that you found this quarter. Has any of that been shipped and will it continue on in the future, because generally those contracts are big and kind of cumbersome to execute?

Well, our federal business is little different than some other companies that you might be familiar with. We do most of our federal business through federal resellers, integrators, and others. They are the ones who have the large contracts although we go into the agencies and do the selling. We typically supply products under their large contracts, and that appears to us pretty much like a standard commercial purchase order sort of business to a reseller. So, when we get an order, it typically is an order that is again processed and shipped within a reasonably short period of time.

Okay. Great. So, you got the federal business last quarter and that's back and you have to go back and sell more if it's better.

That's it. That's always the way. I will go back and tell them.

Sommer! Okay, thanks.

And we have a question from the line Richard Sherman from Janney Montgomery. Please go ahead.

Hi David and Anil.

Hello.

Hello, how are you guys?

Alright.

Good. I had a problem in Kim's question. You are adding 10% . Over what period of time do you expect that to happen?

Well, it always takes a while to find the right sales books, but we are actively recruiting now. So, it should take place over the next several months and perhaps that stretch into next quarter, but we don't expect it to take too much longer than that.

Okay. So, next quarter or maybe two quarters?

Yes. Probably.

So, in terms of a gentle hiring, which sounds very nice. The gentle hiring of sales people, where some of this opportunistic related to some sniffler people that maybe out in market?

Well, we don't want to comment uncharitably on the situation of others, but yes.

Okay. Gentle and uncharitable. Okay. And then you mentioned sort of government business being pretty good carrying over going forward. Could you - - although you did say that in the June quarter, it's kind of some seasonality in the government business. Do you expect the government business to be seasonally lower in the June quarter or do you think that momentum created in March will carry over in the June quarter understanding that you're not - - it's as almost - - it's the current business with the government.

Yes. It's hard to say, Rich, we're sort of still working on this government business, federal business penetration and we are working very successfully with OPNET as we've mentioned a couple of times. So, its hard to say and then the government business tends to be little lumpy. The deals tend to be larger and so it could be that if we don't hit a couple of lumps in the June quarter that it will trend down. Clearly the seasonality builds towards the September quarter, which is when fiscal year end, and so we would expect to see that whether that will be a smooth pass from where we are now through June to September, it's harder for us to say.

Okay. And then just a couple of clean up questions on this. Do have the employee total and how much EMEA was in the quarter?

Yes. We ended the quarter with 343 employees and EMEA was 16% of revenue, up from 14% in the December quarter.

Okay, thank you David.

Thanks Rich.

And we have a question or a comment from the line of Stephen Elliot from IDC. Please go ahead sir.

Hi thank you. Just a quick question. I was wondering if you could provide some color, there is lot of activity in adjacent markets that you claim specifically on picking of, the idea of traffic management, road , very protocol centric from a networking standpoint and we are seeing a lot of uptake from customers. Is this an area that you think you might start to look at from an investment or a partnership standpoint, help to drive additional revenue? Thanks.

We are not looking on optimization. There are lots of small companies doing that, while our data can be used for that, but we don't see that as area for us to invest. But in other areas like you mentioned traffic engineering, we talked about some security budgets inducing the data being collect for anomalous behavior, perhaps even to drag viruses and things like that. Those are some of the areas, which will be interested in partnering or investing, and we already have made several product improvements to cover those areas.

Okay, great. Thank you.

Okay.

And there are no further questions at this time. Please continue.

Okay. Well, thank you very much for joining us for this conference call. We appreciate your continued interest and we look forward to see you at our next conference call in July.

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