NetScout Systems Reports Q4 '20 Results In Line with Pre-Announcement
NetScout Systems (NTCT) reported Q4 ’20 results consistent with its mid-April pre-announcement. Contrary to our prior suggestion that the top line shortfall likely arose from slipped enterprise deals, the enterprise business actually grew for the second consecutive quarter. As it turns out, delays in service provider orders, which we assumed would be somewhat insulated from disruption related to COVID-19, were to blame as restrictions on cross-border shipments amidst the pandemic affected sales. Since late March, NetScout has secured a number of seven-figure wins with customers in the financial services sector as well as an eight-figure award from an international service provider, a welcome sign that deal cycles continue to move forward. However, management noted that visibility into the timing of deal closures remains limited given the uncertainty associated with the duration and economic impact of the COVID-19 pandemic, and consistent with its earlier pre-announcement, refrained from issuing guidance for FY ’21. We had already lowered our estimates for this year and next following the pre-announcement, so our revisions this time around were fairly modest. Reflecting the strong cash flow generated in Q4 and a lower share count following another quarter of repurchases, our price target increases from $29.50 to $30.50, representing an unchanged FY ’21 EV/EBITDA multiple of 12x.
Non-GAAP revenue of $229.4 million (-2.5% Y/Y) was at the high-end of management’s pre-announced expectations for $227.4-$229.4 million but below the company’s original guidance for $237.4-$247.4 million. Service provider revenues declined approximately 8% Y/Y as orders were delayed amidst the pandemic. Additionally, a large radio frequency propagation modeling project expected to be largely completed in Q4 will now wrap up in the first half of FY ’21. On a positive note, management believes carriers will move forward with, if not accelerate, 5G investments as the year progresses. As for the enterprise business, revenues increased 3% Y/Y, marking a second consecutive quarter of growth. Digital transformation initiatives continue to drive demand for NetScout’s service assurance solutions, and Arbor’s DDoS business also contributed positively to both enterprise and service provider sales.
Non-GAAP product gross margin was down approximately 280 basis points sequentially to 77.9% due to the higher mix of revenue from the lower margin RF propagation modeling project mentioned earlier. Overall gross margin was down on a sequential and Y/Y basis, while operating expenses were slightly above our estimate. Adjusted EBITDA of $54.9 million was shy of our $57.7 million estimate, but non-GAAP EPS of $0.50 beat our $0.47 projection due to a lower tax rate. NetScout’s pre-announcement called for non-GAAP EPS of $0.46-$0.48.
NetScout generated $102.5 million in free cash flow during Q4 and exited the quarter with cash and investments of $389.1 million. Outstanding debt remained unchanged from the prior quarter at $450.0 million. In Q4, NetScout repurchased approximately 2.0 million shares at a total cost of $25.0 million. In light of the current uncertainty, management’s priorities for cash have shifted to preservation, and the company does not plan to repurchase any shares in Q1. Also reflecting the uncertainty, no guidance was provided for FY ’21.
As we previously reduced our estimates for this year and next to reflect softer economic conditions, our adjustments after yesterday’s call were fairly modest. Specifically, our projection for services revenue declines slightly due to a lower run rate exiting Q4 ’20. We also cut our operating expense assumptions, which mostly offset the reduction in services revenue. Our non-GAAP EPS estimate increases for both years due to a lower assumed share count.
Our report with model and disclosures is available here.
Disclosure(s):
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).