Guidance Reaffirmed After Another Solid Print
NetScout Systems (NTCT) reported fiscal Q2 ’25 results ahead of our estimates and consensus. The upside versus our model was primarily due to higher than anticipated product sales, reflecting renewed growth in sales of cybersecurity solutions and strength in the enterprise vertical. Although revenue from the service provider vertical remained under pressure, the anticipated renewal of a large maintenance agreement in the current quarter along with expectations from the large, North American Tier-1 carriers to increase capital expenditures moving forward suggest we may finally be at the trough. In addition to the solid revenue performance, gross margin came in higher than we assumed, and operating expenses ran lower as the company realized the initial benefits of a 6% workforce reduction. Both non-GAAP operating income and EPS also beat expectations.
With fiscal 1H results tracking in line with internal expectations, management reaffirmed its prior FY ’25 guidance for revenue and non-GAAP EPS. Moreover, management indicated that the 2H results are expected to be evenly distributed over the remaining quarters, implying Q3 targets slightly ahead of our prior estimates and in line with consensus at the midpoint of guidance. Assuming management delivers on its near-term outlook, we note that NetScout is poised to return to positive revenue growth this quarter and should see further acceleration in Q4 and beyond.
Despite another solid print and guide, shares of NTCT traded lower yesterday and remain cheaply valued, in our opinion. We surmise that the muted response was a function of an outlook that still requires a sizeable sequential step-up in revenue and ongoing declines in service provider revenue. Thus, we believe the next earnings release could prove pivotal in changing investor sentiment as we expect NetScout to reach an inflection point in top line growth, see greater contribution from service providers and build upon early signs of momentum with enterprise customers. As noted earlier, capex plans from the large domestic carriers point to an uptick in spending exiting this year and into the new year driven by investments in standalone 5G and fixed wireless access among other initiatives. We believe NetScout stands to benefit from these investments, which combined with its expanded portfolio of cybersecurity solutions and data streams for AIOps should translate into more material growth and margin expansion in FY ’26 and beyond. Our estimates edge slightly higher for this year and next, and our price target remains $38.00 based on an unchanged FY ’25 EV/EBITDA multiple of 12x.
Exhibit I: Quarterly Results and Guidance Versus Expectations
Sources: FactSet Estimates; K. Liu & Company LLC; NetScout Earnings Release
Q2 revenue of $191.1 million (-2.9% Y/Y) was ahead of our estimate of $188.8 million and consensus of $188.4 million. Per management, if not for approximately $11 million in backlog-related revenue last year and the divestiture of the Test Optimization business, growth in Q2 would have been in the mid-single digit range on a normalized basis. Relative to our model, product revenue of $81.0 million (+0.6% Y/Y) exceeded our estimate of $75.0 million, more than offsetting lower service revenue of $110.1 million (-5.3% Y/Y), which fell short of our $113.8 million projection. Worth noting, the delay of a large maintenance renewal from Q2 to Q3 impacted service revenue in the quarter. By product, revenue from service assurance solutions comprised 64% of revenue and declined 6% Y/Y, while cybersecurity sales comprised the remaining 36% of sales and increased 3% Y/Y. By vertical, revenue from service providers comprised 28% of total revenue in Q2, representing a decline of 40% Y/Y due to the timing of the aforementioned maintenance renewal and the challenging spending environment that has persisted throughout the past year, and enterprise customers accounted for 72% of revenue with a corresponding 28% increase in revenue.
Non-GAAP gross margin of 79.7% was above our 78.2% assumption with both product and service gross margins higher than we modeled. Total operating expenses were slightly below our forecast, mostly due to lower R&D expenses than we projected. As such, both non-GAAP operating income of $44.1 million (23.1% margin) and adjusted EBITDA of $47.5 million (24.9% margin) surpassed our estimates of $40.6 million and $44.4 million, respectively. Non-GAAP EPS of $0.47 also beat our estimate and consensus of $0.45 despite a $0.02 loss per share on a foreign investment.Cash and investments at quarter-end totaled $401.9 million, while outstanding debt remained unchanged from the prior quarter at $75.0 million. In Q2, NetScout used $3.6 million in cash flow from operations and had $2.2 million in capital expenditures. The company also repurchased approximately 14,000 shares at an average price of $18.00 per share.
Management reaffirmed its prior FY ’25 guidance for revenue of $800.0-$830.0 million and non-GAAP EPS of $2.10-$2.30. The outlook for the remainder of the year assumes both revenue and non-GAAP EPS will be evenly distributed between Q3 and Q4, implying approximately $225.0 million and $0.73 per quarter, respectively, at the midpoint of management’s guidance. Prior to revisions, we were projecting Q3 revenue and non-GAAP EPS of $219.1 million and $0.71, while consensus stood at $223.7 million and $0.73.
Exhibit II: Estimate Revisions
K. Liu & Company LLC
Our estimates increase marginally for this year and next as we made only modest adjustments to our revenue and expense assumptions. More importantly, we continue to believe NetScout remains on track to return to positive revenue growth this quarter with further acceleration in Q4 ’25 and FY ‘26.
Our report with model and disclosures is available here.
Disclosure(s):
K. Liu & Company LLC (“the firm”) receives or intends to seek compensation from the companies covered in its research reports. The firm has not received any compensation from NetScout Systems (NTCT) in the past 12 months.
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).