UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
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| x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended March 31, 20152017
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| ¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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Commission file number 0000-26251000-26251
NETSCOUT SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
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| Delaware | 04-2837575 |
(State or other jurisdiction of incorporation or organization) | (IRS Employer Identification No.) |
310 Littleton Road, Westford, MA 01886
(978) 614-4000
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| Securities registered pursuant to Section 12(b) of the Act: | | Name of each exchange on which registered: NASDAQ Global |
| Common Stock, $0.001 Par value | | Select Market |
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES x NO ¨
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. YES ¨ NO x
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 x NO ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨x
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files). YES x NO ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer” andfiler,” “smaller reporting company”company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer x Accelerated filer ¨
Non-accelerated filer ¨ Smaller reporting company ¨
(Do(Do not check if a smaller reporting company)
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 x
The aggregate market value of common stock held by non-affiliates of the registrant as of September 30, 20142016 (based on the last reported sale price on the Nasdaq Global Select Market as of such date) was approximately $1,763,327,709.$2,597,526,506. As of May 13, 2015,12, 2017, there were 40,761,72991,720,938 shares of the registrant’s common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant’s Proxy Statement for the fiscal year 20152017 Annual Meeting of Stockholders are incorporated by reference into Part III of this Annual Report on Form 10-K. Except as expressly incorporated by reference, the proxy statement is not deemed to be part of this report.
NETSCOUT SYSTEMS, INC.
FORM 10-K
FOR THE FISCAL YEAR ENDED MARCH 31, 20152017
TABLE OF CONTENTS
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This Annual Report on Form 10-K contains forward-looking statements under Section 21E of the Exchange Act (as defined below) and other federal securities laws. 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. Actual events or results may differ materially. Factors that may cause such differences include, but are not limited to, the factors discussed under the heading "Risk Factors" and in our other filings with the Securities and Exchange Commission (SEC). These factors may cause our actual results to differ materially from any forward-looking statement.
PART I
Item 1. Business
As used herein, references to “NetScout,” the “Company,” “we,” “us” and “our” are to NetScout Systems, Inc. and its consolidated subsidiaries or, as the context may require, NetScout Systems, Inc. only.
Overview
We are an industry leader for advanced network, applicationreal-time operational intelligence and service assurance solutions, providing high-quality performance analytics that helpare used to address the business assurance needs of customers worldwide spanning service assurance, cybersecurity and business intelligence. Customers rely on our products to optimize network performance, ensure the delivery of high-quality, mission-critical applications and services, provide timely insight into the end user experience and protect the network from attack. Powered by our proprietary Adaptive Service Intelligence (ASI) technology, our solutions are used in many of the most demanding service provider, enterprise and government networks around the globe to continuously monitor our customers' service delivery environment in order to identify performance issues and to provide insight into network-based security threats. As a result, both enterprise and service provider customers proactively manage service deliverycan quickly, efficiently and identify emerging performance problems. Our offerings help customers around the world quicklyeffectively resolve technology issues that cause business disruptions or negativelyadversely impact the user experience. We design, develop, manufacture market, license, sell and supportmarket these products infor integrated hardware and software solutions thatand are used by commercial enterprises, large governmental agenciesalso well positioned to help customers deploy our software in commercial-off-the-shelf hardware and telecommunication service providers in somevirtualized form factors. Regardless of the world’s largest, most demandingplatform, customers use our solutions to help drive return on investment on their network and complex internet protocol (IP) basedbroader information technology (IT) initiatives while reducing the tangible risks associated with downtime, poor service delivery environments.quality and compromised security.
We have been a technology innovator in thefor three-plus decades since our founding in 1984. Our solutions continue to change how organizations manage and optimize the delivery of business applications and services, and assure user experience across global IP networks. Weinternet protocol (IP) networks and help protect networks from unwanted security threats. Through both internal development and acquisitions, we have continually enhanced and expanded our product portfolio to meet the evolving needs of organizationscustomers worldwide. Our software analytics, powered by providing solutions to manage dynamicour ASI technology, capture and transform terabytes of network and application environments and by improving user experience by providing high-value analytics that help validate and assure service availability, quality and reliability. Our solutions are based on a patented Adaptive Service Intelligence™ (ASI) technology which uses traffic data to provide important service metrics related to network, application, server, database, and user communities performance in real-time.
Our solutions are intended to help users in various roles within enterprises, government agencies and service providers to: quickly analyze data, achieve real-time visibilityreal time into and intelligence about their organization's operations, identify service delivery issues early, improve service levels, reduce operational costs, mitigate security risks, and drive better business decisions. By providing a highly scalable and flexible real-time service delivery management platform, ourhigh value, actionable information that enables customers are able to optimize network performance, manage applications, enhance security and gain insight into the performance of their IP-based networks and the applications and services that run across them, using our analytics to proactively identify and resolve potential issues before users are impacted. As a result, our customers are able to maximize their return on investment and mitigate a myriad of risks associated with unreliable service delivery and poorend user experience. Our value proposition to our customers is helping them to manage their complex network and IT infrastructures to achieve their business and financial objectives.
Our mission is to enable IT groupsenterprise and service providers to realize maximum benefit with minimal risk from technologicaltechnology advances, like IP convergence, network function virtualization (NFV), software defined networking (SDN), virtualization, cloud, mobility, bring your own device (BYOD), web and the scale of the evolving Internet of Things (IoT) by managing the inherent complexity in a cost-effective manner.
Our Adaptive Service Intelligence (ASI) technology hasoperating results are influenced by a number of factors, including, but not limited to, the potentialmix 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 only expandinglimited to, our leadershipability 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 structural improvements in the network performance management (NPM)current economic conditions.
On July 14, 2015, we completed the acquisition of Danaher Corporation’s (Danaher) Communications Business (Communications Business), which included certain assets, liabilities, technology and application performance management (APM) space, but also has potential to extend our reach into new adjacent markets such as cyber securityemployees within Tektronix Communications, VSS Monitoring, Arbor Networks and business intelligence.
Manycertain portions of the largest service providers, cloud-based businesses and enterprise customers rely on us to assure service delivery and a high-quality experience for their end users. Our customers are in just about every vertical market including financial, health care, utilities, internet, manufacturing, retail, and transportation, as well as service providers and major government agencies. We are a market leader in helping service providers get a return on their 4G/LTE investment by providing them with the intelligence they need about a range of important aspects of service delivery from handset performance on their networks and subscriber preferences to network traffic trends and overall network speed.
We have three primary customer groups; enterprise customers, service provider customers and government customers. Within the enterprise and government segments, our solutions support a wide-range of enterprise IT operations and management organizations including network operations, application managers, network operations centers, network engineering, security operations and service delivery teams. Within the service provider segment, our solutions support a broad range of operational users including network operations, group network engineering, service operations, application groups, customer care, marketing, chief technology officers and advanced engineering groups.
We market and distribute our products globally through our own direct sales force and through strategic channel partners that include distributors, value added resellers and systems integrators. For our enterprise customers, we focus on the Global 5000, which includes diverse industries such as financial, healthcare, manufacturing, retail, technology, utilities, high-tech and education. Our government customers include domestic agencies of federal, state and local governments as well as international government agencies. In the service provider customer group, we sell to mobile operators, wireline operators and cable multi-service operators globally.
We have a single operating segment and substantially all of our identifiable assets are located in the United States. Financial information about our operating segment and geographic areas is presented in Item 7, Management Discussion and Analysis and Note 18 of our Notes to Consolidated Financial Statements.
On October 12, 2014, NetScout, Danaher Corporation (Danaher), Potomac Holding LLC, a wholly-owned subsidiary of Danaher (Newco), RS Merger Sub I, Inc., a wholly-owned subsidiary of the NetScout (Merger Sub) and RS Merger Sub II, LLC, a wholly-owned subsidiary of NetScout (Merger Sub II and, together with Merger Sub, the Merger Subs), entered into an Agreement and Plan of Merger and Reorganization (the Merger Agreement) pursuant to which NetScout will acquire the communications group business of Danaher conducted under the brands Tektronix Communications, Fluke Networks and Arbor Networks, but excludingEnterprise business, which excluded Danaher’s data communications cable installation business and its communication service provider business (the Communications Business) inComms Transaction), which was structured as a Reverse Morris Trust transaction (the Transaction)whereby Danaher contributed the Communications Business to a new subsidiary, Potomac Holding, LLC (Newco). The total equity consideration was approximately $2.3 billion based on issuing approximately 62.5 million new shares of NetScout common stock to the holders of common units of Newco, based on the July 13, 2015 NetScout common stock closing share price of $36.89 per share. The
Comms Transaction was aimed at extending NetScout's reach into growth-oriented adjacent markets, including cybersecurity, with a broader range of market-leading products and capabilities; strengthening its go-to-market resources to better support a larger, more diverse and more global customer base; and increasing NetScout's scale and elevating its strategic position within key accounts. For additional information regarding the proposed acquisition,Comms Transaction, see Note 207 of our Notes to Consolidated Financial Statements. Since completing the Comms Transaction, we have invested significant resources to integrate certain acquired product lines, features and functionality into our product portfolio to deliver greater value to customers.
Markets
NetScout markets its core service assurance and cybersecurity solutions into two primary markets: enterprise and service provider. Our service assurance solutions, comprised of nGeniusONE, InfiniStream and other various product brands, are used by customers to optimize network performance, quickly identify and resolve issues impacting application and service quality and gain insight into the end user experience. Our cybersecurity solutions, which are marketed under the Arbor Networks brand, are used by customers to identify and mitigate advanced, volumetric and application specific distributed denial of service (DDoS) attacks as well as assist enterprise security teams in rapidly finding and isolating advanced network threats.
Enterprise Markets
Within the enterprise market, NetScout’s nGenius®nGeniusONE® and Infinistream®InfiniStream® technologies, along with certain product lines from the businesses acquired in the Comms Transaction, enable IT organizations to protect and improve service delivery quality, and identify and address business service performance issues and security threats before they become serious and affect large numbers of users. Some of the current enterprise IT initiatives our solutions support include:
IT Operational Excellence – We deliverOur nGeniusONE analytics and our Infinistream real-time and historical information that providesplatform provide the necessary insight to optimize network performance, restore service manage capacity, and understand the quality of the users’ experience. By integrating certain acquired product lines from the Fluke Networks Enterprise business with nGeniusONE, our customers can benefit from a consistent view across their traditional wired network infrastructures, remote offices and WiFi wireless networks.
Data Center Modernization and Cloud Computing – We enable IT organizations to manage the delivery of services across virtual and physical environments, providing a comprehensive, unified real-time view into network, application, server, and user communities' performance. We proactively detect emerging issues with the ability to help analyze both physical and virtual servicesservice delivery environments within the data center which enables organizations to optimize datacenter infrastructure investments, protect against service degradations, and simplify the operation of complex, multi-tier application environments in consolidated, state-of-the-art data centers. Our solutions are often used by enterprises to support private cloud computing environments that are aimed at enabling greater, more cost-effective accessibility to applications without compromising the reliability and security of those applications and the network. In addition, we expect to introduce new offerings during fiscal year 2018 that are aimed at helping enterprise customers monitor applications hosted in public cloud environments.
Unified Communications (UC)– We deliver deep application-level unified visibility into voice, data and video services side-by-side in order to understand the interrelationships of all UC services that traverse the network infrastructure and assess quality and performance of the delivery of these services. As a result, our real-time, actionable intelligence helps customers to deliver a high-quality UC experience as users make calls, video conference and engage in instant messaging. We also help desktop, network, telecom, and application teams manage UC through a common platform across complex, geographically dispersed, and multi-vendor environments.
New Application Service Rollout - –We provide enterprise customers with a holistic view of the new applications and services as they are introduced into their IT environment. This view enables customers to see the relationships and interdependencies across all service delivery components including applications, network, servers, databases, and enabling protocols so they can deliver a superior user experience, achieve outstanding service quality and drive return on their application investments. We also integrated technology from Fluke Networks Enterprise product lines to help enterprises monitor the performance of software-as-a-service (Saas) applications.
Application and Desktop Virtualization - –We provide clear and actionable insights that help customers fully realize the operational benefits associated with Application and Desktop Virtualization, and reduce the time it takes to identify and resolve service problems. We offer visibility across all virtual desktop infrastructure (VDI) tiers including remote access, client, virtualization, web, front-end application, and related database systems, and help customers gain actionable metrics from monitoring and analyzing the consumption and performance of VDI services.
CyberSecurityCybersecurity – Cyberattacks are becoming more sophisticatedincreasing in volume, frequency and complexity as they target users and their corporate applications, infrastructure,devices and mobile devices.technology infrastructure. We provide an additional layera range of visibilitynetwork security solutions under
the Arbor Networks brand that provides insightenable enterprises to protect their networks from high-volume and application-specific DDoS attacks, and identify unauthorized intrusions into potential emerging security issues missed by traditional security tools.the network that can pose significant threats to the integrity of sensitive information and key business operations. We are integrating certain advanced threat analytics with our Infinistream real-time information platform, and expect this solution to be introduced over the next several quarters. We also provide incident response activities with deep-dive network forensics and offer contextual information surrounding a specific alert or incident to enhance investigative capabilities and avoid false positives.
Government Markets
While considered part of the enterprise vertical, we have built a strong position with federal, state and local government agencies, both in the United States and abroad. Similar to our enterprise markets,customers, government agencies are focused on streamlining and transforming IT into more efficient and more easily managed environments. To accomplish this, agencies are turning to IT solutions that will help simplify managing and assuring their IT environments as well as reduce costs. However, governmental markets differ from enterprise markets in thatprimarily due to their purchasing cycles are drivenbeing influenced by a political processpotential changes in government administrators, budgetary priorities and allocated funding.funding for key projects.
Telecommunication Service Provider Markets
Today’s service providers are focused on creatingdelivering a compelling set of services withand ensuring a high qualityhigh-quality user experience, while also keeping an eye on reducingstriving to minimize operational complexity and costs. This, coupled with the challenge of Internet Protocol (IP) transformation activities and emerging new technologies such as LTE, virtualization, Internet Protocol Television (IP-TV),IP-TV, wireless network (WiFi) and cloud services drives the need for a more automated and unified approach to managing service delivery and the subscriber experience. Service providers muststrive to reduce the cost of service delivery, address increasing complexity, scale globallytheir networks cost-effectively and adapt to emerging technologies such as cloud services, virtualization and unified communication services5G while assuring high qualityhigh-quality user experiences to retain their revenue base. Service providers are also seeking to gain greater insight into the subscriber experience in order to create upselling opportunities and improve retention. Additionally, service providers must protect their networks from high-volume, increasingly sophisticated cyberattacks that consume bandwidth and potentially create outages that impact their business customers.
For Mobile Operators – The fundamental transformation of the mobile network to all-IP enables mobile operators to build highly-scalable service delivery environments to offer new services to meet the growing subscriber demand for data, voice and video-centric services and to consolidate and simplify network operations. However, to capitalize fully on the value of IP and the significant market opportunities, mobile operators need detailed IP packet-level insight and core-to-access visibility. The addition of the former Tektronix Communications assets provides a broader range of capabilities that monitor radio access networks as well as powerful analytics that provide insight into subscriber trends and their customer experience.
For Fixed-line and Cable Operators – The growing demand for high-bandwidth triple-play services, broadband connectivity, content anywhere, IP-TV, on-demand video traffic, new extended WiFi initiatives and carrier Ethernet services presents service providers with significant revenue opportunities. IP has become the de facto convergence mechanism for access, distribution and core networks, enabling new service offerings and simplifying network operations while reducing total cost of operations. For example, we also are starting to see cable operators use our solutions to monitor and manage their local area WiFi connectivity services.services as well as broadband and telephony services targeting small- and medium-sized businesses. To realize these benefits, operators need comprehensive insight into IP services, service usage, service availability, application awareness, traffic load, network availability and network performance.
For Internet Service Providers – Over the past decade, Internet Service Providers (ISPs), including leading telecommunications providers, cable multi service operators and cloud providers, have seen significant increases in the sophistication, scale and frequency of high-volume and application-specific DDoS attacks, on their networks. DDoS attacks are aimed at disrupting the online services of an ISP’s business customer by overwhelming it with traffic from multiple sources. Arbor Networks provides a wide range of ISPs around the world with solutions that help them protect their networks against DDoS attacks.
Products & Technology Overview
NetScout continuously develops its solutions to meet the increasing demands and ever changingever-changing technology landscape of IP networks, service and applications. In recent years, we have delivered major product upgrades across our product lines, more tightly integrating deep packet analysis and forensics into our top-down performance management workflows, improving the flexibility of our industry-leading intelligent early warning capabilities, and adding support for new sources of user experience and performance related metrics. NetScout’s solutions are used by customers to better understand and manage network and
application performance, alert themselves to problems that impact end users, validate services and network policy, plan and optimize network capacity, generate timely reports, conduct deep forensic and historical analysis, and protect their networks against security threats.
During Fiscal Year 2015,fiscal year 2017, we continued to invest in development programs aimed at enhancing our range of offerings, including delivering new features and functionality for our nGeniusONETM Service Assurance platform that addressesaddress the evolving requirements of our enterprise, service provider and government customers. The nGeniusONE platform is powered by Adaptive Service Intelligence™ (ASI) 2.0,ASI, NetScout’s next generationnext-generation Deep Packet Inspection (DPI) technology that exploits the inherent richness of packet-flow data to provide real-time, contextual analysis of service, network, and application performance. The patented ASI technology is a critical differentiating technology that enables the creation of statistical metadata, session transaction records and adaptive session traces enabling real-time, scalable monitoring of all users, all applications and all services consistently across the network. NetScout’s solutions are used byWe also invested significantly in enhancing the acquired product lines within the Danaher Communications Business, and in leveraging our ASI technology to advance product integration initiatives aimed at further elevating our value proposition to customers to better understand and manage network and application performance, alert themselves to problems that impacting end users, validate services and network policy, plan and optimize network capacity, generate timely reports and conduct deep forensic and historical analysis. Key products include:in each of the markets we serve.
nGeniusONE™ Service Assurance SolutionSolutions
nGeniusONE Management Software and Analytic Modules – UsedNetScout’s nGeniusONE management software is used to support NetScout’sthe Company’s enterprise, service provider and government customers the nGeniusONE Service Assurance Solution platform enables customersenabling them to predict, preempt, and resolve network and service delivery problems while facilitating the optimization and capacity planning of their network infrastructures. Key features within the nGeniusONETM platform include:
Service Dashboard - Providing at-a-glance metrics, holistic status visibilityOther products acquired from Danaher's Communications Business are supported by their own respective management software and related analytics. Additionally, NetScout markets a range of business services,specialized platforms and analytic modules that can enable its customers to analyze and troubleshoot traffic in radio access network and application components, enabling network and IT professionals to focus their triage efforts where needed most.
Performance Analysis: Offering comprehensive analysis of specific application transactions, such as email, databases, enabling services, and unified communications,WiFi networks, as well as traffic analysisgain timely insight into high-value services, applications and systems, and better understand the subscriber’s experience on the network. The Company expects to identifybring new innovations resulting from key product integration activities to the root cause of performance issues. The specialized service monitors provide holistic visibility into application sessions, their query/response volume, their latencies, and any errors associated with the specific servers, including affected user communities.marketplace during fiscal year 2018.
Session Analysis: Enabling drilldowns, with context, from service monitors to specific session-level analysis related to the issue being investigated.
Packet Analysis: Facilitating detailed analysis of network traffic at a granular, packet level, along with forensic evidence collection that is relevant to the issue at hand based on the context of the workflows already performed.
NetScout’s nGeniusONE Service Assurance Solution also provides other high-value complementary capabilities including:
nGenius UC Server for monitoring and managing advanced unified communications (UC) across a range of collaboration tools including IP-based telephony, video and instant messaging;
nGenius Subscriber Intelligence for visibility into mobile data sessions across a range of mobile network architectures;
NetScout's product family also includes:
nGenius Intelligent Data Sources for data collection - NetScout's Intelligent Data Sources, Packet Flow Switches and Taps – NetScout’s intelligent data sources, marketed under the Infinistream brand and often referred to as network probes, provide the capabilitiesreal-time collection and analysis of gathering and analyzing information richinformation-rich, high-volume packet-flow data from across the network to enablethat is displayed through the granular analysis and reporting capabilities of the nGeniusnGeniusONE Service Assurance Solution. The nGenius Intelligent Data Sources consist of: (1)In September 2016, we introduced an integrated intelligent data source, the InfiniStream appliances, which provide hardware-based data captureInfinistream NG, that powers the traditional nGeniusONE monitoring analytics, the subscriber troubleshooting analytics associated with the Iris analytics from Tektronix and metadata creation forother key features and functionality from the nGenius Service Assurance Solution; (2) the nGenius VI2000, which extends NetScout'sacquired Comms Transaction assets. NetScout also provides comprehensive packet flow switching solutions (also called network packet brokers or network visibility into virtualized and cloud environments by embedding the ASI technology into virtual machines (VMs); and (3) nGenius Collectors, which support collection of network-based statistics from network equipment supporting standards-based data such as Cisco NetFlow, jFlow and sFlow.
nGenius Packet Flow Switches and Taps for data aggregation and distribution - NetScout’s comprehensive network monitoring fabric switching solution providesswitches), that deliver targeted network traffic access to an increasing number of monitoring systems, including the nGeniusONE Performance ManagementService assurance platform, as well as other monitoring and security systems. It enables flexible access to packet-flow traffic to support diverse network traffic monitoring operations including performance management, service delivery management, and security monitoring. NetScout’s Test Access Point (TAP)The acquired product lines from the VSS Monitoring unit further complement the Company’s family provides the nGenius InfiniStream appliances and nGeniusof packet flow switches withswitch offerings. Additionally, NetScout markets a suite of test access points (TAPs) that enable full, non-disruptive access to network traffic while remaining transparent to the networking infrastructure with multiple link type and speed options.
Portable Network Analysis and Troubleshooting Tools
NetScout, Test Optimization Products -through the acquired Fluke Networks Enterprise assets, provides a range of portable network analysis and troubleshooting tools that help customers quickly identify key issues that can impact network and application performance. NetScout’s packet flow switchestools are used by IT departments to support traditional, cloud and WiFi network environments. Certain capabilities and information delivered through these tools have been integrated into NetScout's nGeniusONE management software support test laboratoriessolutions.
Big Data Analytics
Over the next several quarters, NetScout plans to introduce new big data analytic solutions that will help service provider and enterprise customers better mine high-value network traffic data collected by the Infinistream real-time information platform, as well as export this information into third-party systems.
Cybersecurity Solutions
DDoS Protection – NetScout provides security solutions that enable service providers and enterprises around the world to protect their networks against DDoS attacks. Our portfolio of DDoS solutions offer complete deployment flexibility spanning on-premise offerings and cloud-based capabilities to meet a broad array of customer needs.
Advanced Threat Detection – The Arbor Spectrum offering combines its Internet-scale visibility with advanced threat detection, enabling enterprises to rapidly identify and investigate advanced threat campaigns that present tangible risks to the integrity of their networks. We are in their efforts to optimize the performance and speedsprocess of network equipment within simulated network infrastructures.integrating Arbor's advanced threat detection analytics with
nGenius NetFlow Solutions for analyzing and managing enterprise networks by leveraging specific flow-based data such as Cisco NetFlow, Juniper J-Flow, sFlow, Huawei NetStream, and Cisco IP SLA test results collected from flow-capable network devices such as routers or switches.
our Infinistream real-time information platform, and expect to have this capability available within the next several quarters.
Integration with Third-partyThird-Party Solutions
To have greater operational impact on assuring performance of applications and service delivery, NetScout has integrated its technology with third-party management consoles and business service management systems. This integration allows organizations to receive alarms on impending performance problems and to link into the nGenius Service Assurance solution in order to perform detailed problem analysis and troubleshooting. Moving forward, NetScout plans to make its ASI-level data accessible to third party platforms. In addition, Arbor has embedded its DDoS mitigation capabilities on a blade within Cisco's market-leading ASR9000 router and will continue to evaluate partnership opportunities to integrate its DDOS capabilities within other network equipment platforms. By providing seamless integration into management platforms, NetScout fills a significant gap in the third partythird-party product functionality and visibility into the interaction of applications, services and infrastructure resources from a packet-based network vantage point. NetScout collaborates with technology partners to provide integrated solutions and extend the value of the nGenius Service Assurance Solution for application and network performance management across the organization. Using packet-flow data, key performance indicators and other sources of performance information derived from the nGenius Service Assurance Solution, an organization’s ability to optimize, simplify and protect the service delivery environment areis enhanced. Among the third-party solutions providers that NetScout has integrated its solutions with are Cisco Systems, Cisco Sourcefire, Citrix Systems, EMC Corporation,Dell Technologies, Hewlett-Packard Company, IBM Tivoli and VMWare.
Growth Strategy
Our key objectives have been to continue to gain market share in the wireless service provider market and to accelerate our enterprise growth by extending into the application performance management segment.sector. In addition, given the nature of the customers in our government segment,sector, we believe future cybersecurity products would be effective in this market. We believe that the acquisition of Danaher’s Communications Business (see Note 20 of our Consolidated Financial Statements) will further accelerate keyKey elements of our strategy which include:
DriveDriving technology innovation – NetScout will continue to invest in research and development, and leverage the strong technical and domain expertise across its organization. As a result of the planned acquisition of the Communications Business, NetScout’s base of research and development professionals is expected to grow by more than 400% from its current level of over 350 people. The combined company’sCompany’s engineering teams will be focused on advancing technical innovation across its broad product portfolio. By capitalizing on NetScout’s extensive experience with global enterprise, service provider and government organizations with IP-based networks, NetScout will beis well positioned to cross-leverage its technology development across all major platforms and relevant technologies to address the evolving demands of current and prospective customers. NetScout works closely with its largest enterprise and service provider customers to better understand and address their near-term and longer-term requirements. By better understanding the key, time-sensitive needs of NetScout’s global customer base, NetScout will continue to enhance and extend its product line to meet the increasing challenges of managing a diverse range of services over an increasingly global network environment.
Continued portfolio enhancements and product integration – We plan to continue to enhance our products and solutions to address the management challenges associated with virtualization, cloud computing, service-oriented architectures, VoIP, video, telepresence technologies, and telepresence technologies.network security. In addition, we willplan to continue to drive our solutions to help IT organizations address the challenges of complex service delivery, datacenter consolidation, branch office consolidation and optimization, increasing mobility and the move to a more process-oriented operating environment. The acquisition will add Tektronix Communications’ high-value troubleshooting capabilities, which targets service providers, with Fluke Networks’ troubleshooting capabilities, which targets smallDuring fiscal year 2018, we expect to mid-sized enterprises. These capabilities are expectedintroduce and continue enhancing new solutions to complement NetScout’s traditional strengthshelp enterprises monitor the performance of their applications in monitoring large, complex IP-based networkspublic cloud environments as well as within software defined network and the mission-critical services that run across them. Over the longer term, NetScout anticipates that the post-acquisition product roadmap integration would support migrating key features and functionalities from various product platforms into new, higher value solutions at more attractive price points that will appeal to a broader range of customers globally.network function virtualization environments.
ExtensionFuture extension into adjacent markets – By enhancing and expanding NetScout’s product portfolio and driving product integration, NetScout can also enterhas expanded its reach into complementary adjacent markets that willcan drive higher spending from existing customers, help it further expand its customer relationshipsattract new customers, and increase its total addressable market. For example, the acquisitionCertain product initiatives are intended to help us make progress on this element of the Arbor Networks business will bring new security offerings that complement NetScout’s core range of solutions by helping customers identify, mitigate and remediate complex technical threats and unauthorized intrusions into their network and IT infrastructures. The Arbor Networks business will accelerate NetScout’s entry into cyber security with market-leading solutions used by leading service providers and enterprises to prevent and mitigate distributed denial of service (DDoS) attacks. In addition, the acquisition will bring new solutions for optimizing the radio access networks (RANs) of service providers and sophisticated business intelligence analytics that are used by service providers to increase customer satisfaction, reduce churn, and increase profits.our strategy during fiscal year 2018.
Enable pervasive visibility – We intend to continue to expand our intelligent data source family to enable our customers to achieve greater visibility into more places across their end-to-end network environment. We planbelieve that expanding the range of use cases that the Infinistream real-time information platform can support and making it available in multiple form factors, including software that can be deployed with commercial off-the-shelf servers, will make it easier and more affordable for customers to
integrate various capabilities, including our Adaptive Service Intelligence software, across the combined company's product portfolio to enable wider deployment of deploy our technology within virtual computing environments, network devicesacross their networks and computing platforms and to support a broader range of network and application performance management, security and business intelligence requirements. This includes fortifying and enhancing our capabilities and technology by supporting new and innovative ways to address the ongoing challenges associated with the increasing volume of data traffic and enable scalable support for 40 Gigabit, 100 Gigabit topologies and increasing global deployments of IPv6. Advancing these capabilities will enable NetScout to cross-sell a wider range of solutions into NetScout’s existing base of customers using solutions from the Communications Business, as well as increase business with the current base of Communications Business customers by cross-selling NetScout solutions.IT infrastructures.
Expand our customer base in both enterprise and service provider markets – It is our intention to substantially grow our presence in both the enterprise and service provider markets. In the enterprise market, we are growing our installed base to include a broader number of top-tier enterprise customers as well as extending to reach mid-market enterprise customers. We intend to increase the use of our products across the IT organization to include new operational groups by expanding their capabilities and value. In the service provider market, we are expanding our presence by winning new service provider customers. We are also expanding our service provider footprint further out into the radio access network and deeper into the core. As a result of the acquisition,Comms Transaction, NetScout will havehas a larger direct sales force with specialized expertise in targeting the enterprise, service provider and government markets, along with a more extensive global network of value-added resellers and systems integrators. It is our intention to substantially grow our presence in both the enterprise and service provider markets. In the enterprise market, we plan to further expand our relationships with existing large and mid-sized customers, further fortify third-party distribution channels for the enterprise tools products, and help accelerate enterprise adoption of
Arbor’s cybersecurity products. We expect to also continue to drive further penetration into our global service provider customer base.
Increase market relevance and awareness – The acquisition willComms Transaction has substantially expandexpanded our customer base around the world. To generate increased demand for NetScout’s products, NetScout will continue to implement marketing campaigns aimed at promoting its thought leadershipgenerating high-quality sales opportunities with both current and driving lead generation for its technology, products and solutions among bothprospective enterprise and service provider customers. In addition, we will continue to drive industry initiatives around managing service delivery.customers, promoting thought leadership and building the NetScout brand.
Extend our technology partner alliance ecosystem – SupportingWe plan to continue to develop and fortify alliances with complementary solutions providers that can help us support a larger, more global and more diverse customer base as a result of the acquisition will require alliances with complementary solutions providers.base. We plan to continue to enhance our technology value, product capabilities and customer relevance through the continued integration of our products into technology partner products. This includes both interoperability integration efforts, as well as embedding our technology into alliance partner products to gain a more pervasiveextensive footprint across both enterprise and service provider networks.
Pursue strategic acquisitions – We have completed fivemany acquisitions in recent yearssince the Company’s inception that have helped broaden our capabilities, enhance our products and technologies, and better position the Company to meet the needs of itsa larger base of customers and prospects. AfterIn fiscal year 2017, we acquired the acquisitiontechnology assets of the Communications Business, weAvvasi Incorporated (Avvasi), a specialist provider of award-winning solutions used by top-tier service providers to measure, improve and monetize video in their networks, regardless of whether that video traffic is encrypted. We plan to be opportunistic in pursuing strategic acquisitions in order to achieve key business and technology objectives.
Improve cost structure and drive efficiencies – We have continuedintend to improve our profitability as we have expanded our business. We will continue to focus on directing prudent investmentinvestments into the key technology, product development, sales and marketing, and other initiatives that will enable us to drive long-term profitable growth. We believe that the Danaher Communications Business acquisition will createComms Transaction has created a range of opportunities to further improve the Company’s operating profitabilityprofitability. NetScout plans to generate gross margin synergies by pursuing cost synergies. NetScout will seek to leverage its purchasing powerdriving product integration and extendextending its proven manufacturing techniques, in ways that can improveand optimizing certain product gross margin.lines. In addition, NetScout plans to integrate certain operations that have previously been managed separately across various business and product lines. NetScout also expects to achieve synergies by using common infrastructure platforms,lines, consolidating back-office systems, and by eliminatingcontinuing to eliminate or reducingreduce redundancies associated with pre-existing resources, programs and capabilities.
Support Services
Customer satisfaction is a key driver of NetScout’s success. NetScout’s MasterCare™ support programs offer customers various levels of high quality support services to assist in the deployment and use of our solutions. We have support personnel strategically deployed across the globe to deliver 24/7 telephone support to our premium MasterCare customers. Certain support services, such as on-site support activities, are provided by qualified third partythird-party support partners. In addition, many of our certified resellers provide Partner Enabled Support to NetScout end-users.end users. This is especially prevalent in international locations where time zones and language, among other factors, make it more efficient for end-usersend users to have the reseller provide initial support functions. MasterCareOur support also includes updates to our software and firmware at no additional charge, if and when such updates are developed and made generally available to our commercial customer base. If ordered, MasterCare support commences upon expiration of the standard warranty for software. For software, which also includes firmware, the standard warranty commences upon shipment and expires 60 to 90 days thereafter. With regard to hardware, the standard warranty
commences upon shipment and expires 60 days to 12 months thereafter. We believe our warranties are consistent with commonly accepted industry standards. NetScout will continue to provide support services for the acquired platforms under existing agreements and will explore opportunities to further simplify and standardize its support obligations over the coming years.
Manufacturing
Our manufacturing operations consist primarily of final product assembly, configuration and testing. We purchase components and subassemblies from suppliers and construct our hardware products in accordance with NetScout standard specifications. We inspect, test and use process control to ensure the quality and reliability of our products. We maintain an ISO 9001 quality systems registration, a certification showing that our corporate procedures and manufacturing facilities comply with standards for quality assurance and process control. We also maintain an ISO 9001:2000 quality systems registration, a certification showing that our corporate procedures comply with standards for continuous improvement and customer satisfaction. Additionally, we have outsourced the manufacturing of certain acquired products to high-quality third-party contract manufacturers.
Although we generally use standard parts and components for our products, which are available from various suppliers, each of the computer network interface cards used in our devices is currently available only from separate single source suppliers. We have generally been able to obtain adequate supplies of components in a timely manner from current suppliers. While currently we purchase from specific suppliers, we believe that, in most cases, alternate suppliers could be identified if
current suppliers are unable to fulfill our needs. Our reliance on single source suppliers is further described in Item 1A “Risk Factors.”
We manufacture our products based upon near-term demand estimates resulting from sales forecasts and historical fulfillment information. Due to the fact that these forecasts have a high degree of variability because of such factors as time of year, overall economic conditions and sales employee incentives, we believe it is prudent to maintain inventory levels in advance of receipt of firm orders to ensure that we have sufficient stock to satisfy incoming orders.
Sales and Marketing
Sales
We sell our products, support and services through a direct sales force and an indirect reseller and distribution channel.
Our direct sales force uses a “high-touch” sales model that consists of face-to-face meetings with customers to understand and identify their unique business challenges and requirements. Our sales teams then translate those requirements into tailored business solutions that allow the customer to maximize the performance of its infrastructure and service delivery environment. Due to the complexity of the systems and the capital expenditure involved, our sales cycle typically takes three to twelve months. We build strategic relationships with our customers by continually enhancing our solution to help them address their evolving service delivery management challenges. In addition to providing a comprehensive solution to meet these needs, we continually provide software enhancements to our customers as part of their maintenance contracts with us. These enhancements are designed to provide additional and ongoing value to our existing customers to promote loyalty and the expansion of their deployment of our products. Existing customer growth is also driven by the expansion and changes in their networks as they add new infrastructure elements, new users, new locations, new applications and experience increasing service traffic volumes.
We also maintain an indirect reseller and distribution channel. Sales to customers outside the United States are primarily export sales through channel partners. Our channel partners assist us by improving our reach to customers, extending our presence in new markets, and marketing and selling our products to a broad array of organizations globally. We sell through a range of channel partners including value addedvalue-added resellers, value addedvalue-added distributors, resellers, and system integrators, to our enterprise, service provider and government customers. Historically and currently, we have used indirect distribution channels principally as intermediaries on contractual terms for customers with whom we do not have noa contract. Our sales force meets with end user customers to present NetScout products and solutions, conduct demonstrations, provide evaluation equipment, recommend detailed product solutions, develop product deployment designs and timelines, and assist in establishing financial and other justificationjustifications for the proposed solution. During this selling process, a channel partner, who has contracts with both the end customer and NetScout, may be brought in to facilitate the transaction and to provide fulfillment services. In the case of international channel partners, those services usually also include currency translation and support. In the U.S., fulfillment services are usually limited to invoicing and cash collection. Under this approach, we have limited dependence upon channel partners for the major elements of the selling process. In many cases, there are multiple channel partners with the required contractual relationships, so dependence on any single channel partner is not significant.
Total revenue from indirect channels represented 49% of our total revenue forDuring the fiscal years ended March 31, 2015, 20142017 and 2013. During the fiscal year ended March 31, 2015, two direct customers accounted for more than 10% of total revenue, while no indirect channel partner accounted for more than 10% of total revenue. During the fiscal year ended March
31, 2014,2016, one direct customer, Verizon Communications, Inc (Verizon), accounted for more than 10% of total revenue, while no indirect channel partner accounted for more than 10% of total revenue. During the fiscal year ended March 31, 2013, no2015, Verizon and one other direct customer oraccounted for more than 10% of total revenue, while no indirect channel partner accounted for more than 10% of total revenue.
Our sales force is organized into four main geographic teams covering sales around the globe: United States, Europe, Asia and the rest of the world. Revenue from sales outside the United States represented 23%, 24% and 25% of our total revenue in the fiscal years ended March 31, 2015, 2014 and 2013, respectively. For additional information regarding our sales by geographic location, see Note 18 of our Notes to Consolidated Financial Statements.
Marketing
Our marketing organization drives our market research, strategy, product positioning and messaging and produces and manages a variety of programs such as advertising, trade shows, industry events, public and analyst relations, social media, direct mail, seminars, sales promotions, and web marketing to promote the sale and acceptance of our solutions and to build the NetScout, ASI®, nGenius® and Infinistream®other applicable product brand names in the marketplace. We also host an annual worldwide user conference as a way to engage with existing customers, to provide education and awareness, and to promote expanded use of our software products with these customers.
Key elements of our marketing strategy focus on thought leadership, market positioning, market education, go to market strategies, reputation management, demand generation, and the acceleration of our strategic selling relationships with local and global resellers, systems integrators, and our technology alliance partners. During fiscal year 2015,2017, NetScout began investmentcontinued to redesign the NetScout logo andadvance campaigns to further fortify and amplify the NetScout brand. These activities are expectedand Arbor brands within their respective markets, as we phased out the use of certain acquired brand names. In addition, we continued efforts to continue into fiscal year 2016.increase the Company's visibility and broaden market awareness by executing on the aforementioned elements of our marketing strategy.
Research and Development
Our continued success depends significantly on our ability to anticipate and create solutions that will meet emerging customer requirements. NetScout works closely with its largest enterprise and service provider customers to better understand and address their near-term and longer-term requirements. By better understanding the key, time-sensitive needs of NetScout’s global customer base, NetScout’s development programs will continue to result in enhanced products that are able to meet the increasing challenges of an increasingly complex and dynamic global network environment.
We have invested significant financial resources and personnel into the development of our products and technology. Our continued investment in research and development is crucial to our business and our continued success in the market. We have assembled a team of highly skilled engineers with expertise in various technologies associated with our business and the technologies being deployed by our customers. We plan to continue to enhance and expand our product offerings and capabilities in the near future and, therefore,while integrating key capabilities from acquired product lines as appropriate. As a result, we plan to continue to invest and dedicate significant resources to our research and development activities. In addition, as we continue to expandactivities for both our position in theenterprise and service provider market, we will need to continue to expand our offerings and focused capabilities for these customers. We will continue to make substantial investments in growing our service provider technology expertise to maintain and grow our market and technology lead for this rapidly growing market opportunity.
We predominantly develop our products internally, with some limited third-party contracting. We have also acquired developed technology through business acquisitions. To promote industry standards and manifest technology leadership, we participate in and support the activities and recommendations of industry standards bodies, such as the Internet Engineering Task Force and the 3rd Generation Partnership Project, and we also engage in close and regular dialogue with our key customers and alliance partners. These activities provide early insight into the direction of network and applicationsapplication performance requirements for current and emerging technologies.
Seasonality
We have experienced, and expect to continue to experience, quarterly variations in our order bookings as a result of a number of factors, including the length of the sales cycle, complexity of customer environments, new product introductions and their market acceptance and seasonal factors affected by customer projects and typical IT buying cycles. Due to these factors, we historically have experienced stronger bookings during our fiscal third and fourth quarters than in theour first and second quarters.
Customers
We sell our products to enterprises, service providers and governmental agencies with large- and medium-sized high-speed IP computer networks. Our enterprise customers cover a wide variety of industries, such as financial services, technology, manufacturing, healthcare, utilities, education, transportation and retail. In the telecommunications service provider customer group, we address mobile operators, wireline operators and cable operators. A significant number of our service provider customers are mobile operators.
NetScout solutions are deployed at more than 20,000 of the world’s largest enterprises, government agencies, and more than 165 service providers, on over one million physical and 2,000 virtual network segments.
Backlog
We produce our products on the basis of our forecast of near-term demand and maintain inventory in advance of receipt of firm orders from customers. We configure our products to customer specifications and generally deliver products shortly after receipt of the purchase order. Service engagements are also included in certain orders. Customers generally may reschedule or cancel orders with little or no penalty. We believe that our backlog at any particular time is not meaningful because it is not necessarily indicative of future sales levels. Our combined product backlog at March 31, 2015, consisting of orders booked or received prior to our year end,2017 was an immaterial amount$62.7 million compared to $37.4$125.7 million at March 31, 2014. 2016. A majority of the backlog relates to customization and integration projects from our acquired business units. In some cases, we have begun these projects but have not yet hit billable milestones. A majority of revenue for these projects is expected to be recognized into revenue throughout fiscal year 2018.
Competition
We compete with many companies in the markets we serve. The service assurance and performance management market ismarkets are highly competitive, rapidly evolving, and fragmented with overlapping technologies and a wide range of competitors.competitors, both large and small, who may deliver certain elements of our solution. Consequently, there are a number of companies that deliver some elementswho have greater name recognition and substantially greater financial, management, marketing, service, support, technical, distribution and other resources than we do. Additionally, certain competitors, either due to their size and resources or due to their technological strengths, may be able to respond more effectively than we can to new or changing opportunities, technologies, standards and customer requirements.
Principal competitive factors in our service assurance market include scalability; ability to address a large number of applications, locations and users; product performance; the ability to easily deploy into existing network environments; the ability to offer virtualized solutions; and the ability to administer and manage the solution.
While NetScout faces multiple competitors within the service assurance industry, we believe that we compete favorably on the basis of these factors. the following factors:
We provide a comprehensive service delivery management solution that is capable of addressing the needs of both enterprise and service provider customers and can be scaled to meet the challenges of today’s dynamic service delivery environments. environments;
We believe that our solutions provide superior data and compete favorably on a broad range of metrics including the ability to recognize and track a large number of applications,applications;
We believe our solutions possess the scalability to support high and increasing levels of data and network traffic, the ability totraffic;
Our solutions look at both data and control plane traffic across an entire network, and the abilitynetwork;
Our ASI technology is optimized to provide real-time information about service performance and real-time alerts to emerging service problems.problems whereas traditional solutions are inherently latent, supporting only forensic-trouble shooting after an issue has occurred.
In the enterprise market, our competitors include companies such as Avaya, AppDynamics, CA Technologies, Compuware,Cisco Systems, Dynatrace, ExtraHop, Fluke Networks, InfoVista, Keysight (which acquired Ixia JDSU (through its Network Instruments business that was acquired in 2014)April 2017), Viavi, Gigamon, Lancope, New Relic, Riverbed Technology and SolarWinds. In addition, we both compete with and partner with large enterprise management vendors, such as HP and IBM, who offer performance management solutions.
In the service provider market, we compete with traditional probe vendors, network equipment manufacturers, big data and analytics vendors, and virtualization vendors. These vendors include Alcatel-Lucent, Astellia, Anritsu, Cisco, Empirix, Ericsson, EMC,Dell Technologies, EXFO, Guavas, Huawei, IBM, JDSU, Niksun, Polystar, Radcom, SevOne, Splunk, Tektronix and Zettics. We face additional competitive threats from startups and new entrants that seek to offer innovative solutions in an industry characterized by rapid technological change.
In the cybersecurity market, we face a range of competitors, including those that may have greater name recognition and substantially greater financial, management, marketing, service, support, technical, distribution and other resources than we do. We believe that our scalability of our solutions, flexible deployment, and price-performance of our cybersecurity solutions positions us well to compete against both larger network equipment and security companies and smaller niche security solutions vendors.
In the DDoS solutions market, we compete with a broad range of vendors including Radware, Akamai, F5 Networks, A10 Networks, Fortinet and Corero Network Security. In the market for specialized threat analysis and protection solutions used to identify advanced network threats, we compete with a range of vendors including Darktrace, Vectra Networks, Cisco (via its late 2015 acquisition of Lancope), Palo Alto Networks (via its February 2017 acquisition of LightCyber) and other specialist providers.
Our ability to sustain a competitive advantage depends on our ability to deliver continued technology innovation and adapt to meet the evolving needs of our customers. Competitive factors in our industry are further described in Item 1A “Risk Factors.”
Intellectual Property Rights
We rely on patent, copyright, trademark, and trade secret laws and contract rights to establish and maintain our rights in our technology and products. While our intellectual property rights are an important element in our success, our business as a whole does not depend on any one particular patent, trademark, copyright, trade secret, license, or other intellectual property right.
NetScout uses contracts, statutory laws, domestic and foreign intellectual property registration processes, and international intellectual property treaties to police and protect its intellectual property portfolio and rights from infringement. From a contractual perspective, NetScout uses license agreements and non-disclosure agreements to control the use of our intellectual property and protect NetScout trade secrets from unauthorized use and disclosure. In addition to license agreements, NetScout relies on U.S. and international copyright law to protect against unauthorized copying of software programs, in the U.S. and abroad. NetScout has obtained U.S. and foreign trademark registrations to preserve and protect certain trademarks and trade names. NetScout has also filed and obtained U.S. patents and international counterparts to protect certain unique NetScout
inventions from being unlawfully exploited by other parties. However, there is no assurance that pending or future patent
applications will be granted, that we will be able to obtain patents covering all of our products, or that we will be able to license, if needed, patents from other companies on favorable terms or at all. Our proprietary rights are subject to other risks and uncertainties described under Item 1A “Risk Factors.”
Employees
At March 31, 2015,2017, we had a total of 1,0693,113 employees, 6972,045 of whom were employed in the United States. The majority of our employees are not subject to a collective bargaining agreement. In accordance with applicable law,laws, employees in certain international jurisdictions are subject to collective bargaining agreements. Employees by department at March 31, 20152017 were as follows:
|
| | | |
| Function | | Number of Employees |
| Sales and marketing | 373955 |
|
| Research and development | 3571,184 |
|
| Support services | 178601 |
|
| General and administrative | 128278 |
|
| Manufacturing | 3395 |
|
| | | 1,0693,113 |
|
| | | |
Financial Information About Geographic Area
Our sales force is organized into four main geographic teams covering sales around the globe: United States, Europe, Asia and the rest of the world. Revenue from sales outside the United States represented 37%, 29% and 23% of our total revenue in the fiscal years ended March 31, 2017, 2016 and 2015, respectively. For additional information regarding our sales by geographic location, see Note 19 of our Notes to Consolidated Financial Statements for a detailed summary of financial information about geographic areas.
Corporate informationInformation
Our corporate headquarters are located at 310 Littleton Road, Westford, Massachusetts, and our telephone number is (978) 614-4000. NetScout was incorporated in Delaware in 1984.
NetScout’s internet address is http://www.netscout.com. Our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to reports filed pursuant to Sections 13(a) and 15(d) of the Securities Exchange Act, of 1934, as amended (Exchange Act), are made available free of charge on or through our website at http://ir.netscout.com/phoenix.zhtml?c=92658&p=irol-sec as soon as reasonably practicable after such reports are filed with, or furnished to, the Securities and Exchange Commission (the SEC).SEC. None of the information posted on our website is incorporated by reference into this Annual Report.
We webcast our earnings calls and certain events we participate in or host with members of the investment community are made available on our investor relations web-sitewebsite at http://ir.netscout.com/phoenix.zhtml?c=92658&p=irol-calendar. Additionally, we provide notifications of news or announcements regarding our financial performance, including SEC filings, investor events, press and earnings releases, as part of our investor relations web-site.website. The contents of these sections of our investor relations website are not intended to be incorporated by reference into this report or in any other report or document we file.file with the SEC.
Item 1A. Risk Factors.
In addition to the other information in this report, the following discussionfactors should be considered carefully in evaluating NetScout and our business. This Annual Report on Form 10-K contains forward-looking statements under Section 21E of the Exchange Act and other federal securities laws. 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. Actual events or results may differ materially. Factors that may cause such differences include, but are not limited to, the factors discussed below and in our other filings with the SEC. These factors may cause our actual results to differ materially from any forward-looking statement.
Our operating results and financial condition have varied in the past and may vary significantly in the future vary significantly depending on a number of factors. Except for the historical information in this report, the matters contained in this report include forward-looking statements that involve risk and uncertainties. The following factors are among many that could cause actual results to differ materially from those contained in or implied by forward-looking statements made in this report. These statements involve the risks and uncertainties identified below as well as additional risks and uncertainties that are not yet identified or that
we currently think are immaterial but may also impact our business operations. Such factors are among many that may have a material adverse impact upon our business, results of operations and financial condition.
You should consider carefully the risks and uncertainties described below, together with the information included elsewhere in this Annual Report on Form 10-K and other documents we file with the SEC. The risk and uncertainties described below are those that we have identified as material but are not the only risks and uncertainties facing us. Our business is also subject to general risks and uncertainties that affect many other companies. Additional risks and uncertainties not currently known to us or that we currently believe are immaterial also may impair our business, including our results of operations, liquidity and financial condition.
12Because of the following factors, as well as other variables affecting our results of operations, past financial performance may not be a reliable indicator of future performance, and historical trends should not be used to anticipate results or trends in future periods.
Risks Related to the Company and its Operations
Foreign currency exchange rates may adversely affect our financial statements.
Following the Comms Transaction, an increasing portion of our revenue is derived from international operations. Our consolidated financial results are reported in U.S. dollars. Most of the revenue and expenses of our foreign subsidiaries are denominated in local currencies. Given that cash is typically received over an extended period of time for many of our license agreements and given that a material portion of our revenue is generated outside of the United States, fluctuations in foreign exchange rates (including the Euro) against the U.S. dollar could result in substantial changes in reported revenues and operating results due to the foreign exchange impact upon translation of these transactions into U.S. dollars.
In the normal course of business, we employ various hedging strategies to partially mitigate these risks, including the use of derivative instruments. These strategies may not be effective in fully protecting us against the effects of fluctuations from movements in foreign exchange rates. Fluctuations of the foreign exchange rates could materially adversely affect our business, financial condition, operating results and cash flow.
Additionally, sales and purchases in currencies other than the U.S. dollar expose us to fluctuations in foreign currencies relative to the U.S. dollar and may adversely affect our financial statements. Increased strength of the U.S. dollar increases the effective price of our products sold in U.S. dollars into other countries, which may require us to lower our prices or adversely affect sales to the extent we do not increase local currency prices. Decreased strength of the U.S. dollar could adversely affect the cost of materials, products and services we purchase overseas. Sales and expenses of our non-U.S. businesses are also translated into U.S. dollars for reporting purposes and the strengthening or weakening of the U.S. dollar could result in unfavorable translation effects. In addition, certain of our businesses may invoice customers in a currency other than the functional currency of the business, and movements in the invoiced currency relative to the functional currency could also result in unfavorable translation effects. The Company also faces exchange rate risk from its investments in subsidiaries owned and operated in foreign countries.
Our effective tax rate may fluctuate, which could increase our income tax expense and reduce our net income.
Our effective tax rate or the taxes we owe could be adversely affected by several factors, many of which are outside of our control, including:
changes in the relative proportions of revenues and income before taxes in the various jurisdictions in which we operate that have differing statutory tax rates;
changing tax laws, regulations, and interpretations in multiple jurisdictions in which we operate as well as the requirements of certain tax rulings;
changes in the research and development tax credit laws, earnings being lower than anticipated in jurisdictions where we have lower statutory rates and being higher than anticipated in jurisdictions where we have higher statutory rates;
changes in accounting and tax treatment of share-based compensation;
the valuation of generated and acquired deferred tax assets and the related valuation allowance on these assets;
transfer pricing adjustments;
the tax effects of purchase accounting for acquisitions and restructuring charges that may cause fluctuations between reporting periods; and
tax assessments or any related tax interest or penalties that could significantly affect our income tax expense for the period in which the settlements take place.
Risks relatedWe are subject to income taxes in the proposed acquisitionUnited States and in numerous foreign jurisdictions. From time to time, we may receive notices that a tax authority in a particular jurisdiction believes that we owe a greater amount of Danaher's Communications Businesstax than we have reported to such authority.
The announcementWhile we regularly assess the likelihood of adverse outcomes from such examinations and pendencythe adequacy of the proposed acquisition of the Communications Business couldour provision for income taxes, there can be no assurance that such provision is sufficient and that a determination by a tax authority will not have an adverse effect on our stock price, business,results of operations. An adverse change in our effective tax rate could have a material and adverse effect on our financial condition and results of operations or business prospects.
The announcement and pendency of the transaction could disrupt our business in the following ways, among others:
Our customers, channel partners and other third-party business partners may delay or defer purchase decisions with regard to our products and services or may seek to terminate and/or renegotiate their relationships with us as a result of the transaction, whether pursuant to the terms of their existing agreements with us or otherwise; and
Current and prospective employees may experience uncertainty regarding their future roles with the combined company, which might adversely affect our ability to retain, recruit and motivate key personnel and may adversely affect the focus of our employees on our sales efforts.
Should they occur, any of these matters could adversely affect our stock price or harm our financial condition, results of operations or business prospects.
Failure to complete the proposed acquisition of the Communications Business could negatively impact our business, financial condition, results of operations or stock price.
Completion of the transactions is conditioned upon NetScout and Danaher satisfying certain closing conditions, including the approval of the shares to be issued in connection with the transaction by our stockholders, as set forth in the merger agreement. The required conditions to closing may not be satisfied in a timely manner, if at all, or, if permissible, waived. If the transaction is not consummated for these or any other reasons, our ongoing business may be adversely affected and will be subject to a number of risks including:
The market price of our common stock could decline if our financial results are materially affected by an adverse change in our effective tax rate.
Our indebtedness may declinelimit our operations and our use of our cash flow, and any failure to comply with the extentcovenants that apply to our indebtedness could adversely affect our liquidity and financial condition.
On July 14, 2015, we entered into a credit facility with a syndicate of lenders pursuant to a Credit Agreement (Credit Agreement). The Credit Agreement provides for a five-year $800 million senior secured revolving credit facility, including a letter of credit sub-facility of up to $50 million. We have used the current market price reflectsnew credit facility for working capital purposes and for a market assumption thatrepurchase of $300 million of common stock as of March 31, 2017 under our previously announced 20 million share common stock repurchase plan. The commitments under the transactionCredit Agreement will expire on July 14, 2020, and any outstanding loans will be completed;due on that date. As of the date of this report, we had approximately $300 million in outstanding indebtedness under the Credit Agreement. Our debt level can have negative consequences, including exposing us to interest rate risk. We may incur significantly more debt in the future, and there can be no assurance that our cost of funding will not substantially increase. Our current revolving credit facility also imposes certain restrictions on us; for a more detailed description please refer to "Management's Discussion and Analysis of Financial Condition and Results of Operations." Upon an event of default, for example, 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 Credit Agreement and the other loan documents, which would adversely affect our liquidity and financial condition. If we take on additional indebtedness, the risks described above could increase.
Any failure to meet our debt obligations could damage our business.
Our ability to meet our obligations under the Credit Agreement will depend on market conditions and our future performance, which is subject to economic, financial, competitive and other factors beyond our control. If we are unable to remain profitable or if we use more cash than we generate in the future, our level of indebtedness at such time could adversely affect our operations by increasing our vulnerability to adverse changes in general economic and industry conditions and by limiting or prohibiting our ability to obtain additional financing for additional capital expenditures, acquisitions and general corporate and other purposes. In addition, if we are unable to make payments as required under the Credit Agreement, we would be in default under the terms of the loans, which could seriously harm our business. If we incur significantly more debt, this could intensify the risks described above.
We may experience negative reactionsfail to secure necessary additional financing.
Our future success may depend in part on our ability to obtain additional financing to support our continued growth and operations and any downgrades in our credit rating could affect our ability to obtain additional financing in the terminationfuture and may affect the terms of any such financing. If our existing sources of liquidity are insufficient to satisfy our operating requirements, we may need to seek to raise capital by one or more of the transaction from customers, channel partners, suppliers, strategic partners, investorsfollowing:
issuing additional common stock or analysts;other equity instruments;
We would not realize any of the anticipated benefits of having completed the transaction;acquiring additional bank debt;
We may be required to pay a termination fee of $55.0 million to Danaher if the Merger Agreement is terminated under certain circumstances; andissuing debt securities; or
Our expenses incurred related to the transaction, such as legal and accounting fees, must be paid even if the transaction is not completed andobtaining lease financings.
However, we may not except in certain circumstances, be recovered from Danaher.
In addition,able to obtain additional capital when we want or need it, or capital may not be available on satisfactory terms. Furthermore, any delay in the consummation of the transaction or, any uncertainty about the consummation of the transaction,additional capital may have terms and conditions that adversely affect our future business, growth, revenue and results of operations.
The market price ofsuch as new financial or operating covenants, or that may result in additional dilution to our common stock may decline as a result of the acquisition of the Communications Business.
The market price of our common stock may decline as a result of the transaction for a number of reasons including if:stockholders.
We do not achieve the perceived benefits of the transactionexpect that existing cash, cash equivalents, marketable securities, cash provided from operations and our bank credit facilities will be sufficient to meet ongoing cash requirements. However, our failure to generate sufficient cash as rapidlyour debt becomes due or to the extent anticipated;
The effect of the transaction onrenew credit lines prior to their expiration could materially adversely affect our business, financial condition, operating results and prospects is not consistent with the expectations of financial or industry analysts; orcash flows.
Investors react negatively to the effect of the transaction on our business and prospects.
NetScout and Danaher may be unable to satisfy the conditions or obtain the approvals required to complete the proposed transactions.
The consummation of the proposed transactions is subject to numerous conditions including (i) consummation of certain transactions contemplated by the Merger Agreement and the Separation and Distribution Agreement, dated as of October 12, 2014, by and among Danaher, NetScout and Newco (as the same may be amended from time to time) (the Distribution Agreement) (such as the separation of the Communications Business from Danaher’s other business) and (ii) the receipt of NetScout stockholder approval for the issuance of NetScout common stock in the First Merger (as defined in Note 20 of our Notes to Consolidated Financial Statements included in this Annual Report on Form 10-K). We cannot make any assurances that the acquisition of the Communications Business and related transactions will be consummated on the terms or timeline
currently contemplated, or at all. Each of Danaher and NetScout has and will continue to expend time and resources and incur expenses related to the proposed transactions.
The risk to our stockholders that the calculation of the merger consideration will not be adjusted if the value of the business or assets of the Communications Business declines or if the value of NetScout increases before the transactions are completed.
The calculation of the number of shares of NetScout common stock to be distributed in the Transaction will not be adjusted if the value of the business or assets of the Communications Business declines prior to the consummation of the Transaction or the value of NetScout increases prior to the Transaction. We will not be required to consummate the Transaction if there has been any material adverse effect on the Communications Business. However, we will not be permitted to terminate the Merger Agreement or resolicit the vote of our stockholders because of any changes in the market price of our common stock or any changes in the value of the Communications Business that do not constitute a material adverse effect with respect to the Communications Business.
Our estimates and judgments related to the acquisitioncritical accounting models used to record the purchase price allocation maypolicies could be inaccurate.
Our management will make significantWe consider accounting policies related to marketable securities, revenue recognition, valuation of goodwill and acquired intangible assets and share-based compensation to be critical in fully understanding and evaluating our financial results. Management makes accounting judgments and estimates forrelated to these policies. These estimates and judgments affect, among other things, the applicationreported amounts of acquisition accountingour assets, liabilities, revenue and expenses, the amounts of charges accrued by us, and related disclosure of contingent assets and liabilities. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under GAAPthe circumstances and at the time they are made. If our estimates or the assumptions underlying valuation models. Ourthem are not correct, actual results may differ materially from our estimates and we may need to, among other things, accrue additional charges that could adversely impact our business, operating results and financial condition could be materially and adversely impacted in future periods if our accounting judgments and estimates related to these models prove to be inaccurate.
We may be required to recognize impairment charges for goodwill and other intangible assets.
Based on the closing price of our common stock on May 1, 2015, the proposed transaction will add approximately $3.0 billion of goodwill and other intangible assets to our consolidated balance sheet. In accordance with GAAP, our management periodically assesses these assets to determine if they are impaired. Significant negative industry or economic trends, disruptions to our business, inability to effectively integrate acquired businesses, unexpected significant changes or planned changes in use of the assets, divestitures and market capitalization declines may impair goodwill and other intangible assets. Any charges relating to such impairments would adversely affect results of operations in the periods recognized.
If completed, the proposed transactions may not be successful or achieve their anticipated benefits.
If the proposed transactions are completed we may not be able to successfully realize anticipated growth opportunities or integrate our business and operations with the Communications Business’ business and operations. After the transactions, we will have significantly more revenue, expenses, assets and employees than we did prior to the transactions. In the internal restructuring and reorganization of the Communications Business and related assets and liabilities, we will also be assuming certain liabilities of the Communications Business and taking on other obligations (including collective bargaining agreements and certain non-U.S. pension obligations with respect to transferred employees). We may not successfully or cost-effectively integrate the Communications Business’ business and operations into our existing business and operations. Even if the combined company is able to integrate the combined businesses and operations successfully, this integration may not result in the realization of the full benefits of the growth and other opportunities that we currently expect from the transactions within the anticipated time frame, or at all.
We are required to abide by potentially significant restrictions, which could limit our ability to undertake certain corporate actions (such as the issuance of our common stock or the undertaking of a merger or consolidation) that otherwise could be advantageous.
To preserve the tax-free treatment to Danaher and/or its stockholders of the proposed transactions, under the Tax Matters Agreement in substantially the form attached as Exhibit A to the Distribution Agreement (the Tax Matters Agreement), we are restricted from taking any action that prevents such transactions from being tax-free for U.S. federal income tax purposes. These restrictions may limit our ability to pursue certain strategic transactions or engage in other transactions, including using our common stock to make acquisitions and in connection with equity capital market transactions that might increase the value of our business.
The Distribution could result in significant tax liability, and NetScout may be obligated to indemnify Danaher for any such tax liability imposed on Danaher.
The Distribution (as defined in Note 20 of our Notes to Consolidated Financial Statements included in this Annual Report on Form 10-K) and certain aspects of the internal restructuring to separate and consolidate certain assets and liabilities used in
the Communications Business under Newco, could be taxable to Danaher if Newco, its unit holders, NetScout or NetScout’s stockholders were to engage in certain actions specified under the Tax Matters Agreement. In such cases, under the Tax Matters Agreement, Newco and NetScout will be required to indemnify Danaher against any taxes that arise as a result of such specified actions. If Danaher were to recognize gain on the Distribution or certain aspects of the internal restructuring of the Communications Business for reasons not related to a specified action under the Tax Matters Agreement by Newco or NetScout, Danaher would not be entitled to be indemnified under the Tax Matters Agreement and the resulting tax to Danaher could have a material adverse effect on Danaher. If Newco or NetScout were required to indemnify Danaher as a result of the Distribution or certain aspects of the internal restructuring of the Communications Business being taxable, this indemnification obligation would likely be substantial and could have a material adverse effect on us, including with respect to our financial condition and results of operations.
Upon completion of the proposed transactions, we will incur significant expenses in connection with the integration of the Communications Business.
Upon completion of the proposed transactions, we expect to incur significant expenses in connection with the integration of the Communications Business, including integrating products and technology, personnel, information technology systems, accounting systems, suppliers, and channel partners of each business and implementing consistent standards, policies, and procedures, and may possibly be subject to material write downs in assets and charges to earnings, which may include severance pay and other costs.
The Merger Agreement contains provisions that may discourage other companies from trying to acquire NetScout. In addition, we will have more shares of our common stock outstanding after the transactions, which may discourage other companies from trying to acquire NetScout.
The Merger Agreement contains provisions that may discourage a third-party from submitting a business combination proposal to NetScout prior to the closing of the proposed transactions that might result in greater value to our stockholders than the proposed transactions. For example, the Merger Agreement generally prohibits us from soliciting any takeover proposal. In addition, if the Merger Agreement is terminated by NetScout or Danaher in circumstances that obligate us to pay a termination fee or to reimburse transaction expenses to Danaher, our liquidity or financial condition may be materially adversely affected as a result of such payment, and the requirement to make such a payment might deter third parties from proposing alternative business combination proposals. In addition, the Merger Agreement requires that we seek stockholder approval for the issuance of shares of our common stock in the First Merger, even if our board of directors changes its recommendation regarding the issuance of shares of our common stock in the First Merger.
We expect to issue 62.5 million shares of our common stock as part of the proposed transactions, assuming no adjustments pursuant to the Merger Agreement. Because we will be a significantly larger company and have significantly more shares of our common stock outstanding after the proposed transactions, an acquisition of NetScout may become more expensive. As a result, some companies may not seek to acquire NetScout, and the reduction in potential parties that may seek to acquire NetScout could negatively impact the prices at which our common stock trades.
Risks Related to the Combined Company’s Business Following the Proposed Transactions
We will assume certain non-U.S. pension benefit obligations associated with the Communications Business. Future funding obligations related to these liabilities could restrict cash available for our operations, capital expenditures or other requirements, or require us to borrow additional funds.
In the proposed transactions, we will assume certain funded and unfunded non-U.S. pension obligations related to non-U.S. employees of the Communications Business who become employees of Newco to the extent the assumption is required by applicable law. In connection therewith, Danaher will transfer to us all assets set aside by Danaher to fund such non-U.S. pension obligations related to the Communications Business. If the non-U.S. pension liabilities transferred by Danaher exceed the assets transferred by Danaher, Danaher is obligated to transfer an amount of cash to us equal to the difference between the non-U.S. pension liabilities transferred and the assets transferred. The transfers of assets and non-U.S. pension liabilities will be governed by applicable law, provided that if the mechanism for the transfers is not mandated by applicable law, the assets and liabilities will be transferred on a projected benefit obligation basis in accordance with GAAP.
Funding obligations with respect to non-U.S. pension plans change due to, among other things, the actual investment return on plan assets. Continued volatility in the capital markets may have a further negative impact on the funded status of the non-U.S. pension plans, which may in turn increase attendant funding obligations. Changing economic conditions, poor pension
investment returns or other factors may require us to make substantial cash contributions to the pension plans in the future, preventing the use of increased cash contributions for other purposes and adversely affecting our liquidity.
While we intend to comply with any future funding obligations for its non-U.S. pension benefit plans through the use of cash from operations, there can be no assurance that we will generate enough cash to do so and also meet its other required or intended cash uses. Our inability to fund these obligations through cash from operations could require it to seek funding from other sources, including through additional borrowings, which could materially increase our outstanding debt or debt service requirements.
Current NetScout stockholders’ ownership interest in NetScout will be substantially diluted in the proposed transactions.
Following the consummation of the proposed transactions, our stockholders will, in the aggregate, own a significantly smaller percentage of NetScout than they will own of NetScout immediately prior to the consummation of the transactions. It is expected that immediately after consummation of the First Merger, pre-First Merger holders of Newco common units and Newco employees will hold approximately 59.5% of NetScout’s common stock on a fully-diluted basis and NetScout’s existing equityholders will hold approximately 40.5% of NetScout’s common stock on a fully-diluted basis. Our current stockholders, as a group, will be able to exercise less influence over the management and policies of NetScout following the proposed transactions than they will exercise over the management and policies of NetScout immediately prior to the transactions.
Sales of our common stock after the proposed transactions may negatively affect the market price of our common stock.
The shares of our common stock to be issued in the proposed transactions to holders of Newco common units will generally be eligible for immediate resale. The market price of our common stock could decline as a result of sales of a large number of shares of our common stock in the market after the consummation of the proposed transactions or even the perception that these sales could occur.
It is expected that immediately after consummation of the First Merger, pre-First Merger holders of Newco common units and Newco employees will hold approximately 59.5% of NetScout’s common stock on a fully-diluted basis and our existing equityholders will hold approximately 40.5% of our common stock on a fully-diluted basis, subject to potential adjustment under certain limited circumstances. Currently, Danaher stockholders may include index funds that have performance tied to certain stock indices and institutional investors subject to various investing guidelines. Because we may not be included in these indices following the consummation of the proposed transactions or may not meet the investing guidelines of some of these institutional investors, these index funds and institutional investors may decide to or may be required to sell the NetScout common stock that they receive in the proposed transactions. In addition, the investment fiduciaries of Danaher’s defined contribution and defined benefit plans may decide to sell any NetScout common stock that the trusts for these plans receive in the proposed transactions, or may decide not to participate in the exchange offer, if applicable, in response to their fiduciary obligations under applicable law. These sales, or the possibility that these sales may occur, may also make it more difficult for us to obtain additional capital by selling equity securities in the future at a time and at a price that we deem appropriate.
The historical financial information of the Communications Business may not be representative of its results or financial condition if it had been operated independently of Danaher and, as a result, may not be a reliable indicator of its future results.
The Communications Business is currently operated by Danaher. Consequently, the financial information of the Communications Business included in this document has been derived from the consolidated financial statements and accounting records of the Communications Business and reflects all direct costs as well as assumptions and allocations made by management of Danaher. The financial position, results of operations and cash flows of the Communications Business presented may be different from those that would have resulted had the Communications Business been operated independently of Danaher during the applicable periods or at the applicable dates. For example, in preparing the financial statements of the Communications Business, Danaher made allocations of costs and Danaher corporate expenses deemed to be attributable to the Communications Business. However, these costs and expenses reflect the costs and expenses attributable to the Communications Business operated as part of a larger organization and do not necessarily reflect costs and expenses that would be incurred by the Communications Business had it been operated independently. As a result, the historical financial information of the Communications Business may not be a reliable indicator of future results.
Our business, financial condition and results of operations may be adversely affected following the proposed transactions if we cannot negotiate terms that are as favorable as those Danaher has received when we replaces contracts after the closing of the proposed transactions.
Prior to consummation of the proposed transactions, certain functions (such as purchasing, information systems, sales, logistics and distribution) for the Communications Business are generally being performed under centralized systems that will not be transferred to us and, in some cases, under contracts that are also used for Danaher’s other businesses and which are not intended to be assigned to us with the Communications Business. In addition, some other contracts that Danaher or its subsidiaries are a party to on behalf of the Communications Business require consents of third parties to assign them to Newco. While Danaher, under the Transition Services Agreement (in substantially the form attached as Exhibit B to the Distribution Agreement), will agree to provide us with certain services, there can be no assurance that we will be able to obtain those consents or negotiate terms that are as favorable as those Danaher received when and if we replace these services with its own agreements for similar services. Although we believe that we will be able to obtain any such consents or enter into new agreements for similar services, it is possible that the failure to obtain consents for or replace a significant number of these agreements for any of these services or to replace them on terms that as are as favorable as those Danaher has received could have a material adverse impact on our business, financial condition and results of operations following the proposed transactions.
Our failure to successfully integrate the Communications Business into our business within our expected timetable could adversely affect the combined company’s future results and the market price of our common stock following the completion of the proposed transactions.
The success of the proposed transactions will depend, in large part, on our ability, as a combined company following the completion of the proposed transactions, to realize the anticipated benefits and on the sales and profitability of the combined company. To realize these anticipated benefits, the combined company must successfully integrate its respective businesses. This integration will be complex and time-consuming. The failure to successfully integrate and manage the challenges presented by the integration process may result in our failure to achieve some or all of the anticipated benefits of the proposed transactions.
Potential difficulties that may be encountered in the integration process include the following:
lost sales and customers as a result of customers of NetScout or the Communications Business deciding not to do business with the combined company;
complexities associated with managing the larger, more complex, combined business;
integrating personnel of NetScout and the Communications Business while maintaining focus on providing consistent, high-quality products and service to customers;
the loss of key employees; and
potential unknown liabilities and unforeseen expenses, delays or regulatory conditions associated with the proposed transactions
If any of these events were to occur, our ability to maintain relationships with customers, channel partners, suppliers and employees or our ability to achieve the anticipated benefits of the proposed transactions could be adversely affected, or could reduce our sales or earnings or otherwise adversely affect our business and financial results after the proposed transactions and, as a result, adversely affect the market price of our common stock.
The success of the combined company will also depend on relationships with third parties and pre-existing customers and channel partners of NetScout and the Communications Business, which relationships may be affected by customer, channel partner or third-party preferences or public attitudes about the proposed transactions. Any adverse changes in these relationships could adversely affect the combined company’s business, financial condition or results of operations.
The combined company’s success will depend on our ability to maintain and renew relationships with pre-existing customers, channel partners, suppliers, and other third parties of both NetScout and the Communications Business and our ability to establish new relationships. There can be no assurance that the business of the combined company will be able to maintain and renew pre-existing contracts and other business relationships, or enter into or maintain new contracts and other business relationships, on acceptable terms, if at all. The failure to maintain important business relationships could have a material adverse effect on our business, financial condition or results of operations as a combined company.
The growth of the combined company could suffer if the markets into which the combined company sells its products and services experience cyclicality.
The growth of the combined company will depend in part on the growth of the markets which the Communications Business serves. The Communications Business serves certain industries that have historically been cyclical and have experienced periodic downturns that have had a material adverse impact on demand for the products, software and services that the Communications Business offers. Any of these factors could adversely affect the business, financial condition and results of operations of the combined company in any given period.
Defects, quality issues, inadequate disclosure or misuse with respect to the products, software or services of the combined company could adversely affect the business, reputation and financial statements of the combined company.
Defects in, quality issues with respect to or inadequate disclosure of risks relating to the use of the combined company’s products, software and services, or the misuse of the combined company’s products, software and services, could lead to lost profits and other economic damage, property damage, violation of privacy rights, personal injury or other liability resulting in third party claims, criminal liability, significant costs, damage to its reputation and loss of business. Any of these factors could adversely affect the business, financial condition and results of operations of the combined company.
International economic, political, legal, compliance and business factors could negatively affect the financial statements and growth of the combined company.our stock price.
The Communications Business derives significant sales from customers outside the U.S. and certain manufacturing operations, suppliers and employees of the Communications Business are located outside the U.S. The Communications Business expects to continue to increase its sales and presence outside the U.S., particularly in the high-growth markets. The Communications Business’ international business (and particularly its business in high-growth markets) is subject to risks that are customarily encountered in non-U.S. operations, any of which could negatively affect the business, financial condition and results of operations of the combined company.
Risks Related to the Company and its Operations
Our quarterly revenue and operating results may fluctuate.
Our quarterly revenue and operating results are difficult to predict and may fluctuate significantly from quarter to quarter. Our quarterly revenue may fluctuate as a result of a variety of factors associated with our industry, many of which may be outside of our control, including the following:
the rate of growth of, and changes in technology trends in, our market and other industries in which we currently operate or may operate in the future;
technology spending by current and potential customers;
reduced demand for our products;
uneven demand for service delivery and network and application performance management solutions and network security solutions;
the timing and size of orders from customers, especially in light of our lengthy sales cycle;
the timing and market acceptance of new products or product enhancements by us or our competitors;
the timing of hiring sales personnel and the speed at which such personnel become fully productive;
our ability to anticipate or adapt effectively to developing marketsdevelop and rapidly changingmanufacture new products and technologies in a timely manner;
the competitive position of our products;
the continued acceptance of our products by our customers and technology requirements;in the industries that we serve;
changes in the number and size of our competitors, including the effects of new entrants and the effects of well-resourced competitors increasing their investment in our markets, and changes in the prices and capabilities of competitors’competitors' products;
customer ability to implement our products;
cancellation, deferral, or limitation of orders by customers;
changes in foreign currency exchange rates;
attrition of key employees;employees and competition with other companies for employees with specific talents and experience;
the number, severity, and timing of cyber-related threat outbreaks (e.g., malware, attacks, worms and viruses);
the quality and level of our execution of our business strategy and operating plan, and the effectiveness of our sales and marketing programs;
changes in accounting rules;
costs related to acquisitions; and
economic slowdowns andour ability to manage expenses.
If our revenue or operating results fall below the occurrenceexpectations of unforeseeable global events, which contributeinvestors or securities analysts or below any guidance we may provide to such slowdowns.
the market, the price of our common stock could decline substantially. Such a stock price decline could also occur even if we meet or exceed our publicly stated revenue and/or earnings guidance. Most of our expenses, such as employee compensation, benefits and rent, are relatively fixed in the short term. Moreover, our expense levels are based, in part, on our expectations regarding future revenue levels. As a result, if revenue for a particular quarter is significantly below our expectations, we may not be able to reduce operating expenses proportionately for that quarter, and, therefore, this revenue shortfall would have a disproportionately negative impact on our operating results for that quarter.
It may be necessary in the future to undertake cost reduction initiatives to improve profitability, which could lead to a deterioration of our competitive position. Any difficulties that we encounter as we reduce our costs could negatively impact our results of operations and cash flows.
18Our disclosure controls and procedures and internal control over financial reporting may not be effective.
Our disclosure controls and procedures and internal control over financial reporting may not prevent all material errors and intentional misrepresentations. Any system of internal control can only provide reasonable assurance that all control
objectives are met. Some of the potential risks involved could include, but are not limited to, management judgments, simple errors or mistakes and willful misconduct regarding controls or misinterpretation. Under Section 404 of the Sarbanes-Oxley Act, we are required to evaluate and determine the effectiveness of our internal control over financial reporting. Compliance with this legislation requires management's attention and expense. Management's assessment of our internal control over financial reporting may or may not identify weaknesses that need to be addressed in our internal control system. If we are unable to conclude that our internal control over financial reporting is effective, investors could lose confidence in our reported financial information which could have an adverse effect on the market price of our stock or impact our borrowing ability. In addition, changes in operating conditions and changes in compliance with policies and procedures currently in place may result in inadequate disclosure controls and procedures and internal control over financial reporting in the future.
If our products contain errors or quality issues, such issues may be costly to correct, revenue may be delayed, we could be sued and our reputation could be harmed.
Our products are inherently complex and, despite testing by our customers and us, errors or quality issues may be found in our products after commencement of commercial shipments, especially when products are first introduced or when new versions are released. These errors may result from components supplied by third parties incorporated into our products, which makes us dependent upon the cooperation and expertise of such third parties for the diagnosis and correction of such errors. If errors are discovered, we may not be able to correct them in a timely manner or at all. In addition, we may need to make significant expenditures to eliminate errors and failures. Errors and failures in our products could result in loss of or delay in market acceptance of our products and could damage our reputation. Regardless of the source of these defects or errors, we may need to divert the attention of our engineering personnel from our product development efforts to address the detection and correction of these errors and defects. If one or more of our products fail, a customer may assert warranty and other contractual claims for substantial damages against us. Our contracts with customers contain provisions relating to warranty disclaimers and liability limitations, which may not be upheld. Defending a lawsuit, regardless of its merit, is costly and may divert management's attention and harm the market's perception of us and our products. In addition, if our business liability insurance coverage proves inadequate or future coverage is unavailable on acceptable terms or at all, our business, operating results and financial condition could be adversely impacted.
The occurrence or discovery of these types of errors or failures could have a material and adverse impact on our business, operating results and financial condition. Any such errors, defects, or security vulnerabilities could also adversely affect the market's perception of our products and business.
If we fail to introduce new products and solutions or enhance our existing products and solutions to keep up with rapid technological change, demand for our products and solutions may decline.
The market for application and network performance management and service assurance solutions is highly competitive and characterized by rapid changes in technology, evolving industry standards, changes in customer requirements and frequent product introductions and enhancements. Such changes also affect the network security market in which we now participate. Our success is dependent upon our ability to meet our customers’customers' needs, which are driven by changes in computer networking technologies, new application technologies and the emergence of new industry standards. In addition, new technologies may shorten the life cycle for our products and solutions or could render our existing or planned products and services obsolete. We must address demand from our customers for advancements in our products and services applications in order to support our customers' growing needs and requirements. In order to meet this challenge and remain competitive in the market, we must introduce new enhancements, and additional form factors, to our existing product lines and service offerings. If we are unable to develop, introduce and introducecommunicate new network and application performance management and service assurance products or enhancements to existing products, as well as network security products and solutions, in a timely and successful manner, this inability could have a material and adverse impact on our business, operating results and financial condition.
As our success depends in part on our ability to develop product enhancements and new products and solutions that keep pace with continuing changes in technology and customer preferences, we must devote significant resources to research and development, development and introduction of new products and enhancements on a timely basis, and obtaining market acceptance for our existing products and new products. We have introduced and intend to continue to introduce new products and solutions, including by moving to higher software content in our products. If the introduction of these products and solutions is significantly delayed or if we are unsuccessful in bringing these products and solutions to market, our business, operating results and financial condition could be materially and adversely impacted. We are currently developing a number of new products as well as enhancements to our existing products and offerings, including software only solutions and products available in multiple form factors.
In addition, we must invest in research and development in order to remain competitive in our industry. However, there can be no assurances that continued investment and higher costs of research and development will ultimately result in us maintaining or increasing our market share, which would result in a decline to our operating results. The process of developing new solutions is complex and uncertain; we must commit significant resources to developing new services or features without knowing whether our investments will result in services the market will accept. If our research and development expenses increase without a corresponding increase in our revenues, it could have a material adverse effect on our operating results. Also, we may not be able to successfully complete the development and market introduction of new products or product enhancements in a timely manner. If we fail to develop and deploy new products and product enhancements on a timely basis, or if we fail to gain market acceptance of our new products, our revenues will decline, and we may lose market share to our competitors.
We face significant competition from other technology companies.
The service assurance, andapplication performance management market is aand network security markets are highly competitive, rapidly evolving, and fragmented marketmarkets that hashave overlapping technologies and competitors, both large and small.small, and we expect the competition on offerings and pricing to increase. We believe customers make service management system and network security purchasing decisions based primarily upon the following factors:
product and service performance, functionality and price;
timeliness of new product and service introductions;
network capacity;
ease of installation, integration, and use;
customer service and technical support;
name and reputation of vendor;
quality and value of the product and services; and
alliances with industry partners.
We compete with a growing number of providers of service assurance, application performance management solutions, network security offerings and providers of portable network traffic analyzers and probes. In addition, leading network equipment, network security and service assurance and application technology vendors offer their own management solutions, including products which they license from other competitors. Some of our current and potential competitors have greater name recognition and substantially greater financial, management, marketing, service, support, technical, distribution and other resources than we do. In addition, some of our customers develop their own in-house solutions to meet their technological needs. Further, in recent years some of our competitors have been acquired by larger companies that are seeking to enter or expand in the markets in which we operate. We expect this trend to continue as companies attempt to strengthen or maintain their market positions in an evolving industry. Therefore, given their larger size and greater resources, our competitors may be able to respond more effectively than we can to new or changing opportunities, technologies, standards and customer requirements.
As a result of thesethe competitive factors highlighted in this section and in other risk factors, we may not be able to compete effectively with our current or future competitors. If we are unable to anticipate or react to these competitive challenges or if existing or new competitors gain market share in any of our markets, our competitive position could weaken and we could experience a decline in our sales that could adversely affect our business and operating results. This competition could result in increased pricing pressure, reduced profit margins, increased sales and marketing expenses, and failure to increase, or the loss of, market share, any of which would likely have a material and adverse impact on our business, operating results and financial condition.
OurThe continued integration of the Communications Business into our business continues to be complex and could adversely affect our future results and the market price of our common stock.
The long-term success of the Comms Transaction depends, in large part, on our ability, as a significantly more complex combined company, to managerealize the anticipated benefits and leverage our distribution channels.
Sales to our distribution channels, which include resellers, original equipment manufacturers, distributors, systems integratorson the sales and service providers, accounted for 49%, 49%, and 49%profitability of our total revenue for the fiscal years ended March 31, 2015, 2014 and 2013, respectively.combined company. To increase our salesrealize these anticipated benefits, we need tomust continue to enhancesuccessfully integrate the respective businesses of the combined companies. While our indirect salesintegration efforts have been successful so far, any acquisition involves numerous business and strategic risks and if we fail to continue to manageanticipate or deal with these properly, our reputation and expand these existing distribution channels and to develop new indirect distribution channels. Our channel partners have no obligation to purchase any products from us.business success could be adversely affected. In addition, they could internally develop productsthe integration process has been complex and time-consuming. Difficulties that compete with our solutions or partner with our competitors or bundle or resell competitors’ solutions, possibly at lower prices. The potential inability to develop new relationships or to expand and manage our existing relationships with partners, the potential inability or unwillingness of our partners to market and sell our products effectively or the loss of existing partnerships could have a material and adverse impact on our business, operating results and financial condition. Our international operations, including our operationsmay be encountered in the United Kingdom, mainland Europe, India, Asia-Pacificongoing integration process and other regions,which could affect our success include, but are generally also subjectnot limited to, the risk of longer sales cycles through our international distribution channels. Sales to customers outsidefollowing:
difficulties in assimilating the United States accounted for 23%, 24%,acquired operations, systems, technologies, personnel and 25% of our total revenue for the fiscal years ended March 31, 2015, 2014 and 2013, respectively.cultures;
19difficulties in managing geographically dispersed operations;
diversion of management's attention from our core business and the challenges of managing larger and more widespread operations from the Comms Transaction;
significant impairment, exit and/or restructuring charges if the products or technologies acquired in the acquisitions do not meet our sales expectations or are unsuccessful;
substantial accounting charges for restructuring and related expenses, write-off of in-process research and development, impairment of goodwill, amortization or impairment of intangible assets and share-based compensation expense;
insufficient revenue to offset increased expenses associated with the Comms Transaction;
difficulties in maintaining or establishing uniform standards, controls, procedures and policies; and
failure to properly integrate internal controls and financial systems of the combined companies.
If any of these events were to occur, our products contain errors, they may be costlyability to correct, revenue may be delayed, wemaintain relationships with customers, channel partners, suppliers and employees or our ability to achieve the anticipated benefits of the Comms Transaction could be suedadversely affected, or could reduce our sales or earnings or otherwise adversely affect our business and financial results and, as a result, adversely affect the market price of our reputation could be harmed.common stock.
Despite testing by our customers and us, errors may be found in our products after commencement of commercial shipments. If errors are discovered, weThe Comms Transaction may not achieve its anticipated benefits. In addition, we will continue to incur expenses and management will continue to devote time in connection with the integration of the Communications Business.
Following the Comms Transaction, we have significantly more revenue, expenses, assets and employees than we did prior to the Comms Transaction. We will continue to incur expenses in connection with the integration of the Communications Business, including integrating information technology systems and accounting systems, suppliers, and channel partners of each business and implementing consistent standards, policies, and procedures, and may possibly be ablesubject to correct themmaterial write downs in a timely mannerassets and charges to earnings. This integration may not result in the realization of the full benefits of the growth and other opportunities that we currently expect from the Comms Transaction within the anticipated time frame, or at all. In addition, weFurther, our management team will continue to devote time and attention to the integration efforts which may need to make significant expenditures to eliminate errors and failures. Errors and failures indistract us from operating our products could result in loss of or delay in market acceptance of our products and could damage our reputation. If one or more of our products fail, a customer may assert warranty and other claims for substantial damages against us. The occurrence or discovery of these types of errors or failures could have a material and adverse impact on ourongoing business operating results and financial condition.operations.
Increased customer demands on our technical support services may adversely affect our relationships with our customers and our financial results.
We offer technical support services with many of our products. We may be unable to respond quickly enough to accommodate short-term increases in customer demand for support services. We also may be unable to modify the format of our support services to compete with changes in support services provided by competitors. Our customers depend on our support organization to resolve any issues relating to our products deployed on their networks. A high level of support is critical for continued relationships with our customers. If we or our channel partners do not effectively assist our customers in deploying our products, succeed in helping our customers quickly resolve post-deployment issues, and provide effective ongoing support, it would adversely affect our ability to sell our products to existing customers and would harm our reputation with potential customers. In addition, as we continue to expand our operations internationally, our support organization will face additional challenges, including those associated with delivering support, training and documentation in languages other than English. Any failure to maintain high quality support and services would harm our operating results and reputation. Further customer demand for these services, without corresponding revenues, could have a material and adverse impact on our financial condition and results of operations.
WeFailure to manage growth properly and to implement enhanced automated systems could adversely impact our business.
The growth in size and complexity of our business and our customer base has been and will continue to be a challenge to our management and operations. Our growth has been through acquisitions of businesses with complementary businesses and technologies, and we anticipate that further significant expansion will be required. This growth is expected to continue to place significant demands on our management, infrastructure, and other resources. To manage further growth effectively, we must hire, and retain skilled personnel, and plan for and manage the succession of key executives.
Our future success depends in large part upon our ability to attract, train, motivateintegrate, and retain highly skilled employees, particularly executives, salespersonnel qualified to manage our expanded operations. We will also need to continue to improve our financial and marketing personnel, software engineers,management controls, reporting systems, and technical support personnel.procedures. If we are unable to attract and retainmanage our growth effectively, our costs, the highly skilled technical personnel that are integral toquality of our sales, marketing, product development and technical support teams,products, the rate at which we can generate sales and develop new products or product enhancements may be limited. This inability could have a material and adverse impact on our business, operating results and financial condition. In addition, we must maintain and periodically increase the sizeeffectiveness of our sales force in order to increaseorganization, attraction and retention of key personnel, our direct sales and supportbusiness, our indirect sales channels. Because our products are very technical, sales people require a comparatively long period of time to become productive, typically three to twelve months. This lag in productivity, as well as the challenge of attracting qualified candidates, may make it difficult to meet our sales force growth targets. Further, we may not generate sufficient sales to offset the increased expense resulting from growing our sales force. If we are unable to maintain and periodically expand our sales capability, our business, operating results and financial condition could be materially and adversely impacted. To manage our growth effectively, we may need to implement new or enhanced automated infrastructure technology and systems.
Any disruptions or ineffectiveness relating to our systems implementations and enhancements could adversely impactaffect our business. Our future success dependsability to process customer orders, ship products, provide services and support to our customers, bill and track our customers, fulfill contractual obligations, and otherwise run our business.
As a significant degree onresult of the skills, experience and efforts of Anil Singhal, our President, Chief Executive Officer, and co-founder, and our other key executive officers and senior managers to work effectively as a team. The loss of one or more of our key personnel could have a material and adverse impact on our business, operating results and financial condition. We must, therefore, plan for and manage the succession of key executives due to retirement, illness or competitive offers elsewhere.
The successdiversification of our business, depends,personnel growth, acquisitions and international expansion in part, on the continued growth in the market for and the continued commercial demand for service delivery service assurance solutions focused on the performance monitoring and management of applications and networks.
We derive nearly allrecent years, most of our revenue from the saleemployees are now based outside of productsour headquarters. If we are unable to appropriately increase management depth and services that are designed to allow our customers to assure the delivery of services through the management of the performance of applications across IP networks. Therefore,enhance succession planning, we mustmay not be able to predict the appropriate featuresachieve our financial or operational goals. It is also important to our continued success that we hire qualified employees, properly train them and prices for future products to address the market, the optimal distribution strategymanage out poorly-performing personnel, all while maintaining our corporate culture and the future changesspirit of innovation. If we are not successful at these efforts, our growth and operations could be adversely affected.
As our business evolves, we must also expand and adapt our information technology (IT) and operational infrastructure. Our business relies on our data systems, billing systems and other operational and financial reporting and control systems. All of these systems have become increasingly complex due to the competitive environment. In order for us to be successful,diversification and complexity of our potential customers must recognize the valuebusiness, acquisitions of more sophisticated application management solutions, decide to invest in the management of their networked applicationsnew businesses with different systems and in particular, adoptincreased regulation over controls and procedures. To manage our management solutions. Any failure of this markettechnical support infrastructure effectively and improve our sales efficiency, we will need to continue to upgrade and improve our data systems, billing systems, ordering processes and other operational and financial systems, procedures and controls. These upgrades and improvements may be viable would materiallydifficult and adversely impactcostly. If we are unable to adapt our systems and organization in a timely, efficient and cost-effective manner to accommodate changing circumstances, our business operating resultsmay be adversely affected. If the third parties we rely on for hosted data solutions for our internal network and financial condition. Additionally, businesses may chooseinformation systems are subject to outsourcea security breach or otherwise suffer disruptions that impact the operationsservices we utilize, the integrity and managementavailability of their networksour internal information could be compromised causing the loss of confidential or proprietary information, damage to managed service providers. Our business may depend on our ability to continue to develop relationships with these service providersreputation and successfully market our products to them.economic loss.
We may not successfully complete acquisitions or integrate acquisitions we do make, which could impair our ability to compete and could harm our operating results.
We may need to acquire complementary businesses, products or technologies to remain competitive or expand our business. We actively investigate and evaluate potential acquisitions of complementary businesses, products and technologies in the ordinary course of business. We may compete for acquisition opportunities with entities having significantly greater resources than us.we have. As a result, we may not succeed in acquiring some or all businesses, products or technologies that we seek to
acquire. Our inability to effectively consummate acquisitions on favorable terms could significantly impact our ability to compete effectively in our targeted markets and could negatively affect our results of operations.
Acquisitions that we do complete could adversely impact our business. The potential adverse consequences from acquisitions include:
the potentially dilutive issuance of common stock or other equity instruments;
the incurrence of debt and amortization expenses related to goodwill and acquired intangible assets;
the potentially costly and disruptive impact of assuming unfavorable pre-existing contractual relationships of acquired companies that we would not have otherwise entered into and potentially exiting or modifying such relationships;
the potential litigation or other claims in connection with, or inheritance of claims or litigation risk as a result of, an acquisition including claims from terminated employees, customers, third parties or enforcement actions by various regulators;
the incurrence of significant costs and expenses; and
the potentially negative impact of poor performance of an acquisition on our earnings per share.
Acquisition transactions also involve numerous business risks. These risks from acquisitions include:
difficulties in assimilating the acquired operations, technologies, personnel and products;
difficulties in managing geographically dispersed operations;
difficulties in assimilating diverse financial reporting and management information systems;
difficulties in maintaining uniform standards, controls, procedures and policies;
the diversion of management’smanagement's attention from other business concerns;
use of cash to pay for acquisitions that may limit other potential uses of our cash, including stock repurchases and retirement of outstanding indebtedness;
substantial accounting charges for restructuring and related expenses, write-off of in-process research and development, impairment of goodwill, amortization or impairment of intangible assets and share-based compensation expense;
the potential disruption of our business;
the potential loss of key employees, customers, distributors or suppliers;
the inability to generate sufficient revenue to offset acquisition or investment costs; and
the potential for delays in customer purchases due to uncertainty and the inability to maintain relationships with customers of the acquired businesses.
Failure to manage growth properly and to implement enhanced automated systems could adversely impact our business.
The growth in size and complexity of our business and our customer base has been and will continue to be a challenge to our management and operations. To manage further growth effectively, we must integrate new personnel and manage expanded operations. If we are unablenot able to successfully manage these issues, the anticipated benefits and efficiencies of the acquisitions may not be realized fully or at all, or may take longer to realize than expected, and our growth effectively,ability to compete, our costs, the qualityrevenue and gross margins and our results of our products, the effectiveness of our sales organization, attractionoperations may be adversely affected.
Our ability to quickly and retention of key personnel, oursuccessfully recover from a disaster or other business our operating results and financial conditioncontinuity event could be materially and adversely impacted. Any disruptions or ineffectiveness relating to our systems implementations and enhancements could adversely affect our ability to process customer orders, shipdeliver our products provide services and supportcause reputational harm to our customers, billbusiness.
The occurrence of a natural disaster or an act of terrorism, or a decision or need to close any of our facilities without adequate notice or time for making alternative arrangements could result in interruptions in the delivery of our products and trackservices. Our central business functions, including administration, human resources, finance services, manufacturing and customer support depend on the proper functioning of our customers, fulfill contractual obligations,computer, telecommunication and other related systems and operations. A disruption or failure of these systems or operations because of a disaster or other business continuity event could cause data to be lost or otherwise run our business.
Our success depends, in part, ondelay our ability to managecomplete sales and provide the highest level of service to our international researchcustomers. In addition, we could have difficulty producing accurate financial statements on a timely basis, which could adversely affect the trading value of our stock. Although we endeavor to ensure there is redundancy in these systems and developmentthat they are regularly backed-up, there are no assurances that data recovery in the event of a disaster would be effective or occur in an efficient manner. Our operations are dependent upon our ability to protect our technology infrastructure against damage from business continuity events that could have a significant disruptive effect on our operations. We could experience material adverse interruptions to our operations or delivery of services to our clients in a disaster recovery scenario.
We must continue to enhanceIf a security breach or cyberattack of our existingIT networks and systems, or any of our products, occurs, our operations could be interrupted, our products and introduceservices may be perceived as vulnerable, and our brand and reputation could be damaged, which could reduce revenue, increase expenses, and expose us to legal claims or regulatory actions.
Although we have controls and security measures in place to prevent such attacks, experienced computer hackers are increasingly organized and sophisticated. Malicious attack efforts operate on a large-scale and sometimes offer targeted attacks as a paid for service. In addition, the techniques they use to access or sabotage networks change frequently and generally are not recognized until launched against a target. Use of open source code or other third-party software in our products and infrastructure could also result in increased cybersecurity risks. Our products may not anticipate new techniques quickly enough to protect against malicious attacks. If we fail to identify and respond to new and increasingly complex methods of attack and to update our products accordingly, we could be at risk of a cyberattack.
Other individuals or entities, including employees or vendors, may also intentionally or unintentionally provide unauthorized access to our IT environments or to our customers' IT environments.
As such, our IT networks and systems, and our products, may still be vulnerable to data theft, computer viruses, programming errors, attacks by third parties or similar problems. If we, or our customers using our products, were to experience a security breach or cyberattack, we could incur substantial costs and liabilities, including but not limited to, expenses attributable to rectifying the security breach or cyberattack including the cost of repairing any damage to our, or our customers' systems, liability for stolen assets or information, lost revenue and income resulting from any system or product downtime, increased costs for cybersecurity protection, and damage to our reputation causing customers and possibly investors to lose confidence in orderus. Similarly, an actual or perceived breach of our customers' network security allowing access to keep up with rapid technological change. Our international research and development teams play a critical role in these efforts. We must attract, train, motivate and retain our international research and development team members. To maintain this stable international employee research and development talent, we believe we must provide our international engineers with compelling and strategically significant work, coupled with technical and architectural ownershipcustomers' data centers or other parts of their respectiveIT environments, regardless of whether the breach is attributable to our products, may cause contractual disputes, result in damage to our reputation and could require significant expenditures of our capital and diversion of our resources from development projects. Weefforts.
Because some of our products include SaaS offerings, and our customers who purchase these hosted products and solutions depend on us for reliable access to our solution, any significant disruption in our SaaS hosting network infrastructure could harm our reputation, result in early termination of customer agreements or loss of customers, and negatively affect our business.
21Additionally, efforts by hackers or others could cause interruptions, delays or cessation of our product licensing, or modification of our software, which could cause us to lose existing or potential customers. If these efforts are successful and a third party obtains unauthorized access to our or our customers' IT environments, our business operations, and those of our customers, could be adversely affected, losses or theft of data could occur, our reputation and future sales could be harmed,
must develop the leaders of these international teams, while ensuring their frequent inclusion and participation in corporate strategic and operational planning.
If we violate the U.S. Foreign Corrupt Practices Actgovernmental regulatory action or applicable anti-bribery laws in other countries,private or if we fail to comply with U.S. export controls and government contracting laws, our businessgovernmental litigation could be harmed.
We earn a significant portion of our total revenues from international sales. As a result, we are subject to the U.S. Foreign Corrupt Practices Act (FCPA), which generally prohibits U.S. companiescommenced against us and their intermediaries from making corrupt payments to foreign officials for the purpose of obtaining or keeping business or otherwise obtaining favorable treatment and requires companies to maintain appropriate record-keeping and internal accounting practices to accurately reflect the transactions of the company. Under the FCPA, U.S. companies may be held liable for actions taken by agents or local partners or representatives. In addition, regulators may seek to hold us liable for successor liability FCPA violations committed by companies which we acquire. We are also subject to the U.K. Bribery Act and may be subject to certain anti-corruption laws of other countries in which we do business. We are also subject to the export and re-export control laws of the U.S., including the U.S. Export Administration Regulations (EAR). We are also subject to U.S. government contracting laws, rules and regulations, and may be subject to government contracting laws of other countries in which we do business. If we or our distributors, resellers, agents, or other intermediaries fail to comply with the FCPA, the EAR or U.S. government contracting laws, or the anti-corruption, export or governmental contracting laws of other countries, governmental authorities in the U.S. or other countries could seek to impose civil and/or criminal penalties, which could have a material adverse effect on our business, results of operations, financial conditions and cash flows.
The current economic and geopolitical environment may impact some specific industries into which we sell.
Many of our customers are concentrated in certain industries, including financial services, public sector, healthcare, and the service provider market segment. Certain industries may be more acutely affected by economic, geopolitical and other factors than other sectors. Our public sector customers are affected by federal, state and local budget decisions. To the extent that one or more of the sectors in which our customer base operates is adversely impacted, whether as a result of general conditions affecting all sectors or as a result of conditions affecting only those particular sectors, our business, financial condition, operating results and results of operationscash flows could be materially adversely affected.
Our internal operations are dependent upon various information technology systems, and adversely impacted.failures of or interruptions to those systems could harm our business.
Uncertain conditions in the global economy and constraints in the global credit market may adversely affect our revenue and results of operations.
Disruptions in the global economy and constraints in the global credit market may cause some of our customers to reduce, delay, or cancel spending on capital andOur business processes are dependent upon certain information technology projects, resulting in reduced spending with us. While some industry sectors such as government and telecommunications may be less susceptible to the effects of an economic slowdown, our enterprise customers may be adversely affected, especially in financial services and consumer industries. Continued volatility in, or disruption of financial markets could limit customers’ ability to obtain adequate financing to maintain operations and result in a decrease in sales volume that could have a negative impact on our results of operations. Further, competitors may respond to economic conditions by lowering their prices, which could put pressure on our pricing. We could also experience lower than anticipated order levels, cancellations of orders in backlog, defaults on outstanding accounts receivable and extended payment or delivery terms.
The price of our common stock may fluctuate with market volatility.
The market price of our common stock has been volatile and may continue to fluctuate in response to a number of factors,systems, some of which are beyond our control. Trading activityoperated or hosted by third parties. In addition, in connection with integrating the acquired business units, we have reconfigured some of our stock has historicallyIT systems or other business processes; these efforts have been relatively thin, in part as a result of officerstime-consuming and directors and institutional stockholders holding a significant percentage of our stock. Broad market fluctuations could adversely affect the market price of our common stock, which in turn could cause impairment of goodwill that could materially and adversely impact our financial condition and results of operations.costly.
It is not uncommon when the market price of a stock has been volatile for holders of that stock to institute securities class action litigation against the company that issues that stock. If any of our stockholders brought such a lawsuit against us, eventhese systems fail or are interrupted, or if the lawsuit is without merit, we could incur substantial costs defending the lawsuit beyond any insurance coverage which we may have for such risks. Such a lawsuit could also divert the time and attention of our management.
We may fail to secure necessary additional financing.
Our future success may depend in part on our ability to obtain additional financingconnect to supportor interact with one or more networks is interrupted, our continued growth and operations. Ifprocesses may function at a diminished level or not at all. This would harm our existing sources of liquidity are insufficientability to satisfy our operating requirements, we may need to seek to raise capital by:
issuing additional common stock or other equity instruments;
acquiring additional bank debt;
issuing debt securities; or
obtaining lease financings.
However, we may not be able to obtain additional capital when we want or need it, or capital may not be available on satisfactory terms. Furthermore, any additional capital may have terms and conditions that adversely affect our business, such as new financial or operating covenants, or that may result in additional dilution to our stockholders.
Our effective tax rate may increase or fluctuate,ship products, which could increasenegatively impact our income tax expenserelationships with our customers and reduce our net income.
Our effective tax rate could be adversely affected by several factors, many of which are outside of our control, including:
Changes in the relative proportions of revenuespartners and income before taxes in the various jurisdictions in which we operate that have differing statutory tax rates;
Changing tax laws, regulations, and interpretations in multiple jurisdictions in which we operate as well as the requirements of certain tax rulings;
Changes in accounting and tax treatment of share-based compensation;
The valuation of generated and acquired deferred tax assets and the related valuation allowance on these assets;
The tax effects of purchase accounting for acquisitions and restructuring charges that may cause fluctuations between reporting periods; and
Tax assessments or any related tax interest or penalties that could significantly affect our income tax expense for the period in which the settlements take place.
An adverse change in our effective tax rate could have a material and adverse effect on our financial condition and results of operations.would likely be harmed.
Our estimates and judgments related to critical accounting policies could be inaccurate.
We consider accounting policies related to marketable securities, revenue recognition, valuation of goodwill and acquired intangible assets and share-based compensation to be critical in fully understanding and evaluating our financial results. Management makes accounting judgments and estimates related to these policies. Our business, operating results and financial condition could be materially and adversely impacted in future periods if our accounting judgments and estimates related to these critical accounting policies prove to be inaccurate.
Our reliance on sole source suppliers could adversely impact our business.
Specific components that are necessary for the hardware assembly of our instruments are obtained from separate sole source suppliers or a limited group of suppliers. These components include our network interface cards and proprietary NetScout hardware. Our reliance on sole or limited suppliers involves several risks, including a lack of control over the manufacturing process, inventory management and potential inability to obtain an adequate supply of required components and the inability to exercise control over pricing, quality and timely delivery of components. For most of our products, we do not have the internal manufacturing capabilities to meet our customers' demands. It is our practice to mitigate these risks by partnering with key suppliers, including distributors, to establish a variety of supply continuity practices. These practices may include, among other approaches, establishing buffer supply requiring suppliers to maintain adequate stocks of materials, bonding agreements with distributors, and use-based and kanban programs to set supply thresholds. We also enter into escrow arrangements for certain technologies. Where possible, we use widely-available off the shelf hardware and work with large suppliers with multiple factories and other risk management practices. However, failure of supply or failure to execute effectively on any of these programs could result in our inability to obtain adequate deliveries or the occurrence of any other circumstance that would require us to seek alternative sources of these
components would impact our ability to ship our products on a timely basis. ThisMoreover, if we are unable to continue to acquire from these suppliers on acceptable terms, or should any of these suppliers cease to supply us with components for any reason, we may not be able to identify and integrate an alternative source of supply in a timely fashion or at the same costs. Any transition to one or more alternate manufacturers would likely result in delays, operational problems and increased costs, and may limit our ability to deliver our products to our customers on time for such transition period. These risks could damage relationships with our current and prospective customers, cause shortfalls in expected revenue, and could materially and adversely impact our business, operating results and financial condition.
If we violate the U.S. Foreign Corrupt Practices Act or applicable anti-bribery laws in other countries, or if we fail to comply with U.S. export controls and government contracting laws, our business could be harmed.
We earn a significant portion of our total revenues from international sales. As a result, we must comply with complex foreign and U.S. laws and regulations, such as the U.S. Foreign Corrupt Practices Act, the U.K. Bribery Act and other local laws prohibiting corrupt payments to government officials and others, as well as anti-competition regulations.
The U.S. Foreign Corrupt Practices Act (FCPA), which continues to see increased enforcement in recent years, generally prohibits U.S. companies and their intermediaries from making corrupt payments to foreign officials for the purpose of obtaining or keeping business or otherwise obtaining favorable treatment and requires companies to maintain appropriate record-keeping and internal accounting practices to accurately reflect the transactions of the company. Under the FCPA, U.S. companies may be held liable for actions taken by agents or local partners or representatives. In addition, regulators may seek to hold us liable for successor liability FCPA violations committed by companies which we acquire. We are also subject to the U.K. Bribery Act and may be subject to certain anti-corruption laws of other countries in which we do business.
In addition to anti-bribery and anti-corruption laws, we are also subject to the export and re-export control laws of the U.S., including the U.S. Export Administration Regulations (EAR) and to U.S. government contracting laws, rules and regulations, and may be subject to government contracting laws of other countries in which we do business. If we or our distributors, resellers, agents, or other intermediaries fail to comply with the FCPA, the EAR or U.S. government contracting laws, or the anti-corruption, export or governmental contracting laws of other countries, governmental authorities in the U.S. or other countries could seek to impose civil and/or criminal penalties, which could have a material adverse effect on our business, results of operations, financial conditions and cash flows.
Violations of these laws and regulations could result in fines and penalties, criminal sanctions, restrictions on our business conduct and on our ability to offer our products and services in one or more countries. Such violations could also adversely affect our reputation with existing and prospective clients, which could negatively impact our operating results and growth prospects.
The failure to recruit and retain qualified personnel and plan for and manage the succession of key executives could hinder our ability to successfully manage our business, which could have a material adverse effect on our financial position and operating results.
We operate in businesses where there is intense competition for experienced personnel in all of our global markets and have, in some instances, experienced attrition of our employees to direct and indirect competitors. We depend on our ability to identify, recruit, hire, train, develop and retain qualified and effective professionals and to attract and retain talent needed to execute our business strategy. Our future success depends in large part upon our ability to attract, train, motivate and retain highly skilled employees, particularly executives, sales and marketing personnel, software engineers, and technical support personnel. The complexity of our products, processing functionality, software systems and services requires highly trained professionals. While we presently have a sophisticated, dedicated and experienced team of employees who have a deep understanding of our business lines, the labor market for these individuals has historically been very competitive due to the limited number of people available with the necessary technical skills and understanding. If we are unable to attract and retain the highly skilled technical personnel that are integral to our sales, marketing, product development and technical support teams, the rate at which we can generate sales and develop new products or product enhancements may be limited. This inability could have a material and adverse impact on our business, operating results and financial condition.
In addition, we must maintain and periodically increase the size of our sales force in order to increase our direct sales and support our indirect sales channels. Because our products are very technical, sales people require a comparatively long period of time to become productive, typically three to twelve months. This lag in productivity, as well as the challenge of attracting qualified candidates, may make it difficult to meet our sales force growth targets. Further, we may not generate sufficient sales to offset the increased expense resulting from growing our sales force. If we are unable to maintain and periodically expand our sales capability, our business, operating results and financial condition could be materially and adversely impacted.
Loss of key personnel could adversely impact our business. Our future success depends to a significant degree on the skills, experience and efforts of Anil Singhal, our President, Chief Executive Officer, and co-founder, and our other key executive officers and senior managers to work effectively as a team. Effective succession planning is also important for our long-term success. Failure to ensure effective transfers of knowledge and smooth transitions involving key employees could hinder our strategic planning and execution. The loss of one or more of our key personnel could have a material and adverse impact on our business, operating results and financial condition. We must, therefore, plan for and manage the succession of key executives due to retirement, illness or competitive offers elsewhere.
We have assumed certain non-U.S. pension benefit obligations associated with the Communications Business. Future funding obligations related to these liabilities could restrict cash available for our operations, capital expenditures or other requirements, or require us to borrow additional funds.
As part of the Comms Transaction, we assumed certain unfunded non-U.S. pension obligations related to non-U.S. employees of the Communications Business. While we intend to comply with any future funding obligations for our non-U.S. pension benefit plans through the use of cash from operations, there can be no assurance that we will generate enough cash to do so and also meet our other required or intended cash uses. Our inability to fund these obligations through cash from operations could require us to seek funding from other sources, including through additional borrowings, which could materially increase our outstanding debt or debt service requirements.
Our success depends, in part, on our ability to manage and leverage our distribution channels. Disruptions to, or our failure to effectively develop and manage, these partners and the processes and procedures that support them could adversely affect our ability to generate revenues from the sale of our products and services. Managing these distribution channels and relationships requires experienced personnel, and lack of sufficient expertise could lead to the decrease of the sales of our products and services and our operating results could suffer.
To increase our sales we need to continue to enhance our indirect sales efforts, to continue to manage and expand these existing distribution channels and to develop new indirect distribution channels. Our channel partners have no obligation to purchase any products from us. Some of our distribution and channel partners sell competitive products and services and the loss of, or reduction in sales by, these partners could materially reduce our revenues. In addition, they could internally develop products that compete with our solutions or partner with our competitors or bundle or resell competitors' solutions, possibly at lower prices. The potential inability to develop relationships with new partners in new markets, expand and manage our
existing partner relationships, the unwillingness of our partners to market and sell our products effectively or the loss of existing partnerships could have a material and adverse impact on our business, operating results and financial condition. Our international operations, including our operations in the United Kingdom, mainland Europe, India, Asia-Pacific and other regions, are generally also subject to the risk of longer sales cycles through our international distribution channels. Sales to customers outside the United States accounted for 37%, 29%, and 23% of our total revenue for the fiscal years ended March 31, 2017, 2016 and 2015, respectively.
Our future success will likely require us to maintain and increase the number and depth of our relationships with distributors and channel partners and to leverage those relationships to expand our distribution channels and increase revenue. The need to develop such relationships can be particularly acute in areas outside of the U.S. Recruiting and retaining qualified channel partners and training them in the use of our technology and services and ensuring that they comply with our legal and ethical expectations requires significant time and resources.
Our failure to maintain and increase the number and quality of relationships with channel partners, and any inability to successfully execute on the partnerships we initiate, could significantly impede our revenue growth prospects in the short and long term.
Our success depends, in part, on our ability to manage our international research and development operations and related partnerships. Our international research and development efforts may achieve delayed or lower than expected benefits and involve competitive and other risks.
We must continue to enhance our existing products and introduce new products in order to keep up with rapid technological change. Our international research and development teams play a critical role in these efforts. We must attract, train, motivate and retain our international research and development team members. To maintain this stable international employee research and development talent, we believe we must provide our international engineers with compelling and strategically significant work, coupled with technical and architectural ownership of their respective development projects. We must develop the leaders of these international teams, while ensuring their frequent inclusion and participation in corporate strategic and operational planning. We are likely to recognize the costs associated with these investments earlier than some of the anticipated benefits, and the return on these investments may be lower, or may develop more slowly, than we expect. These development efforts also involve risks, including, knowledge transfer issues related to our technology and resulting exposure to misappropriation of intellectual property or information that is proprietary to us, heightened exposure to economic, security and political conditions abroad, and exchange rate and tax compliance issues. The risks related to our research and development efforts abroad could increase our expenses, impair our development efforts, harm our competitive position and/or damage our reputation. If we do not achieve the benefits anticipated from these investments, or if the achievement of these benefits is delayed, our operating results may be adversely affected.
Necessary licenses for third-party technology may not be available to us or may be very expensive.
We currently and will in the future license technology from third parties that we use to produce or embed in our products. While we have generally been able to license required third-party technology to date, futurethird-party licenses required third-party licensesin the future may not be available to us on commercially reasonable terms or at all. Third parties who hold exclusive rights to technology that we seek to license may include our competitors. If we are unable to obtain any necessary third-party licenses, we would be required to redesign our product or obtain substitute technology, which may not perform as well, be of lower quality or be more costly. The loss of these licenses or the inability to maintain any of them on commercially acceptable terms could delay development of future products or the enhancement of existing products. We may also choose to pay a premium price for such a license in certain circumstances where continuity of the licensed product would outweigh the premium cost of the license. The unavailability of these licenses or the necessity of agreeing to commercially unreasonable terms for such licenses could materially adversely affect our business, financial condition, operating results and cash flows.
Our success depends on our ability to protect our intellectual property rights.
Our business is heavily dependent on our intellectual property. We rely upon a combination of patent, copyright, trademark and trade secret laws and registrations and non-disclosure and other contractual and license arrangements to protect our intellectual property rights. The reverse engineering, unauthorized copying, or other misappropriation of our intellectual property could enable third parties to benefit from our technology without compensating us. Furthermore, the laws of some foreign jurisdictions do not offer the same protections for our proprietary rights as the laws of the United States, and we may be subject to unauthorized use of our products in those countries. Legal proceedings to enforce our intellectual property rights could be burdensome and expensive and could involve a high degree of uncertainty. In addition, legal proceedings may divert management’smanagement's attention from growing our business. There can be no assurance that the steps we have taken to protect our intellectual property rights will be adequate to deter misappropriation of proprietary information, or that we will be able to
detect unauthorized use by third parties and take appropriate steps to enforce our intellectual property rights. Further, we also license software from third parties forThe unauthorized copying or use as partof our products or proprietary information could result in reduced sales of our products and if any of these licenses were to terminate, we might experience delays in product shipment until we develop or license alternative software.eventually harm our operating results.
Others may claim that we infringe on their intellectual property rights.
From time to time we have been and may continue to be subject to claims by others that our products infringe on their intellectual property rights, patents, copyrights or trademarks. In some cases, we may have agreed to indemnify our customers and partners if our products or technology infringe or misappropriate specified third party intellectual property rights; therefore, we could become involved in litigation or claims brought against our customers or partners if our products or technology are the subject of such allegations. These claims, whether or not valid, could require us to spend significant sums in litigation, pay damages or royalties, delay product shipments, reengineer our products, rename our products and rebuild name recognition or acquire licenses to such third-party intellectual property. We may not be able to secure any required licenses on commercially reasonable terms or secure them at all. Any of these claims or resulting events could have a material and adverse impact on our business, operating results and financial condition.
The effectivenessUncertainties of our disclosure and internal controls may be limited.
Our disclosure controls and procedures and internal control over financial reporting may not prevent all material errors and intentional misrepresentations. Any system of internal control can only provide reasonable assurance that all control objectives are met. Someregulation of the potential risks involvedInternet and data traveling over the Internet could include, but are not limitedhave a material and adverse impact on our financial condition and results of operations.
Currently, few laws or regulations apply directly to management judgments, simple errorsaccess to or mistakes and willful misconduct regarding controls or misinterpretation. Under Section 404commerce conducted on the Internet. We could be materially adversely affected by regulation of the Sarbanes-Oxley ActInternet and Internet commerce in any country where we are requiredoperate. Further, governments may regulate or restrict the sales, licensing, distribution, and export or import of certain technologies to evaluatecertain countries. The adoption of regulation of the Internet and determineInternet commerce could decrease demand for our products and, at the effectivenesssame time, increase the cost of selling our internal control over financial reporting. Compliance with this legislation requires management’s attention and expense. Management’s assessment of our internal control over financial reporting may or may not identify weaknesses that need to be addressed in our internal control system. If we are unable to conclude that our internal control over financial reporting is effective, investors could lose confidence in our reported financial informationproducts, which could have ana material and adverse effect on our financial condition and results of operations.
The enactment of new privacy laws and regulations in the market pricejurisdictions in which we do business could require significant company resources or limit the way our customers can use our products.
The enactment of new federal, state, or foreign data privacy laws and regulations could cause customers not to be able to take advantage of all the features or capabilities of our stock or impactproducts which in turn could reduce demand for certain of our borrowing ability.products. In addition, changes in operating conditionsinternational privacy laws have required an adjustment to some of our internal processes and changes in compliance with policies and procedures currently in place may result in inadequate internal control over financial reportingsignificant resources in the future.past and future changes could require similar efforts and resources with regard to compliance. The adoption of or changes to any such data privacy laws and regulations could affect demand for our products, increase the cost of selling our products and divert time and attention of our management, all of which could have a material and adverse effect on our financial condition and results of operations.
We or our suppliers may be impacted by new regulations related to climate change.change or other environmental issues.
We or our suppliers may become subject to new laws enacted with regards to climate change.change or other environmental issues. In the event that new laws are enacted or current laws are modified in countries in which we or our suppliers operate, our flow of product may be impacted which could have a material and adverse effect on our financial condition and results of operations.
UncertaintiesThe current economic and geopolitical environment may impact some specific industries into which we sell and may lead our customers to delay or forgo technology investments and could have other impacts, any of regulationwhich could materially adversely affect our business, financial condition, operating results and cash flows.
Many of our customers are concentrated in certain industries, including financial services, public sector, healthcare, and the service provider market segment. Certain industries may be more acutely affected by economic, geopolitical and other factors than other sectors. Our public sector customers are affected by federal, state and local budget decisions. To the extent that one or more of the Internet and data traveling over the Internet could havesectors in which our customer base operates is adversely impacted, whether as a material and adverse impact onresult of general conditions affecting all sectors or as a result of conditions affecting only those particular sectors, our business, financial condition and results of operations.
Currently, few laws or regulations apply directly to access to or commerce on the Internet. Weoperations could be materially and adversely affected by regulation of the Internet and Internet commerceimpacted. If companies in any country whereour target markets reduce capital expenditures, we operate. Such regulations could include matters such as net neutrality. Further, governments may regulate or restrict theexperience a reduction in sales, licensing, distribution, and export or import of certain technologies to certain countries. Thelonger sales cycles, slower adoption of regulationnew technologies as well as downward pressure on the price of the Internet and Internet commerce couldour products.
decreaseInternational economic, political, legal, compliance and business factors could negatively affect our financial statements and growth.
The Communications Business historically derived significant sales from customers outside the U.S. and certain manufacturing operations, suppliers and employees of the Communications Business are located outside the U.S. We expect to continue to increase our sales and presence outside the U.S., particularly in the high-growth markets. Our international business (and particularly our business in high-growth markets) is subject to risks that are customarily encountered in non-U.S. operations, any of which could negatively affect our business, financial condition and results of operations.
The success of our business depends, in part, on the continued growth in the market for and the continued commercial demand for service delivery, service assurance and network security solutions focused on the performance monitoring and management of applications and networks.
We derive nearly all of our revenue from the sale of products and services that are designed to allow our customers to assure the delivery of services through management of the performance and network security of applications across IP networks. We have actively expanded our operations in the past through acquisitions and organic growth and may continue to expand them in the future in order to gain share in the evolving market in which we operate. Therefore, we must be able to predict the appropriate features and prices for future products to address the market, the optimal distribution strategy and the future changes to the competitive environment. In order for us to be successful, our potential customers must recognize the value of more sophisticated application management and network security solutions, decide to invest in the management of their networked applications and, in particular, adopt our management solutions. Any failure of this market to continue to be viable would materially and adversely impact our business, operating results and financial condition. Additionally, businesses may choose to outsource the operations and management of their networks to managed service providers. Our business may depend on our ability to continue to develop relationships with these service providers and successfully market our products to them.
Changes in industry structure and market conditions could lead to charges related to discontinuances of certain of our products or businesses and asset impairments.
In response to changes in industry and market conditions, we may be required to strategically reallocate managerial, operational, financial and other resources. Any such efforts may result in charges related to consolidation of excess facilities or claims from third parties who were resellers or users of discontinued products.
Our growth could suffer if the markets into which we sell our products and atservices experience cyclicality.
Our growth will depend in part on the same time, increasegrowth of the costmarkets which the Company serves. The Company serves certain industries that have historically been cyclical and have experienced periodic downturns that have had a material adverse impact on demand for the products, software and services that the Company offers. Any of sellingthese factors could adversely affect the business, financial condition and results of operations of the combined company in any given period.
Uncertain conditions in the global economy and constraints in the global credit market may adversely affect our products, whichrevenue and results of operations.
Disruptions in the global economy and constraints in the global credit market may cause some of our customers to reduce, delay, or cancel spending on capital and technology projects, resulting in reduced spending with us. While some industry sectors such as government and telecommunications may be less susceptible to the effects of an economic slowdown, our enterprise customers may be adversely affected, especially in financial services and consumer industries. Continued volatility in, or disruption of financial markets could limit customers' ability to obtain adequate financing to maintain operations and result in a decrease in sales volume that could have a negative impact on our results of operations. Further, competitors may respond to economic conditions by lowering their prices, which could put pressure on our pricing. We could also experience lower than anticipated order levels, cancellations of orders in backlog, defaults on outstanding accounts receivable and extended payment or delivery terms. Economic weakness, customer financial difficulties and constrained spending on IT initiatives have resulted, and may in the future result, in challenging and delayed sales cycles and could negatively impact our ability to forecast future periods. In addition, some of the markets we serve are emerging and the purchase of our products involves material changes to established purchasing patterns and adverse effect onpolicies. The purchase of our products is often discretionary and may involve a significant commitment of capital and other resources.
The price of our common stock may fluctuate with market volatility.
The market price of our common stock has been volatile and may continue to fluctuate in response to a number of factors, some of which are beyond our control. The stock market in general, and the market prices of stocks of technology companies in particular, have experienced extreme price volatility that has adversely affected, and may continue to adversely affect, the market price of our common stock for reasons unrelated to our business or operating results. Broad market fluctuations could adversely affect the market price of our common stock, which in turn could cause impairment of goodwill that could materially and adversely impact our financial condition and results of operations. In addition, the enactmentstock market in general, and the market prices of new federal, state, or foreign data privacy laws and regulations could cause customersstock of publicly-traded technology companies in particular, have experienced significant volatility that often has been unrelated to the operating performance of such companies.
It is not uncommon when the market price of a stock has been volatile for holders of that stock to be able to take advantage of allinstitute securities class action litigation against the features or capabilities of our products which in turn could reduce demand for certain of our products.
company that issues that stock. If a security breach or cyber attack of our IT networks and systems, or any of our products, occurs, our operations could be interrupted, our products and services may be perceived as vulnerable, and our brand and reputation could be damaged, which could reduce revenue, increase expenses, and exposestockholders brought such a lawsuit against us, to legal claims or regulatory actions.
Although we believe we have sufficient controls and security measures in place to prevent such attacks, our IT networks and systems, and our products, may still be vulnerable to data theft, computer viruses, programming errors, attacks by third parties or similar problems. If we, or our customers using our products, were to experience a security breach or cyber attack,even if the lawsuit is without merit, we could be required to incur substantial costs defending the lawsuit beyond any insurance coverage which we may have for such risks. Such a lawsuit could also divert the time and liabilities, including but not limited to, expenses attributable to rectifying the security breach or cyber attack including the cost of repairing any damage to our, or our customers' systems, liability for stolen assets or information, lost revenue and income resulting from any system or product downtime, increased costs for cyber security protection, and damage to our reputation causing customers and possibly investors to lose confidence in us. Similarly, an actual or perceived breachattention of our customers’ network security allowing access to our customers’ data centers ormanagement. Any of these events, as well as other parts of their IT environments, regardless of whether the breach is attributable to our products,circumstances discussed in these Risk Factors, may cause contractual disputes and could require significant expendituresthe price of our capital and diversion of our resources from development efforts.common stock to fall.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
We currently lease approximately 175,000 square feet of spaceproperty in an office building in Westford, Massachusetts forwhere our headquarters.headquarters is located. The current lease will expire in September 2023, and we have an option to extend the lease for two additional five-year terms. We lease office spacemaintain offices in twenty-nine international cities for our salesseveral other locations in the United States, including in or near each of Berkeley, Manhattan Beach and support personnel, as well as 72,742 square feet of space in San Jose, California. California; Colorado Springs, Colorado; Atlanta, Georgia; Saint Charles, Illinois; Rockville, Maryland; Burlington, Massachusetts; Ann Arbor, Michigan; Marlton, New Jersey; Austin and Plano, Texas; American Fork, Utah; Reston and Herndon, Virginia and Everett and Kirkland, Washington.
We lease 63,296 square feetalso maintain offices in or near the following cities outside the United States: Melbourne and Sydney, Australia; Vienna, Austria; Sao Paulo, Brazil; Brossard, Oakville and Waterloo, Canada; Beijing, Guangzhou, Hong Kong and Shanghai, China; Brno, Czech Republic; Massy and Paris, France; Berlin and Frankfurt, Germany; Bangalore, Mumbai, Noida, and Pune, India; Jakarta, Indonesia; Dublin, Ireland; Milan, Modena and Padova, Italy; Tokyo, Japan; Seoul, Korea; Kuala Lumpur, Malaysia; Mexico City, Mexico; Rabat, Morocco; Amsterdam, Delft and Eindhoven, the Netherlands; Makati City, Philippines; Singapore; Madrid, Spain; Stockholm, Sweden; Taipei, Taiwan; Bangkok, Thailand; Dubai, United Arab Emirates; and Bracknell and Ipswich, United Kingdom.
All of office space for our engineering and support personnel in India.facilities are leased. We believe that our existing facilities are adequatesufficient to meet our needs for the foreseeable requirements or that suitablefuture and, if needed, additional or substitute space will be available on commerciallyat a reasonable terms.cost.
Item 3. 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 have a significant adverse effect on our financial condition, results of operations or cash flows.
Item 4. Mine Safety Disclosures
None.
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Price Range of Common Stock
Our common stock trades on the Nasdaq Global Select Market, under the symbol NTCT. The following table sets forth, for the periods indicated, the high and low intraday sales prices for our common stock. Such information reflects inter-dealer price, without retail mark-up, markdown or commission and may not represent actual transactions.
|
| | | | | | | | |
| Quarter Ended | | High | | Low |
| Fiscal Year 2014 | | | |
| June 30, 2013 | $ | 24.92 |
| | $ | 21.22 |
|
| September 30, 2013 | $ | 27.55 |
| | $ | 23.22 |
|
| December 31, 2013 | $ | 30.76 |
| | $ | 24.04 |
|
| March 31, 2014 | $ | 39.10 |
| | $ | 28.64 |
|
| Fiscal Year 2015 | | | |
| June 30, 2014 | $ | 44.54 |
| | $ | 33.30 |
|
| September 30, 2014 | $ | 48.13 |
| | $ | 41.15 |
|
| December 31, 2014 | $ | 46.17 |
| | $ | 31.59 |
|
| March 31, 2015 | $ | 44.76 |
| | $ | 33.53 |
|
|
| | | | | | | | |
| Quarter Ended | | High | | Low |
| Fiscal Year 2016 | | | |
| June 30, 2015 | $ | 45.53 |
| | $ | 36.25 |
|
| September 30, 2015 | $ | 41.34 |
| | $ | 34.89 |
|
| December 31, 2015 | $ | 40.28 |
| | $ | 29.47 |
|
| March 31, 2016 | $ | 30.41 |
| | $ | 18.77 |
|
| Fiscal Year 2017 | | | |
| June 30, 2016 | $ | 25.33 |
| | $ | 20.99 |
|
| September 30, 2016 | $ | 30.31 |
| | $ | 21.46 |
|
| December 31, 2016 | $ | 33.83 |
| | $ | 26.25 |
|
| March 31, 2017 | $ | 38.45 |
| | $ | 29.50 |
|
Stockholders
At April 30, 2015,May 12, 2017, we had 71109 stockholders of record. We believe that the number of beneficial holders of our common stock exceeds 14,000.16,000.
Stock Performance Graph
This performance graph shall not be deemed “filed” for purposes of Section 18 of the Exchange Act or otherwise subject to the liabilities under that Section, and shall not be deemed to be incorporated by reference into any filing of NetScout under the Exchange Act or the Securities Act of 1933, as amended.
The Stock Performance Graph set forth below compares the yearly change in the cumulative total stockholder return on our common stock during the five yearfive-year period from March 31, 20102012 through March 31, 20152017 with the cumulative total return of the Nasdaq Composite Index and the Nasdaq Computer & Data Processing Index. The comparison assumes $100 was invested on March 31, 20102012 in our common stock or in the Nasdaq Composite Index and the Nasdaq Computer & Data Processing Index and assumes reinvestment of dividends, if any.
The stock price performance shown on the graph below is not necessarily indicative of future price performance. Information used in the graph was obtained from Zacks Investment Research, Inc.
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN
Assumes Initial Investment of $100
| | | | 3/31/2010 | | 3/31/2011 | | 3/31/2012 | | 3/31/2013 | | 3/31/2014 | | 3/31/2015 | 3/31/2012 | | 3/31/2013 | | 3/31/2014 | | 3/31/2015 | | 3/31/2016 | | 3/31/2017 |
| NetScout Systems, Inc. | $ | 100.00 |
| | $ | 184.72 |
| | $ | 137.53 |
| | $ | 166.13 |
| | $ | 254.09 |
| | $ | 296.48 |
| $ | 100.00 |
| | $ | 120.80 |
| | $ | 184.76 |
| | $ | 215.59 |
| | $ | 112.93 |
| | $ | 186.58 |
|
| NASDAQ Composite – Total Returns | $ | 100.00 |
| | $ | 117.06 |
| | $ | 131.47 |
| | $ | 140.86 |
| | $ | 183.38 |
| | $ | 216.60 |
| $ | 100.00 |
| | $ | 107.14 |
| | $ | 139.48 |
| | $ | 164.75 |
| | $ | 165.66 |
| | $ | 203.56 |
|
| NASDAQ Computer and Data Processing | $ | 100.00 |
| | $ | 116.54 |
| | $ | 125.84 |
| | $ | 134.91 |
| | $ | 177.53 |
| | $ | 194.25 |
| $ | 100.00 |
| | $ | 107.20 |
| | $ | 141.07 |
| | $ | 154.36 |
| | $ | 195.89 |
| | $ | 241.30 |
|
Dividend Policy
In fiscal years 20152017 and 2014,2016, we did not declare any cash dividends and do not anticipate declaring cash dividends in the foreseeable future. In addition, the terms of our credit facility limit our ability to pay cash dividends on our capital stock. It is our intention to retain all future earnings for reinvestment to fund our expansion and growth, as well as for our stock buyback program further described under Item 7 “Liquidity and Capital Resources.” Any future cash dividend declaration will be at the discretion of our Board of Directors and will depend upon, among other things, our future earnings, general financial conditions, capital requirements, existing bank covenants and general business conditions.
Purchases of Equity Securities by the Issuer
The following table provides information about purchases we made during the quarter ended March 31, 20152017 of equity securities that are registered by us pursuant to Section 12 of the Exchange Act:
|
| | | | | | | | | | | | | |
| | 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 Dollar Value of Shares That May Yet be Purchased Under the Plans or Programs |
| 1/1/2015 - 1/31/2015 | 48,303 |
| | $ | 35.36 |
| | 44,100 |
| | |
| 2/1/2015 - 2/28/2015 | 210,602 |
| | 38.32 |
| | 210,300 |
| | |
| 3/1/2015 - 3/31/2015 | 245,600 |
| | 42.31 |
| | 245,600 |
| | |
| Total | 504,505 |
| | $ | 39.98 |
| | 500,000 |
| | $ | 68,507,458 |
|
|
| | | | | | | | | | | | |
| | 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 |
| 1/1/2017 - 1/31/2017 | — |
| | $ | — |
| | — |
| | 6,794,468 |
|
| 2/1/2017 - 2/28/2017 | 42,653 |
| | 33.31 |
| | 21,030 |
| | 6,773,438 |
|
| 3/1/2017 - 3/31/2017 | 41 |
| | 30.11 |
| | — |
| | 6,773,438 |
|
| Total | 42,694 |
| | $ | 33.31 |
| | 21,030 |
| | 6,773,438 |
|
| |
| (1) | We purchased an aggregate of 4,50521,664 shares transferred to us from employees in satisfaction of minimum tax withholding obligations associated with the vesting of restricted stock units during the period. TheSuch purchases of these restricted stock units reflected in the table do not reduce the maximum dollar valuenumber of shares that may be purchased under our previously announced stock repurchase program.program (our 20 million share repurchase program authorized on May 19, 2015). |
Item 6. Selected Financial Data
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data set forth below should be read in conjunction with our audited consolidated financial statements and notes thereto and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included under Item 7 of this Annual Report on Form 10-K. The consolidated statement of operations data for the fiscal years ended March 31, 2015, 20142017, 2016 and 20132015 and the consolidated balance sheet data at March 31, 20152017 and 20142016 are derived from audited consolidated financial statements included under Item 8 of this Annual Report on Form 10-K. The consolidated statement of operations data for the fiscal years ended March 31, 20122014 and 20112013 and the consolidated balance sheet data at March 31, 2013, 20122015, 2014 and 20112013 have been derived from audited consolidated financial statements of NetScout that do not appear in this Annual Report on Form 10-K. The historical results are not necessarily indicative of the operating results to be expected in the future.
| | | | Year Ended March 31, | Year Ended March 31, |
| | 2015 | | 2014 | | 2013 (1) | | 2012 (2) | | 2011 | 2017 | | 2016 (1) | | 2015 | | 2014 | | 2013 (2) |
| | (In thousands, except per share data) | (In thousands, except per share data) |
| Statement of Operations Data: | | | | | | | | | | | | | | | | | | |
| Revenue: | | | | | | | | | | | | | | | | | | |
| Product | $ | 272,895 |
| | $ | 234,268 |
| | $ | 198,749 |
| | $ | 168,141 |
| | $ | 159,948 |
| $ | 735,531 |
| | $ | 633,408 |
| | $ | 272,895 |
| | $ | 234,268 |
| | $ | 198,749 |
|
| Service | 180,774 |
| | 162,379 |
| | 151,801 |
| | 140,538 |
| | 130,592 |
| 426,581 |
| | 322,011 |
| | 180,774 |
| | 162,379 |
| | 151,801 |
|
| Total revenue | 453,669 |
| | 396,647 |
| | 350,550 |
| | 308,679 |
| | 290,540 |
| 1,162,112 |
| | 955,419 |
| | 453,669 |
| | 396,647 |
| | 350,550 |
|
| Cost of revenue: | | | | | | | | | | | | | | | | | | |
| Product | 59,037 |
| | 51,219 |
| | 45,752 |
| | 39,271 |
| | 38,175 |
| 238,002 |
| | 238,037 |
| | 59,037 |
| | 51,219 |
| | 45,752 |
|
| Service | 35,524 |
| | 33,294 |
| | 28,256 |
| | 26,401 |
| | 23,186 |
| 108,137 |
| | 90,412 |
| | 35,524 |
| | 33,294 |
| | 28,256 |
|
| Total cost of revenue | 94,561 |
| | 84,513 |
| | 74,008 |
| | 65,672 |
| | 61,361 |
| 346,139 |
| | 328,449 |
| | 94,561 |
| | 84,513 |
| | 74,008 |
|
| Gross profit | 359,108 |
| | 312,134 |
| | 276,542 |
| | 243,007 |
| | 229,179 |
| 815,973 |
| | 626,970 |
| | 359,108 |
| | 312,134 |
| | 276,542 |
|
| Operating expenses: | | | | | | | | | | | | | | | | | | |
| Research and development | 75,242 |
| | 70,454 |
| | 61,546 |
| | 49,478 |
| | 40,628 |
| 232,701 |
| | 208,630 |
| | 75,242 |
| | 70,454 |
| | 61,546 |
|
| Sales and marketing | 136,446 |
| | 129,611 |
| | 116,807 |
| | 109,624 |
| | 105,271 |
| 328,628 |
| | 293,335 |
| | 136,446 |
| | 129,611 |
| | 116,807 |
|
| General and administrative | 47,296 |
| | 30,623 |
| | 29,718 |
| | 27,488 |
| | 23,308 |
| 118,438 |
| | 117,714 |
| | 47,296 |
| | 30,623 |
| | 29,718 |
|
| Amortization of acquired intangible assets | 3,351 |
| | 3,432 |
| | 2,877 |
| | 2,131 |
| | 1,907 |
| 70,141 |
| | 32,373 |
| | 3,351 |
| | 3,432 |
| | 2,877 |
|
| Restructuring charges | — |
| | — |
| | 1,065 |
| | 603 |
| | — |
| 4,001 |
| | 468 |
| | — |
| | — |
| | 1,065 |
|
| Total operating expenses | 262,335 |
| | 234,120 |
| | 212,013 |
| | 189,324 |
| | 171,114 |
| 753,909 |
| | 652,520 |
| | 262,335 |
| | 234,120 |
| | 212,013 |
|
| Income from operations | 96,773 |
| | 78,014 |
| | 64,529 |
| | 53,683 |
| | 58,065 |
| |
| Income (loss) from operations | | 62,064 |
| | (25,550 | ) | | 96,773 |
| | 78,014 |
| | 64,529 |
|
| Interest and other expense, net | (1,808 | ) | | (158 | ) | | (793 | ) | | (2,765 | ) | | (1,772 | ) | (9,879 | ) | | (6,889 | ) | | (1,808 | ) | | (158 | ) | | (793 | ) |
| Income before income tax expense | 94,965 |
| | 77,856 |
| | 63,736 |
| | 50,918 |
| | 56,293 |
| |
| Income tax expense | 33,773 |
| | 28,750 |
| | 23,127 |
| | 18,490 |
| | 19,028 |
| |
| Net income | $ | 61,192 |
| | $ | 49,106 |
| | $ | 40,609 |
| | $ | 32,428 |
| | $ | 37,265 |
| |
| Basic net income per share | $ | 1.49 |
| | $ | 1.19 |
| | $ | 0.97 |
| | $ | 0.77 |
| | $ | 0.89 |
| |
| Diluted net income per share | $ | 1.47 |
| | $ | 1.17 |
| | $ | 0.96 |
| | $ | 0.76 |
| | $ | 0.87 |
| |
| Income (loss) before income tax expense (benefit) | | 52,185 |
| | (32,439 | ) | | 94,965 |
| | 77,856 |
| | 63,736 |
|
| Income tax expense (benefit) | | 18,894 |
| | (4,070 | ) | | 33,773 |
| | 28,750 |
| | 23,127 |
|
| Net income (loss) | | $ | 33,291 |
| | $ | (28,369 | ) | | $ | 61,192 |
| | $ | 49,106 |
| | $ | 40,609 |
|
| Basic net income (loss) per share | | $ | 0.36 |
| | $ | (0.35 | ) | | $ | 1.49 |
| | $ | 1.19 |
| | $ | 0.97 |
|
| Diluted net income (loss) per share | | $ | 0.36 |
| | $ | (0.35 | ) | | $ | 1.47 |
| | $ | 1.17 |
| | $ | 0.96 |
|
| Weighted average common shares outstanding used in computing: | | | | | | | | | | | | | | | | | | |
| Net income per share—basic | 41,105 |
| | 41,366 |
| | 41,665 |
| | 42,035 |
| | 42,059 |
| |
| Net income per share—diluted | 41,637 |
| | 41,955 |
| | 42,322 |
| | 42,750 |
| | 42,973 |
| |
| Net income (loss) per share—basic | | 92,226 |
| | 81,927 |
| | 41,105 |
| | 41,366 |
| | 41,665 |
|
| Net income (loss) per share—diluted | | 92,920 |
| | 81,927 |
| | 41,637 |
| | 41,955 |
| | 42,322 |
|
| |
| (1) | During the fiscal year ended March 31, 2016, NetScout completed the Comms Transaction. The total equity consideration was approximately $2.3 billion based on issuing approximately 62.5 million new shares of NetScout common stock. |
| |
| (2) | During the fiscal year ended March 31, 2013, NetScout completed the acquisitions of ONPATH Technologies, Inc. and Accanto Systems, S.r.l. for approximately $51.8 million. |
|
| | | | | | | | | | | | | | | | | | | |
| | March 31, |
| | 2017 | | 2016 (1) | | 2015 | | 2014 | | 2013 (2) |
| | (In thousands) |
| Balance Sheet Data: | | | | | | | | | |
| Cash, cash equivalents and short- and long-term marketable securities | $ | 464,705 |
| | $ | 352,075 |
| | $ | 264,857 |
| | $ | 218,794 |
| | $ | 154,091 |
|
| Working capital | $ | 394,279 |
| | $ | 283,422 |
| | $ | 149,651 |
| | $ | 115,798 |
| | $ | 92,141 |
|
| Total assets | $ | 3,601,513 |
| | $ | 3,592,843 |
| | $ | 669,049 |
| | $ | 607,763 |
| | $ | 552,176 |
|
| Debt | $ | 300,000 |
| | $ | 300,000 |
| | $ | — |
| | $ | — |
| | $ | — |
|
| Total stockholders’ equity | $ | 2,436,250 |
| | $ | 2,443,382 |
| | $ | 435,750 |
| | $ | 409,161 |
| | $ | 371,903 |
|
| |
(2)(1) | During the fiscal year ended March 31, 2012,2016, NetScout completed the acquisitionsComms Transaction. The total equity consideration was approximately $2.3 billion based on issuing approximately 62.5 million new shares of Psytechnics, Ltd., Fox Replay BV and Simena LLC for approximately $47.3 million collectively.NetScout common stock. |
|
| | | | | | | | | | | | | | | | | | | |
| | March 31, |
| | 2015 | | 2014 | | 2013(1) | | 2012 (2) | | 2011 |
| | (In thousands) |
| Balance Sheet Data: | | | | | | | | | |
| Cash, cash equivalents and short- and long-term marketable securities | $ | 264,857 |
| | $ | 218,794 |
| | $ | 154,091 |
| | $ | 213,516 |
| | $ | 228,478 |
|
| Working capital | $ | 149,651 |
| | $ | 115,798 |
| | $ | 92,141 |
| | $ | 155,596 |
| | $ | 147,136 |
|
| Total assets | $ | 669,049 |
| | $ | 607,763 |
| | $ | 552,176 |
| | $ | 567,757 |
| | $ | 527,570 |
|
| Debt | $ | — |
| | $ | — |
| | $ | — |
| | $ | 62,000 |
| | $ | 68,106 |
|
| Total stockholders’ equity | $ | 435,750 |
| | $ | 409,161 |
| | $ | 371,903 |
| | $ | 342,369 |
| | $ | 319,559 |
|
| |
(1)(2) | During the fiscal year ended March 31, 2013, NetScout completed the acquisitions of ONPATH Technologies, Inc. and Accanto Systems S.r.l. for approximately $51.8 million, including $527 thousand in cash.million. |
| |
(2) | During the fiscal year ended March 31, 2012, NetScout completed the acquisitions of Psytechnics, Ltd., Fox Replay BV and Simena LLC for approximately $47.3 million, including $616 thousand in cash. |
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following information should be read in conjunction with the audited consolidated financial information and the notes thereto included in this Annual Report on Form 10-K. In addition to historical information, the following discussion and other parts of this Annual Report contain forward-looking statements that involve risks and uncertainties. You should not place undue reliance on these forward-looking statements. Actual events or results may differ materially due to competitive factors and other factors discussed in Item 1A. “Risk Factors” and elsewhere in this Annual Report. These factors may cause our actual results to differ materially from any forward-looking statement. Forward-looking statements do not contemplate the proposed acquisition.
Overview
We are an industry leader for advanced network, applicationreal-time operational intelligence and performance analytics for service assurance solutions, providing high-quality performance analytics and operational intelligencecybersecurity solutions that facilitateare used in many of the evolution toward new computing paradigms, such as virtualization, mobilitymost demanding service provider, enterprise and cloud. We design, develop, manufacture, market, license, sell and support these products focusedgovernment networks. Our solutions, based on assuringproprietary Adaptive Service Intelligence (ASI) technology, help customers continuously monitor the service delivery quality,environment to identify performance issues and availability for some ofto provide insight into network-based security threats. As a result, customers can quickly resolve issues that cause business disruptions or that adversely impact the world’s largest, most demanding and complex internet protocol (IP) based service delivery environments.user experience. We manufacture and market these products infor integrated hardware and software solutions thatand are used by commercial enterprises, large governmental agenciesalso well positioned to help customers deploy our software in commercial-off-the-shelf hardware and telecommunicationin virtualized form factors. Regardless of the platform, customers use our solutions to help drive return on investment on their network and broader information technology (IT) initiatives while reducing the tangible risks associated with downtime, poor service providers worldwide.quality and compromised security. We have a single operating segmentreport revenue and substantially all of our identifiable assets are locatedincome in the United States.one reportable segment.
We have been a technology innovator for three-plus decades since our founding in 1984. Our solutions continue to change how organizations manage and optimize the delivery of business applications and services, and assure user experience across global IP networks. Weinternet protocol (IP) networks and help protect networks from unwanted security threats. Through both internal development and acquisitions, we have continually enhanced and expanded our product portfolio to meet the evolving needs of organizations by providing solutionscustomers worldwide. Our software analytics capture and transform terabytes of network traffic data in real time into high value, actionable information that enables customers to optimize network performance, manage dynamic networkapplications, enhance security and application environments and by improvinggain insight into the end user experience by providing high-value analytics that help validate and assure service availability, quality and reliability.
Our solutions are intended to help users in various roles to: quickly analyze data, achieve real-time visibility into and intelligence about their organization's operations, identify service delivery issues early, improve service levels, reduce operational costs, mitigate security risks, and drive better business decisions. Our value proposition to our customers is helping them to achieve their objectives regarding return on investments and risk mitigation as they develop their IT infrastructure to support their business needs. Our proactive intelligence and analytics provides our customer with knowledge regarding potential issues before their users are impacted.experience.
Our mission is to enable information technology (IT)enterprise and service providers to realize maximum benefit with minimal risk from technology advances, like IP convergence, network function virtualization (NFV), software defined networking (SDN), virtualization, cloud, mobility, bring your own device (BYOD), web and the evolving Internetinternet by managing the inherent complexity in a cost-effective manner. Our Adaptive Session Intelligence (ASI)ASI technology, which we have developed in support of this mission, has the potential of not only expanding our leadership in the network performance management and application performance management (NPM+APM) space,our core markets, but can also serve as a gateway for future intelligencethe underlying technology platform that can extend use of our solutions including cyber and business intelligence.
Many of the largest service providers, cloud based businesses, enterprise and government customers rely on us to assure service delivery and the user experience of their customers. Our customers are in just about every vertical market including financials, health care, utilities, internet, manufacturing, retail, as well as the service providers. We are a market leader in helping service provider’s get a return on their 4G/LTE investment by providing them with the intelligence they need about aspects of service delivery from handset performance to user preferences to network speed.across our global customer base.
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 relatedemployee-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 structural improvements andin the current economic conditions.
During Fiscal YearOn July 14, 2015, we continued to invest in development programs aimed at enhancing our range of offerings, including delivering new features and functionality for our nGeniusONETM platform that addressescompleted the evolving requirements of our enterprise, service provider and government customers. The nGeniusONE platform is powered by Adaptive Session Intelligence™ (ASI) 2.0, NetScout’s next generation Deep Packet Inspection (DPI) technology that exploits the inherent richness of packet-flow data to provide real-time, contextual analysis of service, network, and application performance. The patented ASI technology is a critical differentiating technology that enables the creation of statistical metadata, session transaction records and adaptive session traces enabling real-time, scalable monitoring of all users, all applications and all services consistently across the network. NetScout’s solutions are used by customers to better understand and manage network and application performance, alert themselves to problems that impacting end users, validate services and network policy, plan and optimize network capacity, generate timely reports and conduct deep forensic and historical analysis.
On October 12, 2014, NetScout, Danaher, Newco Merger Sub and Merger Sub II, entered into the Merger Agreement pursuant toComms Transaction, which NetScout will acquire the Communications Business inwas structured as a Reverse Morris Trust transaction.transaction whereby Danaher contributed the Communications Business to Newco. The total equity consideration was approximately $2.3 billion based on issuing approximately 62.5 million new shares of NetScout common stock to the holders of common units of Newco, based on the July 13, 2015 NetScout common stock closing share price of $36.89 per share. The Comms Transaction was aimed at extending NetScout's reach into growth-oriented adjacent markets, including cybersecurity, with a broader range of market-leading products and capabilities; strengthening its go-to-market resources to better support a larger, more diverse and more global customer base; and increasing NetScout's scale and elevating its strategic position within key accounts.
On August 19, 2016, we acquired certain assets and liabilities of Avvasi for $4.6 million. Avvasi’s technology allows service providers to measure, improve and monetize video in their networks. This acquisition builds on NetScout's ongoing investment in enhancing its service assurance capabilities for video traffic over 4G/LTE networks. For additional information regarding the proposedAvvasi acquisition, see Note 207 of our Notes to Consolidated Financial Statements.
During the second quarter of fiscal year 2017, as part of our continued integration efforts of the Comms Transaction, we reorganized our business units. As a result, we account for our operations under one reportable segment.
On September 20, 2016, NetScout's stockholders approved an amendment to the Third Amended and Restated Certificate of Incorporation to increase the number of authorized shares of common stock, par value $0.001 per share, from 150,000,000 to 300,000,000 shares. The increase in authorized shares of common stock has been reflected in our financial statements.
Results Overview
We generated continued growth duringto navigate through challenging market conditions, which have primarily impacted the fiscal yeartiming and magnitude of orders with service provider customers. Despite the difficult selling environment, we have maintained relatively unchanged revenue, slightly improved our gross profit margins and increased our income from operations and income from operations margin due to the combination of investment and decreased costs related to the Comms Transaction when compared to the twelve months ended March 31, 2015, with product revenue growth of 16% and overall revenue growth of 14% compared to the prior fiscal year. Our diluted net income per share2016.
NetScout's financial results for the fiscal year ended March 31, 2015 was $1.47 per share, representing a $0.30, or 26%, increase over2016 include approximately eight and one-half months of contribution from the same period in the prior year. Our business has maintained strong gross profit margins. Our gross margin for the fiscal year ended March 31, 2015 remained flat at 79% compared to the same period in the prior year.
The combination of continued revenue growth, strong gross profit margins and a scalable infrastructure supported by prudent investment across key areas of our business, including research and development initiatives, and sales and marketing programs, has enabled us produce strong operating profit margins. Despite higher one-time expenses associated with the aforementioned planned acquisition of Danaher’s Communications Business, our operating profit margin for the fiscal year ended March 31, 2015 was 21%, as compared to 20% for the same period in the prior year.Business.
We continue to maintain strong liquidity. At March 31, 2015,2017, we had cash, cash equivalents and marketable securities of $264.9$464.7 million. This represents an increase of $46.1$112.6 million over the previous fiscal year ended March 31, 2014.2016. This increase was due to cash flows from operations of $227.8 million which was partially offset by $80.0 million used to repurchase shares of our common stock under our repurchase program, $29.7 million of cash used for capital expenditures and $4.6 million used in the Avvasi acquisition during the twelve months ended March 31, 2017.
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 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 EBIDTA from operations margin, non-GAAP net income, and non-GAAP net income per diluted share.share (diluted). Non-GAAP revenue (total, product and service) eliminates the GAAP effects of acquisitions by adding back revenue related to deferred revenue revaluation.revaluation, as well as revenue impacted by the amortization of acquired intangible assets. Non-GAAP net incomegross profit includes the foregoing adjustmentadjustments and also removes inventory fair value adjustments, expenses related to the amortization of acquired intangible assets, share-basedstock-based compensation, restructuring, certain expenses relating to acquisitions including inventory fair value adjustments, depreciation costs, compensation for post-combination services and business development and integration costs. Non-GAAP income from operations includes the foregoing adjustments and also removes restructuring charges. Non-GAAP operating margin is calculated based on the non-GAAP financial metrics discussed above. 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 and also removes expenses related to share-based compensation and certain expenses relating to acquisitions including: compensation for post-combination services, business development charges, and depreciation expense, net of related income tax effects. 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 itsour 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 to 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.
The following table reconciles revenue, gross profit, income (loss) from operations, net income (loss) and net income (loss) per share on a GAAP and non-GAAP basis for the years ended March 31, 2015, 20142017, 2016 and 2013:2015:
|
| | | | | | | | | | | |
| | Fiscal Year Ended March 31,
(Dollars in Thousands, Except per Share Data) |
| | 2015 | | 2014 | | 2013 |
| GAAP revenue | $ | 453,669 |
| | $ | 396,647 |
| | $ | 350,550 |
|
| Deferred revenue fair value adjustment | 18 |
| | 558 |
| | 1,215 |
|
| Non-GAAP revenue | $ | 453,687 |
| | $ | 397,205 |
| | $ | 351,765 |
|
| GAAP net income | $ | 61,192 |
| | $ | 49,106 |
| | $ | 40,609 |
|
| Deferred revenue fair value adjustments | 18 |
| | 558 |
| | 1,215 |
|
| Inventory fair value amortization | — |
| | — |
| | 453 |
|
| Share-based compensation expense | 16,580 |
| | 12,930 |
| | 9,580 |
|
| Amortization of acquired intangible assets | 6,990 |
| | 6,765 |
| | 7,424 |
|
| Business development and integration expense | 11,956 |
| | 523 |
| | 1,618 |
|
| Compensation for post combination services | 1,414 |
| | 2,215 |
| | 2,721 |
|
| Restructuring charges | — |
| | — |
| | 1,065 |
|
| Income tax adjustments | (13,810 | ) | | (7,879 | ) | | (8,671 | ) |
| Non-GAAP net income | $ | 84,340 |
| | $ | 64,218 |
| | $ | 56,014 |
|
| GAAP diluted net income per share | $ | 1.47 |
| | $ | 1.17 |
| | $ | 0.96 |
|
| Share impact of non-GAAP adjustments identified above | 0.56 |
| | 0.36 |
| | 0.36 |
|
| Non-GAAP diluted net income per share | $ | 2.03 |
| | $ | 1.53 |
| | $ | 1.32 |
|
|
| | | | | | | | | | | |
| | Fiscal Year Ended March 31,
(Dollars in Thousands, Except per Share Data) |
| | 2017 | | 2016 | | 2015 |
| GAAP revenue | $ | 1,162,112 |
| | $ | 955,419 |
| | $ | 453,669 |
|
| Product deferred revenue fair value adjustment | 6,786 |
| | 10,166 |
| | 18 |
|
| Service deferred revenue fair value adjustment | 19,476 |
| | 51,625 |
| | — |
|
| Delayed transfer entity adjustment | — |
| | 633 |
| | — |
|
| Amortization of acquired intangible assets | 11,439 |
| | 6,746 |
| | — |
|
| Non-GAAP revenue | $ | 1,199,813 |
| | $ | 1,024,589 |
| | $ | 453,687 |
|
| | | | | | |
| GAAP gross profit | $ | 815,973 |
| | $ | 626,970 |
| | $ | 359,108 |
|
| Product deferred revenue fair value adjustment | 6,786 |
| | 10,166 |
| | 18 |
|
| Service deferred revenue fair value adjustment | 19,476 |
| | 51,625 |
| | — |
|
| Inventory fair value adjustment | — |
| | 28,638 |
| | — |
|
| Delayed transfer entity adjustment | — |
| | 535 |
| | — |
|
| Share-based compensation expense | 4,890 |
| | 3,246 |
| | 1,532 |
|
| Amortization of acquired intangible assets | 53,455 |
| | 51,873 |
| | 3,639 |
|
| Business development and integration expense | 398 |
| | 1,401 |
| | — |
|
| Compensation for post-combination services | 552 |
| | 4,148 |
| | 19 |
|
| Acquisition related depreciation expense | 240 |
| | 293 |
| | — |
|
| Non-GAAP gross profit | $ | 901,770 |
| | $ | 778,895 |
| | $ | 364,316 |
|
| | | | | | |
| GAAP income (loss) from operations | $ | 62,064 |
| | $ | (25,550 | ) | | $ | 96,773 |
|
| Product deferred revenue fair value adjustment | 6,786 |
| | 10,166 |
| | 18 |
|
| Service deferred revenue fair value adjustment | 19,476 |
| | 51,625 |
| |
|
| Inventory fair value adjustment | — |
| | 28,638 |
| | — |
|
| Delayed transfer entity adjustment | — |
| | 383 |
| | — |
|
| Share-based compensation expense | 39,189 |
| | 28,351 |
| | 16,580 |
|
| Amortization of acquired intangible assets | 123,596 |
| | 84,246 |
| | 6,990 |
|
| Business development and integration expense | 12,083 |
| | 29,434 |
| | 11,956 |
|
| Compensation for post-combination services | 5,076 |
| | 35,118 |
| | 1,414 |
|
|
| | | | | | | | | | | |
| Restructuring charges | 4,001 |
| | 468 |
| | — |
|
| Acquisition related depreciation expense | 3,136 |
| | 3,898 |
| | — |
|
| Non-GAAP income from operations | $ | 275,407 |
| | $ | 246,777 |
| | $ | 133,731 |
|
| | | | | | |
| GAAP net income (loss) | $ | 33,291 |
| | $ | (28,369 | ) | | $ | 61,192 |
|
| Product deferred revenue fair value adjustment | 6,786 |
| | 10,166 |
| | 18 |
|
| Service deferred revenue fair value adjustment | 19,476 |
| | 51,625 |
| | — |
|
| Inventory fair value adjustment | — |
| | 28,638 |
| | — |
|
| Share-based compensation expense | 39,189 |
| | 28,351 |
| | 16,580 |
|
| Amortization of acquired intangible assets | 123,596 |
| | 84,246 |
| | 6,990 |
|
| Business development and integration expense | 12,083 |
| | 29,434 |
| | 11,956 |
|
| Compensation for post-combination services | 5,076 |
| | 35,118 |
| | 1,414 |
|
| Restructuring charges | 4,001 |
| | 468 |
| | — |
|
| Loss on extinguishment of debt | — |
| | 55 |
| | — |
|
| Acquisition-related depreciation expense | 3,136 |
| | 3,898 |
| | — |
|
| Other income | (426 | ) | | — |
| | — |
|
| Income tax adjustments | (67,662 | ) | | (86,263 | ) | | (13,810 | ) |
| Non-GAAP net income | $ | 178,546 |
| | $ | 157,367 |
| | $ | 84,340 |
|
| | | | | | |
| GAAP diluted net income (loss) per share | $ | 0.36 |
| | $ | (0.35 | ) | | $ | 1.47 |
|
| Per share impact of non-GAAP adjustments identified above | 1.56 |
| | 2.26 |
| | 0.56 |
|
| Non-GAAP diluted net income per share | $ | 1.92 |
| | $ | 1.91 |
| | $ | 2.03 |
|
| | | | | | |
| GAAP income (loss) from operations | $ | 62,064 |
| | $ | (25,550 | ) | | $ | 96,773 |
|
| Previous adjustments to determine non-GAAP income from operations | 213,343 |
| | 272,327 |
| | 36,958 |
|
| Non-GAAP income from operations | 275,407 |
| | 246,777 |
| | 133,731 |
|
| Depreciation excluding acquisition related | 34,131 |
| | 23,289 |
| | 12,719 |
|
| Non-GAAP EBITDA from operations | $ | 309,538 |
| | $ | 270,066 |
| | $ | 146,450 |
|
Critical Accounting Policies
We consider accounting policies related to marketable securities, revenue recognition, valuation of goodwill, intangible assets and other acquisition accounting items, and share based compensation to be critical in fully understanding and evaluating our financial results. We apply significant judgment and create estimates when applying these policies.
Revenue Recognition
We exercise judgment and use estimates in connection with determining the amounts of product and services revenues to be recognized in each accounting period.
We derive 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 our product sales consist of hardware products with embedded software that are essential to providing customers the intended functionality of the solutions. We also sell stand-alone software solutions to provide customers with enhanced functionality. In addition, we sell hardware bundled with a software license. Product revenue is recognized upon shipment, provided that evidence of an arrangement exists, title and risk of loss have passed to the customer, and in the case of software products, when the customer has the rights and ability to access the software, fees are fixed or determinable and collection of the related receivable is reasonably assured. 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. Because many of our solutions are comprised of both hardware and more than incidental software components, we recognize revenue in accordance with authoritative guidance on both hardware and software revenue recognition.
Our service offerings include installation, integration, extended warranty and maintenance services, post-contract customer support (PCS), and other professional services including consulting and training. We generally provide 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. 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, our 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.
Multi-element arrangements are concurrent customer purchases of a combination of our product and service offerings that may be delivered at various points in time. For multi-element arrangements comprised only of hardware products and related services, we allocate the total arrangement consideration to the multiple elements based on each element’s fair value compared to the total relative selling price of all the elements. Each element’s selling price is based on management’s best estimate of selling price (BESP) paid by customers based on the element’s historical pricing when vendor-specific objective evidence (VSOE) or third-party evidence (TPE) does not exist. We have established BESP 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. We also consider our overall pricing objectives and practices across different sales channels and geographies, and market conditions. We review sales of the product elements on a quarterly basis and update, when appropriate, our BESP for such elements to ensure that it reflects recent pricing experience. We have established VSOE for a majority of our service elements based on historical standalone sales or by the renewal rate offered to the customer. However certain business units we acquired as part of the Comms Transaction are unable to establish VSOE for undelivered elements. This occurs because the pricing for standalone sales does not occur in tight bands around a midpoint, and they are not contractually fixed. In these scenarios we have typically established BESP by creating wider bands around a midpoint for stand-alone transactions or in some cases using cost plus a margin for the underlying services and products. If VSOE of fair value does not exist for a deliverable, we have determined that BESP is the highest level of fair value that exists for those deliverables.
For multi-element arrangements comprised only of software products and related services, we allocate a portion of the total arrangement consideration to the undelivered elements, primarily support agreements and professional services, using VSOE of fair value for the undelivered elements. The remaining portion of the total arrangement consideration is allocated to the delivered software, referred to as the residual method. VSOE of fair value of the undelivered elements is based on the price customers pay when the element is sold separately. We review the separate sales of the undelivered elements on a regular basis and update when appropriate, our VSOE of fair value for such elements to ensure that it reflects recent pricing experience. If we cannot objectively determine the VSOE of the fair value of any undelivered software element, revenue is deferred until all elements are delivered and services have been performed, or until fair value can objectively be determined for any remaining undelivered elements. However, if the only undelivered element is maintenance and support, the entire arrangement fee is recognized over the service period.
For multi-element arrangements comprised of a combination of hardware and software elements, the total arrangement consideration is bifurcated between the hardware and hardware-related deliverables and the software and software-related deliverables based on the relative selling prices of all deliverables as a group. Then, arrangement consideration for the hardware and hardware-related services is recognized upon delivery or as the related services are provided as outlined above and revenue for the software and software-related services is allocated following the residual method and recognized based upon delivery or as the related services are provided.
Our products are distributed through our 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 we deliver the product to the reseller or distributor. We record consideration given to a reseller or distributor as a reduction of revenue to the extent we have recorded revenue from the reseller or distributor. With limited exceptions, our return policy does not allow product returns for a refund. Returns have been insignificant to date. In addition, we have a history of successfully collecting receivables from our resellers and distributors.
Marketable Securities
We measure the fair value of our marketable securities at the end of each reporting period. Fair value is defined as the exchange price that would be received for an asset in the principal or most advantageous market for the asset in an orderly transaction between market participants on the measurement date. Marketable securities are recorded at fair value and have been classified as Level 1 or 2 within the fair value hierarchy. Fair values determined by Level 1 inputs utilize quoted prices (unadjusted) in accessible active markets for identical assets or liabilities. Fair values determined by Level 2 inputs utilize data points that are observable such as quoted prices, interest rates and yield curves.
Investments and marketable securities are considered to be impaired when a decline in fair value below cost basis is determined to be other-than-temporary. We periodically evaluate whether a decline in fair value below cost basis is other-than-temporary by considering available evidence regarding these investments including, among other factors, the duration of the period that, and extent to which, the fair value is less than cost basis, the financial health of and business outlook for the issuer, including industry and sector performance and operational and financing cash flow factors, overall market conditions and trends and our intent and ability to retain our investment in the security for a period of time sufficient to allow for an anticipated recovery in market value. Once a decline in fair value is determined to be other-than-temporary, a write-down is recorded and a new cost basis in the security is established. Assessing the above factors involves inherent uncertainty. Write-downs, if recorded, could be materially different from the actual market performance of investments and marketable securities in our portfolio if, among other things, relevant information related to our investments and marketable securities was not publicly available or other factors not considered by us would have been relevant to the determination of impairment.
Revenue Recognition
Product revenue consists of sales of our hardware products (which include required embedded software that works together with the hardware to deliver the hardware’s essential functionality), licensing of our software products, and sale of hardware bundled with a software license. Product revenue is recognized upon shipment, provided that evidence of an arrangement exists, title and risk of loss have passed to the customer, fees are fixed or determinable and collection of the related receivable is probable. Because many of our solutions are comprised of both hardware and more than incidental software components, we recognize revenue in accordance with authoritative guidance on both hardware and software revenue recognition.
Service revenue consists primarily of fees from customer support agreements, consulting and training. We generally provide software and 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 warranty expiration. Support services generally include rights to unspecified upgrades (when and if available), telephone and internet-based support, updates and bug fixes. 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 as the related training services are provided.
Generally, our 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.
Multi-element arrangements are concurrent customer purchases of a combination of our product and service offerings that may be delivered at various points in time. For multi-element arrangements comprised only of hardware products and related services, we allocate the total arrangement consideration to the multiple elements based on each element’s selling price compared to the total relative selling price of all the elements. Each element’s selling price is based on management’s best estimate of selling price (BESP) paid by customers based on the element’s historical pricing when VSOE or third party evidence (TPE) does not exist. We have established BESP for product elements as the average selling price the element was sold for over the past six quarters, whether sold alone or sold as part of a multiple element transaction. Our internal list price for products, reviewed quarterly by senior management, with consideration in regards to changing factors in our technology and in the marketplace, is generated to target the desired gross margin from sales of product after analyzing historical discounting trends. We review sales of the product elements on a quarterly basis and update, when appropriate, BESP for such elements to ensure that it reflects recent pricing experience. We have established VSOE for services related undelivered elements based on historical stand-alone sales.
For multi-element arrangements comprised only of software products and related services, we allocate a portion of the total arrangement consideration to the undelivered elements, primarily support agreements and training, using VSOE of fair value for the undelivered elements. The remaining portion of the total arrangement consideration is allocated to the delivered software, referred to as the residual method. VSOE of fair value of the undelivered elements is based on the price customers pay when the element is sold separately. We review the separate sales of the undelivered elements on a quarterly basis and update, when appropriate, our VSOE of fair value for such elements to ensure that it reflects recent pricing experience. If we cannot objectively determine the VSOE of the fair value of any undelivered software element, we defer revenue until all elements are delivered and services have been performed, or until fair value can objectively be determined for any remaining undelivered elements.
For multi-element arrangements comprised of a combination of hardware and software elements, the total arrangement consideration is bifurcated between the hardware and hardware related deliverables and the software and software related deliverables based on the relative selling prices of all deliverables as a group. Then, arrangement consideration for the hardware and hardware-related services is recognized upon delivery or as the related services are provided outlined above and revenue for the software and software-related services is allocated following the residual method and recognized based upon delivery or as the related services are provided.
Our product is distributed through our direct sales force and indirect distribution channels through alliances with resellers. Revenue arrangements with resellers are recognized on a sell-in basis; that is, when we deliver the product to the reseller. We record consideration given to a reseller as a reduction of revenue to the extent we have recorded revenue from the reseller. We do not offer contractual rights of return, stock balancing, or price protection to our resellers, and actual product returns from them have been insignificant to date. In addition, we have a history of successfully collecting receivables from the resellers. As a result, we do not maintain reserves for reseller product returns.
Valuation of Goodwill, Intangible Assets and Other Acquisition Accounting Items
The carrying value of goodwill was $197.4 millionWe amortize acquired definite-lived intangible assets over their estimated useful lives. Goodwill and $203.4 million at March 31, 2015other indefinite-lived intangible assets are not amortized but subject to annual impairment tests; more frequently if events or circumstances occur that would indicate a potential decline in their fair value. We perform the assessment annually during the fourth quarter and 2014, respectively.on an interim basis if potential impairment indicators arise. We have identified two reporting units: (1) Unified Service DeliveryAssurance and (2) Test Optimization.Security. To test impairment, we first assess qualitative factors to determine whether the existence of events and circumstances indicate that it is more likely than not that the intangible asset is impaired. If based on our qualitative assessment, it is more likely than not that the fair value of the intangible asset is less than its carrying amount, quantitative impairment testing is required. However, if we conclude otherwise, quantitative impairment testing is not required. During fiscal year 2017, we performed a quantitative analysis for goodwill. We determined the fair value of the reporting unit's goodwill using established income and market valuation approaches. Goodwill iswas estimated to be recoverable as of January 31, 2017.
Indefinite-lived intangible assets are tested for impairment at a 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 segment below its carrying value.
We performed the qualitative Step 0 assessment on our Unified Service Delivery reporting unit. In performing the qualitative Step 0 assessment, we considered certain events and circumstances specific to the entity at the reporting unit level, such as macroeconomic conditions, industry and market considerations, overall financial performance and cost factors when evaluating whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. No indicators of impairment were noted at January 31, 2015.
We performed the quantitative Step 1 assessment on our Test Optimization reporting unit. If the reporting unit’s carrying value exceeds its fair value, we record an impairment loss equal to the difference between the carrying value of goodwill and its implied fair value. We estimate the fair values of our reporting units using discounted cash flow valuation models. Those models require estimates of future revenues, profits, capital expenditures, working capital, terminal values based on revenue multiples, and discount rates for each reporting unit. We estimate these amounts by evaluating historical trends, current budgets, operating plans and industry data. The estimated fair value of the Test Optimization reporting unit was approximately 120 percent greater than its carrying value as of January 31, 2015.
Additionally, the market capitalization of NetScout as a whole significantly exceeded its carrying value.
The carrying value ofindefinite-lived intangible assets was $50.2 million and $58.5 million at March 31, 2015 and 2014, 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. We amortize intangible assets over their estimated useful lives, except for the acquired tradename which resulted from the Network General acquisition, which has an indefinite life and thus, is not amortized. The carrying value of the indefinite lived tradename is evaluated annually or more frequently if events or changes in circumstances indicate that the asset might be impaired.
Indefinite-lived intangible assets are tested for impairment at a 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 segment below its carrying value. To test impairment, we first assess qualitative factors to determine whether the existence of events and circumstances indicate that it is more likely than not that the indefinite-lived intangible asset is impaired. If based on our qualitative assessment, we conclude that it is more likely than not that the fair value of an indefinite-lived intangible asset is less than its carrying amount, quantitative impairment testing is required. However, if we conclude otherwise, quantitative impairment testing is not required. We completed our annual impairment test of the indefinite lived intangible asset at January 31, 20152017 using the qualitative Step 0 assessment described above, which largely mirrors the Unified Service Delivery analysis, as the tradenames apply to a majority of the products and branding within that reporting unit.assessment. No impairment indicators were observed as of January 31, 2015.2017.
We have acquiredcompleted two companiesacquisitions (the Comms Transaction and the Avvasi acquisition) during the three year period ended March 31, 2015.2017. The acquisition method of accounting requires that wean estimate of the fair value of the assets and liabilities acquired as part of these transactions. In order to estimate the fair value of acquired intangible assets we use a relief from royalty model which requires management to estimate: future revenues expected to be generated by the acquired intangible assets, a royalty rate which a market participant would pay related to the projected revenue stream, a present value factor which approximates a risk adjusted rate of return for a market participant purchasing the assets, and a technology migration curve representing a period of time over which the technology assets or some portion thereof are still being used. We are also required to develop the fair value for customer relationships acquired as part of these transactions which requires that we create estimates for the following items: a projection of future revenues associated with the acquired company’s existing customers, a turnover rate for those customers, a margin related to those sales, and a risk adjusted rate of return for a market participant purchasing those relationships.
The Comms Transaction in July 2015 contained both contingently returnable consideration and contingent purchase consideration. The contingently returnable consideration represented a contingent right of return from Danaher to reimburse NetScout for certain cash awards paid by NetScout to employees of the Communications Business transferred to Newco for post-combination services on various dates through August 4, 2016. During the fiscal year ended March 31, 2017, certain post-combination cash retention payments have been disbursed. Danaher reimbursed the Company for those costs and NetScout reimbursed Danaher for the tax benefit.
The acquisition of Simena LLC on November 18, 2011 also contained contingent consideration based on the ultimate settlement of assets and liabilities acquired as part of the transaction, and the former owners' future period of employment with the Company.NetScout. Contingent consideration accounting requires the Companyus to estimate the probability of various settlement scenarios, the former owners' expected period of employment with NetScout, and a risk adjusted interest rate to present value to the payment streams.
Share-basedShare-Based Compensation
We recognize compensation expense for all share-based payments. Under the fair value recognition provisions, we recognize share-based compensation net of an estimated forfeiture rate and only recognize compensation cost for those shares expected to vest on a straight-line basis over the requisite service period of the award.
We are required to estimate the expected forfeiture rate and only recognize expense for those shares expected to vest. If our actual forfeiture rate is materially different from our estimate, the share-based compensation expense could be significantly different from what we have recorded in the current period.
Based on historical experience, we assumed an annualized forfeiture rate of 0% for awards granted to our directors, an annualized forfeiture rate of approximately 2% for awards granted to our senior executives, and an annualized forfeiture rate of approximately 5% for all remaining employees. We will record additional expense if the actual forfeitures are lower than estimated and will record a recovery of prior expense if the actual forfeitures are higher than estimated.
Results of Operations
Comparison of Years Ended March 31, 20152017 and 20142016
Revenue
Product revenue consists of sales of our hardware products and licensing of our software products. Service revenue consists of customer support agreements, consulting and training. During the fiscal yearyears ended March 31, 2015, two2017 and 2016, one direct customerscustomer, Verizon, accounted for more than 10% of total revenue, while no indirect channel partner accounted for more than 10% of total revenue. During the fiscal year ended March 31, 2014, one direct customer accounted for more than 10% of our total revenue, while no indirect channel partner accounted for more than 10% of total revenue.
| | | | Fiscal Year Ended March 31, (Dollars in Thousands) | | | | | Fiscal Year Ended March 31, (Dollars in Thousands) | | | | |
| | 2015 | | 2014 | | Change | 2017 | | 2016 | | Change |
| | | | % of Revenue | | | | % of Revenue | | $ | | % | | | % of Revenue | | | | % of Revenue | | $ | | % |
| Revenue: | | | | | | | | | | | | | | | | | | | | | | |
| Product | $ | 272,895 |
| | 60 | % | | $ | 234,268 |
| | 59 | % | | $ | 38,627 |
| | 16 | % | $ | 735,531 |
| | 63 | % | | $ | 633,408 |
| | 66 | % | | $ | 102,123 |
| | 16 | % |
| Service | 180,774 |
| | 40 |
| | 162,379 |
| | 41 |
| | 18,395 |
| | 11 | % | 426,581 |
| | 37 |
| | 322,011 |
| | 34 |
| | 104,570 |
| | 32 | % |
| Total revenue | $ | 453,669 |
| | 100 | % | | $ | 396,647 |
| | 100 | % | | $ | 57,022 |
| | 14 | % | $ | 1,162,112 |
| | 100 | % | | $ | 955,419 |
| | 100 | % | | $ | 206,693 |
| | 22 | % |
Product. The 16%, or $38.6$102.1 million, increase in product revenue compared to the same period last year was primarily due to a $26.8$105.4 million increase in revenue from ourentities acquired in the Comms Transaction. The twelve months ended March 31, 2016 only included eight and a half months of such revenues, as the Comms Transaction closed on July 14, 2015. In addition, there was a $10.8 million increase from the general enterprise sector in the legacy NetScout business. These increases were partially offset by a $14.1 million decrease in revenue from the service provider sector in the legacy NetScout business.
Service. The 32%, or $104.6 million, increase in service revenue compared to the same period last year was primarily due to a $7.5$106.4 million increase in revenue from our government enterprise sectorentities acquired in the Comms Transaction. The twelve months ended March 31, 2016 only included eight and a $4.3half months of revenues from these entities as the Comms Transaction closed on July 14, 2015. This increase was partially offset by a $2.8 million increasedecrease in maintenance revenue from our general enterprise sector.
Compared to the same period in the prior year, we realized a 6% increase in units shipped and a 7% increase in the average selling price per unit of our products.
We expect continued growth in our service provider sector through the fiscal year ending March 31, 2016. We also expect growth in our general enterprise market for the fiscal year ending March 31, 2016.
Service. legacy NetScout business.The 11%, or $18.4 million, increase in service revenue was due to a $13.4 million increase in revenue from new maintenance contracts and renewals from a growing support base, a $4.6 million increase in premium support contracts and a $328 thousand increase in revenue from training. We expect single digit percentage growth in our service revenues through the fiscal year ending March 31, 2016. We expect this to be generated by product revenue growth which increases our installed base and therefore our related maintenance contracts.
Total product and service revenue from direct and indirect channels are as follows:
|
| | | | | | | | | | | | | | | | | | | | |
| | Fiscal Year Ended March 31, (Dollars in Thousands) | | | | |
| | 2015 | | 2014 | | Change |
| | | | % of Revenue | | | | % of Revenue | | $ | | % |
| Indirect | $ | 220,093 |
| | 49 | % | | $ | 195,484 |
| | 49 | % | | $ | 24,609 |
| | 13 | % |
| Direct | 233,576 |
| | 51 |
| | 201,163 |
| | 51 |
| | 32,413 |
| | 16 | % |
| Total revenue | $ | 453,669 |
| | 100 | % | | $ | 396,647 |
| | 100 | % | | $ | 57,022 |
| | 14 | % |
The 16%, or $32.4 million, increase in direct revenue is primarily the result of increased domestic revenue from our service provider customers. The 13%, or $24.6 million, increase in indirect channel revenue is primarily the result of the increases in sales to our government enterprise sector in the United States and the service provider sector across international geographies. Sales to customers outside the United States are export sales typically through channel partners, who are generally responsible for distributing our products and providing technical support and service to customers within their territories. Our reported international revenue does not include any revenue from sales to customers outside the United States that are shipped to our United States-based indirect channel partners. These domestic resellers fulfill customer orders based upon joint selling efforts in conjunction with our direct sales force and may subsequently ship our products to international locations; however, we report these shipments as United States revenue since we ship the products to a domestic location.
Total revenue by geography is as follows:
| | | | Fiscal Year Ended March 31, (Dollars in Thousands) | | | | | Fiscal Year Ended March 31, (Dollars in Thousands) | | | | |
| 2015 | | 2014 | | Change | 2017 | | 2016 | | Change |
| | | | % of Revenue | | | | % of Revenue | | $ | | % | | | % of Revenue | | | | % of Revenue | | $ | | % |
| United States | $ | 348,354 |
| | 77 | % | | $ | 303,364 |
| | 76 | % | | $ | 44,990 |
| | 15 | % | $ | 729,373 |
| | 63 | % | | $ | 681,569 |
| | 71 | % | | $ | 47,804 |
| | 7 | % |
| International: | | | | | | | | | | | | | | | | | | | | | | |
| Europe | 46,253 |
| | 10 |
| | 45,837 |
| | 12 |
| | 416 |
| | 1 | % | 190,588 |
| | 16 |
| | 137,411 |
| | 14 |
| | 53,177 |
| | 39 | % |
| Asia | 27,685 |
| | 6 |
| | 20,646 |
| | 5 |
| | 7,039 |
| | 34 | % | 99,277 |
| | 9 |
| | 61,566 |
| | 7 |
| | 37,711 |
| | 61 | % |
| Rest of the world | 31,377 |
| | 7 |
| | 26,800 |
| | 7 |
| | 4,577 |
| | 17 | % | 142,874 |
| | 12 |
| | 74,873 |
| | 8 |
| | 68,001 |
| | 91 | % |
| Subtotal international | 105,315 |
| | 23 |
| | 93,283 |
| | 24 |
| | 12,032 |
| | 13 | % | 432,739 |
| | 37 |
| | 273,850 |
| | 29 |
| | 158,889 |
| | 58 | % |
| Total revenue | $ | 453,669 |
| | 100 | % | | $ | 396,647 |
| | 100 | % | | $ | 57,022 |
| | 14 | % | $ | 1,162,112 |
| | 100 | % | | $ | 955,419 |
| | 100 | % | | $ | 206,693 |
| | 22 | % |
United States revenuesrevenue increased 15%7%, or $45.0$47.8 million, primarily asdue to a result of an increase in revenue from our service provider sector. The 13%, or $12.0$52.9 million increase in international revenue is primarily due to an increase inUnited States revenue from our service provider sector across international geographies. We expect revenue from sales to customers outsideentities acquired as part of the United States to continue to account forComms Transaction. The twelve months ended March 31, 2016 only included eight and a significant portionhalf months of our total revenue insuch revenues, as the future. In accordance with United States export control regulations, we do not sell to, or do business with, countries subject to economic sanctions and export controls.Comms Transaction closed on July 14, 2015. These increases were partially offset by a
$5.1 million decrease within the legacy NetScout business related to lower revenue in the service provider sector. The 58%, or $158.9 million, increase in international revenue was primarily due to a $159.5 million increase in international revenue from entities acquired as part of the Comms Transaction due to twelve months of such revenue as compared to eight and half months in the prior period, as well as an increase across the legacy NetScout general enterprise sector.
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 software and core technology. Cost of service revenue consists primarily of personnel, material, overhead and support costs.
| | | | Fiscal Year Ended March 31, (Dollars in Thousands) | | Change | Fiscal Year Ended March 31, (Dollars in Thousands) | | Change |
| 2015 | | 2014 | | 2017 | | 2016 | |
| | | | % of Revenue | | | | % of Revenue | | $ | | % | | | % of Revenue | | | | % of Revenue | | $ | | % |
| Cost of revenue: | | | | | | | | | | | | | | | | | | | | | | |
| Product | $ | 59,037 |
| | 13 | % | | $ | 51,219 |
| | 13 | % | | $ | 7,818 |
| | 15 | % | $ | 238,002 |
| | 21 | % | | $ | 238,037 |
| | 25 | % | | $ | (35 | ) | | — | % |
| Service | 35,524 |
| | 8 |
| | 33,294 |
| | 8 |
| | 2,230 |
| | 7 | % | 108,137 |
| | 9 |
| | 90,412 |
| | 9 |
| | 17,725 |
| | 20 | % |
| Total cost of revenue | $ | 94,561 |
| | 21 | % | | $ | 84,513 |
| | 21 | % | | $ | 10,048 |
| | 12 | % | $ | 346,139 |
| | 30 | % | | $ | 328,449 |
| | 34 | % | | $ | 17,690 |
| | 5 | % |
| Gross profit: | | | | | | | | | | | | | | | | | | | | | | |
| Product $ | $ | 213,858 |
| | 47 | % | | $ | 183,049 |
| | 46 | % | | $ | 30,809 |
| | 17 | % | $ | 497,529 |
| | 43 | % | | $ | 395,371 |
| | 41 | % | | $ | 102,158 |
| | 26 | % |
| Product gross profit % | 78 | % | | | | 78 | % | | | | — | % | | | 68 | % | | | | 62 | % | | | | 6 | % | | |
| Service $ | 145,250 |
| | 32 | % | | 129,085 |
| | 33 | % | | 16,165 |
| | 13 | % | 318,444 |
| | 27 | % | | 231,599 |
| | 24 | % | | 86,845 |
| | 37 | % |
| Service gross profit % | 80 | % | | | | 79 | % | | | | 1 | % | | | 75 | % | | | | 72 | % | | | | 3 | % | | |
| Total gross profit $ | $ | 359,108 |
| | | | $ | 312,134 |
| | | | $ | 46,974 |
| | 15 | % | $ | 815,973 |
| | | | $ | 626,970 |
| | | | $ | 189,003 |
| | 30 | % |
| Total gross profit % | 79 | % | | | | 79 | % | | | | — | % | | | 70 | % | | | | 66 | % | | | | 4 | % | | |
Product. The 15%, or $7.8 million, increase$35 thousand decrease in cost of product revenue was due to a $3.0 million decrease in direct material costs and a $2.3 million decrease in amortization of legacy NetScout intangibles primarily due to the 16%, or $38.6acceleration of amortization of certain intangibles during the twelve months ended March 31, 2016 for the legacy NetScout business. These decreases were partially offset by a $5.9 million increase in product revenue for the fiscal yearincremental costs related to the Comms Transaction. The twelve months ended March 31, 2015 when compared to the fiscal year ended March 31, 2014. In addition, there was a $2.0 million increase in inventory obsolescence charges2016 only included eight and a $300 thousand increase in amortizationhalf months of intangible assets.such expenses, as the Comms Transaction closed on July 14, 2015. The product gross profit percentage remained flat at 78%increased by six percentage points to 68% during the fiscal year ended March 31, 20152017 as compared to the same period in the prior year. Average headcount in cost of product revenue was 3296 and 100 for the fiscal years ended March 31, 20152017 and 2014,2016, respectively.
Service. The 7%20%, or $2.2$17.7 million, increase in cost of service revenue was primarily due to a $3.6$16.0 million increase in employeethe incremental costs related expenses resulting in part from increased headcount to support our growing installed base, as well as from increased compensation related items for the fiscal yearComms Transaction. The twelve months ended March 31, 2015 when compared2016 only included eight and a half months of such expenses, as the Comms Transaction closed on July 14, 2015. In addition, in the legacy NetScout business there was a $782 thousand increase in allocated overhead expenses, a $591 thousand increase in employee-related expenses due to the fiscal year ended March 31, 2014. Thisan increase wasin headcount and a $506 thousand increase in software license expense. These increases were partially offset by a $1.4 million$717 thousand decrease in allocated overhead.cost of materials used to support customers under service contracts in the legacy NetScout business. The service gross profit percentage increased by onethree percentage pointpoints to 80%75% for the fiscal yeartwelve months ended March 31, 20152017 when compared to the fiscal yeartwelve months ended March 31, 2014.2016. The 13%37%, or $16.2$86.8 million, increase in service gross profit corresponds with the 11%32%, or $18.4$104.6 million, increase in service revenue, partially offset by the 7%20%, or $2.2$17.7 million, increase in cost of services. Average headcount in cost of service revenue was 168616 and 146608 for the fiscal years ended March 31, 20152017 and 2014,2016, respectively.
Gross profit. Our gross profit increased 15%30%, or $47.0$189.0 million. This increase is attributable to our increase in revenue of 14%22%, or $57.0$206.7 million, partially offset by a $10.0$17.7 million, or 12%5%, increase in cost of revenue. The gross margin percentage remained flat at 79%increased four percentage points to 70% during the fiscal year ended March 31, 20152017 when compared to the same period in the prior year. Overall we expect our gross margin percentage to remain relatively flat in future periods with increased sales volumes offset by corresponding increases in product and service costs.
Operating Expenses
| | | | Fiscal Year Ended March 31, (Dollars in Thousands) | | Change | Fiscal Year Ended March 31, (Dollars in Thousands) | | Change |
| | 2015 | | 2014 | | 2017 | | 2016 | |
| | | | % of Revenue | | | | % of Revenue | | $ | | % | | | % of Revenue | | | | % of Revenue | | $ | | % |
| Research and development | $ | 75,242 |
| | 17 | % | | $ | 70,454 |
| | 18 | % | | $ | 4,788 |
| | 7 | % | $ | 232,701 |
| | 20 | % | | $ | 208,630 |
| | 22 | % | | $ | 24,071 |
| | 12 | % |
| Sales and marketing | 136,446 |
| | 30 |
| | 129,611 |
| | 33 |
| | 6,835 |
| | 5 | % | 328,628 |
| | 28 |
| | 293,335 |
| | 31 |
| | 35,293 |
| | 12 | % |
| General and administrative | 47,296 |
| | 10 |
| | 30,623 |
| | 8 |
| | 16,673 |
| | 54 | % | 118,438 |
| | 10 |
| | 117,714 |
| | 12 |
| | 724 |
| | 1 | % |
| Amortization of acquired intangible assets | 3,351 |
| | 1 |
| | 3,432 |
| | 1 |
| | (81 | ) | | (2 | )% | 70,141 |
| | 6 |
| | 32,373 |
| | 3 |
| | 37,768 |
| | 117 | % |
| Restructuring charges | | 4,001 |
| | — |
| | 468 |
| | — |
| | 3,533 |
| | 755 | % |
| Total operating expenses | $ | 262,335 |
| | 58 | % | | $ | 234,120 |
| | 60 | % | | $ | 28,215 |
| | 12 | % | $ | 753,909 |
| | 64 | % | | $ | 652,520 |
| | 68 | % | | $ | 101,389 |
| | 16 | % |
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 7%12%, or $4.8$24.1 million, increase in research and development expenses compared to the same period last year was primarily due to a $3.6$23.5 million increase in employeethe incremental costs related expenses resulting in part from increased headcount as well as from increased compensation related items, a $1.3 million increase in depreciation expense, a $945 thousand increase in consulting expenses,to the Comms Transaction. The twelve months ended March 31, 2016 only included eight and a $320 thousand increase in allocated overhead. Thesehalf months of such expenses, were partially offset by a $952 thousand decrease in non-recurring engineering expenses, and a $253 thousand decrease in deal related compensation.as the Comms Transaction closed on July 14, 2015. Average headcount in research and development was 3581,210 and 3521,224 for the fiscal years ended March 31, 20152017 and 2014,2016, respectively.
Sales and marketing. Sales and marketing expenses consist primarily of personnel expenses, including commissions, overhead and other expenses associated with selling activities and marketing programs such as trade shows, seminars, advertising, and new product launch activities.
The 5%12%, or $6.8$35.3 million, increase in total sales and marketing expenses compared to the same period last year was primarily due to $6.1a $35.9 million increase in employee related expenses resulting in part from increased headcount as well as from increased compensation related items. In addition, there was a $1.4 million increase in advertising and marketing related expenses, a $927 thousand increasethe incremental costs related to the NetScout user conference, an $877 thousand increase in trade show expenses, a $780 thousand increase in allocated overhead, a $531 thousand increase in consulting expenses, and a $479 thousand increase in travel expenses. These expenses were partially offset by a $4.9 million decrease in commission expense for the fiscal yearComms Transaction. The twelve months ended March 31, 20152016 only included eight and a half months of such expenses, as compared to the fiscal year ended March 31, 2014.Comms Transaction closed on July 14, 2015. Average headcount in sales and marketing was 374935 and 358930 for the fiscal years ended March 31, 20152017 and 2014,2016, respectively.
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 54%1%, or $16.7 million,$724 thousand, increase in general and administrative expenses compared to the same period last year was primarily due to a $10.8$15.0 million increasedecrease in business development expenses related to the Comms Transaction and a $3.2$3.1 million decrease in the costs related to the Comms Transaction offset by a $6.6 million increase in employee relatedcompensation-related expenses, as a result of increased incentive related items as well as increased headcount, a $1.6$3.5 million increase in legal expenses, a $653$1.9 million increase in depreciation expense, a $1.6 million increase in allocated overhead expenses, a $1.3 million increase in software license expense, a $960 thousand increase in software licenses,consulting and outside services fees and a $388$513 thousand increase in outside services.state franchise taxes in the legacy NetScout business. Average headcount in general and administrative was 123283 and 118282 for the fiscal years ended March 31, 20152017 and 2014,2016, respectively.
Amortization of acquired intangible assets. Amortization of acquired intangible assets consists primarily of amortization of customer relationships, trademark and tradenames, and leasehold interest related to the acquisitions of the Communications Business, ONPATH Technologies, Inc. (ONPATH), Accanto, Simena, LLC (Simena), Fox Replay BV (Replay), Psytechnics, andLtd (Psytechnics), Network General Central Corporation (Network General).and Avvasi.
The 2%117%, or $81 thousand,$37.8 million, increase in amortization of acquired intangible assets was primarily due to an increase of $39.4 million in amortization related to the Comms Transaction, as there were twelve months of such amortization as of March 31, 2017 as compared to eight and a half months in the prior period. These increases were partially offset by a $1.6 million decrease in amortization of acquired intangible assets is due toin the decreaselegacy NetScout business as a result of expense recorded related to the acquisitionsacceleration of Accanto and Replay.
Overall, we expect our operating margin to remain relatively consistent with historical ranges throughamortization of certain intangibles during the fiscal year endingtwelve months ended March 31, 2016.
38Restructuring. We restructured certain departments to better align functions subsequent to the Comms Transaction. As a result of the restructuring programs, we recorded $4.0 million and $0.5 million of restructuring charges related to costs to be paid to employees for one-time termination benefits and facility related charges during the twelve months ended March 31,
2017 and 2016, respectively. We expect to incur an additional $0.7 million of restructuring charges in the first quarter of fiscal year 2018.
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.
|
| | | | | | | | | | | | | | | | | | | | |
| | Fiscal Year Ended March 31, (Dollars in Thousands) | | Change |
| 2015 | | 2014 | |
| | | | % of Revenue | | | | % of Revenue | | $ | | % |
| Interest and other expense, net | $ | (1,808 | ) | | — | % | | $ | (158 | ) | | — | % | | $ | (1,650 | ) | | (1,044 | )% |
|
| | | | | | | | | | | | | | | | | | | | |
| | Fiscal Year Ended March 31, (Dollars in Thousands) | | Change |
| 2017 | | 2016 | |
| | | | % of Revenue | | | | % of Revenue | | $ | | % |
| Interest and other expense, net | $ | (9,879 | ) | | (1 | )% | | $ | (6,889 | ) | | (1 | )% | | $ | (2,990 | ) | | (43 | )% |
The 1,044%43%, or $1.7$3.0 million, increase in interest and other expense, net was primarily due to a $1.7$2.9 million increase in interest expense due to additional amounts drawn down on the credit facility entered into on July 14, 2015 during the fourth quarter of fiscal year 2016 and a $1.0 million increase in foreign currency exchange expense as well as a $172 thousand increase in expense due to loss on sale of equipment. These increases to interest and other expense, net were partially offset by a $136 thousand increase in interest income received on investments and a $105 thousand increase in other income.expense.
Income Tax Expense
The annual effective tax rate for fiscal year 2015 is 35.6%2017 was 36.2%, compared to an annual effective tax ratebenefit of 36.9%12.5% for fiscal year 2014.2016. Generally, the annual effective tax rates differrate differs from the statutory rates primarilytax rate due to state income taxes and foreign withholding taxes, partially offset by the impact oftax benefit associated with the Company’s domestic production activities deduction, research and development tax credits and earnings in jurisdictions subject to tax rates lower than the impact of state taxes, and federal, foreign and state tax credits. OurU.S. statutory rate. The effective tax rate for the fiscal yeartwelve months ended March 31, 2015 is lower2017 was higher than the comparable prior year periodeffective rate for the twelve months ended March 31, 2016, primarily due to the generation of taxable incomevolatility related to the low profit before tax coupled with significant differences due to transaction related expenses recorded in the fiscal yeartwelve months ended March 31, 2015 within a foreign subsidiary which generated losses in the fiscal year ended March 31, 2014; and whose fiscal year 2014 losses were not benefited.2016.
|
| | | | | | | | | | | | | | | | | | | | |
| | Fiscal Year Ended March 31, (Dollars in Thousands) | | Change |
| 2015 | | 2014 | |
| | | | % of Revenue | | | | % of Revenue | | $ | | % |
| Income tax expense | $ | 33,773 |
| | 7 | % | | $ | 28,750 |
| | 7 | % | | $ | 5,023 |
| | 17 | % |
|
| | | | | | | | | | | | | | | | | | | | |
| | Fiscal Year Ended March 31, (Dollars in Thousands) | | Change |
| 2017 | | 2016 | |
| | | | % of Revenue | | | | % of Revenue | | $ | | % |
| Income tax expense (benefit) | $ | 18,894 |
| | 2 | % | | $ | (4,070 | ) | | — | % | | $ | 22,964 |
| | 564 | % |
Comparison of Years Ended March 31, 20142016 and 20132015
Revenue
During the fiscal year ended March 31, 2014,2016, one direct customer, Verizon, accounted for more than 10% of total revenue, while no single indirect channel partner accounted for more than 10% of total revenue. During the fiscal year ended March 31, 2013, no single2015, Verizon and one other direct customer oraccounted for more than 10% of our total revenue, while no indirect channel partner accounted for more than 10% of total revenue.
| | | | Fiscal Year Ended March 31, (Dollars in Thousands) | | Change | Fiscal Year Ended March 31, (Dollars in Thousands) | | Change |
| 2014 | | 2013 | | 2016 | | 2015 | |
| | | | % of Revenue | | | | % of Revenue | | $ | | % | | | % of Revenue | | | | % of Revenue | | $ | | % |
| Revenue: | | | | | | | | | | | | | | | | | | | | | | |
| Product | $ | 234,268 |
| | 59 | % | | $ | 198,749 |
| | 57 | % | | $ | 35,519 |
| | 18 | % | $ | 633,408 |
| | 66 | % | | $ | 272,895 |
| | 60 | % | | $ | 360,513 |
| | 132 | % |
| Service | 162,379 |
| | 41 |
| | 151,801 |
| | 43 |
| | 10,578 |
| | 7 | % | 322,011 |
| | 34 |
| | 180,774 |
| | 40 |
| | 141,237 |
| | 78 | % |
| Total revenue | $ | 396,647 |
| | 100 | % | | $ | 350,550 |
| | 100 | % | | $ | 46,097 |
| | 13 | % | $ | 955,419 |
| | 100 | % | | $ | 453,669 |
| | 100 | % | | $ | 501,750 |
| | 111 | % |
Product. The 18%132%, or $35.5$360.5 million, increase in product revenue compared to fiscal year ended March 31, 2015 was primarily due to $378.8 million in additional revenue resulting from the Comms Transaction. This increase was partially offset by an $11.4 million decrease in revenue from our legacy service provider sector and a $6.9 million decrease in revenue from our legacy general enterprise sector.
Service. The 78%, or $141.2 million, increase in service revenue compared to fiscal year ended March 31, 2015 was primarily due to a $17.9$128.7 million increase from the expansion of our customer base due to the Comms Transaction and a $12.7 million increase in revenue from maintenance contracts in our service provider sector, an $11.0 million increase in revenue from our general enterprise sector and a $6.7 million increase in revenue from our government enterprise sector.
Compared to the same period in the prior year, we realized a 16% increase in units shipped and a 7% increase in the average selling price per unit of our products.
Service. The 7%, or $10.6 million, increase in service revenue was primarilylegacy NetScout business due to an $8.0 million increase in revenue from new maintenance contracts and renewals from a growing support base and a $3.3 million increase in premium support contracts. These were partially offset by a $443 thousand decrease in consulting revenue.base.
Total product and service revenue from direct and indirect channels are as follows:
|
| | | | | | | | | | | | | | | | | | | | |
| | Fiscal Year Ended March 31, (Dollars in Thousands) | | Change |
| 2014 | | 2013 | |
| | | | % of Revenue | | | | % of Revenue | | $ | | % |
| Indirect | $ | 195,484 |
| | 49 | % | | $ | 172,136 |
| | 49 | % | | $ | 23,348 |
| | 14 | % |
| Direct | 201,163 |
| | 51 | % | | 178,414 |
| | 51 | % | | 22,749 |
| | 13 | % |
| Total revenue | $ | 396,647 |
| | 100 | % | | $ | 350,550 |
| | 100 | % | | $ | 46,097 |
| | 13 | % |
The 14%, or $23.3 million, increase in indirect channel revenue is the result of the increases in sales to our general enterprise sectors across all geographies. The 13%, or $22.7 million, increase in direct revenue is primarily the result of increased domestic revenue from our service provider customers.
Total revenue by geography is as follows:
| | | | Fiscal Year Ended March 31, (Dollars in Thousands) | | Change | Fiscal Year Ended March 31, (Dollars in Thousands) | | Change |
| 2014 | | 2013 | | 2016 | | 2015 | |
| | | | % of Revenue | | | | % of Revenue | | $ | | % | | | % of Revenue | | | | % of Revenue | | $ | | % |
| United States | $ | 303,364 |
| | 76 | % | | $ | 262,020 |
| | 75 | % | | $ | 41,344 |
| | 16 | % | $ | 681,569 |
| | 71 | % | | $ | 348,354 |
| | 77 | % | | $ | 333,215 |
| | 96 | % |
| International: | | | | | | | | | | | | | | | | | | | | | | |
| Europe | 45,837 |
| | 12 |
| | 42,884 |
| | 12 |
| | 2,953 |
| | 7 | % | 137,411 |
| | 14 |
| | 46,253 |
| | 10 |
| | 91,158 |
| | 197 | % |
| Asia | 20,646 |
| | 5 |
| | 18,107 |
| | 5 |
| | 2,539 |
| | 14 | % | 61,566 |
| | 7 |
| | 27,685 |
| | 6 |
| | 33,881 |
| | 122 | % |
| Rest of the world | 26,800 |
| | 7 |
| | 27,539 |
| | 8 |
| | (739 | ) | | (3 | )% | 74,873 |
| | 8 |
| | 31,377 |
| | 7 |
| | 43,496 |
| | 139 | % |
| Subtotal international | 93,283 |
| | 24 |
| | 88,530 |
| | 25 |
| | 4,753 |
| | 5 | % | 273,850 |
| | 29 |
| | 105,315 |
| | 23 |
| | 168,535 |
| | 160 | % |
| Total revenue | $ | 396,647 |
| | 100 | % | | $ | 350,550 |
| | 100 | % | | $ | 46,097 |
| | 13 | % | $ | 955,419 |
| | 100 | % | | $ | 453,669 |
| | 100 | % | | $ | 501,750 |
| | 111 | % |
United States revenues increased 16%96%, or $41.3$333.2 million, primarily due to a $334.1 million increase from entities acquired as a resultpart of an increase in our service provider sector.the Comms Transaction. The 5%160%, or $4.8$168.5 million, increase in international revenue iswas primarily due to ana $173.4 million increase in ourfrom entities acquired as part of the Comms Transaction, partially offset by a decrease across the legacy general enterprise sector in Asia.sector.
Cost of Revenue and Gross Profit
| | | | Fiscal Year Ended March 31, (Dollars in Thousands) | | | | | Fiscal Year Ended March 31, (Dollars in Thousands) | | | | |
| | 2014 | | 2013 | | Change | 2016 | | 2015 | | Change |
| | | | % of Revenue | | | | % of Revenue | | $ | | % | | | % of Revenue | | | | % of Revenue | | $ | | % |
| Cost of revenue: | | | | | | | | | | | | | | | | | | | | | | |
| Product | $ | 51,219 |
| | 13 | % | | $ | 45,752 |
| | 13 | % | | $ | 5,467 |
| | 12 | % | $ | 238,037 |
| | 25 | % | | $ | 59,037 |
| | 13 | % | | $ | 179,000 |
| | 303 | % |
| Service | 33,294 |
| | 8 |
| | 28,256 |
| | 8 |
| | 5,038 |
| | 18 | % | 90,412 |
| | 9 |
| | 35,524 |
| | 8 |
| | 54,888 |
| | 155 | % |
| Total cost of revenue | $ | 84,513 |
| | 21 | % | | 74,008 |
| | 21 | % | | 10,505 |
| | 14 | % | $ | 328,449 |
| | 34 | % | | $ | 94,561 |
| | 21 | % | | $ | 233,888 |
| | 247 | % |
| Gross profit: | | | | | | | | | | | | | | | | | | | | | | |
| Product $ | $ | 183,049 |
| | 46 | % | | $ | 152,997 |
| | 44 | % | | 30,052 |
| | 20 | % | $ | 395,371 |
| | 41 | % | | $ | 213,858 |
| | 47 | % | | 181,513 |
| | 85 | % |
| Product gross profit % | 78 | % | | | | 77 | % | | | | 1 | % | | | |
| Product gross profit | | 62 | % | | | | 78 | % | | | | (16 | )% | | |
| Service $ | 129,085 |
| | 33 | % | | 123,545 |
| | 35 | % | | 5,540 |
| | 4 | % | 231,599 |
| | 24 | % | | 145,250 |
| | 32 | % | | 86,349 |
| | 59 | % |
| Service gross profit % | 79 | % | | | | 81 | % | | | | (2 | )% | | | |
| Service gross profit | | 72 | % | | | | 80 | % | | | | (8 | )% | | |
| Total gross profit $ | $ | 312,134 |
| | | | $ | 276,542 |
| | | | $ | 35,592 |
| | 13 | % | $ | 626,970 |
| | | | $ | 359,108 |
| | | | $ | 267,862 |
| | 75 | % |
| Total gross profit % | 79 | % | | | | 79 | % | | | | — | % | | | 66 | % | | | | 79 | % | | | | (13 | )% | | |
Product. The 12%303%, or $5.5$179.0 million, increase in cost of product revenue was primarily due to the 18%132%, or $35.5$360.5 million increase in product revenue for the fiscal year ended March 31, 20142016 when compared to the fiscal year ended March 31, 2013. In addition, there2015. The increase in cost of product revenue was primarily due to a $641$181.7 million increase as a result of the incremental costs from the operations related to the Comms Transaction, as well as an $886 thousand increase in employee related expensesamortization of intangibles primarily due to increased headcount as well as increased incentive compensation, a $189 thousand increasethe acceleration of intangibles in depreciation expense, a $154 thousand increase in allocated overhead, and a $152 thousand increase in testing services due to new product introduction for the fiscal year ended March 31, 2014.legacy NetScout business. These increases were partially offset by a $3.3 million decrease in cost of goods sold for the legacy NetScout business as well as a $1.2 million decrease in amortization of intangible assets, a $453 thousand decrease in inventory fair value adjustment relatedobsolescence charges. The product gross profit percentage decreased by sixteen percentage points to inventory recorded from the acquisition of ONPATH, and a $169 thousand decrease in obsolescence charges as we did not discontinue any product62% during the fiscal year ended March 31, 2014 . The product gross profit percentage increased by one percentage point to 78% during the fiscal year ended March 31, 20142016 as compared to the same period in the prior year. Average headcount in cost of product revenue was 32100 and 2932 for the fiscal years ended March 31, 20142016 and 2013,2015, respectively.
Service. The 18%155%, or $5.0$54.9 million, increase in cost of service revenue was primarily due to a $3.5$52.2 million increase as a result of the incremental costs from the operations related to the Comms Transaction, a $1.2 million increase in employeecompensation related expenses resulting in part from increased headcount to support our growing installed base, as well as from increased share-based compensationthe legacy NetScout business and increased incentive compensation. In addition, there was a $889$959 thousand increase in cost of materials usedcontracts. The service gross profit percentage decreased by eight percentage points to support customers under service contracts, a $320 thousand increase in software licenses, a $266 thousand increase in travel expenses, and a $200 thousand increase in allocated overhead. These increases were partially offset
by a $348 thousand decrease in consulting expenses.72% for the fiscal year ended March 31, 2016 when compared to the fiscal year ended March 31, 2015. The 4%59%, or $5.5$86.3 million, increase in service gross profit corresponds with the 7%78%, or $10.6$141.2 million, increase in service revenue, partially offset by the 18%155%, or $5.0$54.9 million, increase in cost of services. The service gross profit percentage decreased by two percentage point to 79% for the fiscal year ended March 31, 2014 when compared to the same period in the prior year. Average headcount in cost of service revenue was 146608 and 132168 for the years ended March 31, 20142016 and 2013,2015, respectively.
Gross profit. Our gross profit increased 13%75%, or $35.6$267.9 million. This increase is attributable to our increase in revenue of 13%111%, or $46.1$501.8 million, partially offset by a $10.5$233.9 million, or 14%247%, increase in cost of revenue. The gross margin percentage remained flat at 79%decreased thirteen percentage points to 66% during the fiscal year ended March 31, 20142016 when compared to the same period in the prior year.
Operating Expenses
| | | | Fiscal Year Ended March 31, (Dollars in Thousands) | | | | | Fiscal Year Ended March 31, (Dollars in Thousands) | | | | |
| | 2014 | | 2013 | | Change | 2016 | | 2015 | | Change |
| | | | % of Revenue | | | | % of Revenue | | $ | | % | | | % of Revenue | | | | % of Revenue | | $ | | % |
| Research and development | $ | 70,454 |
| | 18 | % | | $ | 61,546 |
| | 18 | % | | $ | 8,908 |
| | 14 | % | $ | 208,630 |
| | 22 | % | | $ | 75,242 |
| | 17 | % | | $ | 133,388 |
| | 177 | % |
| Sales and marketing | 129,611 |
| | 32 |
| | 116,807 |
| | 33 |
| | 12,804 |
| | 11 | % | 293,335 |
| | 31 |
| | 136,446 |
| | 30 |
| | 156,889 |
| | 115 | % |
| General and administrative | 30,623 |
| | 8 |
| | 29,718 |
| | 8 |
| | 905 |
| | 3 | % | 117,714 |
| | 12 |
| | 47,296 |
| | 10 |
| | 70,418 |
| | 149 | % |
| Amortization of acquired intangible assets | 3,432 |
| | 1 |
| | 2,877 |
| | 1 |
| | 555 |
| | 19 | % | 32,373 |
| | 3 |
| | 3,351 |
| | 1 |
| | 29,022 |
| | 866 | % |
| Restructuring charges | — |
| | — |
| | 1,065 |
| | — |
| | (1,065 | ) | | (100 | )% | 468 |
| | — |
| | — |
| | — |
| | 468 |
| | 100 | % |
| Total operating expenses | $ | 234,120 |
| | 59 | % | | $ | 212,013 |
| | 60 | % |
| $ | 22,107 |
| | 10 | % | $ | 652,520 |
| | 68 | % | | $ | 262,335 |
| | 58 | % |
| $ | 390,185 |
| | 149 | % |
Research and development. The 14%177%, or $8.9$133.4 million, increase in research and development expenses iswas due to a $6.4$133.5 million increase as a result of the incremental costs from the operations related to the Comms Transaction. Average headcount in research and development was 1,224 and 358 for the fiscal years ended March 31, 2016 and 2015, respectively.
Sales and marketing. The 115%, or $156.9 million, increase in total sales and marketing expenses was primarily due to a $146.2 million increase as a result of the incremental costs from the operations related to the Comms Transaction. In addition, in the legacy NetScout business there was a $3.8 million increase in commission expense, a $2.5 million increase in deal related compensation expense, a $2.0 million increase in events, $1.8 million increase for the NetScout User Conference, a $1.5 million increase in employee related expensesexpense items resulting in part from increased headcount as well as from increased share-basedincrease compensation related items and increased incentive compensation, an $818 thousanda $1.3 million increase in non-recurring engineering expenses, an $804 thousand increase in depreciation expense, a $493 thousand increase in temporary hire expenses, a $358 thousand increase in travel expense, a $285 thousand increase in software licenses, a $222 thousand increase in computer supplies and a $183 thousand increase in research and development supplies.advertising expenses. These expenses were partially offset by a $728$1.2 million decrease in recruiting expenses and an $863 thousand decrease in deal related compensation related to the acquisition of Simena and a $197 thousand decrease in meeting expenses. Average headcount in research and development was 352 and 338travel expenses for the fiscal years ended March 31, 2014 and 2013, respectively.
Sales and marketing. The 11%, or $12.8 million, increase in total sales and marketing expenses was due to $6.0 million increase in employee related expenses resulting in part from increased headcount as well as from increased share-based compensation and increased incentive compensation, a $5.1 million increase in commissions due to an increase in higher quota attainment and special incentive programs related to the nGeniusOne product introduction during the fiscal year ended March 31, 20142016 as compared to the fiscal year ended March 31, 2013. In addition, there was a $957 thousand increase in trade show expenses, a $916 thousand increase in travel expenses, a $437 thousand increase in marketing related expenses, a $295 thousand increase allocated overhead, a $292 thousand increase related to the NetScout user conference, and a $180 thousand increase in consulting expenses. These expenses were partially offset by a $524 thousand decrease in recruitment expenses, a $495 thousand decrease in depreciation expense, a $352 thousand decrease in sales meeting expenses, a $326 thousand decrease in temporary help, and a $298 thousand decrease in employee training expenses.2015. Average headcount in sales and marketing was 358930 and 340374 for the fiscal years ended March 31, 20142016 and 2013,2015, respectively.
General and administrative. The 3%149%, or $905 thousand,$70.4 million, increase in general and administrative expenses was primarily due to a $1.7$48.8 million increase as a result of the incremental costs from the operations related to the Comms Transaction, a $14.8 million increase in business development expenses, a $2.5 million increase in legal expenses, a $1.9 million increase in accounting services, a $1.8 million thousand increase in employee related expenses as a result of increased headcount as well as from increased share-based compensation and increased incentive compensation, a $282 thousand increase in tax and accounting related services, a $169 thousand increase in office expenses, a $153 thousand increase in compensation for post combination services, and a $122 thousand increase in expenses for software licenses. These increases were partially offset by a $1.1 million decrease in business development expenses, and a $294 thousand decrease in bad debt expense.expenses. Average headcount in general and administrative was 118282 and 115123 for the fiscal years ended March 31, 20142016 and 2013,2015, respectively.
Amortization of acquired intangible assets. The 19%866%, or $555 thousand,$29.0 million, increase in amortization of acquired intangible assets iswas due to a $27.9 million increase in amortization associated with the Comms Transaction, as well as a $1.2 million increase of expense recordedin the legacy NetScout business related to the acquisitions of ONPATH and Accanto.
Restructuring charges. During the fiscal year ended March 31, 2013, we restructured part of our international sales organization related to an overlap of personnel acquired as partacceleration of the Accanto acquisition. As a result, we recorded $1.2 millionamortization of restructuring charges during the fiscal year ended March 31, 2013 related to severance costs.certain intangibles.
Interest and Other Expense, Net
|
| | | | | | | | | | | | | | | | | | | | |
| | Fiscal Year Ended March 31, (Dollars in Thousands) | | | | |
| | 2014 | | 2013 | | Change |
| | | | % of Revenue | | | | % of Revenue | | $ | | % |
| Interest and other expense, net | $ | (158 | ) | | — | % | | $ | (793 | ) | | — | % | | $ | 635 |
| | 80 | % |
|
| | | | | | | | | | | | | | | | | | | | |
| | Fiscal Year Ended March 31, (Dollars in Thousands) | | | | |
| | 2016 | | 2015 | | Change |
| | | | % of Revenue | | | | % of Revenue | | $ | | % |
| Interest and other expense, net | $ | (6,889 | ) | | (1 | )% | | $ | (1,808 | ) | | — | % | | $ | (5,081 | ) | | (281 | )% |
The 80%281%, or $635 thousand, decrease$5.1 million, increase in interest and other income (expense),expense, net was primarily due to a $523 thousand decrease$5.5 million increase in interest expense due to amounts drawn down on the repayment of our outstanding debt during the fiscal year ended March 31, 2013,credit facility entered into on July 14, 2015, as well as a $315 thousand decrease in foreign currency exchange expense.$1.0 million increase as a result of the incremental costs from operations related to the Comms Transaction. These decreases to interest and other expense, net were partially offset by a $199$1.2 million decrease in foreign currency expense and a $246 thousand decrease inincrease from interest income received on investments.
Income Tax Expense
The annual effective tax rate for fiscal year 20142016 was 36.9%12.5%, compared to an annual effective tax rate of 36.3%35.6% for fiscal year 2013.2015. Generally, the annual effective tax rates differrate differs from statutory rates primarilytax rate due to the impact of the domestic production activities deduction, research and development credit, the impact of state taxes and federal, foreign and state income generated in jurisdictions that have a different
tax credits. Ourrate than the U.S. statutory rate. The effective tax rate for the fiscal year ended March 31, 2014 was higher2016 is lower than the comparable prior year period primarily related to a decrease in profit before taxes due to Transaction related expenses recorded in the exclusionyear, an increase in research and development credits attributable to acquired companies and a change in the jurisdictional mix of certain foreign losses for which a benefit cannot be realized, offset by decreases to the state tax rate and income generated in jurisdictions that have a lower tax rate than the statutory U.S. rate.earnings.
|
| | | | | | | | | | | | | | | | | | | | |
| | Fiscal Year Ended March 31, (Dollars in Thousands) | | | | |
| | 2014 | | 2013 | | Change |
| | | | % of Revenue | | | | % of Revenue | | $ | | % |
| Income tax expense | $ | 28,750 |
| | 7 | % | | $ | 23,127 |
| | 7 | % | | $ | 5,623 |
| | 24 | % |
|
| | | | | | | | | | | | | | | | | | | | |
| | Fiscal Year Ended March 31, (Dollars in Thousands) | | | | |
| | 2016 | | 2015 | | Change |
| | | | % of Revenue | | | | % of Revenue | | $ | | % |
| Income tax expense (benefit) | $ | (4,070 | ) | | — | % | | $ | 33,773 |
| | 7 | % | | $ | (37,843 | ) | | (112 | )% |
Contractual Obligations
At March 31, 2015,2017, we had the following contractual obligations:
Payment due by period (Dollars in thousands)
| | | Contractual Obligations | Total | | Less than 1 year | | 1-3 years | | 3-5 years | | More than 5 years | Total | | Less than 1
year | | 1-3 years | | 3-5 years | | More than
5 years |
| Unconditional purchase obligations | $ | 5,481 |
| | $ | 5,481 |
| | $ | — |
| | $ | — |
| | $ | — |
| |
| Operating lease obligations (1) | 29,161 |
| | 6,065 |
| | 9,077 |
| | 5,331 |
| | 8,688 |
| |
| Long-term debt obligations (1) | | $ | 324,952 |
| | $ | 7,574 |
| | $ | 15,168 |
| | $ | 302,210 |
| | $ | — |
|
| Unconditional purchase obligations (2) | | 32,182 |
| | 29,805 |
| | 2,377 |
| | — |
| | — |
|
| Operating lease obligations (3) | | 39,686 |
| | 13,992 |
| | 14,046 |
| | 7,681 |
| | 3,967 |
|
| Pension benefit plan | | 30,141 |
| | 296 |
| | 744 |
| | 958 |
| | 28,143 |
|
| Contingent purchase consideration | 4,484 |
| | — |
| | — |
| | 4,484 |
| | — |
| 5,449 |
| | 660 |
| | 4,789 |
| | — |
| | — |
|
| Total contractual obligations | $ | 39,126 |
| | $ | 11,546 |
| | $ | 9,077 |
| | $ | 9,815 |
| | $ | 8,688 |
| $ | 432,410 |
| | $ | 52,327 |
| | $ | 37,124 |
| | $ | 310,849 |
| | $ | 32,110 |
|
At March 31, 2015,2017, the total amount of net unrecognized tax benefits for uncertain tax positions and the accrual for the related interest was $1.1$3.2 million. We are unable to make a reliable estimate when cash settlement, if any, will occur with a tax authority as the timing of examinations and ultimate resolution of those examinations is uncertain. We have also excluded long-term deferred revenue of $27.0$86.6 million as such amounts will be recognized as services are provided.
The payment stream for the retirement obligation is based upon the retirement date of our chairman and CEO which is currently not determinable. At March 31, 2015, the total accrual for the retirement obligation was $1.6 million.
| |
| (1) | Includes estimated future interest at an interest rate of 2.49% for our outstanding term loan at March 31, 2017. |
| |
| (2) | Represents estimated open purchase orders to purchase inventory as well as commitments for products and services used in the normal course of business. |
| |
| (3) | We lease facilities and certain equipment under operating lease agreements extending through September 2023March 2024 for a total of $29.2$39.7 million. |
Off-Balance Sheet Arrangements
We do not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements. As such, we are not exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in such relationships.
Commitment 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 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. See Note 17 for a discussion
We have one contingent liability related to the acquisition of Simena in November 2011 for future consideration to be paid to the former seller which had an initial fair value of $8.0 million at the time of acquisition. At March 31, 2015,2017, the fair value of the future consideration was $4.5$4.8 million.
Our contingent purchase consideration at March 31, 2017 includes $660 thousand related to the Avvasi acquisition that occurred in August 2016. The contingent purchase consideration represents amounts deposited into an escrow account, which was established to cover any damages we 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 asset purchase agreement.
Warranty and Indemnification
We warrant that our software and hardware products will substantially conform to the documentation accompanying such products on their original date of shipment. For software, which also includes firmware, the standard warranty commences upon shipment and generally expires 60 to 90 days thereafter. With regard to hardware, the standard warranty commences upon shipment and generally expires 60 days to 12 months thereafter. Additionally, this warranty is subject to various exclusions which include, but are not limited to, non-conformance resulting from modifications made to the software or hardware by a party other than NetScout; customers’ failure to follow our installation, operation or maintenance instructions; and events outside of our reasonable control. We also warrant that all support services will be performed in a good and workmanlike manner. We believe that our product and support service warranties are consistent with commonly accepted industry standards. No warrantyWarranty cost information is presented and no material warranty costs are accrued since service revenue associated with warranty is deferred at the time of sale and recognized ratably over the warranty period.
Contracts that we enter into in the ordinary course of business may contain standard indemnification provisions. Pursuant to these agreements, we may agree to defend third party claims brought against a partner or direct customer claiming infringement of such third party’s (i) U.S. patent and/or European Union (EU), or other selected countries’ patents, (ii) Berne convention member country copyright, and/or (iii) U.S., EU, and/or other selected countries’ trademark or intellectual property rights. Moreover, this indemnity may require us to pay any damages awarded against the partner or direct customer in such type of lawsuit as well as reimburse the partner or direct customer for reasonable attorney’s fees incurred by them from the lawsuit.
We may also agree from time to time to provide other forms of indemnification to partners or direct customers, such as indemnification that would obligate us to defend and pay any damages awarded to a third party against a partner or direct customer based on a lawsuit alleging that such third party has suffered personal injury or tangible property damage legally determined to have been caused by negligently designed or manufactured products.
We have agreed to indemnify our directors and officers and our subsidiaries’ directors and officers if they are made a party or are threatened to be made a party to any proceeding (other than an action by or in the right of NetScout) by reason of the fact that the indemnified are an agent of NetScout or by reason of anything done or not done by them in any such capacity. The indemnity is for any and all expenses and liabilities of any type (including but not limited to, judgments, fines and amounts paid in settlement) reasonably incurred by the directors or officers in connection with the investigation, defense, settlement or appeal of such proceeding, provided they acted in good faith.
Liquidity and Capital Resources
Substantially all of our cash, cash equivalents and marketable securities are located in the United States. Cash, cash equivalents and marketable securities consist of the following:following (in thousands):
| | | | At March 31,
(Dollars in Thousands) | At March 31,
(Dollars in Thousands) |
| | 2015 | | 2014 | | 2013 | 2017 | | 2016 | | 2015 |
| Cash and cash equivalents | $ | 104,893 |
| | $ | 102,076 |
| | $ | 99,930 |
| $ | 304,880 |
| | $ | 210,711 |
| | $ | 104,893 |
|
| Short-term marketable securities | 101,392 |
| | 75,234 |
| | 37,338 |
| 137,892 |
| | 128,003 |
| | 101,392 |
|
| Long-term marketable securities | 58,572 |
| | 41,484 |
| | 16,823 |
| 21,933 |
| | 13,361 |
| | 58,572 |
|
| Cash, cash equivalents and marketable securities | $ | 264,857 |
| | $ | 218,794 |
| | $ | 154,091 |
| $ | 464,705 |
| | $ | 352,075 |
| | $ | 264,857 |
|
Cash, cash equivalents and marketable securities
At March 31, 20152017 cash, cash equivalents and marketable securities totaled $264.9$464.7 million, up $46.1$112.6 million from $218.8$352.1 million at March 31, 20142016. This increase was due primarily to cash flowflows from operations of $106.9$227.8 million and $2.8 million generated from excess tax benefits from share-based compensation awards,which was partially offset by $51.7$80.0 million of cash used to repurchase shares of our common stock and $12.8under our repurchase program, $29.7 million of cash used for capital expenditures.
Substantially all of our cash, cash equivalentsexpenditures and marketable securities are located$4.6 million used in the United States. Avvasi acquisition during the twelve months ended March 31, 2017.
At March 31, 2015,2017, cash, and short-term and long-term investments in the United States was $262.9were $362.6 million, while cash held offshoreoutside of the United States was approximately $2.0$102.1 million.
Cash and cash equivalents were impacted by the following:
| | | | Fiscal Year Ending March 31, (Dollars in Thousands) | Fiscal Year Ended March 31, (Dollars in Thousands) |
| | 2015 | | 2014 | | 2013 | 2017 | | 2016 | | 2015 |
| Net cash provided by operating activities | $ | 106,933 |
| | $ | 110,946 |
| | $ | 95,412 |
| $ | 227,809 |
| | $ | 95,285 |
| | $ | 106,933 |
|
| Net cash (used in) provided by investing activities | $ | (56,185 | ) | | $ | (76,581 | ) | | $ | (21,742 | ) | $ | (42,281 | ) | | $ | 25,089 |
| | $ | (56,185 | ) |
| Net cash used in financing activities | $ | (48,760 | ) | | $ | (31,963 | ) | | $ | (91,004 | ) | $ | (90,598 | ) | | $ | (15,300 | ) | | $ | (48,760 | ) |
Net cash provided byfrom operating activities.activities
Fiscal year 20152017 compared to fiscal year 20142016
Cash provided by operating activities was $106.9$227.8 million during the fiscal year ended March 31, 2015,2017, compared to $110.9$95.3 million of cash provided by operating activities in the fiscal year ended March 31, 2014.2016. This $4.0$132.5 million decreaseincrease was due in part to accounts receivable, which had a $35.3$61.7 million increase from net income, a $47.5 million net increase from amounts due to and from related parties as a result of the Comms Transaction, a $31.1 million increase from deferred income taxes, a $20.8 million increase from depreciation and amortization, a $10.8 million increase from share-based compensation expense, a $7.4 million increase from deferred revenue, a $6.9 million increase from inventories, a $4.7 million increase from prepaid expenses and other assets and a $1.0 million increase from income taxes payable. These increases were partially offset by a $26.5 million decrease from accrued compensation and other expenses and a $24.8 million unfavorable impact in the fiscal year ended March 31, 2015 as compared to the fiscal year ended March 31, 2014.from accounts receivable and unbilled costs. Accounts receivable days sales outstanding was 80 days at March 31, 2017 compared to 80 days at March 31, 2016 and 61 days at March 31, 2015 compared to 47 days at March 31, 2014.2015. In addition, there was a $2.5$6.6 million decrease from deferred income taxes,deal-related compensation expense and accretion charges and a $1.4$1.9 million decrease in cash inflows from income taxes payable. These decreases were offset by a $12.1 million increase in profitability. In addition, there was a $6.5 million increase from accrued compensation and other expensesaccounts payable related to the normalization of the accounts payable balances across the larger business during the fiscal yeartwelve months ended March 31, 2015 when2017 as compared to the fiscal yeartwelve months ended March 31, 2014 largely due to the timing of accruals and payments for accruals related to legal and accounting related expenses at March 31, 2015. The increase in cash provided by operating activities was also due to a $6.3 million decrease from a change in inventory balances, a $3.8 million favorable impact from deferred revenue due to increased sales of maintenance and services delivered over time, a $3.7 million increase from share-based compensation, a $1.4 million increase from depreciation and amortization, and a $672 thousand increase from prepaid expenses and other assets.2016.
Fiscal year 20142016 compared to fiscal year 20132015
Cash provided by operating activities was $110.9$95.3 million during the fiscal year ended March 31, 2014,2016, compared to $95.4$106.9 million of cash provided by operating activities in the fiscal year ended March 31, 2013.2015. This $15.5$11.6 million increasedecrease was due in part to accounts receivable, which hadan $89.5 million decrease from net income, a favorable impact$44.9 million decrease in the fiscal year ended March 31, 2014 as compared to the fiscal year ended March 31, 2013. Accounts receivable days sales outstanding was 47 days at March 31, 2014 compared to 68 days at March 31, 2013. In addition, there was an $8.5 million increase in profitability, a $5.3 million favorable impact from deferred revenue due to increased sales of our products, a $3.8 million increase from accounts payable, a $3.3 million increase from share-based compensation, a $1.3 million increase from deferred income taxes, and a $563 thousand increase from income taxes
payable. These increases were offset by an $8.2 million decrease as a result of an increase in inventory balances to support increases in sales volume, an $8.2$27.3 million decrease from prepaid expenses and other assets, largelyan $18.5 million decrease from amounts owed from a related party as a result of the Comms Transaction, a $6.7 million decrease from amounts that are due to a $5.6related party as a result of the Comms Transaction and a $1.5 million unfavorable impact from accounts receivable. Accounts receivable days sales outstanding was 80 days at March 31, 2016 compared to 61 days at March 31, 2015. These decreases were partially offset by a $120.4 million increase in depreciation and amortization and a $20.0 million increase from prepaid income taxesaccrued compensation and $1.2 million from another expenses. This increase in prepaid royalties, and a $4.0 million decrease from accrued compensation and other expenses during the fiscal year ended March 31, 2014 when compared to the fiscal year ended March 31, 2013was due largely due to the timing of accruals and payments for incentive compensation as a result ofrelated items and legal and accounting related fees. In addition, there was an $11.8 million increase in the payout for fiscal year 2013 incentiveshare-based compensation, during the fiscal year ended March 31, 2014 as compared to the payout for the fiscal year 2012 during the fiscal year ended March 31, 2013, as well as severance activitiesa $9.0 million increase from deferred revenue, a $6.6 million increase in deal related to restructuring.compensation and a $6.0 million increase from inventories.
Net cash used infrom investing activities.activities
| | | | Fiscal Year Ending March 31, (Dollars in Thousands) | Fiscal Year Ended March 31, (Dollars in Thousands) |
| | 2015 | | 2014 | | 2013 | 2017 | | 2016 | | 2015 |
| Cash used in investment activities included the following: | | | | | | |
| Cash (used in) provided by investing activities included the following: | | | | | | |
| Purchase of marketable securities | $ | (133,212 | ) | | $ | (128,122 | ) | | $ | (121,133 | ) | $ | (199,841 | ) |
| $ | (100,278 | ) |
| $ | (133,212 | ) |
| Proceeds from maturity of marketable securities | 89,954 |
| | 65,570 |
| | 163,416 |
| 181,321 |
|
| 118,881 |
|
| 89,954 |
|
| Purchase of fixed assets | (12,808 | ) | | (13,066 | ) | | (11,671 | ) | (29,696 | ) |
| (24,783 | ) |
| (12,808 | ) |
| Purchase of intangible assets | (174 | ) | | (1,086 | ) | | (277 | ) | (1,031 | ) |
| (3,962 | ) |
| (174 | ) |
| Acquisition of businesses, net of cash acquired | — |
| | — |
| | (51,273 | ) | (4,606 | ) |
| 27,700 |
|
| — |
|
| Increase in deposits | 55 |
| | 123 |
| | (804 | ) | |
| Decrease (increase) in deposits | | 129 |
|
| (150 | ) |
| 55 |
|
| Contingent purchase consideration | | 660 |
|
| — |
|
| — |
|
| Collection of contingently returnable consideration | | 12,864 |
|
| 9,306 |
|
| — |
|
| Change in restricted cash | | (660 | ) |
| — |
|
| — |
|
| Capitalized software development costs | | (1,421 | ) |
| (1,625 | ) |
| — |
|
| | $ | (56,185 | ) | | $ | (76,581 | ) | | $ | (21,742 | ) | $ | (42,281 | ) | | $ | 25,089 |
| | $ | (56,185 | ) |
Cash used in investing activities decreasedincreased by $20.4$67.4 million to $56.2$42.3 million during the fiscal year ended March 31, 2015,2017, compared to $76.6 million of cash used in investing activities during the fiscal year ended March 31, 2014. Cash used for investing activities was $76.6 million during the fiscal year ended March 31, 2014, compared to $21.7$25.1 million of cash provided by investing activities during the fiscal year ended March 31, 2013.
During2016. Cash provided by investing activities increased by $81.3 million to $25.1 million during the fiscal year ended March 31, 2013, we paid $51.32016, compared to $56.2 million of cash used for acquisitions.investing activities during the fiscal year ended March 31, 2015.
Net cash outflowsinflows relating to the purchase and sales of marketable securities was down $19.3$37.1 million during the fiscal year ended March 31, 2015 when compared to the fiscal year ended March 31, 20142017 relating to the amount of investments held at each respective balance sheet date.date, from an inflow of $18.6 million during fiscal year ended March 31, 2016 to an outflow of $18.5 million during fiscal year ended March 31, 2017. Net inflowcash inflows relating to the purchase and sales of marketable securities was down $104.8up $61.9 million during the fiscal year ended March 31, 2014 when compared2016 relating to the fiscal year ended March 31, 2013 as we invested our operating cash flow in securities as opposed to funding acquisitions. In addition,amount of investments held at each respective balance sheet date, from an outflow of $43.3 million during the fiscal year ended March 31, 2013, redemptions by2015 to an inflow of $18.6 million during the issuers for our remaining auction rate securities totaling $19.3fiscal year ended March 31, 2016.
During the twelve months ended March 31, 2017, there was a $4.6 million were settled. As a resultcash outflow related to the assets and liabilities acquired as part of the settlements, we reversedAvvasi acquisition. During the remaining valuation reserve of $190 thousand. We held no investments in auction rate securities attwelve months ended March 31, 2015, 2014 and 2013.2016, there was a $27.7 million cash inflow related to cash acquired as part of the Comms Transaction.
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 in our fiscal year 2016.2018.
Purchases of intangible assets decreased by $912 thousand$2.9 million during the fiscal year ended March 31, 20152017 as compared to the fiscal year ended March 31, 2014.2016. During the fiscal yearyears ended March 31, 2014,2017 and 2016, we acquired certain rights to Accanto software for $500 thousand not previously purchased as part of the acquisition transaction in fiscal year 2013. In addition, during the fiscal year ended March 31, 2014 we made an agreemententered into agreements to acquire a technology licenselicenses for $300 thousand.$1.0 million and $3.7 million, respectively.
Net cash from financing activities
|
| | | | | | | | | | | |
| | Fiscal Year Ended March 31, (Dollars in Thousands) |
| | 2017 | | 2016 | | 2015 |
| Cash used in financing activities included the following: | | | | | |
| Issuance of common stock under stock plans | $ | 2 |
| | $ | 1 |
| | $ | 140 |
|
| Treasury stock repurchases | (89,555 | ) | | (311,850 | ) | | (51,714 | ) |
| Proceeds from issuance of long-term debt, net of issuance costs | — |
| | 294,623 |
| | — |
|
| Excess tax benefit (shortfall) from share-based compensation awards | (1,045 | ) | | 1,926 |
| | 2,814 |
|
| | $ | (90,598 | ) | | $ | (15,300 | ) | | $ | (48,760 | ) |
Net cash used in financing activities.
|
| | | | | | | | | | | |
| | Fiscal Year Ending March 31, (Dollars in Thousands) |
| | 2015 | | 2014 | | 2013 |
| Cash used in financing activities included the following: | | | | | |
| Issuance of common stock under stock plans | $ | 140 |
| | $ | 812 |
| | $ | 575 |
|
| Payment of contingent consideration | — |
| | (841 | ) | | (4,038 | ) |
| Treasury stock repurchases | (51,714 | ) | | (34,322 | ) | | (27,448 | ) |
| Repayment of long-term debt | — |
| | — |
| | (62,000 | ) |
| Excess tax benefit from share-based compensation awards | 2,814 |
| | 2,388 |
| | 1,907 |
|
| | $ | (48,760 | ) | | $ | (31,963 | ) | | $ | (91,004 | ) |
Cash used in financing activities was up $16.8$75.3 million to $48.8$90.6 million during the fiscal year ended March 31, 2015,2017, compared to $32.0$15.3 million of cash used in financing activities during the fiscal year ended March 31, 2014.2016.
DuringWe repurchased 3,148,426 and 10,078,136 shares for $80.0 million and $300.0 million under our stock repurchase program during the fiscal yeartwelve months ended March 31, 2013, we paid down our outstanding credit facility in the amount of $62.0 million. At March 31, 2015, 20142017 and 2013, there were no amounts outstanding under this credit facility.2016, respectively.
During the fiscal years ended March 31, 2014 and 2013, we paid $841 thousand and $4.0 million, respectively, related to the contingent purchase consideration related to the acquisition of Simena. For additional information with respect to the contingent purchase consideration, see Note 17 in the Notes to the Consolidated Financial Statements of this Form 10-K.
On September 17, 2001, we announced an open market stock repurchase program to purchase up to one million shares of our outstanding common stock, subject to market conditions and other factors. Any purchases under this stock repurchase program may be made from time to time without prior notice. On July 26, 2006, we announced that we had expanded the existing open market stock repurchase program to enable us to purchase up to an additional three million shares of our outstanding common stock, bringing the total number of shares authorized for repurchase to four million shares. Through March 31, 2015, we had repurchased a total of 4,000,000 shares of common stock through this open market stock repurchase program. We repurchased 243,300 shares for $9.4 million, 1,000,407 shares for $28.8 million and 999,499 shares for $23.5 million under this program during the fiscal years ended March 31, 2015, 2014 and 2013, respectively. At March 31, 2015, all authorized shares under this stock repurchase program have been repurchased.
On April 22, 2014, Netscout's Board of Directors approved an additional stock repurchase program. This program authorizes management to make additional repurchases of NetScout outstanding common stock of up to $100 million. The share repurchase authorization does not have an expiration date and the pace and timing of repurchases will depend on factors such as cash generation from operations, cash requirements for acquisitions, economic and market conditions, stock price and legal and regulatory requirements. Through March 31, 2015, we repurchased 756,700 shares totaling $31.5 million in the open market under this stock repurchase plan. At March 31, 2015, $68.5 million of common stock remained to be purchased under the plan. Future repurchases of shares will reduce our cash balances.
In addition, in connection with the vesting and releasedelivery of the restriction on previously vestedcommon shares upon vesting of restricted stock units, the Company repurchasedwe have withheld 320,572 shares for $9.6 million, 256,514 shares for $9.1 million and 247,568 shares for $10.8 million, 216,198 for $5.5 million and 169,531 shares for $3.9 million related to minimum statutory tax withholding requirements on these restricted stock units during the fiscal years ended March 31, 2017, 2016 and 2015, 2014respectively. These withholding transactions do not fall under the repurchase program described above, and 2013, respectively.therefore do not reduce the amount that is available for repurchase under that program.
We generated $2.8had a tax shortfall of $1.0 million $2.4 million and $1.9 millionfrom share-based compensation awards during the fiscal year ended March 31, 2017. During the fiscal years ended March 31, 2016 and 2015, 2014we generated $1.9 million and 2013, respectively,$2.8 million of excess tax benefits from share-based compensation awards.
Credit Facility
On November 22, 2011,July 14, 2015, we entered into a certain credit facility with a syndicate of lenders ledpursuant to a Credit Agreement (Credit Agreement), dated as of July 14, 2015, by KeyBankand 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; Santander Bank, N.A., SunTrust Bank, N.A. and U.S. Bank National Association, (KeyBank) whichas co-documentation agents; and the lenders party thereto. The Credit Agreement provides us withfor a $250five-year, $800 million senior secured revolving credit facility, which may be increased to $300 million at any time up to 90 days before maturity. The revolving credit facility includes a swing line loan sub-facility of up to $10 million andincluding a letter of credit sub-facility of up to $10$50 million. TheWe may elect to use the credit facility maturesfor working capital purposes or to finance the repurchase of up to 20 million shares of common stock under our common stock repurchase plan. The commitments under the Credit Agreement will expire on November 21,July 14, 2020, and any outstanding loans will be due on that date. At March 31, 2017, $300 million was outstanding under this credit facility.
At our election, revolving loans under the 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 Federal Funds effective 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 December 31, 2016, until we have delivered financial statements for the quarter ended March 31, 2017, 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 2.50 to 1.00, down to 0.25% per annum for Alternate Base Rate loans and 1.25% per annum for LIBOR loans if our consolidated leverage ratio is equal to or less than 1.00 to 1.00.
Our consolidated leverage ratio is the ratio of our 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 Credit Agreement.
Commitment fees accrue on the daily unused amount of the credit facility. For the period from the delivery of our financial statements for the quarter ended December 31, 2016 until we have delivered financial statements for the quarter ended March 31, 2017, the commitment fee will be 0.25% per annum, and thereafter the commitment fee will vary depending on our consolidated leverage ratio, ranging from 0.35% per annum if our consolidated leverage ratio is greater than 2.50 to 1.00, down to 0.20% per annum if our consolidated leverage ratio is equal to or less than 1.00 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 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 NetScout 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 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 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 Credit Agreement.
The Credit Agreement contains certain covenants applicable to us and our assets. At March 31, 2015, there were no amounts outstanding under therestricted 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 facility.facilities. In addition, we are required to maintain certain consolidated leverage and interest coverage ratios as well as a minimum liquidity amount.ratios. These covenants and limitations are more fully described in the Credit Agreement. At March 31, 2015,2017, we were in compliance with all of these covenants.
The 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 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 Credit Agreement and the other loan documents.
TableIn connection with new revolving credit facility described above, effective as of Contentsthe Closing Date, we terminated our existing term loan and revolving credit facility pursuant to the Credit and Security Agreement, dated as of November 22, 2011, by and among the Company, KeyBank National Association, as joint lead arranger, sole book runner and administrative agent, Wells Fargo Bank, National Association, as joint lead arranger and co-syndication agent, Merrill Lynch, Pierce, Fenner & Smith Incorporated, as joint lead arranger, Bank of America, N.A., as co-syndication agent, and Silicon Valley Bank and Comerica Bank, as co-documentation agents, and the Lenders party thereto.We capitalized $6.6 million of debt issuance costs associated with the origination of the Credit Agreement, which are being amortized over the life of the revolving credit facility. The unamortized balance was $4.4 million as of March 31, 2017. A balance of $1.4 million is included as prepaid expenses and other current assets and a balance of $3.0 million is included as other assets in our consolidated balance sheet.
Expectations for Fiscal Year 20162018
NetScout's Liquidity and Capital Resources Prior to the Contemplated Acquisition of Danaher's Communications Business
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. In addition, we expect that cash provided by operating activities will continue to increase due to an expected increase in cash collections related to anticipated higher revenues, partially offset by an anticipated increase in operating expenses that require cash outlays such as salaries and commissions. Capital expenditures in our fiscal year 2016 are currently anticipated to be in line with previous years’ amounts.
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.
NetScout's Liquidity and Capital Resources After the Contemplated Acquisition of Danaher's Communications Business
Following the consummation of the contemplated transactions, we expect cash from operating activities to be in the range of $200.0 million to $250.0 million during the first year of the combined operations. Due to the low capital intensive nature of the combined business, we expect that capital expenditures will continue to be less than 5 percent of total combined revenue following the consummation of the transactions. We expect to incur approximately $11 million of investment banking fees. Due to the ongoing nature of the integration planning, there is no estimate of costs associated with achieving any of the projected synergies or the consolidation of any operations and systems as well as professional fees associated with these activities. Additionally, as part of the Merger Agreement, the Communications Business will enter into a Transition Services Agreement with Danaher, under which Danaher will provide the Communications Business specified support services and other assistance for a limited time following the closing of the Transactions. Certain of the services covered under the Transition Services Agreement are costs that are currently included as operating costs in the Communications Business Combined Statements of Earnings, however, there is no guarantee that the Communications Business will not incur higher operating costs than those reflected in those financial statements and NetScout may incur certain costs to replace services at the end of the Transition Services Agreement.
We anticipate that our primary sources of liquidity for working capital and operating activities will be cash provided by operations as well as a financing arrangement which is being reviewed. While we have an existing Revolving Credit Agreement for $250 million that is fully available, we are reviewing alternative financing arrangements including amending the existing facility to cover the requirements of the combined company. We expect these sources of liquidity will be sufficient to fund working capital and capital expenditure requirements, including the significant one-time costs relating to the contemplated transactions.
Recent Accounting Standards
In May 2014,March 2017, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2017-07, Improving the Presentation of Net Periodic Pension Cost and Net Periodic Post-Retirement Benefit Cost (ASU 2017-07) which requires that an employer report the service cost component in the same line item or items as other compensation costs arising from services rendered by the pertinent employees during the period. The other components of net benefit cost are required to be presented in the income statement separately from the service cost component and outside a subtotal of income from operations. This standard is effective for financial statements issued for fiscal years beginning after December 15, 2017 and should be applied retrospectively to all periods presented. ASU 2017-07 is effective for the Company beginning April 1, 2018. We are currently assessing the potential impact of the adoption of ASU 2017-07 on our consolidated financial statements.
In January 2017, the FASB issued ASU No. 2017-04, Intangibles - Goodwill and Other (Topic 350), Simplifying the Test for Goodwill Impairment (ASU 2017-04). ASU 2017-04 eliminates Step 2 from the goodwill impairment test and instead
requires an entity to perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. The entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value, not to exceed the total amount of goodwill allocated to the reporting unit. The updated guidance requires a prospective adoption. We adopted this standard in the fourth quarter of fiscal year 2017 as early adoption was permitted.
In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805), Clarifying the Definition of a Business (ASU 2017-01). ASU 2017-01 clarifies the definition of a business with the objective of addressing whether transactions involving in-substance nonfinancial assets, held directly or in a subsidiary, should be accounted for as acquisitions or disposals of nonfinancial assets or of businesses. ASU 2017-01 is effective for annual periods beginning December 15, 2017. Early adoption is permitted for transactions, including acquisitions or dispositions, which occurred before the issuance date or effective date of the standard if the transactions were not reported in financial statements that have been issued or made available for issuance. We are evaluating the new guidance and do not believe the adoption of ASU 2017-01 will have a material impact on our consolidated financial statements.
In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash (ASU 2016-18) related to the presentation of restricted cash in the statement of cash flows. The pronouncement requires entities to show the changes in the total of cash, cash equivalents, restricted cash and restricted cash equivalents in the statement of cash flows. As a result, entities will no longer present transfers between cash and cash equivalents and restricted cash and restricted cash equivalents in the statement of cash flows. When cash, cash equivalents, restricted cash and restricted cash equivalents are presented in more than one line item on the balance sheet, the new guidance requires a reconciliation of the totals in the statement of cash flows to the related captions in the balance sheet. Entities will also have to disclose the nature of restricted cash and restricted cash equivalent balances. The pronouncement is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2017, with early adoption permitted. We do not believe ASU 2016-18 will have a material impact on our consolidated statement of cash flows.
In October 2016, the FASB issued ASU 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory (ASU 2016-16). ASU 2016-16 requires that entities recognize the income tax effects of intra-entity transfers of assets other than inventory when the transfer occurs. Current GAAP prohibits the recognition of those tax effects until the asset has been sold to an outside party. The pronouncement is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2017, with early adoption permitted. We are evaluating the new guidance and do not believe the adoption of ASU 2016-16 will have a material impact on our consolidated financial statements.
In August 2016, the FASB issued ASU 2016-15, Classification of Certain Cash Receipts and Cash Payments (ASU 2016-15). ASU 2016-15 is intended to add or clarify guidance on the classification of certain cash receipts and payments in the statement of cash flows and to eliminate the diversity in practice related to such classifications. The guidance in ASU 2016-15 is required for annual reporting periods beginning after December 15, 2017, with early adoption permitted. We are currently assessing the potential impact of the adoption of ASU 2016-15 on our consolidated statement of cash flows.
In March 2016, the FASB issued ASU 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting (ASU 2016-09), which simplifies several aspects of the accounting for employee share-based payment transactions, including the accounting for income taxes, forfeitures and statutory tax withholding requirements, as well as classification in the statement of cash flows. ASU 2016-09 is effective for us beginning April 1, 2017. We are currently assessing the potential impact of the adoption of ASU 2016-09 on our consolidated financial statements.
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), its new standard on accounting for leases. This update requires the recognition of leased assets and lease obligations by lessees for those leases currently classified as operating leases under existing lease guidance. Short term leases with a term of 12 months or less are not required to be recognized. The update also requires disclosure of key information about leasing arrangements to increase transparency and comparability among organizations. ASU 2016-02 is effective for annual reporting periods beginning after December 31, 2018 and interim periods within those fiscal years, and early adoption is permitted. We are currently assessing the potential impact of the adoption of ASU 2016-02 on our consolidated financial statements.
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers: Topic 606 (ASU 2014-09), and issued subsequent amendments to supersedethe initial guidance in August 2015, March 2016, April 2016, May 2016 and December 2016 within ASU 2015-04, 2016-08, ASU 2016-10, ASU 2016-12 and ASU 2016-20, respectively (ASU 2014-09, ASU 2015-04, ASU 2016-08, ASU 2016-10, ASU 2016-12 and ASU 2016-20, collectively, Topic 606). Topic 606 supersedes nearly all existing revenue recognition guidance under U.S. GAAP. The core principle of ASU 2014-09Topic 606 is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration that is expected to be received for those goods or services. ASU 2014-09Topic 606 defines a five stepfive-step process to achieve this core principle and, in doing so, it is possible more judgment and estimates may be required within the revenue recognition process than required under existing U.S. GAAP, including
identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. In April 2015, the FASB issued an exposure draft to propose a delay of theobligation, among others. Topic 606 will be effective date for one year, which would make the effective date for us in our first quarterApril 1, 2018. Entities have the option of fiscal year 2019 using either of two methods: (i)a full retrospective or a modified retrospective approach to each prior reporting period presented withadopt this standard. We believe we will elect the option to elect certain practical expedients as defined within ASU 2014-09; or (ii)modified retrospective withtransition approach. However, we are still in the cumulative effectearly stages of initially applying ASU 2014-09 recognized at the date of initial application and providing certain additional disclosures as defined per ASU 2014-09. We are currently evaluating the impact of our pendingthis new accounting standard. The adoption will most likely result in a reduction in deferred revenue as of April 1, 2018 because we will no longer require VSOE of fair value to recognize software deliverables. Upon adoption of ASU 2014-09 onASC 606, we expect to recognize a greater proportion of revenue upon delivery of our products, whereas some of our current product sales are initially recorded in deferred revenue and recognized over a period of time. Since we currently expenses sales commissions as incurred, the requirement in the new standard to capitalize certain in-scope sales commissions is being evaluated to determine its potential impact in the consolidated financial statements.statements in the year of adoption. There will be no impact to cash flows. We continue to assess all potential impacts of the guidance and given normal ongoing business dynamics, preliminary conclusions are subject to change.
Item 7A. 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. As of March 31, 2017, we owed $300 million on this loan with an interest rate of 2.49%. A sensitivity analysis was performed on the outstanding portion of our debt obligation as of March 31, 2017. Should the current weighted average interest rate increase or decrease by 10%, the resulting annual increase or decrease to interest expense would be approximately $747 thousand as of March 31, 2017.
Credit Risk. Our cash equivalents and marketable securities consist primarily of money market instruments, U.S. Treasury bills, certificates of deposit, commercial paper, corporate bonds and municipal obligations.
At March 31, 20152017 and periodically throughout the year, we have maintained cash balances in various operating accounts in excess of federally insured limits. We limit the amount of credit exposure with any one financial institution by evaluating the creditworthiness of the financial institutions with which we invest.
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. NetScout currently engages in foreign currency hedging activities in order to limit these exposures. We do not use derivative financial instruments for speculative trading purposes.
At March 31, 2015,2017, we had foreign currency forward contracts with notional amounts totaling $20.2$14.8 million. The valuation of outstanding foreign currency forward contracts at March 31, 20152017 resulted in a liability balance of $1.7 million,$213 thousand, reflecting unfavorable contract rates in comparison to current market rates at this date and an asset balance of $15$110 thousand reflecting favorable rates in comparison to current market rates. At March 31, 2014,2016, we had foreign currency forward contracts with notional amounts totaling $17.5 million. The valuation of outstanding foreign currency forward contracts at March 31, 20142016 resulted in a liability balance of $139$158 thousand, reflecting unfavorable contract rates in comparison to current market rates at this date and an asset balance of $368$191 thousand reflecting favorable rates in comparison to current market rates.
Item 8. Financial Statements and Supplementary Data
NetScout’s Consolidated Financial Statements and Schedule and Report of Independent Registered Public Accounting Firm appear beginning on page F-1 attached to this report.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
There have been no changes in or disagreements with accountants on accounting or financial disclosure matters.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
As of March 31, 2015,2017, 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 pursuant to Rule 13a-15(b) promulgated under the Exchange Act. Based upon that evaluation, our principal executive officer and principal financial officer concluded that, as of March 31, 20152017 our disclosure controls and procedures were effective 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.
Management’s Report on Internal Control Over Financial Reporting
Changes in Internal Control over Financial Reporting
During the year ended March 31, 2015, there2017, we have fully extended our oversight and monitoring processes that support our internal control over financial reporting to include those entities acquired in the Comms Transaction that were exempt in the prior year. There has been no changesother change in our internal control over financial reporting during the fiscal year ended March 31, 2017 that havehas materially affected, or areis reasonably likely to materially affect, our internal control over financial reporting.
Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as such term is defined in Exchange Act Rule 13a-15(f). Our internal control over financial reporting was designed to provide reasonable assurance regarding reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Our management assessed the effectiveness of our internal control over financial reporting as of March 31, 2015.2017. In making this assessment, our management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control—Integrated Framework in 2013. Based on our assessment, we concluded that our internal control over financial reporting was effective as of March 31, 2015.2017.
The effectiveness of the Company’s internal control over financial reporting as of March 31, 20152017 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which is included herein at page F-2 of this Annual Report on Form 10-K.appears herein.
Item 9B. Other Information
Not applicable.
PART III
Item 10. Directors, Executive Officers and Corporate Governance
The information required by this Item 10 will be included under the captions “Directors and Executive Officers,” “Election of Directors,” “Section 16(a) Beneficial Ownership Reporting Compliance,” “Code of Ethics,” “The Board of Directors and its Committees” and “Corporate Governance” in our definitive Proxy Statement with respect to our 20152017 Annual Meeting of Stockholders to be filed with the SEC no later than 120 days after the end of the fiscal year covered by this Annual Report and is incorporated herein by reference.
Item 11. Executive Compensation
The information required by this Item 11 will be included under the caption “Compensation and Other Information Concerning Directors and Executive Officers” in our definitive Proxy Statement with respect to our 20152017 Annual Meeting of Stockholders to be filed with the SEC not later than 120 days after the end of the fiscal year covered by this Annual Report and is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required by this Item 12 will be included under the captions “Security Ownership of Certain Beneficial Owners and Management” and “Equity Compensation Plan Information” in our definitive Proxy Statement with respect to our 20152017 Annual Meeting of Stockholders to be filed with the SEC not later than 120 days after the end of the fiscal year covered by this Annual Report and is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information required by this Item 13 will be included, as applicable, under the captions “Director Independence,” “Employment and Other Agreements” and “Transactions with Related Persons” in our definitive Proxy Statement with respect to our 20152017 Annual Meeting of Stockholders to be filed with the SEC not later than 120 days after the end of the fiscal year covered by this Annual Report and is incorporated herein by reference.
Item 14. Principal Accounting Fees and Services
The information required by this Item 14 will be included under the captions “Auditors Fees and Services” and “Policy on Audit Committee Pre-approval of Audit and Non-Audit Services” in our definitive Proxy Statement with respect to our 20152017 Annual Meeting of Stockholders to be filed with the SEC not later than 120 days after the end of the fiscal year covered by this Annual Report and is incorporated herein by reference.
PART IV
Item 15. Exhibits, Financial Statement Schedules
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| | | | No other financial statement schedules have been included because they are either not applicable or the information is in the consolidated financial statements. | |
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| | 3. | | List of Exhibits. | |
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| | | | We hereby file as part of, or incorporate by reference into, this Annual Report on Form 10-K the exhibits listed on the index to exhibits immediately following the financial statements. | |
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| (b) | | We hereby file as part of this Annual Report on Form 10-K the exhibits listed in Item 15(a)(3) above. | |
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| (c) | | We hereby file as part of this Annual Report on Form 10-K the financial statement schedule listed in Item 15(a)(2) above. | |
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
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| | NETSCOUT SYSTEMS, INC. |
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| | By: | /S/ ANIL K. SINGHAL |
| | | Anil K. Singhal |
| | | President, Chief Executive Officer, and Chairman |
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| | Date: May 20, 201524, 2017 |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
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| Signature | | Title(s) | | Date |
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/S/ ANIL K. SINGHAL | | President, Chief Executive Officer, and Chairman (Principal Executive Officer) | | May 20, 201524, 2017 |
| Anil K. Singhal | | |
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/S/ JEAN BUA | | SeniorExecutive Vice President and Chief Financial
Officer (Principal Financial Officer) (Principal Accounting Officer) | | May 20, 201524, 2017 |
| Jean Bua | | |
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/S/ VICTOR A. DEMARINES | | Director | | May 20, 201524, 2017 |
| Victor A. DeMarines | | |
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/S/ JOHN R. EGAN | | Director | | May 20, 201524, 2017 |
| John R. Egan | | |
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/S/ JOSEPH G. HADZIMA, JR. | | Director | | May 20, 201524, 2017 |
| Joseph G. Hadzima, Jr. | | |
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/S/ VINCENT J. MULLARKEY | | Director | | May 20, 201524, 2017 |
| Vincent J. Mullarkey | | |
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/S/s/ ROBERT E. DONAHUE | | Director | | May 20, 201524, 2017 |
| Robert E. Donahue | | |
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/S/ CHRISTOPHER PERRETTA | | Director | | May 20, 201524, 2017 |
| Christopher Perretta | | |
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/s/ JAMES A. LICO | | Director | | May 24, 2017 |
| James A. Lico | | | | |
NetScout Systems, Inc.
Index to Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of NetScout Systems, Inc.:
In our opinion, the consolidated financial statements listed in the accompanying index appearing under Item 15(a)(1) present fairly, in all material respects, the financial position of NetScout Systems, Inc. and its subsidiaries at March 31, 20152017 and March 31, 2014,2016, and the results of their operations and their cash flows for each of the three years in the period ended March 31, 2015 2017in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the accompanying index appearing under itemItem 15(a)(2)presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidatedfinancial statements. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of March 31, 2015,2017, based on criteria established in Internal Control - Integrated Framework (2013)issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company's management is responsible for these financial statements and financial statement schedule, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in Management'sManagement’s Report on Internal Control overOver Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on these financial statements, on the financial statement schedule, and on the Company's internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/S/s/ PricewaterhouseCoopers LLP
Boston, Massachusetts
May 20, 201524, 2017
NetScout Systems, Inc.
Consolidated Balance Sheets
(In thousands, except share and per share data)
| | | | March 31,
2015 | | March 31,
2014 | March 31,
2017 | | March 31,
2016 |
| Assets | | | | | | |
| Current assets: | | | | | | |
| Cash and cash equivalents | $ | 104,893 |
| | $ | 102,076 |
| $ | 304,880 |
| | $ | 210,711 |
|
| Marketable securities | 101,392 |
| | 75,234 |
| 137,892 |
| | 128,003 |
|
| Accounts receivable, net of allowance for doubtful accounts of $173 and $313 at March 31, 2015 and 2014, respectively | 82,226 |
| | 60,518 |
| |
| Inventories | 12,130 |
| | 12,580 |
| |
| Accounts receivable and unbilled costs, net of allowance for doubtful accounts of $2,066 and $5,069 at March 31, 2017 and 2016, respectively | | 294,374 |
| | 247,199 |
|
| Inventories and deferred costs | | 40,002 |
| | 58,029 |
|
| Prepaid income taxes | 1,393 |
| | 1,012 |
| 40,346 |
| | 18,137 |
|
| Deferred income taxes | 21,755 |
| | 15,846 |
| |
| Prepaid expenses and other current assets | 13,495 |
| | 11,496 |
| |
| Prepaid expenses and other current assets (related party balances of $3,585 and $44,161 at March 31, 2017 and 2016, respectively) | | 36,972 |
| | 78,399 |
|
| Total current assets | 337,284 |
| | 278,762 |
| 854,466 |
| | 740,478 |
|
| Fixed assets, net | 23,864 |
| | 23,098 |
| 61,393 |
| | 62,033 |
|
| Goodwill | 197,445 |
| | 203,446 |
| 1,718,162 |
| | 1,709,369 |
|
| Intangible assets, net | 50,180 |
| | 58,513 |
| 931,269 |
| | 1,054,040 |
|
| Deferred income taxes | | 6,580 |
| | 6,206 |
|
| Long-term marketable securities | 58,572 |
| | 41,484 |
| 21,933 |
| | 13,361 |
|
| Other assets | 1,704 |
| | 2,460 |
| 7,710 |
| | 7,356 |
|
| Total assets | $ | 669,049 |
| | $ | 607,763 |
| $ | 3,601,513 |
| | $ | 3,592,843 |
|
| Liabilities and Stockholders’ Equity | | | | | | |
| Current liabilities: | | | | | | |
| Accounts payable | $ | 13,077 |
| | $ | 11,541 |
| |
| Accounts payable (related party balances of $444 and $5,893 at March 31, 2017 and 2016, respectively) | | $ | 37,407 |
| | $ | 43,969 |
|
| Accrued compensation | 36,553 |
| | 34,901 |
| 77,607 |
| | 82,303 |
|
| Accrued other | 14,474 |
| | 6,430 |
| 29,522 |
| | 32,045 |
|
| Income taxes payable | 107 |
| | 791 |
| 5,057 |
| | 2,091 |
|
| Deferred revenue | 123,422 |
| | 109,301 |
| |
| Deferred revenue and customer deposits | | 310,594 |
| | 296,648 |
|
| Total current liabilities | 187,633 |
| | 162,964 |
| 460,187 |
| | 457,056 |
|
| Other long-term liabilities | 1,995 |
| | 2,370 |
| 3,976 |
| | 2,903 |
|
| Deferred tax liability | 10,639 |
| | 2,757 |
| 277,599 |
| | 285,359 |
|
| Accrued long-term retirement benefits | 1,587 |
| | 1,581 |
| 32,117 |
| | 31,378 |
|
| Long-term deferred revenue | 26,961 |
| | 24,639 |
| |
| Long-term deferred revenue and customer deposits | | 86,595 |
| | 68,129 |
|
| Long-term debt | | 300,000 |
| | 300,000 |
|
| Contingent liabilities, net of current portion | 4,484 |
| | 4,291 |
| 4,789 |
| | 4,636 |
|
| Total liabilities | 233,299 |
| | 198,602 |
| 1,165,263 |
| | 1,149,461 |
|
| Commitments and contingencies (Note 17) |
| |
| |
| Commitments and contingencies (Note 18) | |
| |
|
| Stockholders’ equity: | | | | | | |
| Preferred stock, $0.001 par value: 5,000,000 shares authorized; no shares issued or outstanding at March 31, 2015 and 2014 | — |
| | — |
| |
| Common stock, $0.001 par value: 150,000,000 shares authorized; 50,812,548 and 49,922,959 shares issued and 40,807,805 and 41,165,784 shares outstanding at March 31, 2015 and 2014, respectively | 51 |
| | 50 |
| |
| Preferred stock, $0.001 par value: 5,000,000 shares authorized; no shares issued or outstanding at March 31, 2017 and 2016 | | — |
| | — |
|
| Common stock, $0.001 par value: 300,000,000 and 150,000,000 shares authorized; 115,917,431 and 114,495,614 shares issued and 92,041,288 and 94,088,469 shares outstanding at March 31, 2017 and 2016, respectively | | 116 |
| | 114 |
|
| Additional paid-in capital | 298,101 |
| | 273,574 |
| 2,693,846 |
| | 2,642,745 |
|
| Accumulated other comprehensive (loss) income | (4,645 | ) | | 2,772 |
| |
| Treasury stock at cost, 10,004,743 and 8,757,175 shares at March 31, 2015 and 2014, respectively | (169,516 | ) | | (117,802 | ) | |
| Accumulated other comprehensive loss | | (3,472 | ) | | (1,501 | ) |
| Treasury stock at cost, 23,876,143 and 20,407,145 shares at March 31, 2017 and 2016, respectively | | (570,921 | ) | | (481,366 | ) |
| Retained earnings | 311,759 |
| | 250,567 |
| 316,681 |
| | 283,390 |
|
| Total stockholders’ equity | 435,750 |
| | 409,161 |
| 2,436,250 |
| | 2,443,382 |
|
| Total liabilities and stockholders’ equity | $ | 669,049 |
| | $ | 607,763 |
| $ | 3,601,513 |
| | $ | 3,592,843 |
|
The accompanying notes are an integral part of these consolidated financial statements.
NetScout Systems, Inc.
Consolidated Statements of Operations
(In thousands, except per share data)
| | | | Year Ended March 31, | Year Ended March 31, |
| | 2015 | | 2014 | | 2013 | 2017 | | 2016 | | 2015 |
| Revenue: | | | | | | | | | | |
| Product | $ | 272,895 |
| | $ | 234,268 |
| | $ | 198,749 |
| $ | 735,531 |
| | $ | 633,408 |
| | $ | 272,895 |
|
| Service | 180,774 |
| | 162,379 |
| | 151,801 |
| 426,581 |
| | 322,011 |
| | 180,774 |
|
| Total revenue | 453,669 |
| | 396,647 |
| | 350,550 |
| 1,162,112 |
| | 955,419 |
| | 453,669 |
|
| Cost of revenue: | | | | | | | | | | |
| Product | 59,037 |
| | 51,219 |
| | 45,752 |
| |
| Service | 35,524 |
| | 33,294 |
| | 28,256 |
| |
| Product (related party balances of $7,229, $25,055 and $0, respectively) | | 238,002 |
| | 238,037 |
| | 59,037 |
|
| Service (related party balances of $745, $5,736 and $0, respectively) | | 108,137 |
| | 90,412 |
| | 35,524 |
|
| Total cost of revenue | 94,561 |
| | 84,513 |
| | 74,008 |
| 346,139 |
| | 328,449 |
| | 94,561 |
|
| Gross profit | 359,108 |
| | 312,134 |
| | 276,542 |
| 815,973 |
| | 626,970 |
| | 359,108 |
|
| Operating expenses: | | | | | | | | | | |
| Research and development | 75,242 |
| | 70,454 |
| | 61,546 |
| |
| Sales and marketing | 136,446 |
| | 129,611 |
| | 116,807 |
| |
| General and administrative | 47,296 |
| | 30,623 |
| | 29,718 |
| |
| Research and development (related party balances of $1,624, $16,701 and $0, respectively) | | 232,701 |
| | 208,630 |
| | 75,242 |
|
| Sales and marketing (related party balances of $2,423, $15,430 and $0, respectively) | | 328,628 |
| | 293,335 |
| | 136,446 |
|
| General and administrative (related party balances of $4,099, $16,055 and $0, respectively) | | 118,438 |
| | 117,714 |
| | 47,296 |
|
| Amortization of acquired intangible assets | 3,351 |
| | 3,432 |
| | 2,877 |
| 70,141 |
| | 32,373 |
| | 3,351 |
|
| Restructuring charges | — |
| | — |
| | 1,065 |
| 4,001 |
| | 468 |
| | — |
|
| Total operating expenses | 262,335 |
| | 234,120 |
| | 212,013 |
| 753,909 |
| | 652,520 |
| | 262,335 |
|
| Income from operations | 96,773 |
| | 78,014 |
| | 64,529 |
| |
| Interest and other expense, net: | | | | | | |
| Income (loss) from operations | | 62,064 |
| | (25,550 | ) | | 96,773 |
|
| Interest and other income (expense), net: | | | | | | |
| Interest income | 445 |
| | 309 |
| | 508 |
| 1,021 |
| | 691 |
| | 445 |
|
| Interest expense | (773 | ) | | (768 | ) | | (1,291 | ) | (9,184 | ) | | (6,329 | ) | | (773 | ) |
| Other (expense) income, net | (1,480 | ) | | 301 |
| | (10 | ) | |
| Other income (expense), net (related party balances of $426, ($379) and $0, respectively) | | (1,716 | ) | | (1,251 | ) | | (1,480 | ) |
| Total interest and other expense, net | (1,808 | ) | | (158 | ) | | (793 | ) | (9,879 | ) | | (6,889 | ) | | (1,808 | ) |
| Income before income tax expense | 94,965 |
| | 77,856 |
| | 63,736 |
| |
| Income tax expense | 33,773 |
| | 28,750 |
| | 23,127 |
| |
| Net income | $ | 61,192 |
| | $ | 49,106 |
| | $ | 40,609 |
| |
| Basic net income per share | $ | 1.49 |
| | $ | 1.19 |
| | $ | 0.97 |
| |
| Diluted net income per share | $ | 1.47 |
| | $ | 1.17 |
| | $ | 0.96 |
| |
| Income (loss) before income tax expense (benefit) | | 52,185 |
| | (32,439 | ) | | 94,965 |
|
| Income tax expense (benefit) | | 18,894 |
| | (4,070 | ) | | 33,773 |
|
| Net income (loss) | | $ | 33,291 |
| | $ | (28,369 | ) | | $ | 61,192 |
|
| Basic net income (loss) per share | | $ | 0.36 |
| | $ | (0.35 | ) | | $ | 1.49 |
|
| Diluted net income (loss) per share | | $ | 0.36 |
| | $ | (0.35 | ) | | $ | 1.47 |
|
| Weighted average common shares outstanding used in computing: | | | | | | | | | | |
| Net income per share—basic | 41,105 |
| | 41,366 |
| | 41,665 |
| |
| Net income per share—diluted | 41,637 |
| | 41,955 |
| | 42,322 |
| |
| Net income (loss) per share—basic | | 92,226 |
| | 81,927 |
| | 41,105 |
|
| Net income (loss) per share—diluted | | 92,920 |
| | 81,927 |
| | 41,637 |
|
The accompanying notes are an integral part of these consolidated financial statements.
NetScout Systems, Inc.
Consolidated Statements of Comprehensive Income (Loss)
(In thousands)
|
| | | | | | | | | | | |
| | Year Ended March 31, |
| | 2015 | | 2014 | | 2013 |
| Net income | $ | 61,192 |
| | $ | 49,106 |
| | $ | 40,609 |
|
| Other comprehensive (loss) income: | | | | | |
| Cumulative translation adjustments | (6,311 | ) | | 1,887 |
| | 460 |
|
| Changes in market value of investments: | | | | | |
| Changes in unrealized (losses) gains, net of taxes of $0, $0 and $73 | (12 | ) | | 5 |
| | 109 |
|
| Total net change in market value of investments | (12 | ) | | 5 |
| | 109 |
|
| Changes in market value of derivatives: | | | | | |
| Changes in market value of derivatives, net of (benefit) taxes of ($1,113), $33 and ($146) | (1,937 | ) | | 62 |
| | (258 | ) |
| Reclassification adjustment for net gains included in net income, net of taxes of $497, $62 and $91 | 843 |
| | 147 |
| | 148 |
|
| Total net change in market value of derivatives | (1,094 | ) | | 209 |
| | (110 | ) |
| Other comprehensive (loss) income | (7,417 | ) | | 2,101 |
| | 459 |
|
| Total comprehensive income | $ | 53,775 |
| | $ | 51,207 |
| | $ | 41,068 |
|
|
| | | | | | | | | | | |
| | Year Ended March 31, |
| | 2017 | | 2016 | | 2015 |
| Net income (loss) | $ | 33,291 |
| | $ | (28,369 | ) | | $ | 61,192 |
|
| Other comprehensive income (loss): | | | | | |
| Cumulative translation adjustments | (1,000 | ) | | 1,446 |
| | (6,311 | ) |
| Recognition of actuarial net (loss) gain from pension and other post-retirement plans, net of (benefit) taxes of ($368), $215 and $0 | (858 | ) | | 632 |
| | — |
|
| Changes in market value of investments: | | | | | |
| Changes in unrealized (losses) gains, net of taxes of $0, $0 and $0 | (59 | ) | | 3 |
| | (12 | ) |
| Total net change in market value of investments | (59 | ) | | 3 |
| | (12 | ) |
| Changes in market value of derivatives: | | | | | |
| Changes in market value of derivatives, net of tax (benefits) of ($167), ($329) and ($1,113) | (277 | ) | | (523 | ) | | (1,937 | ) |
| Reclassification adjustment for net gains included in net income (loss), net of taxes of $135, $915 and $497 | 223 |
| | 1,586 |
| | 843 |
|
| Total net change in market value of derivatives | (54 | ) | | 1,063 |
| | (1,094 | ) |
| Other comprehensive income (loss) | (1,971 | ) | | 3,144 |
| | (7,417 | ) |
| Total comprehensive income (loss) | $ | 31,320 |
| | $ | (25,225 | ) | | $ | 53,775 |
|
The accompanying notes are an integral part of these consolidated financial statements.
NetScout Systems, Inc.
Consolidated Statements of Stockholders’ Equity
(In thousands, except share data)
| | | | Common stock Voting | | Additional Paid In Capital | | Accumulated Other Comprehensive Income (Loss) | | Treasury stock | | Retained Earnings | | Total Stockholders’ Equity | 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 | | Shares | | Par Value | | Shares | | Stated Value | |
| Balance, March 31, 2012 | 48,185,731 |
| | $ | 48 |
| | $ | 237,289 |
| | $ | 212 |
| | 6,371,540 |
| | $ | (56,032 | ) | | $ | 160,852 |
| | $ | 342,369 |
| |
| | | | | | | | | | | | | | | | | |
| Net Income | | | | | | | | | | | | | 40,609 |
| | 40,609 |
| |
| Unrealized net investment gains | | | | | | | 109 |
| | | | | | | | 109 |
| |
| Unrealized net losses on derivative financial instruments | | | | | | | (110 | ) | | | | | | | | (110 | ) | |
| Cumulative translation adjustments | | | | | | | 460 |
| | | | | | | | 460 |
| |
| Issuance of common stock pursuant to exercise of options | 86,892 |
| | — |
| | 574 |
| | | | | | | | | | 574 |
| |
| Issuance of common stock pursuant to vesting of restricted stock units | 549,932 |
| | 1 |
| | | | | |
|
| |
|
| | | | 1 |
| |
| Stock-based compensation expense for restricted stock units granted to employees | | | | | 8,887 |
| | | | | | | | | | 8,887 |
| |
| Issuance of common stock under employee stock purchase plan | 184,936 |
| | | | 4,545 |
| | | | | | | | | | 4,545 |
| |
| Repurchase of treasury stock | | | | | | | | | 1,169,030 |
| | (27,448 | ) | | | | (27,448 | ) | |
| Tax benefits of disqualifying dispositions of incentive stock options | | | | | 1,907 |
| | | | | | | | | | 1,907 |
| |
| Balance, March 31, 2013 | 49,007,491 |
| | 49 |
| | 253,202 |
| | 671 |
| | 7,540,570 |
| | (83,480 | ) | | 201,461 |
| | 371,903 |
| |
| | | | | | | | | | | | | | | | | |
| Net Income | | | | | | | | | | | | | 49,106 |
| | 49,106 |
| |
| Unrealized net investment gains | | | | | | | 5 |
| | | | | | | | 5 |
| |
| Unrealized net gains on derivative financial instruments | | | | | | | 209 |
| | | | | | | | 209 |
| |
| Cumulative translation adjustments | | | | | | | 1,887 |
| | | | | | | | 1,887 |
| |
| Issuance of common stock pursuant to exercise of options | 117,650 |
| | — |
| | 811 |
| | | | | | | | | | 811 |
| |
| Issuance of common stock pursuant to vesting of restricted stock units | 635,254 |
| | 1 |
| | | | | | | | | | | | 1 |
| |
| Stock-based compensation expense for restricted stock units granted to employees | | | | | 12,178 |
| | | | | | | | | | 12,178 |
| |
| Issuance of common stock under employee stock purchase plan | 162,564 |
| | | | 4,995 |
| | | | | | | | | | 4,995 |
| |
| Repurchase of treasury stock | | | | | | | | | 1,216,605 |
| | (34,322 | ) | | | | (34,322 | ) | |
| Tax benefits of disqualifying dispositions of incentive stock options | | | | | 2,388 |
| | | | | | | | | | 2,388 |
| |
| Balance, March 31, 2014 | 49,922,959 |
| | 50 |
| | 273,574 |
| | 2,772 |
| | 8,757,175 |
| | (117,802 | ) | | 250,567 |
| | 409,161 |
| 49,922,959 |
| | $ | 50 |
| | $ | 273,574 |
| | $ | 2,772 |
| | 8,757,175 |
| | $ | (117,802 | ) | | $ | 250,567 |
| | $ | 409,161 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net Income | | | | | | | | | | | | | 61,192 |
| | 61,192 |
| |
| Net income | | | | | | | | | | | | | | 61,192 |
| | 61,192 |
|
| Unrealized net investment losses | | | | | | | (12 | ) | | | | | | | | (12 | ) | | | | | | | (12 | ) | | | | | | | | (12 | ) |
| Unrealized net losses on derivative financial instruments | | | | | | | (1,094 | ) | | | | | | | | (1,094 | ) | | | | | | | (1,094 | ) | | | | | | | | (1,094 | ) |
| Cumulative translation adjustments | | | | | | | (6,311 | ) | | | | | | | | (6,311 | ) | | | | | | | (6,311 | ) | | | | | | | | (6,311 | ) |
| Issuance of common stock pursuant to exercise of options | 23,850 |
| | — |
| | 139 |
| | | | | | | | | | 139 |
| 23,850 |
| | — |
| | 139 |
| | | | | | | | | | 139 |
|
| Issuance of common stock pursuant to vesting of restricted stock units | 728,239 |
| | 1 |
| | | | | | | | | | | | 1 |
| 728,239 |
| | 1 |
| | | | | |
|
| |
|
| | | | 1 |
|
| Stock-based compensation expense for restricted stock units granted to employees | | | | | 15,685 |
| | | | | | | | | | 15,685 |
| | | | | 15,685 |
| | | | | | | | | | 15,685 |
|
| Issuance of common stock under employee stock purchase plan | 137,500 |
| | | | 5,889 |
| | | | | | | | | | 5,889 |
| 137,500 |
| | | | 5,889 |
| | | | | | | | | | 5,889 |
|
| Repurchase of treasury stock | | | | | | | | | 1,247,568 |
| | (51,714 | ) | | | | (51,714 | ) | | | | | | | | | 1,247,568 |
| | (51,714 | ) | | | | (51,714 | ) |
| Tax benefits of disqualifying dispositions of incentive stock options | | | | | 2,814 |
| | | | | | | | | | 2,814 |
| |
| Excess tax benefit from share-based compensation awards | | | | | | 2,814 |
| | | | | | | | | | 2,814 |
|
| Balance, March 31, 2015 | 50,812,548 |
| | $ | 51 |
| | $ | 298,101 |
| | $ | (4,645 | ) | | 10,004,743 |
| | $ | (169,516 | ) | | $ | 311,759 |
| | $ | 435,750 |
| 50,812,548 |
| | 51 |
| | 298,101 |
| | (4,645 | ) | | 10,004,743 |
| | (169,516 | ) | | 311,759 |
| | 435,750 |
|
| | | | | | | | | | | | | | | | | |
| Net loss | | | | | | | | | | | | | | (28,369 | ) | | (28,369 | ) |
| Unrealized net investment gains | | | | | | | | 3 |
| | | | | | | | 3 |
|
| Unrealized net gains on derivative financial instruments | | | | | | | | 1,063 |
| | | | | | | | 1,063 |
|
| Cumulative translation adjustments | | | | | | | | 1,446 |
| | | | | | | | 1,446 |
|
| Recognition of actuarial net gain from pension and other post-retirement plan | | | | | | | | 632 |
| | | | | | | | 632 |
|
| Issuance of common stock pursuant to vesting of restricted stock units | | 736,170 |
| | 1 |
| | | | | | | | | | | | 1 |
|
| Stock-based compensation expense for restricted stock units granted to employees | | | | | | 26,609 |
| | | | | | | | | | 26,609 |
|
| Issuance of common stock under employee stock purchase plan | | 447,252 |
| | | | 10,560 |
| | | | | | | | | | 10,560 |
|
| Repurchase of treasury stock | | | | | | | | | | 10,402,402 |
| | (311,850 | ) | | | | (311,850 | ) |
| Issuance of shares related to the Comms Transaction | | 62,499,644 |
| | 62 |
| | 2,305,549 |
| | | | | | | | | | 2,305,611 |
|
| Excess tax benefit from share-based compensation awards | | | | | | 1,926 |
| | | | | | | | | | 1,926 |
|
| Balance, March 31, 2016 | | 114,495,614 |
| | 114 |
| | 2,642,745 |
| | (1,501 | ) | | 20,407,145 |
| | (481,366 | ) | | 283,390 |
| | 2,443,382 |
|
| Net income | | | | | | | | | | | | | | 33,291 |
| | 33,291 |
|
| Unrealized net investment losses | | | | | | | | (59 | ) | | | | | | | | (59 | ) |
| Unrealized net losses on derivative financial instruments | | | | | | | | (54 | ) | | | | | | | | (54 | ) |
| Cumulative translation adjustments | | | | | | | | (1,000 | ) | | | | | | | | (1,000 | ) |
| Recognition of actuarial net losses from pension and other post-retirement plan | | | | | | | | (858 | ) | | | | | | | | (858 | ) |
| Issuance of common stock pursuant to vesting of restricted stock units | | 950,159 |
| | 2 |
| | | | | | | | | | | | 2 |
|
| Stock-based compensation expense for restricted stock units granted to employees | | | | | | 36,449 |
| | | | | | | | | | 36,449 |
|
| Issuance of common stock under employee stock purchase plan | | 471,658 |
| | | | 15,697 |
| | | | | | | | | | 15,697 |
|
| Repurchase of treasury stock | | | | | | | | | | 3,468,998 |
| | (89,555 | ) | | | | (89,555 | ) |
| Shortfall from share-based compensation awards | | | | | | (1,045 | ) | | | | | | | | | | (1,045 | ) |
| Balance, March 31, 2017 | | 115,917,431 |
| | $ | 116 |
| | $ | 2,693,846 |
| | $ | (3,472 | ) | | 23,876,143 |
| | $ | (570,921 | ) | | $ | 316,681 |
| | $ | 2,436,250 |
|
The accompanying notes are an integral part of these consolidated financial statements.
NetScout Systems, Inc.
Consolidated Statements of Cash Flows
(In thousands)
| | | | Year Ended March 31, | Year Ended March 31, |
| | 2015 | | 2014 | | 2013 | 2017 | | 2016 | | 2015 |
| Cash flows from operating activities: | | | | | | | | | | |
| Net income | $ | 61,192 |
| | $ | 49,106 |
| | $ | 40,609 |
| |
| Adjustments to reconcile net income to cash provided by operating activities, net of the effects of acquisitions: | | | | | | |
| Net income (loss) | | $ | 33,291 |
| | $ | (28,369 | ) | | $ | 61,192 |
|
| Adjustments to reconcile net income (loss) to cash provided by operating activities, net of the effects of acquisitions: | | | | | | |
| Depreciation and amortization | 19,709 |
| | 18,260 |
| | 17,464 |
| 160,863 |
| | 140,071 |
| | 19,709 |
|
| Loss on disposal of fixed assets | 300 |
| | 39 |
| | 104 |
| 271 |
| | 134 |
| | 300 |
|
| Deal related compensation expense and accretion charges | 153 |
| | 151 |
| | 263 |
| 153 |
| | 6,728 |
| | 153 |
|
| Share-based compensation expense associated with equity awards | 16,580 |
| | 12,930 |
| | 9,591 |
| 39,189 |
| | 28,351 |
| | 16,580 |
|
| Net change in fair value of contingent and contractual liabilities | (10 | ) | | (303 | ) | | 466 |
| — |
| | — |
| | (10 | ) |
| Deferred income taxes | 2,736 |
| | 5,214 |
| | 3,909 |
| (11,008 | ) | | (42,121 | ) | | 2,736 |
|
| Other gains | 168 |
| | (86 | ) | | (3 | ) | |
| Other (gains) losses | | (111 | ) | | (279 | ) | | 168 |
|
| Changes in assets and liabilities | | | | | | | | | | |
| Accounts receivable | (21,801 | ) | | 13,451 |
| | 82 |
| |
| Accounts receivable and unbilled costs | | (48,080 | ) | | (23,259 | ) | | (21,801 | ) |
| Due from related party | | 25,055 |
| | (18,483 | ) | | — |
|
| Inventories | (499 | ) | | (6,798 | ) | | 1,433 |
| 12,456 |
| | 5,523 |
| | (499 | ) |
| Prepaid expenses and other assets | (2,169 | ) | | (2,841 | ) | | 5,391 |
| (24,751 | ) | | (29,481 | ) | | (2,169 | ) |
| Accounts payable | 1,355 |
| | 1,498 |
| | (2,345 | ) | 405 |
| | 2,334 |
| | 1,355 |
|
| Accrued compensation and other expenses | 13,233 |
| | 6,734 |
| | 10,739 |
| 6,785 |
| | 33,250 |
| | 13,233 |
|
| Due to related party | | (2,792 | ) | | (6,743 | ) | | — |
|
| Income taxes payable | (684 | ) | | 677 |
| | 114 |
| 3,008 |
| | 1,984 |
| | (684 | ) |
| Deferred revenue | 16,670 |
| | 12,914 |
| | 7,595 |
| 33,075 |
| | 25,645 |
| | 16,670 |
|
| Net cash provided by operating activities | 106,933 |
| | 110,946 |
| | 95,412 |
| 227,809 |
| | 95,285 |
| | 106,933 |
|
| Cash flows from investing activities: | | | | | | | | | | |
| Purchase of marketable securities | (133,212 | ) | | (128,122 | ) | | (121,133 | ) | (199,841 | ) | | (100,278 | ) | | (133,212 | ) |
| Proceeds from maturity of marketable securities | 89,954 |
| | 65,570 |
| | 163,416 |
| 181,321 |
| | 118,881 |
| | 89,954 |
|
| Purchase of fixed assets | (12,808 | ) | | (13,066 | ) | | (11,671 | ) | (29,696 | ) | | (24,783 | ) | | (12,808 | ) |
| Purchase of intangible assets | (174 | ) | | (1,086 | ) | | (277 | ) | (1,031 | ) | | (3,962 | ) | | (174 | ) |
| Acquisition of businesses, net of cash acquired | — |
| | — |
| | (51,273 | ) | (4,606 | ) | | 27,700 |
| | — |
|
| Decrease (increase) in deposits | 55 |
| | 123 |
| | (804 | ) | 129 |
| | (150 | ) | | 55 |
|
| Net cash used in investing activities | (56,185 | ) | | (76,581 | ) | | (21,742 | ) | |
| Contingent purchase consideration | | 660 |
| | — |
| | — |
|
| Collection of contingently returnable consideration | | 12,864 |
| | 9,306 |
| | — |
|
| Change in restricted cash | | (660 | ) | | — |
| | — |
|
| Capitalized software development costs | | (1,421 | ) | | (1,625 | ) | | — |
|
| Net cash (used in) provided by investing activities | | (42,281 | ) |
| 25,089 |
|
| (56,185 | ) |
| Cash flows from financing activities: | | | | | | | | | | |
| Issuance of common stock under stock plans | 140 |
| | 812 |
| | 575 |
| 2 |
| | 1 |
| | 140 |
|
| Payment of contingent consideration | — |
| | (841 | ) | | (4,038 | ) | |
| Treasury stock repurchases | (51,714 | ) | | (34,322 | ) | | (27,448 | ) | (89,555 | ) | | (311,850 | ) | | (51,714 | ) |
| Repayment of long-term debt | — |
| | — |
| | (62,000 | ) | |
| Excess tax benefit from share-based compensation awards | 2,814 |
| | 2,388 |
| | 1,907 |
| |
| Proceeds from issuance of long-term debt, net of issuance costs | | — |
| | 294,623 |
| | — |
|
| Excess tax benefit (shortfall) from share-based compensation awards | | (1,045 | ) | | 1,926 |
| | 2,814 |
|
| Net cash used in financing activities | (48,760 | ) | | (31,963 | ) | | (91,004 | ) | (90,598 | ) | | (15,300 | ) | | (48,760 | ) |
| Effect of exchange rate changes on cash and cash equivalents | 829 |
| | (256 | ) | | 9 |
| (761 | ) | | 744 |
| | 829 |
|
| Net increase (decrease) in cash and cash equivalents | 2,817 |
| | 2,146 |
| | (17,325 | ) | |
| Net increase in cash and cash equivalents | | 94,169 |
| | 105,818 |
| | 2,817 |
|
| Cash and cash equivalents, beginning of year | 102,076 |
| | 99,930 |
| | 117,255 |
| 210,711 |
| | 104,893 |
| | 102,076 |
|
| Cash and cash equivalents, end of year | $ | 104,893 |
| | $ | 102,076 |
| | $ | 99,930 |
| $ | 304,880 |
| | $ | 210,711 |
| | $ | 104,893 |
|
| Supplemental disclosures of cash flow information: | | | | | | | | | | |
| Cash paid for interest | $ | — |
| | $ | — |
| | $ | 325 |
| $ | 6,442 |
| | $ | 3,807 |
| | $ | — |
|
| Cash paid for income taxes | $ | 29,233 |
| | $ | 21,456 |
| | $ | 13,326 |
| $ | 49,290 |
| | $ | 50,658 |
| | $ | 29,233 |
|
| Non-cash transactions: | | | | | | | | | | |
| Transfers of inventory to fixed assets | $ | 940 |
| | $ | 1,781 |
| | $ | 583 |
| $ | 4,928 |
| | $ | 1,229 |
| | $ | 940 |
|
| Additions to property, plant and equipment included in accounts payable | $ | (187 | ) | | $ | 124 |
| | $ | 154 |
| $ | 1,241 |
| | $ | (1,065 | ) | | $ | (187 | ) |
| Gross (decrease) in contractual liability relating to fair value adjustment | $ | (49 | ) | | $ | (197 | ) | | $ | (184 | ) | |
| Gross increase (decrease) in contingent consideration liability relating to fair value adjustment | $ | 40 |
| | $ | (106 | ) | | $ | 650 |
| |
| Debt issuance costs settled through the issuance of additional debt | | $ | — |
| | $ | 5,377 |
| | $ | — |
|
| Issuance of common stock under employee stock purchase plans | $ | 5,889 |
| | $ | 4,995 |
| | $ | 4,545 |
| $ | 15,697 |
| | $ | 10,560 |
| | $ | 5,889 |
|
| Purchase consideration | | $ | — |
| | $ | 2,276,256 |
| | $ | — |
|
| Contingently returnable consideration | | $ | — |
| | $ | 29,355 |
| | $ | — |
|
| Contingent consideration related to acquisition, included in accrued other | | $ | 660 |
| | $ | — |
| | $ | — |
|
The accompanying notes are an integral part of these consolidated financial statements.
NetScout Systems, Inc.
Notes to Consolidated Financial Statements
NOTE 1 – NATURE OF BUSINESS
NetScout Systems, Inc., or NetScout or the Company, is an industry leader for advanced network, applicationreal-time operational intelligence and performance analytics for service assurance and cybersecurity solutions providing high-quality performance analytics that help enterprise, government andare used in many of the most demanding service provider, enterprise and government networks. The Company's solutions, based on proprietary Adaptive Service Intelligence (ASI) technology, help customers proactively managecontinuously monitor the service delivery environment to identify performance issues and identify emerging performance problems. Our offerings helpto provide insight into network-based security threats. As a result, customers around the worldcan quickly resolve technology issues that cause business disruptions or negativelythat adversely impact the user experience. We design, develop, manufacture, market, license, sellThe Company manufactures and supportmarkets these products infor integrated hardware and software solutions that are used by commercial enterprises, large governmental agencies and telecommunication service providersis also well positioned to help customers deploy its software in somecommercial-off-the-shelf hardware and in virtualized form factors. Regardless of the world’s largest, most demandingplatform, customers use the Company's solutions to help drive return on investment on their network and complex internet protocol (IP) basedbroader information technology (IT) initiatives while reducing the tangible risks associated with downtime, poor service delivery environments. NetScout has a single operating segmentquality and substantially all of its identifiable assets are locatedcompromised security. The Company reports revenue and income in the United States.one reportable segment.
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of NetScout and its wholly-owned subsidiaries. All inter-companyInter-company transactions and balances have been eliminated in consolidation.
The accompanying audited consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. On July 14, 2015, the Company completed the acquisition of Danaher Corporation’s (Danaher) Communications Business (Communications Business), which included certain assets, liabilities, technology and employees within Tektronix Communications, VSS Monitoring, Arbor Networks and certain portions of the Fluke Networks Enterprise business, which excluded Danaher’s data communications cable installation business and its communication service provider business (the Comms Transaction). The Comms Transaction is more fully described in Note 7 below. The Comms Transaction was recorded using the acquisition method of accounting; accordingly, the financial results of the acquisition are included in the accompanying audited consolidated financial statements for the periods subsequent to the acquisition.
Fiscal Year End
During fiscal years 2017 and 2015, the fiscal year end of NetScout and its wholly-owned subsidiaries ended on March 31st. During the fiscal year 2016, the fiscal year end of NetScout and its wholly-owned subsidiaries ended on March 31st, except for Fluke Networks Enterprise business, which ended on April 1, 2016. During fiscal years 2017 and 2015, NetScout’s quarters ended on the last calendar day of the months of June, September and December. The fiscal year 2016 quarter end dates of the entities acquired as part of the Communications Business were October 2nd and December 31st. The Company does not adjust for the difference in fiscal periods between the acquired entities and itself, as such difference would be fewer than 93 days, pursuant to Regulation S-X Rule 3A-02. References herein to Fiscal 2017, 2016 and 2015 refer to the fiscal years ended March 31, 2017, 2016 and 2015, respectively.
Segment Reporting
As part of its continued integration efforts of the Comms Transaction, effective July 1, 2016, the Company reorganized its business units, which resulted in a change in operating segment composition. As a result of this change, the Company reorganized the number of operating segments from five operating segments to one operating segment. The financial information that is regularly reviewed by the Company's Chief Operating Decision Maker (CODM) to allocate resources and assess performance was changed during the second quarter of fiscal year 2017. Our operating segments are determined based on the units that constitute a business for which financial information is available and for which operating results are regularly reviewed by the CODM. The Company reports as a single operating segment with the Chief Executive Officer (CEO) being the Company’s chief operating decision maker. The Company’s CEO reviews financial information presented on a consolidated basis for purposes of allocating resourcesrevenue and evaluating financial performance. Accordingly, the Company hasincome in one business activity and there are no segment managers who are held accountable for operations, operating results or components below the consolidated unit level.reportable segment.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles (GAAP) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates in these financial statements include those involving revenue recognition, valuation of goodwill and acquired intangible assets and liabilities, valuation of the pension obligation and share-based
NetScout Systems, Inc.
Notes to Consolidated Financial Statements—(Continued)
compensation. These items are continuously monitored and analyzed by management for changes in facts and circumstances and material changes in these estimates could occur in the future.
Cash and Cash Equivalents and Marketable Securities
Under current authoritative guidance, NetScout has classified its investments as “available-for-sale” which are carried at fair value based on quoted market prices and associated unrealized gains or losses are recorded as a separate component of stockholders’ equity until realized. NetScout 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.
At March 31, 20152017 and periodically throughout the year, NetScout has maintained cash balances in various operating accounts in excess of federally insured limits. NetScout limits the amount of credit exposure by investing only with credit worthy institutions.institutions which we believe are those institutions with an investment grade rating for deposits.
Revenue Recognition
We exerciseThe Company exercises judgment and useuses estimates in connection with determining the amounts of product and services revenues to be recognized in each accounting period.
Product revenue consistsThe 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 NetScout’s hardware products (which include requiredwith embedded software that works togetherare essential to providing customers the intended functionality of the solutions. The Company also sells stand-alone software solutions to provide customers with enhanced functionality. In addition, the hardware to deliver the hardware’s essential functionality), licensing of its software products, and sale ofCompany sells hardware bundled with a software license. Product revenue is recognized upon shipment, provided that evidence of an arrangement exists, title and risk of loss have passed to the customer, and in the case of software products, when the customer has the rights and ability to access the software, fees are fixed or determinable and collection of the related receivable is probable.reasonably assured. 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. Because many of NetScout’sthe Company’s solutions are comprised of both hardware and more than incidental
NetScout Systems, Inc.
Notes to Consolidated Financial Statements—(Continued)
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
software components, the Company recognizes revenue in accordance with authoritative guidance on both hardware and software revenue recognition.
Service revenue consists primarily of fees fromThe Company’s service offerings include installation, integration, extended warranty and maintenance services, post-contract customer support agreements,(PCS), and other professional services including consulting and training. NetScoutThe Company generally provides software andand/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 softwaresoftware/hardware warranty expiration. Support services generally include rights to unspecified upgrades (when and if available), telephone and internet-based support, updates, bug fixes and bug fixes.hardware repair and replacement. Consulting services are recognized upon delivery or completion of performance. 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 asupon delivery of the related training services are provided.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.
Multi-element arrangements are concurrent customer purchases of a combination of NetScout’sthe Company’s product and service offerings that may be delivered at various points in time. For multi-element arrangements comprised only of hardware products and related services, the Company allocates the total arrangement consideration to the multiple elements based on each element’s selling pricefair value compared to the total relative selling price of all the elements. Each element’s selling price is based on management’s best estimate of selling price (BESP) paid by customers based on the element’s historical pricing when VSOEvendor-specific objective evidence (VSOE) or third partythird-party evidence (TPE) does not exist. The Company has established BESP for product elements as the average or median selling price the element was recently sold for, over the past six quarters, whether sold alone or sold as part of a multiple element transaction. The Company’s internal list price for products, reviewed quarterly by senior management, with consideration in regards to changing factors inCompany also considers its technologyoverall pricing objectives and in the marketplace, is generated to target the desired gross margin frompractices across different sales of product after analyzing historical discounting trends.channels and geographies, and market conditions. The Company reviews sales of the product elements on a quarterly basis and updates when appropriate, its BESP for such elements to ensure that it reflects recent pricing experience. The Company has
NetScout Systems, Inc.
Notes to Consolidated Financial Statements—(Continued)
established VSOE for services related undelivereda majority of its service elements based on historical stand-alone sales.sales or by the renewal rate offered to the customer. However certain business units acquired as part of the Comms Transaction are unable to establish VSOE for undelivered elements. This occurs because the pricing for standalone sales does not occur in tight bands around a midpoint, and they are not contractually fixed. In these scenarios the Company has typically established BESP by creating wider bands around a midpoint for standalone transactions or in some cases using cost plus a margin for the underlying services and products. If VSOE of fair value does not exist for a deliverable, the Company has determined that BESP is the highest level of fair value that exists for those deliverables.
For multi-element arrangements comprised only of software products and related services, the Company allocates a portion of the total arrangement consideration to the undelivered elements, primarily support agreements and training,professional services, using vendor-specific objective evidence of fair value for the undelivered elements. The remaining portion of the total arrangement consideration is allocated to the delivered software, referred to as the residual method. VSOE of fair value of the undelivered elements is based on the price customers pay when the element is sold separately. The Company reviews the separate sales of the undelivered elements on a quarterlyregular basis and updates when appropriate, its VSOE of fair value for such elements to ensure that it reflects recent pricing experience. If the Company cannot objectively determine the VSOE of the fair value of any undelivered software element, revenue is deferred until all elements are delivered and services have been performed, or until fair value can objectively be determined for any remaining undelivered elements. However, if the only undelivered element is maintenance and support, the entire arrangement fee is recognized over the service period.
For multi-element arrangements comprised of a combination of hardware and software elements, the total arrangement consideration is bifurcated between the hardware and hardware related deliverables and the software and software related deliverables based on the relative selling prices of all deliverables as a group. Then, arrangement consideration for the hardware and hardware-related services is recognized upon delivery or as the related services are provided outlined above and revenue for the software and software-related services is allocated following the residual method and recognized based upon delivery or as the related services are provided.
The Company’s products are distributed through its direct sales force and indirect distribution channels through alliances with resellers.resellers and distributors. Revenue arrangements with resellers and distributors are recognized on a sell-in basis; that is, when NetScoutthe Company delivers the product to the reseller.reseller or distributor. The Company records consideration given to a reseller or distributor as a reduction of revenue to the extent the Company has recorded revenue from the reseller. The Companyreseller or distributor. With limited exceptions, the Company’s return policy does not offer contractual rights of return, stock balancing, or price protection to its resellers, and actualallow product returns from themfor a refund. Returns have been insignificant to date. In addition, the Company has a history of successfully collecting receivables from the resellers. As a result, the Company does not maintain reserves for reseller product returns.our resellers and distributors.
NetScout Systems, Inc.
Notes to Consolidated Financial Statements—(Continued)
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Commission Expense
The Company recognizes commission expense related to the renewal of maintenance contracts at the time an order is booked. As a result, commission expense can be recognized in full even though the related revenue may not be fully recognized. Base commission expense on product revenue and corresponding new maintenance contracts is recognized in the same period as related product revenue, typically upon shipment.
Uncollected Deferred Product Revenue
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. The aggregate amount of unrecognized accounts receivable and deferred revenue was $2.0$17.9 million and $9.0$2.0 million at March 31, 20152017 and 2014,2016, respectively.
Concentration of Credit Risk
Financial instruments that potentially subject us to concentration of credit risk consist primarily of investments, trade accounts receivable and accounts payable. Our cash, cash equivalents, and marketable securities are placed with financial institutions with high credit standings.
At March 31, 2015,2017, the Company had oneno direct customer which accounted for more than 10% of the accounts receivable balance, while noor indirect channel partner which accounted for more than 10% of the accounts receivable balance. At March 31, 2014,2016, the Company had one direct customer which accounted for more than
NetScout Systems, Inc.
Notes to Consolidated Financial Statements—(Continued)
10% of the accounts receivable balance, while no indirect channel partner accounted for more than 10% of the accounts receivable balance.
During the fiscal yearyears ended March 31, 2015, two2017, and 2016, one direct customerscustomer, Verizon, accounted for more than 10% of total revenue, while no indirect channel partner accounted for more than 10% of total revenue. During the fiscal year ended March 31, 2014,2015, Verizon and one other direct customer accounted for more than 10% of total revenue, while no indirect channel partner accounted for more than 10% of total revenue. During
As disclosed parenthetically within the fiscal year endedCompany's consolidated balance sheet, the Company has a receivable from Danaher in the amount of $3.6 million that represents a concentration of credit risk at March 31, 2013, no direct customer or indirect channel partner accounted for more than 10% of total revenue. 2017.
Historically, the Company has not experienced any significant failure of its customers 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.
Trade Receivable Valuations
Accounts receivable are stated at their net realizable value. The allowance against gross trade receivables reflects the best estimate of probable losses inherent in the receivables portfolio determined on the basis of historical experience, specific allowances for known troubled accounts and other currently available information.
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.
Fixed Assets
Fixed assets are stated at cost and depreciated using the straight-line method over the estimated useful lives of the assets. Leasehold improvements are amortized on a straight-line basis over the shorter of the lease term or anticipated useful life of the improvement. Gains and losses upon asset disposal are recognized in the year of disposition. Expenditures for replacements and building improvements are capitalized, while expenditures for maintenance and repairs are charged against earnings as incurred.
Valuation of Goodwill, Intangible Assets and Other Acquisition Accounting Items
F-10The Company amortizes acquired definite-lived intangible assets over their estimated useful lives. Goodwill and other indefinite-lived intangible assets are not amortized but subject to annual impairment tests; more frequently if events or circumstances occur that would indicate a potential decline in their fair value. The Company performs the assessment annually during the fourth quarter and on an interim basis if potential impairment indicators arise. Through the first quarter of fiscal year 2017, the Company had five reporting units: (1) legacy NetScout, (2) cybersecurity (Arbor Networks), (3) service assurance product lines primarily focused on the service provider market (formerly known as Tektronix Communications), (4) network visibility product lines (formerly known as VSS Monitoring) and (5) service assurance product lines primarily focused on the enterprise market (formerly known as FNET). As part of its continued integration efforts of the communications Business acquisition, effective July 1, 2016, the Company reorganized its business units. As a result of this change, the Company reduced the number of reporting units from five reporting units to two reporting units. The two reporting units are: (1) Service Assurance and (2) Security. The former cybersecurity reporting unit was aggregated within the Security reporting unit along with portions of the legacy NetScout business while all other former reporting units were aggregated into the Service Assurance reporting unit. Our reporting units are determined based on the components of our operating segments that constitute a business for which financial information is available and for which operating results are regularly reviewed by segment management.
As a result of the reduction in reporting units, the Company completed a quantitative impairment analysis for goodwill as of July 1, 2016. To conduct the impairment test, the Company performed a quantitative step 1 analysis, on a before and after basis, and concluded the estimated fair values of each of the Company’s current and former reporting units exceeded their respective carrying values both immediately prior to and subsequent to the change.
NetScout Systems, Inc.
Notes to Consolidated Financial Statements—(Continued)
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
ValuationTo test impairment, the Company first assesses qualitative factors to determine whether the existence of Goodwill, Intangible Assetsevents and Other Acquisition Accounting Items
circumstances indicate that it is more likely than not that the intangible asset is impaired. If based on the Company's qualitative assessment it is more likely than not that the fair value of the intangible asset is less than its carrying amount, quantitative impairment testing is required. However, if the Company concludes otherwise, quantitative impairment testing is not required. During fiscal year 2017, the Company performed a quantitative analysis for goodwill. The Company has twodetermined the fair value of the reporting units: (1) Unified Service Deliveryunit's goodwill using established income and (2) Test Optimization.market valuation approaches. Goodwill iswas estimated to be recoverable as of January 31, 2017.
Indefinite-lived intangible assets are tested for impairment at a 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 segment below its carrying value.
The Company performed the qualitative Step 0 assessment on its Unified Service Delivery reporting unit. In performing the qualitative Step 0 assessment, the Company considered certain events and circumstances specific to the entity at the reporting unit level, such as macroeconomic conditions, industry and market considerations, overall financial performance and cost factors when evaluating whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. No indicators of impairment were noted at January 31, 2015.
The Company performed the quantitative Step 1 assessment on its Test Optimization reporting unit. If the reporting unit’s carrying value exceeds its fair value, the Company would record an impairment loss equal to the difference between the carrying value of goodwill and its implied fair value. The Company estimates the fair values of its reporting units using discounted cash flow valuation models. Those models require estimates of future revenues, profits, capital expenditures, working capital, terminal values based on revenue multiples, and discount rates for each reporting unit. The Company estimates these amounts by evaluating historical trends, current budgets, operating plans and industry data. The estimated fair value of the Test Optimization reporting unit was approximately 120 percent greater than its carrying value as of January 31, 2015.
Additionally, the market capitalization of NetScout as a whole significantly exceeded its carrying value.
Indefinite-livedindefinite-lived intangible assets are tested for impairment at a 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 segment below its carrying value. To test impairment, the Companywe first assessesassess qualitative factors to determine whether the existence of events and circumstances indicate that it is more likely than not that the indefinite-lived intangible asset is impaired. If based on the Company'sour qualitative assessment, we conclude that it is more likely than not that the fair value of an indefinite-lived intangible asset is less than its carrying amount, quantitative impairment testing is required. However, if the Company concludeswe conclude otherwise, quantitative impairment testing is not required.
NetScout amortizes acquired intangible assets over their estimated useful lives, except for an acquired tradename which has an indefinite life and thus, is not amortized. The carrying value of the indefinite lived tradename is evaluated annually or more frequently if events or changes in circumstances indicate that the asset might be impaired. The Company We completed itsour annual impairment test of the indefinite lived intangible asset at January 31, 20152017 using the qualitative Step 0 assessment described above, which largely mirrors the Unified Service Delivery goodwill impairment assessment, as the tradenames apply to a majority of the products and branding within that reporting unit.assessment. No impairment indicators were identified atobserved as of January 31, 2015.2017.
The Company acquiredcompleted two companiesacquisitions during the three year period ended March 31, 2015.2017. The acquisition method of accounting requires an estimate of the fair value of the assets and liabilities acquired as part of these transactions. In order to estimate the fair value of acquired intangible assets the Company uses a relief from royalty model which requires management to estimate: future revenues expected to be generated by the acquired intangible assets, a royalty rate which a market participant would pay related to the projected revenue stream, a present value factor which approximates a risk adjusted rate of return for a market participant purchasing the assets, and a technology migration curve representing a period of time over which the technology assets or some portion thereof are still being used. The Company is also required to develop the fair value for customer relationships acquired as part of these transactions which requires that we create estimates for the following items: a projection of future revenues associated with the acquired company’s existing customers, a turnover rate for those customers, a margin related to those sales, and a risk adjusted rate of return for a market participant purchasing those relationships.
The Company has a contingent liability for $660 thousand related to the acquisition of Avvasi Incorporated (Avvasi) in August 2016 for which an escrow account was established to cover damages NetScout suffers 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 asset purchase agreement. Generally, indemnification claims that Avvasi 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 seller's breach of certain fundamental representations or related to other specified indemnity items, for which certain of Avvasi'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 $660 thousand will be paid to the seller on August 21, 2017.
The Comms Transaction during fiscal year ended March 31, 2016 contained both contingently returnable consideration and contingent purchase consideration. The contingently returnable consideration represented a contingent right of return from Danaher to reimburse NetScout for certain cash awards paid by NetScout to employees of the Communications Business transferred to Newco for post-combination services on various dates through August 4, 2016. During the fiscal year ended March 31, 2017, certain post-combination cash retention payments have been disbursed. Danaher reimbursed the Company for those costs and NetScout reimbursed Danaher for the tax benefit.
The acquisition of Simena LLC on November 18, 2011 also contained contingent featuresconsideration based on the ultimate settlement of assets and liabilities acquired as part of the transaction, and the former ownersowners' future period of employment with the Company. Contingent consideration accounting requires the Company to estimate the probability of various settlement scenarios, the former ownersowners' expected period of employment with NetScout, and a risk adjusted interest rate to present value to the payment streams.
NetScout Systems, Inc.
Notes to Consolidated Financial Statements—(Continued)
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Capitalized Software Development Costs
Costs incurred in the research and development of the Company’s products are expensed as incurred, except for certain software development costs. Costs associated with the development of computer software are expensed prior to the establishment of technological feasibility and capitalized thereafter until the related software products are available for first customer shipment. Such costs are amortized using the straight-line method over the estimated economic life of the product,
NetScout Systems, Inc.
Notes to Consolidated Financial Statements—(Continued)
which generally does not exceed three years. Capitalized software development costs are periodically assessed for recoverability in the event of changes to the anticipated future revenue for the software products or changes in product technologies. Unamortized capitalized software development costs that are determined to be in excess of the net realizable value of the software products would be expensed in the period in which such a determination is made.
Typically for accounting purposes, these R&D investments have not been capitalized because of the development methodology employed. The developments are added individually to the core code over a shorter period of time but marketed as a release once all portions are complete.
Amortization included as cost of product revenue was $0$594 thousand, $0 thousand and $51 thousand$0 for the years ended March 31, 2015, 2014,2017, 2016, and 2013,2015, respectively. The Company did not capitalize anycapitalized $1.4 million and $1.6 million in software development costs in the years ended March 31, 20152017 and 2014.2016.
Derivative Financial Instruments
Under authoritative guidance for derivative instruments and hedging activities, all hedging activities must be documented at the inception of the hedge and must meet the definition of highly effective in offsetting changes to future cash flows in order for the derivative to qualify for hedge accounting. Under the guidance, if an instrument qualifies for hedge accounting, the changes in the fair value each period for open contracts, measured at the end of the period, are recorded to other comprehensive income. Otherwise, changes in the fair value are recorded in earnings each period. Management must perform initial and ongoing tests in order to qualify for hedge accounting. In accordance with the guidance, the Company accounts for its instruments under hedge accounting. The effectiveness and a measurement of ineffectiveness of qualifying hedge contracts are assessed by the Company quarterly. The Company records the fair value of its derivatives in prepaid expenses and other current assets and accrued other.other in the Company's consolidated balance sheet. The effective portion of gains or losses resulting from changes in the fair value of qualifying hedges are recorded in other comprehensive income (loss) until the forecasted transaction occurs, with any ineffective portion classified directly to the Company’s consolidated statement of operations based on the expense categories of the items being hedged. When forecasted transactions occur, unrealized gains or losses associated with the effective portion of the hedge are reclassified to the respective expense categories in the Company’s consolidated statement of operations. Gains or losses related to hedging activity are included as operating activities in the Company’s consolidated statement of cash flows. If the underlying forecasted transactions do not occur, or it becomes probable that they will not occur, the gain or loss on the related cash flow hedge is recognized immediately in earnings.
Contingencies
NetScout accounts for claims and contingencies in accordance with authoritative guidance that requires an estimated loss to be recorded 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 NetScout determines 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 NetScout to use its judgment. NetScout consults with legal counsel on those issues related to litigation and seeks input from other experts and advisors with respect to matters in the ordinary course of business. See Note 17 for a discussion of contingencies.
Contingent liabilities includesinclude contingent consideration in connection with the Company’s acquisitions and contingent contractual non-compliance liability.acquisitions. Contingent consideration represents earnout payments in connection with the Company’s acquisitions and is recognized at fair value on the acquisition date and remeasured each reporting period with subsequent adjustments recognized in the consolidated statements of income. The Company discounts the contingent purchase consideration to present value using a risk adjusted interest rate at each reporting period. Contingent consideration is valued using significant inputs that are not observable in the market which are defined as Level 3 inputs pursuant to fair value
NetScout Systems, Inc.
Notes to Consolidated Financial Statements—(Continued)
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
measurement accounting. The Company believes its estimates and assumptions are reasonable, however, there is significant judgment involved.
Changes in the fair value of contingent liabilities may result from changes in discount periods. The Company reflects changes in fair value due to probability changes in earnings in the consolidated statements of income. Earnout payments are reflected in cash flows from financing activities and the changes in fair value are reflected in cash flows from operating activities in the consolidated statements of cash flows.
Share-based
NetScout Systems, Inc.
Notes to Consolidated Financial Statements—(Continued)
Share-Based Compensation
NetScout recognizes compensation expense for all share-based payments granted. Under the fair value recognition provisions, share-based compensation is calculated net of an estimated forfeiture rate and compensation cost is only recognized for those shares expected to vest on a straight-line basis over the requisite service period of the award.
Foreign Currency
NetScout accounts for its reporting of foreign operations in accordance with guidance which establishes guidelines for the determination of the functional currency of foreign subsidiaries. A majority of NetScout’s foreign subsidiaries are an extension of NetScout’s U.S. operations. In accordance with the guidance, NetScout has determined its functional currency for those foreign subsidiaries that are an extension of NetScout's U.S. operations to be the U.S. Dollar. Foreign subsidiary expenses that are denominated in
Assets and liabilities of subsidiaries operating outside the United States with a functional currency other than the U.S. Dollar functional currency are translated at the foreign exchange rate in effect at the time the transaction is recorded.
The Company does consolidate European subsidiaries which use the Euro as a functional currency. Accordingly, the assets and liabilities of those entitiesdollars are translated into United States dollars using the period-end exchange rate, and income and expense items are translated using the average exchange rate during the period. Cumulative translation adjustments are reflected as a separate component of stockholders’ equity. Foreign currency transaction gains and losses associated with non-Euro denominated balances held by those entities are charged to operations.
NetScout will experience currency exchange risk with respect to foreign currency denominated expenses. In order to partially offset the risks associated with the effects of certain foreign currency exposures, NetScout has established a program that utilizes foreign currency forward contracts. Under this program, increases or decreases in foreign currency exposures are partially offset by gains or losses on forward contracts, to mitigate the impact of foreign currency transaction gains or losses. The Company does not use forward contracts to engage in currency speculation. All outstanding foreign currency forward contracts are recorded at fair value at the end of each fiscal period.
The Company had a foreign currency losslosses of $2.5 million, $1.5 million and $1.4 million a gain of $315 thousand and a gain of $3 thousand for the years ended March 31, 2017, 2016 and 2015, 2014 and 2013, respectively, andrespectively. These amounts are included in other (income) expense,income (expense), net.
Advertising Expense
NetScout recognizes advertising expense as incurred. Advertising expense was $3.1$8.1 million, $2.4$6.4 million and $1.1$3.1 million for the years ended March 31, 2015, 20142017, 2016 and 2013,2015, respectively.
Comprehensive Income (Loss)
Comprehensive income (loss) is comprised of net income (loss) and other comprehensive income (loss). Other comprehensive income (loss) typically consists of unrealized gains and losses on marketable securities, and restricted investments, unrealized gain (loss) on hedge contracts, actuarial gains and losses, and foreign currency translation adjustments.
Income Taxes
NetScout accounts for its income taxes under the asset and liability method. Under the asset and liability method, deferred tax assets and liabilities are recognized based on anticipated future tax consequences attributable to differences between financial statement carrying amounts of assets and liabilities and their respective tax bases,basis, as well as the effect of any net operating loss and tax credit carryforwards. Income tax expense is comprised of the current tax liability or benefit and the change in deferred tax assets and liabilities. We evaluate the recoverability of deferred tax assets by considering all positive and negative evidence relating to future profitability. We weigh objective and verifiable evidence more heavily in this analysis. In
NetScout Systems, Inc.
Notes to Consolidated Financial Statements—(Continued)
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
situations where we conclude that we do not have sufficient objective and verifiable evidence to support the realizability of the deferred tax asset, we create a valuation allowance against it.
Recent Accounting Standards
In May 2014,March 2017, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2017-07, Improving the Presentation of Net Periodic Pension Cost and Net Periodic Post-Retirement Benefit Cost (ASU 2017-07) which requires that an employer report the service cost component in the same line item or items as other compensation costs arising from services rendered by the pertinent employees during the period. The other components of net benefit cost are required to be presented in the income statement separately from the service cost component and outside a subtotal of income from operations. This standard is effective for financial statements issued for fiscal years beginning after December 15, 2017 and should be applied retrospectively to all periods presented. ASU 2017-07 is effective for the Company beginning April 1, 2018.
NetScout Systems, Inc.
Notes to Consolidated Financial Statements—(Continued)
The Company is currently assessing the potential impact of the adoption of ASU 2017-07 on its consolidated financial statements.
In January 2017, the FASB issued ASU No. 2017-04, Intangibles - Goodwill and Other (Topic 350), Simplifying the Test for Goodwill Impairment (ASU 2017-04). ASU 2017-04 eliminates Step 2 from the goodwill impairment test and instead requires an entity to perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. The entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value, not to exceed the total amount of goodwill allocated to the reporting unit. The updated guidance requires a prospective adoption. The Company adopted this standard in the fourth quarter of fiscal year 2017 as early adoption was permitted.
In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805), Clarifying the Definition of a Business (ASU 2017-01). ASU 2017-01 clarifies the definition of a business with the objective of addressing whether transactions involving in-substance nonfinancial assets, held directly or in a subsidiary, should be accounted for as acquisitions or disposals of nonfinancial assets or of businesses. ASU 2017-01 is effective for annual periods beginning December 15, 2017. Early adoption is permitted for transactions, including acquisitions or dispositions, which occurred before the issuance date or effective date of the standard if the transactions were not reported in financial statements that have been issued or made available for issuance. The Company is evaluating the new guidance and does not believe the adoption of ASU 2017-01 will have a material impact on its consolidated financial statements.
In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash (ASU 2016-18) related to the presentation of restricted cash in the statement of cash flows. The pronouncement requires entities to show the changes in the total of cash, cash equivalents, restricted cash and restricted cash equivalents in the statement of cash flows. As a result, entities will no longer present transfers between cash and cash equivalents and restricted cash and restricted cash equivalents in the statement of cash flows. When cash, cash equivalents, restricted cash and restricted cash equivalents are presented in more than one line item on the balance sheet, the new guidance requires a reconciliation of the totals in the statement of cash flows to the related captions in the balance sheet. Entities will also have to disclose the nature of restricted cash and restricted cash equivalent balances. The pronouncement is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2017, with early adoption permitted. The Company is evaluating the new guidance and does not believe ASU 2016-18 will have a material impact on its consolidated statement of cash flows.
In October 2016, the FASB issued ASU 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory (ASU 2016-16). ASU 2016-16 requires that entities recognize the income tax effects of intra-entity transfers of assets other than inventory when the transfer occurs. Current GAAP prohibits the recognition of those tax effects until the asset has been sold to an outside party. The pronouncement is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2017, with early adoption permitted. The Company is evaluating the new guidance and does not believe the adoption of ASU 2016-16 will have a material impact on its consolidated financial statements.
In August 2016, the FASB issued ASU 2016-15, Classification of Certain Cash Receipts and Cash Payments (ASU 2016-15). ASU 2016-15 is intended to add or clarify guidance on the classification of certain cash receipts and payments in the statement of cash flows and to eliminate the diversity in practice related to such classifications. The guidance in ASU 2016-15 is required for annual reporting periods beginning after December 15, 2017, with early adoption permitted. The Company is currently assessing the potential impact of the adoption of ASU 2016-15 on its consolidated statement of cash flows.
In March 2016, the FASB issued ASU 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting (ASU 2016-09), which simplifies several aspects of the accounting for employee share-based payment transactions, including the accounting for income taxes, forfeitures and statutory tax withholding requirements, as well as classification in the statement of cash flows. ASU 2016-09 is effective for the Company beginning April 1, 2017. The Company is currently assessing the potential impact of the adoption of ASU 2016-09 on its consolidated financial statements.
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), its new standard on accounting for leases. This update requires the recognition of leased assets and lease obligations by lessees for those leases currently classified as operating leases under existing lease guidance. Short term leases with a term of 12 months or less are not required to be recognized. The update also requires disclosure of key information about leasing arrangements to increase transparency and comparability among organizations. ASU 2016-02 is effective for annual reporting periods beginning after December 31, 2018 and interim periods
NetScout Systems, Inc.
Notes to Consolidated Financial Statements—(Continued)
within those fiscal years, and early adoption is permitted. The Company is currently assessing the potential impact of the adoption of ASU 2016-02 on its consolidated financial statements.
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers: Topic 606 (ASU 2014-09), and issued subsequent amendments to supersedethe initial guidance in August 2015, March 2016, April 2016, May 2016 and December 2016 within ASU 2015-04, 2016-08, ASU 2016-10, ASU 2016-12 and ASU 2016-20, respectively (ASU 2014-09, ASU 2015-04, ASU 2016-08, ASU 2016-10, ASU 2016-12 and ASU 2016-20, collectively, Topic 606). Topic 606 supersedes nearly all existing revenue recognition guidance under U.S. GAAP. The core principle of ASU 2014-09Topic 606 is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration that is expected to be received for those goods or services. ASU 2014-09Topic 606 defines a five stepfive-step process to achieve this core principle and, in doing so, it is possible more judgment and estimates may be required within the revenue recognition process than required under existing U.S. GAAP, including identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. In April 2015, the FASB issued an exposure draft to propose a delay of theobligation, among others. Topic 606 will be effective date for one year, which would make the effective date for the Company in its first quarteron April 1, 2018. Entities have the option of fiscal year 2019 using either of two methods: (i)a full retrospective or a modified retrospective approach to each prior reporting period presented with the option to elect certain practical expedients as defined within ASU 2014-09; or (ii) retrospective with the cumulative effect of initially applying ASU 2014-09 recognized at the date of initial application and providing certain additional disclosures as defined per ASU 2014-09.adopt this standard. The Company believes it will elect the modified retrospective transition approach. However, management is currentlystill in the early stages of evaluating the impact of its pendingthis new accounting standard. The adoption will most likely result in a reduction in deferred revenue as of April 1, 2018 because the Company will no longer require VSOE of fair value to recognize software deliverables. Upon adoption of ASU 2014-09 onASC 606, the Company expects to recognize a greater proportion of revenue upon delivery of its products, whereas some of its current product sales are initially recorded in deferred revenue and recognized over a period of time. Since the Company currently expenses sales commissions as incurred, the requirement in the new standard to capitalize certain in-scope sales commissions is being evaluated to determine its potential impact in the consolidated financial statements.statements in the year of adoption. There will be no impact to cash flows. The Company continues to assess all potential impacts of the guidance and given normal ongoing business dynamics, preliminary conclusions are subject to change.
NOTE 3 – CASH, CASH EQUIVALENTS AND MARKETABLE SECURITIES
Cash and cash equivalents consisted of money market instruments and cash maintained with various financial institutions at March 31, 20152017 and 2014.2016.
The following is a summary of marketable securities held by NetScout at March 31, 20152017 classified as short-term and long-term (in thousands):
| | | | Amortized Cost | | Unrealized Gains (Losses) | | Fair Value | Amortized Cost | | Unrealized Losses | | Fair Value |
| Type of security: | | | | | | | | | | |
| U.S. government and municipal obligations | $ | 88,651 |
| | $ | 3 |
| | $ | 88,654 |
| $ | 98,989 |
| | $ | (21 | ) | | $ | 98,968 |
|
| Commercial paper | 5,093 |
| | 2 |
| | 5,095 |
| 29,469 |
| | — |
| | 29,469 |
|
| Corporate bonds | 7,644 |
| | (1 | ) | | 7,643 |
| 7,959 |
| | (3 | ) | | 7,956 |
|
| Certificates of deposit | | 1,499 |
| | — |
| | 1,499 |
|
| Total short-term marketable securities | 101,388 |
| | 4 |
| | 101,392 |
| 137,916 |
| | (24 | ) | | 137,892 |
|
| U.S. government and municipal obligations | 56,683 |
| | 8 |
| | 56,691 |
| 21,952 |
| | (19 | ) | | 21,933 |
|
| Corporate bonds | 1,880 |
| | 1 |
| | 1,881 |
| |
| Total long-term marketable securities | 58,563 |
| | 9 |
| | 58,572 |
| 21,952 |
| | (19 | ) | | 21,933 |
|
| Total marketable securities | $ | 159,951 |
| | $ | 13 |
| | $ | 159,964 |
| $ | 159,868 |
| | $ | (43 | ) | | $ | 159,825 |
|
NetScout Systems, Inc.
Notes to Consolidated Financial Statements—(Continued)
The following is a summary of marketable securities held by NetScout at March 31, 2014,2016, classified as short-term and long-term (in thousands):
| | | | Amortized Cost | | Unrealized Gains | | Fair Value | Amortized Cost | | Unrealized Gains | | Fair Value |
| Type of security: | | | | | | | | | | |
| U.S. government and municipal obligations | $ | 53,854 |
| | $ | 26 |
| | $ | 53,880 |
| $ | 109,963 |
| | $ | 4 |
| | $ | 109,967 |
|
| Commercial paper | 14,581 |
| | — |
| | 14,581 |
| 16,172 |
| | — |
| | 16,172 |
|
| Corporate bonds | 6,772 |
| | 1 |
| | 6,773 |
| 1,864 |
| | — |
| | 1,864 |
|
| Total short-term marketable securities | 75,207 |
| | 27 |
| | 75,234 |
| 127,999 |
| | 4 |
| | 128,003 |
|
| U.S. government and municipal obligations | 37,875 |
| | 2 |
| | 37,877 |
| 13,349 |
| | 12 |
| | 13,361 |
|
| Corporate bonds | 3,611 |
| | (4 | ) | | 3,607 |
| |
| Total long-term marketable securities | 41,486 |
| | (2 | ) | | 41,484 |
| 13,349 |
| | 12 |
| | 13,361 |
|
| Total marketable securities | $ | 116,693 |
| | $ | 25 |
| | $ | 116,718 |
| $ | 141,348 |
| | $ | 16 |
| | $ | 141,364 |
|
Contractual maturities of the Company’s marketable securities held at March 31, 20152017 and March 31, 20142016 were as follows (in thousands):
| | | | March 31,
2015 | | March 31,
2014 | March 31,
2017 | | March 31,
2016 |
| Available-for-sale securities: | | | | | | |
| Due in 1 year or less | $ | 101,392 |
| | $ | 75,234 |
| $ | 137,892 |
| | $ | 128,003 |
|
| Due after 1 year through 5 years | 58,572 |
| | 41,484 |
| 21,933 |
| | 13,361 |
|
| | $ | 159,964 |
| | $ | 116,718 |
| $ | 159,825 |
| | $ | 141,364 |
|
NetScout Systems, Inc.
Notes to Consolidated Financial Statements—(Continued)
NOTE 4 – 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 March 31, 20152017 and 20142016 (in thousands).:
| | | | Fair Value Measurements at | Fair Value Measurements at |
| | March 31, 2015 | March 31, 2017 |
| | Level 1 | | Level 2 | | Level 3 | | Total | Level 1 | | Level 2 | | Level 3 | | Total |
| ASSETS: | | | | | | | | | | | | | | |
| Cash and cash equivalents | $ | 104,893 |
| | $ | — |
| | $ | — |
| | $ | 104,893 |
| $ | 304,880 |
| | $ | — |
| | $ | — |
| | $ | 304,880 |
|
| U.S. government and municipal obligations | 46,564 |
| | 98,781 |
| | — |
| | 145,345 |
| 40,628 |
| | 80,273 |
| | — |
| | 120,901 |
|
| Commercial paper | — |
| | 5,095 |
| | — |
| | 5,095 |
| — |
| | 29,469 |
| | — |
| | 29,469 |
|
| Corporate bonds | 9,524 |
| | — |
| | — |
| | 9,524 |
| 7,956 |
| | — |
| | — |
| | 7,956 |
|
| Certificate of deposits | | — |
| | 1,499 |
| | — |
| | 1,499 |
|
| Derivative financial instruments | — |
| | 15 |
| | — |
| | 15 |
| — |
| | 110 |
| | — |
| | 110 |
|
| | $ | 160,981 |
| | $ | 103,891 |
| | $ | — |
| | $ | 264,872 |
| $ | 353,464 |
|
| $ | 111,351 |
|
| $ | — |
|
| $ | 464,815 |
|
| LIABILITIES: | | | | | | | | | | | | | | |
| Contingent consideration | $ | — |
| | $ | — |
| | $ | (4,484 | ) | | $ | (4,484 | ) | |
| Contingent purchase consideration | | $ | — |
| | $ | — |
| | $ | (5,449 | ) | | $ | (5,449 | ) |
| Derivative financial instruments | — |
| | (1,664 | ) | | — |
| | (1,664 | ) | — |
| | (213 | ) | | — |
| | (213 | ) |
| | $ | — |
| | $ | (1,664 | ) | | $ | (4,484 | ) | | $ | (6,148 | ) | $ | — |
| | $ | (213 | ) | | $ | (5,449 | ) | | $ | (5,662 | ) |
| | | | Fair Value Measurements at | Fair Value Measurements at |
| | March 31, 2014 | March 31, 2016 |
| | Level 1 | | Level 2 | | Level 3 | | Total | Level 1 | | Level 2 | | Level 3 | | Total |
| ASSETS: | | | | | | | | | | | | | | |
| Cash and cash equivalents | $ | 82,079 |
| | $ | 19,997 |
| | $ | — |
| | $ | 102,076 |
| $ | 210,711 |
| | $ | — |
| | $ | — |
| | $ | 210,711 |
|
| U.S. government and municipal obligations | 21,992 |
| | 69,765 |
| | — |
| | 91,757 |
| 41,116 |
| | 82,212 |
| | — |
| | 123,328 |
|
| Commercial paper | — |
| | 14,581 |
| | — |
| | 14,581 |
| — |
| | 16,172 |
| | — |
| | 16,172 |
|
| Corporate bonds | 10,380 |
| | — |
| | — |
| | 10,380 |
| 1,864 |
| | — |
| | — |
| | 1,864 |
|
| Derivative financial instruments | — |
| | 368 |
| | — |
| | 368 |
| — |
| | 191 |
| | — |
| | 191 |
|
| Contingently returnable consideration | | — |
| | — |
| | 16,131 |
| | 16,131 |
|
| | $ | 114,451 |
| | $ | 104,711 |
| | $ | — |
| | $ | 219,162 |
| $ | 253,691 |
| | $ | 98,575 |
| | $ | 16,131 |
| | $ | 368,397 |
|
| LIABILITIES: | | | | | | | | | | | | | | |
| Contingent consideration | $ | — |
| | $ | — |
| | $ | (4,291 | ) | | $ | (4,291 | ) | $ | — |
| | $ | — |
| | $ | (7,293 | ) | | $ | (7,293 | ) |
| Contingent contractual non-compliance liability | — |
| | — |
| | (49 | ) | | (49 | ) | |
| Derivative financial instruments | — |
| | (139 | ) | | — |
| | (139 | ) | — |
| | (158 | ) | | — |
| | (158 | ) |
| | $ | — |
| | $ | (139 | ) | | $ | (4,340 | ) | | $ | (4,479 | ) | $ | — |
| | $ | (158 | ) | | $ | (7,293 | ) | | $ | (7,451 | ) |
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.
NetScout Systems, Inc.
Notes to Consolidated Financial Statements—(Continued)
The Company’s Level 2 investments are classified as such because fair value is being calculated using market observable data fromfor similar but not identical sources,instruments, or a discounted cash flow model using the contractual interest rate as compared to the underlying interest yield curve. The Company's derivative financial instruments consist of forward foreign exchange contracts and are
NetScout Systems, Inc.
Notes to Consolidated Financial Statements—(Continued)
NOTE 4 – FAIR VALUE MEASUREMENTS (Continued)
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 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. For further information on theThe Company's derivative financial instruments refer to Note 9.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’sCompany's Level 3 asset and liabilities consist of contingently returnable consideration and contingent purchase consideration, at March 31, 2015 and 2014 was classified as Level 3 in the fair value hierarchy.respectively. The contingent contractual non-compliance liability was also classified as Level 3Company's contingently returnable consideration at March 31, 2014. At March 31, 2015, the2016 represents a contingent non-compliance liability has been reducedright of return from Danaher to zero asreimburse NetScout has either settled those liabilities or believes that becausefor cash awards to be paid by NetScout to employees of the passageCommunications Business transferred to Newco (as defined below) for post-combination services on various dates through August 4, 2016 as part of time that the probability of a future negative settlementComms Transaction. The contingently returnable consideration is essentially zero. The liabilities are classified as Level 3 because the estimatefair value of future payment scenarios is based onthe asset was determined using assumptions developed by management.management in determining the estimated cash awards paid on August 4, 2016 after applying an assumed forfeiture rate. There was no contingently returnable consideration or contingent purchase consideration related to the Comms Transaction at March 31, 2017 as Danaher reimbursed NetScout for these cash awards during fiscal year 2017.
The Company's contingent purchase consideration at March 31, 2017 includes $660 thousand related to the acquisition of certain assets and liabilities of Avvasi Inc. (Avvasi) in the second quarter of fiscal year 2017. The contingent purchase consideration represents amounts deposited into an escrow account, which was established to cover damages NetScout suffers 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 asset purchase agreement. The contingent purchase consideration is included as accrued other in the Company's consolidated balance sheet at March 31, 2017.
The fair value of contingent purchase consideration related to the acquisition of Simena LLC (Simena) in November 2011 for future consideration to be paid to the former seller is $4.8 million at March 31, 2017. The contingent purchase consideration is included as contingent liabilities in the Company's consolidated balance sheet at March 31, 2017 and 2016.
The following table sets forth a reconciliation of changes in the fair value of the Company’s Level 3 financial liabilities for the year ended March 31, 20152017 (in thousands):
|
| | | | | | | |
| | Contingent Purchase Consideration | | Contingent Contractual Non-compliance Liability |
| Balance at March 31, 2014 | $ | (4,291 | ) | | $ | (49 | ) |
| (Increase) / decrease in fair value and accretion expense (included within research and development expense) | (193 | ) | | 49 |
|
| Balance at March 31, 2015 | $ | (4,484 | ) | | $ | — |
|
|
| | | | | | | |
| | Contingent Purchase Consideration | | Contingently Returnable Consideration |
| Balance at March 31, 2016 | $ | (7,293 | ) | | $ | 16,131 |
|
| Additions to Level 3 | (660 | ) | | — |
|
| Increase in fair value and accretion expense (included within research and development expense) | (153 | ) | | — |
|
| Decrease in fair value | — |
| | (610 | ) |
| Gross presentation of contingently returnable consideration to contingent purchase consideration | (3,910 | ) | | 3,910 |
|
| Payments received | — |
| | (19,431 | ) |
| Payments made | 6,567 |
| | — |
|
| Balance at March 31, 2017 | $ | (5,449 | ) | | $ | — |
|
The Company has updated the probabilities used in the fair value calculation ofDeal-related compensation expense and accretion charges related to the contingent liabilities at March 31, 2015 which reduced the net liability by $9 thousand and is included as part of earningsconsideration for the fiscal year ended March 31, 2015. Key assumptions include a 3.3% discount rate, and a percent weighted-probability of the settlement of the contingent contractual non-compliance liability. Deal related compensation expense, accretion charges and changes related to settlements of contractual non-compliance liabilities for the fiscal year ended March 31, 2015 was2017 were $153 thousand and waswere included as part of earnings.
NetScout Systems, Inc.
Notes to Consolidated Financial Statements—(Continued)
The following table sets forth a reconciliation of changes in the fair value of the Company’s Level 3 financial liabilities for the year ended March 31, 20142016 (in thousands):
|
| | | | | | | |
| | Contingent Purchase Consideration | | Contingent Contractual Non-compliance Liability |
| Balance at March 31, 2013 | $ | (5,087 | ) | | $ | (246 | ) |
| (Increase) / decrease in fair value and accretion expense (included within research and development expense) | (45 | ) | | 197 |
|
| Payments | 841 |
| | — |
|
| Balance at March 31, 2014 | $ | (4,291 | ) | | $ | (49 | ) |
|
| | | | | | | |
| | Contingent Purchase Consideration | | Contingently Returnable Consideration |
| Balance at March 31, 2015 | $ | (4,484 | ) | | $ | — |
|
| (Increase) / decrease in fair value and accretion expense (included within research and development expense) | (152 | ) | | — |
|
| Contingently returnable consideration | — |
| | 19,125 |
|
| Increase in fair value | (21 | ) | | 3,676 |
|
| Gross presentation of contingently returnable consideration to contingent purchase consideration | (2,636 | ) | | 2,636 |
|
| Payments received | — |
| | (9,306 | ) |
| Balance at March 31, 2016 | $ | (7,293 | ) | | $ | 16,131 |
|
The Company had updated the probabilities used in the fair value calculation of the contingent liabilities at March 31, 2014, which reduced the liability by $303 thousand and is included as part of earnings for the fiscal year ended March 31, 2014. The fair value of the contingent purchase consideration was estimated by applying a probability based model, which utilizes significant inputs that are unobservable in the market. Key assumptions include a 3.3% discount rate, a stay period of two or three years and a percent weighted-probability of the settlement of the contingent contractual non-compliance liability. Deal related compensation expense, accretion charges and changes related to settlements of contractual non-compliance liabilities for the fiscal year ended March 31, 2014 was $1512016 were $152 thousand and waswere included as part of earnings.
During the fiscal year ended March 31, 2014, $841 thousand related to the contingent purchase consideration as part of the acquisition of Simena was paid to the former owner.
NetScout Systems, Inc.
Notes to Consolidated Financial Statements—(Continued)
NOTE 5 – INVENTORIES
Inventories are stated at the lower of actual cost or net realizable value. Cost is determined by using the FIFO method. Inventories consist of the following (in thousands):
| | | | March 31, | March 31, |
| | 2015 | | 2014 | 2017 | | 2016 |
| Raw materials | $ | 6,134 |
| | $ | 6,025 |
| $ | 22,305 |
| | $ | 18,617 |
|
| Work in process | 17 |
| | 161 |
| 998 |
| | 651 |
|
| Finished goods | 5,979 |
| | 6,394 |
| |
| Finished goods and deferred costs | | 16,699 |
| | 38,761 |
|
| | $ | 12,130 |
| | $ | 12,580 |
| $ | 40,002 |
| | $ | 58,029 |
|
NOTE 6 – FIXED ASSETS
Fixed assets consist of the following (in thousands):
| | | | | | | | | | | |
| | Estimated Useful Life in Years | | March 31, | Estimated Useful Life in Years | | March 31, |
| | | 2015 | | 2014 | | 2017 | | 2016 |
| Furniture and fixtures | 3-7 | | $ | 3,739 |
| | $ | 3,693 |
| 3-7 | | $ | 6,436 |
| | $ | 5,843 |
|
| Computer equipment and internal use software | 3-5 | | 69,259 |
| | 62,045 |
| 3-5 | | 135,100 |
| | 118,974 |
|
| Demonstration and spare part units | 2 | | 12,092 |
| | 10,755 |
| 2-5 | | 28,036 |
| | 6,860 |
|
| Leasehold improvements (1) | up to 12 | | 14,709 |
| | 13,141 |
| up to 12 | | 16,623 |
| | 22,490 |
|
| | | 99,799 |
| | 89,634 |
| | 186,195 |
| | 154,167 |
|
| Less – accumulated depreciation | | (75,935 | ) | | (66,536 | ) | | (124,802 | ) | | (92,134 | ) |
| | | $ | 23,864 |
| | $ | 23,098 |
| | $ | 61,393 |
| | $ | 62,033 |
|
(1) Leasehold improvements are depreciated over the shorter of the lease term or anticipated useful life of the improvement.
Depreciation expense was $12.6$33.0 million, $11.4$26.6 million and $9.8$12.6 million for the years ended March 31, 2017, 2016 and 2015, 2014 and 2013, respectively.
NetScout Systems, Inc.
Notes to Consolidated Financial Statements—(Continued)
NOTE 7 – ACQUISITIONS
Avvasi
On August 19, 2016, the Company acquired certain assets and liabilities of Avvasi for $4.6 million. Avvasi’s technology allows service providers to measure, improve and monetize video in their networks. This acquisition builds on the Company's ongoing investment in enhancing its service assurance capabilities for video traffic over 4G/LTE networks.
The Company completed the purchase accounting related to the Avvasi acquisition in the second quarter of fiscal year 2017.
The following table summarizes the allocation of the purchase price (in thousands): |
| | | |
| Initial cash payment | $ | 3,946 |
|
| Estimated fair value of contingent purchase consideration | 660 |
|
| Estimated Purchase Price | $ | 4,606 |
|
| | |
| Estimated fair value of assets acquired and liabilities assumed: | |
| Accounts receivable | $ | 103 |
|
| Inventories | 85 |
|
| Prepaid and other current assets | 32 |
|
| Property, plant and equipment | 43 |
|
| Intangible assets | 2,760 |
|
| Accounts payable | (1 | ) |
| Accrued compensation | (49 | ) |
| Deferred revenue | (317 | ) |
| Goodwill | $ | 1,950 |
|
Of the total consideration, $660 thousand was deposited into an escrow account. The escrow account was established to cover damages NetScout suffers 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 asset purchase agreement. Generally, indemnification claims that Avvasi would be liable for are limited to the total amount of the escrow account and 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 seller's breach of certain fundamental representations or related to other specified indemnity items, for which certain of Avvasi'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 $660 thousand will be paid to the seller on August 21, 2017.
In connection with the Avvasi acquisition, certain former employees of Avvasi will receive cash retention payments subject to such employee's continued employment with the Company through two specified dates: August 21, 2017 and August 20, 2018. The cash retention payment liability was 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.
Goodwill was recognized for the excess purchase price over the fair value of the net assets acquired. Goodwill of $2.0 million from the acquisition was included within the Service Assurance reporting unit. Goodwill and intangible assets recorded as part of the acquisition are deductible for tax purposes.
NetScout Systems, Inc.
Notes to Consolidated Financial Statements—(Continued)
The fair values of intangible assets were based on valuations using an income approach. These assumptions include estimates of future revenues associated with the technology purchased as part of the acquisition and the migration of the current technology to a more advanced version of the software. This fair value measurement was based on significant inputs not observable in the market and thus represents Level 3 fair value measurements. The following table reflects the fair value of the acquired identifiable intangible assets and related estimates of useful lives (in thousands):
|
| | | | | |
| | Fair Value | | Useful Life (Years) |
| Developed technology | $ | 1,730 |
| | 9 |
| Customer relationships | 1,030 |
| | 14 |
| | $ | 2,760 |
| | |
The weighted average useful life of identifiable intangible assets acquired from Avvasi is 10.9 years.
Communications Business
On July 14, 2015 (Closing Date), the Company completed the Comms Transaction, which was structured as a Reverse Morris Trust transaction whereby Danaher contributed its Communications Business to a new subsidiary, Potomac Holding LLC (Newco). The total equity consideration was approximately $2.3 billion based on issuing approximately 62.5 million new shares of NetScout common stock to the existing common unit holders of Newco, based on the July 13, 2015 NetScout common stock closing share price of $36.89 per share. On the Closing Date, the Company did not gain control over certain foreign entities due to regulatory and other compliance requirements (Delayed Close Entities). The Company closed on the acquisition of these Delayed Close Entities on October 7, 2015.
The Comms Transaction was accounted for under the acquisition method of accounting with the operations of the Communications Business included in the Company’s operating results from the relevant date of acquisition. The acquisition method of accounting requires, among other things, that assets acquired and liabilities assumed be recognized at their fair values as of the acquisition date. The determination of the fair value of assets acquired and liabilities assumed has been recognized based on management's estimates and assumptions using the information about facts and circumstances that existed at the acquisition date.
While the Company uses its best estimates and assumptions as part of the purchase price allocation process to value the assets acquired and liabilities assumed on the acquisition date, its estimates and assumptions are subject to refinement. Fair value estimates are based on a complex series of judgments about future events and uncertainties and rely heavily on estimates and assumptions. The judgments used to determine the estimated fair value assigned to each class of assets acquired and liabilities assumed, as well as asset lives, can materially impact the Company's results of operations. The finalization of the purchase accounting assessment may result in a change in the valuation of assets acquired and liabilities assumed. As a result, during the preliminary purchase price allocation period, which may be up to one year from the acquisition date, the Company records adjustments to the assets acquired and liabilities assumed with a corresponding offset to goodwill.goodwill to reflect additional information received about facts and circumstances which existed at the date of acquisition. The Company records adjustments to the assets acquired and liabilities assumed subsequent to the purchase price allocation period in the Company’s operating results in the period in which the adjustments were determined.
During the six months ended September 30, 2016, the Company identified measurement period adjustments that impacted the estimated fair value of the assets and liabilities assumed on July 14, 2015 as a result of new information obtained about the facts and circumstances that existed as of the Closing Date. The resultstable below, which summarizes the allocation of operationsthe purchase price for the entities acquired on July 14, 2015, has been updated to reflect these measurement period adjustments. The total measurement period adjustments resulted in a decrease in prepaid expenses and other current assets of $0.2 million, an increase in deferred income taxes of $0.7 million, an increase in deferred tax liabilities of $3.3 million and an overall increase in goodwill of $2.8 million. This change to the provisional amounts of fair value of the assets and liabilities assumed had no impact on the Statement of Operations for the year ended March 31, 2017. The Company completed the purchase accounting related to the Comms Transaction during the second quarter of fiscal year 2017.
During the fiscal year ended March 31, 2016, the Company determined that the accounts payable, accrued expenses and goodwill balances of the acquired businesses described below have been includedentities reported in the Company’s unaudited interim consolidated financial statements beginning on their respective acquisition dates unless indicated otherwise below.
ONPATH
On October 31, 2012, the Company acquired ONPATH Technologies, Inc. (ONPATH), an established provider of scalable packet flow switching technology for high-performance networks for the aggregation and distribution of network traffic for data, voice, video testing, monitoring, performance management and cybersecurity deployments for $41.0 million in cash.
Accanto
On July 20, 2012, the Company acquired certain assets, technology and employees of Accanto Systems, S.r.l. (Accanto), a supplier of service assurance solutions for telecommunication service providers which enables carriers to monitor and manage the delivery of voice services over converged, next generation telecom architectures for $15.0 million in cash.
NetScout Systems, Inc.
Notes to Consolidated Financial Statements—(Continued)
NOTE
period ended September 30, 2015 were overstated and inventory and deferred revenue was understated. The affected balances were revised in the audited consolidated financial statements for the fiscal year ended March 31, 2016. These revisions correct the immaterial errors identified. The revision resulted in inventory increasing by $0.2 million, accounts payable decreasing by $0.6 million, accrued expenses decreasing by $4.8 million, deferred revenue increasing $1.4 million and an overall decrease in goodwill of $4.2 million. There was no impact to the Statement of Operations for the period ended September 30, 2015, December 31, 2015 or March 31, 2016.
In connection with the Comms Transaction, under the Employee Matters Agreement dated July 14, 2015 by and among the Company, Danaher and Newco, Danaher funded certain contracts under which employees provided post-combination services to the Company.
| |
| 1) | For any outstanding Danaher restricted stock units or stock options held by employees of the Communications Business transferred to Newco (Newco Employees) that vested from July 14, 2015 through August 4, 2015, the awards continued to vest in Danaher shares. These awards met the definition of a derivative under ASC 815 and as such, the Company determined the fair value of these awards on July 14, 2015 and recorded them separately from the business combination as prepaid compensation. The derivative was amortized into compensation expense through August 4, 2015, the post-combination requisite settlement date. The total amount of compensation expense for post-combination services recorded for fiscal years ended March 31, 2017 and 2016 was $0 and $6.5 million, respectively. |
| |
| 2) | All outstanding Danaher restricted stock units or stock options held by Newco Employees that were due to vest after August 4, 2015 were canceled and replaced by NetScout with a cash retention award equal to one half of the value of the employee’s canceled Danaher equity award and up to an aggregate of $15 million of restricted stock units relating to shares of NetScout common stock equal to the remaining one half of the value of the employee’s canceled Danaher equity award. The restricted stock units issued are considered new share-based payment awards granted by NetScout to the former employees of Danaher. NetScout accounted for these new awards separately from the business combination. The Company recognized share-based compensation net of an estimated forfeiture rate and only recognized compensation cost for those shares expected to vest on a straight-line basis over the requisite service period of the award. The cash retention award was paid on August 4, 2016, to those employees that continued their employment with NetScout through the applicable vesting date of August 4, 2016. Danaher reimbursed NetScout for the amount of the cash retention payments (net of any applicable employment taxes and tax deductions). The cash retention award liability was accounted for separately from the business combination as the cash retention award was automatically forfeited upon termination of employment. NetScout recorded the cash retention award liability over the period it was earned as compensation expense for post-combination services. The reimbursement by Danaher to NetScout of the cash retention award payment was accounted for separately from the business combination on the date of the acquisition. For the fiscal years ended March 31, 2017 and 2016, $4.3 million and $8.0 million, respectively, has been recorded as compensation expense for post-combination services. |
| |
| 3) | Newco Employees that were entitled to receive an incentive bonus under the Danaher annual bonus plan and who continued to be employed by NetScout through December 31, 2015 received a cash incentive bonus payment. The cash incentive bonus liability was accounted for separately from the business combination as the cash incentive bonus is automatically forfeited upon termination of employment. NetScout recorded the liability over the period it was earned as compensation expense for post-combination services. The payment of the cash retention award, which was reimbursed by Danaher to NetScout, was accounted for separately from the business combination on the date of the acquisition. For the fiscal years ended March 31, 2017 and 2016, $0 and $9.3 million, respectively, was recorded as compensation expense for post-combination services. |
| |
| 4) | Certain Newco Employees received cash retention payments that were subject to the employee’s continued employment with NetScout through October 16, 2015, ninety (90) days after the close of the acquisition. The cash retention payment liability was accounted for separately from the business combination as the cash retention payment was automatically forfeited upon termination of employment. NetScout recorded the liability over the period it was earned as compensation expense for post-combination services. The payment of the cash retention award, which was reimbursed by Danaher to NetScout, was accounted for separately from the business combination on the date of the acquisition. For the fiscal year ended March 31, 2017 and 2016, $0 and $7.8 million, respectively, was recorded as compensation expense for post-combination services. |
NetScout Systems, Inc.
Notes to Consolidated Financial Statements—(Continued)
The following table summarizes the allocation of the purchase price for the entities acquired on July 14, 2015 (in thousands):
|
| | | | |
| Purchase Price Allocation: | | |
| Total equity consideration | $ | 2,299,911 |
| (1) |
| Less: Equity consideration for replacement awards | (29,355 | ) | (2) |
| Estimated Purchase Price | $ | 2,270,556 |
| |
| | | |
| Estimated fair value of assets acquired and liabilities assumed: | | |
| Cash | 27,701 |
| |
| Accounts receivable | 140,586 |
| |
| Inventories | 80,719 |
| |
| Prepaid expenses and other assets | 6,519 |
| |
| Property, plant and equipment | 36,825 |
| |
| Deferred income taxes | 13,803 |
| |
| Intangible assets | 1,080,700 |
| |
| Other assets | 999 |
| |
| Accounts payable | (21,311 | ) | |
| Accrued compensation | (24,316 | ) | |
| Accrued other | (12,916 | ) | |
| Deferred revenue | (187,882 | ) | |
| Other long-term liabilities | (3,615 | ) | |
| Accrued retirement benefits | (29,917 | ) | |
| Deferred tax liabilities | (348,004 | ) | |
| Goodwill | $ | 1,510,665 |
| |
|
| | |
| (1) | Represents approximately 62.5 million new shares (plus cash in lieu of fractional shares) of NetScout common stock issued to the existing common unit holders of Newco based on the July 13, 2015 NetScout common stock closing share price of $36.89 per share, less the fair value attributable to the foreign entities that the Company did not obtain control over on July 14, 2015 due to regulatory and other compliance requirements. |
|
| | |
| (2) | Represents the value of certain outstanding Danaher equity awards held by Newco Employees for which continuing employees received, or will receive value after the Closing Date. A portion of this amount relates to awards that continued to vest in Danaher shares after the Closing Date. These future compensation amounts were settled in shares other than shares of the acquired business. The balance of this amount also represents future compensation expense and relates to cash awards which were paid by NetScout to acquired Newco employees on August 4, 2016. The cash payments by NetScout were reimbursed by Danaher. These items are further described in the Employee Matters Agreement dated July 14, 2015 by and among NetScout Systems, Inc., Danaher Corporation and Potomac Holding LLC and have been accounted for separately from the Comms Transaction. |
NetScout Systems, Inc.
Notes to Consolidated Financial Statements—(Continued)
The following table summarizes the allocation of the purchase price for the Delayed Close Entities acquired on October 7, – ACQUISITIONS 2015 (in thousands):
|
| | | | |
| Purchase Price Allocation: | | |
| Total equity consideration | $ | 5,700 |
| (1) |
| Estimated Purchase Price | $ | 5,700 |
| |
| | | |
| Estimated fair value of assets acquired and liabilities assumed: | | |
| Accounts receivable | $ | 110 |
| |
| Inventories | 78 |
| |
| Prepaid expenses and other assets | 35 |
| |
| Property, plant and equipment | 1,254 |
| |
| Other assets | 281 |
| |
| Accounts payable | (8 | ) | |
| Accrued compensation | (824 | ) | |
| Accrued other | (176 | ) | |
| Deferred revenue | (65 | ) | |
| Other long-term liabilities | (126 | ) | |
| Goodwill | $ | 5,141 |
| |
|
| | | |
| (1) | | Represents the fair value attributable to the Delayed Close Entities that the Company obtained control over on October 7, 2015. |
The Comms Transaction was aimed at extending the Company's reach into growth-oriented adjacent markets, including cybersecurity, with a broader range of market-leading products and capabilities; strengthening the Company's go-to-market resources to better support a larger, more diverse and more global customer base; and increasing scale and elevating the Company's strategic position within key accounts. Goodwill was recognized for the excess purchase price over the fair value of the assets acquired. Goodwill of $1.5 billion from the acquisition was included within the following reporting units: $534.8 million in the Security reporting unit and $976.5 million in the Service Assurance reporting unit.
Goodwill and intangible assets recorded as part of the acquisition are not deductible for tax purposes.
The fair values of intangible assets were based on valuations using an income approach. These assumptions include estimates of future revenues associated with the technology purchased as part of the acquisition and the migration of the current technology to a more advanced version of the software. This fair value measurement was based on significant inputs not observable in the market and thus represents Level 3 fair value measurements. The following table reflects the fair value of the acquired identifiable intangible assets and related estimates of useful lives (in thousands):
|
| | | | | |
| | Fair Value | | Useful Life (Years) |
| Developed technology | $ | 221,900 |
| | 9 - 13 |
| Customer relationships | 794,100 |
| | 13 - 18 |
| Backlog | 18,200 |
| | 1 - 3 |
| Definite-lived trademark and tradenames | 43,900 |
| | 3 - 9 |
| Leasehold interest | 2,600 |
| | 4 - 6 |
| | $ | 1,080,700 |
| | |
The weighted average useful life of identifiable intangible assets acquired in the Comms Transaction is 14.7 years. Developed technology is amortized using an accelerated amortization method and has a weighted average useful life of 11.7 years. Customer relationships are amortized using an accelerated amortization method and have a weighted average useful life of 16.3 years. Backlog is amortized using an accelerated amortization method and has a weighted average useful life of 2.0 years. Trademarks and tradenames are amortized using an accelerated amortization method and have a weighted average useful life of 8.5 years. Leasehold interests are amortized on a straight-line basis and have a weighted average useful life of 5.6 years.
NetScout Systems, Inc.
Notes to Consolidated Financial Statements—(Continued)
The Company incurred approximately $0 and $29.4 million of acquisition-related costs related to the Comms Transaction during the fiscal years ended March 31, 2017 and 2016, respectively.
During the fiscal year ended March 31, 2017, the Company has recorded $719.3 million of revenue and a net loss of $2.1 million directly attributable to the entities acquired as part of the Comms Transaction within its consolidated financial statements.
The following table presents unaudited pro forma results of the historical Consolidated Statements of Operations of the Company and ONPATH and Accantothe Communications Business of Danaher for the fiscal year ended March 31, 20132016, giving effect to the mergersComms Transaction as if they occurred on April 1, 20122014 (in thousands, except per share data):
| | | | Year Ended March 31, (unaudited) | Year Ended March 31, (unaudited) |
| | 2013 | 2016 | | 2015 |
| Pro forma revenue | $ | 361,086 |
| $ | 1,131,626 |
| | $ | 1,177,938 |
|
| Pro forma net income | $ | 34,589 |
| |
| Pro forma income per share: | | |
| Pro forma net loss | | $ | (58,806 | ) | | $ | (2,323 | ) |
| Pro forma loss per share: | | | | |
| Basic | $ | 0.83 |
| $ | (0.59 | ) | | $ | (0.02 | ) |
| Diluted | $ | 0.82 |
| $ | (0.59 | ) | | $ | (0.02 | ) |
| Pro forma shares outstanding | | | | |
| Basic | 41,665 |
| 99,687 |
| | 103,573 |
|
| Diluted | 42,322 |
| 99,687 |
| | 103,573 |
|
The pro forma results for the yearsfiscal year ended March 31, 20132016 and 20122015 primarily includeincludes adjustments for amortization of intangible assets.intangibles. This pro forma information does not purport to indicate the results that would have actually been obtained had the acquisitionacquisitions been completed on the assumed date, or which may be realized in the future.
NOTE 8 – GOODWILL & INTANGIBLE ASSETS
Goodwill
TheThrough the first quarter of fiscal year 2017, the Company has twohad five reporting units: (1) Unifiedlegacy NetScout, (2) cybersecurity (Arbor Networks), (3) service assurance product lines focused on the service provider market (formerly known as Tektronix Communications), (4) network visibility product lines (formerly known as VSS Monitoring) and (5) service assurance product lines primarily focused on the enterprise market (formerly known as FNET). As part of its continued integration efforts of the Communication Business acquisition, effective July 1, 2016, the Company reorganized its business units. As a result of this change, the Company reduced the number of reporting units from five reporting units to two reporting units. The two reporting units are: (1) Service DeliveryAssurance and (2) Test Optimization. Security. The former cybersecurity reporting unit was aggregated within the Security reporting unit along with portions of the legacy NetScout business while all other former reporting units were aggregated into the Service Assurance reporting unit. Our reporting units are determined based on the components of our operating segment that constitute a business for which financial information is available and for which operating results are regularly reviewed by segment management.
As a result of the reduction in reporting units, the Company completed a quantitative impairment analysis for goodwill as of July 1, 2016. To conduct the impairment test, the Company performed a quantitative step 1 analysis, on a before and after basis, and concluded the estimated fair values of each of the Company’s current and former reporting units exceeded their respective carrying values both immediately prior to and subsequent to the change.
At March 31, 2015 and March 31, 20142017, goodwill attributable to the Unifiedour Service DeliveryAssurance and Security reporting unitunits was $195.0 million$1.2 billion and $201.0$548.5 million, respectively. GoodwillAt March 31, 2016, goodwill attributable to the Test Optimizationour Service Assurance and Security reporting unitunits was $2.4$1.2 billion and $547.4 million, at March 31, 2015 and March 31, 2014.respectively. Goodwill is tested for impairment at a 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, 2015. No indicators2017.
NetScout Systems, Inc.
Notes to Consolidated Financial Statements—(Continued)
The Company determined the market capitalizationfair values of its reporting units by preparing a discounted cash flow analysis using forward looking projections of the Company asreporting units’ future operating results and by comparing the value of the reporting units to the implied market value of selected peers. The significant assumptions used in the discounted cash flow analysis include: revenue and revenue growth, selling margins, other operating expenditures, the discounted rate used to present value future cash flows and terminal growth rates. The discount rate used is a whole significantlycost of equity method, which is essentially equal to the “market participant” weighted-average cost of capital (WACC). The Service Assurance and Security reporting units' goodwill fair value substantially exceeded its carrying value.
The change in the carrying amount of goodwill for the fiscal year ended March 31, 20152017 is due to the acquisition of Avvasi, purchase accounting adjustments 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 amounts of goodwill for the fiscal year ended March 31, 2014 are due to the impact of foreign currency translation adjustments related to asset balances that are recorded currencies other than the U.S. Dollar.
The changes in the carrying amount of goodwill for the fiscal years ended March 31, 20152017 and 20142016 are as follows (in thousands):
| | | | | |
| Balance at March 31, 2013 | $ | 202,453 |
| |
| Balance at March 31, 2015 | | $ | 197,445 |
|
| Goodwill acquired during the quarter ended September 30, 2015 | | 1,504,261 |
|
| Goodwill acquired during the quarter ended December 31, 2015 from Delayed Close Entities | | 5,141 |
|
| Deferred revenue adjustments | | (11,392 | ) |
| Purchase accounting adjustments | (665 | ) | (527 | ) |
| Change in assumptions for assumed liabilities | | (6,258 | ) |
| Adjust deferred tax liability | | 25,034 |
|
| Adjust tax effect on equity consideration | | (3,271 | ) |
| Foreign currency translation impact | 1,658 |
| (1,064 | ) |
| Balance at March 31, 2014 | $ | 203,446 |
| |
| Foreign currency translation impact | (6,001 | ) | |
| Balance at March 31, 2015 | $ | 197,445 |
| |
| Balance at March 31, 2016 | | $ | 1,709,369 |
|
| Goodwill attributable to the Avvasi acquisition | | 1,950 |
|
| Purchase accounting adjustments | | 3,792 |
|
| Foreign currency translation impact and other adjustments | | 3,051 |
|
| Balance at March 31, 2017 | | $ | 1,718,162 |
|
| | | |
NetScout Systems, Inc.
Notes to Consolidated Financial Statements—(Continued)
Intangible Assets
The net carrying amounts of intangible assets were $50.2$931.3 million and $58.5 million$1.1 billion at March 31, 20152017 and 2014,2016, 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.
During theIn fiscal year ended March 31, 2014,2017 and 2016, the CompanyCompany's annual impairment tests indicated that the acquired certain rights to Accanto softwaretrade name was not previously purchased as partimpaired. In the fourth quarter of the acquisition transaction in fiscal year 2013 for $500 thousand. This amount is included within developed technology and is being amortized using2017, the economic benefit method over a useful life of 6.3 years.
During the fiscal year ended March 31, 2014, the Company acquired a certain technology license for $300 thousand. This amount is included within developed technology and is being amortized using the economic benefit method over a useful life of 3.0 years.
The Company completed its annual impairment test of the indefinite lived intangible at January 31, 2015,2017, using the qualitative Step 0 assessment described above which largely mirrors the Unified Service Delivery goodwill impairment assessment, as the tradenames apply to a majority of the products and branding within that reporting unit.assessment. No impairment indicators were observed at January 31, 2015. As such2017.
During the years ended March 31, 2017 and 2016, the Company concludedacquired technology licenses for $1.0 million and $3.7 million, respectively. These amounts are included within distributor relationships and are being amortized using the indefinite lived intangible was not impaired.economic benefit method over a useful life of 3 years and 4 years, respectively.
NetScout Systems, Inc.
Notes to Consolidated Financial Statements—(Continued)
Intangible assets include anthe indefinite lived trade name with a carrying value of $18.6 million and the following amortizable intangible assets at March 31, 20152017 (in thousands):
| | | | Cost | | Accumulated Amortization | | Net | Cost | | Accumulated Amortization | | Net |
| Developed technology | $ | 30,865 |
| | $ | (25,561 | ) | | $ | 5,304 |
| $ | 254,005 |
| | $ | (110,200 | ) | | $ | 143,805 |
|
| Customer relationships | 38,498 |
| | (16,935 | ) | | 21,563 |
| 831,731 |
| | (105,319 | ) | | 726,412 |
|
| Distributor relationships | 1,585 |
| | (711 | ) | | 874 |
| |
| Distributor relationships and technology licenses | | 8,290 |
| | (3,068 | ) | | 5,222 |
|
| Definite-lived trademark and trade name | | 43,817 |
| | (12,078 | ) | | 31,739 |
|
| Core technology | 7,118 |
| | (3,660 | ) | | 3,458 |
| 7,108 |
| | (6,009 | ) | | 1,099 |
|
| Net beneficial leases | | 336 |
| | (336 | ) | | — |
|
| Non-compete agreements | 280 |
| | (280 | ) | | — |
| 278 |
| | (278 | ) | | — |
|
| Leasehold interest | | 2,600 |
| | (998 | ) | | 1,602 |
|
| Backlog | | 18,142 |
| | (18,133 | ) | | 9 |
|
| Capitalized software | | 3,047 |
| | (594 | ) | | 2,453 |
|
| Other | 943 |
| | (562 | ) | | 381 |
| 1,208 |
| | (880 | ) | | 328 |
|
| | $ | 79,289 |
| | $ | (47,709 | ) | | $ | 31,580 |
| $ | 1,170,562 |
| | $ | (257,893 | ) | | $ | 912,669 |
|
Intangible assets include anthe indefinite lived trade name with a carrying value of $18.6 million and the following amortizable intangible assets at March 31, 20142016 (in thousands):
| | | | Cost | | Accumulated Amortization | | Net | Cost | | Accumulated Amortization | | Net |
| Developed technology | $ | 31,946 |
| | $ | (23,524 | ) | | $ | 8,422 |
| $ | 253,249 |
| | $ | (69,810 | ) | | $ | 183,439 |
|
| Customer relationships | 38,801 |
| | (14,046 | ) | | 24,755 |
| 834,091 |
| | (42,526 | ) | | 791,565 |
|
| Distributor relationships | 2,014 |
| | (568 | ) | | 1,446 |
| |
| Distributor relationships and technology licenses | | 5,348 |
| | (1,633 | ) | | 3,715 |
|
| Definite-lived trademark and trade name | | 43,964 |
| | (5,511 | ) | | 38,453 |
|
| Core technology | 7,572 |
| | (2,701 | ) | | 4,871 |
| 7,169 |
| | (4,659 | ) | | 2,510 |
|
| Net beneficial leases | | 336 |
| | (336 | ) | | — |
|
| Non-compete agreements | 355 |
| | (295 | ) | | 60 |
| 288 |
| | (288 | ) | | — |
|
| Leasehold interest | | 2,600 |
| | (416 | ) | | 2,184 |
|
| Backlog | | 18,245 |
| | (6,750 | ) | | 11,495 |
|
| Capitalized software | | 1,625 |
| | — |
| | 1,625 |
|
| Other | 769 |
| | (410 | ) | | 359 |
| 1,191 |
| | (737 | ) | | 454 |
|
| | $ | 81,457 |
| | $ | (41,544 | ) | | $ | 39,913 |
| $ | 1,168,106 |
| | $ | (132,666 | ) | | $ | 1,035,440 |
|
Amortization of software and core technology included as cost of product revenue was $3.6 million, $3.3 million and $4.5 million for the fiscal years ended March 31, 2015, 2014 and 2013, respectively. Amortization of other intangible assets included as operating expense was $3.5 million, $3.6 million and $3.1 million for the fiscal years ended March 31, 2015, 2014 and 2013, respectively.
NetScout Systems, Inc.
Notes to Consolidated Financial Statements—(Continued)
Amortization included as product revenue consists of amortization of backlog. Amortization included as cost of product revenue consists of amortization of developed technology, distributor relationships, core technology and software. Amortization included as operating expense consists of all other intangible assets. The following table provides a summary of amortization expense during the fiscal years ended March 31, 2017, 2016, and 2015 (in thousands).
|
| | | | | | | | | | | |
| | Years Ended March 31, |
| | 2017 | | 2016 | | 2015 |
| Amortization of intangible assets included as: | | | | | |
| Product revenue | $ | 11,438 |
| | $ | 6,747 |
| | $ | — |
|
| Cost of product revenue | 44,326 |
| | 45,127 |
| | 3,639 |
|
| Operating expense | 70,325 |
| | 32,547 |
| | 3,503 |
|
| | $ | 126,089 |
| | $ | 84,421 |
| | $ | 7,142 |
|
The following is the expected future amortization expense at March 31, 20152017 for the years ended March 31 (in thousands):
| | | 2016 | $ | 6,269 |
| |
| 2017 | 5,716 |
| |
| 2018 | 4,891 |
| $ | 111,606 |
|
| 2019 | 3,981 |
| 106,148 |
|
| 2020 | 3,500 |
| 97,872 |
|
| 2021 | | 85,402 |
|
| 2022 | | 74,109 |
|
| Thereafter | 7,223 |
| 437,532 |
|
| Total | $ | 31,580 |
| $ | 912,669 |
|
| | | |
The weighted average amortization period of acquired softwaredeveloped technology and core technology is 6.711.5 years. The weighted average amortization period for customer and distributor relationships is 13.316.1 years. The weighted average amortization period for trademarks and trade names is 8.5 years. The weighted average amortization period for leasehold interests is 5.6 years. The weighted average amortization period for backlog is 2.0 years. The weighted average amortization period for capitalized software is 4.0 years. The weighted average amortization period for amortizing all intangible assets is 10.114.6 years.
NOTE 9 – 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.
NetScout Systems, Inc.
Notes to Consolidated Financial Statements—(Continued)
The notional amounts and fair values of derivative instruments in the consolidated balance sheets at March 31, 20152017 and 20142016 were as follows (in thousands):
| | | | Notional Amounts (a) | | Prepaid Expenses and Other Current Assets | | Accrued Other | Notional Amounts (a) | | Prepaid Expenses and Other Current Assets | | Accrued Other |
| | March 31, 2015 | | March 31, 2014 | | March 31, 2015 | | March 31, 2014 | | March 31, 2015 | | March 31, 2014 | March 31, 2017 | | March 31, 2016 | | March 31, 2017 | | March 31, 2016 | | March 31, 2017 | | March 31, 2016 |
| Derivatives Designated as Hedging Instruments: | | | | | | | | | | | | | | | | | | | | | | |
| Forward contracts | $ | 20,203 |
| | $ | 17,483 |
| | $ | 15 |
| | $ | 368 |
| | $ | 1,664 |
| | $ | 139 |
| $ | 14,752 |
| | $ | 17,490 |
| | $ | 110 |
| | $ | 191 |
| | $ | 213 |
| | $ | 158 |
|
| |
| (a) | Notional amounts represent the gross contract/notional amount of the derivatives outstanding. |
NetScout Systems, Inc.
Notes to Consolidated Financial Statements—(Continued)
The following table provides the effect foreign exchange forward contracts had on other comprehensive income (loss), (OCI) and results of operations at March 31, 20152017 and 20142016 (in thousands):
| | Derivatives in Cash Flow Hedging Relationships | Effective Portion | | Ineffective Portion | Effective Portion | | Ineffective Portion |
Gain (Loss) Recognized in OCI on Derivative (a) | | Gain (Loss) Reclassified from Accumulated OCI into Income (b) | | Gain (Loss) Recognized in Income (Amount Excluded from Effectiveness Testing) (c) | Loss Recognized in OCI on Derivative (a) | | Gain (Loss) Reclassified from Accumulated OCI into Income (b) | | Gain (Loss) Recognized in Income (Amount Excluded from Effectiveness Testing) (c) |
| March 31, | | March 31, | | | | March 31, | | March 31, | | | | March 31, | | March 31, | March 31, | | March 31, | | | | March 31, | | March 31, | | | | March 31, | | March 31, |
| | 2015 | | 2014 | | Location | | 2015 | | 2014 | | Location | | 2015 | | 2014 | 2017 | | 2016 | | Location | | 2017 | | 2016 | | Location | | 2017 | | 2016 |
| Forward contracts | $ | (3,050 | ) | | $ | 95 |
| | Research and development | | $ | 217 |
| | $ | (373 | ) | | Research and development | | $ | 193 |
| | $ | 245 |
| $ | (444 | ) | | $ | (852 | ) | | Research and development | | $ | (3 | ) | | $ | 206 |
| | Research and development | | $ | 74 |
| | $ | 113 |
|
| | | | | | Sales and marketing | | 1,123 |
| | 164 |
| | Sales and marketing | | 25 |
| | 1 |
| | | | | Sales and marketing | | 361 |
| | 2,295 |
| | Sales and marketing | | (183 | ) | | (24 | ) |
| | $ | (3,050 | ) | | $ | 95 |
| | $ | 1,340 |
| | $ | (209 | ) | | $ | 218 |
| | $ | 246 |
| $ | (444 | ) | | $ | (852 | ) | | $ | 358 |
| | $ | 2,501 |
| | $ | (109 | ) | | $ | 89 |
|
| |
| (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. |
| |
| (c) | The amount represents the change in fair value of derivative contracts due to changes in the difference between the spot price and forward price that is excluded from the assessment of hedge effectiveness and therefore recognized in earnings. No gains or losses were reclassified as a result of discontinuance of cash flow hedges. |
NetScout Systems, Inc.
Notes to Consolidated Financial Statements—(Continued)
NOTE 10 – RESTRUCTURING CHARGES
During the fiscal year ended March 31, 2013,2016, the Company recorded a restructuring charge of $500 thousand related to one-time termination benefits to be paid to one employee, which was the completion of a plan that was required as a closing condition for the Comms Transaction.
During the quarter ended June 30, 2016, the Company restructured part of its international sales organization relatedcertain departments to an overlap of personnel acquired as partbetter align functions subsequent to the Comms Transaction. As a result of the Accanto acquisition. Therestructuring program, the Company recorded $1.2$2.0 million of restructuring charges related to severance costs.one-time termination benefits to be paid to nineteen employees which was recorded in the twelve months ended March 31, 2017.
During the quarter ended March 31, 2017, the Company restructured certain departments to better align functions subsequent to the Comms Transaction, resulting in the termination of forty-one employees. Communication of the plan to the impacted employees was substantially completed on March 31, 2017. All of the workforce reduction is expected to be completed during the quarter ending June 30, 2017. As a result of the workforce reduction, during the twelve months ended March 31, 2017, the Company recorded a restructuring charge totaling $1.9 million related to one-time termination benefits and $0.4 million in facility related charges. An additional one-time termination benefit charge of approximately $0.7 million is anticipated to be recorded in the quarter ending June 30, 2017. The one-time termination benefits will be paid in full in the next twelve months.
The following table provides a summary of the activity related to thesethe restructuring plans and the related restructuring liability included as accrued compensation on the Company’s consolidated balance sheet (in thousands):
| | | | Employee Severance | Q3 FY2016 Plan | | Q1 FY2017 Plan | | Q4 FY2017 Plan | | |
| Balance at March 31, 2013 | $ | 910 |
| |
| | | Employee-Related | | Employee-Related | | Employee-Related | | Facilities Related | | Total |
| Balance at March 31, 2016 | | $ | 272 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 272 |
|
| Restructuring charges to operations | | — |
| | 2,034 |
| | 1,867 |
| | 405 |
| | 4,306 |
|
| Cash payments | | (272 | ) | | (1,739 | ) | | (317 | ) | | — |
| | (2,328 | ) |
| Other adjustments | (49 | ) | — |
| | (295 | ) | | — |
| | — |
| | (295 | ) |
| Cash payments | (790 | ) | |
| Balance at March 31, 2014 | $ | 71 |
| |
| Cash payments | (71 | ) | |
| Balance at March 31, 2015 | $ | — |
| |
| | | |
| Balance at March 31, 2017 | | $ | — |
| | $ | — |
| | $ | 1,550 |
| | $ | 405 |
| | $ | 1,955 |
|
The accrual for employee-related severance is included as accrued compensation in the Company's consolidated balance sheet. The balance is expected to be paid in full in the next twelve months.
The accruals for facilities related exit costs are included as accrued other and other long-term liabilities.
NetScout Systems, Inc.
Notes to Consolidated Financial Statements—(Continued)
NOTE 11 – LONG-TERM DEBT
On November 22, 2011,July 14, 2015, the Company entered into a certain credit facility (the Credit Agreement) with a syndicate of lenders ledpursuant to a Credit Agreement (Credit Agreement), dated as of July 14, 2015, by KeyBankand 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; Santander Bank, N.A., SunTrust Bank, N.A. and U.S. Bank National Association, (KeyBank) providingas co-documentation agents; and the Company withlenders party thereto. The Credit Agreement provides for a $250five-year $800 million senior secured revolving credit facility, which may be increased to $300 million at any time up to 90 days before maturity. The revolving credit facility includes a swing line loan sub-facility of up to $10 million andincluding a letter of credit sub-facility of up to $10$50 million. The Company may elect to use the new credit facility for working capital purposes or to finance the repurchase of up to 20 million shares of common stock under the Company's common stock repurchase plan. The commitments under the Credit Agreement matureswill expire on November 21, 2016.July 14, 2020, and any outstanding loans will be due on that date. At March 31, 2015, there were no amounts2017, $300 million was outstanding under this credit facility.
At the Company’s election, revolving loans under the Credit Agreement bear interest at either (a) a ratean Alternate Base Rate per annum equal to the highestgreatest of (1) KeyBank’sJPMorgan’s prime rate, (2) 0.50% in excess of the federal fundsFederal Funds effective rate, or (3) an adjusted one hundred (100.00) basis points in excess of the London Interbank Offered Rate for one-month interest periods, or the Base Rate;month LIBOR rate plus 1%; or (b) such adjusted LIBOR rate (for the one-, two-, three-, or six-month per annum London InterBank Offered Rate (LIBOR), asinterest period selected by the Company, multiplied by the statutory reserve adjustment, or collectively, the Eurodollar Rate,Company), in each case plus an applicable margin. Swing line loans will bear interest atFor the Base Rate plus the applicable Base Rate margin. Beginning withperiod from the delivery of the Company’sCompany's financial statements for the quarter ended December 31, 2011,2016, until the Company has delivered financial statements for the quarter ended March 31, 2017, the applicable margin began to dependwill 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 100 basis points1.00% per annum for Base Rate loans and 200 basis points2.00% per annum for Eurodollar RateLIBOR loans if the Company’s consolidated leverage ratio is greater than 2.50 to 1.00, or higher, down to 25 basis points0.25% per annum for Alternate Base Rate loans and 125 basis points1.25% per annum for Eurodollar RateLIBOR loans if the Company’s consolidated leverage ratio is equal to or less than 1.00 to 1.00.
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 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 December 31, 2016 until the Company has delivered financial statements for the quarter ended March 31, 2017, 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 0.35% per annum if the Company’s consolidated leverage ratio is greater than 2.50 to 1.00, down to 0.20% per annum if the Company’s consolidated leverage ratio is equal to or less.less than 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 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 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 collateralizedsecured by substantially all of the assets of the Company and its domestic subsidiaries, as well as 65%the subsidiary guarantors, including a pledge of all the capital stock of the Company’s foreignmaterial subsidiaries held directly owned by the Company and its domestic subsidiaries.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 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 Credit Agreement.
NetScout Systems, Inc.
Notes to Consolidated Financial Statements—(Continued)
The Credit Agreement contains certain covenants applicable to the Company and its restricted subsidiaries, including, without limitation, limitations on additional indebtedness, liens, various fundamental changes, (including mergers and dispositions of assets), dividends and distributions, capital expenditures, investments (including acquisitions and investments in foreign subsidiaries)acquisitions), transactions with affiliates, asset sales, including sale-leaseback transactions, speculative hedge agreements, payment of junior financing, material 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 as well as a minimum liquidity amount.ratios. These covenants and limitations are more fully described in the Credit Agreement. At March 31, 2015,2017, the Company was in compliance with all of these covenants.
The 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 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 Credit Agreement and the other loan documents.
In connection with the Company’s new revolving credit facility described above, effective as of the Closing Date, the Company terminated its existing term loan and revolving credit facility pursuant to the Credit and Security Agreement, dated as of November 22, 2011, by and among the Company, KeyBank National Association, as joint lead arranger, sole book runner and administrative agent, Wells Fargo Bank, National Association, as joint lead arranger and co-syndication agent, Merrill Lynch, Pierce, Fenner & Smith Incorporated, as joint lead arranger, Bank of America, N.A., as co-syndication agent, and Silicon Valley Bank and Comerica Bank, as co-documentation agents, and the Lenders party thereto.
The Company capitalized $6.6 million of debt issuance costs associated with the origination of the Credit Agreement, which are being amortized over the life of the revolving credit facility. The unamortized balance was $4.4 million as of March 31, 2017. The balance of $1.4 million was included as prepaid expenses and other current assets and a balance of $3.0 million was included as other assets in Company’s consolidated balance sheet.
NetScout Systems, Inc.
F-23Notes to Consolidated Financial Statements—(Continued)
NOTE 12 – NET INCOME (LOSS) PER SHARE
Calculations of the basic and diluted net income (loss) per share and potential common shares are as follows (in thousands, except for per share data):
|
| | | | | | | | | | | |
| | Year Ended March 31, |
| | 2015 | | 2014 | | 2013 |
| Numerator: | | | | | |
| Net income | $ | 61,192 |
| | $ | 49,106 |
| | $ | 40,609 |
|
| Denominator: | | | | | |
| Denominator for basic net income per share - weighted average common shares outstanding | 41,105 |
| | 41,366 |
| | 41,665 |
|
| Dilutive common equivalent shares: | | | | | |
| Weighted average stock options | 9 |
| | 54 |
| | 122 |
|
| Weighted average restricted stock units | 523 |
| | 535 |
| | 535 |
|
| Denominator for diluted net income per share - weighted average shares outstanding | 41,637 |
| | 41,955 |
| | 42,322 |
|
| Net income per share: | | | | | |
| Basic net income per share | $ | 1.49 |
| | $ | 1.19 |
| | $ | 0.97 |
|
| Diluted net income per share | $ | 1.47 |
| | $ | 1.17 |
| | $ | 0.96 |
|
|
| | | | | | | | | | | |
| | Year Ended March 31, |
| | 2017 | | 2016 | | 2015 |
| Numerator: | | | | | |
| Net income (loss) | $ | 33,291 |
| | $ | (28,369 | ) | | $ | 61,192 |
|
| Denominator: | | | | | |
| Denominator for basic net income (loss) per share - weighted average common shares outstanding | 92,226 |
| | 81,927 |
| | 41,105 |
|
| Dilutive common equivalent shares: | | | | | |
| Weighted average stock options | — |
| | — |
| | 9 |
|
| Weighted average restricted stock units | 694 |
| | — |
| | 523 |
|
| Denominator for diluted net income (loss) per share - weighted average shares outstanding | 92,920 |
| | 81,927 |
| | 41,637 |
|
| Net income (loss) per share: | | | | | |
| Basic net income (loss) per share | $ | 0.36 |
| | $ | (0.35 | ) | | $ | 1.49 |
|
| Diluted net income (loss) per share | $ | 0.36 |
| | $ | (0.35 | ) | | $ | 1.47 |
|
The following table sets forth options and restricted stock units excluded from the calculation of diluted net income per share, since their inclusion would be antidilutive (in thousands):
|
| | | | | | | | |
| | Year Ended March 31, |
| 2015 | | 2014 | | 2013 |
| Restricted stock units | 14 |
| | — |
| | 41 |
|
|
| | | | | | | | |
| | Year Ended March 31, |
| 2017 | | 2016 | | 2015 |
| Restricted stock units | 1,320 |
| | 453 |
| | 14 |
|
Basic EPSnet income (loss) per share is calculated by dividing net income (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 EPSnet income (loss) per share is calculated by dividing net income (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, unrecognized compensation expense and any tax benefits as additional proceeds. As we incurred a net loss in the year ended March 31, 2016, all outstanding restricted stock units have an anti-dilutive effect and are therefore excluded from the computation of diluted weighted average share outstanding.
NOTE 13 - STOCKHOLDERS EQUITY
On September 20, 2016, the stockholders of the Company approved an amendment to the Third Amended and Restated Certificate of Incorporation to increase the number of authorized shares of common stock, par value $0.001 per share, from 150,000,000 to 300,000,000 shares. The increase in authorized shares of common stock has been reflected in the Company's financial statements.
NOTE 14 – TREASURY STOCK
Under an open marketOn April 22, 2014, the Company's board of directors approved a stock repurchase program. This program subjectauthorized management to market conditions and other factors,make repurchases of NetScout outstanding common stock of up to $100 million. Through March 31, 2016, the Company had repurchased 824,452 shares totaling $34.3 million in the option to purchase up to four million shares of the Company's outstanding common stock.open market under this stock repurchase plan. The Company repurchased 243,30067,752 shares for $9.4$2.8 million 1,000,407and 756,700 shares for $28.8 million and 999,499 shares for $23.5$31.5 million under the program during the fiscal years ended March 31, 2016 and 2015, 2014 and 2013, respectively. As
NetScout Systems, Inc.
Notes to Consolidated Financial Statements—(Continued)
On May 19, 2015, the Company had repurchased all authorized shares under this stock repurchase program.
On April 22, 2014, the Company'sCompany’s board of directors approved an additionala new share repurchase program, conditional upon the completion of the Comms Transaction. This program enables the Company to repurchase up to 20 million shares of its common stock. This plan became effective on July 14, 2015 upon the completion of the Comms Transaction and replaced the Company's previously existing open market stock repurchase program. This program authorizes managementdescribed above. The Company is not obligated to make additional repurchasesacquire any specific amount of NetScout outstanding common stock of up to $100 million.within any particular timeframe under this program. The share repurchase authorization does not have an expiration dateCompany repurchased 3,148,426 shares for $80.0 million and the pace and timing of repurchases will depend on factors such as cash generation from operations, cash requirements10,078,136 shares for acquisitions, economic and market conditions, stock price and legal and regulatory requirements. Through March 31, 2015, the company has repurchased 756,700 shares totaling $31.5$300.0 million in the open market under this stock repurchase plan.plan during the fiscal years ended March 31, 2017 and 2016, respectively. At March 31, 2015, $68.5 million2017, 6,773,438 shares of common stock remained available to be purchased under the plan.
In connection with the vesting and release of the restriction on previously vested shares of restricted stock, the Company repurchased 320,572 shares for $9.6 million, 256,514 shares for $9.1 million and 247,568 shares for $10.8 million, 216,198 shares for $5.5 million and 169,531 shares for $3.9 million related to minimum statutory tax withholding requirements on these restricted stock units during the fiscal years ended March 31, 2015, 20142017, 2016 and 2013,2015, respectively. These repurchase transactions do not fall under the repurchase program described above, and therefore do not reduce the amount that is available for repurchase under that program.
NetScout Systems, Inc.
Notes to Consolidated Financial Statements—(Continued)
NOTE 1415 – STOCK PLANS
2011 Employee Stock Purchase Plan
On September 7, 2011, the Company’s stockholders approved the 2011 Employee Stock Purchase Plan (the ESPP), under which 2,500,000 shares of the Company’s common stock have been reserved for issuance. The Company implemented the ESPP on March 1, 2012. Eligible employees may purchase shares of the Company’s common stock through regular payroll deductions of up to 20% of their eligible compensation. Under the terms of the offering under the ESPP, the number of shares of the Company’s common stock which a participant could purchase during any purchase period is limited to 2,000. In addition, the fair market value of shares purchased by an individual participant in the plan may not exceed $25,000 if the contribution period is within any calendar year. However, if contribution periods overlap calendar years, an individual participant is eligible to utilize the unused portion of the $25,000 limit from the subsequent purchase in the current purchase up to $50,000. 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 market value on the last day of such offering period. The offering periods run from March 1 through August 31 and from September 1 through the last day of February 28 of each year. During the fiscal year ended March 31, 2015,2017, employees purchased 137,500471,658 shares under the ESPP with a weighted average purchase price per share of $42.82.$33.28. At March 31, 2015, 2,015,0002017, 1,096,090 shares were available for future issuance under the ESPP.
1999 Stock Option and Incentive Plan
In April 1999, NetScout adopted the 1999 Stock Option and Incentive Plan (1999 Stock Option Plan). The 1999 Stock Option Plan, which was replaced by the 2007 Equity Incentive Plan effective September 12, 2007, provided for the grant of share-based awards to employees, officers and directors, consultants or advisors. Under the 1999 Stock Option Plan, NetScout could grant options that were intended to qualify as incentive stock options, options not intended to qualify as incentive stock options, restricted stock and other share-based awards. Incentive stock options could be granted only to employees of NetScout. At March 31, 2015,2017, no options to purchase shares of common stock were outstanding under the 1999 Stock Option Plan. No additional grants can be made under the 1999 Stock Option Plan.
2007 Equity Incentive Plan
InEnacted in September 2007, the 2007 Equity Incentive Plan (2007 Plan), replaced the 1999 Stock Option Plan. The 2007 Plan permits the granting of stock options, restricted stock and restricted stock units, 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. On September 7, 2011, the Company’s stockholders approved an amendment and restatement of the 2007 Equity Incentive Plan to increase the shares of common stock reserved for issuance by 8,000,000 shares. On September 22, 2015, the Company's stockholders approved an amendment and restatement of the 2007 Equity Incentive Plan (the Amended 2007 Plan) to increase the shares of common stock reserved for issuance by 8,000,000 shares.8,500,000. A total of 13,000,000
NetScout Systems, Inc.
Notes to Consolidated Financial Statements—(Continued)
21,500,000 shares are reserved for issuance under the Amended 2007 Plan. In addition, any shares not delivered to a participant because an award is exercised through a reduction of shares subject to the award (cashless exercise) will not be available for issuance under the Amended 2007 Plan and any shares reacquired by the Company to cover withholding taxes upon exercise of a stock option or stock appreciation right or as consideration for the exercise of a stock option or stock appreciation right will not become available for issuance under the Amended 2007 Plan. Shares withheld to cover tax liabilities of restricted stock unit grants will be restored to the available reserve on the 2 for 1 amount. Furthermore, the share reserve under the Amended 2007 Plan is reduced one share for each share of common stock issued pursuant to a stock option or stock appreciation right and two 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 Amended 2007 Plan on or after March 31, 2011. At March 31, 2015,2017, an aggregate of 1,929,3153,610,301 unvested equity awards were outstanding under the Amended 2007 Plan.
The Amended 2007 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 had 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.
NetScout Systems, Inc.
Notes to Consolidated Financial Statements—(Continued)
NOTE 14 – STOCK PLANS (Continued)
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 options granted cannot exceed ten years (five years for incentive stock options granted to holders of more than 10% of the voting stock of NetScout).
Based on historical experience, the Company assumed an annualized forfeiture rate of 0% for awards granted to its independent directors, approximately 2% for awards granted to its senior executives, and approximately 5% granted to all remaining employees during the fiscal year ended March 31, 2015. During the fiscal years ended March 31, 20142017, 2016 and 2013, the Company assumed an annualized forfeiture rate of 0% for awards granted to its directors, and an annualized forfeiture rate of 10% for awards granted to its senior executives and remaining employees during fiscal years.2015.
The following is a summary of share-based compensation expense including restricted stock units and employee stock purchases made under our employee stock purchase plan (ESPP) based on estimated fair values within the applicable cost and expense lines identified below (in thousands):
| | | | Year Ended March 31, | Year Ended March 31, |
| | 2015 | | 2014 | | 2013 | 2017 | | 2016 | | 2015 |
| Cost of product revenue | $ | 338 |
| | $ | 228 |
| | $ | 235 |
| $ | 934 |
| | $ | 645 |
| | $ | 338 |
|
| Cost of service revenue | 1,194 |
| | 741 |
| | 342 |
| 3,956 |
| | 2,601 |
| | 1,194 |
|
| Research and development | 5,505 |
| | 4,361 |
| | 2,944 |
| 12,362 |
| | 9,205 |
| | 5,505 |
|
| Sales and marketing | 4,841 |
| | 3,791 |
| | 3,035 |
| 12,823 |
| | 8,725 |
| | 4,841 |
|
| General and administrative | 4,702 |
| | 3,809 |
| | 3,024 |
| 9,114 |
| | 7,175 |
| | 4,702 |
|
| | $ | 16,580 |
| | $ | 12,930 |
| | $ | 9,580 |
| $ | 39,189 |
| | $ | 28,351 |
| | $ | 16,580 |
|
NetScout Systems, Inc.
Notes to Consolidated Financial Statements—(Continued)
Transactions under the 1999 Stock Option Plan and the 2007 Equity Incentive Plan during the fiscal years ended March 31, 2015, 20142017, 2016 and 20132015 are summarized in the table below. The Company has revised the weighted average fair values, the aggregate intrinsic value of options exercised and the aggregated fair values of restricted stock units vested for fiscal years 2013 and 2014. These revisions correct immaterial errors identified within those tables.
| | | | Stock Options | | Restricted Stock Units | Stock Options | | Restricted Stock Units |
| | Number of Shares | | Weighted Average Exercise Price | | Number of Awards | | Weighted Average Fair Value | Number of Shares | | Weighted Average Exercise Price | | Number of Awards | | Weighted Average Fair Value |
| Outstanding – March 31, 2012 | 240,892 |
| | $ | 6.63 |
| | 1,755,325 |
| | $ | 13.33 |
| |
| Granted | — |
| | — |
| | 764,893 |
| | 24.15 |
| |
| Exercised (Options)/Issued (RSU’s) | (86,892 | ) | | 6.62 |
| | (549,932 | ) | | 13.76 |
| |
| Canceled | 0 |
| | 0.00 |
| | (99,460 | ) | | 16.85 |
| |
| Outstanding – March 31, 2013 | 154,000 |
| | $ | 6.63 |
| | 1,870,826 |
| | $ | 18.09 |
| |
| Granted | — |
| | — |
| | 602,359 |
| | 25.75 |
| |
| Exercised (Options)/Issued (RSU’s) | (117,650 | ) | | 6.91 |
| | (635,254 | ) | | 17.14 |
| |
| Canceled | (5,000 | ) | | 3.76 |
| | (99,632 | ) | | 17.61 |
| |
| Outstanding – March 31, 2014 | 31,350 |
| | $ | 5.87 |
| | 1,738,299 |
| | $ | 21.11 |
| 31,350 |
| | $ | 5.87 |
| | 1,738,299 |
| | $ | 21.11 |
|
| Granted | — |
| | — |
| | 1,009,770 |
| | 36.92 |
| — |
| | — |
| | 1,009,770 |
| | 36.92 |
|
| Exercised (Options)/Issued (RSU’s) | (23,850 | ) | | 5.87 |
| | (728,239 | ) | | 18.97 |
| (23,850 | ) | | 5.87 |
| | (728,239 | ) | | 18.97 |
|
| Canceled | (7,500 | ) | | 5.87 |
| | (90,515 | ) | | 21.44 |
| (7,500 | ) | | 5.87 |
| | (90,515 | ) | | 21.44 |
|
| Outstanding – March 31, 2015 | — |
| | $ | — |
| | 1,929,315 |
| | $ | 30.18 |
| — |
| | $ | — |
| | 1,929,315 |
| | $ | 30.18 |
|
| Granted | | — |
| | — |
| | 1,806,490 |
| | 37.20 |
|
| Exercised (Options)/Issued (RSU’s) | | — |
| | — |
| | (736,170 | ) | | 26.52 |
|
| Canceled | | — |
| | — |
| | (126,329 | ) | | 34.99 |
|
| Outstanding – March 31, 2016 | | — |
| | $ | — |
| | 2,873,306 |
| | $ | 35.32 |
|
| Granted | | — |
| | — |
| | 2,020,536 |
| | 24.92 |
|
| Exercised (Options)/Issued (RSU’s) | | — |
| | — |
| | (950,159 | ) | | 33.16 |
|
| Canceled | | — |
| | — |
| | (333,382 | ) | | 33.40 |
|
| Outstanding – March 31, 2017 | | — |
| | $ | — |
| | 3,610,301 |
| | $ | 30.24 |
|
At March 31, 2015,2017, there were 5,682,3198,602,261 shares of common stock available for grant under the Amended 2007 Plan.
NetScout Systems, Inc.
Notes to Consolidated Financial Statements—(Continued)
NOTE 14 – STOCK PLANS (Continued)
The Company does not currently expect to repurchase shares from any source to satisfy its obligations under the 2007 Plan.
The aggregate intrinsic value of stock options exercised and the fair value of restricted stock units vested at March 31, 2015, 20142017, 2016 and 20132015 were as follows (in thousands):
| | | | Year Ended March 31, | Year Ended March 31, |
| 2015 | | 2014 | | 2013 | 2017 | | 2016 | | 2015 |
| Total intrinsic value of stock options exercised | $ | 800 |
| | $ | 2,375 |
| | $ | 1,564 |
| $ | — |
| | $ | — |
| | $ | 800 |
|
| Total fair value of restricted stock unit awards vested | $ | 31,651 |
| | $ | 16,104 |
| | $ | 12,814 |
| $ | 28,293 |
| | $ | 25,936 |
| | $ | 31,651 |
|
At March 31, 2015,2017, there was no unrecognized compensation cost related to stock options.
At March 31, 2015,2017, the total unrecognized compensation cost related to restricted stock unit awards was $49.4$87.2 million, which is expected to be amortized over a weighted-average period of 2.01.7 years.
NOTE 1516 – RETIREMENT PLANPENSION BENEFIT PLANS
In 1996, NetScout established an employee savings plan, which401(k) Plan
The Company has a defined contribution program for certain employees that is intended to qualifyqualified under Section 401(k) of the Internal Revenue Code of 1986, as amended. NetScoutThe Company matches 50% of the employee’s contribution up to 6% of the employee’s salary. NetScout contributions vest at a rate of 25% per year of service. NetScout made matching contributions of $2.6$9.4 million, $2.5$7.8 million and $1.9$2.6 million to the plan for the years ended March 31, 2017, 2016 and 2015, 2014 and 2013, respectively.
NOTE 16 – INCOME TAXESDefined Benefit Pension Plan
Income before income tax expense consistedCertain of the following (in thousands):
|
| | | | | | | | | | | |
| | Year Ended March 31, |
| 2015 | | 2014 | | 2013 |
| Domestic | $ | 93,447 |
| | $ | 80,515 |
| | $ | 66,735 |
|
| Foreign | 1,518 |
| | (2,659 | ) | | (2,999 | ) |
| | $ | 94,965 |
| | $ | 77,856 |
| | $ | 63,736 |
|
The componentsCompany's non-U.S. employees participate in certain noncontributory defined benefit pension plans acquired in the Comms Transaction on July 14, 2015. None of the income tax expenseCompany's employees in the U.S. participate in any noncontributory defined benefit pension plans. In general, these plans are as follows (in thousands):funded based on considerations relating to legal
|
| | | | | | | | | | | |
| | Year Ended March 31, |
| 2015 | | 2014 | | 2013 |
| Current income tax expense: | | | | | |
| Federal | $ | 25,927 |
| | $ | 20,123 |
| | $ | 15,826 |
|
| State | 3,825 |
| | 2,260 |
| | 2,266 |
|
| Foreign | 1,307 |
| | 1,174 |
| | 1,035 |
|
| | 31,059 |
| | 23,557 |
| | 19,127 |
|
| Deferred income tax expense (benefit): | | | | | |
| Federal | 2,836 |
| | 5,347 |
| | 5,161 |
|
| State | 17 |
| | 96 |
| | 320 |
|
| Foreign | (139 | ) | | (250 | ) | | (1,481 | ) |
| | 2,714 |
| | 5,193 |
| | 4,000 |
|
| | $ | 33,773 |
| | $ | 28,750 |
| | $ | 23,127 |
|
NetScout Systems, Inc.
Notes to Consolidated Financial Statements—(Continued)
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 components of the change in benefit obligation of the pension plan is as follows (in thousands): |
| | | | | | | |
| | March 31, | | March 31, |
| | 2017 | | 2016 |
| Benefit obligation, at beginning of year | $ | 29,188 |
| | $ | — |
|
| Service cost | 329 |
| | 279 |
|
| Interest cost | 638 |
| | 391 |
|
| Benefits paid and other | (231 | ) | | (175 | ) |
| Acquisitions | — |
| | 29,033 |
|
| Actuarial loss (gain) | 1,226 |
| | (847 | ) |
| Foreign exchange rate impact | (1,009 | ) | | 507 |
|
| Benefit obligation, at end of year | $ | 30,141 |
| | $ | 29,188 |
|
The reconciliation of the beginning and ending balances of the fair value of the assets of the pension plan is as follows (in thousands): |
| | | | | | | |
| | March 31, | | March 31, |
| | 2017 | | 2016 |
| Fair value of plan assets, at beginning of year | $ | — |
| | $ | — |
|
| Employer direct benefit payments | 231 |
| | 175 |
|
| Benefits paid and other | (231 | ) | | (175 | ) |
| Fair value of plan assets, at end of year | $ | — |
| | $ | — |
|
The following sets forth the components of the Company's net periodic pension cost of the noncontributory defined benefit pension plans for the fiscal years ended March 31, 2017 and 2016 (in thousands):
|
| | | | | | | |
| | Year Ended March 31, |
| | 2017 | | 2016 |
| Service cost | $ | 329 |
| | $ | 279 |
|
| Interest cost | 638 |
| | 391 |
|
| Net periodic pension cost | $ | 967 |
| | $ | 670 |
|
There was no net periodic pension cost for fiscal years prior to fiscal year 2016 as the pension plan was acquired as a result of the Comms Transaction during the fiscal year ended March 31, 2016.
Weighted average assumptions used to determine net periodic pension cost at date of measurement: |
| | | | | |
| | March 31, | | March 31, |
| | 2017 | | 2016 |
| Discount rate | 2.10 | % | | 2.30 | % |
| Rate of compensation increase | 2.25 | % | | 2.25 | % |
As of March 31, 2017, unrecognized actuarial losses of $1.2 million ($858 thousand, net of tax) which have not yet been recognized in net periodic pension cost are included in accumulated other comprehensive income (loss). The unrecognized actuarial gains and losses are calculated as the difference between the actuarially determined projected benefit obligation and the value of the plan assets less accrued pension costs. None of this amount is expected to be recognized in net periodic pension costs during the fiscal year ending March 31, 2018. No plan assets are expected to be returned to the Company during the fiscal year ending March 31, 2018.
NetScout Systems, Inc.
Notes to Consolidated Financial Statements—(Continued)
Expected Contributions
During the fiscal year ended March 31, 2017, the Company contributed $231 thousand to its defined benefit pension plan. The following sets forth benefit payments, which reflect expected future service, as appropriate, expected to be paid by the plan in the periods indicated (in thousands):
|
| | | |
| 2018 | $ | 296 |
|
| 2019 | $ | 346 |
|
| 2020 | $ | 398 |
|
| 2021 | $ | 456 |
|
| 2022 | $ | 502 |
|
| 2023 - 2026 | $ | 3,597 |
|
NetScout Systems, Inc.
Notes to Consolidated Financial Statements—(Continued)
NOTE 1617 – INCOME TAXES (Continued)
Income (loss) before income tax expense (benefit) consisted of the following (in thousands):
|
| | | | | | | | | | | |
| | Year Ended March 31, |
| 2017 | | 2016 | | 2015 |
| Domestic | $ | 32,475 |
| | $ | (6,979 | ) | | $ | 93,447 |
|
| Foreign | 19,710 |
| | (25,460 | ) | | 1,518 |
|
| | $ | 52,185 |
| | $ | (32,439 | ) | | $ | 94,965 |
|
The components of the income tax expense (benefit) are as follows (in thousands):
|
| | | | | | | | | | | |
| | Year Ended March 31, |
| 2017 | | 2016 | | 2015 |
| Current income tax expense: | | | | | |
| Federal | $ | 15,912 |
| | $ | 29,238 |
| | $ | 25,927 |
|
| State | 3,152 |
| | 2,223 |
| | 3,825 |
|
| Foreign | 11,175 |
| | 6,628 |
| | 1,307 |
|
| | 30,239 |
| | 38,089 |
| | 31,059 |
|
| Deferred income tax expense (benefit): | | | | | |
| Federal | (8,278 | ) | | (30,216 | ) | | 2,836 |
|
| State | 3,578 |
| | (4,461 | ) | | 17 |
|
| Foreign | (6,645 | ) | | (7,482 | ) | | (139 | ) |
| | (11,345 | ) | | (42,159 | ) | | 2,714 |
|
| | $ | 18,894 |
| | $ | (4,070 | ) | | $ | 33,773 |
|
The income tax expense (benefit) computed using the federal statutory income tax rate differs from NetScout’s effective tax rate primarily due to the following:
| | | | Year Ended March 31, | Year Ended March 31, |
| | 2015 | | 2014 | | 2013 | 2017 | | 2016 | | 2015 |
| Statutory U.S. federal tax rate | 35.0 | % | | 35.0 | % | | 35.0 | % | 35.0 | % | | 35.0 | % | | 35.0 | % |
| State taxes, net of federal tax effect | 3.2 |
| | 2.8 |
| | 3.6 |
| 9.7 |
| | 3.1 |
| | 3.2 |
|
| Research and development tax credits | (1.4 | ) | | (1.9 | ) | | (2.1 | ) | (8.2 | ) | | 13.0 |
| | (1.4 | ) |
| Tax rate differential of foreign operations | 0.1 |
| | 0.2 |
| | 0.7 |
| |
| Effect of foreign operations | | (6.7 | ) | | (18.2 | ) | | 0.1 |
|
| Meals and entertainment | | 2.5 |
| | (3.5 | ) | | 0.5 |
|
| Domestic production activities deduction | (2.9 | ) | | (2.7 | ) | | (2.9 | ) | (4.0 | ) | | 9.2 |
| | (2.9 | ) |
| Change in valuation allowance | 0.4 |
| | 2.0 |
| | 0.4 |
| (0.1 | ) | | 0.7 |
| | 0.4 |
|
| Transaction costs | — |
| | — |
| | 0.7 |
| — |
| | (19.1 | ) | | — |
|
| Other | 1.2 |
| | 1.5 |
| | 0.9 |
| |
| Foreign withholding | | 3.8 |
| | (6.1 | ) | | — |
|
| Other permanent differences | | 4.2 |
| | (1.6 | ) | | 0.7 |
|
| | 35.6 | % | | 36.9 | % | | 36.3 | % | 36.2 | % | | 12.5 | % | | 35.6 | % |
NetScout Systems, Inc.
Notes to Consolidated Financial Statements—(Continued)
The components of net deferred tax assets and liabilities are as follows (in thousands):
| | | | Year Ended March 31, | Year Ended March 31, |
| | 2015 | | 2014 | 2017 | | 2016 |
| Assets: | | | | |
| Deferred tax assets: | | | | |
| Accrued expenses | $ | 3,730 |
| | $ | 3,954 |
| $ | 4,883 |
| | $ | 6,734 |
|
| Depreciation | (732 | ) | | 140 |
| |
| Deferred revenue | 9,054 |
| | 8,873 |
| 8,427 |
| | 13,913 |
|
| Reserves | 1,651 |
| | 1,006 |
| 6,240 |
| | 7,916 |
|
| Pension and other retiree benefits | | 4,978 |
| | 4,842 |
|
| Net operating loss carryforwards | 19,214 |
| | 23,730 |
| 27,322 |
| | 41,225 |
|
| Tax credit carryforwards | 3,838 |
| | 3,628 |
| 5,502 |
| | 5,824 |
|
| Share-based compensation | 2,660 |
| | 2,125 |
| 6,418 |
| | 4,975 |
|
| Transaction related costs | 4,001 |
| | — |
| |
| Other | 808 |
| | 233 |
| 288 |
| | 426 |
|
| | 44,224 |
| | 43,689 |
| |
| Liabilities: | | | | |
| Total gross deferred tax assets | | 64,058 |
| | 85,855 |
|
| Valuation allowance | | (3,374 | ) | | (3,777 | ) |
| Net deferred tax assets | | 60,684 |
| | 82,078 |
|
| Deferred tax liabilities: | | | | |
| Intangible assets | (29,202 | ) | | (25,659 | ) | (323,008 | ) | | (354,601 | ) |
| Valuation allowance | (3,906 | ) | | (4,941 | ) | |
| | $ | 11,116 |
| | $ | 13,089 |
| |
| Depreciation | | (8,695 | ) | | (6,630 | ) |
| Total deferred tax asset (liability) | | $ | (271,019 | ) | | $ | (279,153 | ) |
Deferred tax assets and liabilities are recognized based on the anticipated future tax consequences, attributable to differences between financial statement carrying amounts of assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which the differences are expected to reverse. We evaluate the recoverability of deferred tax assets by considering all positive and negative evidence relating to future profitability. We weigh objective and verifiable evidence more heavily in this analysis. In situations where we conclude that we do not have sufficient objective and verifiable evidence to support the realizability of the asset we create a valuation allowance against it. A valuation allowance has been established for the deferred tax assets related to Psytechnics Ltd., NetScout Systems Italy Srl. and for certain deferred tax assets related to the acquisition of ONPATH, as well as for the federal foreign tax credits acquired as part of the Network General acquisition, as the Company has determined there is not sufficient objective evidence to support the realizability of these tax assets.ONPATH. If it is later determined the Company is able to use all or a portion of the deferred tax assets for which a valuation allowance has been established, then the Company may be required to recognize these deferred tax assets through a tax benefit recorded in the period such determination is made.
NetScout Systems, Inc.
Notes to Consolidated Financial Statements—(Continued)
NOTE 16 – INCOME TAXES (Continued)
At March 31, 2015,2017, undistributed earnings of non-U.S. subsidiaries totaled $21.3approximately $58 million. No provision for U.S. income and foreign withholding taxes has been made for these permanently invested foreign earnings because it is expected that such earnings will be reinvested indefinitely. If these earnings were distributed to the United States in the form of dividends or otherwise, they would be included in the Company’s U.S. taxable income. TheAt this time, the Company has deemed it to be impracticable to determine the amount of unrecognized deferred income tax liability relatedany taxes payable if these amounts were to these earnings is approximately $1.9 million.be repatriated to the United States.
At March 31, 2015,2017, the Company had United States federal net operating loss carryforwardscarry forwards of $34.2approximately $39 million, state net operating loss carryforwards of approximately $67.3$69 million and gross federal and state research and development tax credit carryforwards of $4.5approximately $6 million. The net operating loss and credit carryforwards will expire at various dates beginning in 2023 and extending through 2033, if not utilized.2018. The Company also had foreign net operating loss carryforwards of approximately $19.5$71 million at March 31, 2015.2017. The majority of foreign net operating losses have no expiration dates. Utilization of the U.S. net operating losses and credits are subject to an annual limitation due to the ownership change limitations provided by the Internal Revenue Code of 1986, as amended, and similar state tax provisions.
The Company files U.S. federal tax returns and files returns in various state, local and foreign jurisdictions. With respect to the U.S. federal and primary state jurisdictions, the Company is no longer subject to examinations by tax authorities for tax years before 2013,2014, although carryforward attributes that were generated prior to 20132014 may still be adjusted upon examination if they either have been or will be used in a future period. The Company also receives inquiries from various tax jurisdictions during the year, and some of those inquiries may include an audit of the tax return previously filed. In the normal course of business, NetScout and its subsidiaries are examined by various taxing authorities, including the IRS in the United States. At March 31, 2015, the Company remained subject
NetScout Systems, Inc.
Notes to examination in the United States for the 2013 and 2014 tax years.Consolidated Financial Statements—(Continued)
A reconciliation of the beginning and ending amount of unrecognized tax benefits for the fiscal years ended March 31, 2015, 20142017, 2016 and 20132015 is as follows (in thousands):
| | | | Year Ended March 31, | Year Ended March 31, |
| | 2015 | | 2014 | | 2013 | 2017 | | 2016 | | 2015 |
| Balance at April 1, | $ | 421 |
| | $ | 370 |
| | $ | 335 |
| $ | 1,588 |
| | $ | 1,038 |
| | $ | 421 |
|
| Additions based on tax positions related to the current year | 45 |
| | 51 |
| | 35 |
| 46 |
| | 48 |
| | 45 |
|
| Release of tax positions of prior years | (75 | ) | | — |
| | — |
| (154 | ) | | — |
| | (75 | ) |
| Increase in unrecognized tax benefits as a result of a tax position taken during a prior period | 647 |
| | — |
| | — |
| 1,446 |
| | 502 |
| | 647 |
|
| Balance at March 31, | $ | 1,038 |
| | $ | 421 |
| | $ | 370 |
| $ | 2,926 |
| | $ | 1,588 |
| | $ | 1,038 |
|
The Company notes that a majority of the unrecognized tax benefits are in the appeals process in foreign jurisdictions. We are unable to make a reliable estimate when cash settlement, if any, will occur with a tax authority as the timing of examinations and ultimate resolution of those examinations is uncertain. All of the unrecognized tax benefits would affect the effective tax rate if recognized.
The Company includes interest and penalties accrued in the consolidated financial statements as a component of the tax provision.
NOTE 1718 – COMMITMENTS AND CONTINGENCIES
Acquisition related
The Company has onea contingent liability related to the acquisition of Simena in November 2011 for future consideration to be paid to the former seller which had an initial fair value of $8.0 million at the time of acquisition. At March 31, 2015,2017, the present value of the future consideration was $4.5$4.8 million.
In addition, the Company has a contingent liability for $660 thousand related to the acquisition of Avvasi in August 2016 for which an escrow account was established to cover damages NetScout suffers 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 asset purchase agreement. Generally, indemnification claims that Avvasi 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 seller's breach of certain fundamental representations or related to other specified indemnity items, for which certain of Avvasi'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 $660 thousand will be paid to the seller on August 21, 2017.
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 significantmaterial adverse effect on the Company’s financial condition, results of operations or cash flows.
Unconditional purchase obligations
NetScout Systems, Inc.
Notes$32.2 million, which represent estimated open purchase orders to Consolidated Financial Statements—(Continued)purchase inventory as well as commitments for products and services used in the normal course of business.
NOTE 17 – COMMITMENTS AND CONTINGENCIES (Continued)
Leases
NetScout leases office space under non-cancelable operating leases. Total rent expense under the leases was $5.9$13.8 million, $6.0$12.8 million and $5.7$5.9 million for the fiscal years ended March 31, 2017, 2016 and 2015, 2014 and 2013, respectively.
NetScout Systems, Inc.
Notes to Consolidated Financial Statements—(Continued)
At March 31, 2015,2017, future non-cancelable minimum lease commitments (including office space, copiers and automobiles) are as follows (in thousands):
| | | Year Ending March 31, | | |
| 2016 | $ | 6,065 |
| |
| 2017 | 4,971 |
| |
| 2018 | 4,106 |
| $ | 13,992 |
|
| 2019 | 2,738 |
| 8,062 |
|
| 2020 | 2,593 |
| 5,984 |
|
| 2021 | | 4,244 |
|
| 2022 | | 3,437 |
|
| Remaining years | 8,688 |
| 3,967 |
|
| Total minimum lease payments | $ | 29,161 |
| $ | 39,686 |
|
| | | |
NOTE 1819 – SEGMENT AND GEOGRAPHIC INFORMATION
TheAs part of its continued integration efforts of the Comms Transaction, effective July 1, 2016, the Company reports revenues and income underreorganized its business units, which resulted in a change in operating segment composition. As a result of this change, the Company reorganized the number of operating segments from five operating segments to one reportableoperating segment. The consolidated financial information that is usedregularly reviewed by the chief operating decision maker in deciding howCompany's Chief Operating Decision Maker (CODM) to allocate resources and assess performance was changed during the second quarter of fiscal year 2017. Our operating segment is determined based on the units that constitute a business for which financial information is available and for which operating results are regularly reviewed by the CODM. The Company reports revenue and income in assessing performance.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):
| | | | Year Ended March 31, | Year Ended March 31, |
| | 2015 | | 2014 | | 2013 | 2017 | | 2016 | | 2015 |
| United States | $ | 348,354 |
| | $ | 303,364 |
| | $ | 262,020 |
| $ | 729,373 |
| | $ | 681,569 |
| | $ | 348,354 |
|
| Europe | 46,253 |
| | 45,837 |
| | 42,884 |
| 190,588 |
| | 137,411 |
| | 46,253 |
|
| Asia | 27,685 |
| | 20,646 |
| | 18,107 |
| 99,277 |
| | 61,566 |
| | 27,685 |
|
| Rest of the world | 31,377 |
| | 26,800 |
| | 27,539 |
| 142,874 |
| | 74,873 |
| | 31,377 |
|
| | $ | 453,669 |
| | $ | 396,647 |
| | $ | 350,550 |
| $ | 1,162,112 |
| | $ | 955,419 |
| | $ | 453,669 |
|
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. The Company reports these shipments as United States revenue sincebecause the Company ships the products to a United States location. 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.
NetScout Systems, Inc.
Notes to Consolidated Financial Statements—(Continued)
NOTE 1920 - RELATED PARTY TRANSACTIONTRANSACTIONS
ADuring our fiscal year ended March 31, 2016 and the three months ended June 30, 2016, a member of the Company’s Board of Directors also servesserved as a memberan executive officer of Danaher. As part of the split off of Danaher’s Communications Business and the Company’s subsequent acquisition of that business from Newco's shareholders, NetScout entered into multiple transactions with Danaher which include: transition services agreements, lease agreements, closing agreements, and compensation for post-combination services provisions within the separation and distribution agreement. This board member is now the founding President and CEO of directors for EMC Corp. (EMC)Fortive Corporation (Fortive), which spun off of Danaher in July 2016. As part of the spin-off of Fortive, the transition services agreement was amended to, among other things, assign Danaher's rights, duties, obligations and therefore,liabilities under the transition services agreement to Fluke Corporation, a subsidiary of Fortive. The Company has disclosed the transactions with Danaher and Fortive parenthetically within the financial statements.
As disclosed parenthetically within the Company's consolidated balance sheet, the Company considers sales to EMC to be ahas receivables from related party transaction.parties. The Company generated $374 thousand in revenue from EMC duringfollowing table summarizes those balances (in thousands):
|
| | | | | | | |
| | March 31, 2017 | | March 31, 2016 |
| Danaher | $ | 404 |
| | $ | 44,161 |
|
| Fortive | 3,181 |
| | — |
|
| | $ | 3,585 |
| | $ | 44,161 |
|
As disclosed parenthetically within the fiscal year ended March 31, 2015 in the ordinary course of business. Another member of the Company’s Board of Directors also serves as a Section 16 officer of State Street and therefore,Company's consolidated balance sheet, the Company considers saleshas payables due to State Street to be a related party transaction.parties. The following table summarizes those balances (in thousands):
|
| | | | | | | |
| | March 31, 2017 | | March 31, 2016 |
| Danaher | $ | — |
| | $ | 5,893 |
|
| Fortive | 444 |
| | — |
|
| | $ | 444 |
| | $ | 5,893 |
|
As disclosed parenthetically within the Company's consolidated statements of operations, the Company generated $240 thousand in revenuehas recorded expenses from State Street during the fiscal year ended March 31, 2015 in the ordinary course of business.related parties. The following table summarizes those balances (in thousands):
|
| | | | | | | |
| | Year Ended March 31, |
| | 2017 | | 2016 |
| Danaher: | | | |
| Cost of product revenue | $ | 4,690 |
| | $ | 25,055 |
|
| Cost of service revenue | 485 |
| | 5,736 |
|
| Research and development expenses | 1,720 |
| | 16,701 |
|
| Sales and marketing | 2,273 |
| | 15,430 |
|
| General and administrative expenses | 2,551 |
| | 16,055 |
|
| Other expense | — |
| | 379 |
|
| | $ | 11,719 |
| | $ | 79,356 |
|
| Fortive: | | | |
| Cost of product revenue | $ | 2,539 |
| | $ | — |
|
| Cost of service revenue | 260 |
| | — |
|
| Research and development expenses | (96 | ) | | — |
|
| Sales and marketing | 150 |
| | — |
|
| General and administrative expenses | 1,548 |
| | — |
|
| Other income | (426 | ) | | — |
|
| | $ | 3,975 |
| | $ | — |
|
NetScout Systems, Inc.
Notes to Consolidated Financial Statements—(Continued)
NOTE 20 – PROPOSED ACQUISITION
On October 12, 2014, NetScout Systems, Inc., Danaher Corporation (Danaher), Potomac Holding LLC, a wholly-owned subsidiary
As disclosed within the Company's consolidated statements of Danaher (Newco), RS Merger Sub I, Inc., a wholly-owned subsidiary ofcash flows, the Company (Merger Sub)has cash flows from operating activities resulting from amounts due to related parties and RS Merger Sub II, LLC, a wholly-owned subsidiarydue from related parties. The following table summarizes those cash flows from operating activities (in thousands):
|
| | | | | | | |
| | Year Ended March 31, |
| | 2017 | | 2016 |
| Due from related party: | | | |
| Danaher | $ | 17,310 |
| | $ | (18,483 | ) |
| Fortive | 7,745 |
| | — |
|
| Total | $ | 25,055 |
| | $ | (18,483 | ) |
| | | | |
| Due to related party: | | | |
| Danaher | $ | (2,954 | ) | | $ | (6,743 | ) |
| Fortive | 162 |
| | — |
|
| Total | $ | (2,792 | ) | | $ | (6,743 | ) |
As disclosed within the Company's consolidated statements of cash flows, the Company (Merger Sub IIhas cash flows from investing activities resulting from amounts due from related parties. The following table summarizes those cash flows from investing activities (in thousands): |
| | | | | | | |
| | Year Ended March 31, |
| | 2017 | | 2016 |
| Due from related party: | | | |
| Danaher | $ | 12,864 |
| | $ | 9,306 |
|
| Total | $ | 12,864 |
| | $ | 9,306 |
|
The Company recognized $177 thousand and together with Merger Sub,$130 thousand in revenue from Danaher during the Merger Subs), entered into an Agreementfiscal years ended March 31, 2017 and Plan2016 in the ordinary course of Merger and Reorganization (Merger Agreement) pursuant to which the Company will acquire the communications group business of Danaher conducted under the brands Tektronix Communications, Fluke Networks and Arbor Networks (Communications Business), but excluding Danaher’s data communications cable installation business and its communication service provider business in a Reverse Morris Trust transaction (the Transaction).business.
Prior to the Mergers (as defined below) and pursuant to a Separation and Distribution Agreement (Distribution Agreement), dated as of October 12, 2014, among Danaher, Newco and the Company, Danaher will, among other things, transfer the Communications Business to Newco and, thereafter, Danaher will distribute to Danaher stockholders , either through a split-off or spin-off transaction, all of the issued and outstanding shares of Newco (the Distribution).
Immediately following the Distribution, the Company, Danaher, Newco and the Merger Subs will effect a two-step merger process whereby (i) Merger Sub I will merge with and into Newco, with Newco continuing as the surviving corporation (the First Merger) and (ii) immediately following the First Merger, Newco will merge with and into Merger Sub II, with Merger Sub II surviving as a wholly-owned subsidiary of the Company (the Second Merger, and together with the First Merger, the Mergers).
Upon consummation of the transactions contemplated by the Merger Agreement and the Distribution Agreement, the common units of Newco then outstanding will be automatically converted into 62.5 million sharesA member of the Company’s common stock (the Company Common Stock) and will represent approximately 59.5%Board of Directors served as a member of the board of directors for EMC Corporation (EMC) during the fiscal years ended March 31, 2017 and 2016, and therefore, the Company Common Stock onconsiders sales to EMC to be a fully-diluted basis after giving effectrelated party transaction. During the quarter ended September 30, 2016, EMC was acquired by Dell Technologies and EMC's board member resigned. The Company continued to report the stock issuancewind down of preexisting transactions as related party transactions through the Company's fiscal year 2017. The Company recognized $167 thousand and $475 thousand in revenue from EMC during the issuance to Newco employees of certain NetScout restricted stock unitsfiscal years ended March 31, 2017 and 2016 in the Transaction. The Company’s existing equityholders will continue to hold the remaining approximately 40.5%ordinary course of the Company Common Stock. The common units of Newco then outstanding could convert into more than 62.5 million sharesbusiness.
A member of the Company’s common stock ifBoard of Directors also serves as a consultant for The MITRE Corporation (MITRE) and therefore, the Company issuesconsiders sales to MITRE to be related party transactions. The Company Common Stockgenerated $24 thousand and $125 thousand in certain acquisitions prior torevenue from MITRE during the First Merger (in which case such additional conversion shares shall be calculated by multiplying 1.46 byfiscal years ended March 31, 2017 and 2016 in the numberordinary course of shares ofbusiness.
During the fiscal year ended March 31, 2016, the Company Common Stock issued in such acquisition).
The consummationhad a member of the First Merger is subject to various customary closing conditions, including, among other things (i) accuracyBoard of Danaher’sDirectors who served as a Section 16 officer of State Street Corporation (State Street) and the Company’ representations and warranties, (ii) compliance by Danaher andtherefore, the Company with certain covenants in the Merger Agreement, (iii) effectiveness of the registration statementsconsidered sales to State Street to be filed with the Securities and Exchange Commission to register the Newco common units and the Company Common Stock to be issued to Danaher’s stockholders, (iv) approval of the Company’s stockholders of the issuance of the Company Common Stock in the First Merger, (v) completion of the transactions contemplated by the Distribution Agreement, (vi) no material adverse effect shall have occurred with respect to either the Company or the Communications Business, (vii) absence of any law or order from any court or governmental authority restraining, enjoining or prohibiting the Transaction and (xiii) receipt of certain rulings from the Internal Revenue Service.
The Merger Agreement contains certain termination rights for both the Company and Danaher and further provides that, upon termination of the Merger Agreement under specified circumstances, the Company must pay Danaher a termination fee of $55 million. The circumstances under which the Company must pay Danaher the termination fee include, among other circumstances:
•the Merger Agreement is terminated by Danaher following a Company triggering event. A Company triggering event is defined in the Merger Agreement to include, among other things, the failure of the Company’s board of directors to recommend that the Company’s stockholders vote in favor of the issuance of the Company Common Stock in the First Merger, the withdrawal or adverse modification by the Company’s board of directors of such recommendation, or the Company’s material breach of its covenants not to solicit any alternative acquisition proposal
•if the Merger Agreement is terminated by (x) either Danaher or NetScout because the First Merger has not been consummated by October 12, 2015 or (y) by Danaher because NetScout has breached or failed to perform in any material respect any of its representations, warranties, covenants or other agreements contained in the Merger Agreement and (A) after October 12, 2014 but before such termination, an acquisition proposal shall have been made to NetScout and (B) within 9 months after such termination NetScout reaches a definitive agreement to consummate or consummates such acquisition proposal
•if the Merger Agreement is terminated by NetScout or Danaher because NetScout’s stockholders failed to approve the issuance of shares of NetScout’s common stock in the First Merger at the NetScout special meeting (including any adjournment or postponement of the NetScout special meeting) and (A) after October 12, 2014 but before such termination, an acquisition
NetScout Systems, Inc.
Notes to Consolidated Financial Statements—(Continued)
proposal shall have been made to NetScout and (B) within 9 months after such termination NetScout reaches a definitive agreement to consummate or consummates such acquisition proposal
related party transaction. The Company has incurred $12.0 millionrecognized $452 thousand in acquisition related costsrevenue from State Street during the fiscal year ended March 31, 2015.
In connection with RBC Capital Markets’ services as NetScout’s financial advisor, NetScout has agreed to pay RBC Capital Markets an aggregate fee of $11 million, a portion of which was payable upon delivery of RBC Capital Markets’ opinion and $9.5 million of which is contingent upon consummation of the Mergers. NetScout also has agreed to reimburse RBC Capital Markets for expenses reasonably incurred in connection with RBC Capital Markets’ services and to indemnify RBC Capital Markets and related persons against certain liabilities, including liabilities under the federal securities laws, arising out of RBC Capital Markets’ engagement.
The transaction is expected to increase NetScout’s scale and broaden its customer base in both the service provider and enterprise markets, while accelerating NetScout’s entry into the Cyber Intelligence market. The transaction is expected to close2016 in the first halfordinary course of NetScout’sbusiness. This board member is no longer a Section 16 officer of State Street, and as a result, State Street is no longer considered a related party in the Company's fiscal year 2016.ended March 31, 2017.
NOTE 21 – SUBSEQUENT EVENTS
On May 19, 2015, the Company’s board of directors approved a new share repurchase program, conditional upon the completion of the Company's planned acquisition of Danaher Corporation's Communications Business, that will enable the Company to repurchase up to 20 million shares of its common stock. Upon it becoming effective, this new share repurchase plan would replace the Company's existing open market stock repurchase program.
NOTE 22 – QUARTERLY RESULTS OF OPERATIONS – UNAUDITED
The following table sets forth certain unaudited quarterly results of operations of NetScout for the fiscal years ended March 31, 20152017 and 2014.2016. In the opinion of management, this information has been prepared on the same basis as the audited consolidated financial statements and all necessary adjustments, consisting only of normal recurring adjustments, have been included in the amounts stated below to present fairly the quarterly information when read in conjunction with the audited consolidated financial statements and notes thereto included elsewhere in this Annual Report on Form 10-K. The quarterly operating results are not necessarily indicative of future results of operations.
| | | | Three Months Ended | Three Months Ended |
| | (in thousands, except per share data) | (in thousands, except per share data) |
| | March 31, 2015 | | Dec. 31, 2014 | | Sept. 30, 2014 | | June 30, 2014 | | March 31, 2014 | | Dec. 31, 2013 | | Sept. 30, 2013 | | June 30, 2013 | March 31, 2017 | | Dec. 31,
2016 | | Sept. 30,
2016 | | June 30,
2016 | | March 31, 2016 | | Dec. 31, 2015 | | Sept. 30, 2015 | | June 30, 2015 |
| Revenue | $ | 119,385 |
| | $ | 122,833 |
| | $ | 103,599 |
| | $ | 107,852 |
| | $ | 112,317 |
| | $ | 110,428 |
| | $ | 92,097 |
| | $ | 81,805 |
| $ | 318,920 |
| | $ | 302,192 |
| | $ | 272,048 |
| | $ | 268,952 |
| | $ | 285,887 |
| | $ | 307,679 |
| | $ | 261,110 |
| | $ | 100,743 |
|
| Gross profit | $ | 95,997 |
| | $ | 95,851 |
| | $ | 82,004 |
| | $ | 85,256 |
| | $ | 88,032 |
| | $ | 86,826 |
| | $ | 72,393 |
| | $ | 64,883 |
| $ | 226,003 |
| | $ | 220,514 |
| | $ | 187,538 |
| | $ | 181,918 |
| | $ | 185,036 |
| | $ | 201,564 |
| | $ | 160,923 |
| | $ | 79,447 |
|
| Net income | $ | 20,854 |
| | $ | 17,629 |
| | $ | 11,233 |
| | $ | 11,476 |
| | $ | 16,676 |
| | $ | 17,294 |
| | $ | 9,883 |
| | $ | 5,253 |
| |
| Diluted net income per share | $ | 0.50 |
| | $ | 0.42 |
| | $ | 0.27 |
| | $ | 0.27 |
| | $ | 0.40 |
| | $ | 0.41 |
| | $ | 0.24 |
| | $ | 0.12 |
| |
| Net income (loss) | | $ | 22,310 |
| | $ | 21,245 |
| | $ | (1,266 | ) | | $ | (8,998 | ) | | $ | (3,616 | ) | | $ | (24,507 | ) | | $ | (7,915 | ) | | $ | 7,669 |
|
| Diluted net income (loss) per share | | $ | 0.24 |
| | $ | 0.23 |
| | $ | (0.01 | ) | | $ | (0.10 | ) | | $ | (0.04 | ) | | $ | (0.25 | ) | | $ | (0.09 | ) | | $ | 0.19 |
|
NetScout Systems, Inc.
Schedule II—Valuation and Qualifying Accounts
(in thousands)
| | | | Balance at Beginning of Year | | Additions Resulting in Charges to Operations | | Charges to Other Accounts | | Deductions Due to Write-Offs | | Balance at End of Year | Balance at Beginning of Year | | Additions Resulting in Charges to Operations | | Charges to Other Accounts | | Deductions Due to Write-Offs | | Balance at End of Year |
| Year ended March 31, 2013 | | | | | | | | | | |
| Allowance for doubtful accounts | $ | 226 |
| | $ | 560 |
| | $ | 284 |
| | | $ | (99 | ) | | $ | 971 |
| |
| Deferred tax asset valuation allowance | $ | 3,529 |
| | $ | 101 |
| | $ | 165 |
| | $ | — |
| | $ | 3,795 |
| |
| Year ended March 31, 2014 | | | | | | | | | | |
| Allowance for doubtful accounts | $ | 971 |
| | $ | 250 |
| | $ | (40 | ) | | | $ | (868 | ) | | $ | 313 |
| |
| Deferred tax asset valuation allowance | $ | 3,795 |
| | $ | 837 |
| | $ | 309 |
|
| | $ | — |
| | $ | 4,941 |
| |
| Year ended March 31, 2015 | | | | | | | | | | | | | | | | | | |
| Allowance for doubtful accounts | $ | 313 |
| | $ | (140 | ) | | $ | — |
| | | $ | — |
| | $ | 173 |
| $ | 313 |
| | $ | (140 | ) | | $ | — |
| | | $ | — |
| | $ | 173 |
|
| Deferred tax asset valuation allowance | $ | 4,941 |
| | $ | 152 |
| | $ | — |
| | | $ | (1,187 | ) | | $ | 3,906 |
| $ | 4,941 |
| | $ | 152 |
| | $ | 0 |
| | $ | (1,187 | ) | | $ | 3,906 |
|
| Year ended March 31, 2016 | | | | | | | | | | |
| Allowance for doubtful accounts | | $ | 173 |
| | $ | 1,824 |
| | $ | 3,221 |
| | | $ | (149 | ) | | $ | 5,069 |
|
| Deferred tax asset valuation allowance | | $ | 3,906 |
| | $ | 99 |
| | $ | — |
|
| | $ | (228 | ) | | $ | 3,777 |
|
| Year ended March 31, 2017 | | | | | | | | | | |
| Allowance for doubtful accounts | | $ | 5,069 |
| | $ | 6,961 |
| | $ | (7,580 | ) | | | $ | (2,384 | ) | | $ | 2,066 |
|
| Deferred tax asset valuation allowance | | $ | 3,777 |
| | $ | (338 | ) | | $ | (65 | ) | | | $ | — |
| | $ | 3,374 |
|
NetScout Systems, IncInc.
Index to Exhibits
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| 2.1 | | Agreement and Plan of Merger dated October 31, 2012 by and among NetScout Systems, Inc., Gold Merger Sub, Inc., OnPATH Technologies Inc., and Blueprint Ventures Management I, LLC, solely in its capacity as the representative of certain holders of OnPATH’s securities (filed as Exhibit 2.1 to NetScout’s Current Report on Form 8-K, SEC File No. 000-26251, filed on November 1, 2012 and incorporated herein by reference) |
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2.2 *** | | Agreement and Plan of Merger and Reorganization dated October 12, 2014 by and among NetScout Systems, Inc., Danaher Corporation, Potomac Holding LLC, RS Merger Sub I, Inc., and RS Merger Sub II, LLC (filed as Exhibit 2.1 to NetScout’s current report on Form 8-K, SEC File No. 000-26251, filed with the SEC on October 14, 2014 and incorporated herein by reference). |
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2.32.2 *** | | Separation and Distribution Agreement dated October 12, 2014 by and among Danaher Corporation, NetScout Systems, Inc. and Potomac Holding LLC (filed as Exhibit 10.1 to NetScout’s current report on Form 8-K, SEC File No. 000-26251, filed with the SEC on October 14, 2014 and incorporated herein by reference). |
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| 2.3 | | Closing Agreement dated July 14, 2015 by and among NetScout Systems, Inc., Danaher Corporation, Potomac Holding LLC, RS Merger Sub I, Inc., and RS Merger Sub II, LLC (filed as Exhibit 2.3 to NetScout’s current report on Form 8-K, SEC File No. 000-26251, filed with the SEC on July 15, 2015 and incorporated herein by reference). |
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| 3.1, 4.1 | | Composite conformed copy of Third Amended and Restated Certificate of Incorporation of NetScout (as amended) (filed as Exhibit 3.3, 4.13.2 to NetScout’s Registration Statementcurrent report on Form S-1,8-K, SEC File No. 333-76843,000-26251, filed on September 21, 2016, and incorporated herein by reference). |
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| 3.2, 4.2 | | Composite copy of Amended and Restated By-laws of NetScout (filed as Exhibits 3.1, 4.1 to NetScout’s current Report on Form 8-K, SEC File No. 000-26251, filed on July 17, 2014 and incorporated herein by reference). |
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| 4.3 | | Specimen Certificate for shares of NetScout’s Common Stock (filed as Exhibit 4.3 to NetScout’s Annual Report on Form 10-K for the fiscal year ended March 31, 2001, SEC File No. 000-26251, filed on June 29, 2001, and incorporated herein by reference). |
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| 10.1* | | Form of Amended and Restated Indemnification Agreement between NetScout and each director and executive officer filed as Exhibit 10.1 to NetScout's Quarterly Report on Form 10-Q for the quarterly period ended December 31, 2013, SEC File No. 000-26251, filed January 28, 2014, and incorporated herein by reference). |
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| 10.2* | | Form of Incentive Stock Option Agreement – Incorporated Terms and Conditions pursuant to 1999 Stock Option and Incentive Plan, as amended (filed as Exhibit 10.1 to NetScout’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2004, SEC File No 000-26251, filed November 4, 2004 and incorporated herein by reference). |
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| 10.3 | | Lease between Arturo J. Gutierrez and John A. Cataldo, Trustees of Nashoba Westford Realty Trust, u/d/t dated April 27, 2000 and recorded with the Middlesex North Registry of Deeds in Book 10813, Page 38 and NetScout for Westford Technology Park West, as amended (filed as Exhibit 10.26 to NetScout’s Annual Report on Form 10-K for the fiscal year ended March 31, 2001, SEC File No. 000-26251, filed on June 29, 2001, and incorporated herein by reference). |
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| 10.4* | | Agreement Relating to Employment, dated January 3, 2007, by and between NetScout and Anil K. Singhal (filed as Exhibit 10.2 to NetScout’s Current Report on Form 8-K, SEC File No. 000-26251, filed on January 5, 2007 and incorporated herein by reference). |
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| 10.5* | | Amendment No. 1, dated February 2, 2007, to Agreement Relating to Employment by and between the Company and Anil K. Singhal (filed as exhibit 10.1 to NetScout’s Quarterly Report on Form 10-Q for the quarterly period ended December 31, 2006, SEC File No. 000-26251, filed February 5, 2007 and incorporated herein by reference). |
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| 10.6* | | Amendment No. 2, dated December 22, 2008, to Agreement Relating to Employment by and between the Company and Anil K. Singhal (filed as exhibit 10.1 to NetScout’s Quarterly Report on Form 10-Q for the quarterly period ended December 31, 2008, SEC File No. 000-26251, filed February 6, 2009 and incorporated herein by reference). |
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| 10.7* | | Amendment No. 3, dated May 28, 2012, to Agreement Relating to Employment, by and between the Company and Anil K. Singhal (filed as Exhibit 10.3 to NetScout’s Current Report on Form 8-K, SEC File No. 000-26251, filed on June 1, 2012 and incorporated herein by reference). |
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| 10.8* | | NetScout Systems, Inc. Amended and Restated 2007 Equity Incentive Plan, (incorporated by reference toas amended (filed as Appendix A of NetScout's definitive proxy statement,to the Registrant’s Definitive Proxy Statement on Schedule 14A, SEC File No. 000-26251, filed with the SECCommission on July 26, 2011).28, 2015 and incorporated herein by reference)
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| 10.9* | | NetScout Form of Restricted Stock Unit Agreement with respect to the NetScout 2007 Equity Incentive Plan (filed as Exhibit 99.2 to NetScout’s Registration Statement on Form S-8, SEC File No. 333-148364, filed on December 27, 2007 and incorporated herein by reference). |
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| 10.10 | | Credit and Security Agreement, dated as of November 22, 2011, by and among NetScout Systems, Inc., KeyBank National Association, as joint lead arranger, sole book runner and administrative agent, Wells Fargo Bank, National Association, as joint lead arranger and co-syndication agent, Merrill Lynch, Pierce, Fenner & Smith Incorporated, as joint lead arranger, Bank of America, N.A., as co-syndication agent, and Silicon Valley Bank and Comerica Bank, as co-documentation agents, and the Lenders party thereto. (filed as Exhibit 10.1 to NetScout’s Current Report on Form 8-K, SEC File No. 000-26251, filed on November 29, 2011 and incorporated herein by reference). |
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| 10.11* | | Form of Amended and Restated Severance Agreement for Named Executive Officers (other than the CEO and CFO) (filed as Exhibit 10.1 to NetScout’s Current Report on Form 8-K, SEC File No. 000-26251, filed on June 1, 2012 and incorporated herein by reference). |
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| 10.12* | | Amended and Restated Severance Agreement, dated May 28, 2012, by and between the Company and Jean Bua (filed as Exhibit 10.2 to NetScout’s Current Report on Form 8-K, SEC File No. 000-26251, filed on June 1, 2012 and incorporated herein by reference). |
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| 10.13 | | Third Amendment Agreement, dated August 10, 2010, to that certain Lease, dated August 17, 2000, as amended, between the Company and Westford West I Limited Partnership, as successor to Arturo J. Gutierrez and John A. Cataldo, Trustees of Nashoba Westford Realty Trust, u/d/t dated April 27, 2000 (filed as Exhibit 10.1 to NetScout’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2010, SEC File No. 000-26251, filed November 9, 2010 and incorporated herein by reference). |
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| 10.14* | | NetScout Systems, Inc. Amended and Restated 2011 Employee Stock Purchase Plan (filed as Exhibit 10.1 to NetScout’s Current Report on Form 8-K, SEC File No. 000-26251, filed on February 14, 2012 and incorporated herein by reference) . |
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| 10.15 * | | Summary of Non-Employee Director Compensation (filed as Exhibit 10.8 to NetScout’s Quarterly Report on Form 10-Q for the quarterly period ended December 31, 2014, SEC File No. 000-26251, filed on January 27, 2015 and incorporated herein by reference). |
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| 10.16 * | | Form of Amendment to Amended and Restated Severance Agreement for Executive Officers (filed as Exhibit 10.9 to NetScout’s Quarterly Report on Form 10-Q for the quarterly period ended December 31, 2014, SEC File No. 000-26251, filed on January 27, 2015 and incorporated herein by reference). |
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| 10.17 | | Tax Matters Agreement dated July 14, 2015 by and among Danaher Corporation, NetScout Systems, Inc. and Potomac Holding LLC (filed as Exhibit 10.1 to NetScout’s current report on Form 8-K, SEC File No. 000-26251, filed with the SEC on July 15, 2015 and incorporated herein by reference). |
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| 10.18 | | Transition Services Agreement dated July 14, 2015 by and among NetScout Systems, Inc., Danaher Corporation and Potomac Holding LLC (filed as Exhibit 10.2 to NetScout’s current report on Form 8-K, SEC File No. 000-26251, filed with the SEC on July 15, 2015 and incorporated herein by reference). |
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| 10.19 | | Employee Matters Agreement dated July 14, 2015 by and among NetScout Systems, Inc., Danaher Corporation and Potomac Holding LLC (filed as Exhibit 10.3 to NetScout’s current report on Form 8-K, SEC File No. 000-26251, filed with the SEC on July 15, 2015 and incorporated herein by reference). |
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| 10.20 | | Intellectual Property Cross-License Agreement dated July 14, 2015 by and between Danaher Corporation and Potomac Holding LLC (filed as Exhibit 10.4 to NetScout’s current report on Form 8-K, SEC File No. 000-26251, filed with the SEC on July 15, 2015 and incorporated herein by reference). |
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| 10.21 | | Credit Agreement, dated as of July 14, 2015, by and among: NetScout Systems, Inc., JPMorgan Chase Bank, N.A., 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 (filed as Exhibit 10.5 to NetScout’s current report on Form 8-K, SEC File No. 000-26251, filed with the SEC on July 15, 2015 and incorporated herein by reference). |
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| 10.22 | | Summary of Non-Employee Director Compensation (filed as Exhibit 10.1 to NetScout’s Quarterly Report on Form 10-Q for the quarterly period ended December 31, 2016, SEC File No. 000-26251, filed on February 2, 2017 and incorporated herein by reference). |
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| 21 | | Subsidiaries of NetScout (filed herewith). |
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| 23 | | Consent of PricewaterhouseCoopers LLP (filed herewith). |
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| 31.1 | | Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith). |
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| 31.2 | | Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith). |
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32.1† | | Certification Pursuant to Section 906 of the Sarbanes–Oxley Act of 2002 (furnished herewith). |
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32.2† | | Certification Pursuant to Section 906 of the Sarbanes–Oxley Act of 2002 (furnished herewith). |
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| 101.INS** | | XBRL Instance Document. |
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| 101.SCH** | | XBRL Taxonomy Extension Schema Document. |
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| 101.CAL** | | XBRL Taxonomy Extension Calculation Linkbase Document. |
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| 101.DEF** | | XBRL Taxonomy Extension Definition Linkbase Document. |
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| 101.LAB** | | XBRL Taxonomy Extension Label Linkbase Document. |
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| 101.PRE** | | XBRL Taxonomy Extension Presentation Linkbase Document. |
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| * | Indicates a management contract or compensatory plan or arrangement. |
| ** | XBRL (Extensible Business Reporting Language) information is furnished and not filed or a part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections. |
*** | Exhibits and schedules have been omitted pursuant to Item 601(b)(2) of Regulation S-K and will be supplementally provided to the SEC upon request. |
| † | 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 |
