Following several quarters of year-over-year revenue decline, NetScout began to see light at the end of the tunnel. In its third-quarter 2019 earnings call with investors, the performance management software company boasted customer wins across its enterprise segment, savings from its headcount reduction and restructuring, and new opportunities within the burgeoning 5G market.
Third-quarter revenue was $246.3 million, down 9 percent year over year, but up from its previous quarter. NetScout also noted that its September 2018 divestiture of its handheld network test business (HNT) to StoneCalibre represented 4 percentage points of that decline.
This was still a smaller year-over-year drop than the company’s previous quarters. Its second quarter 2019 revenue was $224 million, a 14 percent drop year over year; first quarter was $206 million, down 10 percent; and its fourth-quarter 2018 reported revenue of $235.2 million, a 27 percent decline.
The company expects a strong fourth quarter. This will be driven by “top line growth, better gross margins driven by product mix, savings from our prior restructuring activities, and ongoing diligence in managing costs, including carefully managing the timing of new hires,” said NetScout’s President and CEO Anil Singhal according to the Seeking Alpha transcript.
In NetScout’s previous Q1 earnings call with investors, it highlighted headcount reduction and restructuring plans to help reduce its operating costs. Singhal said at that time, according to the Seeking Alpha transcript, that these would “not impede our ability to grow or support customers or run counter to our corporate values and culture.”
These plans were implemented with the overall goal of reducing its annual run rate operating costs by up to $50 million. At that time, its divestiture of HNT reduced operating costs by $30 million. Additionally, 120 employees left NetScout to StoneCalibre as part of this sale.
Of its restructuring plans, Singhal said that the company would “realign our resources in ways that are aimed at prioritizing investment in growth-oriented initiatives and eliminating redundancies arising from the integration of legacy platforms, products and technologies associated with the Danaher Communications acquisition.” NetScout acquired Danaher in July 2015.
In its most recent third-quarter call, NetScout attributed further cost savings to its consolidation activities, which included the combination of its engineering teams and its facilities in Massachusetts where it is headquartered. By the end of the fiscal year, NetScout estimates that these consolidation efforts, and its restructuring, will reduce its headcount by 145 employees. The company did not say where specifically it would cut employees. In Q3, it reduced its headcount by 7 percent.
These changes reduced Netscout’s total operating costs by 7 percent year over year. However, its operating expenses remained relatively unchanged. Jean Bua, the company’s EVP and CFO, said that the “benefits from lower overall headcount were offset by increased incentive compensation.”
These payments related to the restructuring totaled $13 million, attributed to severance pay, in its third quarter, and it anticipates $3 million more in Q4. Bua said that there were no payments related to this anticipated in fiscal year 2020 and said the company hopes to save $14 million more as a result of this restructuring.
Q3 Customer Wins
NetScout boasted a number of customer wins during the quarter and said it closed 30 deals over $500,000. It also noted that 85 percent of these deals included its vSTREAM, vSCOUT, nGeniusPULSE, and nGenius packet broker offerings as well as its traditional ISNG and NG1 offerings.
The company also said it saw wins associated with its nGenius product portfolio due to its expansion over the past two years. The offering, which includes its business analytics tools to extract data at a granular level, is now sold as a cloud-based offering and has synthetic test options. According to Singhal, this product line and its expansion were “fundamental to closing a number of large six- and seven-figure deals during the third quarter.” This included deals with existing and new accounts.
While the company’s service provider customer segment remained relatively stagnant in the third quarter, it saw a record quarter in its 5G RAN product area. This product area is comprised of model calibration and service assurance capabilities to help provider’s design their networks and 5G-related monitoring.
“While we do not expect material spending on 5G-related monitoring over the next few quarters, we believe that these capabilities will position us to benefit as carriers expand their monitoring capacities in their core 4G mobile networks to handle initial 5G traffic volumes,” said Singhal.