Netscout Systems Inc 2027 Q1 Earnings Call

Scott, please go ahead. Thank you, operator, and good morning, everyone.

Welcome to NetScout's first quarter fiscal year 2027 conference call for the period ended June 30, 2026. Joining me today are Anil Singhal, NetScout's President and Chief Executive Officer, and Tony Piazza, NetScout's Executive Vice President and Chief Financial Officer. Please note that the 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 the 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 number three, 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, including our annual report on Form 10-K and quarterly reports on Form 10-Q. As discussed in detail on slide number four, today's conference call will also include discussion of certain non-GAAP financial measures that the company believes to be useful for investors. While this slide presentation includes both GAAP and non-GAAP results, other than revenue and balance sheet information, which are presented in accordance with GAAP, we'll 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.

Reconciliations 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? Thank you, Scott, and good morning, everyone.

We appreciate you joining us today. In the first quarter of fiscal year 2027, we delivered strong top and bottom-line results as enterprises and service providers continue to rely on NetScout for mission-critical, high-fidelity visibility across increasingly complex digital environments. We executed well against our strategic priorities and believe we are in a well position to achieve our fiscal 2027 objectives of investing in innovation, driving profitable growth, expanding margins, and generating solid free cash flow. Service assurance performed well, reflecting in part government-related demand, while cybersecurity delivered results consistent with the prior year. Overall, our first quarter results reflect disciplined execution and keep us on track with our full-year outlook. Our investment in innovation continued to yield differentiated patented technologies that generate complex, high-fidelity, AI-ready Smart Data.

These capabilities provide customers with a trusted data foundation for advanced analytics, automation, and AI-enabled decision-making across observability, AIOps, service assurance, cybersecurity, and DDoS attack protection solutions. In June, we reached an important milestone with the granting of our 750th patent, demonstrating the strength of our R&D engine and the durability of our technology moat around our Smart Data platform and AI-enabled applications. Digital complexity and fragmented visibility increase the need for trusted data, stronger resilience, and more efficient operations. We believe our portfolio helps customers manage that complexity, reduce risk, and improve efficiency, all of which reinforce the long-term growth potential of our business. With that context, let me turn to slide six for a brief review of our fiscal year 2027 financial performance for the period ending June 30, 2026.

For the first quarter, total revenue increased by 13% to $210 million, compared with $187 million for the same period last year. We expanded both our gross and operating margins nicely in the quarter. Diluted earnings per share was $0.52, compared with $0.34 in the same period last year. Let's turn to slide seven for some perspective on our business and some market insight. Starting with the review of our service assurance offerings. Revenue grew approximately 20% year-over-year, benefiting in part from government-related orders, including orders that were received earlier than anticipated as the customer advanced their deployment plans. Growth also reflected sales of our newest innovation, including our Omnis Sensor and Omnis Streamer products, which make our high-fidelity metadata available in observability, cybersecurity, and AIOps platform across our partner ecosystem.

This enables our customer to leverage the real-time visibility we provide to improve automated workflows and critical investigations across the business. Enterprise customers are turning to our service assurance solutions to close visibility gaps created by hybrid clouds, remote work, automation, and AI workloads. These environments are inherently complex, with more traffic paths, potential points of failure, and operational silos across network application, observability, and security teams. With greater exposure to downtime, the consequences can be significant from an operational, legal, and financial standpoint. Our service provider customer remains focused on reducing network cost and complexity. They're also working to improve automation across fixed mobile and edge environments. NetScout 5G Observability Solutions gives customers end-to-end visibility for standalone 5G networks. They also support mission-critical applications and emerging use cases, including fixed wireless access, network slicing, and immersive services. Carrier spending remains disciplined. Even so, we continue to see opportunities for our solutions to help customers improve efficiency and monetize next-generation network investments.

Turning to cybersecurity, the revenue increased approximately 1% year-over-year. We achieved that growth despite a difficult comparison to the prior year period, which grew in the high teens due to the timing of some large projects. We continue to view cybersecurity as an important long-term growth opportunity for NetScout. Our previously disclosed May acquisition of DigiCert DDoS attack protection business assets, together with our recently announced capacity expansion, reflect a deliberate strategy to scale Arbor Cloud with greater control, efficiency, and speed. By bringing the platform backend infrastructure fully in-house, we have created the operational and architectural foundation to invest more quickly and efficiently in capacity.

That work culminated in the doubling of our mitigation capability to 30 terabits per second. It also gives us a tighter alignment between infrastructure and threat intelligence, faster innovation cycles, and improved margin potential through immediately accretive recurring revenues. These actions strengthen Arbor Cloud as a more resilient, vertically integrated cloud platform. They also position NetScout to help customers respond to the rapidly escalating scale and complexity of attacks while delivering consistent high-performance protection for mission-critical, always-on digital environments. Turning to AI, we believe it is creating a long-term growth opportunity across our portfolio. It is also bringing service assurance and cybersecurity closer together as customers look for solutions that can automate workflows, support AI-enabled applications, and large volumes of data across hybrid environments. These trends increase the need for unused visibility, observability, and cybersecurity. They also reinforce the value of NetScout Smart Data.

With packet-level precision, automation, and analytics, our AI-ready Smart Data helps customers find root causes faster, improve efficiency, strengthen cyber resilience, and connect more effectively with broader observability, security operations, and emerging agentic AI frameworks. Turning to customer wins. We saw continued demand across both service assurance and cybersecurity. In the quarter, we secured new customers and repeat business from existing customers who are investing in new solutions, upgrades, and maintenance services. These wins demonstrate the continued relevance of our portfolio, the depth of our customer relationships, and the opportunity to expand across our installed base. Highlights from the first quarter included the following. First, we completed multiple government agency-related deals in service assurance and cybersecurity with an aggregate value in the low eight digits that included our Omnis Sensor, Omnis Streamer, and Omnis Cyber Intelligence solutions. Another agency selected NetScout to support modernization and zero-trust security at the edge.

Second, we signed a multimillion-dollar agreement with a long-standing international service provider customer. That customer expanded its NetScout cybersecurity portfolio to strengthen DDoS attack protection in response to a heightened threat environment. Third, we secured a seven-figure deal with a U.S. financial institution that included our Omnis KlearSight Sensor. This solution addresses visibility challenges in large multi-cluster Kubernetes deployments. The customer selected NetScout for our ability to deliver deep, actionable, real-time insight into system performance, health, and cost drivers for customer-facing banking application in virtual environments. With that, let's move on to slide number eight and review our outlook. We are reaffirming our full fiscal year 2027 outlook. We are managing the business with that environment in mind.