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Transcript Summary

NetScout Systems reported a strong fiscal year 2026, with revenue rising 4.5% to $860 million and non-GAAP EPS growing 12% to $2.48. Growth was fueled by an 8% increase in Cybersecurity revenue and a 3% rise in Service Assurance. A key highlight was the acquisition of DigiCert’s DDoS assets, which internalizes the Arbor Cloud infrastructure and adds roughly $20 million in annualized revenue. Management emphasized their AI-ready smart data strategy, positioning NetScout as a provider of high-fidelity data essential for training and operationalizing enterprise AI models. Financial health remains robust, with $705 million in cash and $285.4 million in annual free cash flow. For fiscal year 2027, the company expects continued growth with revenue guidance of $885 million to $915 million. While carrier spending remains disciplined and macro uncertainties persist, NetScout’s expansion into observability and automated threat protection provides a positive outlook. The company also remains active in capital returns, repurchasing $61 million in stock during the year. Overall, the transition to software-centric, AI-integrated solutions is successfully driving margin expansion and recurring revenue streams.

5-year share-count history (top 10 holders by peak, incl. exited) + price

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NETSCOUT SYSTEMS, INC.: Metadata-Only Analysis of Administrative Filing

Full Earnings Call Transcript — Q4 • 2026-05-07

Operator: Thank you for standing by, and welcome to the NetScout's Fourth Quarter and Full Fiscal Year 2026 Financial Results Conference Call.[Operator Instructions] As a reminder, this call is being recorded.[Operator Instructions] I would now like to turn the call over to Scott Dressel, NetScout's VP of Corporate Finance. Scott, please go ahead.
Scott Dressel: Thank you, operator, and good morning, everyone. Welcome to NetScout's Fourth Quarter and Full Fiscal Year 2026 Conference Call for the period ended March 31, 2026. Joining me today are Anil Singhal, NetScout's President and Chief Executive Officer, Anthony Piazza, NetScout's Executive Vice President and Chief Financial Officer. Please note that a slide presentation accompanies our prepared remarks. You can advance the slides in the webcast viewer to follow our commentary. Both the slides and the prepared remarks can be accessed in multiple areas within our Investor Relations section of our website at www.netscout.com, including the IR landing page and the Quarterly Results page. As discussed in detail on Slide #3, today's conference call will include certain forward-looking statements about NetScout's views on expected results of future performance and business strategy. These statements speak only as of today's date and involve risks, uncertainties and assumptions that may cause actual results to differ materially, including, but not limited to, those described in the company's filings with the Securities and Exchange Commission that can be found in our annual report on Form 10-K and quarterly reports on Form 10-Q. As discussed in detail on Slide #4, today's conference call will also include discussion of certain non-GAAP financial measures that the company believes to be useful for investors. While the slide presentation includes both GAAP and non-GAAP results other than revenue and balance sheet information, which are presented in accordance with GAAP, we will focus our discussion on non-GAAP financial information. These measures should not be considered in isolation from or as a substitute for financial information prepared in accordance with GAAP. Reconciliation of all non-GAAP metrics to the nearest GAAP measures are provided in the appendix of the slide presentation in today's financial results press release and on our website. I will now turn the call over to Anil for his prepared remarks. Anil?
Anil Singhal: Thank you, Scott, and good morning, everyone. We appreciate you joining us today. NetScout delivered strong fiscal year 2026 top and bottom line results, driven by growth across both our Cybersecurity and Service Assurance offerings. Our performance in the fiscal year helped us achieve the key strategic objectives we laid out a year ago, including accelerating product innovation, driving annual revenue growth and expanding margins. We also strengthened our innovation engine through the introduction of differentiated capability across the portfolio, including AI-ready smart data, expanded observability, enhanced edge visibility and adaptive threat protection. We accomplished this in what continues to be a dynamic operating environment, underscoring the strength of our strategy and the consistency of our execution. These results have further reinforced our financial foundation and position NetScout to drive continued innovation, revenue growth and margin improvement in fiscal year 2027. At the same time, we believe market trends across AI, observability and network security are expanding our opportunity set and creating additional revenue for long-term value creation. With that context, let me turn to Slide #6 for a brief review of our fourth quarter and full fiscal year 2026 financial performance for the period ended March 31, 2026. For the fourth quarter, total revenue was approximately $203 million compared with $205 million for the same period last fiscal year, which was in line with our expectations given the shift in customer order timing to the prior quarter as we discussed on our Q3 earnings call. Diluted earnings per share was $0.52, consistent with the same period last fiscal year. For the full fiscal year, which is more representative of the business and the underlying market trends, revenue increased by 4.5% to approximately $860 million, driven by growth in both our Cybersecurity and Service Assurance offerings. We expanded both our gross and operating margins year-over-year and delivered nearly 12% growth in diluted earnings per share at $2.48, exceeding the high end of our guidance range. Now let's turn to Slide #7 for some perspective on our business and some market insights. Starting with a review of our service assurance offerings. The revenue for the full fiscal year increased approximately 3% year-over-year, driven by growth in the enterprise customer vertical with strong contributions from both federal and nonfederal government-related spending. Our Enterprise customers continue to rely on our Service Assurance solutions to advance their digital transformation initiatives. In turn, we are investing in innovation, particularly with respect to observability and AI and to help our customers drive greater efficiency, reduce risk and accelerate troubleshooting and lower costs. An example of this innovation during the year is our Omnis Sensor and Omnis streamer, which work together as an integrated AIOps solution that transforms high-fidelity network packet data into actionable intelligence. Also, our sensor and streamer products include Agentic AI interfaces that enable efficient and cost-effective integration with multi-vendor AI solutions, which facilitate automation and reduces total cost of ownership for our customers. Among our Carrier Service Provider customers, we continue to see measured 5G investment as they balance build-outs with monetization, and we expect this to continue into our fiscal year 2027. At the same time, emerging opportunities such as fixed wireless access, 5G network slicing and AIOps initiative have the potential to drive revenue and cost efficiency for a Communication Service Provider. We believe NETScout is well positioned to support this transition. Our 5G observability solution provides end-to-end visibility for 5G stand-alone slices to support high-performance services such as immersive gaming and large-scale sporting events as well as mission-critical application and services. Moving to our Cybersecurity offerings. Revenue for the full fiscal year increased approximately 8%, with growth across both our Enterprise and Service Provider verticals. Cybersecurity continues to grow faster than the company average and is an increasingly important driver of our long-term revenue growth and margin expansion. Our latest DDoS Threat Intelligence report, which was released in March 2026, assesses the current global threat environment, including newer AI-powered attacks. Foundational services such as DNS and NTP remain under persistent pressure and recent botnet attacks on government, financial and transportation infrastructure show how quickly threat actors can disrupt critical services with either legacy tools or by using AI to increase the scale and sophistication of their attacks. Large coordinated attacks are outpacing traditional defenses and organizations are increasingly turning to automated intelligent protection to keep up. NetScout is well positioned to help customers protect their digital services. Many of our newest innovations support distributed detection and mitigation solutions to provide a more robust and resilient adaptive DDoS protection environment. Additionally, as noted in our earnings release, we just completed a tuck-in acquisition of the assets of DigiCert Incorporation's DDoS protection business that brings the back-end infrastructure of our Arbor Cloud network to fully in-house. We believe this transaction provides us with a greater control of the platform and a clearer path to scaling cloud-based services over time while providing immediate incremental recurring revenue in the cloud DDoS space. Before touching on some of our recent customer wins, I would like to briefly discuss AI and what we believe this new era would mean for NetScout over time. We believe AI will create additional opportunities for both Service Assurance and Cybersecurity by amplifying the need for network visibility and protection. As networks grow more complex and cyber threats increasingly leverage AI tools, we believe the need for adaptive real-time visibility and intelligence protection will continue to rise. These dynamics play directly to NetScout's strengths. We have long been recognized for our packet level approach to network detection, investigation and response. Now our patented deep-packet inspection and metadata aggregation capabilities can generate complex, high fidelity, AI-ready smart data at scale that is purpose-built for advanced analytics like never before. More importantly, we are not competing with foundational AI models. Instead, we are leveraging our differentiated data and domain expertise to enable automation that integrates into our customers' broader observability and AI workflows, helping to enhance visibility and operationalize AI within those environments. From a financial perspective, we believe AI advancement could reinforce the durability of both our cybersecurity and service assurance businesses by supporting upgrade cycles and expanding use cases across our installed base. Taken together, we view AI as a promising opportunity that enhances the value of what we already do best and extends our relevance within customers' critical infrastructures over the long term as they develop and implement their broader AI strategies and initiatives. Turning to customer wins, both Service Assurance and Cybersecurity continue to gain traction. In addition to new customers, we continue to secure a significant amount of repeat business from loyal customers buying new solutions and upgrades along with maintenance services. Two wins from the fourth quarter were: A mid-seven-figure deal with a large European telecom that has been a longtime Cybersecurity and Service Assurance customer. They upgraded their DDoS protection with our Adaptive DDoS offering and our Distributed Threat Mitigation System to enhance their cyber protection. Our adaptive's DDoS mitigates all types of multi-vector attacks before they can impact critical services, while DMS provides enterprise-level protection across both cloud and edge environments with physical and virtual platforms and multiple usage configurations. This client also values our subscription model, which includes support and maintenance and a flexible scale-up and scale-down approach to minimize license wastage. A second deal in the low-seven- figures was with a new customer that is a global leader in chip manufacturing for a variety of industries, including automotive, mobile communications and data centers. This contract included our engineered solution to maintain traffic visibility and address system reliability issues across the network that spans multiple countries. They chose NetScout because of our reputation and ability to provide the critical solutions required to manage the complex interdependency of their networks and applications. With that, let's move to Slide #8 to review our outlook. In fiscal year 2026, we returned the business to revenue growth, improved margins, expanded profitability, delivered strong free cash flows and continue to advance our product capability across both Cybersecurity and Service Assurance. Looking ahead, we are excited about the year in front of us and are leaning into this momentum. We see significant opportunities over the long term to leverage NetScout's deep expertise in cybersecurity and network observability together with our AI-ready data platform to help customers advance their AI and digital transformation initiatives and to manage an increasingly complex digital environment where network performance, availability and security are mission-critical. We believe we are well positioned to drive profitable growth, generate strong free cash flow and enhance long-term shareholder value. These growth dynamics are reflected in our fiscal year 2027 outlook, which Tony will review during his remarks. While we remain mindful of the macro environment, ongoing carrier spending discipline and demand trends across both enterprise and service provider customers, our priorities remains clear. We aim to drive sustained revenue growth by executing against a healthy pipeline with particular emphasis on Cybersecurity and enterprise-led Service Assurance. At the same time, we'll continue to invest in innovation across AI, observability and DDoS protection as well as maintain a disciplined focus on cost management and a balanced capital allocation strategy. We are energized by what lies ahead and look forward to updating you on our progress throughout the year. With that, I will turn the call over to Tony for a review of our financial performance and our outlook for fiscal year 2026 -- 2027.
Anthony Piazza: Thank you, Anil, and good morning, everyone. We appreciate you joining us today. I'll start by walking you through the key financial metrics for our fourth quarter and full fiscal year 2026. After that, I'll share some additional commentary on our fiscal year 2027 outlook. As a reminder, other than revenue and balance sheet information, which are on a GAAP basis, this review focuses on our non-GAAP results. All reconciliations with our GAAP results appear in the presentation appendix. I will note the nature of any such comparisons accordingly. Also, as comparisons are on a year-over-year -- also all comparisons are on a year-over-year basis, unless otherwise noted. Slide #10 details the results for the fourth quarter and full fiscal year 2026. Focusing on our fourth quarter performance first. Total revenue was $203 million, down 1% from the same period last fiscal year. This reflects the impact of timing-related order shifts discussed on last quarter's earnings call as certain orders originally expected in Q4 were pulled forward into Q3 as customers utilize remaining calendar year-end budgets. Product revenue totaled $80.7 million compared with $89.5 million last fiscal year, reflecting the timing and mix of certain orders across quarters. Service revenue increased 5.9% year-over-year to $122.3 million, driven by underlying growth and favorable timing of service renewal orders and the mix associated with an enterprise license agreement. We ended the fourth quarter with total product backlog of approximately $50 million, which included $45.8 million of fulfillable backlog. This compares to total product backlog of approximately $33 million, including $25.1 million of fulfillable backlog at the end of the same period in 2025. Our gross profit margin was 79.7% in the fourth quarter, an increase of 0.5 percentage points for the same period -- from the same period in the prior year, reflecting higher gross -- product gross margin due to favorable product mix. Quarterly operating expenses were $117.9 million, up 2.4% year-over-year, primarily related to the timing of variable incentive compensation expense. Our operating margin was 21.6% compared with 23.1% in the same period last fiscal year. We delivered diluted earnings per share of $0.52 for both periods. Moving to the full fiscal year 2026. Revenue increased $4.5 million to 859. -- 4.5% to $859.5 million. Product revenue increased 2.8% to $370.1 million and service revenue increased 5.7% to $489.3 million. As mentioned earlier and in prior quarters, product revenue was impacted by a year-over-year shift in the classification of revenue associated with an enterprise license agreement, reflecting the nature of the customer's composition mix. Service revenue correspondingly benefited from this classification shift as well as the timing of renewals, including back maintenance. Our gross profit margin rose 0.8 percentage points to 80.8%, driven by an increased product margin attributable to higher volume and a favorable product mix. Annual operating expenses increased 2.9% from the prior year. We reported an operating profit margin of 25.4%, up 1.7 percentage points compared to the prior year based on higher revenue, enhanced product margin -- gross margin and disciplined cost management. Diluted earnings per share increased nearly 12% to $2.48. Our annual non-GAAP effective tax rate was 19.9% compared to 19% in the prior year, which benefited from a valuation gain in a foreign investment with favorable tax treatment. Let's turn to Slide 11, where I'll walk you through the key revenue trends by product lines and customer verticals. For the full fiscal year 2026, Service Assurance revenue increased by 2.6% and Cybersecurity revenue grew by 7.8%. During the same period, Service Assurance accounted for approximately 64% of total revenue and Cybersecurity accounted for the remaining 36%. Cybersecurity continues to grow faster than the company average. And over time, we expect it to become a larger portion of our mix, which should be a positive driver of growth. Turning to our customer verticals. For the full fiscal year 2026, Enterprise revenue grew by 5.4% and Service Provider revenue grew by 3.3%. During the same period, Enterprise accounted for approximately 58% of our total revenue and Service Provider accounted for the remaining 42% Additionally, no customer accounted for more than 10% of our revenue for the quarter or the full fiscal year 2026. Turning to Slide 12. This shows our revenue mix between the United States and international markets. For the full fiscal year 2026, the United States represented 55% of revenue and international represented the remaining 45% of revenue. Slide 13 shows some key balance sheet items along with our free cash flow for the period. We ended fiscal year 2026 with $705.1 million in cash, cash equivalents and short- and long-term marketable securities, representing an increase of $212.7 million since the end of fiscal year 2025. Free cash flow was $150.1 million for the fourth quarter and a near record high of $285.4 million for the full fiscal year. During fiscal year 2026, we repurchased approximately 2.5 million shares of our common stock at an average price of $24.29 per share for a total of approximately $61 million under our share repurchase program. From a debt perspective, at year-end, we had no outstanding balance on our $600 million revolving credit facility, which expires in October 2029. To briefly recap some other balance sheet items, accounts receivable net was $151.5 million, representing a decrease of $12.2 million since March 31, 2025. Days Sales Outstanding at the end of the fourth quarter was 62 days compared with 68 days in the same period in the prior year. This change in DSO in the fourth quarter reflects the timing and composition of bookings as well as working capital enhancement initiatives. Let's move to Slide 14 for our outlook. I will focus my remarks on our revenue and non-GAAP earnings per share targets for fiscal year 2027. As Anil noted, we expect to build on our current momentum by driving sustained revenue growth and expanding profitability. For fiscal year 2027, we anticipate revenue in the range of $885 million to $915 million and a non-GAAP diluted earnings per share in the range of $2.65 and $2.80, both representing year-over-year growth on the top and bottom lines. This outlook incorporates the DigiCert DDoS asset acquisition that Anil mentioned during his remarks, which is expected to be immediately accretive and assumes an initial annualized revenue run rate contribution of approximately $20 million, with a partial benefit for fiscal year 2027 given the May 1 transaction close. For the full fiscal year, we expect our non-GAAP effective tax rate to be approximately 20% and weighted average diluted shares outstanding of approximately 74 million to 75 million shares. Our guidance reflects a growing contribution from our Cybersecurity offerings and awareness of the trends in our Service Assurance offerings, including continued spending discipline in the carrier market as well as the current dynamic macro environment. Additionally, I'd like to provide some color on the first quarter of fiscal year 2027. We expect revenue to grow in the mid-single digits range and earnings per share to increase at approximately twice the rate of revenue growth compared with that same -- with the same quarter last fiscal year. So in summary, we delivered on our fiscal year 2026 strategic objectives through new innovations, a return to revenue growth and enhanced margins, resulting in strong performance for the fiscal year. Looking ahead to fiscal year 2027, we plan to build on this momentum by advancing innovation, sustaining revenue growth, further improving profitability and continuing to generate strong free cash flow. Our capital allocation priorities remain consistent, investing in the business for profitable growth, maintaining a strong financial position and returning excess capital to shareholders primarily through share repurchases. We currently have capacity under our share repurchase authorization and subject to market conditions, intend to be active in the market during fiscal year 2027. With a strong cash position, no drawn revolver and ongoing free cash flow generation, we have meaningful flexibility to support our growth initiatives and shareholder returns with a clear focus on long-term value creation. That concludes my formal review of our financial results and outlook. I would also like to note that we will be participating in the Annual Needham Technology, Media and Consumer Conference as well as the Annual B. Riley Securities Institutional Investor Conference in May. I look forward to engaging with many of you there. With that, let's open it up for questions. Operator?
Operator: Our first question is from Matthew Hedberg with RBC Capital Markets.
Sanika Merchant: This is Sanika Merchant on for Matt Hedberg. Congrats on the quarter. I guess to start, could you talk more about the broader macroeconomic landscape and what demand trends have been like? More specifically, are you seeing any uncertainties from tariffs, AI supply chain dynamics or the war in Iran? And has there been any impact to close rates as a result?
Anil Singhal: I think there is a general concerns about what could happen tomorrow. But so far, we have not seen a big impact. We have a strong financial position. We have partners who are supplying the hardware, and we have been able to procure in advance. So overall, the impact on us and even the tariff impact was minimal. So it has not been a big impact on us so far, but we are still cautious about what could happen because of what's happening with Iran war and other thing. But so far, the direct impact has been minimal on NetScout. And yes, just one more thing. So yes, people are always cautious and hold budgets. And that's why sometimes those are flushed in the December quarter, and we benefit from that. So I think overall, while our internal conditions and chances have improved substantially as a result of innovation on -- during the last year, the external environment is -- could get worse, and that's why we are cautiously optimistic on our guidance.
Sanika Merchant: Got it. And as a quick follow-up, could you tell us more about how the Fed business performed this quarter and any trends you're seeing there?
Anthony Piazza: So the Fed business was good for NetScout for the full fiscal year. Federal generally runs in the mid- to high single digits of total revenue. And this year, fiscal year ran at the high end of that particular range. And so we see good -- we have a strong pipeline in the federal business, but it was really high for us in fiscal year '26. And so therefore, one of the things we're cognizant in the Service Assurance business is if that trend starts to normalize back to what we've seen in the past. But right now, we're seeing good federal traction and a nice pipeline.
Operator: And we'll move next to Erik Suppiger with B. Riley Securities.
Erik Suppiger: Solid quarter, very good. One, can you just -- last quarter, you had indicated that I think the sensor and streaming business was about $15 million for the first 3 quarters of the fiscal year. Can you give us an update on that? And then we saw some legal actions taken against some of these large botnets where the governments cross-country governments were shutting down some of these botnets. I'm curious if you think that's going to reduce the threat landscape and are customers responding at all to that in terms of their purchasing?
Anil Singhal: Yes. So the business which you talked about, about $15 million, we were in the range, somewhere between $10 million and $15 million. And so this is good news as we just launched this solution later in the fiscal year. Regarding the DDoS..
Erik Suppiger: Just to be clear, are you saying you were $10 million to $15 million for fiscal '26. Or was that in the fourth quarter?
Anil Singhal: Fiscal year '26. And it was in the second half mostly because the product was introduced only in -- at our ENGAGE conference in October.
Anthony Piazza: I think, Erik, like Anil said, that's a relatively new product. We're pleased with the first year out here. And we see opportunity even within some of our backlog, there's some opportunity we already have in there. So we see the opportunity there. I think with regard to some of these sensors and streamers, which target bringing DPI to the observability space and the AI space. I think what we're finding is that there's tremendous interest in this right now. And so we're talking to customers about it, but customers are still trying to figure out what their AI strategy and execution is. And so we're working through that. So even though we've gotten some good initial traction and we see good opportunity, it does take a little while for these type of..
Anil Singhal: Another thing is there is an indirect impact because this strengthens our value proposition of a smart data company. And it makes our core business more sticky because this runs -- our AI solution runs on the foundation of Service Assurance and DDoS solutions. As to your other question about government taking action on the DDoS, I mean that was sort of backward looking. I think these actions were too late for people to be able to fully helped by that. So that will continue. hackers will keep finding new ways. Our product will be used in the initial stage at some point, partly because of some of our innovations and other people who are helping the industry in cybersecurity area, the government will then identify and take some action. And this doesn't reduce the need for our solution and it doesn't reduce the threat landscape, which we'll see in the coming years.
Anthony Piazza: I think what we've seen in our threat reports and what's been highlighted by us and others is that AI is actually just accelerating threat landscape. So I don't know that taking out any one party is going to impact the long-term trajectory of the threat landscape.
Operator: And we will move next to Kevin Liu with K.Liu & Company.
Kevin Liu: Just kind of on the topic of enterprise customers and what they're doing with AI. I'm curious with a lot of your larger, more regulated players, what are you seeing them doing in terms of kind of moving from pilots into more production use cases? And ultimately, do you feel NetScout gets a lot of incremental workloads to kind of monitor and secure there? Or do you think it's more just kind of a shift in kind of what they monitor within their own networks?
Anil Singhal: Yes. So Kevin, on the -- I mean, obviously, monitoring the AI infrastructure is an extension of our monitoring and protecting. So the new infrastructure, there's always incremental business that's going to keep the core business growing. But the real AI opportunity for incremental revenue besides that is playing in the agentic AI space, whereas our data either was not easy to consume by third parties. But even if it was consumed, it was not mixed with other data sets so easily. So the promise of agentic AI driving automation is to be able to mix NetScout data with other data set to drive good outcomes. And in that said, we believe our data set may be the most important because it's only available from us in this current form at a scalable level. And yet it's a multiplier to the rest of the data set who generally tell you what is going wrong or what's happening, but not necessarily provide the context of why. And that's what why we do. So I think it's going to highlight the value of our data beyond our existing customer and use cases, which was a dream for last so many -- I mean, last couple of decades. And now it might come through with all the things happening in the AI area.
Kevin Liu: A quick follow-up on that. How quickly do you think kind of these agentic AI use cases manifest? Is that within your fiscal '27 or kind of more beyond that? And then just on the backlog that you're carrying today, how much of -- it's up meaningfully year-over-year and sequentially. So just wondering how much of that is kind of due to maybe supply chain constraints impacting your ability to ship versus just kind of timing of orders closed in the quarter?
Anil Singhal: I'll let Tony cover after I answer the first question about AI traction. So I think we have to look at there is a lot of investment going on. As you know, part of the supply chain problem is because people by buying a lot of hardware for the AI infrastructure. But it's going to take some time. But I feel that the indirect impact on NetScout core business is already happening. For example, our AI solution runs as a software module on top of the existing deployments. So that makes those deployment more sticky. And even if we -- if the pace of adoption in terms of third-party solution consuming our data, AI solution consuming our data, it may take some time. I think it will have an impact on the core business in the short term. And that's why we have provided this new guidance for the coming year.
Anthony Piazza: And then, Kevin, on the backlog, it's really more about timing. It was some large orders that really came in at the end of the quarter and the customer didn't need them yet. And so we've prioritized what had to go out. So it's really more timing. It didn't have anything to do really with any supply chain constraints.
Kevin Liu: All right. Great. Congrats on a strong quarter and outlook.
Operator: Thank you. This does conclude the Q&A session, and it also concludes the conference call. Thank you for joining us today. You may disconnect at any time.