NetScout Systems Provides Business and FY '20 Financial Update

NetScout Systems (NTCT) pre-announced FY ’20 results reflecting revenue slightly below management’s prior guidance but non-GAAP EPS near the high-end of prior expectations. The preliminary results imply Q4 performance was mixed relative to our estimates and consensus. While details underlying the results were scant, CEO Anil Singhal noted that revenue was approximately 1% below target despite disruption from COVID-19, demonstrating the necessity for NetScout’s service assurance and security solutions. We surmise the slight top line shortfall was therefore attributable to delayed deals on the enterprise side of the business, while service provider sales were likely within range. As for the outlook, the company refrained from issuing guidance for FY ’21 citing the uncertainty arising from COVID-19. Although we believe NetScout is well positioned to withstand any near-term disruption from the coronavirus crisis, we are reducing our estimates for this year and next to reflect softer economic conditions. Our price target declines in concert from $33.00 to $29.50, reflecting an unchanged FY ’21 EV/EBITDA multiple of 12x. Given our view that NetScout’s service provider exposure should help insulate the business in the current environment, and the potential for any slipped opportunities in the interim to close by the latter half of the company’s fiscal year, we continue to believe shares are worth owning at current levels.

NetScout’s preliminary FY ’20 results include revenue of $890.0-$892.0 million and non-GAAP EPS of $1.54-$1.56, which was mixed relative to guidance for $900.0-$910.0 million in revenue and $1.51-$1.56 in non-GAAP EPS. The full year performance implies Q4 revenue of $227.5-$237.5 million and non-GAAP EPS of $0.46-$0.48. We were projecting Q4 revenue and non-GAAP EPS of $241.9 million and $0.44, respectively, while consensus stood at $241.9 million and $0.47. Although the impact of COVID-19 is impossible to predict at this juncture, we believe enterprise sales cycles are likely to elongate in the near-term and economic conditions will remain more challenging even as shelter-in-place orders are lifted in the coming months. With this in mind, we have reduced our estimates for FY ’21 and FY ’22. We currently assume a gradual recovery scenario in which a return to product revenue growth by Q4 ’21 and only modest growth in expenses will enable the company to hold its top and bottom line steady for the year. Beyond FY ’21, we continue to forecast accelerating growth, albeit off a lower base.

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Disclosure(s):

The analyst, a member of the analyst’s household, and/or an account in which the analyst exercises discretion hold(s) a long position in the common stock of NetScout Systems (NTCT).