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| NTCT > SEC Filings for NTCT > Form 10-Q on 6-Nov-2009 | All Recent SEC Filings |
6-Nov-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 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 six months ended September 30, 2009, our total revenue decreased $11.7 million, or 9%, to $117.8 million compared to $129.5 million for the six months ended September 30, 2008. This decrease is attributable to a 21% decline in product revenue for the six months ended September 30, 2009 when compared to the six months ended September 30, 2008. This revenue decline was the result of the impact of the global economic downturn on our customers' capital spending. Our cost of revenue decreased by $7.6 million, or 23%, to $25.0 million compared to $32.7 million for the six months ended September 30, 2008. This decrease is primarily due to decreased revenue as well as cost savings in our manufacturing and service organizations. Gross profit of $92.7 million, or 79% of revenue, for the six months ended September 30, 2009 decreased from $96.8 million, or 75% of revenue, for the six months ended September 30, 2008. The 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. Our gross profit is significantly affected by the mix and volume of our product and service revenue. Product revenue for the six months ended September 30, 2009 decreased $15.4 million, or 21%, to $59.0 million from $74.4 million for the six months ended September 30, 2008. Service revenue for the six months ended September 30, 2009 increased $3.7 million, or 7%, to $58.7 million from $55.0 million for the six months ended September 30, 2008. We realize significantly higher gross profit on service revenue than on product revenue.
For the six months ended September 30, 2009, our total operating expenses, which include research and development, sales and marketing, general and administrative expenses, and amortization of intangible assets, were $72.2 million, decreasing by $11.5 million, or 14%, compared to $83.7 million of total operating expenses in the six months ended September 30, 2008. The primary contributors to this decrease in operating expenses were a $5.1 million in decreased sales commissions commensurate with the lower sales revenue, a $2.3 million decrease in other incentive compensation and employee related expenses, an $841 thousand decrease in travel expenses, a $1.0 million decrease in professional fees, an $805 thousand decrease of non recurring integration expenses and a $259 thousand reduction in bad debt expense.
Net income for the six months ended September 30, 2009 increased by $5.9 million, or 91%, to $12.3 million compared to net income of $6.4 million for the six months ended September 30, 2008. This increase was attributable to the 14%, or $11.5 million, decrease in operating expenses and a $1.7 million decrease in total
interest and other income (expense), net, partially offset by a decrease in total product and service gross profit of $4.1 million as well as an increase of $3.3 million, or 95%, in income tax expense due to the higher pre-tax income.
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 six months ended September 30, 2009, our income from operations was $20.5 million, increasing by $7.4 million compared to income from operations of $13.1 million for the six months ended September 30, 2008. As networks continue to expand, traffic 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 Snifferฎ Global product with Cisco's Unified Wireless Networking solution. In the second quarter, we extended our strategic hardware instrumentation offering through the nGenius Infinistream 2900 Series appliance to enable our customers to deploy intelligent Deep Packet Capture capabilities in more places. We also shipped the Sniffer Global network analyzer v3.1 which provided integration into the Cisco Wireless Mobility Service Engine. 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.
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.
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;
uncollected deferred revenue;
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.
Three Months Ended September 30, 2009 and 2008
Revenue
Product revenue consists of sales of our hardware products and licensing of our software products. Service revenue consists of customer support agreements, consulting and training. No one direct customer or indirect channel partner accounted for more than 10% of our total revenue during the three months ended September 30, 2009. During the three months ended September 30, 2008, one direct customer accounted for 20% of our total revenue, while no one indirect channel partner accounted for more than 10% of our total revenue.
Three Months Ended
September 30,
(Dollars in Thousands)
2009 2008 Change
% of % of
Revenue Revenue $ %
Revenue:
Product $ 30,631 51 % $ 39,513 57 % $ (8,882 ) (22 )%
Service 29,060 49 29,348 43 (288 ) (1 )%
Total Revenue $ 59,691 100 % $ 68,861 100 % $ (9,170 ) (13 )%
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Product. The 22%, or $8.9 million, decrease in product revenue was the result of the impact of the global economic downturn on our customers' capital spending. Product revenue as a percent of total revenue decreased six points when compared to the three months ending September 30, 2008.
Service. The 1%, or $288 thousand, decrease in service revenue was primarily due to the recognition of previously deferred maintenance associated with a large product order which was shipped in prior periods and recognized in the three months ended September 30, 2008 offset by a lower purchase accounting adjustment associated with the Network General acquisition during the three months ended September 30, 2009.
Total product and service revenue from direct and indirect channels are as follows:
Three Months Ended
September 30,
(Dollars in Thousands)
2009 2008 Change
% of % of
Revenue Revenue $ %
Indirect $ 39,054 65 % $ 33,343 48 % $ 5,711 17 %
Direct 20,637 35 35,518 52 (14,881 ) (42 )%
Total Revenue $ 59,691 100 % $ 68,861 100 % $ (9,170 ) (13 )%
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The 17%, or $5.7 million, increase in indirect channel revenue is primarily the result of increased sales to the federal government vertical market, which we sell to entirely through channel partners. Sales to customers outside the United States are primarily export sales through indirect channel partners, who are generally responsible for distributing our products and providing technical support and service to customers within their territories. All sales arrangements are primarily transacted in United States dollars. Our reported international revenue does not include any revenue from sales to customers outside the United States that are shipped to our United States-based indirect channel partners. These domestic resellers fulfill customer orders based upon joint
selling efforts in conjunction with our direct sales force and may subsequently ship our products to international locations; however, we report these shipments as United States revenue since we ship the products to a domestic location. The 42%, or $14.9 million, decrease in direct channel revenue is the result of the recognition of one large direct order totaling $14.9 million for the three months ended September 30, 2008. Our product mix between indirect and direct customers was also impacted in the three months ended September 30, 2008 by this large direct order.
Total revenue by geography is as follows:
Three Months Ended
September 30,
(Dollars in Thousands)
2009 2008 Change
% of % of
Revenue Revenue $ %
United States $ 44,465 75 % $ 53,687 78 % $ (9,222 ) (17 )%
International:
Europe 7,761 13 8,438 12 (677 ) (8 )%
Asia 3,226 5 3,209 5 17 1 %
Other 4,239 7 3,527 5 712 20 %
Subtotal International: 15,226 25 15,174 22 52 (0 )%
Total Revenue $ 59,691 100 % $ 68,861 100 % $ (9,170 ) (13 )%
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United States revenues decreased $9.2 million due to the impact of the global economic downturn on our customers' capital spending offset by a $3.8 million reduction in purchase accounting adjustments related to the Network General acquisition. The 8% decline in Europe revenue is also a result of the economic slowdown. The 20% increase in Other international revenue, which includes Africa, Australia, Canada, India, Latin America, Mexico and the Middle East, was primarily due to market penetration in Australia and in the Middle East. We expect revenue from sales to customers outside the United States to continue to account for a significant portion of our total revenue in the future.
Cost of Revenue and Gross Profit
Cost of product revenue consists primarily of material components, manufacturing
personnel expenses, media duplication, manuals, packaging materials, overhead
and amortization of capitalized software and developed product technology. Cost
of service revenue consists primarily of personnel, material, overhead and
support costs.
Three Months Ended
September 30,
(Dollars in Thousands)
2009 2008 Change
% of % of
Revenue Revenue $ %
Cost of revenue
Product $ 8,289 14 % $ 12,057 17 % $ (3,768 ) (31 )%
Service 4,584 8 5,289 8 (705 ) (13 )%
Total cost of revenue $ 12,873 22 % $ 17,346 25 % $ (4,473 ) (26 )%
Gross profit:
Product $ $ 22,342 37 % $ 27,456 40 % $ (5,114 ) (19 )%
Product gross profit % 73 % 69 %
Service $ $ 24,476 41 % $ 24,059 35 % $ 417 2 %
Service gross profit % 84 % 82 %
Total gross profit $ $ 46,818 $ 51,515 $ (4,697 ) (9 )%
Total gross profit % 78 % 75 %
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Product. The 31%, or $3.8 million, decrease in cost of product revenue was primarily due to the 22%, or $8.9 million decline in product revenue for the three months ended September 30, 2009 when compared to the three months ended September 30, 2008. The product gross profit percentage increased by four points from 69% for the three months ended September 30, 2008 to 73% for the three months ended September 30, 2009. This increase was due to product mix and the realization of material cost reductions and efficiencies in our manufacturing organization. Average headcount in cost of product revenue was 26 and 26 for the three months ended September 30, 2009 and 2008, respectively.
Service. The 13%, or $705 thousand, decrease in cost of service revenue was primarily due to decreases in employee related expenses, travel in our support and consulting groups and a decrease in the use of outside contractors by our consulting and training groups. The 2%, or $417 thousand, increase in service gross profit corresponds with the 13%, or $705 thousand, decrease in cost of services offset by the 1%, or $288 thousand, decrease in service revenue. Average headcount in cost of service revenue was 103 and 98 for the three months ended September 30, 2009 and 2008, respectively.
Gross profit. Our gross profit decreased 9%, or $4.7 million. This decrease is attributable to our decrease in revenue of 13%, or $9.2 million, offset by the reduction in product cost of revenue. The net effect of the combined decreases in revenue and cost of revenue was a three point increase in gross profit percentage from the three months ended September 30, 2008 to the three months ended September 30, 2009. This increase in gross profit percentage is primarily attributable to component cost reductions that we have been making over the last several quarters, favorable product mix towards higher margin hardware platforms, a larger percentage of higher margin service revenue, acquisition related synergies and a $3.8 million reduction in purchase accounting adjustments. Our gross profit is significantly affected by the mix and volume of our product and service revenue. Product revenue for the three months ended September 30, 2009 decreased $8.9 million, or 22%, to $30.6 million from $39.5 million for the three months ended September 30, 2008. Service revenue for the three months ended September 30, 2009 decreased $288 thousand, or 1%, to $29.1 million from $29.3 million for the three months ended September 30, 2008. We realize significantly higher gross profit on service revenue than on product revenue.
Operating Expenses
Three Months Ended
September 30,
(Dollars in Thousands)
2009 2008 Change
% of % of
Revenue Revenue $ %
Research and development $ 8,670 15 % $ 10,135 15 % $ (1,465 ) (14 )%
Sales and marketing 21,372 36 25,739 37 (4,367 ) (17 )%
General and administrative 4,604 7 6,080 9 (1,476 ) (24 )%
Amortization of acquired intangible
assets 491 1 490 1 1 0 %
Total Operating Expenses $ 35,137 59 % $ 42,444 62 % $ (7,307 ) (17 )%
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Research and development. Research and development expenses consist primarily of personnel expenses, fees for outside consultants, overhead and related expenses associated with the development of new products and the enhancement of existing products.
The 14%, or $1.5 million, decrease in research and development expenses is primarily due to decreases in employee related expenses and travel as well as a reduction in integration costs associated with the acquisition of Network General. Average headcount in research and development was 234 and 246 for the three months ended September 30, 2009 and 2008, respectively.
Sales and marketing. Sales and marketing expenses consist primarily of personnel expenses, including commissions, overhead and other expenses associated with selling activities and marketing programs such as trade shows, seminars, advertising, and new product launch activities.
The 17%, or $4.4 million, decrease in total sales and marketing expenses was primarily due to $2.8 million in decreased sales commissions commensurate with the lower sales revenue, a $420 thousand decrease in travel expenses, a $230 thousand decrease in sales meeting expenses, a $257 thousand decrease in recruiting costs, an $83 thousand decrease in other employee related expenses and an $85 thousand decrease in integration costs related to the acquisition of Network General. Average headcount in sales and marketing was 297 and 303 for the three months ended September 30, 2009 and 2008, respectively.
General and administrative. General and administrative expenses consist primarily of personnel expenses for executive, financial, legal and human resource employees, overhead and other corporate expenditures.
The 24%, or $1.5 million, decrease in general and administrative expenses was primarily due to a $633 thousand decrease in employee related expenses, a $600 thousand decrease in professional fees and a $139 thousand decrease in bad debt expense. Average headcount in general and administrative was 109 and 105 for the three months ended September 30, 2009 and 2008, respectively.
Amortization of acquired intangible assets. Amortization of acquired intangible assets consists primarily of amortization of customer relationships related to the acquisition of Network General.
Interest and Other Income (Expense), Net. Interest and other income (expense), net includes interest earned on our cash, cash equivalents, marketable securities and restricted investments, interest expense and other non-operating gains or losses.
Three Months Ended
September 30,
(Dollars in Thousands)
2009 2008 Change
% of % of
Revenue Revenue $ %
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The 50%, or $713 thousand, change in interest and other income (expense), net was primarily due to the $705 thousand decrease in interest expense due to a reduction in the interest rate and the related principal amount outstanding associated with debt entered into as a result of the acquisition of Network General. For the three months ended September 30, 2009 and 2008, the term loan incurred interest at 3.38% and 5.94%, respectively. The change this year was also due to a $473 thousand decrease in foreign currency transaction expense due to the settlement of transactions, such as the collection of accounts receivable or the payment of liabilities related to our international locations, which were denominated in currencies other than the U.S. dollar as well as translation adjustments on foreign currency denominated assets and liabilities offset by a $465 thousand decrease in interest income due to a decrease in market interest rates received on investments.
Income Tax Expense. We estimate our income tax expense based on our estimated annual effective tax rate. The estimated annual effective tax rate as of September 30, 2009 for fiscal year 2010 is 35.5%, compared to an estimated annual effective tax rate of 34.5% as of September 30, 2008 for fiscal year 2009. The increase in our effective tax rate is primarily due to the scheduled expiration of the federal research and development credit and a decrease in tax exempt interest. Generally, the estimated annual effective tax rates differ from the statutory rates primarily due to the impact of federal and state tax credits, tax-exempt interest income, state taxes, and qualified production activities deductions.
Three Months Ended
September 30,
(Dollars in Thousands)
2009 2008 Change
% of % of
Revenue Revenue $ %
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Net Income. Net income for the three months ended September 30, 2009 and 2008 is as follows:
Three Months Ended
September 30,
(Dollars in Thousands)
2009 2008 Change
% of % of
Revenue Revenue $ %
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Six Months Ended September 30, 2009 and 2008
Revenue
Product revenue consists of sales of our hardware products and licensing of our software products. Service revenue consists of customer support agreements, consulting and training. No one direct customer or indirect channel partner accounted for more than 10% of our total revenue during the six months ended . . .
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