UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

(Mark One)

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2019

OR

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the transition period from                      to

         

Commission file number 000-26251

NETSCOUT SYSTEMS, INC.

(Exact Name of Registrant as Specified in Its Charter)

Delaware	04-2837575
(State or Other Jurisdiction of Incorporation or Organization)	(IRS Employer Identification No.)

310 Littleton Road, Westford, MA 01886

(978) 614-4000

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Trading Symbol(s)	Name of each exchange on which registered:
Common Stock, $0.001 par value per share	NTCT	Nasdaq Global Select Market

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ☒    No  ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  ☒    No  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer  ☒            Accelerated filer             ☐    

Non-accelerated filer   ☐             Smaller reporting company    ☐

Emerging growth company    ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  ☐    No  ☒

The number of shares outstanding of the registrant's common stock, par value $0.001 per share, as of October 24, 2019 was 74,838,047.

NETSCOUT SYSTEMS, INC.

FORM 10-Q

FOR THE QUARTER ENDED SEPTEMBER 30, 2019

TABLE OF CONTENTS

CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS		1
PART I: FINANCIAL INFORMATION
Item 1.	Unaudited Financial Statements:
	Consolidated Balance Sheets: At September 30, 2019 and March 31, 2019	2
	Consolidated Statements of Operations: For the three and six months ended September 30, 2019 and 2018	3
	Consolidated Statements of Comprehensive Income (Loss): For the three and six months ended September 30, 2019 and 2018	4
	Consolidated Statements of Stockholder's Equity: For the three and six months ended September 30, 2019 and 2018	5
	Consolidated Statements of Cash Flows: For the six months ended September 30, 2019 and 2018	7
	Notes to Consolidated Financial Statements	8
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	27
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	43
Item 4.	Controls and Procedures	43
PART II: OTHER INFORMATION
Item 1.	Legal Proceedings	44
Item 1A.	Risk Factors	44
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	44
Item 3.	Defaults Upon Senior Securities	45
Item 4.	Mine Safety Disclosures	45
Item 5.	Other Information	45
Item 6.	Exhibits	46
SIGNATURES		47

Unless the context suggests otherwise, references in this Quarterly Report on Form 10-Q, or Quarterly Report, to "NetScout," the "Company," "we," "us," and "our" refer to NetScout Systems, Inc. and, where appropriate, our consolidated subsidiaries.

NetScout, the NetScout logo, Adaptive Service Intelligence and other trademarks or service marks of NetScout appearing in this Quarterly Report are the property of NetScout Systems, Inc. and/or its subsidiaries and/or affiliates in the United States and/or other countries. Any third-party trade names, trademarks and service marks appearing in this Quarterly Report are the property of their respective holders.

Cautionary Statement Concerning Forward-Looking Statements

In addition to historical information, the following discussion and other parts of this Quarterly Report contain forward-looking statements under Section 21E of the Securities Exchange Act of 1934, as amended, and other federal securities laws. These forward-looking statements involve risks and uncertainties. These statements relate to future events or our future financial performance and are identified by terminology such as "may," "will," "could," "should," "expects," "plans," "intends," "seeks," "anticipates," "believes," "estimates," "potential" or "continue," or the negative of such terms or other comparable terminology. These statements are only predictions. You should not place undue reliance on these forward-looking statements. The outcome of the events described in these forward-looking statements is subject to risks, uncertainties, and other factors, including those described to in Part I, Item 1A. Risk Factors in our Annual Report on Form 10-K for our fiscal year ended March 31, 2019, filed with the Securities and Exchange Commission, and elsewhere in this Quarterly Report. These factors may cause our actual results to differ materially from any forward-looking statement. Moreover, we operate in a very competitive and rapidly changing environment. New risks and uncertainties emerge from time to time, and it is not possible for us to predict all risks and uncertainties that could have an impact on the forward-looking statements contained in this Quarterly Report on Form 10-Q. We cannot assure you that the results, events, and circumstances reflected in the forward-looking statements will be achieved or occur, and actual results, events, or circumstances could differ materially from those described in the forward-looking statements.

The forward-looking statements made in this Quarterly Report on Form 10-Q relate only to events as of the date on which the statements are made. We undertake no obligation to update any forward-looking statements made in this Quarterly Report on Form 10-Q to reflect events or circumstances after the date of this Quarterly Report on Form 10-Q or to reflect new information or the occurrence of unanticipated events, except as required by law. We may not actually achieve the plans, intentions, or expectations disclosed in our forward-looking statements and you should not place undue reliance on our forward-looking statements. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures, or investments we may make.

1

PART I: FINANCIAL INFORMATION

Item 1. Unaudited Financial Statements

NetScout Systems, Inc.

Consolidated Balance Sheets

(In thousands, except share data)

	September 30, 2019			March 31, 2019
	(Unaudited)
Assets
Current assets:
Cash and cash equivalents	$	245,064		$	409,632
Marketable securities	55,129			76,344
Accounts receivable and unbilled costs, net of allowance for doubtful accounts of $2,280 and $1,583 at September 30, 2019 and March 31, 2019, respectively	202,288			235,318
Inventories and deferred costs	26,195			26,270
Prepaid income taxes	13,109			18,000
Prepaid expenses and other current assets	31,209			35,658
Total current assets	572,994			801,222
Fixed assets, net	58,505			58,951
Operating lease right-of-use assets	65,118			—
Goodwill	1,719,362			1,715,485
Intangible assets, net	624,799			669,118
Deferred income taxes	7,006			7,218
Long-term marketable securities	7,630			1,012
Other assets	13,960			16,988
Total assets	$	3,069,374		$	3,269,994
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable	$	34,855		$	24,582
Accrued compensation	50,202			58,501
Accrued other	19,223			23,027
Income taxes payable	1,517			1,318
Deferred revenue and customer deposits	234,229			272,508
Current portion of operating lease liabilities	10,533			—
Total current liabilities	350,559			379,936
Other long-term liabilities	7,199			19,493
Deferred tax liability	120,895			124,229
Accrued long-term retirement benefits	35,332			36,284
Long-term deferred revenue and customer deposits	97,013			94,619
Operating lease liabilities, net of current portion	68,112			—
Long-term debt	450,000			550,000
Total liabilities	1,129,110			1,204,561
Commitments and contingencies (Note 14)
Stockholders' equity:
Preferred stock, $0.001 par value:
5,000,000 shares authorized; no shares issued or outstanding at September 30, 2019 and March 31, 2019	—			—
Common stock, $0.001 par value:
300,000,000 shares authorized; 121,648,747 and 119,760,132 shares issued and 74,838,047 and 77,610,361 shares outstanding at September 30, 2019 and March 31, 2019, respectively	122			120
Additional paid-in capital	2,863,003			2,828,922
Accumulated other comprehensive loss	(3,699		)	(2,639		)
Treasury stock at cost, 46,810,700 and 42,149,771 shares at September 30, 2019 and March 31, 2019, respectively	(1,230,440		)	(1,119,063		)
Retained earnings	311,278			358,093
Total stockholders' equity	1,940,264			2,065,433
Total liabilities and stockholders' equity	$	3,069,374		$	3,269,994

The accompanying notes are an integral part of these consolidated financial statements.

2

NetScout Systems, Inc.

Consolidated Statements of Operations

(In thousands, except per share data)

(Unaudited)

	Three Months Ended						Six Months Ended
	September 30,						September 30,
	2019			2018			2019			2018
Revenue:
Product	$	102,775		$	110,753		$	178,494		$	207,680
Service	113,646			113,044			223,951			221,228
Total revenue	216,421			223,797			402,445			428,908
Cost of revenue:
Product	29,368			34,492			56,303			67,457
Service	29,764			29,488			57,572			58,550
Total cost of revenue	59,132			63,980			113,875			126,007
Gross profit	157,289			159,817			288,570			302,901
Operating expenses:
Research and development	50,058			55,959			93,785			111,422
Sales and marketing	73,067			72,051			146,592			150,183
General and administrative	25,177			25,294			47,388			51,353
Amortization of acquired intangible assets	16,132			17,981			32,275			41,446
Restructuring charges	150			2,472			273			3,619
Impairment of intangible assets	—			—			—			35,871
Loss on divestiture of business	—			9,177			—			9,177
Total operating expenses	164,584			182,934			320,313			403,071
Loss from operations	(7,295		)	(23,117		)	(31,743		)	(100,170		)
Interest and other expense, net:
Interest income	1,214			1,293			2,872			2,233
Interest expense	(5,173		)	(6,427		)	(11,538		)	(12,315		)
Other income (expense), net	343			(812		)	651			(557		)
Total interest and other expense, net	(3,616		)	(5,946		)	(8,015		)	(10,639		)
Loss before income tax expense (benefit)	(10,911		)	(29,063		)	(39,758		)	(110,809		)
Income tax expense (benefit)	6,561			(2,635		)	7,057			(21,877		)
Net loss	$	(17,472	)	$	(26,428	)	$	(46,815	)	$	(88,932	)
Basic net loss per share	$	(0.23	)	$	(0.34	)	$	(0.61	)	$	(1.12	)
Diluted net loss per share	$	(0.23	)	$	(0.34	)	$	(0.61	)	$	(1.12	)
Weighted average common shares outstanding used in computing:
Net loss per share - basic	75,687			78,631			76,490			79,490
Net loss per share - diluted	75,687			78,631			76,490			79,490

The accompanying notes are an integral part of these consolidated financial statements.

3

NetScout Systems, Inc.

Consolidated Statements of Comprehensive Income (Loss)

(In thousands)

(Unaudited)

	Three Months Ended						Six Months Ended
	September 30,						September 30,
	2019			2018			2019			2018
Net loss	$	(17,472	)	$	(26,428	)	$	(46,815	)	$	(88,932	)
Other comprehensive income (loss):
Cumulative translation adjustments	(525		)	559			(1,086		)	(2,149		)
Changes in market value of investments:
Changes in unrealized gains (losses), net of taxes (benefit) of $5, ($20), $11 and $9, respectively	2			(5		)	37			23
Total net change in market value of investments	2			(5		)	37			23
Changes in market value of derivatives:
Changes in market value of derivatives, net of benefit of $22, $14, $41 and $140, respectively	(5		)	(45		)	(60		)	(438		)
Reclassification adjustment for net gains included in net loss, net of taxes of $11, $49, $21 and $72, respectively	13			153			49			224
Total net change in market value of derivatives	8			108			(11		)	(214		)
Other comprehensive (loss) income	(515		)	662			(1,060		)	(2,340		)
Total comprehensive loss	$	(17,987	)	$	(25,766	)	$	(47,875	)	$	(91,272	)

The accompanying notes are an integral part of these consolidated financial statements.

4

NetScout Systems, Inc.

Consolidated Statements of Stockholders' Equity

(In thousands, except share data)

(Unaudited)

	Three Months Ended September 30, 2019
	Common stock Voting			Additional Paid In Capital		Accumulated Other Comprehensive Income (Loss)			Treasury stock				Retained Earnings			Total Stockholders' Equity
	Shares	Par Value							Shares	Stated Value
Balance, June 30, 2019	120,123,018	$	120	$	2,841,001	$	(3,184	)	43,568,720	$	(1,155,252	)	$	328,750		$	2,011,435
Net loss													(17,472		)	(17,472		)
Unrealized net investment gains						2										2
Unrealized net gains on derivative financial instruments						8										8
Cumulative translation adjustments						(525		)								(525		)
Issuance of common stock pursuant to vesting of restricted stock units	1,228,094	2														2
Stock-based compensation expense for restricted stock units granted to employees				15,409												15,409
Issuance of common stock under employee stock purchase plan	297,635			6,593												6,593
Repurchase of treasury stock									3,241,980	(75,188		)				(75,188		)
Balance, September 30, 2019	121,648,747	$	122	$	2,863,003	$	(3,699	)	46,810,700	$	(1,230,440	)	$	311,278		$	1,940,264
	Six Months Ended September 30, 2019
	Common stock Voting			Additional Paid In Capital		Accumulated Other Comprehensive Income (Loss)			Treasury stock				Retained Earnings			Total Stockholders' Equity
	Shares	Par Value							Shares	Stated Value
Balance, March 31, 2019	119,760,132	$	120	$	2,828,922	$	(2,639	)	42,149,771	$	(1,119,063	)	$	358,093		$	2,065,433
Net loss													(46,815		)	(46,815		)
Unrealized net investment gains						37										37
Unrealized net losses on derivative financial instruments						(11		)								(11		)
Cumulative translation adjustments						(1,086		)								(1,086		)
Issuance of common stock pursuant to vesting of restricted stock units	1,590,980	2														2
Stock-based compensation expense for restricted stock units granted to employees				27,488												27,488
Issuance of common stock under employee stock purchase plan	297,635			6,593												6,593
Repurchase of treasury stock									4,660,929	(111,377		)				(111,377		)
Balance, September 30, 2019	121,648,747	$	122	$	2,863,003	$	(3,699	)	46,810,700	$	(1,230,440	)	$	311,278		$	1,940,264

The accompanying notes are an integral part of these consolidated financial statements.

5

NetScout Systems, Inc.

Consolidated Statements of Stockholders' Equity

(In thousands, except share data)

(Unaudited)

	Three Months Ended September 30, 2018
	Common stock Voting			Additional Paid In Capital		Accumulated Other Comprehensive Income (Loss)			Treasury stock				Retained Earnings			Total Stockholders’ Equity
	Shares	Par Value							Shares	Stated Value
Balance, June 30, 2018	118,139,282	$	117	$	2,676,382	$	(107	)	37,604,005	$	(999,329	)	$	368,138		$	2,045,201
Net loss													(26,428		)	(26,428		)
Unrealized net investment losses						(5		)								(5		)
Unrealized net gains on derivative financial instruments						108										108
Cumulative translation adjustments						559										559
Issuance of common stock pursuant to vesting of restricted stock units	789,011	2														2
Stock-based compensation expense for restricted stock units granted to employees				15,955												15,955
Issuance of common stock under employee stock purchase plan	302,994			7,575												7,575
Repurchase of treasury stock				96,783					3,922,558	(103,152		)				(6,369		)
Issuance of shares, net
Balance, September 30, 2018	119,231,287	$	119	$	2,796,695	$	555		41,526,563	$	(1,102,481	)	$	341,710		$	2,036,598
	Six Months Ended September 30, 2018
	Common stock Voting			Additional Paid In Capital		Accumulated Other Comprehensive Income (Loss)			Treasury stock				Retained Earnings			Total Stockholders’ Equity
	Shares	Par Value							Shares	Stated Value
Balance, March 31, 2018	117,744,913	$	117	$	2,665,120	$	2,895		37,474,890	$	(995,843	)	$	396,493		$	2,068,782
Net loss													(88,932		)	(88,932		)
Unrealized net investment gains						23										23
Unrealized net losses on derivative financial instruments						(214		)								(214		)
Cumulative translation adjustments						(2,149		)								(2,149		)
Issuance of common stock pursuant to vesting of restricted stock units	1,183,380	2														2
Stock-based compensation expense for restricted stock units granted to employees				27,217												27,217
Issuance of common stock under employee stock purchase plan	302,994			7,575												7,575
Repurchase of treasury stock				96,783					4,051,673	(106,638		)				(9,855		)
Cumulative effect of adoption of ASU 2014-09													34,149			34,149
Balance, September 30, 2018	119,231,287	$	119	$	2,796,695	$	555		41,526,563	$	(1,102,481	)	$	341,710		$	2,036,598

The accompanying notes are an integral part of these consolidated financial statements.

6

NetScout Systems, Inc.

Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

	Six Months Ended
	September 30,
	2019			2018
Cash flows from operating activities:
Net loss	$	(46,815	)	$	(88,932	)
Adjustments to reconcile net loss to cash provided by operating activities, net of the effects of acquisitions:
Depreciation and amortization	58,666			74,558
Operating lease right-of-use assets	5,106			—
Loss on divestiture of business	—			7,390
Loss on disposal of fixed assets	—			174
Deal-related compensation expense and accretion charges	—			76
Share-based compensation expense	28,600			30,383
Net change in fair value of contingent and contractual liabilities	541			—
Accretion of contingent consideration	(24		)	(10		)
Impairment of intangible assets	—			35,871
Deferred income taxes	(2,945		)	(22,289		)
Other gains	(85		)	(208		)
Changes in assets and liabilities
Accounts receivable and unbilled costs	32,937			29,325
Due from related party	—			1,719
Inventories	(2,484		)	892
Prepaid expenses and other assets	11,289			4,751
Accounts payable	10,099			(9,518		)
Accrued compensation and other expenses	(4,370		)	15,413
Operating lease liabilities	(6,565		)	—
Due to related party	—			(3		)
Income taxes payable	(48		)	(1,759		)
Deferred revenue	(35,446		)	(45,127		)
Net cash provided by operating activities	48,456			32,706
Cash flows from investing activities:
Purchase of marketable securities	(83,502		)	(136,019		)
Proceeds from sales and maturity of marketable securities	98,147			94,057
Purchase of fixed assets	(9,056		)	(12,207		)
Payments related to the divestiture of business	—			(2,911		)
Increase in deposits	(4		)	(97		)
Acquisition of businesses	(4,154		)	—
Net cash provided by (used in) investing activities	1,431			(57,177		)
Cash flows from financing activities:
Issuance of common stock under stock plans	2			2
Payment of contingent consideration	—			(523		)
Repayment of long-term debt	(100,000		)	—
Treasury stock repurchases	(100,000		)	—
Tax withholding on restricted stock units	(11,377		)	(9,854		)
Net cash used in financing activities	(211,375		)	(10,375		)
Effect of exchange rate changes on cash and cash equivalents	(2,268		)	(3,515		)
Net decrease in cash and cash equivalents and restricted cash	(163,756		)	(38,361		)
Cash and cash equivalents and restricted cash, beginning of period	409,820			370,731
Cash and cash equivalents and restricted cash, end of period	$	246,064		$	332,370
Supplemental disclosures:
Cash paid for interest	$	10,167		$	11,065
Cash paid for income taxes	$	7,232		$	6,434
Non-cash transactions:
Transfers of inventory to fixed assets	$	2,290		$	2,152
Additions to property, plant and equipment included in accounts payable	$	238		$	1,929
Tenant improvement allowance	$	—		$	10,171
Issuance of common stock under employee stock plans	$	6,593		$	7,575
Contingent consideration related to acquisition, included in accrued other	$	1,000		$	—
Fair value of contingent consideration received as partial consideration for divestiture of business	$	—		$	2,257

The accompanying notes are an integral part of these consolidated financial statements.

7

NetScout Systems, Inc.

Notes to Consolidated Financial Statements

(Unaudited)

NOTE 1 – BASIS OF PRESENTATION

The accompanying unaudited interim consolidated financial statements have been prepared by NetScout Systems, Inc. (NetScout or the Company). Certain information and footnote disclosures normally included in financial statements prepared under United States generally accepted accounting principles (GAAP) have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). In the opinion of management, the unaudited interim consolidated financial statements include all adjustments, consisting of normal recurring adjustments, necessary for a fair statement of the Company's financial position and stockholders' equity, results of operations and cash flows. The year-end consolidated balance sheet data and statement of stockholders' equity were derived from the Company's audited financial statements, but do not include all disclosures required by GAAP. The results reported in these unaudited interim consolidated financial statements are not necessarily indicative of results that may be expected for the entire year. All significant intercompany accounts and transactions are eliminated in consolidation.

These unaudited interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements, including the notes thereto, included in the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2019 filed with the Securities and Exchange Commission on May 28, 2019.

Recent Accounting Pronouncements

In August 2018, the FASB issued ASU 2018-14, Compensation – Retirement Benefits – Defined Benefit Plans – General (Subtopic 715-20): Disclosure Framework—Changes to the Disclosure Requirements for Defined Benefit Plans. This ASU adds, modifies and clarifies several disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans. This guidance is effective for fiscal years ending after December 15, 2020. ASU 2018-14 is effective for NetScout beginning April 1, 2021. Early adoption is permitted. The Company is currently assessing the effect that ASU 2018-14 will have on its financial position, results of operations, and disclosures.

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement. ASU 2018-13 adds, modifies and removes several disclosure requirements relative to the three levels of inputs used to measure fair value in accordance with Topic 820, Fair Value Measurement. This guidance is effective for fiscal years beginning after December 15, 2019, including interim periods within that fiscal year. ASU 2018-13 is effective for NetScout beginning April 1, 2020. Early adoption is permitted. The Company is currently assessing the effect that ASU 2018-13 will have on its financial position, results of operations, and disclosures.

In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815), Targeted Improvements to Accounting for Hedging Activities (ASU 2017-12). ASU 2017-12 provides guidance to better align an entity's risk management activities and financial reporting for hedging relationships through changes to both the designation and measurement guidance for qualifying hedging relationships and the presentation of hedge results. The amendments expand and refine hedge accounting for both non-financial and financial risk components and align the recognition and presentation of the effects of the hedging instrument and the hedged item in the financial statements. This standard is effective for financial statements issued for fiscal years beginning after December 15, 2018. The Company adopted ASU 2017-12 effective April 1, 2019. The adoption has had an immaterial impact on the Company's consolidated financial statements.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (ASU 2016-13) and also issued subsequent amendments to the initial guidance: ASU 2018-19, ASU 2019-04 and ASU 2019-05 (collectively, Topic 326). Topic 326 requires measurement and recognition of expected credit losses for financial assets held. Topic 326 is effective for annual periods beginning after December 15, 2019, and interim periods therein. Topic 326 is effective for NetScout beginning April 1, 2020, and earlier adoption is permitted. The Company is currently assessing the effect that Topic 326 will have on its financial position, results of operations, and disclosures.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) Section A - Leases: Amendments to the FASB Accounting Standards Codification (ASU 2016-02) and issued subsequent amendments to initial guidance in July 2018 within ASU 2018-10, Codification Improvements to Topic 842, Leases and ASU 2018-11, Leases (Topic 842): Targeted Improvements (collectively, ASC 842). ASC 842 aims to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. The Company adopted the guidance as of April 1, 2019 using the modified retrospective method. Please refer to Note 13, "Leases" for further details.

8

NOTE 2 – REVENUE RECOGNITION

Revenue Recognition Policy

The Company exercises judgment and uses estimates in connection with determining the amounts of product and service revenues to be recognized in each accounting period.

The Company derives revenues primarily from the sale of network management tools and security solutions for service provider and enterprise customers, which include hardware, software and service offerings. The majority of the Company's product sales consist of hardware products with embedded software that are essential to providing customers the intended functionality of the solutions. The Company also sells software offerings decoupled from the underlying hardware and software solutions to provide customers with enhanced functionality.

The Company accounts for revenue once a legally enforceable contract with a customer has been approved by the parties and the related promises to transfer products or services have been identified. A contract is defined by the Company as an arrangement with commercial substance identifying payment terms, each party’s rights and obligations regarding the products or services to be transferred and the amount the Company deems probable of collection. Customer contracts may include promises to transfer multiple products and services to a customer. Determining whether the products and services are considered distinct performance obligations that should be accounted for separately or as one combined performance obligation may require significant judgment. Revenue is recognized when control of the products or services are transferred to the Company's customers, in an amount that reflects the consideration the Company expects to be entitled to in exchange for products and services.

Product revenue is typically recognized upon shipment, provided a legally enforceable contract exists, control has passed to the customer, and in the case of software products, when the customer has the rights and ability to access the software; and collection of the related receivable is probable. If any significant obligations to the customer remain post-delivery, typically involving obligations relating to installation and acceptance by the customer, revenue recognition is deferred until such obligations have been fulfilled. The Company's service offerings include installation, integration, extended warranty and maintenance services, post-contract customer support, stand-ready software-as-a-service (SAAS) and other professional services including consulting and training. The Company generally provides software and/or hardware support as part of product sales. Revenue related to the initial bundled software and hardware support is recognized ratably over the support period. In addition, customers can elect to purchase extended support agreements for periods after the initial software/hardware warranty expiration. Support services generally include rights to unspecified upgrades (when and if available), telephone and internet-based support, updates, bug fixes and hardware repair and replacement. Consulting services are recognized upon delivery or completion of performance depending on the terms of the underlying contract. Reimbursements of out-of-pocket expenditures incurred in connection with providing consulting services are included in services revenue, with the offsetting expense recorded in cost of service revenue. Training services include on-site and classroom training. Training revenues are recognized upon delivery of the training.

Generally, the Company's contracts are accounted for individually. However, when contracts are closely interrelated and dependent on each other, it may be necessary to account for two or more contracts as one to reflect the substance of the group of contracts.

Bundled arrangements are concurrent customer purchases of a combination of the Company's product and service offerings that may be delivered at various points in time. The Company allocates the transaction price among the performance obligations in an amount that depicts the relative standalone selling prices (SSP) of each obligation. Judgment is required to determine the SSP for each distinct performance obligation. The Company uses a range of amounts to estimate SSP when it sells each of the products and services separately based on the element’s historical pricing. The Company also considers its overall pricing objectives and practices across different sales channels and geographies, and market conditions. Generally, the Company has established SSP for a majority of its service elements based on historical standalone sales. In certain instances, the Company has established SSP for services based upon an estimate of profitability and the underlying cost to fulfill those services. Further, for certain service engagements, the Company considers quoted prices as part of multi-element arrangements of those engagements as a basis for establishing SSP. SSP has been established for product elements as the average or median selling price the element was recently sold for, whether sold alone or sold as part of a multiple element transaction. The Company reviews sales of the product elements on a quarterly basis and updates, when appropriate, its SSP for such elements to ensure that it reflects recent pricing experience. The Company's products are distributed through its direct sales force and indirect distribution channels through alliances with resellers and distributors. Revenue arrangements with resellers and distributors are recognized on a sell-in basis; that is, when control of the product transfers to the reseller or distributor. The Company records consideration given to a reseller or distributor as a reduction of revenue to the extent they have recorded revenue from the reseller or distributor. With limited exceptions, the Company's return policy does not allow product returns for a refund. Returns have been insignificant to date. In addition, the Company has a history of successfully collecting receivables from its resellers and distributors.

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During the six months ended September 30, 2019, the Company recognized revenue of $175.4 million related to the Company's deferred revenue balance reported at March 31, 2019.

Performance Obligations

Customer contracts may include promises to transfer multiple products and services to a customer. Determining whether the products and services are considered distinct performance obligations that should be accounted for separately or as one combined performance obligation may require significant judgment. The transaction price is allocated among performance obligations in bundled contracts in an amount that depicts the relative standalone selling prices of each obligation.

For contracts involving distinct hardware and software licenses, the performance obligations are satisfied at a point in time when control is transferred to the customer. For standalone maintenance and post-contract support (PCS) the performance obligation is satisfied ratably over the contract term as a stand-ready obligation. For consulting and training services, the performance obligation may be satisfied over the contract term as a stand-ready obligation, satisfied over a period of time as those services are delivered, or satisfied at the completion of the service when control has transferred, or the services have expired unused.

Payments for hardware, software licenses, one-year maintenance, PCS and consulting services, are typically due up front with payment terms of 30 to 90 days. However, the Company does have contracts pursuant to which billings occur ratably over a period of years following the transfer of control for the contracted performance obligations. Payments on multi-year maintenance, PCS and consulting services are typically due in annual installments over the contract term. The Company did not have any material variable consideration such as obligations for returns or refunds at September 30, 2019.

At September 30, 2019, the Company had total deferred revenue of $331.2 million, which represents the aggregate total contract price allocated to undelivered performance obligations. The Company expects to recognize $234.2 million, or 71%, of this revenue during the next 12 months, and expects to recognize the remaining $97.0 million, or 29%, of this revenue thereafter.

Because of NetScout's revenue recognition policies, there are circumstances for which the Company does not recognize revenue relating to sales transactions that have been billed, but the related account receivable has not been collected. While the receivable represents an enforceable obligation, for balance sheet presentation purposes, the Company has not recognized the deferred revenue, or the related account receivable and no amounts appear in the consolidated balance sheets for such transactions because control of the underlying deliverable has not transferred. The aggregate amount of unrecognized accounts receivable and deferred revenue was $5.0 million and $23.3 million at September 30, 2019 and March 31, 2019, respectively.

NetScout expects that the amount of billed and unbilled deferred revenue will change from quarter to quarter for several reasons, including the specific timing, duration and size of large customer support and service agreements, varying billing cycles of such agreements, the specific timing of customer renewals, and foreign currency fluctuations. The Company did not have any significant financing components, or variable consideration or performance obligations satisfied in a prior period recognized during the six months ended September 30, 2019.

Contract Balances

The Company may receive payments from customers based on a billing schedule as established by the Company’s contracts. Contract assets relate to performance obligations where control has transferred to the customer in advance of scheduled billings. The Company records unbilled accounts receivable representing the right to consideration in exchange for goods or services that have been transferred to a customer conditional on the passage of time. Deferred revenue relates to payments received in advance of performance under the contract.

Costs to Obtain Contracts

The Company has determined that the only significant incremental costs incurred to obtain contracts with customers within the scope of Topic 606 are sales commissions paid to its employees. Sales commissions are recorded as an asset and amortized to expense ratably over the remaining performance periods of the related contracts with remaining performance obligations. The Company expenses costs as incurred for sales commissions when the amortization period would have been one year or less.

At September 30, 2019, the consolidated balance sheet included $6.2 million in assets related to sales commissions to be expensed in future periods. A balance of $3.6 million was included in prepaid expenses and other current assets, and a balance of $2.6 million was included as other assets in the Company's consolidated balance sheet at September 30, 2019. At March 31, 2019, the consolidated balance sheet included $6.4 million in assets related to sales commissions to be expensed in future periods. A balance of $3.8 million was included in prepaid expenses and other current assets, and a balance of $2.6 million was included as other assets in the Company's consolidated balance sheet at March 31, 2019.

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During the three and six months ended September 30, 2019 and 2018, respectively, the Company recognized $1.6 million, $1.8 million, $3.2 million, and $3.3 million of amortization related to this sales commission asset, which is included in the sales and marketing expense line in the Company's consolidated statements of operations.

NOTE 3 – CONCENTRATION OF CREDIT RISK AND SIGNIFICANT CUSTOMERS

Financial instruments that potentially subject the Company to concentration of credit risk consist primarily of investments, trade accounts receivable and accounts payable. The Company's cash, cash equivalents, and marketable securities are placed with financial institutions with high credit standings.

At September 30, 2019, the Company had one direct customer who accounted for more than 10% of the accounts receivable balance, and one indirect channel partner, a large U.S. based reseller, who accounted for more than 10% of the accounts receivable balance. At March 31, 2019, the Company had no direct customers or indirect channel partners which accounted for more than 10% of the accounts receivable balance.

During the three and six months ended September 30, 2019 and 2018, no direct customers or indirect channel partners accounted for more than 10% of the Company's total revenue.

Historically, the Company has not experienced any significant failure of its customers' ability to meet their payment obligations nor does the Company anticipate material non-performance by its customers in the future; accordingly, the Company does not require collateral from its customers. However, if the Company's assumptions are incorrect, there could be an adverse impact on its allowance for doubtful accounts.

NOTE 4 – SHARE-BASED COMPENSATION

The following is a summary of share-based compensation expense including restricted stock units granted pursuant to the Company's 2007 Equity Incentive Plan, as amended (Amended 2007 Plan), and employee stock purchases made under the Company's 2011 Employee Stock Purchase Plan, as amended, (ESPP) based on estimated fair values within the applicable cost and expense lines identified below (in thousands):

	Three Months Ended				Six Months Ended
	September 30,				September 30,
	2019		2018		2019		2018
Cost of product revenue	$	345	$	544	$	612	$	813
Cost of service revenue	1,842		1,845		3,309		3,175
Research and development	4,820		5,414		8,639		9,565
Sales and marketing	5,288		6,043		9,423		10,402
General and administrative	3,562		3,572		6,617		6,428
	$	15,857	$	17,418	$	28,600	$	30,383

On September 12, 2019, the Company’s stockholders approved the 2019 Equity Incentive Plan (2019 Plan), which replaced the Company’s Amended 2007 Plan. The 2019 Plan permits the granting of incentive and nonstatutory stock options, stock appreciation rights, restricted stock awards, restricted stock unit awards, and other stock awards, collectively referred to as “share-based awards.” Periodically, the Company grants share-based awards to employees and officers of the Company and its subsidiaries. The Company accounts for these share-based awards in accordance with GAAP, which requires the measurement and recognition of compensation expense based on estimated fair values for all share-based payment awards made to its employees and directors. Share-based award grants are generally measured at fair value on the date of grant based on the number of shares granted and the quoted price of the Company’s common stock. Such value is recognized as a cost of revenue or an operating expense over the corresponding vesting period. At September 12, 2019, there was a total of 6,794,651 shares reserved for issuance under the 2019 Plan, which consists of 5,500,000 new shares plus 1,294,651 shares that remained available for grant under the Amended 2007 Plan as of the September 12, 2019, the effective date of the 2019 Plan.

The aggregate number of shares available for issuance under the 2019 Plan will increase by 2.76 shares for each share: (i) subject to an award granted under the Amended 2007 Plan or 2019 Plan that are not issued because such award expires or otherwise terminates without all of the shares covered by such award having been issued; (ii) any shares subject to an award under the Amended 2007 Plan or 2019 Plan that are not issued because such award is settled in cash; (iii) any shares issued pursuant to an award granted under the Amended 2007 Plan or 2019 Plan that are forfeited back to or repurchased by the Company because of failure to vest; and (iv) any shares that are reacquired or withheld by the Company to satisfy tax withholdings obligation in connection with common stock issued pursuant to restricted stock, restricted stock units, performance stock awards, or other stock award under the Amended 2007 Plan and 2019 Plan. Furthermore, the share reserve

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under the 2019 Plan is reduced by one share for each share of common stock issued pursuant to a stock option or stock appreciation right and 2.76 shares for each share of common stock issued pursuant to restricted stock, restricted stock units, performance stock awards, or other stock awards granted under the 2019 Plan on or after September 12, 2019. At September 30, 2019, there were 6,965,972 shares of common stock available for grant under the 2019 Plan.

The 2019 Plan is administered by the Compensation Committee of the Board of Directors. The Compensation Committee operates under guidelines established by the Board of Directors. The Compensation Committee has the authority to select the employees and consultants to whom awards are granted (except for directors and executive officers) and determine the terms of each award, including the number of shares of common stock subject to the award.

Share-based awards generally vest over four years. The exercise price of incentive stock options shall not be less than 100% of the fair market value of the common stock at the date of grant (110% for incentive stock options granted to holders of more than 10% of the voting stock of NetScout). The term of stock options granted cannot exceed seven years (five years for incentive stock options granted to holders of more than 10% of the voting stock of NetScout).

Employee Stock Purchase Plan – The Company maintains the ESPP for all eligible employees as described in the Company's Annual Report on Form 10-K for the year ended March 31, 2019. Under the ESPP, shares of the Company's common stock may be purchased on the last day of each bi-annual offering period at 85% of the fair value on the last day of such offering period. The offering periods run from March 1st through August 31st and from September 1st through the last day of February each year. During the six months ended September 30, 2019, employees purchased 297,635 shares under the ESPP and the value per share was $22.15.

NOTE 5 – CASH, CASH EQUIVALENTS, RESTRICTED CASH AND MARKETABLE SECURITIES

The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents and those investments with original maturities greater than three months to be marketable securities. Cash and cash equivalents consisted of U.S. government and municipal obligations, commercial paper, money market instruments and cash maintained with various financial institutions at September 30, 2019 and March 31, 2019.

Cash, Cash Equivalents and Restricted Cash

The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the consolidated balance sheets that sum to the total of the same such amounts shown in the consolidated statements of cash flows (in thousands):

	September 30, 2019		March 31, 2019		September 30, 2018		March 31, 2018
Cash and cash equivalents	$	245,064	$	409,632	$	332,183	$	369,821
Restricted cash	1,000		188		187		910
Total cash, cash equivalents and restricted cash	$	246,064	$	409,820	$	332,370	$	370,731

The Company's restricted cash includes cash balances which are legally or contractually restricted. The Company's restricted cash is included within prepaid and other current assets and consists of amounts related to holdbacks associated with prior acquisitions.

Marketable Securities

The following is a summary of marketable securities held by NetScout at September 30, 2019, classified as short-term and long-term (in thousands):

	Amortized Cost		Unrealized Gains		Fair Value
Type of security:
U.S. government and municipal obligations	$	25,621	$	29	$	25,650
Commercial paper	25,289		—		25,289
Corporate bonds	4,181		9		4,190
Total short-term marketable securities	55,091		38		55,129
U.S. government and municipal obligations	7,603		27		7,630
Total long-term marketable securities	7,603		27		7,630
Total marketable securities	$	62,694	$	65	$	62,759

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The following is a summary of marketable securities held by NetScout at March 31, 2019, classified as short-term and long-term (in thousands):

	Amortized Cost		Unrealized Gains		Fair Value
Type of security:
U.S. government and municipal obligations	$	27,610	$	12	$	27,622
Commercial paper	48,722		—		48,722
Total short-term marketable securities	76,332		12		76,344
Corporate bonds	1,007		5		1,012
Total long-term marketable securities	1,007		5		1,012
Total marketable securities	$	77,339	$	17	$	77,356

Contractual maturities of the Company's marketable securities held at September 30, 2019 and March 31, 2019 were as follows (in thousands):

	September 30, 2019		March 31, 2019
Available-for-sale securities:
Due in 1 year or less	$	55,129	$	76,344
Due after 1 year through 5 years	7,630		1,012
	$	62,759	$	77,356

NOTE 6 – FAIR VALUE MEASUREMENTS

The fair value hierarchy has three levels based on the reliability of the inputs used to determine fair value. Level 1 refers to fair values determined based on quoted prices in active markets for identical assets. Level 2 refers to fair values estimated using significant other observable inputs, and Level 3 includes fair values estimated using significant non-observable inputs. The following tables present the Company's financial assets and liabilities measured on a recurring basis using the fair value hierarchy at September 30, 2019 and March 31, 2019 (in thousands):

	Fair Value Measurements at
	September 30, 2019
	Level 1		Level 2			Level 3			Total
ASSETS:
Cash and cash equivalents	$	245,064	$	—		$	—		$	245,064
U.S. government and municipal obligations	33,280					—			33,280
Commercial paper	—		25,289			—			25,289
Corporate bonds	4,190		—			—			4,190
Derivative financial instruments	—		37			—			37
Contingent consideration	—		—			245			245
	$	282,534	$	25,326		$	245		$	308,105
LIABILITIES:
Contingent purchase consideration	$	—	$	—		$	(1,000	)	$	(1,000	)
Derivative financial instruments	—		(35		)	—			(35		)
	$	—	$	(35	)	$	(1,000	)	$	(1,035	)

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	Fair Value Measurements at
	March 31, 2019
	Level 1		Level 2			Level 3		Total
ASSETS:
Cash and cash equivalents	$	409,632	$	—		$	—	$	409,632
U.S. government and municipal obligations	10,732		16,890			—		27,622
Commercial paper	—		48,722			—		48,722
Corporate bonds	1,012		—			—		1,012
Derivative financial instruments	—		58			—		58
Contingent consideration	—		—			762		762
	$	421,376	$	65,670		$	762	$	487,808
LIABILITIES:
Derivative financial instruments	$	—	$	(68	)	$	—	$	(68	)
	$	—	$	(68	)	$	—	$	(68	)

This hierarchy requires the Company to use observable market data, when available, and to minimize the use of unobservable inputs when determining fair value. On a recurring basis, the Company measures certain financial assets and liabilities at fair value, including marketable securities and derivative financial instruments.

The Company's Level 1 investments are classified as such because they are valued using quoted market prices or alternative pricing sources with reasonable levels of price transparency.

The Company's Level 2 investments are classified as such because fair value is calculated using market observable data for similar but not identical instruments, or a discounted cash flow model using the contractual interest rate as compared to the underlying interest yield curve. The Company classifies municipal obligations as Level 2 because the fair values are determined using quoted prices from markets the Company considers to be inactive. Commercial paper is classified as Level 2 because the Company uses market information from similar but not identical instruments and discounted cash flow models based on interest rate yield curves to determine fair value. The Company's derivative financial instruments consist of forward foreign exchange contracts and are classified as Level 2 because the fair values of these derivatives are determined using models based on market observable inputs, including spot prices for foreign currencies and credit derivatives, as well as an interest rate factor.

The Company's Level 3 assets consist of contingent consideration related to the divestiture of the Company's handheld network test (HNT) tools business in September 2018. The contingent consideration represents potential future earnout payments to the Company of up to $4.0 million over two years that are contingent on the HNT tools business achieving certain milestones. The Company recorded a $0.5 million change in the fair value of the contingent consideration for the six months ended September 30, 2019, which is included in other income (expense), net within the Company's consolidated statement of operations for the six months ended September 30, 2019. The fair value of the contingent consideration was $0.2 million and $0.8 million at September 30, 2019 and March 31, 2019 respectively. The contingent consideration is included in other assets within the Company’s consolidated balance sheet at September 30, 2019 and March 31, 2019.

The Company's Level 3 liability consists of contingent purchase consideration related to the acquisition of certain assets and liabilities of Eastwind Networks, Inc. (Eastwind) in April 2019. The contingent purchase consideration represents amounts deposited into an escrow account, which was established to cover damages NetScout may suffer related to any liabilities that NetScout did not agree to assume or as a result of the breach of representations and warranties of the seller as described in the acquisition agreement. The contingent purchase consideration is included as accrued other in the Company's consolidated balance sheet at September 30, 2019.

The following table sets forth a reconciliation of changes in the fair value of the Company's Level 3 financial assets and liabilities for the six months ended September 30, 2019 (in thousands):

	Contingent Consideration			Contingent Purchase Consideration
Balance at March 31, 2019	$	762		$	—
Additions to Level 3	—			(1,000		)
Change in fair value of contingent consideration	(517		)	—
Balance at September 30, 2019	$	245		$	(1,000	)

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Accretion income related to the contingent consideration received as partial consideration for the divestiture of the HNT tools business for the six months ended September 30, 2019 was $24 thousand and was included within interest income.

NOTE 7 – INVENTORIES

Inventories are stated at the lower of actual cost or net realizable value. Cost is determined by using the first in, first out (FIFO) method. Inventories consist of the following (in thousands):

	September 30, 2019		March 31, 2019
Raw materials	$	16,848	$	14,432
Work in process	274		1,181
Finished goods	4,950		7,738
Deferred costs	4,123		2,919
	$	26,195	$	26,270

NOTE 8 - ACQUISITIONS & DIVESTITURES

Eastwind Acquisition

On April 3, 2019 (the Eastwind Closing Date), the Company completed the acquisition of certain assets and liabilities of Eastwind for $5.2 million. Eastwind's breach analytics cloud analyzes data to identify malicious activity, insider threats and data leakage.

The Company completed the purchase accounting related to the Eastwind acquisition as of June 30, 2019. Goodwill and intangible assets recorded as part of the acquisition are deductible for tax purposes.

Initial cash payment	$	4,154
Estimated fair value of contingent purchase consideration	1,000
Estimated purchase price	$	5,154

The following table reflects the estimated fair value of assets acquired and liabilities assumed (in thousands):

Property, plant and equipment	$	17
Intangible assets	4,230
Accrued other liabilities	(96		)
Goodwill	$	1,003

Of the total consideration, $1.0 million was deposited into an escrow account. The escrow account was established to cover damages NetScout may suffer related to any liabilities that NetScout did not agree to assume or as a result of the breach of representations and warranties of the seller as described in the acquisition agreement. Generally, indemnification claims that Eastwind would be liable for are limited to the total amount of the escrow account, which shall be the sole source for the satisfaction of any damages to the Company for such claims, but such limitation does not apply with respect to the seller's breach of certain fundamental representations or related to other specified indemnity items, for which certain of Eastwind's shareholders may be liable for additional amounts in excess of the escrow amount. Except to the extent that valid indemnification claims are made prior to such time, the $1.0 million will be paid to the seller in April 2020.

In connection with the Eastwind acquisition, certain former employees of Eastwind received cash retention payments totaling $0.3 million on the Eastwind Closing Date. Because these employees were not required to provide future services to the Company, the cash retention payments were accounted for as part of the purchase price. These former Eastwind employees will also receive cash retention payments subject to such employee's continued employment with the Company through the next regularly scheduled payroll dates following each of the first and second anniversaries of the Eastwind Closing Date. The cash retention payment liability related to these future cash retention payments were accounted for separately from the business combination as the cash retention payment is automatically forfeited upon termination of employment. The Company will record the liability over the period it is earned as compensation expense for post-combination services.

The fair value of intangible assets was based on a valuation using a cost method approach. The underlying assumptions include estimates of cost to replace or reproduce the asset, less adjustments for physical deterioration and functional obsolescence, if relevant. This fair value measurement was based on significant inputs not observable in the market and thus represents Level 3 fair value measurements.

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The following table reflects the fair value of the acquired identifiable intangible asset and related estimated useful life (in thousands):

	Fair Value		Useful Life (Years)
Developed technology	$	4,230	10

The average useful life of the developed technology acquired from Eastwind is 10 years.

HNT Tools Business Divestiture

On September 14, 2018 (the HNT Divestiture Date), the Company divested its HNT tools business. As part of the divestiture, the Company recorded contingent consideration which represents potential future earnout payments of up to $4.0 million over two years that are contingent on the HNT tools business achieving certain milestones. The Company recorded a $0.5 million change in the fair value of the contingent consideration, which is included in other income (expense), net within the Company’s consolidated statements of operations for the six months ended September 30, 2019. The fair value of the contingent consideration was $0.2 million and $0.8 million at September 30, 2019 and March 31, 2019, respectively. The contingent consideration is included within other assets within the Company’s consolidated balance sheet.    

In connection with the divestiture, the Company has entered into a transitional services agreement with the buyer to provide certain services for a period of up to eighteen months. Income associated with the transitional services agreement for the three and six months ended September 30, 2019 and 2018 was $0.3 million, $0.2 million, $1.2 million, and $0.2 million respectively. Transitional services agreement income is included within other income (expense), net in the Company's consolidated statements of operations.

NOTE 9 – GOODWILL AND INTANGIBLE ASSETS

Goodwill

The Company has two reporting units: (1) Service Assurance and (2) Security. The Company assesses goodwill for impairment at the reporting unit level at least annually, or on an interim basis if an event occurs or circumstances change that would, more likely than not, reduce the fair value of the reporting unit below its carrying value. The Company completed its annual impairment test on January 31, 2019.

At September 30, 2019 goodwill attributable to our Service Assurance and Security reporting units was $1.2 billion and $555.8 million, respectively. At March 31, 2019, goodwill attributable to our Service Assurance and Security reporting units was $1.2 billion and $555.1 million, respectively.

The change in the carrying amount of goodwill for the six months ended September 30, 2019 is due to the acquisition of Eastwind and the impact of foreign currency translation adjustments related to asset balances that are recorded in currencies other than the U.S. Dollar.

The changes in the carrying amount of goodwill for the six months ended September 30, 2019 are as follows (in thousands):

Balance at March 31, 2019	$	1,715,485
Goodwill attributed to the Eastwind acquisition	1,003
Foreign currency translation impact	2,874
Balance at September 30, 2019	$	1,719,362

Intangible Assets

The net carrying amounts of intangible assets were $624.8 million and $669.1 million at September 30, 2019 and March 31, 2019, respectively. Intangible assets acquired in a business combination are recorded under the acquisition method of accounting at their estimated fair values at the date of acquisition. The Company amortizes intangible assets over their estimated useful lives, except for the acquired trade name which resulted from the Network General acquisition, which has an indefinite life and thus is not amortized. The carrying value of the indefinite-lived trade name is evaluated for potential impairment annually, or more frequently if events or changes in circumstances indicate that the asset might be impaired. The Company completed its annual impairment test on January 31, 2019.

During the three months ended June 30, 2018, the Company performed a quantitative analysis on certain intangible assets related to the HNT tools business, which has since been divested. The fair value for the intangible assets related to the HNT tools business was calculated considering a range of potential transaction prices which the Company considers to be a Level 3 measurement. The fair value of these intangible assets was determined to be less than the carrying value, and as a result, the

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Company recognized an impairment charge of $35.9 million in the six months ended September 30, 2018.  The impairment charge was recorded within a separate operating expense line item in the Company's consolidated statements of operations during the six months ended September 30, 2018.

Intangible assets include the indefinite-lived trade name with a carrying value of $18.6 million and the following amortizable intangible assets at September 30, 2019 (in thousands):

	Cost		Accumulated Amortization			Net
Developed technology	$	245,601	$	(180,008	)	$	65,593
Customer relationships	769,809		(246,711		)	523,098
Distributor relationships and technology licenses	6,827		(5,814		)	1,013
Definite-lived trademark and trade name	39,166		(23,414		)	15,752
Core technology	7,192		(6,959		)	233
Net beneficial leases	336		(336		)	—
Non-compete agreements	292		(292		)	—
Leasehold interest	500		(500		)	—
Backlog	16,299		(16,299		)	—
Capitalized software	3,317		(3,083		)	234
Other	1,208		(932		)	276
	$	1,090,547	$	(484,348	)	$	606,199

Intangible assets include the indefinite-lived trade name with a carrying value of $18.6 million and the following amortizable intangible assets at March 31, 2019 (in thousands):

	Cost		Accumulated Amortization			Net
Developed technology	$	242,259	$	(168,289	)	$	73,970
Customer relationships	772,969		(218,043		)	554,926
Distributor relationships and technology licenses	6,882		(5,237		)	1,645
Definite-lived trademark and trade name	39,304		(20,586		)	18,718
Core technology	7,192		(6,845		)	347
Net beneficial leases	336		(336		)	—
Non-compete agreements	292		(292		)	—
Leasehold interest	500		(500		)	—
Backlog	16,397		(16,397		)	—
Capitalized software	3,317		(2,690		)	627
Other	1,208		(923		)	285
	$	1,090,656	$	(440,138	)	$	650,518

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Amortization included as cost of product revenue consists of amortization of developed technology, distributor relationships and technology licenses, core technology and software. Amortization included as operating expense consists of all other intangible assets. The following table provides a summary of amortization expense for the three and six months ended September 30, 2019 and 2018, respectively (in thousands):

	Three Months Ended				Six Months Ended
	September 30,				September 30,
	2019		2018		2019		2018
Amortization of intangible assets included as:
Cost of product revenue	$	6,677	$	8,491	13,479		17,682
Operating expense	16,137		17,986		32,285		41,456
	$	22,814	$	26,477	$	45,764	$	59,138

The following is the expected future amortization expense at September 30, 2019 for the fiscal years ending March 31 (in thousands):

2020 (remaining six months)	$	45,337
2021	79,776
2022	69,388
2023	61,690
2024	53,605
Thereafter	296,403
	$	606,199

The weighted-average amortization period of developed technology and core technology is 11.3 years. The weighted-average amortization period for customer and distributor relationships is 15.9 years. The weighted-average amortization period for trademarks and trade names is 8.6 years. The weighted-average amortization period for capitalized software is 3.0 years. The weighted-average amortization period for amortizing all intangible assets is 14.6 years.

NOTE 10 – DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

NetScout operates internationally and, in the normal course of business, is exposed to fluctuations in foreign currency exchange rates. The exposures result from costs that are denominated in currencies other than the U.S. Dollar, primarily the Euro, British Pound, Canadian Dollar, and Indian Rupee. The Company manages its foreign cash flow risk by hedging forecasted cash flows for operating expenses denominated in foreign currencies for up to twelve months, within specified guidelines through the use of forward contracts. The Company enters into foreign currency exchange contracts to hedge cash flow exposures from costs that are denominated in currencies other than the U.S. Dollar. These hedges are designated as cash flow hedges at inception.

All of the Company's derivative instruments are utilized for risk management purposes, and the Company does not use derivatives for speculative trading purposes. These contracts will mature over the next twelve months and are expected to impact earnings on or before maturity.

The notional amounts and fair values of derivative instruments in the consolidated balance sheets at September 30, 2019 and March 31, 2019 were as follows (in thousands):

	Notional Amounts (a)				Prepaid Expenses and Other Current Assets				Accrued Other
	September 30, 2019		March 31, 2019		September 30, 2019		March 31, 2019		September 30, 2019		March 31, 2019
Derivatives Designated as Hedging Instruments:
Forward contracts	$	9,965	$	4,550	$	37	$	58	$	35	$	68

(a) Notional amounts represent the gross contract/notional amount of the derivatives outstanding.

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The following table provides the effect foreign exchange forward contracts had on other comprehensive income (loss) (OCI) and results of operations for the three months ended September 30, 2019 and 2018 (in thousands):

	Loss Recognized in OCI on Derivative (a)						Gain (Loss) Reclassified from Accumulated OCI into Income (b)
	September 30, 2019			September 30, 2018			Location	September 30, 2019			September 30, 2018
Forward contracts	$	(27	)	$	(59	)	Research and development	$	(4	)	$	57
							Sales and marketing	28			145
	$	(27	)	$	(59	)		$	24		$	202

(a) The amount represents the change in fair value of derivative contracts due to changes in spot rates.

(b) The amount represents reclassification from other comprehensive income to earnings that occurs when the hedged item affects earnings.

The following table provides the effect foreign exchange forward contracts had on other comprehensive income (loss) (OCI) and results of operations for the six months ended September 30, 2019 and 2018 (in thousands):

	Loss Recognized in OCI on Derivative (a)						Gain (Loss) Reclassified from Accumulated OCI into Income (b)
	September 30, 2019			September 30, 2018			Location	September 30, 2019			September 30, 2018
Forward contracts	$	(101	)	$	(578	)	Research and development	$	(8	)	$	87
							Sales and marketing	78			209
	$	(101	)	$	(578	)		$	70		$	296

(a) The amount represents the change in fair value of derivative contracts due to changes in spot rates.

(b) The amount represents reclassification from other comprehensive income to earnings that occurs when the hedged item affects earnings.

NOTE 11 – LONG-TERM DEBT

On January 16, 2018, the Company amended and expanded its existing credit agreement (Amended Credit Agreement) with a syndicate of lenders by and among: the Company; JPMorgan Chase Bank, N.A. (JPMorgan), as administrative agent and collateral agent; J.P. Morgan Securities LLC, KeyBanc Capital Markets, Merrill Lynch, Pierce, Fenner & Smith Incorporated, RBC Capital Markets and Wells Fargo Securities, LLC, as joint lead arrangers and joint bookrunners; Fifth Third Bank, Santander Bank, N.A., SunTrust Bank, N.A. and U.S. Bank National Association, as co-documentation agents; and the lenders party thereto.

The Amended Credit Agreement provides for a five-year, $1.0 billion senior secured revolving credit facility, including a letter of credit sub-facility of up to $75.0 million. The Company may elect to use the new credit facility for general corporate purposes or to finance the repurchase of up to twenty-five million shares of the Company's common stock under the Company's common stock repurchase plan. The commitments under the Amended Credit Agreement will expire on January 16, 2023, and any outstanding loans will be due on that date. During the six months ended September 30, 2019, the Company repaid $100.0 million of borrowings under the Amended Credit Agreement. At September 30, 2019, $450 million was outstanding under the Amended Credit Agreement.

At the Company's election, revolving loans under the Amended Credit Agreement bear interest at either (a) an Alternate Base Rate per annum equal to the greatest of (1) JPMorgan's prime rate, (2) 0.50% in excess of the New York Federal Reserve Bank (NYFRB) rate, or (3) an adjusted one month LIBOR rate plus 1%; or (b) such adjusted LIBOR rate (for the interest period selected by the Company), in each case plus an applicable margin. For the period from the delivery of the Company's financial statements for the quarter ended June 30, 2019, until the Company has delivered financial statements for the quarter ended September 30, 2019, the applicable margin will be 1.50% per annum for LIBOR loans and 0.50% per annum for Alternate Base Rate loans, and thereafter the applicable margin will vary depending on the Company's leverage ratio, ranging from 1.00% per annum for Base Rate loans and 2.00% per annum for LIBOR loans if the Company's consolidated leverage ratio is greater than 3.50 to 1.00, down to 0.00% per annum for Alternate Base Rate loans and 1.00% per annum for LIBOR loans if the Company's consolidated leverage ratio is equal to or less than 1.50 to 1.00.

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On July 27, 2017, the U.K. Financial Conduct Authority (FCA) announced that it will no longer require banks to submit rates for the calculation of LIBOR after 2021. The Company's Amended Credit Agreement provides for the Administrative Agent to determine if (i) adequate and reasonable means do not exist for ascertaining the LIBOR rate or (ii) the FCA or Government Authority having jurisdiction over the Administrative Agent has made a public statement identifying a specific date after which the LIBOR rate shall no longer be used for determining interest rates for loans and the Administrative Agent determines that (i) and (ii) above are unlikely to be temporary then the Administrative Agent and the Company would agree to transition to an Alternate Base Rate Borrowing or amend the Credit Agreement to establish an alternate rate of interest to LIBOR that gives due consideration to the then prevailing market convention for determining a rate of interest for syndicated loans in the United States at such time.

The Company's consolidated leverage ratio is the ratio of its total funded debt compared to its consolidated adjusted EBITDA. Consolidated adjusted EBITDA includes certain adjustments, including, without limitation, adjustments relating to extraordinary, unusual or non-recurring charges, certain restructuring charges, non-cash charges, certain transaction costs and expenses and certain pro forma adjustments in connection with material acquisitions and dispositions, all as set forth in detail in the definition of consolidated adjusted EBITDA in the Amended Credit Agreement.

Commitment fees will accrue on the daily unused amount of the credit facility. For the period from the delivery of the Company's financial statements for the quarter ended June 30, 2019 until the Company has delivered financial statements for the quarter ended September 30, 2019, the commitment fee will be 0.25% per annum, and thereafter the commitment fee will vary depending on the Company's consolidated leverage ratio, ranging from 0.30% per annum if the Company's consolidated leverage ratio is greater than 2.75 to 1.00, down to 0.15% per annum if the Company's consolidated leverage ratio is equal to or less than 1.50 to 1.00.

Letter of credit participation fees are payable to each lender on the amount of such lender’s letter of credit exposure, during the period from the closing date of the Amended Credit Agreement to but excluding the date which is the later of (i) the date on which such lender’s commitment terminates or (ii) the date on which such lender ceases to have any letter of credit exposure, at a rate per annum equal to the applicable margin for LIBOR loans. Additionally, the Company will pay a fronting fee to each issuing bank in amounts to be agreed to between the Company and the applicable issuing bank.

Interest on Alternate Base Rate loans is payable at the end of each calendar quarter. Interest on LIBOR loans is payable at the end of each interest rate period or at the end of each three-month interval within an interest rate period if the period is longer than three months. The Company may also prepay loans under the Amended Credit Agreement at any time, without penalty, subject to certain notice requirements.

Debt is recorded at the amount drawn on the revolving credit facility plus interest based on floating rates reflective of changes in the market which approximates fair value.

The loans and other obligations under the credit facility are (a) guaranteed by each of the Company's wholly owned material domestic restricted subsidiaries, subject to certain exceptions, and (b) are secured by substantially all of the assets of the Company and the subsidiary guarantors, including a pledge of all the capital stock of material subsidiaries held directly by the Company and the subsidiary guarantors (which pledge, in the case of any foreign subsidiary, is limited to 65% of the voting stock), subject to certain customary exceptions and limitations. The Amended Credit Agreement generally prohibits any other liens on the assets of the Company and its restricted subsidiaries, subject to certain exceptions as described in the Amended Credit Agreement.

The Amended Credit Agreement contains certain covenants applicable to the Company and its restricted subsidiaries, including, without limitation, limitations on additional indebtedness, liens, various fundamental changes, dividends and distributions, investments (including acquisitions), transactions with affiliates, asset sales, including sale-leaseback transactions, speculative hedge agreements, payment of junior financing, changes in business and other limitations customary in senior secured credit facilities. In addition, the Company is required to maintain certain consolidated leverage and interest coverage ratios. These covenants and limitations are more fully described in the Amended Credit Agreement. At September 30, 2019, the Company was in compliance with all of these covenants.

The Amended Credit Agreement provides that events of default will exist in certain circumstances, including failure to make payment of principal or interest on the loans when required, failure to perform certain obligations under the Amended Credit Agreement and related documents, defaults under certain other indebtedness, certain insolvency events, certain events arising under ERISA, a change of control and certain other events. Upon an event of default, the administrative agent with the consent of, or at the request of, the holders of more than 50% in principal amount of the loans and commitments may terminate the commitments and accelerate the maturity of the loans and enforce certain other remedies under the Amended Credit Agreement and the other loan documents.

In connection with the Company's Amended Credit Agreement described above, the Company terminated its previous term loan dated as of July 14, 2015, by and among the Company; JPMorgan Chase Bank, N.A. (JPMorgan), as administrative agent and collateral agent; J.P. Morgan Securities LLC, KeyBanc Capital Markets, Merrill Lynch, Pierce, Fenner & Smith

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Incorporated, RBC Capital Markets and Wells Fargo Securities, LLC, as joint lead arrangers and joint bookrunners; Santander Bank, N.A., SunTrust Bank, N.A. and U.S. Bank National Association, as co-documentation agents; and the lenders party thereto.

The Company has capitalized debt issuance costs totaling $12.2 million at September 30, 2019, which are being amortized over the life of the revolving credit facility. The unamortized balance was $5.7 million as of September 30, 2019. The balance of $1.7 million was included as prepaid expenses and other current assets and a balance of $4.0 million was included as other assets in the Company's consolidated balance sheet.

NOTE 12 – RESTRUCTURING CHARGES

During the third quarter of the fiscal year ended March 31, 2018, the Company restructured certain departments to better align functions. As a result of the workforce reduction, during the twelve months ended March 31, 2018, the Company recorded a restructuring charge totaling $5.1 million related to one-time termination benefits for the employees that were notified during the period. During the six months ended September 30, 2018, the Company recorded an additional charge of $1.7 million for one-time termination benefits and facilities-related costs. The one-time termination benefits were paid in full during the fiscal year ended March 31, 2019.

During the second quarter of the fiscal year ended March 31, 2019, the Company implemented a voluntary separation program (VSP) for employees who met certain age and service requirements to reduce overall headcount resulting in a total restructuring charge for the program of $17.3 million. As a result of the related workforce reduction, during the six months ended September 30, 2019 and 2018, the Company recorded restructuring charges totaling $0.1 million and $2.3 million, respectively, related to one-time termination benefits employees who voluntarily terminated their employment with the Company during the period. The one-time termination benefits were paid in full by the end of the first quarter of the fiscal year ending March 31, 2020.

During the second quarter of the fiscal year ending March 31, 2020, the Company restructured certain departments to better align functions. As a result of the workforce reduction, during the six months ended September 30, 2019, the Company recorded a restructuring charge totaling $0.2 million related to one-time termination benefits for the employees that were notified during the period. Additional one-time termination benefit charges of approximately $0.3 million in the aggregate are anticipated to be recorded in the next six months. The one-time termination benefits are expected to be paid in full by the first quarter of the fiscal year ending March 31, 2021.

The following table provides a summary of the activity related to the restructuring plan and the related restructuring liability (in thousands):

	Q2FY20 Plan			VSP
	Employee-Related			Employee-Related			Total
Balance at March 31, 2019	$	—		$	—		$	—
Restructuring charges to operations	150			123			273
Cash payments	(150		)	(123		)	(273		)
Balance at September 30, 2019	$	—		$	—		$	—

NOTE 13 - LEASES

In February 2016, the FASB issued ASC 842 to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. The Company adopted the guidance on April 1, 2019 using the modified retrospective method and as a result did not adjust comparative periods or modify disclosures in those comparative periods.

The new guidance provides a number of optional practical expedients in transition. The Company elected the package of practical expedients, which does not require the reassessment of prior conclusions about lease identification, lease classification and initial direct costs. Further, the Company elected the practical expedients to combine lease and non-lease components, and to not recognize right-of-use (ROU) assets and lease liabilities for short-term leases. Leases with an initial term of 12 months or less are classified as short-term leases. The Company did not elect the hindsight practical expedient to determine the lease term for existing leases.

The adoption of ASC 842 on April 1, 2019 resulted in the recognition of operating lease ROU assets of approximately $68.2 million, operating lease liabilities of approximately $83.2 million and the elimination of deferred rent of approximately $15.0 million. Operating leases are included in operating lease ROU assets and lease liabilities on the Company’s balance sheets. The adoption of ASC 842 did not have a material impact on the Company’s consolidated statement of operations,

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consolidated statement of stockholders' equity, consolidated statement of comprehensive income (loss) or consolidated statement of cash flows. The new standard had no material impact on liquidity and had no impact on the Company’s debt-covenant compliance under its current debt agreements.

The Company determines if an arrangement is a lease at inception. ROU assets represent the Company’s right to use an underlying asset for the duration of the lease term. Lease liabilities represent the Company’s contractual obligation to make lease payments over the lease term. ROU assets are recorded and recognized at commencement for the lease liability amount, plus initial direct costs incurred less lease incentives received. Lease liabilities are recorded at the present value of future lease payments over the lease term at commencement. The discount rate used is generally the Company’s estimated incremental borrowing rate unless the lessor’s implicit rate is readily determinable. Incremental borrowing rates are calculated periodically to estimate the rate the Company would pay to borrow the funds necessary to obtain an asset of similar value over a similar term. Lease expenses relating to operating leases are recognized on a straight-line basis over the lease term.

The Company has operating leases for administrative, research and development, sales and marketing and manufacturing facilities and equipment under various non-cancelable lease agreements. The Company’s leases have remaining lease terms ranging from 1 year to 11 years. The Company’s lease terms may include options to extend or terminate the lease where it is reasonably certain that the Company will exercise those options. The Company considers several economic factors when making this determination, including but not limited to, the significance of leasehold improvements incurred in the office space, the difficulty in replacing the asset, underlying contractual obligations, or specific characteristics unique to a particular lease. The Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants.

Most of the Company’s lease agreements contain variable payments, primarily for common area maintenance (CAM), which are expensed as incurred and not included in the measurement of the ROU assets and lease liabilities.

The components of operating lease cost for the three and six months ended September 30, 2019 were as follows (in thousands):

	Three Months Ended		Six Months Ended
	September 30, 2019		September 30, 2019
Lease cost under long-term operating leases	$	3,276	$	6,521
Lease cost under short-term operating leases	897		1,749
Variable lease cost under short-term and long-term operating leases	1,063		2,275
Total operating lease cost	$	5,236	$	10,545

The table below presents supplemental cash flow information related to leases during the six months ended September 30, 2019 (in thousands):

Cash paid for amounts included in the measurement of lease liabilities	$	6,565
Right-of-use assets obtained in exchange for new operating lease liabilities	$	2,049

Weighted average remaining lease term in years and weighted average discount rate are as follows:

Weighted average remaining lease term in years - operating leases	9.16
Weighted average discount rate - operating leases	4.2	%

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Future minimum payments under non-cancellable leases at September 30, 2019 are as follows (in thousands):

Year ending March 31:
2020 (remaining six months)	$	6,397
2021	12,314
2022	11,472
2023	9,905
2024	9,038
Thereafter	45,458
Total lease payments	$	94,584
Less imputed interest	(15,939		)
Present value of lease liabilities	$	78,645

As previously disclosed in the Company’s fiscal year Form 10-K and under the previous lease accounting standard, ASC 840, Leases, the following table summarizes the future non-cancelable minimum lease commitments (including office space, copiers, and automobiles) at March 31, 2019 (in thousands):

Year ending March 31:
2020	$	16,102
2021	11,059
2022	9,804
2023	8,807
2024	8,500
Thereafter	43,997
Total	$	98,269

NOTE 14 – COMMITMENTS AND CONTINGENCIES

Acquisition and divestiture related – The Company has a contingent consideration asset related to the divestiture of its HNT tools business in September 2018. The contingent consideration asset represents potential future earnout payments to the Company of up to $4.0 million over two years that are contingent on the HNT tools business achieving certain milestones. The fair value of the contingent consideration asset at September 30, 2019 and March 31, 2019 was $0.2 million and $0.8 million, respectively.

The Company had a contingent liability at September 30, 2019 for $1.0 million related to the acquisition of Eastwind in April 2019 for which an escrow account was established to cover damages NetScout may suffer related to any liabilities that NetScout did not agree to assume or as a result of the breach of representations and warranties of the seller as described in the merger agreement. Except to the extent that valid indemnification claims are made prior to such time, the $1.0 million will be paid to the seller in April 2020.

Legal – From time to time, NetScout is subject to legal proceedings and claims in the ordinary course of business. In the opinion of management, the amount of ultimate expense with respect to any current legal proceedings and claims, if determined adversely, will not have a material adverse effect on the Company’s financial condition, results of operations or cash flows.

As previously disclosed, in March 2016, Packet Intelligence LLC (Packet Intelligence or Plaintiff) filed a Complaint against NetScout and two subsidiary entities in the United States District Court for the Eastern District of Texas asserting infringement of five United States patents. Plaintiff’s Complaint alleged that legacy Tektronix GeoProbe products, including the G10 and GeoBlade products, infringed these patents. NetScout filed an Answer denying Plaintiff’s allegations and asserting that Plaintiff’s patents were, among other things, invalid, not infringed, and unenforceable due to inequitable conduct. In October 2017, a jury trial was held to address the parties’ claims and counterclaims regarding infringement of three patents by the G10 and GeoBlade products, invalidity of these patents, and damages. On October 13, 2017, the jury rendered a verdict finding in favor of the Plaintiff and that Plaintiff was entitled to $3,500,000 for pre-suit damages and $2,250,000 for post-suit damages. The jury indicated that the awarded damages amounts were intended to reflect a running royalty. In September 2018, the Court entered judgment and "enhanced" the jury verdict in the amount of $2.8 million as a result of a jury finding. The judgment also awards pre- and post-judgment interest, and a running royalty on the G10 and GeoBlade products until the

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expiration of the patents at issue, the last date being June 2022. The Court denied the Plaintiff's motion for fees. Following additional motions for judgment as a matter of law, the court entered final judgment. On June 12, 2019, NetScout filed its Notice of Appeal of the judgment and all other adverse findings. NetScout has concluded that the risk of loss from this matter is currently neither remote nor probable, and therefore, under GAAP definitions, the risk of loss is termed "reasonably possible." Therefore, accounting rules require NetScout to provide an estimate for the range of potential liability. NetScout currently estimates that the estimated range of liability is between $0 and the aggregate amount awarded by the jury and the Court's award of enhanced damages, plus potential additional pre- and post-judgment interest amounts and costs and any royalties owed on post-trial sales of the accused G10 and GeoBlade products.

NOTE 15 – PENSION BENEFIT PLANS

Certain of the Company's non-U.S. employees participate in noncontributory defined benefit pension plans. None of the Company's employees in the U.S. participate in any noncontributory defined benefit pension plans. In general, these plans are funded based on considerations relating to legal requirements, underlying asset returns, the plan's funded status, the anticipated deductibility of the contribution, local practices, market conditions, interest rates and other factors.

The following sets forth the components of the Company's net periodic pension cost of the noncontributory defined benefit pension plans for the three and six months ended September 30, 2019 and 2018 (in thousands):

	Three Months Ended				Six Months Ended
	September 30,				September 30,
	2019		2018		2019		2018
Service cost	$	45	$	63	$	86	$	126
Interest cost	106		123		202		244
Net periodic pension cost	$	151	$	186	$	288	$	370

Expected Contributions

During the six months ended September 30, 2019, the Company made contributions of $0.2 million to its defined benefit pension plans. During the fiscal year ending March 31, 2020, the Company's cash contribution requirements for its defined benefit pension plans are expected to be less than $1.0 million. As a majority of the participants within the Company's plans are all active employees, the benefit payments are not expected to be material in the foreseeable future.

NOTE 16 – TREASURY STOCK

On May 19, 2015, the Company's board of directors approved a share repurchase program. This program enabled the Company to repurchase up to 20 million shares of its common stock. This plan became effective on July 14, 2015. The Company was not obligated to acquire any specific amount of common stock within any particular timeframe under this program. Through March 31, 2018, the Company had repurchased 20,000,000 shares totaling $607.6 million in the open market under this stock repurchase plan. At March 31, 2018, there were no shares of common stock that remained available to be purchased under the plan.

On October 24, 2017, the Company’s Board of Directors approved a new share repurchase program that enables the Company to repurchase up to twenty-five million shares of its common stock. This new program became effective when the Company’s previously disclosed twenty million share repurchase program was completed. The Company is not obligated to acquire any specific amount of common stock within any particular timeframe as a result of this new share repurchase program. 

On February 1, 2018, the Company entered into accelerated share repurchase (ASR) agreements with two third-party financial institutions (the Dealers) to repurchase an aggregate of $300 million of the Company's common stock via accelerated stock repurchase transactions under the Company’s twenty million share repurchase program (until such program was completed) and the twenty-five million share repurchase program. The Company borrowed $300 million against its Amended Credit Facility to finance the payment of the initial purchase price to each of the Dealers. Under the terms of the ASR, the Company made a $150 million payment to each of the Dealers on February 2, 2018 and received an initial delivery of 3,693,931 shares from each of the Dealers, or 7,387,862 shares in the aggregate, which was approximately 70 percent of the total number of shares of the Company's common stock expected to be repurchased under the ASR. As part of this purchase, 970,650 shares for $27.6 million were deducted under the twenty million share repurchase program and 6,417,212 shares for $182.4 million were deducted from the twenty-five million share repurchase program during the fiscal year ended March 31, 2018. Final settlement of the ASR agreements was completed in August 2018. As a result, the Company received an additional 3,679,947 shares of its common stock for $96.8 million, which reduced the number of shares available to be purchased from

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the twenty-five million share repurchase program during the six months ended September 30, 2018. In total, 11,067,809 shares of the Company's common stock were repurchased under the ASR at an average cost per share of $27.11.

Through September 30, 2019, the Company has repurchased 14,801,246 shares for $393.7 million in the open market under the twenty-five million share repurchase program. At September 30, 2019, 10,198,754 shares of common stock remained available to be purchased under the current repurchase program. The Company repurchased 4,160,836 shares for $100.0 million during the six months ended September 30, 2019 under the twenty-five million share repurchase program.

In connection with the delivery of shares of the Company's common stock upon vesting of restricted stock units, the Company withheld 500,093 shares and 371,726 shares at a cost of $11.4 million and $9.9 million related to minimum statutory tax withholding requirements on these restricted stock units during the six months ended September 30, 2019 and 2018, respectively. These withholding transactions do not fall under the repurchase program described above, and therefore do not reduce the number of shares that are available for repurchase under that program.

NOTE 17 – NET LOSS PER SHARE

Calculations of the basic and diluted net loss per share and potential common shares are as follows (in thousands, except for per share data):

	Three Months Ended						Six Months Ended
	September 30,						September 30,
	2019			2018			2019			2018
Numerator:
Net loss	$	(17,472	)	$	(26,428	)	$	(46,815	)	$	(88,932	)
Denominator:
Denominator for basic net loss per share - weighted average common shares outstanding	75,687			78,631			76,490			79,490
Dilutive common equivalent shares:
Weighted average restricted stock units	—			—			—			—
Denominator for diluted net loss per share - weighted average shares outstanding	75,687			78,631			76,490			79,490
Net loss per share:
Basic net loss per share	$	(0.23	)	$	(0.34	)	$	(0.61	)	$	(1.12	)
Diluted net loss per share	$	(0.23	)	$	(0.34	)	$	(0.61	)	$	(1.12	)

The following table sets forth restricted stock units excluded from the calculation of diluted net loss per share, since their inclusion would be anti-dilutive (in thousands):

	Three Months Ended		Six Months Ended
	September 30,		September 30,
	2019	2018	2019	2018
Restricted stock units	624	731	897	895

Basic net loss per share is calculated by dividing net loss by the weighted average number of shares outstanding during the period. Unvested restricted shares, although legally issued and outstanding, are not considered outstanding for purposes of calculating basic earnings per share. Diluted net loss per share is calculated by dividing net loss by the weighted average number of shares outstanding plus the dilutive effect, if any, of outstanding stock options, restricted shares and restricted stock units using the treasury stock method. The calculation of the dilutive effect of outstanding equity awards under the treasury stock method includes consideration of proceeds from the assumed exercise of stock options and unrecognized compensation expense as additional proceeds. As we incurred a net loss during the three and six months ended September 30, 2019 and 2018, all outstanding restricted stock units have an anti-dilutive effect and are therefore excluded from the computation of diluted weighted average shares outstanding.

The delivery of approximately 7.4 million shares under the Company's accelerated share repurchase (ASR) agreements reduced our outstanding shares used to determine our weighted average common shares outstanding for purposes of calculating basic and diluted earnings per share for the six months ended September 30, 2018. See Note 16 for additional information. We evaluated the ASR agreements for potential dilutive effects of any shares remaining to be received or owed upon settlement and

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determined the additional shares to be received would be anti-dilutive, and therefore they were not included in our calculation of diluted earnings per share for the six months ended September 30, 2018.    

NOTE 18 – INCOME TAXES

The Company's effective income tax rates were 60.1% and 9.1% for the three months ended September 30, 2019 and 2018, respectively. Generally, the effective tax rate differs from the statutory tax rate due to state income taxes, foreign withholding taxes, the Global Intangible Low Taxes Income inclusion and earnings in jurisdictions subject to tax rates higher than the U.S. statutory rate partially offset by the tax benefit associated with research and development tax credits, foreign tax credits and the Foreign Derived Intangible Income deduction. The effective tax rate for the three months ended September 30, 2019 was higher than the effective rate for the three months ended September 30, 2018, primarily due to a discrete item recorded in the quarter related to stock-based compensation and a significant change in the pre-tax loss.

The Company's effective income tax rates were 17.7% and 19.7% for the six months ended September 30, 2019 and 2018, respectively. Generally, the effective tax rate differs from the statutory tax rate due to state income taxes, foreign withholding taxes, the Global Intangible Low Taxes Income inclusion and earnings in jurisdictions subject to tax rates higher than the U.S. statutory rate partially offset by the tax benefit associated with research and development tax credits, foreign tax credits and the Foreign Derived Intangible Income deduction. The effective tax rate for the six months ended September 30, 2019 was lower than the effective rate for the six months ended September 30, 2018, primarily due to discrete items relating to establishing new U.S. deferred tax liabilities due to several of our foreign subsidiaries making elections in the first quarter to be treated as U.S. branches for federal income tax purposes and stock-based compensation.

NOTE 19 – SEGMENT AND GEOGRAPHIC INFORMATION

The Company reports revenues and income under one reportable segment.

The Company manages its business in the following geographic areas: United States, Europe, Asia and the rest of the world. In accordance with United States export control regulations, the Company does not sell or do business with countries subject to economic sanctions and export controls.

Total revenue by geography is as follows (in thousands):

	Three Months Ended				Six Months Ended
	September 30,				September 30,
	2019		2018		2019		2018
United States	$	139,544	$	136,752	$	246,647	$	263,998
Europe	33,901		33,450		65,210		64,471
Asia	13,138		18,198		25,690		36,098
Rest of the world	29,838		35,397		64,898		64,341
	$	216,421	$	223,797	$	402,445	$	428,908

The United States revenue includes sales to resellers in the United States. These resellers fulfill customer orders and may subsequently ship the Company’s products to international locations. Further, the Company determines the geography of its sales after considering where the contract originated. A majority of revenue attributable to locations outside of the United States is a result of export sales. Substantially all of the Company's identifiable assets are located in the United States.

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Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

You should read the following discussion and analysis of our financial condition and results of operations in conjunction with the condensed consolidated financial statements and notes thereto included elsewhere in this Quarterly Report and in our Annual Report on Form 10-K for the fiscal year ended March 31, 2019, filed with the Securities and Exchange Commission. This discussion contains forward-looking statements that involve risks and uncertainties. When reviewing the discussion below, you should keep in mind the substantial risks and uncertainties that could impact our business. In particular, we encourage you to review the risks and uncertainties described in Part I, Item 1A "Risk Factors" in our Annual Report on Form 10-K for the fiscal year ended March 31, 2019. These risks and uncertainties could cause actual results to differ significantly from those projected in forward-looking statements contained in this report or implied by past results and trends. Forward-looking statements are statements that attempt to forecast or anticipate future developments in our business, financial condition or results of operations. See the section titled "Cautionary Statement Concerning Forward-Looking Statements" that appears at the beginning of this Quarterly Report. These statements, like all statements in this report, speak only as of the date of this Quarterly Report (unless another date is indicated), and, except as required by law, we undertake no obligation to update or revise these statements in light of future developments.

Overview

We are an industry leader in providing service assurance and security solutions that are used by customers worldwide to assure their digital business services against disruption. Service providers and enterprises, including local, state and federal government agencies, rely on our solutions to achieve the visibility necessary to optimize network performance, ensure the delivery of high-quality, mission-critical applications and services, gain timely insight into the end user experience and protect the network from attack. With our offerings, customers can quickly, efficiently and effectively identify and resolve issues that result in downtime, interruptions to services, poor service quality or compromised security, thereby driving compelling returns on their investments in their network and broader technology initiatives.

Our operating results are influenced by a number of factors, including, but not limited to, the mix and quantity of products and services sold, pricing, costs of materials used in our products, growth in employee-related costs, including commissions, and the expansion of our operations. Factors that affect our ability to maximize our operating results include, but are not limited to, our ability to introduce and enhance existing products, the marketplace acceptance of those new or enhanced products, continued expansion into international markets, development of strategic partnerships, competition, successful acquisition integration efforts, and our ability to achieve expense reductions and make improvements in a highly competitive industry.

Results Overview

Total revenue for the six months ended September 30, 2019 was impacted by a combination of factors. The primary factor was the divestiture of the HNT tools business assets as that sale occurred in mid-September 2018. Additionally, disruption in our international enterprise sales force from a recent reorganization impacted revenue.

Our gross profit percentage increased by one percentage point during the six months ended September 30, 2019 as compared with the six months ended September 30, 2018.

Net loss for the six months ended September 30, 2019 was $46.8 million, as compared with net loss for the six months ended September 30, 2018 of $88.9 million, a decrease of $42.1 million, primarily due to a $35.9 million impairment charge of certain intangible assets related to the HNT tools business and a $9.2 million loss on the divestiture of the HNT tools business recorded in the six months ended September 30, 2018.

At September 30, 2019, cash, cash equivalents and marketable securities (short-term and long-term) totaled $307.8 million, a $179.2 million decrease from $487.0 million at March 31, 2019 due primarily to $100.0 million used to repay long-term debt, $100.0 million used to repurchase shares of our common stock, $11.4 million used for tax withholdings on restricted stock units, $9.1 million used for capital expenditures, and $4.2 million used for the acquisition of Eastwind, partially offset by cash provided by operations of $48.5 million during the six months ended September 30, 2019.

Use of Non-GAAP Financial Measures

We supplement the United States generally accepted accounting principles (GAAP) financial measures we report in

quarterly and annual earnings announcements, investor presentations and other investor communications by reporting the following non-GAAP measures: non-GAAP total revenue, non-GAAP product revenue, non-GAAP service revenue, non-GAAP gross profit, non-GAAP income from operations, non-GAAP operating margin, non-GAAP earnings before interest and other expense, income taxes, depreciation and amortization (EBITDA) from operations, non-GAAP net income, and non-GAAP net income per share (diluted). Non-GAAP revenue (total, product and service) eliminates the GAAP effects of acquisitions by adding back revenue related to deferred revenue revaluation. Non-GAAP gross profit includes the

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aforementioned revenue adjustments and also removes expenses related to the amortization of acquired intangible assets, share-based compensation, certain expenses relating to acquisitions including depreciation costs, and adds back transitional service agreement income. Non-GAAP income from operations includes the aforementioned adjustments and also removes business development and integration costs, compensation for post-combination services, restructuring charges, intangible asset impairment charges, loss on divestiture and costs related to new accounting standard implementation. Non-GAAP EBITDA from operations includes the aforementioned items related to non-GAAP income from operations and also removes non-acquisition-related depreciation expense. Non-GAAP net income includes the foregoing adjustments related to non-GAAP income from operations, net of related income tax effects, and changes in contingent consideration. Non-GAAP diluted net income per share also excludes these expenses as well as the related impact of all these adjustments on the provision for income taxes.

These non-GAAP measures are not in accordance with GAAP, should not be considered an alternative for measures prepared in accordance with GAAP (revenue, gross profit, operating profit, net income (loss) and diluted net income (loss) per share), and may have limitations in that they do not reflect all our results of operations as determined in accordance with GAAP. These non-GAAP measures should only be used to evaluate our 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.

Management believes these non-GAAP financial measures enhance the reader's overall understanding of our current financial performance and our 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 we plan and measure our business. We believe that providing these non-GAAP measures affords investors a view of our operating results that may be more easily compared with our peer companies and also enables investors to consider our operating results on both a GAAP and non-GAAP basis during and following the integration period of our acquisitions. Presenting the GAAP measures on their own may not be indicative of our core operating results. Furthermore, management 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 our financial condition and results of operations.

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The following table reconciles revenue, gross profit, loss from operations, net loss and net loss per share on a GAAP and non-GAAP basis for the three and six months ended September 30, 2019 and 2018 (in thousands, except for per share amounts):

	Three Months Ended						Six Months Ended
	September 30,						September 30,
	2019			2018			2019			2018
GAAP revenue	$	216,421		$	223,797		$	402,445		$	428,908
Product deferred revenue fair value adjustment	—			—			—			391
Service deferred revenue fair value adjustment	48			243			96			714
Non-GAAP revenue	$	216,469		$	224,040		$	402,541		$	430,013
GAAP gross profit	$	157,289		$	159,817		$	288,570		$	302,901
Product deferred revenue fair value adjustment	—			—			—			391
Service deferred revenue fair value adjustment	48			243			96			714
Share-based compensation expense	2,187			2,389			3,921			3,988
Amortization of acquired intangible assets	6,225			7,731			12,455			16,133
Acquisition related depreciation expense	6			17			19			50
Transitional service agreement income	—			2			—			2
Non-GAAP gross profit	$	165,755		$	170,199		$	305,061		$	324,179
GAAP loss from operations	$	(7,295	)	$	(23,117	)	$	(31,743	)	$	(100,170	)
Product deferred revenue fair value adjustment	—			—			—			391
Service deferred revenue fair value adjustment	48			243			96			714
Share-based compensation expense	15,857			17,418			28,600			30,383
Amortization of acquired intangible assets	22,357			25,712			44,730			57,579
Business development and integration expense	39			366			18			385
New standard implementation expense	—			54			9			816
Compensation for post-combination services	135			169			328			618
Restructuring charges	150			2,472			273			3,619
Impairment of intangible assets	—			—			—			35,871
Acquisition related depreciation expense	69			164			190			662
Loss on divestiture	—			9,177			—			9,177
Transitional service agreement income	275			219			1,184			219
Non-GAAP income from operations	$	31,635		$	32,877		$	43,685		$	40,264

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	Three Months Ended						Six Months Ended
	September 30,						September 30,
	2019			2018			2019			2018
GAAP net loss	$	(17,472	)	$	(26,428	)	$	(46,815	)	$	(88,932	)
Product deferred revenue fair value adjustment	—			—			—			391
Service deferred revenue fair value adjustment	48			243			96			714
Share-based compensation expense	15,857			17,418			28,600			30,383
Amortization of acquired intangible assets	22,357			25,712			44,730			57,579
Business development and integration expense	39			366			18			385
New standard implementation expense	—			54			9			816
Compensation for post-combination services	135			169			328			618
Restructuring charges	150			2,472			273			3,619
Impairment of intangible assets	—			—			—			35,871
Acquisition-related depreciation expense	69			164			190			662
Loss on divestiture	—			9,177			—			9,177
Change in contingent consideration	(6		)	—			517			—
Income tax adjustments	181			(9,367		)	(994		)	(29,229		)
Non-GAAP net income	$	21,358		$	19,980		$	26,952		$	22,054
GAAP diluted net loss per share	$	(0.23	)	$	(0.34	)	$	(0.61	)	$	(1.12	)
Per share impact of non-GAAP adjustments identified above	0.51			0.59			0.96			1.39
Non-GAAP diluted net income per share	$	0.28		$	0.25		$	0.35		$	0.27
GAAP loss from operations	$	(7,295	)	$	(23,117	)	$	(31,743	)	$	(100,170	)
Previous adjustments to determine non-GAAP income from operations	38,930			55,994			75,428			140,434
Non-GAAP income from operations	31,635			32,877			43,685			40,264
Depreciation excluding acquisition related	6,905			8,335			13,746			16,317
Non-GAAP EBITDA from operations	$	38,540		$	41,212		$	57,431		$	56,581

Critical Accounting Policies

 Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with GAAP consistently applied. The preparation of these consolidated financial statements requires us to make significant estimates and judgments that affect the amounts reported in our consolidated financial statements and the accompanying notes. These items are regularly monitored and analyzed by management for changes in facts and circumstances, and material changes in these estimates could occur in the future. Changes in estimates are recorded in the period in which they become known. We base our estimates on historical experience and various other assumptions that we believe to be reasonable under the circumstances. Actual results may differ from our estimates.

While all of our accounting policies impact the consolidated financial statements, certain policies are viewed to be critical. Critical accounting policies are those that are both most important to the portrayal of our financial condition and results of operations and that require management's most subjective or complex judgments and estimates. We consider the following accounting policies to be critical in fully understanding and evaluating our financial results:

• marketable securities;

• revenue recognition;

• valuation of goodwill, intangible assets and other acquisition accounting items; and

• share-based compensation.

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Please refer to the critical accounting policies set forth in our Annual Report on Form 10-K for the fiscal year ended March 31, 2019, filed with the Securities and Exchange Commission (SEC) on May 28, 2019, for a description of all of our critical accounting policies.

Three Months Ended September 30, 2019 and 2018

Revenue

Product revenue consists of sales of our hardware products and licensing of our software products. Service revenue consists of customer support agreements, consulting, training and stand-ready software as a service offering. During the three months ended September 30, 2019 and 2018, no direct customer or indirect channel partner accounted for more than 10% of our total revenue.

	Three Months Ended								Change
	September 30,
	(Dollars in Thousands)
	2019				2018
			% of Revenue				% of Revenue		$			%
Revenue:
Product	$	102,775	47	%	$	110,753	49	%	$	(7,978	)	(7	)%
Service	113,646		53		113,044		51		602			1	%
Total revenue	$	216,421	100	%	$	223,797	100	%	$	(7,376	)	(3	)%

Product. The 7%, or $8.0 million, decrease in product revenue compared with the same period last year was primarily due to the divestiture of the HNT tools business in September 2018 and a decrease in revenue from lower enterprise-related product revenue, partially offset by an increase in revenue from service provider customers.

Service. The 1%, or $0.6 million, increase in service revenue compared to the same period last year was primarily driven by an increase in professional services.

Total revenue by geography is as follows:

	Three Months Ended								Change
	September 30,
	(Dollars in Thousands)
	2019				2018
			% of Revenue				% of Revenue		$			%
United States	$	139,544	64	%	$	136,752	61	%	$	2,792		2	%
International:
Europe	33,901		16		33,450		15		451			1	%
Asia	13,138		6		18,198		8		(5,060		)	(28	)%
Rest of the world	29,838		14		35,397		16		(5,559		)	(16	)%
Subtotal international	76,877		36		87,045		39		(10,168		)	(12	)%
Total revenue	$	216,421	100	%	$	223,797	100	%	$	(7,376	)	(3	)%

United States revenue increased 2%, or $2.8 million, primarily due to an increase in revenue for service assurance offerings, partially offset by a decrease in revenue from security. The 12%, or $10.2 million, decrease in international revenue compared with the same period last year was primarily driven by lower enterprise-related product revenue for service assurance, and the divestiture of the HNT tools business in September 2018.

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Cost of Revenue and Gross Profit

Cost of product revenue consists primarily of material components, manufacturing personnel expenses, packaging materials, overhead and amortization of capitalized software, acquired developed technology and core technology. Cost of service revenue consists primarily of personnel, material, overhead and support costs.

	Three Months Ended										Change
	September 30,
	(Dollars in Thousands)
	2019					2018
				% of Revenue					% of Revenue		$			%
Cost of revenue
Product	$	29,368		14	%	$	34,492		15	%	$	(5,124	)	(15	)%
Service	29,764			14		29,488			13		276			1	%
Total cost of revenue	$	59,132		28	%	$	63,980		28	%	$	(4,848	)	(8	)%
Gross profit:
Product $	$	73,407		34	%	$	76,261		34	%	$	(2,854	)	(4	)%
Product gross profit %	71		%			69		%
Service $	$	83,882		39	%	$	83,556		37	%	$	326		—	%
Service gross profit %	74		%			74		%
Total gross profit $	$	157,289				$	159,817				$	(2,528	)	(2	)%
Total gross profit %	73		%			71		%

Product. The 15%, or $5.1 million, decrease in cost of product revenue was primarily due to a $3.1 million decrease in costs to deliver model calibration products, a $1.9 million decrease in the amortization of intangible assets, a $1.3 million decrease in employee-related expenses associated with the timing of certain projects and a reduction in headcount, and a $0.5 million decrease in direct material costs due to a decrease in product revenue. These decreases were partially offset by a $0.9 million increase in inventory obsolescence charges, a $0.4 million increase in capitalized overhead costs, and a $0.4 million increase in shipping costs. The product gross profit percentage increased by two percentage points to 71% during the three months ended September 30, 2019 as compared with the three months ended September 30, 2018. The 4%, or $2.9 million, decrease in product gross profit corresponds with the 7%, or $8.0 million, decrease in product revenue partially offset by the 15%, or $5.1 million, decrease in cost of product revenue.

Service. The 1%, or $0.3 million, increase in cost of service revenue during the three months ended September 30, 2019 when compared with the three months ended September 30, 2018 was primarily due to a $1.1 million increase in employee-related expenses associated with the timing of certain projects and an increase in variable incentive compensation partially offset by a reduction in headcount. This increase was partially offset by an $0.8 million decrease in contractor fees. The service gross profit percentage remained flat at 74% for the three months ended September 30, 2019 as compared with the three months ended September 30, 2018. The $0.3 million increase in service gross profit corresponds with the 1%, or $0.6 million, increase in service revenue partially offset by the 1%, or $0.3 million, increase in cost of service.

Gross profit. Our gross profit decreased 2%, or $2.5 million, during the three months ended September 30, 2019 when compared with the three months ended September 30, 2018. This decrease is attributable to the decrease in revenue of 3%, or $7.4 million, partially offset by the 8%, or $4.8 million, decrease in cost of revenue. The gross profit percentage increased two percentage points to 73% for the three months ended September 30, 2019 as compared with the three months ended September 30, 2018.

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Operating Expenses

	Three Months Ended								Change
	September 30,
	(Dollars in Thousands)
	2019				2018
			% of Revenue				% of Revenue		$			%
Research and development	$	50,058	23	%	$	55,959	25	%	$	(5,901	)	(11	)%
Sales and marketing	73,067		34		72,051		32		1,016			1
General and administrative	25,177		12		25,294		12		(117		)	—
Amortization of acquired intangible assets	16,132		7		17,981		8		(1,849		)	(10	)
Restructuring charges	150		—		2,472		1		(2,322		)	(94	)
Loss on divestiture of business	—		—		9,177		4		(9,177		)	(100	)
Total operating expenses	$	164,584	76	%	$	182,934	82	%	$	(18,350	)	(10	)%

Research and development. Research and development expenses consist primarily of personnel expenses, fees for outside consultants, overhead and related expenses associated with the development of new products and the enhancement of existing products.

The 11%, or $5.9 million, decrease in research and development expenses was primarily due to a $5.1 million decrease in employee-related expenses due to a reduction in headcount, partially offset by an increase in variable incentive compensation, and a $0.5 million decrease in depreciation expense in the three months ended September 30, 2019 when compared with the three months ended September 30, 2018.

Sales and marketing. Sales and marketing expenses consist primarily of personnel expenses and commissions, overhead and other expenses associated with selling activities and marketing programs such as trade shows, seminars, advertising and new product launch activities.

The 1%, or $1.0 million, increase in total sales and marketing expenses was primarily due to a $3.1 million increase in commissions expense, and a $2.0 million increase in advertising and other marketing related programs in the three months ended September 30, 2019 when compared with the three months ended September 30, 2018. These increases were partially offset by a $1.8 million decrease in employee-related expenses mainly due to a reduction in headcount, a $1.5 million decrease in trade shows and other events, and a $0.5 million decrease in travel expenses.

General and administrative. General and administrative expenses consist primarily of personnel expenses for executive, financial, legal and human resource employees, overhead and other corporate expenditures.

The $0.1 million decrease in general and administrative expenses was primarily due to $1.5 million of non-recurring facilities related expenses incurred during the three months ended September 30, 2018. This decrease was partially offset by a $0.7 million increase in bad debt expense, and a $0.4 million increase in legal expenses.

Amortization of acquired intangible assets. Amortization of acquired intangible assets consists primarily of amortization of customer relationships, definite-lived trademarks and tradenames, and leasehold interests; related to the acquisition of Danaher Corporation's Communications Business (Comms Transaction), ONPATH Technologies, Inc. (ONPATH), Simena, LLC (Simena), Psytechnics, Ltd (Psytechnics), Network General Corporation (Network General), Avvasi Inc. (Avvasi) and Efflux Systems, Inc. (Efflux).

The 10%, or $1.8 million, decrease in amortization of acquired intangible assets was largely due to a decrease in amortization of the intangible assets related to the divestiture of the HNT tools business in September 2018, with the remaining decrease due a decrease in the amortization of intangible assets related to the Comms Transaction.

Loss on divestiture of business. During the three months ended September 30, 2018, we recorded a $9.2 million loss as a result of the divestiture of the HNT tools business.

Restructuring. During the fiscal year ending March 31, 2020, we restructured certain departments to better align functions. As a result of the workforce reduction, during the three months ended September 30, 2019, we recorded a restructuring charge totaling $0.2 million related to one-time termination benefits for employees who were notified during the period. During the fiscal year ended March 31, 2019, we implemented a voluntary separation program for employees who met certain age and service requirements to reduce overall headcount. As a result of the related workforce reduction, during the

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three months ended September 30, 2018, we recorded restructuring expenses of $2.3 million for one-time termination benefits for employees who voluntarily terminated during the period.

Interest and Other Expense, Net. Interest and other expense, net includes interest earned on our cash, cash equivalents and marketable securities, interest expense and other non-operating gains or losses.

	Three Months Ended										Change
	September 30,
	(Dollars in Thousands)
	2019					2018
				% of Revenue					% of Revenue		$		%
Interest and other expense, net	$	(3,616	)	(2	)%	$	(5,946	)	(3	)%	$	2,330	39	%

The 39%, or $2.3 million, decrease in interest and other expense, net was primarily due to a $1.3 million decrease in interest expense due to debt repayments, and a $1.0 million decrease in foreign exchange expense.

Income Taxes. Our effective income tax rates were 60.1% and 9.1% for the three months ended September 30, 2019 and 2018, respectively. Generally, the effective tax rate differs from the statutory tax rate due to state income taxes, foreign withholding taxes, the Global Intangible Low Taxes Income inclusion and earnings in jurisdictions subject to tax rates higher than the U.S. statutory rate partially offset by the tax benefit associated with research and development tax credits, foreign tax credits and the Foreign Derived Intangible Income deduction. The effective tax rate for the three months ended September 30, 2019 is higher than the effective rate for the three months ended September 30, 2018, primarily due to a discrete item recorded in the quarter related to stock-based compensation and a significant change in the pre-tax loss.

	Three Months Ended									Change
	September 30,
	(Dollars in Thousands)
	2019				2018
			% of Revenue					% of Revenue		$		%
Income tax expense (benefit)	$	6,561	3	%	$	(2,635	)	(1	)%	$	9,196	349	%

Six Months Ended September 30, 2019 and 2018

Revenue

During the six months ended September 30, 2019, and 2018, no direct customer or indirect channel partner accounted for more than 10% of our total revenue.

	Six Months Ended								Change
	September 30,
	(Dollars in Thousands)
	2019				2018
			% of Revenue				% of Revenue		$			%
Revenue:
Product	$	178,494	44	%	$	207,680	48	%	$	(29,186	)	(14	)%
Service	223,951		56	%	221,228		52	%	2,723			1	%
Total revenue	$	402,445	100	%	$	428,908	100	%	$	(26,463	)	(6	)%

Product. The 14%, or $29.2 million, decrease in product revenue compared with the same period last year was primarily due to a decrease in revenue from lower enterprise-related product revenue for both service assurance and security offerings, as well as the divestiture of the HNT tools business in September 2018.

Service. The 1%, or $2.7 million, increase in service revenue compared with the same period last year was primarily due to an increase in professional services.

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Total revenue by geography is as follows:

	Six Months Ended								Change
	September 30,
	(Dollars in Thousands)
	2019				2018
			% of Revenue				% of Revenue		$			%
United States	$	246,647	61	%	$	263,998	62	%	$	(17,351	)	(7	)%
International:
Europe	65,210		16		64,471		15		739			1	%
Asia	25,690		7		36,098		8		(10,408		)	(29	)%
Rest of the world	64,898		16		64,341		15		557			1	%
Subtotal international	155,798		39		164,910		38		(9,112		)	(6	)%
Total revenue	$	402,445	100	%	$	428,908	100	%	$	(26,463	)	(6	)%

United States revenue decreased 7%, or $17.4 million, due to the divestiture of the HNT tools business in September 2018, and a decrease in revenue from service assurance offerings, partially offset by an increase in revenue from security. International revenue decreased 6%, or $9.1 million, primarily due to lower enterprise-related product revenue for both service assurance and security offerings, as well as the divestiture of the HNT tools business in September 2018.

Cost of Revenue and Gross Profit

	Six Months Ended										Change
	September 30,
	(Dollars in Thousands)
	2019					2018
				% of Revenue					% of Revenue		$			%
Cost of revenue
Product	$	56,303		14	%	$	67,457		16	%	$	(11,154	)	(17	)%
Service	57,572			14		58,550			14		(978		)	(2	)%
Total cost of revenue	$	113,875		28	%	$	126,007		30	%	$	(12,132	)	(10	)%
Gross profit:
Product $	$	122,191		30	%	$	140,223		33	%	$	(18,032	)	(13	)%
Product gross profit %	68		%			68		%
Service $	$	166,379		41	%	$	162,678		38	%	$	3,701		2	%
Service gross profit %	74		%			74		%
Total gross profit $	$	288,570				$	302,901				$	(14,331	)	(5	)%
Total gross profit %	72		%			71		%

Product. The 17%, or $11.2 million, decrease in cost of product revenue compared to the same period last year was primarily due to a $4.4 million decrease in the amortization of intangible assets, a $3.5 million decrease in direct material costs due to a decrease in product revenue, a $2.7 million decrease in costs to deliver model calibration products, and a $2.6 million decrease in employee related expenses largely due to a reduction in headcount. These decreases were partially offset by a $0.9 million increase in capitalized overhead costs and a $0.8 million increase in inventory obsolescence charges. The product gross profit percentage remained flat at 68% during the six months ended September 30, 2019 when compared to the six months ended September 30, 2018. The 13%, or $18.0 million, decrease in product gross profit corresponds with the 14%, or $29.2 million, decrease in product revenue, partially offset by the 17%, or $11.2 million, decrease in cost of product revenue.

Service. The 2%, or $1.0 million, decrease in cost of service revenue compared to the same period last year was primarily due to a $0.9 million decrease in contractor fees. The service gross profit percentage remained flat at 74% for the six months ended September 30, 2019 when compared to the six months ended September 30, 2018. The 2%, or $3.7 million, increase in

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service gross profit corresponds with the 1%, or $2.7 million, increase in service revenue, and the 2%, or $1.0 million, decrease in cost of services.

Gross profit. Our gross profit for the six months ended September 30, 2019 decreased 5%, or $14.3 million, compared to the same period last year. This decrease is primarily attributable to the decrease in revenue of 6%, or $26.5 million, partially offset by a 10%, or $12.1 million, decrease in cost of revenue. The gross profit percentage increased by one percentage point to 72% for the six months ended September 30, 2019 when compared to the six months ended September 30, 2018.

Operating Expenses

	Six Months Ended								Change
	September 30,
	(Dollars in Thousands)
	2019				2018
			% of Revenue				% of Revenue		$			%
Research and development	$	93,785	23	%	$	111,422	26	%	$	(17,637	)	(16	)%
Sales and marketing	146,592		36		150,183		35		(3,591		)	(2	)
General and administrative	47,388		12		51,353		12		(3,965		)	(8	)
Amortization of acquired intangible assets	32,275		8		41,446		10		(9,171		)	(22	)
Restructuring charges	273		—		3,619		1		(3,346		)	(92	)
Impairment of intangible assets	—		—		35,871		8		(35,871		)	(100	)
Loss on divestiture of business	—		—		9,177		2		(9,177		)	(100	)
Total operating expenses	$	320,313	79	%	$	403,071	94	%	$	(82,758	)	(21	)%

Research and development. The 16%, or $17.6 million, decrease in research and development expenses for the six months ended September 30, 2019 compared to the same period last year was primarily due to a $16.2 million decrease in employee-related expenses due to a reduction in headcount, and a $1.2 million decrease in depreciation expense. These decreases were partially offset by a $1.0 million increase in consulting fees.

Sales and marketing. The 2%, or $3.6 million, decrease in total sales and marketing expenses for the six months ended September 30, 2019 compared to the same period last year was primarily due to a $6.4 million decrease in employee-related expenses due to a reduction in headcount, and a $1.4 million decrease in travel expense. These decreases were partially offset by a $2.5 million increase in commissions expense, and a $1.6 million increase in advertising and other marketing related programs.

General and administrative. The 8%, or $4.0 million, decrease in general and administrative expenses for the six months ended September 30, 2019 compared to the same period last year was primarily due to a $2.5 million decrease in employee-related expenses due to a decrease in variable incentive compensation as well as a reduction in headcount, and a $1.5 million decrease of non-recurring facilities-related expenses incurred during the six months ended September 30, 2018.

Amortization of acquired intangible assets. Amortization of acquired intangible assets consists primarily of amortization of customer relationships, definite-lived trademark and tradenames, and leasehold interest related to the Comms Transaction and the acquisitions of ONPATH, Simena, Psytechnics, Network General, Avvasi and Efflux.

The 22%, or $9.2 million, decrease in amortization of acquired intangible assets for the six months ended September 30, 2019 compared to the same period last year was largely due to a decrease in amortization of the intangible assets related to the divestiture of the HNT tools business in September 2018, with the remaining decrease due to a decrease in the amortization of intangible assets related to the Comms Transaction.

Restructuring. During the fiscal year ending March 31, 2020, we restructured certain departments to better align functions. As a result of the workforce reduction, during the six months ended September 30, 2019, we recorded a restructuring charge totaling $0.2 million related to one-time termination benefits for employees who were notified during the period. During the fiscal year ended March 31, 2019, we implemented a voluntary separation program for employees who met certain age and service requirements to reduce overall headcount. As a result of the related workforce reduction, during the six months ended September 30, 2019 and six months ended September 30, 2018, we recorded restructuring expenses of $0.1 million and $2.3 million, respectively for one-time termination benefits for employees who voluntarily terminated during the period.

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Impairment of intangible assets. During the first quarter of the fiscal year ended March 31, 2019, we performed a quantitative analysis on certain intangible assets related to the HNT tools business. The fair value of these intangible assets was determined to be less than the carrying value, and as a result, we recognized an impairment charge of $35.9 million during the six months ended September 30, 2018.

Loss on Divestiture of Business. During the six months ended September 30, 2018, we recorded a $9.2 million loss on the divestiture of the HNT tools business.

Interest and Other Expense, Net

	Six Months Ended										Change
	September 30,
	(Dollars in Thousands)
	2019					2018
				% of Revenue					% of Revenue		$		%
Interest and other expense, net	$	(8,015	)	(2	)%	$	(10,639	)	(2	)%	$	2,624	25	%

The 25%, or $2.6 million, decrease in interest and other expense, net was primarily due to a $0.9 million increase in transitional services agreement income related to the HNT tools business divestiture, a $0.8 million decrease in interest expense due to debt repayments on the credit facility, a $0.7 million decrease in foreign exchange expense, and a $0.6 million increase in interest income received on investments. These decreases were partially offset by a $0.5 million increase in other expense due to the change in the fair value of the contingent consideration related to the HNT tools business divestiture during the six months ended September 30, 2019.

Income Taxes. Our effective income tax rates were 17.7% and 19.7% for the six months ended September 30, 2019 and 2018, respectively. Generally, the effective tax rate differs from the statutory tax rate due to state income taxes, foreign withholding taxes, the Global Intangible Low Taxes Income inclusion and earnings in jurisdictions subject to tax rates higher than the U.S. statutory rate partially offset by the tax benefit associated with research and development tax credits, foreign tax credits and the Foreign Derived Intangible Income deduction. The effective tax rate for the six months ended September 30, 2019 is lower than the effective rate for the six months ended September 30, 2018, primarily due to discrete items relating to establishing new U.S. deferred tax liabilities due to several of our foreign subsidiaries making elections in the first quarter to be treated as U.S. branches for federal income tax purposes and stock-based compensation.

	Six Months Ended									Change
	September 30,
	(Dollars in Thousands)
	2019				2018
			% of Revenue					% of Revenue		$		%
Income tax expense (benefit)	$	7,057	2	%	$	(21,877	)	(5	)%	$	28,934	132	%

Off-Balance Sheet Arrangements

At September 30, 2019 and 2018, we did not have any off-balance sheet arrangements as defined in Regulation S-K, Item 303(a)(4)(ii).

Commitments and Contingencies

We account for claims and contingencies in accordance with authoritative guidance that requires us to record an estimated loss from a claim or loss contingency when information available prior to issuance of our consolidated financial statements indicates that it is probable that a liability has been incurred at the date of the consolidated financial statements and the amount of the loss can be reasonably estimated. If we determine that it is reasonably possible but not probable that an asset has been impaired or a liability has been incurred, or if the amount of a probable loss cannot be reasonably estimated, then in accordance with the authoritative guidance, we disclose the amount or range of estimated loss if the amount or range of estimated loss is material. Accounting for claims and contingencies requires us to use our judgment. We consult with legal

37

counsel on those issues related to litigation and seek input from other experts and advisors with respect to matters in the ordinary course of business.

Acquisition and divestiture related – We have a contingent consideration asset related to the divestiture of our HNT tools business in September 2018. The contingent consideration asset represents potential future earnout payments to us of up to $4.0 million over two years that are contingent on the HNT tools business achieving certain milestones. The fair value of the contingent consideration asset at September 30, 2019 was $0.2 million.

We had a contingent liability at September 30, 2019 for $1.0 million related to the acquisition of Eastwind in April 2019 for which an escrow account was established to cover damages we may suffer related to any liabilities that we did not agree to assume or as a result of the breach of representations and warranties of the seller as described in the merger agreement. Except to the extent that valid indemnification claims are made prior to such time, the $1.0 million will be paid to the seller in April 2020.

Legal – From time to time, NetScout is subject to legal proceedings and claims in the ordinary course of business. In the opinion of management, the amount of ultimate expense with respect to any current legal proceedings and claims, if determined adversely, will not have a material adverse effect on our financial condition, results of operations or cash flows.

As previously disclosed, in March 2016, Packet Intelligence LLC (Packet Intelligence or Plaintiff) filed a Complaint against NetScout and two subsidiary entities in the United States District Court for the Eastern District of Texas asserting infringement of five United States patents. Plaintiff’s Complaint alleged that legacy Tektronix GeoProbe products, including the G10 and GeoBlade products, infringed these patents. NetScout filed an Answer denying Plaintiff’s allegations and asserting that Plaintiff’s patents were, among other things, invalid, not infringed, and unenforceable due to inequitable conduct. In October 2017, a jury trial was held to address the parties’ claims and counterclaims regarding infringement of three patents by the G10 and GeoBlade products, invalidity of these patents, and damages. On October 13, 2017, the jury rendered a verdict finding in favor of the Plaintiff and that Plaintiff was entitled to $3,500,000 for pre-suit damages and $2,250,000 for post-suit damages. The jury indicated that the awarded damages amounts were intended to reflect a running royalty. In September 2018, the Court entered judgment and "enhanced" the jury verdict in the amount of $2.8 million as a result of a jury finding. The judgment also awards pre- and post-judgment interest, and a running royalty on the G10 and GeoBlade products until the expiration of the patents at issue, the last date being June 2022. The Court denied the Plaintiff's motion for fees. Following additional motions for judgment as a matter of law, the court entered final judgment. On June 12, 2019, we filed our Notice of Appeal of the judgment and all other adverse findings. We have concluded that the risk of loss from this matter is currently neither remote nor probable, and therefore, under GAAP definitions, the risk of loss is termed "reasonably possible". Therefore, accounting rules require us to provide an estimate for the range of potential liability. We currently estimate that the estimated range of liability is between $0 and the aggregate amount awarded by the jury and the Court's award of enhanced damages, plus potential additional pre- and post-judgment interest amounts and costs and any royalties owed on post-trial sales of the accused G10 and GeoBlade products.

Liquidity and Capital Resources

Cash, cash equivalents and marketable securities consisted of the following (in thousands):

	September 30, 2019		March 31, 2019
Cash and cash equivalents	$	245,064	$	409,632
Short-term marketable securities	55,129		76,344
Long-term marketable securities	7,630		1,012
Cash, cash equivalents and marketable securities	$	307,823	$	486,988

Cash, cash equivalents and marketable securities

At September 30, 2019, cash, cash equivalents and marketable securities (current and non-current) totaled $307.8 million, a $179.2 million decrease from $487.0 million at March 31, 2019, due primarily to $100.0 million used to repay long-term debt, $100.0 million used to repurchase shares of our common stock, $11.4 million used for tax withholdings on restricted stock units, $9.1 million used for capital expenditures, and $4.2 million used for the acquisition of Eastwind, partially offset by cash provided by operations of $48.5 million during the six months ended September 30, 2019.

At September 30, 2019, cash and short-term and long-term investments in the United States were $158.6 million, while cash held outside the United States was approximately $149.2 million.

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Cash and cash equivalents were impacted by the following (in thousands):

	Six Months Ended
	September 30,
	2019			2018
Net cash provided by operating activities	$	48,456		$	32,706
Net cash provided by (used in) investing activities	$	1,431		$	(57,177	)
Net cash used in financing activities	$	(211,375	)	$	(10,375	)

Net cash from operating activities

Cash provided by operating activities was $48.5 million during the six months ended September 30, 2019, compared with $32.7 million of cash provided by operating activities during the six months ended September 30, 2018. This $15.8 million increase was due in part to a $42.1 million increase from a smaller net loss, a $19.6 million increase from accounts payable, a $19.3 million increase from deferred income taxes, a $9.7 million increase from deferred revenue, a $6.5 million increase from prepaid expenses and other assets, and a $5.1 million increase from operating lease right-of-use assets. These increases were partially offset by a $35.9 million decrease due to the impairment of intangible assets, a $19.8 million decrease from accrued compensation and other expenses, a $15.9 million decrease from depreciation and amortization expense, a $7.4 million decrease in loss on divestiture of business, and a $6.6 million decrease in operating lease liabilities during the six months ended September 30, 2019 as compared with the six months ended September 30, 2018.

Net cash from investing activities

	Six Months Ended
	September 30,
	(in thousands)
	2019			2018
Cash provided by (used in) investing activities included the following:
Purchase of marketable securities	$	(83,502	)	$	(136,019	)
Proceeds from sales and maturity of marketable securities	98,147			94,057
Purchase of fixed assets	(9,056		)	(12,207		)
Payments related to the divestiture of business	—			(2,911		)
Increase in deposits	(4		)	(97		)
Acquisition of businesses	(4,154		)	—
	$	1,431		$	(57,177	)

Cash provided by investing activities increased by $58.6 million to $1.4 million during the six months ended September 30, 2019, compared with $57.2 million of cash used in investing activities during the six months ended September 30, 2018.

The overall increase in cash inflow from marketable securities was primarily related to a decrease of $52.5 million in the purchase of marketable securities as well as a $4.1 million increase in proceeds from the maturity of marketable securities during the six months ended September 30, 2019 when compared with the six months ended September 30, 2018.

During the six months ended September 30, 2019, there was a $4.2 million cash outflow related to the acquisition of Eastwind.

Our investments in property and equipment consist primarily of computer equipment, demonstration units, office equipment and facility improvements. We plan to continue to invest in capital expenditures to support our infrastructure through the remainder of fiscal year 2020.

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Net cash from financing activities

	Six Months Ended
	September 30,
	(in thousands)
	2019			2018
Cash used in financing activities included the following:
Issuance of common stock under stock plans	$	2		$	2
Payment of contingent consideration	—			(523		)
Repayment of long-term debt	(100,000		)	—
Treasury stock repurchases	(100,000		)	—
Tax withholding on restricted stock units	(11,377		)	(9,854		)
	$	(211,375	)	$	(10,375	)

Cash used in financing activities increased by $201.0 million to $211.4 million during the six months ended September 30, 2019, compared with $10.4 million of cash used in financing activities during the six months ended September 30, 2018.

During the six months ended September 30, 2019, we repaid $100.0 million of borrowings under the Amended Credit Agreement.

During the six months ended September 30, 2019, we repurchased 4,160,836 shares of our common stock for $100.0 million under the twenty-five million share repurchase program.

In connection with the delivery of the Company's common stock upon vesting of restricted stock units, we withheld 500,093 and 371,726 shares at a cost of $11.4 million and $9.9 million related to minimum statutory tax withholding requirements on these restricted stock units during the six months ended September 30, 2019 and 2018, respectively. These withholding transactions do not fall under the repurchase program described above, and therefore do not reduce the number of shares that are available for repurchase under that program.

Credit Facility

On January 16, 2018, we amended and expanded our existing credit agreement (Amended Credit Agreement) with a syndicate of lenders by and among: NetScout; JPMorgan Chase Bank, N.A. (JPMorgan), as administrative agent and collateral agent; J.P. Morgan Securities LLC, KeyBanc Capital Markets, Merrill Lynch, Pierce, Fenner & Smith Incorporated, RBC Capital Markets and Wells Fargo Securities, LLC, as joint lead arrangers and joint bookrunners; Fifth Third Bank, Santander Bank, N.A., SunTrust Bank, N.A. and U.S. Bank National Association, as co-documentation agents; and the lenders party thereto.

The Amended Credit Agreement provides for a five-year, $1.0 billion senior secured revolving credit facility, including a letter of credit sub-facility of up to $75.0 million. We may elect to use the new credit facility for general corporate purposes or to finance the repurchase of up to twenty-five million shares of common stock under our common stock repurchase plan. The commitments under the Amended Credit Agreement will expire on January 16, 2023, and any outstanding loans will be due on that date. During the six months ended September 30, 2019, we repaid $100.0 million of borrowings under the Amended Credit Agreement. At September 30, 2019, $450 million was outstanding under the Amended Credit Agreement.

At our election, revolving loans under the Amended Credit Agreement bear interest at either (a) an Alternate Base Rate per annum equal to the greatest of (1) JPMorgan's prime rate, (2) 0.50% in excess of the New York Federal Reserve Bank (NYFRB) rate, or (3) an adjusted one month LIBOR rate plus 1%; or (b) such adjusted LIBOR rate (for the interest period selected by us), in each case plus an applicable margin. For the period from the delivery of our financial statements for the quarter ended June 30, 2019, until we have delivered financial statements for the quarter ended September 30, 2019, the applicable margin will be 1.50% per annum for LIBOR loans and 0.50% per annum for Alternate Base Rate loans, and thereafter the applicable margin will vary depending on our leverage ratio, ranging from 1.00% per annum for Base Rate loans and 2.00% per annum for LIBOR loans if our consolidated leverage ratio is greater than 3.50 to 1.00, down to 0.00% per annum for Alternate Base Rate loans and 1.00% per annum for LIBOR loans if our consolidated leverage ratio is equal to or less than 1.50 to 1.00.

On July 27, 2017, the U.K. Financial Conduct Authority (FCA) announced that it will no longer require banks to submit rates for the calculation of LIBOR after 2021. Our Amended Credit Agreement provides for the Administrative Agent to determine if (i) adequate and reasonable means do not exist for ascertaining the LIBOR rate or (ii) the FCA or Government Authority having jurisdiction over the Administrative Agent has made a public statement identifying a specific date after which the LIBOR rate shall no longer be used for determining interest rates for loans and the Administrative Agent determines that (i)

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and (ii) above are unlikely to be temporary then the Administrative Agent and NetScout would agree to transition to an Alternate Base Rate Borrowing or amend the Credit Agreement to establish an alternate rate of interest to LIBOR that gives due consideration to the then prevailing market convention for determining a rate of interest for syndicated loans in the United States at such time.

Our consolidated leverage ratio is the ratio of our total funded debt compared to our consolidated adjusted EBITDA. Consolidated adjusted EBITDA includes certain adjustments, including, without limitation, adjustments relating to extraordinary, unusual or non-recurring charges, certain restructuring charges, non-cash charges, certain transaction costs and expenses and certain pro forma adjustments in connection with material acquisitions and dispositions, all as set forth in detail in the definition of consolidated adjusted EBITDA in the Amended Credit Agreement.

Commitment fees will accrue on the daily unused amount of the credit facility. For the period from the delivery of our financial statements for the quarter ended June 30, 2019, until we have delivered financial statements for the quarter ended September 30, 2019, the commitment fee will be 0.25% per annum, and thereafter the commitment fee will vary depending on our consolidated leverage ratio, ranging from 0.30% per annum if our consolidated leverage ratio is greater than 2.75 to 1.00, down to 0.15% per annum if our consolidated leverage ratio is equal to or less than 1.50 to 1.00.

Letter of credit participation fees are payable to each lender on the amount of such lender’s letter of credit exposure, during the period from the closing date of the Amended Credit Agreement to but excluding the date which is the later of (i) the date on which such lender’s commitment terminates or (ii) the date on which such lender ceases to have any letter of credit exposure, at a rate per annum equal to the applicable margin for LIBOR loans. Additionally, we will pay a fronting fee to each issuing bank in amounts to be agreed to between us and the applicable issuing bank.

Interest on Alternate Base Rate loans is payable at the end of each calendar quarter. Interest on LIBOR loans is payable at the end of each interest rate period or at the end of each three-month interval within an interest rate period if the period is longer than three months. We may also prepay loans under the Amended Credit Agreement at any time, without penalty, subject to certain notice requirements.

Debt is recorded at the amount drawn on the revolving credit facility plus interest based on floating rates reflective of changes in the market which approximates fair value.

The loans and other obligations under the credit facility are (a) guaranteed by each of our wholly owned material domestic restricted subsidiaries, subject to certain exceptions, and (b) are secured by substantially all of the assets of us and the subsidiary guarantors, including a pledge of all the capital stock of material subsidiaries held directly by us and the subsidiary guarantors (which pledge, in the case of any foreign subsidiary, is limited to 65% of the voting stock), subject to certain customary exceptions and limitations. The Amended Credit Agreement generally prohibits any other liens on the assets of NetScout and its restricted subsidiaries, subject to certain exceptions as described in the Amended Credit Agreement.

The Amended Credit Agreement contains certain covenants applicable to us and our restricted subsidiaries, including, without limitation, limitations on additional indebtedness, liens, various fundamental changes, dividends and distributions, investments (including acquisitions), transactions with affiliates, asset sales, including sale-leaseback transactions, speculative hedge agreements, payment of junior financing, changes in business and other limitations customary in senior secured credit facilities. In addition, we are required to maintain certain consolidated leverage and interest coverage ratios. These covenants and limitations are more fully described in the Amended Credit Agreement. At September 30, 2019, we were in compliance with all of these covenants.

The Amended Credit Agreement provides that events of default will exist in certain circumstances, including failure to make payment of principal or interest on the loans when required, failure to perform certain obligations under the Amended Credit Agreement and related documents, defaults under certain other indebtedness, certain insolvency events, certain events arising under ERISA, a change of control and certain other events. Upon an event of default, the administrative agent with the consent of, or at the request of, the holders of more than 50% in principal amount of the loans and commitments may terminate the commitments and accelerate the maturity of the loans and enforce certain other remedies under the Amended Credit Agreement and the other loan documents.

In connection with the Amended Credit Agreement described above, we terminated our previous term loan dated as of July 14, 2015, by and among NetScout; JPMorgan Chase Bank, N.A. (JPMorgan), as administrative agent and collateral agent; J.P. Morgan Securities LLC, KeyBanc Capital Markets, Merrill Lynch, Pierce, Fenner & Smith Incorporated, RBC Capital Markets and Wells Fargo Securities, LLC, as joint lead arrangers and joint bookrunners; Santander Bank, N.A., SunTrust Bank, N.A. and U.S. Bank National Association, as co-documentation agents; and the lenders party thereto.

We have capitalized debt issuance costs totaling $12.2 million at September 30, 2019, which are being amortized over the life of the revolving credit facility. The unamortized balance was $5.7 million as of September 30, 2019. The balance of $1.7 million was included as prepaid expenses and other current assets and a balance of $4.0 million was included as other assets in our consolidated balance sheet.

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Expectations for Fiscal Year 2020

We believe that our cash balances, available debt, short-term marketable securities classified as available-for-sale and

future cash flows generated by operations will be sufficient to meet our anticipated cash needs for working capital and capital expenditures for at least the next 12 months.

Additionally, a portion of our cash may be used to acquire or invest in complementary businesses or products or to obtain the right to use complementary technologies. From time to time, in the ordinary course of business, we evaluate potential acquisitions of such businesses, products or technologies. If our existing sources of liquidity are insufficient to satisfy our liquidity requirements, we may seek to sell additional equity or debt securities. The sale of additional equity or debt securities could result in additional dilution to our stockholders.

Recent Accounting Pronouncements

For information with respect to recent accounting pronouncements on our consolidated financial statements, see Note 1 contained in the "Notes to Consolidated Financial Statements" included in Part I of this Quarterly Report on Form 10-Q.

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Item 3.  Quantitative and Qualitative Disclosures About Market Risk

Interest Rate Risk. We hold our cash, cash equivalents and investments for working capital purposes. Some of the securities we invest in are subject to market risk. This means that a change in prevailing interest rates may cause the principal amount of the investment to fluctuate. To minimize this risk, we maintain our portfolio of cash, cash equivalents and investments in a variety of securities, including money market funds and government debt securities. The risk associated with fluctuating interest rates is limited to our investment portfolio. Due to the short-term nature of these instruments, we believe that we do not have any material exposure to changes in the fair value of our investment portfolio as a result of changes in interest rates. Declines in interest rates, however, would reduce future interest income. The effect of a hypothetical 10% increase or decrease in overall interest rates would not have had a material impact on our operating results or the total fair value of the portfolio.

We are exposed to market risks related to fluctuations in interest rates related to our credit facility. At September 30, 2019, we owed $450 million on this loan with an interest rate of 3.55%. A sensitivity analysis was performed on the outstanding portion of our debt obligation as of September 30, 2019. Should the current weighted-average interest rate increase or decrease by 10%, the resulting annual increase or decrease to interest expense would be approximately $1.6 million as of September 30, 2019.

Foreign Currency Exchange Risk. As a result of our foreign operations, we face exposure to movements in foreign currency exchange rates, primarily the Euro, British Pound, Canadian Dollar and Indian Rupee. The current exposures arise primarily from expenses denominated in foreign currencies. We currently engage in foreign currency hedging activities in order to limit these exposures. We do not use derivative financial instruments for speculative trading purposes.

At September 30, 2019, we had foreign currency forward contracts with notional amounts totaling $10.0 million. The valuation of outstanding foreign currency forward contracts at September 30, 2019 resulted in an asset balance of $37 thousand, reflecting favorable rates in comparison to current market rates and a liability balance of $35 thousand, reflecting unfavorable contract rates in comparison to current market rates at this date. At March 31, 2019, we had foreign currency forward contracts with notional amounts totaling $4.6 million. The valuation of outstanding foreign currency forward contracts at March 31, 2019 resulted in a liability balance of $68 thousand, reflecting unfavorable contract rates in comparison to current market rates at this date and an asset balance of $58 thousand reflecting favorable rates in comparison to current market rates. The effect of a hypothetical 10% change in foreign currency exchange rates applicable to our business would not have a material impact on our historical consolidated financial statements. As our international operations grow, we will continue to reassess our approach to manage our risk relating to fluctuations in currency rates.

Item 4.  Controls and Procedures

At September 30, 2019, NetScout, under the supervision and with the participation of our management, including the Company's principal executive officer and principal financial officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (Exchange Act)). Based upon that evaluation, our principal executive officer and principal financial officer concluded that, at September 30, 2019, our disclosure controls and procedures were effective at the reasonable assurance level in ensuring that material information relating to NetScout, including its consolidated subsidiaries, required to be disclosed by NetScout in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, including ensuring that such material information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.

There were no changes in our internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f) occurred during the period covered by this quarterly report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II: OTHER INFORMATION

Item 1.  Legal Proceedings

From time to time, NetScout is subject to legal proceedings and claims in the ordinary course of business. In the opinion of management, the amount of ultimate expense with respect to any current legal proceedings and claims, if determined adversely, will not be material to our financial condition, results of operations or cash flows.

As previously disclosed, in March 2016, Packet Intelligence LLC (Packet Intelligence or Plaintiff) filed a Complaint against NetScout and two subsidiary entities in the United States District Court for the Eastern District of Texas asserting infringement of five United States patents. Plaintiff’s Complaint alleged that legacy Tektronix GeoProbe products, including the G10 and GeoBlade products, infringed these patents. NetScout filed an Answer denying Plaintiff’s allegations and asserting that Plaintiff’s patents were, among other things, invalid, not infringed, and unenforceable due to inequitable conduct. In October 2017, a jury trial was held to address the parties’ claims and counterclaims regarding infringement of three patents by the G10 and GeoBlade products, invalidity of these patents, and damages. On October 13, 2017, the jury rendered a verdict finding in favor of the Plaintiff and that Plaintiff was entitled to $3,500,000 for pre-suit damages and $2,250,000 for post-suit damages. The jury indicated that the awarded damages amounts were intended to reflect a running royalty. In September 2018, the Court entered judgment and "enhanced" the jury verdict in the amount of $2.8 million as a result of a jury finding. The judgment also awards pre- and post-judgment interest, and a running royalty on the G10 and GeoBlade products until the expiration of the patents at issue, the last date being June 2022. The Court denied the Plaintiff's motion for fees. Following additional motions for judgment as a matter of law, the court entered final judgment. On June 12, 2019, we filed our Notice of Appeal of the judgment and all other adverse findings. We have concluded that the risk of loss from this matter is currently neither remote nor probable, and therefore, under GAAP definitions, the risk of loss is termed "reasonably possible". Therefore, accounting rules require us to provide an estimate for the range of potential liability. We currently estimate that the estimated range of liability is between $0 and the aggregate amount awarded by the jury and the Court's award of enhanced damages, plus potential additional pre- and post-judgment interest amounts and costs and any royalties owed on post-trial sales of the accused G10 and GeoBlade products.

Item 1A.  Risk Factors

In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, Item 1A. “Risk Factors” in our Annual Report on Form 10-K for our fiscal year ended March 31, 2019. The risks discussed in our Annual Report on Form 10-K could materially affect our business, financial condition and future results. There have been no material changes to those risk factors since we filed our Annual Report on Form 10-K. The risks described in our Annual Report on Form 10-K are not the only risks facing us. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially and adversely affect our business, financial condition or operating results.

Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds

Sales of Unregistered Securities

None.

Issuer Purchase of Equity Securities

The following table provides information about purchases we made during the quarter ended September 30, 2019 of equity securities that are registered by us pursuant to Section 12 of the Exchange Act:

Period	Total Number of Shares Purchased (1)	Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Maximum Number of Shares That May Yet be Purchased Under the Program
7/1/2019-7/31/2019	649,018	$	25.92	649,018	12,413,172
8/1/2019-8/31/2019	1,686,307	22.09		1,366,500	11,046,672
9/1/2019-9/30/2019	906,655	23.29		847,918	10,198,754
Total	3,241,980	$	23.19	2,863,436	10,198,754

(1) We purchased an aggregate of 378,544 shares during the three months ended September 30, 2019 transferred to us from employees in satisfaction of minimum tax withholding obligations associated with the vesting of restricted stock units during the period. Such purchases reflected in the table do not reduce the maximum number of shares that may be purchased under our previously announced stock repurchase program (our previously disclosed twenty-five million share repurchase program).

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Item 3.  Defaults Upon Senior Securities

None.

Item 4.  Mine Safety Disclosures

Not Applicable.

Item 5.  Other Information

None.

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Item 6. Exhibits

(a) Exhibits

3.1		Composite conformed copy of Third Amended and Restated Certificate of Incorporation of NetScout (as amended) (filed as Exhibit 3.2 to NetScout's current report on Form 8-K, SEC File No. 000-26251, filed on September 21, 2016, and incorporated herein by reference).
3.2		Amended and Restated By-laws of NetScout (filed as Exhibit 3.1 to NetScout's current report on Form 8-K, SEC File No. 000-26251, filed on October 30, 2017 and incorporated herein by reference).
10.1		NetScout Systems, Inc. 2019 Equity Incentive Plan (filed as Exhibit 99.1 to NetScout’s Registration Statement on Form S-8, SEC File No. 333-234326, filed on October 25, 2019 and incorporated herein by reference).
31.1	+	Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	+	Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	++	Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	++	Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS	+	XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
101.SCH	+	Inline XBRL Taxonomy Extension Schema Document.
101.CAL	+	Inline XBRL Taxonomy Extension Calculation Linkbase document.
101.DEF	+	Inline XBRL Taxonomy Extension Definition Linkbase document.
101.LAB	+	Inline XBRL Taxonomy Extension Label Linkbase document.
101.PRE	+	Inline XBRL Taxonomy Extension Presentation Linkbase document.
104		The cover page from the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2019 formatted in Inline XBRL

+	Filed herewith.
++	Exhibit has been furnished, is not deemed filed and is not to be incorporated by reference into any of the Company's filings under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, irrespective of any general incorporation language contained in any such filing.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	NETSCOUT SYSTEMS, INC.
Date: October 31, 2019	/s/ Anil K. Singhal
	Anil K. Singhal
	President, Chief Executive Officer and Chairman
	(Principal Executive Officer)
Date: October 31, 2019	/s/ Jean Bua
	Jean Bua
	Executive Vice President and Chief Financial Officer
	(Principal Financial Officer)
	(Principal Accounting Officer)

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