NTCT earnings call transcript, November 5, 2026

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Scott, please go ahead.

Thank you, operator.

Good morning, everyone. Welcome to NETSCOUT's second quarter fiscal year 2027 conference call for the period ended September 30, 2026. Joining me today... They are Anil Singhal, NETSCOUT's president and chief executive officer, and Tony Piazza, NETSCOUT's executive vice president and chief financial officer. Please note that...

If you can advance the slides... ...in the webcast viewer to follow our commentary. Both the slides and the prepared remarks can be accessed in multiple areas within our investor relations section of our website at www.netscout.com, including the IR... ...in the quarterly results page. As discussed in detail on slide number three, today's conference call will include certain forward-looking statements about NetScout's views on expected results of future performance and business strategy. These statements speak only as of today's date and involve risks, uncertainties, and assumptions that may cause actual results to differ materially, including but not limited to those described in our company's filings with the Securities Exchange Commission. Including our annual report on Form 10-K and quarterly reports on Form 10-Q. Just in detail on slide number four, today's conference call will also include discussion of certain... ...financial measures that the company believes to be useful for investors. While the slide presentation includes both GAAP and non-GAAP results, other than revenue and balance sheet information, which are presented in accordance with GAAP... ...we will focus our discussion on non-GAAP financial information. These measures should not be considered in isolation from, or as a substitute for, financial information prepared in accordance with GAAP. Reconciliations of all non-GAAP metrics to the nearest GAAP measures are provided in the appendix of the slide presentation in today's financial results press release and on our website. I will now turn the call over to Anil for his prepared remarks.

Anil.

Thank you Scott and good morning everyone. We appreciate you joining us today. Our second quarter results were consistent with our expectations. The performance keeps us on track to achieve. our objectives for fiscal year 2027. Our continued focus on cost discipline support supported operating margin expansion from the prior year. We were also active in our shareholder at the end of the year.

Thank you Scott.

The share for repurchase program during the quarter reflecting our commitment to returning capital to shareholders. With that foundation we are reaffirming our full year outlook. In October we hosted our annual engaged technology and user summit showcasing our newer solution. to more than 400 customers and partners. These innovations extend our scaleable DPI derived AI ready smart data into AI ops and agentic workflows as well as strengthen our cyber. security and DDoS attack protection portfolio. While customer AI adoption is still in its early stages, we view this as a strong long-term opportunity. As investment matures, we will be well positioned to expand.

For the second quarter of fiscal year 2027, total revenue grew 1.4% to $22.2 million, reflecting the timing of certain orders pulled into Q1 from Q2, as discussed last quarter. Operating margins expanded, and valued earning per share increased to $0.71. For the first offer, revenue grew. Nearly 7% to approximately $400, reflecting growth in both cybersecurity and service assurance. Gross and operating margins expanded, and valued earning per share increased to $1.

Now, let's turn to slide number 7 for some perspective on a business and some markets. Starting with service assurance, revenue increased approximately $1. it. the fiscal year, driven by the timing of strong federal government related enterprise customers continued to run to NETSCOUT to close the visibility gaps created by hybrid cloud automation and AI workloads. And we centered our solution. during the quarter. We expanded our data platform, which observes digital interactions and converts packets in real time into compact, contextualized evidence for observability, service assurance, cybersecurity, and AI. By applying early semantic extraction at the point of observation, our AI systems reason for natural data rather than inference. In our internal testing, this approach meaningfully reduced AI token consumption and mean time to knowledge, helping customers improve decision confidence and lower the cost of AI-driven analysis. We also launched InGenius Co-Pilot, a conversational AI extension to InGenius1 that turns natural language questions into evidence-based answers. Incredible. Our service provider customers remain focused on reducing network costs and complexity, as well as improving automation across fixed, mobile, and agile. Our 5G observatory solution gives them end-to-end visibility for standalone 5G networks and support emerging use cases, including fixed wireless access and network slicing.

Carrier spending... ...discipline and tight. Even so, customers continue to select next or to monetize their next generation network investment. Beginning in fiscal year 2028, we will rename service assurance as network observability. ...to better align with industry terminology. Network observability is the term of the industry now uses for these solutions, and the new name reflects how our customers see this part of our business, and the broader opportunity set our solutions as... Turning to cybersecurity, a revenue increase of approximately 4% in the first half of the fiscal year, reflecting contribution for more expanded hardware cloud capacity. Cybersecurity continues to be an important... ...long-term growth opportunity as the threat environment continues to intensify in our first half of 2020. ...to threat intelligence report released in October. We noted that high-capacity attacks are no longer anomalies and are now routine. Adversaries are increasingly using residential programs. Short-duration attacks and DDoS for higher services. This means customers require finer-grained network controls, selective mitigation, and more scrubbing capacity at the network edge. To address this expanding need, we have extended adaptive DDoS protection from attack target to its source by automatically detecting and mitigating outbound attack traffic, helping service providers stop compromise.

Subscriber devices before they disrupt their networks, consume costly capacity, or attack organizations across the internet. Secondly, we have enhanced arborized defense to identify attacks. Sources hidden behind content delivery processes, adding an independent layer of protection for enterprises revenue-generating applications without requiring CDN provider replacements. Providing AI, our packet-derived smart data differences, providing AI models, operational context needed for more effective reasoning and outcomes. Customers are buying AI solutions designed for service assurance and using them for cybersecurity applications, bringing the two areas closer together. In September, we unveiled Model Context Protocol, or MCP, connected... ...to our Omnis AI Insight solution. It gives AI assistants and agents on-demand access to AI-ready smart data. That's called real-time operational evidence, providing the trusted contacts they need to support more accurate and informed decisions. Customers can stream smart data into the platform they already use and without re-platforming. Defining their AI strategies, we are encouraged by the level of engagement. And expect adoption to build over time. Moreover, our install base and income base provides a meaningful advantage as programs move into production. That brings me back to Engage 2026. Our theme, Moving on.

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Your program will now resume. Mr. Dressel, go ahead. I apologize for the interruption. We have some technical difficulties. I know we'll continue where you left off. Yeah, I think I left... Then I started talking about Engage. So I'll start. So we started by talking about Engage 26. Our team moving from proactive to predictive spoke to how our customers are advancing beyond... ...monitoring to detect issues earlier, predict outcomes more accurately, gain greater insight, and automate more decisions. Our AI-ready smart data, our values, and our customer focus provide the trusted foundation... ...for that shift. With more than four decades of experience adapting to each area of technological change, expanding our purpose and innovation solutions, we are built to help our customers as their AI strategy. ...evolved. Turning to customer wins, we saw continued demand across both service assurance and network observability and cybersecurity offerings. New and existing customers invested in new solutions. ...and maintenance services. Second quarter highlights included wins from two long-standing customers. We secured a high seven-figure win with a leading U.S. financial institution to build out our... ...and customer-facing networks, as well as upgrade internal unified communication and network performance capabilities. The repeat business underscores the strength of our relationship and our mission-critical role ensuring the performance...

...millions of its digital environment, including large multi-cluster Kubernetes deployments. We also won a low seven-figure order with a leading global service provider that relies on our hardware products to deliver... ...manage DDoS service to its own customers. The customer purchases our adaptive DDoS protection solution, which leverages our Atlas intelligence feed to combat the increasing frequency... ...of DDoS attacks, including outbound and carpet bombing attacks, as it attacks to a rapidly expanding threat environment. With that, let's move to slide 8 and review our outlook. We remain focused on profit... ...healthy free cash flow generation, and long-term shareholder value. Based on our first-off results, we are reaffirming our full-year 2027 outlook. Customer remain disciplined in the future. ...spending, and we are managing the business accordingly. At the same time, we see meaningful long-term opportunity in network observability, AI ops, and DDoS attack protection. We'll keep investing in innovation, including... ...using our data and intelligence to power AI-driven workflows that enhance resilience and service reliability for our customers. We look forward to sharing our progress with you throughout the remainder of the fiscal year. Before I turn the call over to Tony...

I want to briefly address a leadership change recently disclosed. Sanjay Mishin designed as chief operating officer effective October 22. We thank Sanjay for his contribution to NETSOR and wishing well. Our experienced leadership team... customers and partners and members of their team have assumed additional responsibilities. We remain focused on executing our strategy, serving our customers, and delivering on our fiscal 2027 priorities. With that... I will turn the call over to Tony for a review of our financial performance.

Thank you. At this time, if you would like to ask a question, please press star one on your telephone keypad. If you wish to remove yourself from the queue, press star two. In the interest of time, we ask that you limit yourself to one question and one follow up. We'll take our first question today from Eric Supacher with B Riley Securities. Your line is now open. Yeah, thanks for taking the call and congrats on a good question. First off, any comment on what federal was in the quarter? It sounds like it was continued with some strict and then can you comment in terms of what growth you're seeing out of your smart data product? I think you've talked about that generating around 15 million last year. Any thoughts on what we might think about in terms of annualized growth in fiscal 20? Yeah, so just on the federal, so for the first half, federal revenue generally runs in mid to high single digits as a percentage of total revenue. So for the first half, it's running in, let's say, the low teens. So it's been strong in the first half. And we have a good pipeline going into the second half of the year. The thing with federal that we always caution is that the timing and magnitude of orders can be less predictable. So we do have a lot of good pipeline there. We're just looking at when the timing of the projects will hit in the quarters. Yeah, so I can talk about that. So last year's was the early adopter team and a couple of large

questions. customer made most of the smart data consumption and on this revenue. This year, as we mentioned, it's a long sales cycle, but we have a dramatic increase in funnel. But sales cycle are long. It's not clear right now. Maybe we'll have something more to share towards the end of the fiscal year, how much will be the growth in that. But the interest level and the traction on the funnel is just very, very impressive. Even all the analysts and customers that are engaging in were very excited about this area of growth for us. And I think, Eric, as we talked about, as we talked about. On a prior call, when we launched some of these AI, Omnus AI solutions, we did it to a select customer group as pilots and kind of working through some of it. So we recently reentered. Introduced it to the larger group at Engage. And like Anil said, there's been a lot of interest in it. But, you know, it does take a little time as customers work through their AI strategies and build it into their budget and stuff like that. Okay. Since you can't give me a growth on that, can you give us a sense on what kind of growth you're expecting out of the cyber product in fiscal 27?

Yeah, so I would say cyber, it'll probably be in the mid single digits for cyber. I think in the prior year, we did have some large customer refreshes that we're trying to work through right now. So in my sense, it's a mid single digits. And then for the AI product, Eric, whatever growth is there will be part of a service assurance. That's how we classify right now. Very good. Thank you. Excellent.

Thanks, Eric.

Thank you.

Our next question comes from Soneka Merchant with RBC Capital Markets.

Our next question comes from Kevin Liu with K Liu and Company. Please go ahead.

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