NETSCOUT Systems reported modest revenue growth for its fiscal second quarter, with higher service revenue offsetting a decline in product sales. Profitability improved from a year earlier, and the company reaffirmed its full-year fiscal 2027 outlook, citing first-half performance that remains on track.
The network observability and cybersecurity company also repurchased about $77 million of stock during the quarter. It ended September with $571.3 million in cash, cash equivalents and marketable securities and no borrowings under its $600 million revolving credit line.
Second-quarter results
- Revenue rose 1.4% to $222.2 million. Product revenue fell 5.1% to $89.9 million, while service revenue grew 6.4% to $132.3 million. Services made up 60% of quarterly revenue, compared with 57% a year earlier.
- Profitability improved. GAAP operating income increased to $37.6 million from $32.5 million, and the operating margin rose to 16.9% from 14.8%. On a non-GAAP basis, operating income was $62.9 million, or 28.3% of revenue, versus $58.1 million, or 26.5%.
- Earnings per diluted share increased. GAAP net income was $34.4 million, or $0.47 per share, compared with $25.8 million, or $0.35. Non-GAAP net income was $52.8 million, or $0.71 per share, versus $45.1 million, or $0.62. Adjusted EBITDA rose to $66.5 million from $60.7 million.
- Product backlog was lower. At September 30, total product backlog was $20.9 million, including $15.4 million of fulfillable backlog. A year earlier, those amounts were $39.8 million and $27.7 million, respectively.
- Management said government-related orders that benefited the first quarter shaped the year-over-year comparison in the second quarter. It characterized the quarter’s results as consistent with expectations.
First-half performance and outlook
- For the six months ended September 30, revenue increased 6.6% to $432.6 million. Product revenue grew 4.9% to $175.9 million, and service revenue rose 7.8% to $256.7 million.
- First-half profitability also strengthened: GAAP operating income more than doubled to $52.1 million, while non-GAAP operating income increased to $106.6 million. GAAP diluted earnings per share were $0.76, compared with $0.30 a year earlier; non-GAAP diluted earnings per share were $1.23, versus $0.95.
- NETSCOUT reaffirmed its fiscal 2027 outlook:
- Revenue of $885 million to $915 million, representing 4.7% growth at the midpoint.
- GAAP diluted earnings per share of $1.55 to $1.70.
- Non-GAAP diluted earnings per share of $2.65 to $2.80, implying 9.9% growth at the midpoint.
Capital returns and strategy
- NETSCOUT bought back 2.0 million shares for approximately $77 million in the quarter. Its cash, cash equivalents and short- and long-term marketable securities totaled $571.3 million at September 30, down from $705.1 million at the end of March. The company had no outstanding debt on its revolving credit facility.
- Management pointed to cost discipline as a contributor to higher operating margins and said the company remains focused on revenue growth, margin expansion and free cash flow.
- The company is positioning its network data and observability tools for customers’ use of AI, including AIOps and agentic workflows. Management described this as a multi-year opportunity and said it expects to pursue growth both with existing customers and in new markets.
The quarter’s mix shifted further toward services as product revenue declined, while margins and earnings improved. The reaffirmed full-year targets indicate that, despite the softer product comparison in the quarter, management continues to expect growth for fiscal 2027.