Netscout Systems Inc (NTCT) 2007 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to NetScout's fourth quarter of fiscal year 2007 operating results conference call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session. 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. He is accompanied by NetScout's Chief Financial Officer, Mr. David Sommers. David Sommers. Also with Mr. Singhal is NetScout's Director of Investor Relations, Ms. Cathy Taylor.

At this time I will turn the call over to Ms. Taylor to provide the opening remarks. Ms. Taylor, please proceed.

Thank you and good afternoon, everyone. Welcome to NetScout's fourth quarter fiscal year 2007 conference call for the period ended March 31.

In terms of the format of this call, Anil will begin with an overview of our fourth quarter and fiscal year 2007 financial and operating results and David will follow with a review of our financial results and Company performance in greater detail. At the conclusion there will be opportunity for questions and answers.

Before we begin however let me remind you that during the course of this conference call, we will be providing you with a discussion of the factors we currently anticipate that may 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, the Company's revenues, profitability and growth, and 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 earnings 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 make today are still valid. The risks and uncertainties that could cause our projections not to be achieved include the specific risks and uncertainties that are discussed in NetScout's Form 10-K for the year ended March 31, 2006 on file with the Securities and Exchange Commission.

I will now turn the call back over to Anil Singhal, our Chief Executive Officer.

Thank you, Cathy.

We are pleased to be reporting solid operating results for our fourth quarter with strong bookings, revenue and operating margins. Compared to our quarterly guidance, our revenue was at the high end of the range and earnings per share exceeded the range. Revenue at $27.3 million increased 6% year-over-year and 3% sequentially. Product revenue was up 5% sequentially. Net income was $2.1 million, an increase of 15% year-over-year with earnings per share at $0.06, again exceeding guidance.

The first quarter of the fiscal year 2007 started more slowly than we expected. While we picked up substantial momentum in the second half, the overall growth for the entire year was only 5%. However we are pleased to have crossed the $100 million mark in annual revenue and to have met our full year earnings guidance.

In addition, we executed successfully all our business initiatives, including the expansion of our sales team and geographic coverage and launching new products that have lengthened our lead over the competition into our targeted markets. These initiatives led to the improved growth at the end of fiscal year 2007 and we believe they will lead us to still higher growth in fiscal 2008.

At the beginning of our fiscal year, we laid out our strategic objective of 40% Earnings Per Share growth for fiscal year 2007 and 2008. We achieved our 2007 40% EPS growth target and also reached our quarterly goal of hitting a 12% operating margin target in the fourth quarter. These EPS and operating margin results exclude the expense related to the retirement of Cofounder Narendra Popat that David will review in more detail.

During the year, we released our new Application Flow Monitor and Analytics products and achieved good penetration into the wireless service provider vertical market segment. We now have three of the five largest wireless service providers in the United States as our customers and we are focused on continuing to expand this opportunity internationally.

We are also targeting the financial services market with unique new product features for monitoring high-speed trading infrastructures. We believe this will also be a significant growth market for NetScout in fiscal year 2008.

As our competitive strength comes from the market's acceptance of the importance of our packet flow technology in monitoring applications from the network vantage point. We believe our solution is leading the market in reducing the Mean Time To Restore for networked applications and services, in case of performance degradation or disruption. The demand for our products is growing as our prospects increasingly value, dependable, uninterrupted business services in ever more complex, converged, heterogenous and widely distributed infrastructures.

The increasing contention for share resources between users and applications and the continuous challenge of monitoring the relationships between the multiple elements on the network creates new problems for network managers as they support and manage their rapidly converging virtualized application infrastructures. NGenius substantially streamlines the process of problem identification, diagnosis and fixed verification through integration of flow and packet based data. This process accelerates troubleshooting by allowing network managers to quickly identify service degradation problems through high-level views and then drill down to packet detail for further analysis.

A recent survey of 138 of our customers has revealed that nGenius cut their average time to diagnose problems by 69%. This evidence demonstrates the value of the solution and the importance of the integration of flow analysis and deep packet analysis to effectively troubleshoot challenging application problems that can materially affect our customers' bottom line.

Looking ahead into our next fiscal year, we will continue to work closely with our customers to help improve the Mean Time To Restore for internal and customer facing services. This is especially relevant in the wireless service provider and financial services vertical, which we have identified as an emerging opportunity for us. Combined with the strength across other vertical markets and our plans for future enhancements to our nGenius solution, we believe we have good prospects for improved growth in fiscal year 2008.

We are targeting growth again in our bottom line and we expect annual net income per diluted share to grow by 40% or more in fiscal 2008, through continued expense controls and double-digit revenue growth.

I would like to thank all of our employees, customers and stakeholders for their loyalty and support as we finish another successful fiscal year. We are enthusiastic about our prospects for fiscal year 2008 and I look forward to sharing those developments with you in the coming quarter.

With that I would like to turn the call over to David.

Thank you.

Our quarterly financial results which you can find in the financial statements are -- which are included with our press release. Our fourth quarter review of $27.3 million was up 6% year-over-year and up 3% over the previous quarter. Net income for the quarter on a GAAP basis was $2.1 million or $0.06 per diluted share. Included in net income is a charge of $1.4 million or $0.03 per diluted share related to the accrued expense for the retirement agreement of cofounder and former chairman Mr. Popat. This compares to net income of $2.0 million or $0.06 per diluted share for the previous quarter and compares to net income of $1.8 million or $0.06 per diluted share in the fourth quarter of fiscal 2006.

For the full year ended March 31, 2007, NetScout reported revenue of $102.5 million, a 5% increase over revenue of 79 -- 97 -- excuse me $97.9 million for fiscal year ended March 31, 2006.

Net income for the fiscal year ended March 31, 2007 was $7.7 million or $0.23 per diluted share, an increase of 33% year-over-year. Excluding the $1.4 million retirement expense non-GAAP net income per diluted share would have been $0.26 per share, representing growth of 43% year-over-year and exceeding our full year guidance of 40%.

Revenue contribution from direct customers was 42%, compared to 39% last quarter. Reseller revenue made up the balance. During this quarter we added 21 new customers worldwide or 5% of total orders. The rest of our order volume came from 299 repeat customers.

68 customers gave us orders over $100,000 this quarter including 12 customers with orders over $500,000 and six orders over $1 million. Revenue from International sales was 19% of total, up from 16% last quarter with Europe at 10 points and a strong contribution from Asia at nine points of the total.

In our vertical markets this quarter, the financial services sector represented 24% with strong government bookings also at 24% of order dollar volume followed by High-tech at 17%, with Telecom, Healthcare and Energy at 5 to 7% each.

During the quarter we saw significant strength in competitive wins involving 24 deals, totaling approximately $8.2 million against Network General and a number of other competitors.

Turning back to our financial picture, the gross profit for the quarter was $21.5 million, up 10% year-over-year and 4% sequentially. Gross margin was 79% in the quarter up 3 points year-over-year and 1 point sequentially. Operating expenses in total were $19.7 million, up 12% year-over-year and up 5% from last quarter. Much of the increase in Operating expenses resulted from the charge of $1.4 million, related to the accrued expense for the retirement agreement of Mr. Popat -- without which operating expenses would've been $18.3 million, an increase of 5% year-over-year and a decrease of 2% sequentially.

Income From Operations was $1.8 million which included $398,000 of stock-based compensation expense and $143,000 of amortization of intangible assets from the acquisition of Quantiva.

Operating margin on a GAAP basis was 7% for the fourth quarter down 1 point from last year and even with last quarter. On a non-GAAP basis we reached our goal of 12% operating margin which excludes the 5 points of operating margin related to the accrued expense for Mr. Popat's retirement.

Our long-term operating model goal remains 15 to 20%.

Turning now to key balance sheet measures, Cash and Marketable Securities are $100.1 million, up $5 million sequentially, and year-over-year, an increase of $12.6 million. With respect to our share repurchase program during the quarter we repurchased 124,000 shares. And we plan to continue the execution of the buyback program going forward. Accounts Receivable, net of allowances were $18.3 million compared to $16.5 million last quarter and 16.8 million a year ago. Day sales outstanding were 60 days for the quarter, up from 57 days in the prior quarter and above our target range of 45 to 55 days. Inventories were $4.6 million, up slightly from $4.4 million in the prior quarter.

Now for our guidance. We are issuing detailed guidance only for the June quarter today. We expect first quarter revenue to be in the range of $26 million to $27 million. This revenue guidance is down slightly from our fourth quarter results in recognition that, historically, our first quarter is seasonally weak. However the guidance range projects year-over-year growth for the quarter of 10 to 15%. We expect net income per diluted share to be in the range of $0.05 to $0.06 which represents a 25 to 50% increase year over year.

In addition, for fiscal year 2008 we expect annual net income per diluted share to grow by 40% or more versus our GAAP results in fiscal year 2007.

This is the conclusion of our guidance. We plan to provide further guidance at the end of each quarter in our succeeding conference calls. We do not plan to disclaim any obligation to provide updates for this information even though our expectations may change during the quarter. And now Anil and I will be glad to take your questions.

Please go ahead.

(OPERATOR INSTRUCTIONS)

Peter Jacobson.

Start with the mention that the June quarter is typically seasonally weak. It appears to me that that was definitely the case a year ago. If I go back two years ago to June of '05, 1Q fiscal '06 looks like there was a sequential improvement in the June quarter. Can you just give us a little more description as to why you think that would be seasonally weak and what is going on that would cause that when typically a calendar first quarter, the March quarter is -- I would say generally -- is more often a weak quarter rather than a June quarter?

Our -- the typical technology buying patterns that we experience along with everyone else which has December as the strongest quarter and typically June is the second strongest quarter, are overlaid in our case by our fiscal year which corresponds to our quota year. And because the March quarter which is our fiscal year end -- the one we just ended -- is also the end of our quota year, it gets a lot of attention from our sales force as you would expect.

That's if the sales claim is designed to promote quota attainment and exceeding quota and that of course happens at the end of the year. So we have an overriding dynamic that causes the March quarter to be strong and sort of the offset to that is, it causes what is normally a good technology buying quarter in the enterprise space in June to be weaker for us. Because that's the beginning of our quota year.

And we've experienced that in our order flow for some time. Often we are -- we buffer that. Able to buffer that with -- by coming into the year with some backlog of orders, modest backlog of orders. But we can't always do that. We are now guiding to a June quarter revenue target which more closely reflects our order flow, inherent quota year order flow than we have in the past. And you saw that as you said a year ago.

You've indicated you are providing guidance for the fiscal 1Q but it sounded like you also gave guidance for at least 10% year-over-year revenue growth in FY '08?

Yes. That's -- we think we can achieve that kind of full year revenue growth. But our real guidance target is the 40% EPS target that we talked about for the full year and if we for some reason we're not able to achieve the 10% revenue growth our plan would be still to hit the 40% EPS target.

And it looked like the -- at least based on my numbers -- it looked like the Sales and Marketing expenses were a little higher than I had estimated in the March quarter. And I think you had indicated that you had reached your target level in terms of hiring new salespeople. Can you tell me a little bit about the dynamics on that line item?

Yes. We have essentially reached the target for salespeople. We were successful in adding about 10 salespeople during the year; and so part of the growth throughout the year was due to the increased compensation expense for those people. But the real driver of our higher Sales and Marketing expense in the fourth quarter was the end of the quarter year phenomenon that I mentioned earlier.

Our sales plans are as so many -- as many are -- designed to pay accelerators or higher commission rates for exceeding quota. And when we have a successful year, as we did, and a number of salesmen exceed quota, some of them substantially then the expense will go up. Now what we try to do is we try to anticipate that throughout the year and in our accounting for sales compensation. But invariably our estimates early in the year are not completely right and so this year we had some additional expense at the end of the year.

That is what caused that uptick in Sales and Marketing. It's basically good news.

Then my last question. You mentioned that three of the five wireless providers -- service providers are customers. Of the three were any of those signed in the March quarter?

I don't think it was in March. It was the previous quarter, yes.

We didn't have any new customers. Those customers were all -- one of them came in during as Anil said, during the fiscal year, but they were all -- we had been working on them for a long time. As you know, these wireless carriers that the sales cycles are long and the relationships are very, typically, very robust. So we are just getting started with them.

And also, Peter, as we talked in the previous calls that the initial order is not necessarily the largest order with them.

(OPERATOR INSTRUCTIONS). Scott Zeller.

Can you tell me, from a competitive standpoint you've given some color on Network General again. But anything you could tell us about perhaps maybe a mid tier type solution perhaps trying to become more aggressive at the high-end where you are?

I think there is in terms of the solution -- I mean, there are mid tier companies in sizes but really I mean the direct competitors like we said in the past, we feel there are two types of competition. One is direct competition where people try to use the same techniques to solve these problems for performance problems. But we have a technology advantage. When we talk about competitive wins, we typically talk about them with Network General being the bigger one.

All the rest of them are small private companies, but we also have competitive wins we don't necessarily list in this, which are among people who really solved the problem through different techniques. And maybe that is what you are referring to mid tier solution which basically is not using the full probes or application fabric monitors that we have but using the instrumentation already in the network instead of a separate device.

So I think, basically, there is really no one big company other than Network General we can cite in either the midsized company direct competitor or mid tier with indirect competition.

And then on the larger deals, you had mentioned those that are over 1 million. I believe it was 6. Can you tell us if there were any 10% customers?

In the quarter?

Yes.

Yes. We had one 10% customers in the quarter.

Could you disclose the deal size?

It was substantially greater than $1 million. We are not required to disclose the 10% customer in the quarter by name. So we are not going to do that here, but it was noticeably above $1 million.

Then on the international sales effort, I believe it was up quarter-to-quarter percentage wise. Could you give us an update on -- or just colorwise, how that's progressing? In the field?

Well, we got some significant uptick in Asia as we mentioned this quarter and we think that there is significant opportunity in Asia. We are -- particularly in the wireless space where they have very large carriers and are -- we are just basically getting started and taking our solution to them.

We have expanded in our coverage in Asia. That was part of our sales force expansion that we began last year. And some of that is beginning to pay dividends. Plus, we have been working in China in particular really now for a couple of years; and some of those relationships are starting to mature. Both financial services and government and just beginning wireless carriers. So we are very encouraged by that.

Europe is a little less of an even success story. We are having good success in some of the areas in southern Europe and in western Europe and we are still working on penetration -- further penetration into Eastern Europe. But we have high expectations for that effort in the future.

Last question. Do you think that the effort in EMEA will require just more partner networking? Or will it require more NetScout employees on the ground, do you think?

Probably both. Much of our opportunity in Europe is in wireless service providers and certainly with the wireless, large wireless carriers it's necessary for us to put NetScout employees in front of the customer. With other kinds of customers increased -- as we always try to do developing new reseller relationships, increased reseller relationships will be effective. But much of our large customer base in Europe requires NetScout employees.

Eric Martinuzzi with Craig-Hallum.

Good afternoon and congratulations on a strong finish to the year.

My question has to do with the product service mix. If I go back to your fiscal year ended 2006, it was about 65/35. Based on the Q4 numbers here it looks like 2007 was 62% product and 38% service. Where do you expect that to finish out for 2008? Do we get the growth in product faster than the growth in service? Do we get back to 65/35?

Well, we don't -- it's a little hard to predict and we don't really include that kind of stuff in our guidance. But as -- so I can't answer your question to the percentage point, Eric, but directionally, yes. We would expect product to become a bigger proportion of the revenue mix in 2008, as revenue growth accelerates from the 5% year-over-year growth that we saw in 2007. And it could approach that level, but we don't really predict it in that way in our guidance.

Then second question, Q1, a year ago, the June quarter was a bit of a disappointment. We got basically a -- I don't want to say an easy comp because it's never over till it's over, but I would imagine that September would be more of a challenge for you. As you talk about this 40% EPS growth, I assume that's a full year basis not a quarter by quarter basis?

Yes. That's full year. We are not saying every quarter is going to be evenly 40% above the last.

Then shifting over to sales force productivity that the folks who came aboard in June, it sounds like they were -- they did contribute here in Q4. Is that correct?

Yes. Yes, they have started to come online. As we talked about in the past, even an experienced network technology salesperson takes three or four quarters to really start to be able to deliver -- and sometimes more than that, depending on the customer territory, the customers in the territory, the size of customers. So yes. But they have started to come online.

And could you give me the numbers on them, quota bearing sales reps that you have finishing out the year?

Sure. We ended with 57 and we began with 46 in the year. Not the quarter. With 46 so there's (multiple speakers)

And your expectation for coming up the June is that -- does that number change?

Will we had a little bit of hiring still to do. Not much. So slightly up. We would hope that and expect that nothing like the 20% growth we saw last year.

[Kevin O'Boyle] with [KCO Investments].

I also would like to add my congratulations to the nice finish to the year.

Thank you.

Following up on the sales force question, I believe you saw a dip in the number of reps from the September quarter to the December quarter from 57 to 53. I was wondering if you could explain why that happened?

There was no single explanation. I mean, general explanation. We had some departures. Most of those departures I think about -- I think all of those departures were mutually agreed and so it wasn't a mass exodus from one area or another. The sales process is a tough process. We do monitor performance and people who aren't having a good time in our sales process typically choose to. And we agree that it's a good thing for them to move on. We don't have that happen an awful lot. Most of our salespeople do very very well.

But that's kind of what happened. It just so happens that a number of them came together at the end of the quarter in the third quarter. So we didn't backpedal them before the end of the quarter.

Had that happened at the beginning of the quarter the number probably wouldn't have been down the way it was. That's why it came back in the fourth quarter. So that -- I guess long-winded answer to say that sort of an anomaly. You know random "brownie in motion" you might say.

The reason I asked is that, you know, a year ago we saw a sales shortfall because you did have some attrition in the sales force I think nine months prior to that and I know at that time I think it was a mass exodus from the UK or something like that. But I just wanted to understand what gives you confidence (multiple speakers) -- what gives you confidence that that kind of sort of sales hiccup won't happen again?

What was the case then was a sort of change of sales structure is not what's happened here. This is just a couple of random events.

At this time there are no further questions. Are there any closing remarks?

Yes. Thank you. Thank you all very much for coming to our fiscal year end conference call. We appreciate your questions and your attention and your interest in NetScout. We look forward to talking with you again in 90 days at our first quarter conference call. Thank you and have a good day.

Thank you, ladies and gentlemen, for joining today's NetScout's fourth quarter fiscal year 2007 conference call. You may now disconnect.