Reports Solid Q4 ’21 Results and Calls for Renewed Growth in FY ‘22

NetScout Systems’ (NTCT) Q4 ’21 results exceeded our estimates, although the performance was mixed relative to Street expectations. Revenue was just shy of the midpoint of management’s guidance and consensus, which we attribute to revenue recognition associated with the company’s larger deals in the service provider vertical. Of more importance, NetScout continued to see momentum build for 5G-related projects, securing an eight-figure award from a second Tier-1 carrier in North America as well as a couple of seven-figure wins with regional Tier-2 providers. Contribution from software-only sales also increased from the prior year period, which combined with tight cost controls and pandemic-related savings, produced margins and non-GAAP EPS above guidance and consensus.

After successfully navigating through last year’s challenges, management anticipates both renewed revenue growth and earnings expansion in FY ‘22. We note that the midpoint of the company’s top and bottom-line guidance for the year was generally consistent with Street expectations heading into the print and compared favorably with our prior projections. Management’s expectations for renewed growth in FY ’22 are predicated upon an economic recovery post-pandemic; leveraging NetScout’s incumbency to capture incremental budget dollars associated with 5G, cloud and DDoS use cases; winning new logos down market via its software-centric solutions; and increasing contribution from new security offerings. All told, progress on these fronts is expected to yield revenue growth in the low single-digit range and a slight increase in non-GAAP EPS. Near-term, management expects flat to modest growth on both the top and bottom lines in Q1, implying a more back-end loaded year than reflected in our prior estimates and consensus.

As management’s FY ’22 guidance left our prior revenue and non-GAAP EPS estimates at the midpoint and low-end, respectively, we made only minor adjustments to our model. Our estimates tick up ever so slightly for this year while our FY ’23 projections, which reflect further acceleration in growth and margin expansion remain virtually unchanged. We also maintain our price target of $33.00, which continues to represent a FY ’22 EV/EBITDA multiple of approximately 12x. In our opinion, shares are attractively valued at present given an imminent inflection point in growth and the company’s exposure to tailwinds associated with 5G, cloud migration and cybersecurity.

Exhibit I: Quarterly Results and Guidance Versus Expectations

Revenue of $213.4 million (-7.0% Y/Y) was above our estimate of $209.3 million but shy of the Street’s $215.1 million. Management’s guidance called for $207.1-$222.1 million. Relative to our estimate, the upside was attributable to higher than anticipated Product sales, which totaled $99.1 million (-15.0% Y/Y) versus our estimate of $95.0 million. Service revenue of $114.3 million (+1.3% Y/Y) was in line with our forecast. By vertical, service provider comprised 57% of revenue and increased 5% Y/Y driven by budding momentum for 5G-related initiatives. Enterprise comprised the remaining 43% of revenue and decreased 19% Y/Y due to ongoing declines in sales of Fluke Networks systems and lower activity in the financial services vertical. Also noteworthy, NetScout’s security business generated revenue in excess of $200.0 million in FY ’21, and the company secured several new logo wins for its Arbor Edge Defense product in Q4. At its recent Engage 2021 customer conference, NetScout unveiled its new Omnis security platform combining its network visibility and threat detection capabilities. Together with the upcoming launch of a new mobile security solution, cybersecurity solutions are expected to contribute to higher growth in product revenue as the fiscal year progresses.

Gross margin on a non-GAAP basis was 77.2%, up from 76.0% last year and ahead of our 76.8% assumption. Software-only sales comprised 33% of service assurance product revenue versus 29% in the year-ago period, resulting in product gross margin increasing from 77.9% last year to 81.2% in Q4 ‘21. Service gross margin of 73.7% was down slightly from both the prior and year-ago quarters but was ahead of our 73.3% assumption. Operating expenses were largely in line with our expectations as higher sales and marketing expenses were offset by lower research and development costs. Both non-GAAP operating income of $47.8 million (22.4% margin) and adjusted EBITDA of $53.9 million (25.3% margin) also outpaced our estimates. Non-GAAP EPS of $0.49 beat guidance for $0.39-$0.46, our $0.41 projection and the Street’s $0.44.

In Q4, NetScout generated $89.1 million in free cash flow and exited the quarter with cash and investments of $476.5 million. Outstanding debt declined to $350.0 million as management repaid $100.0 million in debt during the quarter. The company did not repurchase any shares in the quarter but expects to be active in the market during Q1. As for the near-term outlook, management anticipates revenue growth of 0%-2% and a corresponding increase in earnings during Q1, which implies revenue of $183.8-$187.5 million and non-GAAP EPS of $0.17-$0.19. We were projecting revenue and non-GAAP EPS of $188.8 million and $0.23, respectively, while consensus stood at $184.5 million and $0.24. For FY ’22, guidance for $835.0-$865.0 million in revenue and $1.71-$1.77 in non-GAAP EPS was consistent with both our estimates and consensus.

Exhibit II: Estimate Revisions

We fine-tuned our estimates for this year and next, primarily shifting some revenue between quarters and adjusting the mix of product and services. We continue to anticipate improvement in gross margin driven by a higher mix of software-only and security solutions. On the expense side, we raised our assumptions for sales and marketing while reducing our estimate of research and development costs. Overall, our estimates are little changed for FY ’22 and FY ’23.

Our report with model and disclosures is available here.

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).