 Q2 FY 2015
Conference Call NetScout
October 16, 2014
Filed by NetScout Systems, Inc.
Pursuant to Rule 425 under the Securities Act of 1933, as amended
and deemed filed pursuant to Rule 14a-12
under the Securities Exchange Act of 1934, as amended
Subject Company: NetScout Systems, Inc.
(Commission File No. 000-26251)
The following is a copy of slide deck presented during an investor
conference call and web cast hosted by NetScout Systems, Inc. on October 16, 2014.
|
 NetScout Systems Confidential
2
Agenda
•
Introduction & Safe Harbor
–
Andrew Kramer, Vice President of Investor Relations
•
CEO Perspective
–
Anil Singhal, President and CEO
•
COO Update: Customer Use Cases & Business Initiatives
–
Michael Szabados, Chief Operating Officer
•
Financial Review and Fiscal Year 2015 Outlook
–
Jean Bua, SVP and CFO |
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3
Additional Information and Where You Can Find It
NetScout will file a Registration Statement on Form S-4 containing a proxy
statement/prospectus of NetScout and other documents concerning the proposed
acquisition with the Securities and Exchange Commission (the
“SEC”). Investors are urged to read the proxy statement/prospectus
when it becomes available and other relevant documents filed with the SEC
because they will contain important information. Security holders may obtain a free
copy of the proxy statement/prospectus (when it is available) and other documents
filed by NetScout with the SEC at the SEC’s website at www.sec.gov. The proxy statement/prospectus and other
documents may also be obtained for free by contacting Andrew Kramer, Vice
President
of
Investor
Relations,
by
telephone
at
978-614-4000,
by
email
at
ir@netscout.com,
or
by mail at Investor Relations, NetScout Systems, Inc., 310 Littleton Road,
Westford, MA 01886. This communication is not a solicitation of a proxy from
any security holder of NetScout. However, NetScout, Danaher and certain of
their respective directors and executive officers may be deemed to be
participants in the solicitation of proxies from NetScout’s stockholders in
connection with the proposed transaction. Information about NetScout’s
directors and executive officers and their beneficial ownership of
NetScout’s common stock may be found in its definitive proxy statement
relating to its 2014 Annual Meeting of Shareholders filed with the SEC on
July 24, 2014. This document can be obtained free of charge from the SEC website at
www.sec.gov. |
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4
Safe Harbor & Non-GAAP Financial Metrics
Forward-looking statements in this communication are made pursuant to the safe harbor provisions
of Section 21E of the Securities Exchange Act of 1934, as amended, and other federal securities
laws. Investors are cautioned that statements in this communication, which are not strictly
historical statements, including without limitation, our financial guidance for fiscal year 2015 and the anticipated timing, terms or benefits of the
proposed transaction involving NetScout’s acquisition of communications business lines of Danaher
Corporation, constitute forward-looking statements which involve risks and uncertainties.
Actual results could differ materially from the forward-looking statements, including those related to the company’s confidence
in its strategic guidance and the timing associated with completing the acquisition of Danaher’s
Communications business. Risks and uncertainties which could cause actual results to differ
include, without limitation, risks and uncertainties associated with the failure to obtain, delays in obtaining or adverse conditions
related to obtaining shareholder or regulatory approvals; the anticipated tax treatment of the
transaction and related transactions; risks relating to any unforeseen changes to or the
effects on liabilities, future capital expenditures, revenue, expenses, synergies, indebtedness, financial condition, losses and
future prospects; failure to consummate or delay in consummating the transaction for other reasons;
our ability to retain key executives and employees; slowdowns or downturns in economic
conditions generally and in the market for advanced network and service assurance solutions specifically, NetScout’s
relationships with strategic partners; dependence upon broad-based acceptance of NetScout’s
network performance management solutions; NetScout’s ability to achieve and maintain a
high rate of growth, introduction and market acceptance of new products and product enhancements; the ability of NetScout to take
advantage of service provider opportunities; competitive pricing pressures; reliance on sole source
suppliers; successful expansion and management of direct and indirect distribution channels;
and dependence on proprietary technology and the ability of NetScout to successfully integrate Accanto Systems and
ONPATH Technologies, and achieve operational efficiencies. For a more detailed description of the risk
factors associated with NetScout, please refer to NetScout’s Annual Report on Form
10-K for the fiscal year ended March 31, 2014 on file with the Securities and Exchange Commission. NetScout assumes no
obligation to update any forward-looking information contained in this press release or with
respect to the announcements described herein.
This presentation makes reference to certain non-GAAP measures such as non-GAAP revenue and
non-GAAP earnings per share. These non-GAAP measures are not in accordance with
GAAP, should not be considered an alternative for measures prepared in accordance with GAAP
(revenue, net income and diluted net income per share), and may have limitations in that they do not reflect all of NetScout’s results of operations as
determined in accordance with GAAP. These non-GAAP measures should only be used to evaluate
NetScout’s results of operations in conjunction with the corresponding GAAP
measures. The presentation of non-GAAP information is not meant to be considered superior to, in isolation from or as a substitute for
results prepared in accordance with GAAP. NetScout believes these non-GAAP financial measures will
enhance the reader’s overall understanding of NetScout’s current financial
performance and NetScout's prospects for the future by providing a higher degree of transparency for certain financial measures
and providing a level of disclosure that helps investors understand how the Company plans and measures
its own business. NetScout believes that providing these non-GAAP measures affords
investors a view of NetScout’s operating results that may be more easily compared to peer companies and also enables
investors to consider NetScout’s operating results on both a GAAP and non-GAAP basis during
and following the integration period of NetScout’s acquisitions. Presenting the GAAP
measures on their own would not be indicative of NetScout’s core operating results. Furthermore, NetScout believes that the
presentation of non-GAAP measures when shown in conjunction with the corresponding GAAP measures
provide useful information to management and investors regarding present and future business
trends relating to its financial condition and results of operations. NetScout management regularly uses
supplemental non-GAAP financial measures internally to understand, manage and evaluate its
business and to make operating decisions. These non-GAAP measures are among the
primary factors that management uses in planning and forecasting. The reconciliation of these non-GAAP metrics to the comparable
GAAP metrics are set forth in the accompanying tables in the index of this presentation and are
available on our website at
Forward Looking Statements:
Regulation G Disclosure:
http://ir.netscout.com. |
 CEO
Perspective Anil Singhal
Co-Founder, President and CEO
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NetScout Highlights
•
Very strong Q2
•
Reaffirm FY15 guidance
–
Revenue of $450m-$465m
–
Non-GAAP EPS of $1.74 per
share to $1.81 per share
•
Acquisition of Danaher’s
Communications Business
Financial Highlights |
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4 Key Questions about NetScout’s Acquisition of
Danaher’s Communication Business
1.
What is the growth profile of the businesses being
acquired?
2.
How do Tektronix and NetScout businesses
complement each other?
3.
Are we biting off too much?
4.
What synergies are possible?
Understanding the unique benefits of this acquisition.
Understanding the unique benefits of this acquisition. |
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1a. Danaher’s Communications Business
•
Track record of growth
•
Targeting markets
currently growing in the
mid-single digit to low
double digit range
•
Each business is
profitable with upside
Better Access to Service Providers
Jump Starting our Cyber Security Initiative
Broader Access in Enterprise
•
HQ: Plano, Texas
•
Leading provider of SP network monitoring solutions
•
125+ SP customers
•
4,000+ probes deployed worldwide, monitoring 500,000+ calls
per second
•
HQ: Burlington, MA
•
Leading provider of network DDoS attack detection and
mitigation for SP and Enterprise networks
•
300+ SP customers
•
Analyzes over 80TB/second of traffic worldwide
•
HQ: Everett, WA
•
Leading provider of network deployment and installation tools
for SP and Enterprise installers
•
1,000s of customers |
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1b. A Closer Look
~50% of total revenue
~25% of total revenue
~25% of total revenue
•
It has consistently performed in the high-single digit revenue growth
range. •
A challenging 2014
•
Orders have turned positive
•
A growth outlook for 2015 with product revenue anticipated to reach the upper
single digit growth rates •
Track record of generating low double-digit growth since acquisition by
Danaher in mid-2010 •
Strong base of both service provider and enterprise customers
•
We believe that Arbor’s product revenue will grow in the combined business
around the mid-teens •
Complementary to NetScout
•
Reported overall growth in the mid to upper single digits
•
Product revenue positioned for continued growth in the mid to upper single digits
over the coming years |
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10
2. Top-line synergy and opportunities
•
Primary capabilities of Tektronix Communications
(troubleshooting) and NetScout (monitoring) are very
complementary and both are needed by service provider
–
Better positioned for future technology turns with a broader range
of service providers
•
Extend our reach into new, higher growth adjacent
markets
–
Cyber Intelligence and Radio Access Networks, WiFi, BI
•
Expanding our customer base and geographic footprint
–
Opportunity with Fluke in the mid-tier of the market with
complementary vertical focus (SAS, Cloud, WiFi)
–
International distribution channels |
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3. Are we biting off more than we can chew?
•
No!
•
Proven experience in successfully integrating the
transformative acquisition of Network General, which created
an industry leader while assuring customer continuity
•
Proven experience in integrating small technology acquisitions
(five in the past 3 years)
•
Proven productivity and superior execution with R&D
distributed across 8 development centers and 5 time zones
•
Talent retention, product integration and improved performance
•
Compatible cultures with the Danaher Communications
business
•
Jim Lico, EVP of Danaher and responsible for Communications
business, to join NetScout’s Board of Directors |
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4. Operating Synergies
•
Meaningful synergies, in conjunction with anticipated revenue growth, will help us
drive profitability substantially higher, particularly as we move out of
year 1 and into year 2 •
Deal is accretive in the first full year of operation
•
Gross margin upside: leverage our purchasing power and extend our proven
manufacturing techniques to improve product gross margin by a few percentage points
over the next few years
•
Operational synergies arising from using common infrastructure platforms, and by
eliminating or reducing expenses associated with programs and capabilities
already in place
•
Initial estimate is to identify, remove and begin realizing synergies of about 5
percent on
the
900
million
dollars
within
the
combined
cost
base
of
both
organizations
•
Expect to realize the full effect of those initial actions in the second year of
operations, while also exploring the potential to improve upon that as we
more closely examine how to best align our go-to-market and related
support programs and initiatives •
Does not include any potential tax savings that we can realize moving forward after
the acquisition closes |
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COO Update
Michael Szabados
Chief Operating Officer |
 Financial Review
Fiscal Year 2015 Outlook
Jean Bua
SVP and Chief Financial Officer
NetScout Systems Confidential
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15
Q2 FY 2015 Income Statement
(in millions except for EPS)
Q2 FY'15
% Change
over Prior
Year
Q2 FY'15
% Change
over Prior
Year
Total Revenue
$103.6
12%
$103.6
12%
Product Revenue
$58.0
11%
$58.0
11%
Service Revenue
$45.6
14%
$45.6
15%
Gross Profit
$83.3
13%
$82.0
13%
%
80.4%
79.2%
Operating Income
$26.9
19%
$18.6
17%
%
26.0%
18.0%
Net Income
$16.6
16%
$11.2
14%
EPS
$0.40
18%
$0.27
13%
NON-GAAP
GAAP |
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NetScout Q2 FY 2015 Growth
(in millions)
Non-GAAP
GAAP |
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17
1H FY 2015 Income Statement
(in millions except for EPS)
NON-GAAP
GAAP
1H FY'15
% Change
over Prior
Year
1H FY'15
% Change
over Prior
Year
Total Revenue
$211.5
21%
$211.5
22%
Product Revenue
$122.3
28%
$122.3
28%
Service Revenue
$89.2
13%
$89.1
13%
Gross Profit
$169.8
22%
$167.3
22%
%
80.3%
79.1%
Operating Income
$52.2
42%
$38.2
54%
%
24.7%
18.1%
Net Income
$31.8
39%
$22.7
50%
EPS
$0.76
38%
$0.54
50% |
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1H FY 2015 Product Revenue Composition
(Non-GAAP, in millions)
1H FY’15
% Change
over Prior
Year
Total Revenue
$211.5
21%
Product Revenue
$122.3
28%
Service Revenue
$89.2
13%
1H FY'15 Product Revenue
1H FY'14 Product Revenue
42%
13%
45%
50%
39%
11%
Service Providers
Government Enterprise
General Enterprise |
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19
1H FY’15
% Change
over Prior
Year
Total Revenue
$211.5
21%
Product Revenue
$122.3
28%
Service Revenue
$89.2
13%
1H FY 2015 Product Revenue Growth by Sector
(Non-GAAP, in millions)
53%
12%
7%
24%
49%
-3%
0
20
40
60
80
100
120
1H FY'15
1H FY'14
Product Revenue and Growth
Government Enterprise
General Enterprise
Service Providers |
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20
1H FY 2015 Total Revenue Composition
(Non-GAAP, in millions)
1H FY’15
% Change
over Prior
Year
Total Revenue
$211.5
21%
Product Revenue
$122.3
28%
Service Revenue
$89.2
13%
Service Providers
Government Enterprise
General Enterprise
40%
14%
46%
1H FY'15 Total Revenue
34%
13%
53%
1H FY'14 Total Revenue |
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21
1H FY’15
% Change
over Prior
Year
Total Revenue
$211.5
21%
Product Revenue
$122.3
28%
Service Revenue
$89.2
13%
1H FY 2015 Total Revenue Growth by Sector
(Non-GAAP, in millions)
34%
0%
5%
14%
42%
3%
0
20
40
60
80
100
120
1H FY'15
1H FY'14
Total Revenue and Growth
Government Enterprise
General Enterprise
Service Providers |
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22
1H FY 2015 Revenue by Geography
(GAAP, in millions)
1H FY ’15
% Change
over Prior
Year
Total Revenue
$211.5
22%
United States
$165.4
28%
International
$46.1
4%
Europe
$20.0
-7%
Asia
$11.4
6%
Rest of World
$14.7
23%
1H FY'15
1H FY'14
78%
22%
5%
7%
10%
75%
25%
6%
12%
7%
United States
Europe
Asia
Rest of World |
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23
Balance Sheet Highlights & Free Cash Flow
(in millions)
Ending
Balance
Sheet
Q2 FY ’15
Ending
Balance
Sheet
FY ’14
% Change
over Prior
Year
Cash and Securities
$217.3
$218.8
-1%
Accounts Receivables
$49.8
$60.5
-18%
Inventories
$14.5
$12.6
15%
Total Debt
$0.0
$0.0
0%
Total Deferred
Revenue
$117.6
$133.9
-12%
Total Stockholders’
Equity
$412.6
$409.2
1%
Total Liquidity >
$465 million
($ in millions)
1H FY'15
Operating Cash Flow
29.0
$
Purchase of Fixed Assets & Intangible Assets
(4.1)
$
Free Cash Flow
24.9
$
Free Cash Flow |
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Guidance –
FY 2015
(in millions except for EPS)
GAAP
Low
High
Revenue
$450
$465
EPS
$1.32
$1.39
EPS Increase from
Prior Year
13%
19%
Product revenue growth:
18% -
23%
7%
13%
13 -
17%
14%
$450 -
$465
290
309
352
397
200
250
300
350
400
450
500
FY '11
FY '12
FY '13
FY '14
FY '15
Non-GAAP Revenue ($MM)
$1.04
$1.10
$1.32
$1.53
FY '11
FY '12
FY '13
FY '14
FY '15
Non-GAAP EPS (Non-GAAP)
20%
14 -
18%
16%
6%
$1.74 -
$1.81
$0.60
$0.80
$1.00
$1.20
$1.40
$1.60
$1.80
$2.00 |
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25
GAAP Reconciliation: Net Income
•
For
fiscal
year
2015,
the
non-GAAP
net
income
per
diluted
share
expectation excludes forecasted share-based compensation
expenses of approximately $17.0 million, estimated amortization of
acquired intangible assets of approximately $7.1 million,
compensation for post combination services of approximately $1.2
million, business development expenses of approximately $1.5
million, and the related impact of these adjustments on the provision
for income taxes of $9.2 million. |
 Thank
You |
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27
Add GAAP to Non-GAAP Reconciliation
NetScout Systems, Inc.
Reconciliation of Current GAAP to Current and Historical Non-GAAP Financial Measures
(In thousands, except per share data)
Three Months Ended
June 30,
2014
2013
2014
2014
2013
GAAP Revenue
103,599
$
92,097
$
107,852
$
211,451
$
173,902
$
Deferred revenue fair value
adjustment -
139
18
18
279
Non-GAAP Revenue
103,599
$
92,236
$
107,870
$
211,469
$
174,181
$
GAAP Gross profit
82,004
$
72,393
$
85,256
$
167,260
$
137,276
$
Deferred revenue fair value
adjustment -
139
18
18
279
Share-based compensation expense (1)
407
294
288
695
484
Amortization of acquired intangible assets (2)
923
824
934
1,857
1,643
Compensation for post combination services (4) 9
9
8
17
17
Non-GAAP Gross profit
83,343
$
73,659
$
86,504
$
169,847
$
139,699
$
GAAP Income from operations
18,644
$
15,882
$
19,602
$
38,246
$
24,765
$
Deferred revenue fair value
adjustment -
139
18
18
279
Share-based compensation expense (1)
4,495
3,930
3,302
7,797
6,742
Amortization of acquired intangible assets (2) 1,779
1,681
1,796
3,575
3,354
Business development and integration expense (3) 1,477
234
-
1,477
404
Compensation for post combination services (4)
545
711
536
1,081
1,155
Non-GAAP
Income from operations 26,940
$
22,577
$
25,254
$
52,194
$
36,699
$
GAAP Net income
11,233
$
9,883
$
11,476
$
22,709
$
15,136
$
Deferred revenue fair value
adjustment -
139
18
18
279
Share-based compensation expense (1)
4,495
3,930
3,302
7,797
6,742
Amortization of acquired intangible assets (2) 1,779
1,681
1,796
3,575
3,354
Business development and integration expense (3) 1,477
234
-
1,477
404
Compensation for post combination services (4)
545
711
536
1,081
1,155
Income tax adjustments (5) (2,908)
(2,308)
(1,910)
(4,818)
(4,093)
Non-GAAP Net
income 16,621
$
14,270
$
15,218
$
31,839
$
22,977
$
GAAP Diluted Net income per share
0.27
$
0.24
$
0.27
$
0.54
$
0.36
$
Share impact of non-GAAP adjustments identified above 0.13
0.10
0.09
0.22
0.19
Non-GAAP Diluted net income per share
0.40
$
0.34
$
0.36
$
0.76
$
0.55
$
Shares used in computing non-GAAP diluted net income per share
41,652
41,950
41,808
41,732
42,004
(1)
Share-based compensation expense included in these amounts
is as follows:
Cost of product revenue
93
$
68
$
60
$
153
$
112
$
Cost of service revenue
314
226
228
542
372
Research and development
1,490
1,263
1,026
2,516
2,159
Sales and marketing
1,235
1,163
963
2,198
2,008
General and administrative
1,363
1,210
1,025
2,388
2,091
Total share-based compensation expense 4,495
$
3,930
$
3,302
$
7,797
$
6,742
$
(2)
Amortization expense related to acquired software and product
technology included in these amounts is as follows:
Cost of product revenue
923
$
824
$
934
$
1,857
$
1,643
$
Operating expenses
856
857
862
1,718
1,711
Total amortization expense 1,779
$
1,681
$
1,796
$
3,575
$
3,354
$
(3)
Business development and integration expense included in
these amounts is as follows:
General and administrative
1,477
234
-
1,477
404
Total business development and integration expense
1,477
$
234
$
-
$
1,477
$
404
$
Three Months
Ended Six Months Ended
September 30,
September 30, |