NetScoutSystems Reports Financial Results for Second Quarter Fiscal Year 2010

GAAP Net Income up 35% Sequentially; Non-GAAP Net Income up 23% Sequentially

WESTFORD, Mass.--(BUSINESS WIRE)--October 22, 2009--NetScout Systems, Inc. (NASDAQ: NTCT):

NetScout Systems, Inc. (NASDAQ: NTCT), an industry leader for advanced network and service assurance solutions, today announced financial results for its second quarter of fiscal year 2010, ended September 30, 2009.

Total GAAP revenue for the second quarter of fiscal year 2010 was $59.7 million, and non-GAAP revenue was $60.1 million. Non-GAAP revenue excludes the purchase accounting adjustment to record the acquired Network General deferred revenue at fair value. Product revenue was $30.6 million on a GAAP and non-GAAP basis. Service revenue was $29.1 million on a GAAP basis and $29.5 million on a non-GAAP basis.

GAAP net income for the quarter was $7.1 million, or net income per diluted share of $0.17. GAAP income from operations was $11.7 million. On a non-GAAP basis, net income was $9.0 million, or $0.22 per diluted share, and non-GAAP income from operations was $14.8 million. Non-GAAP income from operations excludes the purchase accounting adjustment to record the acquired Network General deferred revenue at fair value, as well as share-based compensation expenses and amortization of acquired intangible assets. Non-GAAP net income excludes these effects as well as their related impact on the provision for income taxes. A reconciliation between GAAP and non-GAAP results is included in the attached financial tables.

“Our results are still being affected by the slow economy and depressed IT spending across most of our verticals. However, we are seeing signs of improvement that are appearing in our pipeline, and we continue to expect the economy and IT spending to improve in the second half of our fiscal year, which will amplify our normal seasonality. We are confirming our expectation that our bookings and revenue will accelerate in Q3 and Q4, on the strength of the pipeline,” said Anil Singhal, President and CEO of NetScout Systems. “We have maintained focus on cost and expense management, improving to a 25% non-GAAP operating margin despite lower revenue and, as a result, we are raising the low end of our FY 2010 EPS guidance range. We are lowering the high end of our FY 2010 revenue guidance range, recognizing weaker first half revenue. Looking forward, we see increasing opportunity in the wireless service provider market and we are stepping up our investment to accelerate our market share gains there. We are optimistic about our future growth in service provider and our other major market sectors.”

NetScout has tightened the guidance range, lowering the high end of revenue guidance and raising the low end of net income per diluted share guidance for fiscal year 2010. GAAP revenue is now expected to be in the range of $259 to $269 million and non-GAAP revenue between $260 million to $270 million. GAAP net income per diluted share is now expected to be in the range of $0.65 to $0.75 and non-GAAP net income per diluted share is expected to be between $0.85 and $0.95. The fiscal year 2010 non-GAAP revenue expectation excludes the purchase accounting adjustment to fair value of approximately $1.3 million of Network General’s deferred revenue and the non-GAAP net income per diluted share expectation excludes the deferred revenue purchase accounting adjustment, as well as share-based compensation expenses of approximately $5.6 million, amortization of acquired intangible assets of approximately $5.9 million, and the related impact of these adjustments on the provision for income taxes of $4.9 million.

To supplement the financial measures presented in the Company's press release in accordance with accounting principles generally accepted in the United States ("GAAP"), the Company also presents non-GAAP measures relating to revenue, income from operations, net income and net income per diluted share which were adjusted from amounts determined based on GAAP to exclude the purchase accounting adjustment representing the fair value of Network General’s deferred revenue, share-based compensation expenses, amortization of acquired intangible assets, as well as the related income tax effects.

These non-GAAP measures are not in accordance with GAAP, should not be considered an alternative for measures prepared in accordance with GAAP, and may have limitations in that they do not reflect all of NetScout’s results of operations as determined in accordance with GAAP. These non-GAAP measures should only be used to evaluate NetScout’s results of operations in conjunction with the corresponding GAAP measures. The presentation of non-GAAP information is not meant to be considered superior to, in isolation from or as a substitute for results prepared in accordance with GAAP.

The Company believes these non-GAAP financial measures will enhance the reader’s overall understanding of NetScout’s current financial performance and the Company's prospects for the future by providing a higher degree of transparency for certain financial measures and providing a level of disclosure that helps investors understand how the Company plans and measures its own business. The Company believes that providing these non-GAAP measures affords investors a view of the Company’s operating results that may be more easily compared to peer companies and also enables investors to consider the Company’s operating results on both a GAAP and non-GAAP basis during the period where GAAP results are affected by the Company’s acquisition of Network General. Presenting the GAAP measures on their own would not be indicative of the Company’s core operating results. Furthermore, NetScout believes that the presentation of non-GAAP measures when shown in conjunction with the corresponding GAAP measures provide useful information to management and investors regarding present and future business trends relating to its financial condition and results of operations.

As discussed above, Company management regularly uses supplemental non-GAAP financial measures internally to understand, manage and evaluate its business and to make operating decisions. These non-GAAP measures are among the primary factors that management uses in planning and forecasting future periods.

The Company invites shareholders to listen to its conference call today at 4:30 p.m. ET, which will be webcast live through the Company’s website at http://www.netscout.com/investors. Alternatively, people can listen to the call by dialing 866-701-8242 for U.S./Canada and 763-416-6912 for international callers and using conference ID: 35698529. A replay of the call will be available after 7:30 p.m. ET on October 22 for approximately one week. The number for the replay is 800-642-1687 for U.S./Canada and 706-645-9291 for international callers. The conference ID is: 35698529.

NetScout Systems, Inc. is the market leader in Unified Service Delivery Management enabling comprehensive end-to-end network and application assurance. For 25 years, NetScout has delivered breakthrough packet-flow technology that provides trusted and comprehensive real-time network and application performance intelligence enabling unified assurance of the network, applications and users. These solutions enable IT staff to predict, preempt and resolve network and service delivery problems while facilitating the optimization and capacity planning of the network infrastructure. NetScout nGenius® and Sniffer® solutions are deployed at more than 20,000 of the world’s largest enterprises, government agencies, and service providers, on over 740,000 network segments to assure the network, applications, and service delivery to their users and customers. More information about NetScout Systems is available at http://www.netscout.com.

Forward-looking statements in this press release are made pursuant to the safe harbor provisions of Section 21E of the Securities Exchange Act of 1934, as amended, and other federal securities laws. Investors are cautioned that statements in this press release, which are not strictly historical statements, including the plans, objectives and future financial performance of NetScout, constitute forward-looking statements which involve risks and uncertainties. Actual results could differ materially from the forward-looking statements. Risks and uncertainties which could cause actual results to differ include, without limitation, risks and uncertainties associated with slowdowns or downturns in economic conditions generally and in the market for advanced network and service assurance solutions specifically, the Company’s relationships with strategic partners, dependence upon broad-based acceptance of the Company’s network performance management solutions, the Company’s ability to achieve and maintain a high rate of growth, introduction and market acceptance of new products and product enhancements, the ability of the Company to take advantage of service provider opportunities, competitive pricing pressures, reliance on sole source suppliers, successful expansion and management of direct and indirect distribution channels and dependence on proprietary technology. 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, 2009 and subsequent Quarterly Reports on Form 10-Q on file with the Securities and Exchange Commission. NetScout assumes no obligation to update any forward-looking information contained in this press release or with respect to the announcements described herein.

NetScout Systems, Inc.
Condensed Consolidated Statements of Operations
(In thousands, except per share data)
(Unaudited)

	Three Months Ended						Six Months Ended
	September 30,						September 30,
	2009			2008			2009			2008
Revenue:
Product	$	30,631		$	39,513		$	59,022		$	74,430
Service		29,060			29,348			58,731			55,038
Total revenue		59,691			68,861			117,753			129,468

Cost of revenue:
Product		8,289			12,057			15,548			22,403
Service		4,584			5,289			9,493			10,280
Total cost of revenue		12,873			17,346			25,041			32,683

Gross profit		46,818			51,515			92,712			96,785

Operating expenses:
Research and development		8,670			10,135			17,888			20,308
Sales and marketing		21,372			25,739			43,478			49,798
General and administrative		4,604			6,080			9,834			12,611
Amortization of acquired intangible assets		491			490			981			981
Total operating expenses		35,137			42,444			72,181			83,698

Income from operations		11,681			9,071			20,531			13,087
Interest and other income (expense), net		(715	)		(1,428	)		(1,434	)		(3,181	)

Income before income tax expense		10,966			7,643			19,097			9,906
Income tax expense		3,880			2,701			6,774			3,467
Net income	$	7,086		$	4,942		$	12,323		$	6,439

Basic net income per share	$	0.18		$	0.13		$	0.31		$	0.16
Diluted net income per share	$	0.17		$	0.12		$	0.30		$	0.16
Weighted average common shares outstanding used in computing:
Net income per share - basic		40,395			39,201			40,352			39,078
Net income per share - diluted		41,590			41,008			41,388			40,781

NetScout Systems, Inc.
Reconciliation of GAAP to Non-GAAP Financial Measures
(In thousands, except per share data)
(Unaudited)

	Three Months Ended						Six Months Ended
	September 30,						September 30,
	2009			2008			2009			2008

GAAP Revenue	$	59,691		$	68,861		$	117,753		$	129,468
Product deferred revenue fair value adjustment		9			1,422			18			1,611
Service deferred revenue fair value adjustment		378			2,723			978			7,306
Non-GAAP revenue	$	60,078		$	73,006		$	118,749		$	138,385

GAAP Gross profit	$	46,818		$	51,515		$	92,712		$	96,785
Deferred revenue fair value adjustment		387			4,145			996			8,917
Shared-based compensation expense (1)		85			81			169			147
Amortization of acquired intangible assets (2)		995			995			1,990			2,007
Integration expense (3)		-			39			-			286
Non-GAAP Gross profit	$	48,285		$	56,775		$	95,867		$	108,142

GAAP Income from operations	$	11,681		$	9,071		$	20,531		$	13,087
Deferred revenue fair value adjustment		387			4,145			996			8,917
Shared-based compensation expense (1)		1,284			1,188			2,567			2,379
Amortization of acquired intangible assets (2)		1,486			1,485			2,971			2,988
Integration expense (3)		-			266			-			1,089
Non-GAAP Income from operations	$	14,838		$	16,155		$	27,065		$	28,460

GAAP Net income	$	7,086		$	4,942		$	12,323		$	6,439
Deferred revenue fair value adjustment		387			4,145			996			8,917
Shared-based compensation expense (1)		1,284			1,188			2,567			2,379
Amortization of acquired intangible assets (2)		1,486			1,485			2,971			2,988
Integration expense (3)		-			266			-			1,089
Income tax adjustments (4)		(1,200	)		(2,692	)		(2,483	)		(5,842	)
Non-GAAP Net income	$	9,043		$	9,334		$	16,374		$	15,970

GAAP Diluted Net income per share	$	0.17		$	0.12		$	0.30		$	0.16
Share impact of non-GAAP adjustments identified above		0.05			0.11			0.10			0.23
Non-GAAP Diluted net income per share	$	0.22		$	0.23		$	0.40		$	0.39

Shares used in computing non-GAAP diluted net income per share		41,590			41,008			41,388			40,781



(1)Share-based compensation expense included in these amounts
is as follows:
Cost of product revenue	$	29		$	26		$	57		$	53
Cost of service revenue		56			55			112			94
Research and development		312			300			620			611
Sales and marketing		545			511			1,101			1,041
General and administrative		342			296			677			580
Total share-based compensation expense	$	1,284		$	1,188		$	2,567		$	2,379

(2)Amortization expense related to acquired software and product
technology included in these amounts is as follows:
Cost of Product Revenue	$	995		$	995		$	1,990		$	2,007
Operating expenses		491			490			981			981
Total amortization expense	$	1,486		$	1,485		$	2,971		$	2,988

(3)Integration expense included in these amounts is as follows:
Cost of product revenue	$	-		$	-		$	-		$	141
Cost of service revenue		-			39			-			145
Research and development		-			75			-			177
Sales and marketing		-			85			-			199
General and administrative		-			67			-			427
Total integration expense	$	-		$	266		$	-		$	1,089


(4)Reflects the tax effect of non-GAAP adjustments above at the statutory rate of 38%


NetScout Systems, Inc.
Condensed Consolidated Balance Sheets
	(In thousands)
	(Unaudited)

	September 30			March 31
	2009			2009

Assets
Current assets:
Cash and cash equivalents	$	84,698		$	82,222
Marketable securities		29,232			24,162
Accounts receivable, net		33,159			39,827
Inventories		7,414			6,850
Refundable income taxes		6,764			8,389
Deferred income taxes		2,796			2,796
Prepaid expenses and other current assets		4,675			4,939

Total current assets		168,738			169,185

Fixed assets, net		12,434			13,848
Goodwill		128,177			128,177
Acquired intangible assets, net		56,639			59,610
Deferred income taxes		33,006			34,941
Long-term marketable securities		28,856			29,528
Other assets		1,668			1,445
Total assets	$	429,518		$	436,734


Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable	$	8,118		$	6,385
Accrued compensation		12,674			23,156
Accrued other		4,849			5,407
Income taxes payable		4,780			1,702
Long-term debt, current portion		10,000			10,000
Deferred revenue		61,937			70,815

Total current liabilities		102,358			117,465

Other long-term liabilities		684			771
Accrued long-term retirement benefits		1,485			1,330
Long-term deferred revenue		8,572			8,937
Long-term debt, net of current portion		74,356			82,500
Total liabilities		187,455			211,003

Stockholders' equity:
Common stock		45			45
Additional paid-in capital		196,957			192,844
Accumulated other comprehensive loss		(1,565	)		(1,461	)
Treasury stock		(28,939	)		(28,939	)
Retained earnings		75,565			63,242

Total stockholders' equity		242,063			225,731

Total liabilities and stockholders' equity	$	429,518		$	436,734

CONTACT:
NetScout Systems, Inc.
Catherine Taylor, 978-614-4286
Director of Investor Relations
IR@netscout.com

	Q2 FY 2010
	GAAP	Non-GAAP
Revenue	$59.7 million	$60.1 million
Net income	$7.1 million	$9.0 million
Net Income per share	$0.17	$0.22