Netscout Systems Inc (NTCT) 2008 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to NetScout's first quarter of fiscal year 2008 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 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. 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 first quarter fiscal year 2008 conference call for the period ended June 30th. The terms of the format of this call, Anil will begin with an overview of our 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 that 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 judgments may vary. Forward-looking statements include expressed or implied statements regarding future economic and market conditions, the company's revenue, profitability and growth and delivering market acceptance of NetScout products. It should be clearly understood that the projections in 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 of 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 includes the specific risk and uncertainties that are discussed in NetScout's form 10-K for the year ended March 31, 2007 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 very strong first quarter results. We saw record first quarter revenues driven by strong bookings. We are particularly pleased with these results given that the first quarter has been seasonably weak quarter. Our revenue at $37.9 million increased 18% year-over-year. This performance was led by product revenue growth of 23%.

Improved operating margins drove earnings per share of $0.08, an increase of 100% year-over-year and an increase of $0.02 sequentially. This great start to our year fiscal year demonstrates that our products are securing market leadership. We have been unwavering in our strategy to drive innovation in the packet [plus] space. We have targeted high-growth vertical markets with new and innovative capabilities in our nGenius solution. We believe our strong results -- of our record results and success of the quarter are directly attributable to changes we made in our go to market strategy in the second half of our last fiscal year.

The changes shifted some of our sales and product focus to aggressive high-growth opportunities in the financial, telco and government sectors. These opportunities are directly linked to solving specific problems in this vertical that have specific budgets associated with them and that could be best addressed by NetScout technology and products. As a result, the quality and size of our sales pipeline has been steadily growing for the last two quarters. In addition, our sales (inaudible) execution and yield from this pipeline has been growing based upon a larger and more seasoned sales force versus a year ago.

In summary, we're not only excited about our excellent result this quarter but also about the fact that the growth initiatives we put in place last year are beginning to deliver on the promise, thus providing us confidence in our ability to deliver double-digit top line growth and improving operating margins that will produce 40% or more earnings per share growth in the current fiscal year.

We look forward to sharing our accomplishments with you in the coming quarters. With that, I would like to turn the call over to David.

Our quarterly financial results, which you can find in the financial statements, are included in our press release. Our first quarter revenue of $27.9 million came in at the top of the revised higher guidance that we released on June 25th. Revenue was up 18% year-over-year and up 2% over the previous quarter. Net income for the quarter on a GAAP basis was $2.7 million, up 95% on a year-over-year basis and up 29% sequentially.

Earnings per diluted share were $0.08, at the high end of the revised guidance range of $0.06 to $0.08. Earnings per diluted share were up 100% over the first quarter of last year and 33% sequentially.

I am also pleased to report that our excellent operating results have been recognized by the national media. NetScout was one of four companies in America to be included in the business 2.0's 100 list, ranking us as the 34th fastest growing tech company in America, and to receive a high-ranking in the Forbes.com, and Forbes.com is one of the top 100 most trustworthy companies in the US for best performance in accounting transparency and conservative corporate governance. NetScout is honored to have been so recognized. These awards are the result of our pursuit of excellent and delivering innovative products to our customers, producing solid financial results and of our diligence in holding to high standards of financial management and transparency for our stakeholders.

I would like to thank all NetScout employees for making this recognition happen. We will continue to set the bar high for ourselves in our quest to deliver high returns to our stakeholders. Turning now back to our financial results for the quarter, revenue contribution from direct customers was 36% compared to 40% last quarter. Reseller revenue made up the balance. During this quarter we added 27 new customers worldwide or 14% of total orders. The rest of our order volume came from 258 repeat customers.

Sixty customers gave us orders of over $100,000 this quarter, including 9 customers with orders over $500,000 and 2 orders over $1 million. One of the $1 million deals came from a large investment banking firm. The other came from a division with very large US conglomerate which will be using nGenius to monitor the performance of all its business critical application systems, both within the data center and throughout the networks.

Revenue from international sales was 15% of total, down from 19% last quarter with Europe at 9 points and Asia at 6. In our vertical markets this quarter we had strong bookings coming from the financial services sector representing 36% of order dollar volume followed by telecommunications at 14% and manufacturing at 12%. The government health sectors followed, each representing 11% of order volume. During the quarter we saw significant strength in competitive wins involving 41 deals totaling $7.4 million against Network General and a number of other competitors.

Turning back now to our financial picture, our gross profit for the quarter was $21.8 million, up 18% year-over-year and up 1% sequentially. Gross margin was 78% in the quarter, flat compared to a year ago and down one point sequentially. Operating expenses in total were $18.9 million, up 9% year-over-year and down 4% from last quarter. Income from operations was $2.9 million, which included $385,000 of stock-based compensation expense, and $111,000 of amortization of intangible assets from the acquisition of Quantiva.

Operating margin was 10% for the first quarter, up 6 points from last year and three points over last quarter. We are continuing to make progress toward our long term operating model, operating margin model goal of 17 to 22%.

Now to key balance sheet measures. Cash and marketable securities are $105.2 million, up $5.1 million sequentially and year-over-year increase of $14.4 million. Accounts Receivable net of allowances were $15.9 million compared to $18.3 million last quarter and $15 million a year ago. Days sales outstanding were 51 days for the quarter, down from 60 days in the prior quarter and within our target range of 45 to 55 days. Inventories were $4.9 million up slightly from $4.6 million in the prior quarter.

And now our guidance. We are issuing detailed guidance only for the September quarter today. We expect second quarter revenue to be in the range of $28 to $29 million. We expect net income per diluted share to be in the range of $0.08 to $0.09. In addition, we are reiterating prior guidance that we expect fiscal year 2008 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 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. Elizabeth, would you go ahead please?

(OPERATOR INSTRUCTIONS) Scott Zeller.

I wanted to ask about the field organization. Have there been any recent changes at all in the way you've done territories or perhaps regional leadership, both for the US and for EMEA?

Scott, we have not really made any changes but obviously some of the new people we have hired over the last year or so have gone to some new territories where we didn't have any presence. But overall we have not done any major changes.

Okay, and wanted to also ask about the analytics products and any color you can offer us on the interest levels for analytics and attach rates.

The (multiple speakers) level is very high, and as you know, we have been making steady progress as we talked about in our product roadmap, there is a new (inaudible) coming up and, but we don't record the revenue by product. Because we really have a single productline and all the business in [probe] and [as1] is driven by VM, performances manager and analytics. So there is a lot of interest, and still there is a lot of work to be done.

Thank you.

One more addition to that, one of those million dollar deals, the conglomerate that I mentioned, was strongly influenced by our analytics functionality. That million dollar deal wasn't analytics by itself, but it was strongly influenced. So we are getting strong interest that is dragging not just analytics, but a lot of other business.

Would you said that was a differentiator versus whoever the competitor was?

It was one of them. It wasn't the only reason, but it was one of them.

Thank you.

Matt Hewitt.

Congratulations on a great quarter. A couple housecleaning. What was cash flow from operations?

One second, we will get that for you. While we are getting that do you have --

Yes, second, you've got now $105 million on your books in cash and just curious what your intentions are with that. And I guess along those lives, did you buy back any shares during the quarter, and where do you stand on the buyback plan?

First of all, the cash question -- the reason for the cash balances remains the same as it has been in the past, which is for strategic alternative acquisitions. And that is why we are continuing to grow it except for the buyback. And as we've said in the past, the buyback is subject to a normal set of guidelines and restrictions as to when we are in and out of the market. And we are pursuing it diligently this quarter. It didn't meet our criteria to be in the market, so we didn't execute any on the buyback this quarter, but you should not interpret that to mean that we are not going to pursue it diligently going forward.

Okay. And then lastly, the conglomerate division that acquired your nGenius product, is that a situation where this first division bought it and they may be rolling it out across other divisions, or was this kind of a one-off, just one division recognized the need?

Well, we always go in -- this is a typical pattern for us -- we go in and establish a success, a beachhead someplace -- this is a pretty big beachhead -- and then try to get that spread around the rest of the organization. This is a somewhat decentralized organization, so there is no certainty that that will be a rapid spread. But it is clearly our intent to do that that. There is no commitment on the part of the customer to do that, but it is clearly our intent. In answer to your first question is $6.2 million cash from operations.

And then the CapEx along with that? Sorry. I'm sorry I should have asked that right away.

Quite right. I know you guys want these answers. We will get that for you in a second.

Trying to think here, there was a slight decline in the gross margin, the percent or so. Is that a trend we should be looking for? Is that a slight decline going forward, or was that just first quarter?

It was actually about 6/10 of a point, 6/10 of a point here or there, or approximate point here or there will happen. It is not -- our gross margin target is 76 to 78%. So 79% in Q4 was actually higher than we think is sustainable, driven principally by product mix. As our product revenue accelerates, which of course it did in Q1, our product because of the hardware components runs at a slightly lower margin than our service, which is essentially a -- there is a labor cost to our service but a lot of it is essentially software subscription and is higher margin therefore. So as that mix shifts you will see the gross margin move around a little bit. But 78% is at the high end of our range, and we are pleased with that.

Fair enough.

And CapEx was $1.2 million.

Excellent. Thanks a lot. Again great quarter.

(OPERATOR INSTRUCTIONS) Ted Levy.

First of all, congratulations on an excellent quarter. Well done. And the stock has performed very well despite those last couple days drop, etc. etc. But just one question and I am pretty logical person in here you said that during the quarter you didn't purchase any shares because it didn't meet whatever requirements that you have in terms -- I don't know if you use valuation or etc. etc. This questions, it sends a signal that you believe -- there is a signal here and I'm quite logical that you believe it is properly priced in this market and you are using your cash in case there is a sharp drop or something when it meets your parameters. It sounds like that is the story. (inaudible) the question in my mind why should I buy the stock although I love your company and I believe there is long-term growth in it, but that is my first question.

And the follow-up because I know the obvious answer, but the follow-up to that is you've got $105 million in cash. It would be nice to shareholders and probably the officers of the Corporation to clear like $0.50 or $1.00 a share; along those lines while the current tax laws are such that dividends are taxed at only a maximum of 15% in case there is a change in administration. I suggest that to the President and all your officers, including shareholders it wouldn't be bad, you got $105 million. $0.50 a share would be $15 million. And then I think that would be a nice participation, a way to participate for the shareholders. Otherwise excellent quarter; but I'm interested in the answer to the question one and also what is your reflections on the dividend question also.

First of all, the parameters on the buyback are in part market-based parameters, but not entirely. So you should not interpret our lack of buyback execution in the quarter either as an indication that we are not going to execute in the future, or that we think the stock is fairly priced and is not going up in the future. Neither one is the case.

It might be useful to point out here that in our -- in the fourth quarter when we executed on the buyback I think our average price -- you can check this in our filings -- $8.45. And although the stock has been slightly higher than that this quarter, not substantially higher, and so we are obviously willing to buy at an average of $8.45.

Okay. I didn't realize that.

And regarding the dividend, we look regularly at the most appropriate uses of cash to provide shareholder return, which is our whole motivation here. It is our judgment at the moment that the best way to provide that shareholder return is to preserve the cash, to invest in acquisitions that will enable us to grow the business even more strongly and provide even better return in the long run than by providing a dividend. But I will register your comment and your request, and we will be sure to discuss it at the next Board meeting.

Sure because if there is a change in administration the tax rates go from 15 to 35 or 40%. You guys that own a lot of shares it would be to your benefit basically to take some money out that way versus and the tax rates are going up. It is in your interest, the management owns a lion's share of the company, and it would bring along the shareholders. So I think it could be some intelligent strategic planning and maybe some institutions that don't buy your stock would be attracted by some sort of dividend and plus -- anyway, great quarter, and continued success in the future. Thank you.

Thank you very much.

Peter Jacobson.

Great quarter, guys. Just was interested in the direct headcount. Has there been a change in that in the current quarter, any anticipated changes in the upcoming quarters? And also any changes in the direct/indirect mix that might be contributing to the sequential increase in fiscal 3Q?

And also more specifically, I'm not sure if you mentioned it earlier, but any comments on the HP comarketing in development? I'm going to go on mute because I have some noise in the background, but thank you for your answers.

Peter, I'm going to need you to come back and refresh me on some of those multifaceted questions. Direct headcount was up about 10 in the quarter, and we are hiring modestly both in engineering and in field organization and sales, and other key areas of pressure, resource constraints in the company. But very limited. We do expect a modest increase in headcount as we go through the year, but it will be at probably a slower pace than the headcount growth we saw this quarter. Can you elaborate, Peter, on the next pieces? I know there is another piece here, your resource question.

Yes, I was interested in are there changes in the mix between direct and indirect channels this quarter or the upcoming quarter and specifically any developments with HP?

Okay, thank you. The channel mix was heavier this quarter. That is really more of an artifact of the large deal dynamics. We expect channel mix to continue to be, revenue continue to be strong as opposed to direct, but that again depends sort of on the mix of which customers are buying. Some customers have channel relationships that they use and some we do business with direct. So it is not going to be a secular increase from where it is in the mix of channel revenue.

As far as HP is concerned, we continue to work with HP. We continue to believe that our work with HP will -- we integrate with HP OpenView and that that work will continue to bear -- show benefits for both us and for HP. But we have nothing more to share with you at this point.

Okay. Thanks very much.

At this time there are no further questions. Do you have any closing remarks?

Yes. Thank you very much for your good questions and for joining us on this conference call; we look forward to talking to you again at the end of the second quarter. Have a good day.

This concludes today's conference call; you may now disconnect.