Ladies and gentlemen, thank you for standing by, and welcome to NetScout's first quarter fiscal year 2021 financial results conference call. At this time, all parties are in a listen-only mode until the question and answer portion of the call. As a reminder, this call is being recorded. Tony Piazza, Vice President of Corporate Finance, and his colleagues at NetScout are on the line with us today. If you require operator assistance at any time, please press star zero. 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 first quarter fiscal year 2021 conference call for the period ended June 30th, 2020. Joining me today are Anil Singhal, NetScout's President and CEO, Michael Szabados, NetScout's Chief Operating Officer, and Jean 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 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 three, 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 fiscal year 2021 assumptions, our market opportunities and market 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, and other factors which are described in the slide and in today's financial results press release, as well as in our annual report on Form 10-K for the year ended March 31st, 2020. NetScout assumes no obligation to update any forward-looking information contained in this communication or with respect to announcements described herein. Let's turn to slide number four, which involves 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 detailed 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 this slide presentation in today's earnings press release, and they are also available 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 six with a brief recap of our first quarter non-GAAP results. We delivered strong earnings per share growth on a relatively consistent revenue level compared with the same quarter last year. Revenue was $183.8 million in the quarter, approximately 1% lower than the same period last year. Earnings per share was $0.17 in the quarter. An increase of more than 140% compared to the same period last year. Enterprise revenue in the quarter was strong but was offset by a decline in service provider revenue due to this vertical's project-based nature. The quarter benefited from the lower operating costs from continued cost control measures and a decrease in expenses largely attributable to lower sales and marketing costs from reduced programs, events, and travel expenditures, primarily due to COVID-19 pandemic-related restrictions.
Let's move to slide seven for some further perspective as we review business insights. Following our April virtual ENGAGE technology and user forum, we continue to experience solid interest in our suite of solutions. NetScout Trust Factor is attracting enterprises to our solutions to help solve heightened pandemic challenges such as remote work, telemedicine, digital transformation, and expanding cyber threat landscape. Our ability to provide service assurance with real-time pervasive visibility and insight and security solutions that mitigate disruption regardless of a customer's underlying infrastructure is paramount in this environment. The pandemic and the economic environment are driving varying behavior in our customer base, with some customer accelerating their investments while others are exercising caution with their purchasing decisions as they evaluate the impact within their own organizations.
Overall, it appears that enterprises focus on right-sizing their networks and proactively address potential vulnerability while service providers were a bit more cautious with their spending given the environment or their organization's shifting focus. In the enterprise vertical, revenue grew approximately 21% over the same quarter last year as customers continued to advance their digital transformation and cloud migrations and security initiatives as they work to address speed, agility, and cost. In some cases, they have been accelerating plans to address potential vulnerability in their networks with our solutions in light of the current environment. We experienced strong order volume for both our service assurance security solution, primarily driven by the government, financial, and healthcare sectors.
We are pleased to see some of the benefits of the integration of our sales force that we undertook last fiscal year as enterprise customers explored solutions across our portfolio of service assurance and security offerings, and the integration allows us to quickly address their broader requirements. Michael will highlight some of our enterprise wins during his remarks. Turning to the service provider vertical, revenue declined approximately 20% compared with the same quarter last year, as carriers were cautious with their spending. As a reminder, this vertical historically experienced inconsistent variation in revenue patterns due to its project-based nature and the timing of orders. In this vertical, we continue to work with our service provider customer on their 4G and LTE evolutions internationally, and their 5G evolutions domestically and in certain Asian regions.
Michael will comment on a large order we received this quarter in the 4G international space as part of his remarks. From a 5G perspective, NetScout is 5G ready and is in a position to assist carriers or enterprises with their 5G initiatives and evolutions regardless of the stage they are in, from non-standalone to standalone to edge computing. Although we are pleased to have seen signs of 5G acceleration last fiscal year, the current pandemic and economic environment may have changed this momentum in the short term as organizations focus on other priorities. With the initial Citizens Broadband Radio Service, CBRS, spectrum auction for mid-band spectrum earlier this month, we believe that this may re-accelerate the momentum of these initiatives. We believe that 5G is a longer-term opportunity and driver of growth that will benefit our business in numerous ways, especially as edge computing becomes more mainstream.
Finally, during the quarter, our customers continued to adopt our software-only form factor with the software-only revenue at 36% of the service assurance product revenue for the quarter, which is 28% increase over the same quarter last year and was driven by increased adoption in the enterprise vertical. Now let's move to slide number eight to review our outlook and summary. As we evaluate the outlook for the remainder of the fiscal year, we are encouraged by the opportunities we see, but remain cautiously optimistic given the continuing uncertainty around the pandemic and the global economic environment, which continues to make the timing and funding of deals challenging to predict. Accordingly, we'll continue defer providing fiscal year 2021 guidance until there is a clearer outlook on the duration and magnitude of the effects of the COVID-19 global pandemic.
We remain committed to improving our operations and maintaining our disciplined cost controls so that we should be able to once again provide leverage in our earnings per share over the fiscal year 2020. From an operating perspective, we continue to run the company effectively with a mix of employees working remotely or in our facilities as we cautiously advance through the reopening stages with all of the necessary precautions to keep our team safe. We appreciate the dedication and support of our employees and other stakeholders throughout the initial stages of this pandemic. From a financial perspective, we will continue to prudently manage our cost structure and intend to maintain a solid financial position. We have more than $425 million in cash and cash equivalents, which represent more than six months of normal working capital requirements.
Additionally, we continue to generate solid free cash flows and have capacity on our $1 billion revolving credit facility, with $450 million outstanding at the end of the first quarter, and no principal repayments required until its maturity in January of 2023. We also believe it continues to be prudent to prioritize capital preservation in the near term and do not have plans to use our share repurchase program during our second quarter. These actions, along with our strong financial profile and experienced team, should provide us the flexibility and liquidity required to continue to weather this global pandemic and challenging economic environment, while also allowing us to invest in our technology and solutions to maintain our leadership position within the industry. I look forward to sharing our progress with you as the fiscal year continues to unfold. We'll now turn the call over to Michael for his remarks.
Thank you, Anil, and good morning, everyone. Slide 10 outlines the areas I will cover. Starting with customer wins for the quarter, one notable win within the service provider vertical was a low eight-figure deal we did with a large international provider with close to 400 million subscribers. This deal is a continuation of our long-standing partnership with this provider, featuring highly advanced use cases, especially in leveraging our subscriber intelligence in planning and marketing their services, as well as structuring their partnership relationships with over-the-top providers, OTTs, and retail channels, just to name a few examples.
This win demonstrates the unique role of our ASI dataset empowering two business-critical functions for this operator, as well as the value of our continued relationship and incumbency with our customer base. In the enterprise vertical, we continue to make good progress as customers evolve and accelerate their digital transformation initiatives in general, and as they deal with the changes in the way they operate their businesses due to the COVID-19 pandemic in particular. During the quarter, we closed a series of deals amounting to low seven figures in total in one of our largest standing relationships with a healthcare provider customer, whose digital transformation telemedicine initiatives have drastically accelerated because of the pandemic.
Our service assurance solutions are deployed at cloud connect edges in this application in so-called carrier neutral service facilities or colos to monitor and troubleshoot cloud resident telemedicine applications, whose use significantly increased with the shift to virtual doctor's appointments and patient care. The funding for the deals came from the organization's emergency COVID-19 budget and demonstrates our value as technology turns occur and accelerate, as well as the strength of our incumbency and long-standing relationships. During the quarter, we also received a mid-seven-figure order from another long-standing customer, this time within the U.S. government, that is taking the lead role in a multi-year initiative to consolidate the back-office services for multiple different agencies. The objective of this major digital transformation initiative is to create a consolidated and secure service environment while reducing operating costs. We provide the strategic visibility platform for the new deployment.
This win demonstrates once again the value of our solutions in the changing environment, as well as the resiliency of our relationships and incumbency in our customer base. In the security space, our Arbor DDoS solutions continue to lead in our large enterprise customer base because we can provide robust and simple to configure and adapt protection as well as network-wide visibility during an attack. In the quarter, we saw several low seven-figure deals from multiple financial institution customers as they upgraded their solutions and added capacity to deal with the evolving distributed workforce and expanding threat landscape. Again, our customers come to us for robustness of our solutions and speed at which we can react, and the strength of our relationship. In terms of go-to-market, we continue to build our partnership network to advance our solution deployment.
Recently, we announced our collaboration with Oracle to help customers gain end-to-end visibility for service assurance and security of mission-critical applications and services across the hybrid cloud infrastructures. Our vSTREAM and nGeniusONE are now available from the Oracle Cloud Marketplace, offering Oracle Cloud customers best-in-class application visibility and the ability to leverage authentic information contained in application and network traffic for real-time telemetry. This Smart Data enables IT teams to gain consistent visibility and perform monitoring and troubleshooting of their critical services regardless of the application or underlying infrastructure, with the ability to provide the deep forensics needed for faster and more efficient responses. During the quarter, we also signed a multi-year OEM private label deal with a major software infrastructure company that will be using our Smart Data as their virtual probe software solution.
Finally, on the sales front, with the integration of our sales teams behind us from last fiscal year's integration initiative, we are gaining traction with some of our cross-selling initiatives as we have seen some existing enterprise service assurance customers starting to purchase security products such as AED or Arbor Edge Defense. Our enterprise customers' elevated interest in on-premise advanced DDoS protection is sparked by the growing dependency on virtual private networks as the main vehicle to connect employees working from home. The integration of our sales teams in the prior year has allowed us to respond to this opportunity rapidly with clear ownership and training in place when the pandemic hit. That concludes my prepared remarks, and I will now turn the call over to Jean.
Thank you, Michael, and good morning, everyone. I will review key metrics for our first quarter. As a reminder, this review focuses on our non-GAAP results, unless otherwise stated, and all reconciliations with our GAAP results appear in the presentation appendix. Slide number 12 details our results for our first quarter of fiscal year 2021. Revenue declined 1.2% over the same quarter in the prior year to $183.8 million. Product revenue declined 5.3%, and service revenue grew 1.5% over the prior year's quarter. Our first quarter fiscal year 2021 gross profit margin was 74.6%, slightly lower than the same quarter last year. Our software-only sales were 36% of service assurance product revenue as compared to 25% in the same quarter of the prior year.
Quarterly operating expenses decreased 8.3% from the same quarter in the prior year, primarily due to continued cost controls and reduced cost for sales and marketing programs, events, and travel, primarily due to COVID-19 pandemic-related restrictions. We reported an operating profit margin of 11.2%, compared with 6.5%, and diluted earnings per share of $0.17, compared with $0.07 in the same quarter in the prior year. Turning to slide 13, I'd like to review key revenue trends for the first quarter. In the enterprise customer vertical, revenue grew 21%, while the service provider customer vertical declined 20.4%. Approximately 57% of total revenue was generated from the enterprise vertical, with the remainder from the service provider vertical. Turning to slide 14, this shows our geographic revenue mix on a GAAP basis. The geographic split between domestic and international was consistent with the same period in the prior year.
Additionally, there were no customers that represented 10% or more of revenue in the quarter. Slide 15 details our balance sheet highlights of free cash flow. We ended the quarter with cash equivalents, and short-term and long-term marketable securities of $426.5 million, which is an increase of $37.4 million since the end of the fourth quarter of our last fiscal year. Our cash and marketable securities balance represents more than six months of normal working capital requirements. Free cash flow generated in the quarter was $38.1 million in accordance with our near-term capital preservation priority. As Anil mentioned, given the current economic environment and uncertainties as a result of the COVID-19 pandemic, we did not repurchase any shares of our common stock during the quarter and do not plan to use our share repurchase program in the second quarter of the fiscal year.
From a debt perspective, as of the end of the first quarter, we had $450 million outstanding on our $1 billion revolving credit facility. We had approximately 1.5 x cushion against our gross leverage covenant, providing potential borrowing capacity if needed. Our revolving credit facility expires in January of 2023 and has no required principal repayments until maturity. To briefly recap other balance sheet highlights, accounts receivable net was $138.8 million, down by $74.7 million since the end of March. DSOs were 57 days versus 73 days at the end of fiscal year 2020, and for the same quarter last year as well. The decrease in the DSOs in the first quarter of this year compared with the first quarter of the prior year is primarily attributable to the timing of orders within the quarter. Let's move to slide 16 for some commentary on the full fiscal year 2021.
As Anil stated in his remarks, given the continuing evolution of the COVID-19 situation, the company will defer providing full fiscal year 2021 guidance until there is a clearer outlook on the duration and magnitude of the effects of the global pandemic. That said, I want to comment on a few capital structure related items for our second quarter of fiscal year 2021. For the quarter, we expect the tax rate to continue to be approximately 23%. Additionally, we expect the diluted shares outstanding for the quarter to be approximately 74 million shares. That concludes my formal review of our financial results. Before we transition to Q&A, I'd like to quickly note that our IR conference participation is listed on slide 17. I'll now turn the call over to the operator to start Q&A.
At this time, if you would like to ask a question, please press star one on your touch-tone phone. If you wish to remove yourself from the queue, press the pound key. We do ask in the interest of time that you limit yourself to one question and one follow-up. We'll take our first question from Matt Hedberg of RBC Capital Markets.
Hey, it's Dan Bergstrom for Matt Hedberg. Thanks for taking our questions.
The enterprise sounded strong, revenue up 21%. Just trying to gauge the strength here. How much do you think was related to ongoing digital transformation, cloud migration, security initiatives, versus say, some acceleration or pull forward to address potential network vulnerabilities during the current environment here?
I think the bulk of it is still for cloud transformation and traditional projects. Yeah, there was some acceleration of needs because of people working from home, which makes the VPN link very important, both from a security and performance point of view. We are not able to carve out exact numbers because our product has multi-use. Definitely, what's happening right now had some impact both on the security front and the performance front in the enterprise.
Great. Thanks, Anil. Could you talk about trends and maybe pipeline build through the quarter? Any changes in demand or easing in project funding as the quarter progressed? Perhaps, thoughts around activity in July, any way to contrast it against June or perhaps previous Julys?
Well, versus previous July, I think in the service provider, we see continuing challenges. I think last year was much better for us. Again, as we mentioned, the timing of the project makes the quarterly numbers very skewed. Overall, I would say there is a slightly better pipeline build in the enterprise area and slightly worse on the service provider side versus last year.
Great. Thanks.
Okay.
We'll move next to James Fish of Piper Sandler. Your line is open.
Hey.
Hey, Jean, Anil, and Michael, glad to hear you're doing well. Dan actually stole a couple of my questions there. How have conversations with your major carrier customers been regarding that timing of 5G core deployments? Can you remind us the difference in typical deal sizes between the radio access side versus the core for you guys?
I think so overall, we always have been saying that 5G opportunity is more longer term, and that's not significantly changed. We always also said that the major investments are required right now. It's interesting that we have to be able to make major investment, which compared to our competitors, we are in a position to do. A lot of the product is being used to get the network up and running. There are not many subscribers, and we sell based on the bandwidth, there's not a lot of money on 5G. One other thing I wanted to mention, even though you didn't ask that particular question, the 5G is significant in other areas, including private 5G. Our investment will pay off in the federal government and the enterprise also as, for example, Mercedes-Benz have their own spectrum.
5G slicing will be used by enterprises. I think this 5G investment may not bring any short-term revenue, but in the long term, it will make us a stronger company after we come out of the pandemic. We cannot measure that in terms of the pipeline or revenue right now, but in terms of leadership gains, I think that's going to have a big impact.
Got it. That's great color, Anil. Jean, maybe for you on sort of the OpEx side, how should we think about the savings that you guys had or at least the kind of cost controls you guys had in the quarter here related to not traveling and sort of the pandemic that we're going in? In other words, what's not sustainable for you guys moving forward that we should expect should come back into the model at some point?
Sure. I think our internal plans going forward surrounding returning to travel for the sales force, and particularly investment in marketing, as Anil talked about, to make sure that our brand is fully recognized through all organizations, probably would mean that in the second half of the year, including Q2, we plan to ramp a lot of those sales and marketing related events. In the quarter, obviously, there was some travel that didn't happen, so I'm going to estimate probably $0.02 in earnings per share, maybe $0.02-$0.03 in earnings per share were reduced travel and some reduced marketing spend.
That's great.
If I may, I just wanted to make one comment. I think that there's a permanent shift towards hybrid or virtual events and live events, which are very expensive and not very productive or generally taking a backseat, and I think that is a big shift that's going to persist.
Yeah, agreed, Michael. Thanks, everyone.
Thank you.
We'll move next to Eric Martinuzzi of Lake Street. Your line is open.
Yeah. I wanted to talk about the service provider segment. I understand the 5G color commentary, more in the long term, less in the short term. You talked, at least in the press release, about timing issues and then budget challenges. Just from looking at the AT&T and Verizon commentary, so North America commentary, it seemed like the CapEx budgets for them were unchanged coming out of their most recent quarterly commentary. Curious to know, is that you're not getting a piece of their unchanged spend, or is it something else within timing or budget challenges that I'm not understanding?
Well, I think that, Eric, as you know, the budget challenges have been there forever, for I would say last three, four years on the 4G side. 5G at this early stage is not able to mitigate or compensate for them. We have consolidation. I mean, we are the top provider in U.S., which are big customers of NetScout and a substantial portion of the revenue. They're having all of them having different kinds of challenges. I think some of that is those challenges continue, and until 5G revenue is coming for them, which will only happen when they have sufficient number of subscribers. Right now, you have single digits in that subscriber base, and that's also for one or two providers. I look at service provider environment, even after 5G to be somewhat challenging.
Right now in the short term, even 5G is not having an impact. There's a lot of work. We have to continue to make the investment so we come out stronger, as I said earlier, but there's no significant revenue. The projects have to be in the analytics area, taking 4G data for machine learning and AI type stuff. One other thing I wanted to find out, which has a little bit impact on enterprise also, but also on the service provider, is that we announced several things at our ENGAGE event. Some were enhancement to existing solutions, software upgrades, but other was brand-new products. It's very tough for a customer to evaluate brand-new products right now because somebody has to go there, do some installation.
I think some of the things which we might have been counting on for this year in January, I think is going to be delayed. Our leadership will still continue as a result of the awareness of what we are doing.
For Jean, I know you're not giving guidance either for the fiscal year or for Q2, but historically, we would see seasonally NetScout Q2 total revenue is up versus Q1, and then services revenue is up sequentially. Do both of those historical trends hold, even though you can't give us numbers?
The pattern that you describe is the pre-pandemic pattern. Sorry, I just took my mask off. It's a pre-pandemic pattern, and you're 100% correct. In Q1, which is the beginning of our fiscal year, we always have the lowest amount of revenue, and then it grows in product revenue based on Q2 being the traditional end of the fiscal year for federal government, and then Q3 and Q4, the budget transitions where people are using their current calendar year budget and/or in Q4 using their current new calendar year budget.
I would say that with the pandemic and our revenue being relatively consistent, that what we see in the pipeline, we would hope that continued pattern would exist, but it would probably be somewhat muted between Q2 to Q1, just given some of the assurance and DDoS sales that we saw in the beginning of April that wanted customers to be able to strengthen their network and make sure they were having good performance and good security.
Okay, the services line, could you respond to that?
The services line, I would say it probably continues to grow slightly over the course of the year. As you know, it all depends on the economic recovery and whether product revenue and projects continue to occur for us, and then that mitigates some of the growth, either positively or negatively in service revenue.
Gotcha. Okay. Thanks for taking my questions.
Thank you.
Our next question is from Kevin Liu of K. Liu & Company. Your line is open.
Hey, good morning. As it relates to the seasonality, could you talk a little bit more about what you're seeing in the government vertical right now, and whether you do actually expect that budget flush to occur in the September quarter?
Well, I think the activity level, Kevin, is very high. Like last year, we have a lot of projects, we were just talking about before the call that, as we hear from sales teams, there are a lot of uncertainty because of the election year and other things going on. Yeah, we have a lot of projects, but we do get big orders. We did get some big ones last year, but we are cautiously optimistic this time, because there's some additional uncertainty factors.
That's helpful. It sounds like you're starting to get more traction with sales of Arbor into the enterprise space. Maybe talk a little bit about the penetration rates you currently have and any sort of goals you might have as we exit the year here.
Well, one of the big things we were counting on this year as we merged as Arbor sales force with NetScout, we have an overlay function now. We were planning to introduce some of the Arbor products into the enterprise. That's going to be slowed down because if it is going to customers who have never seen that product before, then we can't evaluate and do effective POCs because you have to ship a unit there. That effect, which we would have happened positively this year, won't happen. On the other side, as people are working from home, we happen to have a solution which is always good for monitoring the VPN and securing the VPN, but that was not an interesting problem until now, or it became a more interesting problem.
We see some upside because of that, which is reflected in what happened last quarter and this quarter. At the same time, some of the plans which we had for cross-selling probably will be delayed.
Got it. Thank you for taking the question.
Sure.
Our next question is from Nick Mattiacci of Craig-Hallum.
Hi, this is Nick Mattiacci on for Chad Bennett. Just on the software penetration of overall revenues, I guess, how should we think about the growth rate there throughout this year, and what kind of impact should that have on gross margins? Thank you.
The software penetration going forward is always a factor in what the customer prefers to buy in, and I think what form factor they prefer to buy in. I think that when you think about our penetration of software only into especially the enterprise, where you have interest in our products for future 5G-related networks, as Anil talked about, or where they want to do more monitoring at the edge, which is very important, I can think over the year that the penetration will probably continue to increase, especially given how fast you can deploy the software and the efficiency from a cost perspective also in being able to purchase the software and install it very rapidly. I would imagine if I look over the year, last year, FY 2020, our total penetration for the entire year was about 30%.
I would see it being north of 30% in FY 2021. I think Anil in the past has said that over time, it will probably get to about 50% of our product revenue of service assurance. Just to remind everyone that our software's nature in the product revenue is much higher than the number that we give out. This is the percentage of customers who are transitioning from an appliance-based form factor to a software-only form factor.
Great. Thank you. Any other questions, operator?
There are no further questions at this time. I'd be happy to return the call to Tony Piazza for any concluding remarks.
Great. Well, that concludes our call. We appreciate everybody joining us this morning. We look forward to speaking with some of you at some of the virtual investor events, and I hope everybody enjoys the rest of the summer and stay safe. Thank you.
This does conclude NetScout's first quarter fiscal year 2021 financial results conference call. You may now disconnect your lines. Everyone, have a good day.