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| NTCT > SEC Filings for NTCT > Form 10-Q on 10-Aug-2009 | All Recent SEC Filings |
10-Aug-2009
Quarterly Report
The following information should be read in conjunction with the unaudited consolidated financial information and the notes thereto included in this Quarterly Report on Form 10-Q. In addition to historical information, the following discussion and other parts of this Quarterly Report contain forward-looking statements that involve risks and uncertainties. You should not place undue reliance on these forward-looking statements. Actual events or results may differ materially due to competitive factors and other factors referred to in Part I, Item 1A. Risk Factors in our Annual Report on Form 10-K for our fiscal year ended March 31, 2009 and elsewhere in this Quarterly Report. These factors may cause our actual results to differ materially from any forward-looking statement.
Overview
NetScout designs, develops, manufactures, markets, sells and supports a family of integrated management products that enable unified service delivery management capabilities, performance management and optimization of complex, high-speed networks, that assure the delivery of critical business applications, services and content efficiently to customers and end-users. These solutions enable the world's largest IT organizations to optimize, protect and simplify their IT infrastructure and operational environments while bringing enhanced operational efficiencies and helping to reduce the total overall cost of IT operations. We manufacture and market these products in integrated hardware and software solutions that have been used by commercial enterprises, large governmental agencies and telecommunication service providers worldwide. We have a single operating segment and substantially all of our identifiable assets are located in the United States.
NetScout was incorporated in 1984 as a consulting services company. In 1992, we began to develop, manufacture and market our first infrastructure performance management products. Our operations have been financed principally through cash provided by operations and through the sale of NetScout securities in conjunction with our initial public offering in August 1999.
Our operating results are influenced by a number of factors, including, but not limited to, the mix of products and services sold, pricing, costs of materials used in our products and the expansion of our operations. Factors that affect our ability to maximize our operating results include, but are not limited to, our ability to introduce and enhance existing products, the marketplace acceptance of those new or enhanced products, continued expansion into international markets, development of strategic partnerships, competition, successful integration efforts and current economic conditions.
For the three months ended June 30, 2009, our total revenue decreased $2.5 million, or 4%, to $58.1 million compared to $60.6 million for the three months ended June 30, 2008. This decrease is attributable to a 19% decline in product revenue for the three months ended June 30, 2009 when compared to June 30, 2008. This revenue decline was experienced through most of our major vertical markets, especially healthcare and financial services, and is symptomatic of the overall macroeconomic conditions currently facing most businesses. Our cost of revenue decreased by $3.2 million, or 21%, to $12.2 million compared to $15.3 million for the three months ended June 30, 2008. This decrease is primarily due to the decreased revenue noted previously as well as continued cost savings in our manufacturing and service organizations. Gross profit of $45.9 million, or 79% of revenue, for the three months ended June 30, 2009 increased from $45.3 million, or 75% of revenue, for the three months ended June 30, 2008. This increase in gross profit percentage is attributable to product mix, the decline in the purchase accounting adjustments related to the Network General acquisition and realized cost savings. Additionally, a higher percentage of our overall revenue for the three months ended June 30, 2009 was from services which contributes to a higher overall gross profit when compared to the three months ended June 30, 2008. Our gross profit is significantly affected by the mix and volume of our product and service revenue. Product revenue for the three months ended June 30, 2009 decreased $6.5 million, or 19%, to $28.4 million from $34.9 million for the three months ended June 30, 2008. Service revenue for the three months ended June 30, 2009 increased $4.0 million, or 15%, to $29.7 million from $25.7 million for the three months ended June 30, 2008. We realize significantly higher gross profit on service revenue than on product revenue.
For the three months ended June 30, 2009, our total operating expenses, which include research and development, sales and marketing, general and administrative expenses, and amortization of intangible assets, were $37.0 million, decreasing by $4.2 million, or 10%, compared to $41.3 million of total operating expenses in the three months ended June 30, 2008. The primary contributor to this decrease in operating expenses was $2.2 million in decreased sales commissions commensurate with the lower sales revenue, a $542 thousand decrease in employee related expenses, a $290 thousand decrease in accounting related expenses, $276 thousand in decreased travel expenses and $124 thousand in decreased legal expenses.
Net income for the three months ended June 30, 2009 increased by $3.7 million, or 250%, to $5.2 million compared to net income of $1.5 million for the three months ended June 30, 2008. This increase was attributable to the increase in total product and service gross profit of 1%, or $625 thousand, a decrease of $824 thousand of non-recurring integration expenses and a 10%, or $4.2 million, decrease in operating expenses mainly due to $2.9 million of decreased employee related expenses and incentive compensation as well as a $1.0 million decrease in total interest and other income (expense), net.
We have continued to see significant benefit from operating leverage and remain focused on increasing our operating margin by increasing overall gross profit while limiting the growth of operating expenses. For the three months ended June 30, 2009, our income from operations was $8.9 million, increasing by $4.8 million compared to income from operations of $4.0 million for the three months ended June 30, 2008. As networks continue to expand, bandwidth continues to increase, applications become more complex, converged networks become more prevalent, and virtualization, web services and service oriented architectures become more pervasive, our products are ideally positioned to enable IT organizations to optimize, protect and simplify their modern IP network and the services delivered to their users from within the network with packet-flow technology through a unified service delivery management platform. In the first quarter of fiscal year 2010, we announced a technology partnership with Cisco Systems and the integration of our Sniffer ฎ Global product with Cisco's Unified Wireless Networking solution. These enhancements extend the value of our solutions while enabling IT organizations to more effectively manage network and application performance over wired and wireless networks.
We announced the integration of our enterprise-class Snifferฎ Global network analyzer with the open application programming interface of the Cisco Mobility Services Engine, or MSE. The Cisco MSE is a key element of Cisco's Unified Wireless Network solution architecture. This integration enables Sniffer Global to discover and provide location-based information for all users and devices connected to a Cisco Wireless network.
NetScout announced its membership in the new Cisco Developer Network for Mobility. The integration and interoperability of the Sniffer Global product with the Cisco MSE is the first result of NetScout joining Cisco's technology community. With this announcement we were the first management vendor to leverage Cisco MSE Contextual Location Services that helps IT organizations to simplify and improve management of wireless networks. Our capabilities are very complementary to Cisco's own management capabilities, while bringing incremental value to both Cisco and NetScout customers.
Backed by orders coming from the government and wireless telecommunications markets, we entered the second quarter with combined product backlog, consisting of unshipped orders, and deferred product revenue of $6.3 million. We believe that this product backlog is firm and both our unshipped orders and deferred product revenue to be material to an understanding of our financial results. However, due to the fact that most of our customers have the contractual ability to cancel unshipped orders we cannot provide assurance that our product backlog at any point in time will ultimately become revenue.
Critical Accounting Policies
Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America consistently applied. The preparation of these consolidated financial statements requires us to make significant estimates and judgments that affect the amounts reported in our consolidated financial statements and the accompanying notes. These items are regularly monitored and analyzed by management for changes in facts and circumstances, and material changes in these estimates could occur in the future. Changes in estimates are recorded in the period in which they become known. We base our estimates on historical experience and various other assumptions that we believe to be reasonable under the circumstances. Actual results may differ from our estimates.
While all of our accounting policies impact the consolidated financial statements, certain policies are viewed to be critical. Critical accounting policies are those that are both most important to the portrayal of our financial condition and results of operations and that require management's most subjective or complex judgments and estimates. We consider the following accounting policies to be critical in fully understanding and evaluating our financial results:
cash, cash equivalents and marketable securities;
revenue recognition;
valuation of inventories;
assumptions related to purchase accounting;
valuation of goodwill and acquired intangible assets;
capitalization of software development costs;
share-based compensation; and
income taxes.
Please refer to the critical accounting policies set forth in our Annual Report on Form 10-K for the fiscal year ended March 31, 2009, filed with the SEC on June 1, 2009, for a description of all critical accounting policies.
Results of Operations
The following table sets forth for the periods indicated the percentage of total revenue of certain line items included in our consolidated statements of operations:
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