Ladies and gentlemen, thank you for standing by, and welcome to NETSCOUT’s Second Quarter Fiscal Year 2024 Financial Results Conference Call. At this time all parties are in a listen-only mode until the question-and-answer portion of the call. As a reminder, this call is being recorded. Tony Piazza, Senior Vice President of Corporate Finance and his colleagues at NETSCOUT are on the line with us today. [Operator Instructions] I would now like to turn the call over to Tony Piazza to begin the company’s prepared remarks.

Thank you, operator, and good morning, everyone. Welcome to NETSCOUT’s second quarter fiscal year 2024 conference call for the period ended September 30, 2023. Joining me today are: Anil Singhal, NETSCOUT’s President and Chief Executive Officer; Michael Szabados, NETSCOUT’s Chief Operating Officer; and Jean Bua, NETSCOUT’s Executive Vice President and Chief Financial Officer. There is a slide presentation that 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 the Investor Relations section of our website at www.NETSCOUT.com, including the IR landing page under Financial Results, the webcast itself, and under financial information on the quarterly results page. Moving on to Slide 3, today’s conference call will include forward-looking statements. Examples of forward-looking statements include statements regarding our future financial performance or position, results of operations, business strategy, plans and objectives of management for future operations, and other statements that are not historical fact. You can identify forward-looking statements by their use of forward-looking words such as “anticipate,” “believe,” “plan,” “will,” “should,” “expect,” or other comparable terms. We caution listeners not to place undue reliance on any forward-looking statements included in this presentation which speak only as of today’s date. These forward-looking statements involve risks and uncertainties, and actual results could differ materially from the forward-looking statements due to known and unknown risks, uncertainties, assumptions, and other factors, including but not limited to those described on this slide and in today’s financial results press release. For a more detailed description of the risk factors associated with the company, please refer to the company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2023, on file with the Securities and Exchange Commission. NETSCOUT assumes no obligation to update any forward-looking information contained in this communication or with respect to the announcements described herein. Let’s now move to Slide 4, which involves non-GAAP metrics. While this slide presentation includes both GAAP and non-GAAP results, unless otherwise stated, financial information discussed on today’s conference call will be on a non-GAAP basis only. The rationale for providing non-GAAP measures along with the limitations of relying solely on those measures is detailed on this slide and in today’s press release. These measures should not be considered in isolation from or as a substitute for financial information prepared in accordance with GAAP. Reconciliations of all non-GAAP metrics with the applicable GAAP measures are provided in the appendix of the slide presentation, in today’s earnings press release, and on our website. I will now turn the call over to Anil for his prepared remarks. Anil?

Thank you, Tony, and good morning, everyone. Welcome and thank you all for joining us today. We delivered second quarter revenue in line with our preliminary results announced in mid-October. Revenue was impacted by a slowing in order conversion rate in the second quarter related to industry and economic headwinds that we expect will persist into the second half of fiscal year 2024. In response to these dynamics, we initiated several actions to manage discretionary costs, which more than offset the bottom-line impact in the second fiscal quarter and should reduce the negative impact to our full fiscal year earnings per share outlook – without compromising our longer-term objectives. We will provide more information on these market dynamics affecting our business as we review our performance and outlook. Let’s turn to Slide 6 for a brief recap of our non-GAAP financial results for the second quarter and first half of our fiscal year 2024. For the second quarter, financial results were in-line with our preliminary expectations released on October 16th. Revenue for the quarter was $196.8 million, down 13.7% year-over-year, due to the previously mentioned order conversion slowdown related to the industry and economic environment impacting our customers as well as a lower level of radio frequency propagation modeling project revenue compared to the prior year. Despite the revenue decline, we delivered diluted earnings per share for the quarter of $0.61, an increase of 7% year-over-year, as we benefited from several discretionary cost saving actions that we initiated in response to the current environment. For the first half of the fiscal year, or the period ended September 30, 2023 revenue for the first half was $407.9 million, down 6.6% year-over-year, primarily for the reasons stated earlier that impacted our second fiscal quarter revenue. The corresponding diluted earnings per share of…

Thank you, Anil, and good morning, everyone. Slide 10 outlines the areas that I will be covering today, starting with customer win highlights in the second quarter. In our enterprise customer vertical, we experienced several deals where customers purchased across our platform of solutions, a trend we are seeing more of, which we believe validates the power of NETSCOUT’s unified portfolio and supports our strategy. For example, a federal agency placed multi-solution orders totaling mid-seven figures with us in the second quarter. These orders consisted of solutions across our service assurance, availability, and security product portfolio, within which our Omnis solution was a significant portion of this order. We have a long-standing relationship with this customer and our proven technology and historical performance continues to win us repeat business as they deploy our new and legacy solutions more broadly within their organization. Now, turning to our service provider customer vertical, we remain focused on supporting carriers’ 5G network evolutions as well as their security efforts, as cyberattack incidents accelerate, and threat surfaces continue to expand. We continue to see carriers invest in 5G and other areas, albeit at a slower pace and through smaller order sizes, given the current environment. During the second quarter, a long-standing, Tier-1 North American carrier customer placed follow on orders with us amounting to high-seven figures. These orders were for our service assurance solution, for both their mobile network, related to 5G and the radio access network, as well as for their business IT systems. We remain excited about continuing to broaden our relationship with this customer as a trusted partner across their organization and network ecosystem. Turning to our go-to-market activities. Since our last earnings call, we announced several product advancements. This included the release of Adaptive DDoS for our Threat Mitigation System and…

Thank you, Michael, and good morning, everyone. I will review key metrics for our second quarter and first half of fiscal year 2024 and provide some additional commentary on our fiscal year 2024 outlook. As a reminder, this review focuses on our non-GAAP results unless otherwise stated, and all reconciliations with our GAAP results appear in the presentation appendix. Regardless, I will note the nature of any such comparisons. Slide 12 details our results for our second quarter and first half of fiscal year 2024. Focusing on quarterly performance, total revenue declined 13.7% year-over-year to $196.8 million. Product revenue declined 28% and service revenue was flat, both on a year-over-year basis. Our second-quarter fiscal year 2024 gross profit margin was 80.3%, up 3.5 percentage points over the same quarter last year. The increase was primarily attributable to lower levels of radio frequency propagation modeling project costs this quarter compared with last year and a reduction in variable incentive compensation. As a reminder, radio frequency propagation modeling projects tend to have significantly lower gross margin than our other products due to the labor-intensive nature of those projects. Quarterly operating expenses decreased 15.1% year-over-year, primarily related to cost reductions associated with variable incentive compensation and certain events. We reported an operating profit margin of 28%, compared with 23.7% in the same quarter last year. Diluted earnings per share was $0.61 compared with $0.57 in the same quarter last year, an increase of 7% year-over-year as we took the actions previously mentioned to offset the impact of the revenue decline. Finally, I wanted to note that in the last month of the second quarter we divested the test lab automation portion of our Test Optimization business to Spirent for approximately $8 million. This business was not material to NETSCOUT’s overall financial profile, nor…

[Operator Instructions]. Our first question will come from Matt Hedberg with RBC Capital Markets. Your line is open.

Hey it’s Dan Bergstrom for Matt Hedberg. I appreciate taking your question. Can you hear me?

Yes.

Okay. Great. So the spending environment has been kind of not great all year, but you’ve been fairly insulated from pressures and service provider over much of the first half. I appreciate the commentary on the call, but just wondering if you could provide any further color on maybe what changed in the environment or what you view as change and then really when that emerged in the quarter?

Well, as we mentioned, Matt, that we started noticing this towards the end of the second quarter, but we see signs of big layoffs, if you look at two of the big bellwether of NEMs, Ericsson and Nokia announcing big layoffs and cutbacks. So all these are signs of this will continue for some time. And – but none of it is impacting – is impacted by competition or anything. So we think that the sales cycle has lengthened and these projects are important, but they should happen sometime in the next 12 months.

Okay. Great. And then maybe a little more on the two segments. Curious how you categorize enterprise demand outside of the financial and health care verticals. You called those out as soft Sounds like federal was strong. And then maybe on the service provider side, it sounds like much of the softness was in international markets. You’re assuming that occurs in North America over the second half, but you’re not seeing it yet. Is that correct?

I think basically, as we mentioned, Matt, in the past, the service provider deals are very lumpy. And one big order in international can polarize the results. So I think it’s mainly international and cable, but cable is a lot of U.S. and even cable providers are doing 5G and mobility now. So I think the things are intertwined, and we think that it’s just the timing of who is affected when. And that’s why it looks like we are seeing only in international, but it’s just the timing of the orders, which – or the forecast, which makes it look like it’s just an international versus U.S. event in the first half.

Yes. So just to add on to what Anil had said, in the service provider in international, there is a large Asian carrier that we do business with. And they are more like delayed their purchase as opposed to eliminated it. So it’s probably why you see the international service provider being decreased. Going forward, given the comments that Anil made about the constraints that you see in the North American carriers, the sales force has adjusted their projects and the timing of their projects, which contribute significantly to the change in revenue that we reported.

Okay. Thanks.

And also just as one final thing because it’s usually – it’s the Fed quarter. The federal government did very well this quarter. We grew a little – between 25% to 30% for the quarter. And on a year-to-date basis, we’re up between 40% to 50% on – for the first half of the year versus the first half of last year.

That’s great. Thanks.

Thank you. Our next question will come from James Fish with Piper Sandler. Your line is open.

Hey, thanks for the questions. Working off to Dan’s question there, understanding budgets are tight and you’re seeing delays in push-outs. But I guess, based on your seasonal guide here, Jean, what makes you guys confident that this comes back in the March quarter based on the seasonality we typically see? I guess, what’s given the sales force confidence that it hits in March instead of sometime in fiscal 2025? As it really embeds a much, much larger pickup in that March quarter than we’ve seen historically even to hit the reduced guide here.

So the sales force has – as you know, we have long-term relationships with all of the carriers. And – as Anil mentioned, the change in the budget was a surprise showing up in probably actually even in the later part of September in our quarter. What the sales force believes is in talking to each of our sales – each of our customers and going through a detailed list of carriers, they believe that the projects have either been delayed or they’ve been rightsized at this point. Q3 has historically been a larger quarter recently, and that has been mostly due with budget flushes. And I think the question of whether it will be in our Q3 using a 2023 remaining budget or budget flush or in our Q1 is something that we’re dealing with and the timing right now. And your question is, could it slip further out of fiscal 2024? At this point, the sales force doesn’t see that and they have significantly changed what their original expectations were.

I think one more thing to add, James, to what Jean is saying is that we have seen this dynamic play out. There has been times where Q4 has been bigger than Q3. And because many of our carrier customers are – are using – their fiscal years are starting in January. So when these kind of things happen, sometimes the budgets instead of going – we have the opposite impact, instead of using budget flush for in the last – in the December quarter, we are in – our projects are funded by the new budget coming in the new fiscal year. So we have seen that with a couple of big carriers in the past, and that’s what we are anticipating this time depending on what happened with Q3.

Yes. And just to be clear, in case I wasn’t when I said Q1, I’m thinking Q1 calendar year. So Q1 calendar year is our Q4. And as we’ve discussed in the past, Q3 gets the customer’s budget flushes and Q4 is the last quarter that our sales teams can get into accelerators into their commissions and other incentive compensations. So they usually have a high incentive to try to close those deals using the New Year’s budget in our fiscal Q4.

Helpful color, guys. Can you guys just walk us through how you’re thinking then about gross margins? As they were pretty strong this quarter, obviously, – we don’t have the RFP projects going on, but how are you thinking about gross margins versus OpEx for the back half of the year? It seems like despite the revenue headwind for this current quarter, that you’re embedding actually a fairly massive sequential uptick in OpEx of about $20 million to $25 million. I guess, really the core of my question is why wouldn’t cost stay kind of near these levels, excluding the ENGAGE conference that you guys just hosted?

So in Q3, we see the gross margin probably approaching 78%, 79% and Q4 being closer to 80% or higher. Operating expenses are flat in Q3 year-over-year due to the ENGAGE event, some head count additions and most of that has been offset by the change in variable incentive compensation. When you go out to Q4, we would see that there would be a decrease in operating expenses mostly due to the change in variable incentive compensation, such that for the full year, we would anticipate that our full year operating expenses could be down on a year-over-year basis by as much as 5%.

Got it. Thanks guys.

Thanks, Jim.

Our next question will come from Kevin Liu with K. Liu & Company. Your line is open.

Hi, good morning. Just wanted to touch on the service provider business. As while, you mentioned cable as an area of weakness. So I was curious what percentage of your business that’s represented either over the first half or last year? And then what are some of the types of projects that are being delayed where we can look for those to come back potentially?

Yes. So we don’t break out the – I mean, most of the cable business is part of the enterprise service assurance – enterprise works to – carrier vertical in the U.S. And largely, all of the cable business is that. So I don’t have the breakdown of the cable versus the total because we don’t report that. But the types of projects – there are projects in the security area, and DDoS area, Omni security area, DNS protection, there are a lot of security type projects. There are a lot of visibility type projects in the cable. And so it also a lot of people are using now, cable also are having their own 5G initiatives. So there are projects related to that. So they are all traditional things, except there has been more focus on the cable side in the recent past, and that’s why we see the impact this time.

Understood. And just as you kind of parse through the demand environment, is there any noticeable change in priorities between kind of your service assurance portfolio versus cybersecurity?

Yes. I think like for many other vendors, if you look at any companies who have multiple verticals or multiple solution sets, yes we see the Cybesecurity project and – get higher prioritization, especially when the spending is tough. And that’s why you saw an uptick in that area versus the service assurance for the first half.

Thanks for taking the questions.

Thank you.

Thank you. This does conclude the Q&A portion of today’s call. And I would now like to turn the call over to Tony for any additional or closing remarks.

Thank you, operator. That concludes our call for today. Thank you all very much for joining us. Have a good rest of the day.

Thank you, ladies and gentlemen. This concludes today’s NETSCOUT’s Second Quarter Fiscal Year 2024 Financial Results Conference Call. You may disconnect at any time.