Netscout Systems Inc (NTCT) 2011 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to NetScout first quarter 2011 operating results conference call. At this time all participants are in a listen-only mode. Later we will conduct a question and answer session. Instruction also be given at this time. As a reminder, this conference call is being recorded. With us today a NetScout President and CEO Anil Singhal he is accompanied by NetScout's Chief Financial Officer David Sommers and NetScout's Chief Operating Officer Michael Szabados. Also with Anil Singhal is NetScout's Director of Investor Relations Cathy Taylor. At this time I will turn the call over to Cathy Taylor for opening remarks. Please proceed.

Thank you and good afternoon, everyone. Welcome to NetScout first quarter fiscal year 2011 conference call for the period ending June 30. Before we begin, let me remind you during the course of this conference call we will be providing you with the discussions of the factors that we currently anticipate that may influence our results going forward. Such statements are forward-looking statements made to the Safe Harbor provision of section 21E and security exchange act 1934 another federal securities laws.

These forward-looking statements may involve judgments and individual judgments may vary. Forward-looking statements include express or implied statements regarding future economic and market conditions, our guidance for fiscal year 2011 and our new product releases. It should be clearly understood that the projections on which we base our guidance and other forward-looking statements and perception of the factors influencing the projections are highly 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 update that guidance otherwise. Actual results may differ materially from what we say today and no one should assume later in the quarter that comments we make today are still valid. For the further discussions of risks and uncertainties that could cause our actual results to differ materially from those set forth and discussed in annual report and Form 10-K for the year ended March 31, 2010 on file with the Securities and Exchange Commission. Also in our discussion non-GAAP revenue excludes the impact of the early adoption of new accounting principles and the purchase accounting adjustments representing the reduction of fair value deferred revenue. non-GAAP net income excludes a non-GAAP revenue adjustments as well as share base compensation expenses, amortization of acquired tangible assets and related income tax adjustments. I will turn the call over to Anil Singhal our Chief Executive Officer.

Thank you, Cathy. Today we are reporting our first market fiscal year 2011 results and I am pleased the results show a substantial stand over the same period last year. The momentum that we saw building at the end of the past fiscal year is continuing into the new year. Fourth quarter GAAP revenue was $66.8 million up 15% year-over-year and non-GAAP revenue was $67 million up 14% year over year. GAAP and non-GAAP product revenue was strong up 20% year-over-year. GAAP net income for the quarter was $7.1 million with earnings per diluted shares of $0.17.

Non-GAAP net income was $8.9 million with earnings per diluted shares up $0.21. Despite revenue down sequentially reflecting the normal seasonality of per bookings. Operating margins by 1 point over last quarter. GAAP operating margins was 17% and non-GAAP operating margin was 22%. I'm pleased to know that our business in the financial services sector maintaining the positive growth trends we have been seeing. Although, the financial industry was a solid contribution overall business last year, it was primarily service and existing installation additions rather than new projects.

This quarter we saw major new projects as financial services presented 40% of total bookings versus last year when financial services average between 25% and 30% of total quarterly bookings. This is a significant increase and we expect the strength of new buying to continue as banking industry recovers. We have been actively building relationship with major outsources where we landed a couple of large orders this quarter. (inaudible) banking government are secure through two of the largest providers of outsource services for data centers and network corporations.

In the quarter we continue to build vertically for focused sales coverage for the wireless world wide market in North America and Europe. This is proving to be successful. We continue to see solid growth with global pier one wireless service providers while we establish a presence in managing their IP services. We are expanding the pier one success with a dedicated focus on providers in North America.

Finally, I want to give you a quick update on our expanding fiscal partnership. We talked about availability of our nGenius integrated data software that runs on the Cisco integrated services platform. We have had a number of successful early filed drives that have turned into orders and we are currently in the design stage with a number of customers for large-scaled deployment. To facilitate this process we are working with Cisco to drive away less and to integrate our product in the customer deployment. Beyond that, we have decently lunched a number of important new products that will target for particular markets including products focus on this growing provider sector. Michael will provide more details on this.

Thank you , Anil. We have been working on number of key initiatives that are providing us a platform for further growth in fiscal year 2011 and beyond. I will provide you with brief comments regarding some of our key products releases we announced in the quarter. At the end of June, we began shipping the engineer service delivery manager software, which has greatly extended our service management capabilities.

The release of technology leadership by providing integrated end to end view of service delivery, enabling customers to better support delivery of critical business applications. nGenius Service Delivery Manager provides business integration that can be used by application managers, data center managers, security teams, business mangers and the network corporation staff. nGenius Service Delivery Manager, delivers and intuitive logical view of a service and is supporting infrastructure elements.

It provides performance metrics and the ability to drill down to access performance problems and quickly make actionable decisions. The product has broad ability to both enterprise and service provider customers providing proactive assessment and management of the operation. In June, we announced our nGenius trading intelligence software, the purpose built for financial service sector. The unique functionality that provides real time and to add invisibility into order flow and fade execution performance for high speed, high frequency trading environments.

Highly precise measurements that interrelationships involving trade transactions and quarterly hand-offs providing accuracy of frequency at each point in the transaction cycle from the traders consol to the trading platform and back. Our solution simplifies correlation and analysis of performance for complex trading systems, eliminating the need for time-consuming and costly programming effort.

The product has been in trials and in a number of exchanges and is expecting to be shipping into grand quarter. It is worth highlighting that the Gardner Group recognize and that has an introduction of engineer trading intelligence, trading our entry into this market that has mostly been addressed to date. In this report, Gardner noted, quote, "That's got likely grow rapidly in the space, given the size of the market share install base and the general high regard with which the industry holds its interesting technology", unquote.

This report is available publicly on Gardner's website. Another important new product release was a high performance nGenius InfiniStream 7900 series appliance. The new appliance extends our industry leading interesting technology with increment performance in high demand environments such as the mobile wireless core and cloud-base data centers. The new InfiniStream appliance offers much more expansion in 32 terra bytes increments and storage capacity to 9600 terra bytes.

As NetScout continues to grow at a blinding pace we have already seen purchases by a number of our service provider customers. As you can see this quarter has been significant in terms of new product and solutions capabilities. Focused on continuing to build on our market and technology service management by addressing the challenges of both the service provider and the enterprise market. I would like to turn the call over to

Thank you, Michael. Our quarterly results are in our earnings press release financial statements. We reported our results on a GAAP basis as well as non-GAAP basis. Our non-GAAP results eliminate the gap purchasing accounting effects of acquisitions by adding back revenue related to deferred revenue valuation -- reevaluation and removing the amortization of acquired tangible assets . In addition, we remove the GAAP effects of stock based compensation and our early adoption of new accounting principles that I will discuss in more detail in a moment. The differences between GAAP and non-GAAP are disclosed in reconciliation tables in the financial tables attached to the press release.

We believe these adjusted financial measures will enhance your overall standing current financial performance and are prospects for the future. We use these adjusted financial measures internally for the purpose of analyzing, managing and forecasting our business. Starting this fiscal year we've adopted, along with many other companies, a new revenue accounting policy that will begin to materially affect our revenue recognition in the second half of fiscal 2011. As we discussed last quarter for most of our product sales this will result in minimum change to revenue recognition.

Our hardware products, like the InfiniStream, will fall under the new guidelines but we anticipate that revenue impact will be slight. For our software and appliance software sales we anticipate that in the second half of fiscal 2011, we will begin rateable recognition over the term of the maintenance period sold with the software. This will result in slower recognition of software revenue than what we would recognize under the current the rules and therefore lower period revenue, particularly during an initial phase-in period of four or more quarters. We are reporting to you revenue and earnings based on both methods of accounting during the phase-in period until rateable recognition is fully established in our results.

Throughout fiscal 2011 we will report current and historical GAAP and non-GAAP results. In our press release and in this conference call I will be discussing current GAAP and historical non-GAAP. The historical GAAP and current non-GAAP were presented as part of a financial summary table in the press release for comparative purposes. Accordingly, the results discussed now are presented in GAAP under the new current accounting standards and non-GAAP under the former historical accounting standards. At a future date we will discontinue reporting of historical GAAP as a reporting rules allow and discontinue historical non-GAAP when non-GAAP reporting under the new accounting standards becomes more meaningful in the understanding of NetScout's results operations. And now at last to the financial results. For the first quarter GAAP revenue was $66.8 million up 15% year-over-year.

Non-GAAP revenue was $67 even million dollars up 14% year-over-year. Product revenue on a GAAP basis was $34 million and non-GAAP basis $34.1 million. Both GAAP and non-GAAP were up 20% year-over-year. Service revenue on a GAAP basis was $32.8 million up 11% year-over-year. On a non-GAAP basis service revenue was $32.9 million up 9% year-over year. Our GAAP gross profit for the quarter was $52.2 million. GAAP gross margin was 78% down1 point year-over-year. On a non-GAAP basis gross profit was $53.5 million, gross margin was 80% down 1 point year-over-year. GAAP income from operations was $11.6 million.

GAAP operating marginal was 17% up two points from a year ago. GAAP net income for the quarter was $7.1 million yielding earnings per diluted share $0.17 and GAAP net after tax margin was 11% up two points from a year ago. Non-GAAP income from operation was $14.4 million and operating margin was 22% up 1 point from a year ago and a couple points below our target operating margin. Non-GAAP net income was $8.9 million or $0.21per diluted share.

Non-GAAP after tax -- net after tax margin was 13% up1 point from a year ago. The non-GAAP adjustments to our GAAP results are summarized in the reconciliation table included in the press release. The provisions for income taxes is recorded based on full year effective tax rate of 38% on a GAAP basis. We use the statutory rate of 38% to tax effect non-GAAP adjustments. Our current long-term operating model remains as follows, non-GAAP gross margin 78% to 81%, R&D expense to revenue 13% to 15%.

Sales and marketing expense to revenue 33% to 35%. G&A expense to revenue 6% to 8% yielding and operating margin range of 24% to 27%. In the future, as we invest in driving revenue, we expect that higher revenue levels will be required to our achieve target margin range. Our balance sheet strengthened significantly during the quarter. Cash, short and long term marketable securities set a record high of $191 million up $20 million in the quarter an increase of $49 million year-over-year.

Free cash flow was 28 -- 21, sorry. $21.8 million. CapEx was $2.8 million. Depreciation $2.6 million and amortization required intangibles $1.5 million. Long-term marketable securities include investments and option rate securities valued now at $25.1 million. During the quarter $4.3 million of option rate securities redeemed at par by the issuers. As of June 30, 2010 the value of securities include, sorry 2011, includes a decline -- temporary decline in value of $3 million below par to reflect liquidity concerns.

All these investments have investment grade ratings ranging from aaa to single a with underlying support by the federal government through the federal family education loan. We believe they have no credit issues only short-term liquidity. We have classified these securities as long term on our balance sheet and recorded the temporary decline in value to accumulated other comprehensive loss on the balance sheet.

With our strong cash position and positive cash flow the liquidity securities poses no liquidity problems for us. Accounts for receivable net allowances was $40 million down $66 million last quarter and up from $29 million a year ago. Sales outstanding was 53 days for the quarter within our typical DSO range of 45-55 days. This is down from 81 days in the prior quarter and up from 43 days last year. Inventories were $9.9 million up from $9.2 million in the prior quarter and up from $7.3 million a year ago. Inventory turns were 2.2 times.

These turns are seasonal low as year end inventory buildup carries over into the first quarter lower revenues and cost. Turning to other metrics, revenue contribution from direct customers was 47%. Reseller revenue was 53%.Revenue from international sales was 20% of total down 1 point from last year. Europe delivered 9% no change from last year. Asia was similar unchanged at 4%. Other international sales were 7% down 1 point. Summarizing large deals in the quarter, 102 customers gave us orders over $100,000 flat with Q1 last year.

25 customers were over 500,000 up five customers from last year and eight over $1 million orders of which four were from telecom, four from financial services. Last year we received 7 million, $1 million orders. We saw bookings from the following sectors in the quarter, financial services up significantly at 40%, Telecom was 22%, Government 16%, Healthcare sector was 7% followed by manufacturing at 4% and high-tech at 3%.

Our Telecom bookings included another significant win with the same US wireless carrier that topped our bookings last quarter. Total bookings in Q1 were $54.5 million up $4.1 million or 8% year-over-year. New business bookings were $44.1 million up $9.1 million over last year or 26%. This strong growth in new business continues the trend of last two quarters and we believe is an indicator of future growth. Service contract bookings were $10.4 million down $5 million or 32% year-over-year. The Q1 renewal bookings declined by the early renewals that we talked you about before in Q3 and Q4 from last year, a pull ahead of renewals from Q1. Product back logged at the end of Q1 remains immaterial, deferred revenue was $91 million up $16 million or 20%, 21% year-over-year.

And now to guidance. As I mentioned we adopted new accounting principles related to revenue recognition we are reporting GAAP and non-GAAP results under the new standard and we've disclosed what our results would have been under the previously applied historical standard for comparison with prior periods in the reconciliation tables attached to the press release.

We are raising fiscal 2011 guidance for both GAAP and non-GAAP in order to account for the small one-time recognition in the first quarter of additional revenue, resulting from training and consulting contracts that were passed expiration. Under the current accounting rules GAAP -- NetScout now expects GAAP revenue in the range of $279 million to $296 million and GAAP net income per diluted share in the range of $0.74 to $0.83.

Under the historical accounting rules NetScout expects non-GAAP revenue to be in the range of $281 million to $298 million a growth of 7% to 14% year-over-year and a non-GAAP net income per diluted to be between $0.96 and $1.05 a growth of 12% to 22%. As I mentioned last quarter, we expect that pattern of quarterly results -- revenue results will mirror those of fiscal 2010 because we enter this year with a minimal backlog as we did in 2010. The consequence of that is our revenue results will closely reflect our normal booking seasonality as they did last year.

At the EPS level, we expected greater skew in the quarterly results than last year, that is a greater difference between the level of quarterly EPS between the first half of the year and the second half than the case of 2010 because. This is because of front end loaded hiring in engineering in sales that will push most of the full year EPS growth into the third and fourth quarters.

Fiscal year 2010 non-GAAP revenue expectations before and after accounting change excludes the purchase accounting adjustment to fair value of approximately $100,000 of deferred revenue and non-GAAP net income per diluted share exception excludes that deferred revenue plus purchase accounting adjustments as well as share based compensation expenses approximately $6.3 million, amortization of acquired intangible assets of approximate $5.9 million and related impact of those adjustments on the provision for income taxes of $4.7 million. That concludes our financial discussion this afternoon. We appreciate your attendance and we look forward to your questions. Christy, would you go ahead,

(Operator Instructions). Your first question from Mark Kelleher from Brigantine Advisors, your line is open.

Thank you. Congratulations. Very nice quarter. I wanted to look at the verticals. If you look at Telecom the bookings of 22% seems a little light compared to the 30% of bookings over the last couple of quarters. Was that just -- they got overwhelmed by the financial strength in financial and could you also talk about the government? We have been hearing some weakness with federal government, could you give us expectations there? Thanks.

Thank you, Mark. First on Telecom we saw last year Telecom performance, although it grew as strongly, was uneven. In fact. in the first part of the year we experienced weakness in Telecom then huge strength at the back end of the year. So we continue to see this lumpiness in the Telecom business. The relative likeness as a share of our overall bookings of Telecom this quarter isn't a precursor of continued likeness going forward. Just really a matter of lumpiness. We continue to expect to penetrate the Telecom space as some of our new product announcements that Michael talked about we think anticipate. So just lumpiness on the Telecom side. Our government performance year-over-year was down. Last year, you may recall, we had a very unusual, for us, very strong June quarter, particularly in the federal government, and actually it was stronger in June than September a year ago, which was highly unusual. There was some artisans artifacts that caused that one large deal that came in the end of June instead of the beginning of July of which that the pattern would have been reversed. We have seen less strong business from the government this year in June than we had hoped. We expect that business will come back in the September -- will be there in the September quarter. We and be there in the September, in the September quarter. We just didn't close the business that we might otherwise have closed but it's still there. And we continue to expect improved performance over June quarter in the federal business.

Thank you.

Your next question comes from Alex Kurtz, Merriman & Co. Your line is open.

Thanks for taking the questions. First Dave, I wanted to give you the opportunity just to clear the air on what the consensus the street, the sell side should be thinking about as far as using the historical versus the current as far as what should be published.

Historical, please. Historical non-GAAP. If you'd like to talk about why that is, I'd be glad to but just for the sake of brevity, historical non-GAAP.

Only for the sake of brevity. Just to clarify Mark's question around government because he had two competitors over last couple of days, David, that have seen some problems in government. Is your government business really concentrated within a couple of agency's and a couple of departments or really broad-based and more susceptible to broader slowdown there?

We are mostly concentrated in defense and much of our concentration and defense is in war fighting areas so we tend to be less so far sensitive to government spending constraints. We have been working on penetrating the civilian side but that's less well developed than our defense business. We also are starting to get traction intelligence but that again is less well developed than our defense business. As long as the war spending priorities continue, we would expect that the core of our federal government business will be fine.

And some commentary of what you're seeing within governments in Europe last quarter and what's tracking this quarter?

Let me pause for a second. Government spending in Europe was weak. Relatively small numbers and so hard to draw significant conclusions from that. I mean in the context of our total bookings really small numbers from European governments, so probably not a good metric to take away but they were down.

And just last question obviously a good start to the year. Seems like finances doing well. What's your sense of enterprise right now, David, and what's the feedback you're hearing from your sales force channel working on that segment? That was a head wind last year. Starting to see an improvement there yet?

Not so much in this quarter's results but the pipeline and expectations going forward. We are starting to get the sense that improvement is coming but we haven't really seen it yet. Outside of financial our enterprise results this year were pretty flat on new product, on new business with last year. Last year, of course, was depressed so flat isn't good. So enterprise is still weak. We are starting to see signs and hear indications that it may be improving. As we've said before, corporate America certainly, and where most of our enterprise business is concentrated, is producing good earnings, not much revenue growth and not much hiring. Certainly the large companies, the largest enterprises that we sell to and so once we start to see pick up in hiring, that's an indication of confidence that should spill over into capital spending we haven't quit seen yet but we think it's coming.

Thanks.

Thank you.

(Operator Instructions) Next call from Eric Martinuzzi from Craig-Hallum. Your line is open.

Thanks. Just revisiting last year seasonality. I want to make sure I have the right starting point for Q2. Last year you were up low single digits sequentially. Is the starting point than for this year we would take the $67 million back off the $1 million and start from there as we modeling September.

That's a good approach. Yes

Okay. And then on the product side, maybe this one is for Michael, two questions on the product just for the InfiniStream. I'm just curious, what do the service providers get that they didn't get before? I think InfiniStream more of forensic tool and I'm curious what the pull is there for the service provider? Than one more after that on the trading.

InfiniStream is certainly more than a forensic tool. InfiniStream provides real-time monitoring capability. A super set of the legacy proposition and recording proposition and so for service product used as a combination of both and a lot of value in their network operations in following the development of traffic on a fairly high resolution basis looking back, maybe over a past day or so minute by minute basis by application and so on and something is going awry then they defer to our data and see how does it correlate with a change in traffic pattern. There's a lot of monitoring value that involves processing and not just storage. And the next generation or 7900 that I talked about provides officially higher performance and more storage and high-performance both in terms of terra bytes per second than in terms of recording so that --

More about deployment of assets in support of demands as opposed to billing application.

Right. And what it is it enables us to grow with the traffic as everyone knows I'm sure on the call, mobile traffic has been growing dramatically even by smart phones mostly. And these interfaces where we are sitting growing fast and so this next generation platform enable us both to upgrade all the deployments and to also go into new accounts.

I just wanted to add there are three other big users of InfiniStream beyond forensic especially in the service provider. One is end user experience. Business intelligence and target subscriber visibility. All these are very important and we announced the product Sniffer Intelligence last quarter or before that, That was to cover that, so subscriber intelligence has a model and InfiniStream also to provide three additional functions which I talked about.

Okay. And lastly the trading intelligence capability, who are your competitors, you mentioned smaller players?

I would give you one. Corvil has been selling on both sides of the Atlantic, but relatively small players. Not much more.

Can you say the name?

Corvil, c-o-r-v-i-l.

Okay.

It's a British company.

Thank you very much.

Your next question comes from Kyle Norton of Wunderlich.

You have answered all the questions. Thank you.

Thanks, Kyle.

Your next question from Richard Todaro at Kennedy Capital . Your line is

You guys gave guidance which I appreciate. Can you give any color on how we should think about bookings, growths year-over-year this year?

Well, yes. So we are guiding up revenue on a non-GAAP basis plus or minus from around 10%. And bookings in order to support that have to grow faster than that. We don't guide bookings so I can't give you specific numbers but the bookings have to grow faster than that and you may know, Richard, that we have in the past talked about high teen growth rates and that once we reach steady state would have to apply to both bookings and revenue.

I don't know if I have this math right but in the past four quarters looks like a 21% run rate of bookings year-over-year. Eight last quarter, 13 quarter before and 40. I'm just trying to decipher the trailing trend versus maybe what you're thinking going forward.

The numbers I just quoted to you were long-term growth target numbers. Off the depressed numbers of the economic downturn we are growing faster than that. I think that is true of other companies as well. A bunch of what's happening in terms of bookings has been service maintenance, renewals that we talked about in Q3 and Q4 that are future revenue but very important to us. The new business numbers that we talked this time and in previous quarters are more long-term indicators of growth and we have been growing faster than the numbers that I mentioned to you but part of that is pentup demand. We saw that as we talked about financial where we were at depressed levels a year ago and now we are starting to see new projects that deferred and to some extent coming back stronger and faster than they would in the normal course of events. So we think there's going to be a temporary app's performance on bookings and caused by those phenomena alone and to be replaced by normal growth rate driven by our product innovation and expanded sales force and market penetration.

You said deferred revenues were up-year-over year. When I looked at the balance sheet it looked they were down. Did I miss something?

You may be looking at Q4 year end balance sheet versus Q1 and that's down and that's seasonally what happens to us in Q1. What I was referring to in the balance sheet was Q1 a year ago versus Q1 now. We are shifting to a year-over-year quarter analysis because with our seasonality now, which we experienced really at revenue financial performance for the first time strongly last year because of what we experienced for the first time strongly last year and experiencing we expect to experience again this year we think is more meaningful in terms of trends in our business. But you're right March year end balance versus June balance we were down $9 million of deferred revenue, we are changing that.

That makes since. And just one last question, on that wireless business, I'm really interested in this area, how do you feel like you're progressing market share versus the competitors? Do you feel like are you continuing to gain market share, using you on a wide scale yet or using you in applications? Trying to get a feeling for how you are doing and excluding in this wireless market you're going after.

Thus far in the quarter you felt good about the wireless segment. In particular your question about us gaining market definitely winning. And definitely an extension or foot print of the accounts on farther out to the network from the core which is where we started. So those trends are positive in our assessment.

Are you guys seeing multiple carriers start to look at using similar solutions like maybe At& t today are using it and now Sprint needs to use it in the same fashion?

Similar requirements everywhere. I think we mentioned in the previous cause we are working, we are working with all major carriers in the US and some big ones in Europe.

A lot of similarity.

Short answer to your questions, yes.

How big do you think this wireless opportunity could possibly be in relation to the overall size of the company today?

I think it's hard to guess exactly but we could double over service provider business over the next couple of years. And opportunity.

Clearly the wireless is the fastest growth sector that we address today.

And are the margins and the wireless products better or worse than the rest of the sectors?

The products we sell to the wireless sector are the same as the products we sell to the enterprise and financial sectors. Some software modules we talked being targeted specifically but in terms of margins the hardware products are the same, the InfiniStream products are the same. Now the service providers tend to buy the very big ones and enterprise tends not to buy the very big ones but the margins across the product line are reasonably uniform.

Thank you. I really appreciate it.

(Operator Instructions) there are no further questions in queue. I turn the call back over to the presenters.

Thank you very much. We appreciate your interest, attendance and questions and we look forward to speaking with you again at the end of our next quarter. Have a good evening.

This concludes today's conference call. You may now disconnect.