Ladies and
gentlemen, thank you for standing by and welcome NetScout Second Quarter 2021 Financial Results Conference Call. At this time, all parties are in a listen only mode until the As a reminder, this call is being recorded. Tony Piazza, Vice President of Corporate Finance And His I would now like to turn the call over to begin the company's prepared remarks.
Thank you, operator, and good morning, everyone. Welcome to NETSCOUT's 2nd quarter fiscal year 2021 conference call for the period ended September 30, 2020. Joining me today are Anil Singhal NetScout's President and Chief Executive Officer Michael Zabados, NETSCOUT's Chief Operating Officer and Jean Bua, Netsco's Executive Vice President And Chief Financial Officer. There is a slide presentation that accompanies our prepared remarks. You can advance slides in the webcast viewer to follow our the Relations section of our website at www.netscout.com, including the IR landing page under financial results, the webcast itself and under financial information on the quarterly results page.
Moving on 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 outlook, our market opportunities and mark share key business initiatives and future product plans, along with their potential impact on our financial performance. These forward looking statements involve risks and uncertainties, and actual results could differ materially from the forward looking statements due to known and unknown risks uncertainties, assumptions, release as well as in the company's annual report on Form 10 K for the year ended March 31, 2020. NetScout assumes no obligation to update any forward looking information contained in this communication or with respect to the announcements described herein. Let's turn to Slide number 4, which involve non GAAP metrics.
While this slide presentation includes both GAAP and non GAAP results, unless otherwise stated, financial information 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 described on the slide and in today's press release. These measures should not be considered in isolation from or as a substitute for financial information prepared in accordance with GAAP. Reconciliations of all non GAAP metrics with the applicable GAAP measures are provided in the appendix of the 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 second quarter non GAAP results. We delivered solid earnings per share growth on lower revenue of $205,300,000 compared with the same quarter compared with the same quarter last year. Earnings per share was $0.38 in the quarter and an increase of more than 35% compared with in the U.
S. Federal government sector, which impacted enterprise and its revenue. The quarter benefited from our focus on control as well as pandemic related travel restrictions. Let's move to Slide 7 for some further perspective on the business. In the service provider vertical, revenue grew 4% compared with the same quarter last year.
We continue to work with our service provider domestically and in certain Asian regions. Given that 5G build out is one of our catalysts for future growth, I want to provide some insights to where we see the market right now and how it may go. Currently, many North American carriers have 5G offering utilizing their 4G network. These services are operated on what is called non standalone 5G network. Over time, carriers and others will need to build new the standalone 5G networks to support future use cases and ultimately a larger volume of traffic.
The standalone 5G networks will be tier of virtual installation, given that there will be more distributed attach in order to deliver on the promise of enhanced bandwidth higher speed and low latency to support 5G use cases like industrial automation, telemedicine, autonomous transportation and drones, augmented and virtual reality gaming and the internet of things. Last year, we discussed a few projects we want related to the radio frequency propagation modeling or calibration which is a precursor to 5G as the providers plan out their network based on signal data collected. From a network perspective, although we participate in all visers of 5G evolution from planning, development, deployment and monitoring, we believe that we'll see the largest benefit once the standalone networks are deployed and traffic is flowing over those networks. Therefore, we see 5G as a bigger revenue opportunity for our next fiscal year and beyond. Yet a major R and D investment up.
In the short term, our 5G roadmap investment and leadership will be one of the key enabler for securing our income as the and for driving our 4 g user claim monitoring business. Michael will highlight some of this quarter's service provider money and steering his remarks. In the enterprise vertical, the revenue declined approximately 14% over the same quarter last year. This was primarily attributable to lower spending in the federal government sector in our second quarter, which declined more than 60%. As we have previously mentioned, despite having a solid pipeline of user approved projects in the federal government sector, The timing and magnitude of funding what these initiatives has been challenging to predict in the current environment.
Government revenue from the comparison, enterprise revenue would have grown in the low single digits in the quarter. Even this quarter decline in enterprise, even with this quarter's decline in the enterprise revenue. The vertical has grown 1% year to date as strong performance in our security offerings helped offset muted federal government spending. In this vertical, customers continue to advance their digital transformation, cloud migration and security initiated with even greater urgency as a result of the pandemic and the new normal of operating with remote resources and interacting with their customers in a more virtual fashion as they work to address speed, agility and cost. On the security front, the threat landscape continues to evolve rapidly, and the pandemic has created more opportunities for bad actors disrupt organization given the distributed operations.
Last month, we issued our first half twenty twenty third intelligence report. Which highlighted how cybersecurity criminals are exploiting the pandemic through the radical, through a radical change in the feed of attack methods they are using. The report discussed how Cyber Cream has launched the heartbreaking DDoS attacks on online platforms and other services with Kushal during the pandemic and an increasingly connected work. These attacks targeted e commerce education platforms, financial services, and health care services. These multi factor attacks were shorter, faster, hard hitting and more complex.
These new methods put pressure on security teams as they have left time to react to defend their organization system making the job much more difficult and highlighting the need to have strong VDoS detection and mitigation solution like ours. This dynamic has certainly played on an important part in the strong performance of our security solution in the quarter and year to date. Michael will highlight some of our enterprise events related to these trends during his remarks. Now let's move to Slide number 8 to review our outlook. Our business and operations business as operations have proven to be largely resilient as we navigate the global pandemic and macroeconomics as uncertainty.
This is due to our relevant solutions, trusted brand, strong customer relationships, dedicated team and solid financial profile. That said, we have not immune from the impacts of COVID-nineteen global pandemic. As we evaluate the outlook for the remainder of the fiscal year, we remain cautious given the uncertainty around the pandemic and the resulting macroeconomic environment. These dynamics have cost elongated purchase cycles, make their timing, magnitude, and funding for these difficult to predict, which we anticipate will negatively impact our provisionally stronger second half of the fiscal year financial results. As a result, we now expect fiscal year 2021 revenue to decline in the mid-twosuppersingledigits on a percentage basis compared with fiscal year 2020.
Despite the revenue decline, we are committed to delivering annual non GAAP earnings per share in line with our fiscal year 2020 non GAAP earnings per share as we continue to prudently manage our cost structure. In closing, We are pleased with our ability to serve our customer visibility and security needs while ensuring the safety and productivity of our team as we agree with our and deliver stable results in this tough and uncharted COVID 19 environment. We appreciate the continued dedication and support of our employees and other stakeholders as we navigate the global pandemic. With long term market trends in October such as digital transformation, cloud migration, increased cyber threat and 5g Networks, NetGOT is well positioned as guardians of the connected world when we merge from this global crisis. I look forward to sharing our progress with you as the fiscal year continues to run for.
I will now turn the call over to Mike Delaire for his remarks. To Anil, and good morning, everyone. Slide 10 outlines the areas I will cover. 1st, with customer wins. Starting with customer wins, as Anil mentioned, our service provider vertical has solid growth in the quarter as we continue to see 4G expansions in our international customer base and 5G trials in North America as we await the 5G investment cycle to kick in.
A notable internal 4G win in the quarter a multi year HAW software and support deal for a major European carrier, a long standing loyal customer, that provided mid-seven figures of revenue in the quarter. The investment enabled the carrier to expand their 4 g capacity and positions them to transition to 5 key solutions in the future. On the 5G front, we want to move to mid-seven figure user trial with a Tier 1 North American carrier as they start to explore a standard old, so called 5G network. It is still early days for North American standalone 5G visibility project, but this is a good sign for progress. All these demonstrate the Trucks in our brands the strength and value of our solutions and the importance of our incumbency with our loyal customer base.
In the enterprise vertical, service assurance solutions have continued to be highly relevant and are producing important new logos for us in the financial health CAD and other sectors. During the quarter, volume logo and DOE 1 was with a large domestic medical provider with over 1000 beds and more than 1,500,000 patient visits annually. This was a low to mid-seven figure deal to implement our visibility formed in a fully virtualized employment with extensions into the cloud for this provider's patient management system. The scale and completeness of our solution as well as the expertise of our team honors the deal over multiple competitors with partial solutions. On the international front, another new logo and competitive win was a low 7 figure deal with a major stock exchange that needed a faster and more reliable solution to triage and troubleshoot application problems.
They selected our services for a solution because of our each data source and strong analytical capabilities, which solve the challenges as we replaced a major competitive solution that was falling short from their expectations. Both of these cases, we secured these new customer as a result of our reputation as a trusted leader in service assurance, innovative and reliable solutions, but We have also identified TDAR's opportunities to expand these relationships in these deals as we leverage our cross selling capabilities to our integrated sales team. On the security front, we span both the service provider and enterprise verticals. We can't to explain its growing interest in our ZDoS protection, especially as the sophistication and volume of FX grow quickly, as we outlined in our first half twenty twenty threat intelligence report, which Daniel referenced earlier. During the quarter, we successfully reported extortion attacks, for large U.
S. Customers, prompting even more attention on this space and our solutions sector. This level of protection requires on premise deployments such as our Arbor Edge Defense solution, both for rapid responsiveness and sophisticated layer 7 protection. The demand for our AED based solutions have increased due to the large customer due to large customers redesigning their infrastructure, now settling info for remote work for the long haul after the initial rush to shore up defenses and the pandemic started. This trend is exemplified in the mid 6 with a deal with a large insurance company domestically and the low 7 figure deal with the leading international party exchange.
We are excited about our ability to provide these solutions to our customers, through a Beltran and unified worldwide Salesforce. In terms of go to market activities, We continue to build our vendor's strategically critical partner to leading virtualization and cloud providers. In October, we participated in the annual VM World event as a technology alliance partner. There were more than 150,000 participants that joined the virtual event over the 10 day duration. We presented a showcase or residence applications, performance management and troubleshooting capabilities in VMware's virtualized on prem and AWS AWS Cloud Deployment.
Also recently, our AWS migration ISV partner competent, has been approved by AWS, meaning that AWS certifies to customers. The NASCAR has been vetted, validated and 5 against the high bar and that AWS will promote NETSCAR through the AWS sponsorship program. On the security front, during the quarter on global research leader in technology ranked NETSCOUT, Arbor as the top and largest vendor in the DDoS Smart highlighting our new security investments and our visibility and that analytics. Finally, as a leader in our industry, earlier discussed in September, we published our semi annual threat intelligence report. A report was picked up by approximately 50 publications and translated into 5 languages as our threat intelligence report is considered an industry bell dialer report.
That concludes my prepared remarks. I will now turn the call over to Jean.
Thank you, Michael, and good morning, everyone. I will receive a key second quarter and first half fiscal year 2021 metrics and our outlook. As a reminder, this review focuses on our non GAAP results unless otherwise stated. All reconciliations with our GAAP results appear in the presentation appendix. Slide number 12 details our results for our second quarter and first half fiscal year 2021, focusing on the quarterly performance, revenue declined 5.1% over the same quarter in the prior and service revenue declined 0.3% over the prior year's quarter.
Our second quarter fiscal year 2021 gross profit margin was 74.7%, down 1.9 percentage points over the same quarter last year due to product mix, most notably increased radio frequency propagation modeling project revenue with much lower gross margins. Our software only sales were 27% of service assurance product revenue compared with 20% in the second quarter of the prior year. Quarterly operating expenses decreased 15.4 percent from the prior year, primarily due to continued cost controls and pandemic related travel restriction. We reported an operating profit margin of 19 point percent in the same quarter last year. Diluted earnings per share was $0.38 compared with $0.28 in the same quarter last year.
Turning to Slide 13, I'd like to review key revenue trends for the first half of the year. For the 1st 6 months of fiscal year 2021, The service provider customer vertical revenue declined approximately 8%, while the enterprise vertical grew approximately 1%. The service provider and enterprise verticals each contributed approximately 50% to total revenue for the 1st 6 months of this fiscal year. Turning to Slide 14, which shows our geographic revenue mix on a GAAP basis. Revenue by geography 18% in the United States and 42% Internationally.
There were no customers in the quarter or the first half of the year that represented percent for more of revenue. Slide 15 details our balance sheet highlights and free cash flow. We ended the quarter with cash, cash equivalents, short term dollars since the end of the first quarter. Free cash flow generated in the quarter was $8,300,000. We did not repurchase shares of our common stock during the quarter.
From a debt perspective, as of the end of the second quarter, we had 4 $50,000,000 outstanding on our $1,000,000,000 revolving credit facility. We had approximately 1.5 times cushion against top gross leverage covenant, providing potential borrowing capacity if needed, our revolving credit facility expires in January of 2023 had no required principal repayments until maturity. To briefly recap other balance sheet highlights, accounts receivable net was 100 and $69,700,000 down by $43,800,000 since the end of March. DSOs were 65 days same time last year. The improvement in the DSOs in the second quarter of this year compared to the second quarter of the prior year is primarily attributable to the timing of orders with the quarter.
Moving to Slide 16 for our outlook from a non GAAP perspective, As announced stated in his remarks, for fiscal year 2021, we expect revenue to decline in the mid to upper single digit on a percentage basis compared to fiscal year 2020. Despite lower revenue, we anticipate delivering annual earnings per share in line with our fiscal year 2020 earnings per share number as we continue to prudently manage our cost structure. For the second half of the fiscal year, we anticipate that the remaining earnings per share performance should be equally more equally distributed between our 3rd and 4th fiscal quarters than it was in the prior fiscal year, given the current pandemic conditions our cost management focus, we anticipate that our 3rd quarter operating expenses will be in line with our 2nd quarter operating expense results. I also want to comment on a few capital structure related items for fiscal year 2021. We expect the tax rate to be approximately 23% Additionally, we expect the diluted shares outstanding for the year to be approximately 74,000,000 shares.
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. I'll now turn the call over to the
We do ask in the interest time that you limit yourself to one question and one follow-up. We'll take our first question today from Kevin Liu with K Liu and Company. Your line is open.
First question here, you talked about some of the deals elongating. I was wondering if you could elaborate more so in terms of what you're actually seeing in terms of pipeline building? Have you still been able to grow that both on the enterprise and service provider side? And then just from the perspective of deals, pushing out, if we kind of put the government vertical upside, what exactly think your customers are waiting for in order to move forward with some of these opportunities?
Thanks for the question, Kevin. So I think there are 2 areas. One is certain industries where there is unpredictable timing of whether they go with certain projects in pipeline. And I would put on the top of that, it's Hospitality Industry and, and the federal government. A lot of uncertainty around that.
So that's part factor number 1. The second one is elongated sales cycle and those are in two buckets. One is we released some new products, especially in the security space. And normally during the purchase cycle, we have to evaluate them and that requires somebody to go in and install that And that has been difficult and that extends the sales cycle. And second thing is people who are new logos I even though we had some successes, there's a lot of interest in our new software based offerings, especially in the enterprise, but new logos are the first time buyers also has to go through the cycle of verification and trials, and that has slowed down.
So those are those are the factors, which are mostly also COVID related and which we're certainly counting on this year, which has changed.
Got it. And then just quickly, in the past, you've talked about enterprises kind of emerging as an interesting opportunity for 5G. Are you still seeing that trend build out? Anything you can talk about in terms of how large of an opportunity you see that over the coming years?
I see that as a follow on opportunity. So if you, as Dean talked about, I think, in the last year and partly this year, for some revenue, we see some pre deployment opportunities like calibration, which are small. And, but that's where we are. Then next step will be carriers using our 5G solution for user plane monitoring. And we are in the early phases of that.
And much later than that, we'll be carriers participating in private 5G because cloud vendors and the carriers will have to lead those efforts also. So I see that as a more private 5G and more of a longer term opportunity. Delta and then the carrier 5G.
Got it. That's helpful. Thank you for taking the questions.
Our next question comes from James Fish with Piper Sandler.
Hey, guys. Glad to hear you're all doing well. On the security side years ago, your carrier customer spot additional capacity. And now we're starting to hear from you guys that we're seeing larger and more attacks. Are we starting to get to a point where these carrier customers are going to need to add more capacity with ARBOUR?
I think they have,
I mean, they will lead, but I don't, I think they have quite, I mean, good capacity when we talk about security, there are 2 products which we have. 1 is for the service provider side and other is for the enterprise side. We see the network being a much bigger enterprise business versus Arbor. We had seen a lot of opportunity in that area with a product called AED. And which basically looks at application layer attack, which is a new set of attack vectors.
It's an on prem device or it's an entry to the cloud. And when it gets into trouble, it signals to Arbor cloud. So that's a big area of growth we are counting on, and we have released a couple of solutions and started the go to market initiative, which has been sort of slowed down because our people not being able to do speedy trials. So while there'll be, we see some spread straight business on the carrier side as a growth area for security is the DDoS for the enterprise with application layer attacks focused, layer 7 attack And a new product we had announced at our user conference called a genius type of investigator. So those are the things we see more opportunity in the through those products in the enterprise sector.
Then sometime next year, similar functionality will be needed for mobility providers, both for 4G and 5G. And those are the things. So those are somewhat different than the past Arbor revenue growth area of more capacity in the carriers.
Got it. And then, Jean, for you, can you give us some color between within Arbor across enterprise and carrier like you typically do? And also, billings appeared fairly strong. Was there a good amount of product backlog that makes you give some confidence here, that our trends are, could be a little bit better than you're expecting or were you just seeing greater attach of additional services?
So Arbor, for, I guess, we can talk about the year to date Arbor. Year to date generally in service provider was, pretty good for the second quarter and probably it's flat on a year over year basis. In enterprise, for the year to date, for the year to date, they grew, very strongly. They grew on about a 30% increase. And it's mostly in the areas where they again play to very large institutions like financial institutions for the government.
They continue to do well in offer given the the details of the security nature, they are better because of the integration of the sales force. They have many more opportunities now with the service assurance and any of the issues that they had more than a year ago with, understanding their territories are behind them. So obviously it's done pretty well for the first half of this year.
Got it. And then on
the billings being kind of stronger? I mean, is it more product backlog than your, than normal or was it greater attach of additional services this quarter?
Oh, it's all, let me
just check one second. It's mostly, I would say it's mostly product when I look at it. Their products grew pretty strongly in, in Q2 and is on an okay growth rate for year to date also.
Got it. Thank you.
We'll go now to Eric Martinucci with Lake Street. Your line is open.
Yes, just a clarification on the full year revenue guide. I want to make, try and put some numbers around the mid to upper single digits. Is this down 5% to 8%, down 4% to 9%. Do you have a preference between those 2?
I would say I always think of mid digits as 4 to 6 and then the upper single digit as 7 to 9. So my range would be 4 to 9.
Okay, great. And then, on the fed historically, the September quarter would be a good quarter for NETSCOUT with the Federal business. Are we looking at something that just, you know, vagaries of being a sub to the main, you know, where it's just lumpy, or is this potentially killed projects? Is it pending new appropriations, could it snap back in December, or are we looking at a multi quarter issue in your view?
I think it could be a longer time. I don't think it's going to snap back in December. And in federal government, we have seen projects even without COVID in the past, they never die. They just sometimes last for 2 years. So I think that Budgets approved, we have the selected partner, but something magically changing in the fiscal year, is, I think, is unlikely.
Right.
Okay. All right. And your commentary on the non GAAP earnings for the business, you you guys have always done a good job on the cost management. You've done a good job of being able to hit your non GAAP earnings targets. On an annual basis.
18% in the operating expense. I got to believe part of that is just less T and E, less conferences because COVID. But where are our cost structure points of leverage as you're trying to manage to that non GAAP EPS target?
So the first one would obviously be the, condition of the pandemic and the amount of travel that the sales force will do. In Q3, I don't viewed them doing incrementally more traveled than they did in Q2. The other levers that we have for the rest of the year, generally our headcount, the backfilling of any attrition or if there are certain investment areas that we'd like to make sales, whether we continue with that investment or delay that investment. And then one of the other larger levers goes down to basically variable incentives come station, which is in the form in the sales force, obviously, is commissions, which is a function of revenue, or for the rest of the employee population, the incentive the station that comes with the achievement of earnings per share targets on an annual basis and the resources available to achieve those earnings per share.
Got you. And last question for me comes down to the services revenue Historically, we would see an uptick here, but this is, you know, we're not, well, I guess we are in historic times. We're certainly not in normal times You had a negative comp in the services revenue in Q2. And I would guess based on the products sales in the prior quarters. We're probably looking at negative comps in Q3 and Q4 on the services revenue.
Can you give us some insight, Q3 services revenue Is that up sequentially, or is your expectation that it could, in fact, be down sequentially?
I would a service revenue is fairly baked in, which is why we're generally very accurate on that on forecasting service revenue. I would say when I look at our models, let me just look at one thing first. I'm looking at the midpoint. I would say service revenue looks like it's going to be relatively consistent with the service revenue that we achieved in FY twenty 20. As you pointed out, Q2 of this year, compared to last year, was actually pretty flat.
Last year had about a $2,000,000 catch up of revenue due to a later signing on a renewal. But for the full year, I would look and estimate that service revenue will be generally flat to, last year's level.
Great, that's helpful. Thanks for taking my questions.
And it does appear that we have turn the call back to our
everybody joining us and have a great day.
That concludes today's program. Thank you for your participation. May disconnect at any