Ladies and gentlemen, thank you for standing by, and welcome to NETSCOUT's First Quarter Fiscal Year 2022 Financial Results Conference Call. At this time, all parties are in a listen only mode until the question and answer portion of the call. Fiscal 2020. As a reminder, this call is being recorded. Tony Piazza, Vice President of Corporate Finance and his colleagues at Net Scout are on
the line with us today.
I would now like to turn the call over to Tony Piazza to begin the company's prepared remarks.
Thank you, operator, and good morning, everyone. Welcome to NETSCOUT's Q1 fiscal year 2022 conference call for the period ended June 30, 2021. 20. Joining me today are Anil Sankal, NETSCOUT's President and Chief Executive Officer Michael Szabados, NETSCOUT's Chief Operating Officer and Gene Bua, NETSCOUT's Executive Vice President and Chief Financial Officer. There is a slide presentation that accompanies our prepared remarks.
You can advance the slides in the webcast viewer to follow our commentary. Both the slides and the prepared remarks can be accessed in multiple areas within the Investor Relations section of our website at fiscal 2019. Moving to Slide number 3, today's conference call will include forward looking statements. These statements may be prefaced by words such as anticipate, believe and expect and will cover a range of topics that are not strictly historical facts such as our financial outlook, our market opportunities and market share, key business initiatives and future product plans, Actual results could differ materially from those forward looking statements due to known and unknown risks, uncertainties, assumptions and other factors, which fiscal 2020. On this slide and in today's financial results press release as well as in the company's annual report on Form 10 ks for the year ended March 31, 2021, on file with the Securities and Exchange Commission.
NETSCOUT assumes no obligation to update any forward looking information contained in this communication or with respect to the announcement described herein. Let's turn to Slide number 4, which involves non GAAP metrics. While this slide presentation includes both GAAP and non GAAP results, Unless otherwise stated, financial information disclosed discussed on today's conference call will be on a non GAAP basis only. The rationale for providing non GAAP measures along with the limitations of relying solely on those measures is detailed on this slide and in today's press release. Reconciliations of all non GAAP metrics with the applicable GAAP measures are provided in the appendix of this slide presentation, in today's earnings press release and they are also on our website.
I will now turn the call over to Anil for his prepared remarks. Anil?
Thank you, Tony. Good morning, everyone, and thank you for joining us. Let's begin on Slide number 6 with a brief recap of our 1st quarter non GAAP results. We had a solid start to the fiscal year. 1st quarter revenue increased more than 3 20 while contributing to our strong diluted earnings per share performance.
Diluted earnings per share increased more than 17% to $0.20 compared with the same quarter last year. Let's move to Slide 7 for some further perspective as we review fiscal
2020.
In our service provider vertical, revenue grew approximately 10% compared with the same quarter last year. This growth was partially attributable to a large domestic cable operator investing in their 5 gs core and edge environment solutions. We also benefited from an international carrier customer accepting completion of an implementation earlier than expected, fiscal 2020 as we recognized revenue a quarter earlier than planned. During the quarter, we also received a low 8 figure radio frequency modeling order from a Tier 1 North American carrier as they progress their 5 gs network planning. We anticipate that we will be able to complete these projects by the end of our fiscal year.
Within the service provider market, We have started seeing some momentum around 5 gs network advancements globally. Michael will discuss some of these wins during his remarks. Turning to our enterprise customer vertical, revenue declined approximately 1% compared with the same quarter last year. Low single digit revenue growth in the service assurance area was offset by a mid single digit decline in the enterprise Despite the relatively flat overall enterprise and customer vertical performance in the Q1, we see opportunity in this vertical for the full fiscal year fiscal 2020. The ability of our solutions to provide visibility and protection during a cloud transition and in hybrid or multi cloud environments give customers the control and confidence required to innovate.
Some recently launched solutions, which include Smart Edge Monitoring and Omni Cyber Investigator, will help address their visibility and security needs. Our Smart Edge Monitoring solution uses an innovative approach that combines smart data analytics and synthetic transaction testing to assist in early identification and rapid resolution of performance issues to protect the digital experience from anywhere. This unique solution gives IT teams complete visibility and insight to assure the highest quality end user experience fiscal 2019. As our sales team resumes traveling, conduct in person customer meetings and complete proof of concepts that demonstrates the value of our solution in reducing mean time to resolution of issues while saving time and expense. Fiscal 2020.
Potential opportunity emerging in the enterprise customer vertical for 5 gs utilization as enterprises and governments look to leverage 5 gs technology In private networks through network slices and edge. NETSCOUT is one of the only handful of vendors that have both service provider and enterprise knowledge in providing both scale and functionality. This should serve us and our customer well as 5 gs advancements unfold in the future. Now let's move to Slide number 8 to review our outlook. Within our quarter with 1 quarter behind us, we year.
As the world continues to emerge from the pandemic, we remain focused on meeting our customer needs for service assurance and cybersecurity solutions that solve some of the connected world's toughest challenges. As we advance our new service assurance and omni cybersecurity solutions And resume normal customer interaction selling these solutions, we believe sales will accelerate towards the second half of the fiscal year. We also believe we will build greater momentum with our NETSCOUT With Our Board initiative that is focused on expanding our business with existing customers by leveraging our incumbency to access both existing and new budgets, acquiring new customers through new consumption choices and expanding our reach into high value adjacencies such as expanded cybersecurity and big data analytics that can leverage our smart data. We remain committed to delivering within the non GAAP fiscal year 2022 outlook that was provided on our May 6, 2021 earnings call, Which calls for low single digit revenue growth and enhanced diluted earnings per share at the midpoint of our outlook. Jean will recap the numbers during her remarks.
Finally, I am proud to announce that we recently issued our inaugural environmental, social and governance ESG report, which is available in the company section of our website at www.netscout.com. While ESG is a growing area of interest for a diverse set of stakeholders, this principle has always been part of who we are at NETSCOUT. To obtain greater insight into how we think about ESG and our efforts in the area, I invite you to explore this new report and join us as we strive to increase our positive impact on the world. I look forward to sharing our progress with you as the fiscal year progresses. I'll now turn the call over to Michael for his remarks.
Thank you, O'Neill, and good morning, everyone. Slide 10 outlines the areas that I will cover. In the service provider customer vertical, we continue to see some momentum around 5 gs globally. Some customers continue their planning with the AU frequency propagation modeling project, while others are starting initial deployment. During the quarter, we won a couple of low 7 trigger deals in the large domestic cable operator space Internationally, we won a low 7 figure deal with a mobile carrier in Asia related to the core to ramp service assurance visibility for the initial rollout of 5 gs.
We successfully won these deals due to our superior technology, comprehensive solutions and incumbency despite the competitive bid process used in some of these transactions. In the enterprise customer vertical, we continue to gain traction with existing as well as new customers. This customer also deploys our cybersecurity solutions given the unwelcomed interest from bad actors due to the company's trade second, a new customer expects their service assurance solutions to replace an incumbent product to gain superior visibility fiscal 2020. This deal was won during a highly competitive bid process. Both wins demonstrate the critical value for a comprehensive and powerful solution in winning deals 2020 and public cloud brand awareness.
Beyond marketing campaigns, we are also attending leading trade shows to showcase our brand and solutions. Later this month, NETSCOUT will attend the virtual version of Black Hat 2021, and later this year, we will be attending the AWS post presentations addressing the threat of triple extortion being used by ransomware gangs. During these events, We will demonstrate our visibility and cybersecurity solution can be levered, detect, investigate and respond to these threats And reduce mean time to resolution and cost while fostering collaboration between IT and security operations teams. At the AWS Reinvent Conference, we will support our partnership with AWS and showcase our visibility tools that can be leveraged in the cloud environment. That concludes my prepared remarks.
I will now turn over the call to G.
Thank you, Michael, and good morning, everyone. I will review key metrics for our quarter along with our outlook. As a reminder, this review focuses on our non GAAP results unless otherwise stated, and all reconciliations to our GAAP results appear in the presentation appendix. Regardless, I will note the nature of any such comparison. Slide number 12 details our results for our Q1 of fiscal year 2022.
Revenue grew 3.5 percent over the same quarter in the prior fiscal year to $190,300,000 Product revenue grew 14.3% and service revenue declined 3.4% over the prior fiscal year's quarter. The decline in service revenue decreased nonrenewals associated with service provider consolidation and discontinued product lines. Our Q1 fiscal year 2022 gross profit margin was 74.2%, down 0.4 percentage points over the same quarter last fiscal year as inventory associated with discontinued products was reserved. Quarterly operating expenses increased 2.4% from the prior fiscal year, largely due to variable sales fiscal. Diluted earnings per share was 0 point fiscal year.
Turning to Slide 13, I'd like to review key revenue trends for the Q1. In the service provider revenue grew 9.6%, while the enterprise customer vertical declined 1.1%. Approximately 54% of total revenue was generated from the enterprise customer vertical with the remainder from the service provider customer vertical. Turning to Slide 14, which shows our geographic revenue mix on a GAAP basis. Revenue by geography continues to be domestically weighted, but international revenue increased compared to the same quarter in the prior year.
There was no customer that represented 10% or more of revenue in the quarter. Slide 15 details our balance sheet highlights and free cash flow. We ended the quarter with cash, cash equivalents and short term and long term marketable securities of $493,900,000 which is an increase of $17,500,000 since the end of the Q4 of fiscal year 20 21. Free cash flow generated in the quarter was $21,500,000 We currently have capacity on our share repurchase authorization and depending on market conditions, plans to be active in the market. We did not repurchase any of our common stock during the Q1 of the fiscal year.
From a debt perspective, as of the end of the Q1, we had $350,000,000 outstanding on our revolving credit fiscal 2020. On July 27, 2021, we leveraged the favorable financing market environment to amend and extend our revolving 20 quarter. To briefly recap other balance sheet highlights, accounts receivable net was $151,200,000 since the end of March. DSOs were 63 days versus 75 days at the end of fiscal year 2020 57 days at the same time last year. The increase in the DSOs in the Q1 of this year compared with the Q1 of the prior year is primarily attributable to the timing of when orders were received in the quarters.
Let's move to Slide In his earlier comments, we are reiterating the non GAAP outlook that was presented on our May 6, 2021 earnings call. Growth. The anticipated effective tax rate is expected to be between 21% 23% as we incorporate the impact from the recent U. K. Tax legislation change, increasing their tax rate from 19% to 25%.
Expected to be between $1.71 $1.77 The GAAP diluted net income per year range has been updated to account for certain charges, including the impact of the amendment of our revolving credit facility. I'd also like to offer some color on the non GAAP outlook for the first half of the fiscal year. As we assess the opportunities in front of us, we currently anticipate approximately 1.5 percent revenue growth with corresponding mid single digit diluted earnings per share growth compared with the first half of prior fiscal year. That concludes my formal review of our financial results. Before we transition to Q and A, I'd like to quickly note that our upcoming IR conference participation is listed on Slide 17.
Thank you. And I'll now turn the call over to the operator, Scott.
And we will take our first question from Matt Hedberg with RBC Capital Markets. Your line is now open. Hi, this is Anushta for Matt Hedberg. Thanks for taking my question. Could you talk about how the federal vertical formed in the quarter and do you see any benefits as Fed spending picks up?
Well, our big federal quarter is actually the coming quarter and so we have lot of orders in the pipeline, but as always, the federal spending and last minute spend is still up for the graph. So we are looking for a good fat quarter. And normally Q1 is not a good fat quarter, but Q2 is a good flat quarter, being the end of the fiscal year. So, I'm not sure, Deane, what we had in this quarter, but I think big orders for Fed are expected in the coming quarters.
So federal sector this quarter on a quarter over quarter basis was down in the single $1,000,000 of dollars. So ranging from $2,000,000 to $4,000,000 less this quarter than in Q1 of last year.
Got it. And if I could ask one more, did you mention anything on software only mix?
So the software what we've been calling software only, which is the transition of customers from hardware appliances fiscal 2020. Okay.
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Thank you. Thank you. Thank you. Our next question comes from the line of It was 40% in Q1 of last year, which was predominantly due to the financials and government dynamics This quarter versus last quarter. And last year, for the full fiscal year, we ended the software only portion at about 34%.
Got it. Thank you. And we will take our next question from I apologize. We'll take our next question from Eric Martinuzzi with Lake Street. Your line is now open.
On the services revenue, it was down sequentially a little bit more than
I would have
thought. Is that just
a lagging indicator tied to weak product sales a year ago?
Eric, there's a few things going on in there. One is there was a comparison, a difficult to compare of $5,000,000 And they're reassessing their renewals on all of their equipment and how they rationalize their network deployment. And then we've talked in the past some ancillary product lines such as Luke. And as those product lines continue to not be sold, So certain customers do not renew on their service revenue.
Okay. And then how should we think about it for September quarter, is Q1 a base from which we grow?
I would say those dynamics continue at this point into Q2 and that there are programs in place that sales are wanting to re incentivize certain customers as well as just looking at other areas where they flat to maybe down slightly 1% in service revenue at the midpoint of guidance.
Thanks for taking my question.
Sure.
And we will take our next question from James Fish with Piper Sandler. Your line is now open.
Strength across the board given what's going on in the attack environment, much like what we had about 7 years ago now And really some of the strongest budget and talent we've actually come across in a long, long time. I guess why is NETSCOUT not Seeing that strength, is it a competitive thing that the financial institutions specifically are shifting towards others in your space or is it just the flow through of running out of the pipeline from last year? And then, Gene, any way to think about the mix for NETSCOUT with service assurance versus Arbor as well as Arbor enterprise service provider to help us with what's going on with the enterprise harbor weakness here.
James, let me just cover high level and maybe Gene can add some commentary. So this 1 quarter is not the trend. Overall, we think that service assurance Cybersecurity growth for the year will be close to twice the rate of service assurance growth fiscal 2020. So as we talked about single digit overall growth, security growth will be Much, much higher than that. I think it's just the timing.
There are some big deals in different quarters, the 1 quarter trend. So there is no real issues related to what's happening in the competitive environment. It's just the timing of the deals and sometime in Q1 last year may have been better for some reason. But overall trend this year is that we are going to see higher growth than in cybersecurity, Even though some of the new products may not hit the mark if we are not able to do trials because of COVID issues international. Also cyber security is almost much larger percentage of our business is international.
And as you know, we have a lot of pandemic related issues. So overall, you will see that our Cybersecurity growth will be higher than the overall growth and could be as much as 2 times the service assurance growth this year.
Jean, any color on the mix there?
So what I would say is Opera declined this quarter due to mostly the U. S. And financials as you point out. Probably the decline was Again, probably around somewhere between $3,000,000 to $5,000,000 in overall revenue. And as Anil said, it's mostly due Going forward, our focus is on DDoS and there are some new Products coming out, which would include mobile security.
And as we've talked about in the past, Arbor is a Cadillac. So they do well in The large institutions that are enterprise and then they do well in service provider. And then going forward, With the security products that Anil and team are rolling out, the anticipated growth That is probably the difference between the different ranges in our guidance.
Understood. Just one more for me, if you got a sec. One of your networking peers actually out earlier product orders due to supply chain shortages and it does seem like you guys had some more net pull on effect this quarter, Especially as you left guide unchanged despite the product upside here and an 8 figure large deal that we were talking about. Is it fair to think about that net pull in effect of a couple of million and that's kind of the difference between where The Street is here quarter revenue versus in fiscal Q1 and versus fiscal Q2 that we got the upside on?
Yes, I would say it's not related to the supply chain. It is related to one of the Asian providers that has been rolling out their 4 gs network over a few years now and they completed one of their projects involving our solution in this quarter rather than last quarter. And then I'm sorry, this quarter rather than next quarter. And as you stated, it's probably somewhere between, say, $2,000,000 to $4,000,000 that was pulled forward from Q2 over Q1. And so if you normalize for that, where our product revenue grew 14%, If you normalize for that, our product revenue would probably have grown somewhere between 8 around 8% in Q1.
And we will take our final question from Kevin New with Kailu and Company LLC. Your line is now open.
Hey, good morning. Just a quick follow-up on the security side of the business. You've talked in past quarters just about the ability to demo some of these newer solutions. Have you guys seen that start to open up much at all or is there still some risk to being able to trial and get that in front of customers?
Yes. So, Yes, Kevin, there is some risk into that. I just wanted to mention that what our cybersecurity line is 100% based solution right now. So not only we expect to grow that area with some new ideas we have and new way of deploying the product, But we're also adding now non DDoS security to our portfolio, Omni Security. So for the DDoS product line, we are not as much DDoS extensions to the product line.
We are not as much dependent on doing POCs. That was a new additional non DDoS security, which is we are counting on At least toward 2 to meet the higher end of the guidance, as Gene mentioned, called Omni Security. We are counting on POCs. And yes, that could be impacted, but that will be the difference between where we end up in the guidance. So our guidance range assumes these scenarios the worst and best case.
And the big difference is going to be how well we do, How well our traction goes in the face of pandemic, both international and U. S. In this fiscal year.
Got it. Appreciate that color. And just one for Gene as well on the product gross margin side. I think you mentioned inventory reserve taking. I was wondering if provide the size of that and then maybe more generally just talk to whether that was the primary factor in kind of the decline relative to the back half of last year Or if there are other things, whether it's component costs or freight that might be also impacting the margin there?
So the quarter this quarter's product margin is down due to about $1,000,000 of discontinued products that we reserved. I would say the last half year last prior fiscal year was gross margin was probably a little more suppressed by the product mix where we have more calibration revenue, which as you know is lower gross margin overall.
Got it. And then just one last one, just with respect to the Smart Edge Monitoring solution that you guys introduced, I'm curious if that's something that your customers have been asking For a while, more of this is more kind of an opportunity that you identified given some of the hybrid work dynamics that have gone on since the pandemic?
Yes. So, Kevin, so we have announced our Smart Edge Monitoring solution last year and for remote sites. And unfortunately, most of the remote side people went home because of pandemic. So, we got lot of input from our customers fiscal 2020. They are looking for similar capability for work from home users.
So, this now the revised Smart Edge Marketing solution, which we sort of re announced and we had 2020. To the work from home user, which is that if you have IT problem, is it your carrier, is it your cloud provider, is it your laptop Or is it your VPN and we are the only solution in the market. We can quickly do a triage for that. This also requires trials and POCs, but it's still with existing customer and is incremental to our existing solution. So I think, yes, there is a We are counting on some traction in that area in the coming quarters.
All right.
Great. Well, thanks for
'twenty. I will now turn the program back over to Tony Piazza any additional or closing remarks.
Thank you, operator. This