NetScout Systems, Inc. (NTCT) Earnings

Management highlights

### Financial Performance Overview - Delivered a strong first quarter with solid start to fiscal year 2027, with improved operating margin driven by revenue growth, favorable product mix, and disciplined expense management - Completed the previously announced acquisition of DDoS assets from DigiCert, Inc. on May 1st, which increased overhead costs in the quarter ### Capital Allocation Strategy - Committed to the existing share repurchase program, with no repurchases completed in the first quarter - Core priorities: investing in profitable growth, maintaining a strong balance sheet, and returning excess cash to shareholders over time primarily through share repurchases ### Product & Strategic Positioning - The company's combined expertise in cybersecurity, service assurance, and network observability, paired with its AI-ready smart data platform, provides a trusted foundation for customer digital transformation and AI-enabled operations - New AI-related product innovations (Sensor and Streamr) are integrated into the existing service assurance segment, with strong early customer demand driven by need for high-quality training datasets for AI projects - The company recently launched AI-enabled ADP automation for its DDoS cybersecurity solution, which is currently in the customer adoption cycle

Guidance

- Management reaffirmed its full fiscal year 2027 outlook initially provided in the prior quarter, maintaining expectations for year-over-year growth in both revenue and earnings. The guidance range is $885 to $915 million in total revenue, and $2.65 to $2.80 for non-GAAP diluted EPS. Assumptions include a ~20% non-GAAP effective tax rate and 74 to 75 million weighted average diluted shares outstanding. - Q2 FY27 revenue is expected to be broadly consistent with the prior year period, due to $10 to $15 million in government orders pulled forward into Q1, and a strong comparison to the prior year Q2 which saw ~15% revenue growth from orders accelerated from Q3. - First half FY27 revenue growth is expected to land in the mid-single digits, while Q2 EPS is expected to grow in the high single digits, partially driven by a calendar shift moving the company's user conference from Q2 (prior year) to Q3 (current fiscal year).

Segment performance

By product segment: Service assurance revenue grew 19.7% year-over-year, accounting for 67% of total revenue, driven in part by early receipt of government-related orders. Cybersecurity revenue grew 0.6% year-over-year, accounting for 33% of total revenue, with a difficult year-over-year comparison following 18% growth in the prior year's same quarter. By customer vertical: Enterprise revenue grew 19.1% year-over-year, contributing 63% of total revenue. Service provider revenue grew 3.3% year-over-year, contributing 37% of total revenue. No single customer accounted for more than 10% of total revenue in the quarter. By geography: The U.S. represented 59% of total revenue, while international markets represented 41%. The company also reported $126 million in operating expenses (up 4.6% YoY), 20.8% operating margin (up 660 basis points YoY), net income of $38.6 million (diluted EPS of $0.52, up from $24.7 million / $0.34 YoY), $668.5 million in total cash/cash equivalents/securities, and $44.3 million in free cash flow for the quarter.

Risks & headwinds

- New AI-focused product offerings have extended sales cycles, as customers are still in the experimentation phase of developing their corporate AI strategies, creating uncertainty around near-term revenue contribution from these innovations. - Ongoing supply chain disruptions related to AI infrastructure buildouts have made certain production equipment harder to source and increased input prices, forcing the company to build incremental inventory to mitigate delivery challenges for customers. - Federal government revenue is subject to unpredictable fluctuations in the magnitude and timing of government funding, creating quarterly revenue volatility.

Analyst Q&A

• Q: The call noted Q1 benefited from early government orders. How much revenue was pulled forward, and what impact will this have on Q2 performance? /

  A: Approximately $10 to $15 million in government orders were pulled into Q1 from future periods. Adjusting for this pull-forward, Q1 would have delivered mid-single-digit growth, which aligns with full year and first half guidance. The pull-forward is the core reason Q2 revenue is expected to be flat year-over-year. /

• Q: What traction are you seeing with new AI products Sensor and Streamr, and what contribution do you expect from them this year? /

  A: These offerings are currently categorized under the existing service assurance segment, with fewer than 10 customers to date. There is strong customer demand, as high-quality datasets are a critical unmet need for AI projects. While the pipeline is solid, customers are still experimenting with AI strategies, leading to longer sales cycles; the company expects a small but growing contribution for the full year. /

• Q: Can you update on federal revenue expectations after the Q1 pull-forward, and why was rest of world revenue down this quarter? /

  A: Federal revenue typically makes up mid to high single digits of total revenue, and hit mid teens in Q1 due to the accelerated orders. There is a solid pipeline of federal deals, though timing remains dependent on government funding approvals. The rest of world revenue decline is purely due to deal timing, not underlying demand slowdown or Middle East conflict impacts. /

• Q: How have AI exploit fears impacted cybersecurity deal cycles, and what is driving the recent inventory increase? /

  A: AI is already being integrated into the company's DDoS offering via the new ADP automation module, which is seeing healthy adoption; AI cybersecurity use cases for Sensor/Streamr are planned but not prioritized yet. Inventory increased ~$7 million due to proactive purchases to mitigate supply chain shortages and price increases for hardware components tied to AI infrastructure buildouts.