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| NTCT > SEC Filings for NTCT > Form 10-Q on 2-Nov-2012 | All Recent SEC Filings |
2-Nov-2012
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, 2012 and elsewhere in this Quarterly Report. These factors may cause our actual results to differ materially from any forward-looking statement.
Overview
We design, develop, manufacture, market, sell and support market leading unified service delivery management, service assurance and application performance management solutions focused on assuring service delivery for the world's largest, most demanding and complex IP based service delivery environments. We manufacture and market these products in integrated hardware and software solutions that are 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.
Our operating results are influenced by a number of factors, including, but not limited to, the mix and quantity of products and services sold, pricing, costs of materials used in our products, growth in employee related costs, including commissions, 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 acquisition integration efforts, our ability to achieve significant expense reductions and make structural improvements and current economic conditions.
On July 20, 2012, we completed the acquisition of certain assets, technology and employees from Accanto Systems, S.r.l. (Accanto). Accanto provides service assurance for telecommunication service providers enabling carriers to monitor and manage the delivery of voice services over converged, next generation network architectures. This technology is synergistic with our packet flow strategy and brings voice service monitoring capabilities for legacy voice environments and for next generation network voice services, including voice over IP (VoIP) and voice over long-term evolution (VoLTE) for 4G wireless networks.
Results Overview
During the quarter ended September 30, 2012, net income and net income per share increased 41% and 35%, respectively compared to the same period in the prior year.
We saw continued growth during the quarter ended September 30, 2012, with product revenue growth of 21% and overall revenue growth of 16% compared to the same period in the prior year.
Total new business bookings increased by 15% during the six months ended September 30, 2012 when compared to the same period in the prior year. Our new business bookings for the service provider sector grew 70% for the six months ended September 30, 2012 when compared to the same period in the prior year. This is the result of the expansion of our Long-term Evolution (LTE) deployments within the major global carriers. Our new business bookings for the financial enterprise sector grew modestly at 4% for the six months ended September 30, 2012 when compared to the same period in the prior year due to the weakness in this sector within the European region. New business bookings from the government enterprise sector decreased by 38% for the six months ended September 30, 2012 as compared to September 30, 2011 due to the deferral by the federal government on long-term strategic initiatives. A new business booking is defined as new product orders and new service orders including new maintenance purchases.
We ended the quarter ended September 30, 2012 with backlog of $19.5 million.
We continue to maintain strong liquidity. At September 30, 2012, we had cash, cash equivalents and marketable securities of $235.6 million. This represents an increase of $22.1 million from March 31, 2012.
Use of Non-GAAP Financial Measures
From time to time in press releases regarding quarterly earnings, presentations and other communications, we supplement the financial measures by providing non-GAAP measures relating to revenue and net income per diluted share. Non-GAAP results eliminate the GAAP effects of acquisitions by adding back revenue related to deferred revenue revaluation and removing expenses related to the amortization of acquired intangible assets, the GAAP effects of stock-based compensation, and restructuring charges. Non-GAAP results also exclude certain expenses relating to acquisitions including compensation for post combination services and business development charges. Non-GAAP results also exclude the related impact of all these adjustments on the provision for income taxes.
These non-GAAP measures are not in accordance with GAAP, should not be considered an alternative for measures prepared in accordance with GAAP, and may have limitations in that they do not reflect all our results of operations as determined in accordance with GAAP. These non-GAAP measures should only be used to evaluate our results of operations in conjunction with the corresponding GAAP measures. The presentation of non-GAAP information is not meant to be considered superior to, in isolation from or as a substitute for results prepared in accordance with GAAP.
Management believes these non-GAAP financial measures enhance the reader's overall understanding of NetScout's current financial performance and its prospects for the future by providing a higher degree of transparency for certain financial measures and providing a level of disclosure that helps investors understand how NetScout plans and measures its own business. We believe that providing these non-GAAP measures affords investors a view of our operating results that may be more easily compared to our peer companies and also enables investors to consider our operating results on both a GAAP and non-GAAP basis during and following the integration period of our acquisitions. Presenting the GAAP measures on their own would not be indicative of our core operating results. Furthermore, management believes that the presentation of non-GAAP measures when shown in conjunction with the corresponding GAAP measures provide useful information to management and investors regarding present and future business trends relating to our financial condition and results of operations.
The following table reconciles revenue, net income and net income per share on a GAAP and non-GAAP basis for the three and six months ended September 30, 2012 and 2011 (in thousands):
Three Months Ended Six months ended
September 30, September 30,
2012 2011 2012 2011
GAAP revenue $ 84,545 $ 72,624 $ 160,906 $ 135,920
Deferred revenue fair value adjustment 133 20 271 40
Non-GAAP revenue $ 84,678 $ 72,644 $ 161,177 $ 135,960
GAAP net income $ 9,910 $ 7,051 $ 14,918 $ 9,450
Deferred revenue fair value adjustment 133 20 271 40
Share based compensation expense 2,532 1,788 4,779 3,947
Amortization of acquired intangible assets 2,130 1,593 4,133 3,173
Business development and integration
expense 474 1,871 831 2,473
Compensation for post combination services 442 0 814 0
Restructuring charges 1,153 0 1,066 0
Income tax adjustments (2,330 ) (2,004 ) (4,242 ) (3,299 )
Non-GAAP net income $ 14,444 $ 10,319 $ 22,570 $ 15,784
GAAP diluted net income per share $ 0.23 $ 0.17 $ 0.35 $ 0.22
Share impact of non-GAAP adjustments
identified above 0.11 0.07 0.18 0.15
Non-GAAP diluted net income per share $ 0.34 $ 0.24 $ 0.53 $ 0.37
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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:
• revenue recognition;
• valuation of goodwill and acquired intangible assets; and
• share-based compensation.
Please refer to the critical accounting policies set forth in our Annual Report on Form 10-K for the fiscal year ended March 31, 2012, filed with the Securities and Exchange Commission (SEC) on May 25, 2012, for a description of all critical accounting policies.
Three Months Ended September 30, 2012 and 2011
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. One customer accounted for more than 10% of our total revenue during the three months ended September 30, 2012. During the three months ended September 30, 2011, no one customer accounted for more than 10% of total revenue.
Three Months Ended
September 30,
(Dollars in Thousands)
2012 2011 Change
% of % of
Revenue Revenue $ %
Revenue:
Product $ 46,162 55 % $ 38,080 52 % $ 8,082 21 %
Service 38,383 45 34,544 48 3,839 11 %
Total revenue $ 84,545 100 % $ 72,624 100 % $ 11,921 16 %
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Product. The 21%, or $8.1 million, increase in product revenue was due to a $12.7 million increase in revenue from our service provider sector and a $334 thousand increase in our financial enterprise sector. These increases were offset by a $4.0 million decrease in our government enterprise sector and a $937 million decrease in our general enterprise sector. Compared to the same period in the prior year, we realized a 3% increase in units shipped, while the average selling price per unit of our products increased approximately 19%. The increase in average selling price is due to product mix.
We expect our service provider sector to continue to be a significant driver of future growth.
Service. The 11%, or $3.8 million, increase in service revenue was due to a $3.8 million increase in revenue from maintenance contracts due to increased new maintenance and renewals from a growing support base, a $252 thousand increase in premium support contracts and a $276 thousand increase in training revenue. This was partially offset by a $498 thousand decrease in consulting revenue.
Total product and service revenue from direct and indirect channels are as follows:
Three Months Ended
September 30,
(Dollars in Thousands)
2012 2011 Change
% of % of
Revenue Revenue $ %
Indirect $ 36,770 43 % $ 38,951 54 % $ (2,181 ) (6 %)
Direct 47,775 57 33,673 46 14,102 42 %
Total revenue $ 84,545 100 % $ 72,624 100 % $ 11,921 16 %
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The 6%, or $2.2 million, decrease in indirect channel revenue is the result of the decrease in sales to our government sector, which generally come through resellers. Sales to customers outside the United States are export sales typically through channel partners, who are generally responsible for distributing our products and providing technical support and service to customers within their territories. 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 $14.1 million, increase in direct channel revenue is largely the result of an order placed by a domestic service provider customer that was over 10% of revenue for the three months ended September 30, 2012.
Total revenue by geography is as follows:
Three Months Ended
September 30,
(Dollars in Thousands)
2012 2011 Change
% of % of
Revenue Revenue $ %
United States $ 66,616 79 % $ 55,296 76 % $ 11,320 20 %
International:
Europe 8,001 9 7,239 10 762 11 %
Asia 4,206 5 4,217 6 (11 ) 0 %
Rest of the world 5,722 7 5,872 8 (150 ) (3 %)
Subtotal international 17,929 21 17,328 24 601 3 %
Total revenue $ 84,545 100 % $ 72,624 100 % $ 11,921 16 %
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United States revenues increased 20%, or $11.3 million, as a result of an increase in our service provider sector. The 3%, or $601 thousand, increase in international revenue is primarily due to an increase in our service provider sector in Europe. 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. In accordance with United States export control regulations we do not sell to, or do business with, countries subject to economic sanctions and export controls.
Cost of Revenue and Gross Profit
Cost of product revenue consists of material components, manufacturing personnel
expenses, including stock-based compensation costs, manuals, packaging
materials, overhead and amortization of capitalized software, acquired software
and core technology. Cost of service revenue consists of personnel, including
stock based compensation costs, material, overhead and support costs.
Three Months Ended
September 30,
(Dollars in Thousands)
2012 2011 Change
% of % of
Revenue Revenue $ %
Cost of revenue
Product $ 10,330 12 % $ 9,061 12 % $ 1,269 14 %
Service 6,611 8 6,516 9 95 1 %
Total cost of revenue $ 16,941 20 % $ 15,577 21 % $ 1,364 9 %
Gross profit:
Product $ $ 35,832 42 % $ 29,019 40 % $ 6,813 23 %
Product gross profit % 78 % 76 %
Service $ $ 31,772 38 % $ 28,028 39 % $ 3,744 13 %
Service gross profit % 83 % 81 %
Total gross profit $ $ 67,604 $ 57,047 $ 10,557 19 %
Total gross profit % 80 % 79 %
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Product. The 14%, or $1.3 million, increase in cost of product revenue was primarily due to the 21% increase in product revenue during the three months ended September 30, 2012. Amortization of software and core technology included as cost of product revenue increased by $386 thousand for the three months ended September 30, 2012. The product gross profit percentage increased by two percentage points to 78% during the three months ended September 30, 2012. This increase was primarily due to a mix shift to higher margin products during the three months ended September 30, 2012 as compared to the three months ended September 30, 2011, offset by the increase in amortization of software and core technology. Average headcount in manufacturing was 27 and 26 for the three months ended September 30, 2012 and 2011, respectively.
Service. The 1%, or $95 thousand, increase in cost of service revenue was due to a $389 thousand increase in employee related expenses resulting from increased incentive compensation offset by a $322 thousand decrease in cost of materials used to support customers under service contracts. The service gross profit percentage increased by two percentage points to 83% for the quarter ended September 30, 2012. The 13%, or $3.7 million, increase in service gross profit corresponds with the 11%, or $3.8 million, increase in service revenue, offset by the 1%, or $95 thousand, increase in cost of services. Average service headcount was 141 and 123 for the three months ended September 30, 2012 and 2011, respectively.
Gross profit. Our gross profit increased 19%, or $10.6 million. This increase is attributable to our increase in revenue of 16%, or $11.9 million, offset by a 9%, or $1.4 million, increase in cost of revenue. The gross margin percentage increased by one point to 80% for the three months ended September 30, 2012.
Operating Expenses
Three Months Ended
September 30,
(Dollars in Thousands)
2012 2011 Change
% of % of
Revenue Revenue $ %
Research and development $ 15,201 18 % $ 11,160 15 % $ 4,041 36 %
Sales and marketing 26,743 32 26,854 37 (111 ) (0 %)
General and administrative 6,975 8 7,037 10 (62 ) (1 %)
Amortization of acquired
intangible assets 645 1 494 1 151 31 %
Restructuring charges 1,153 1 0 0 1,153 100 %
Total operating expenses $ 50,717 60 % $ 45,545 63 % $ 5,172 11 %
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Research and development. Research and development expenses consist primarily of personnel expenses, including stock-based compensation costs, fees for outside consultants, overhead and related expenses associated with the development of new products and the enhancement of existing products.
The 36%, or $4.0 million, increase in research and development expenses is due to a $2.4 million increase in employee related expenses due to increased headcount and incentive compensation, a $442 thousand increase in compensation for post combination services related to the acquisitions of Replay and Simena, a $258 thousand increase in meeting expenses and a $162 thousand increase in consulting. Average headcount in research and development was 333 and 285 for the three months ended September 30, 2012 and 2011, respectively.
Sales and marketing. Sales and marketing expenses consist primarily of personnel expenses, including stock-based compensation costs and commissions, overhead and other expenses associated with selling activities and marketing programs such as trade shows, seminars, advertising, and new product launch activities.
The $111 thousand decrease in total sales and marketing expenses was due to an $875 thousand decrease in commission expense and a $726 thousand decrease in trade show expenses. These decreases were offset by a
$769 thousand increase in marketing related expenses, a $481 increase in employee related expenses and a $203 thousand increase in depreciation. Average headcount in sales and marketing was 327 and 320 for the three months ended September 30, 2012 and 2011, respectively.
General and administrative.General and administrative expenses consist primarily of personnel expenses for executive, financial, legal and human resource employees, including stock-based compensation costs, overhead and other corporate expenditures.
The 1%, or $62 thousand, decrease in general and administrative expenses was due to an $898 thousand decrease in business development expenses. This was offset by a $587 thousand increase in employee related expenses related to an increase in incentive compensation and a $237 thousand increase in software licenses. Average headcount in general and administrative was 112 and 119 for the three months ended September 30, 2012 and 2011, respectively.
Amortization of acquired intangible assets. Amortization of acquired intangible assets consists primarily of amortization of customer relationships related to the acquisitions of Accanto, Simena, Replay, Psytechnics and Network General Central Corporation.
The 31%, or $151 thousand, increase in amortization of acquired intangible assets is due to the increase of expense recorded related to the acquisitions of Accanto, Simena and Replay. The amortization related to these acquisitions was not recorded during the three months ended September 30, 2011 as the acquisitions have occurred within the past twelve months.
Restructuring charges. During the quarter ended September 30, 2012, we restructured part of our international sales organization related to an overlap of personnel acquired as part of the Accanto acquisition and eliminated one European sales executive. As a result, we recorded $1.2 million of restructuring charges during the three months ended September 31, 2012 related to severance costs.
Interest and Other Expense, Net. Interest and other income (expense), net includes interest earned on our cash, cash equivalents and marketable securities, interest expense and other non-operating gains or losses.
Three Months Ended
September 30,
(Dollars in Thousands)
2012 2011 Change
% of % of
Revenue Revenue $ %
Interest and other expense, net $ (116 ) (0 %) $ (835 ) (1 %) $ 719 86 %
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The 86%, or $719 thousand, decrease in interest and other income (expense), net was due to a $533 thousand decrease in foreign currency transaction expense, a $91 thousand increase in interest income received on investments and a $76 thousand decrease in interest expense due to a decrease in the interest rate and principal amounts outstanding associated with our debt. During the quarters ended September 30, 2012 and 2011, the average interest rates on our outstanding debt were 1.50% and 2.50%, respectively.
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, 2012 for fiscal year 2013 is 36.2%, compared to an estimated annual effective tax rate of 34.2% as of September 30, 2011 for fiscal year 2012. Generally, the annual effective tax rates differ from statutory rates primarily due to the impact of the domestic production activities deduction, the impact of state taxes, and federal, foreign and state tax credits. The difference in our estimated effective tax rate compared to the prior year is primarily due to acquisition related items, the expiration of the research and development credit and differences in tax rates in foreign jurisdictions as compared to the United States.
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