NETSCOUT SYSTEMS INC - 10-Q Quarterly Report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

(Mark One)

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2004

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number 0000-26251

NETSCOUT SYSTEMS, INC.

(Exact name of registrant as specified in its charter)

Delaware

04-2837575

(State or other jurisdiction of incorporation

or organization)

(IRS Employer Identification No.)

310 Littleton Road, Westford, MA 01886

(978) 614-4000

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 whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). YES ¨ NO x

The number of shares outstanding of the registrant’s common stock, par value $0.001 per share, as of August 5, 2004 was 30,532,428.

NETSCOUT SYSTEMS, INC.

FORM 10-Q

FOR THE QUARTER ENDED JUNE 30, 2004

TABLE OF CONTENTS


PART I: FINANCIAL INFORMATION

Item 1. Financial Statements		3

a.) Condensed Consolidated Balance Sheets:
As of June 30, 2004 and March 31, 2004		3

b.) Condensed Consolidated Statements of Operations:
For the three months ended June 30, 2004 and June 30, 2003		4

c.) Condensed Consolidated Statements of Cash Flows:
For the three months ended June 30, 2004 and June 30, 2003		5

d.) Notes to Condensed Consolidated Financial Statements		6

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		11

Item 3. Quantitative and Qualitative Disclosures About Market Risk		28

Item 4. Controls and Procedures		29

PART II: OTHER INFORMATION

Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities		30

Item 6. Exhibits and Reports on Form 8-K		30

SIGNATURES		31

EXHIBIT INDEX

PART I: FINANCIAL INFORMATION

Item 1. Financial Statements

NetScout Systems, Inc.

Condensed Consolidated Balance Sheets

(In thousands, except share and per share data)

(Unaudited)


	June 30, 2004			March 31, 2004
Assets
Current assets:
Cash and cash equivalents	$	30,092		$	19,011
Marketable securities		40,443			50,432
Accounts receivable, net of allowance for doubtful accounts of $42 and $40 at June 30, 2004 and March 31, 2004, respectively		11,521			10,851
Inventories		2,985			3,366
Refundable income taxes		2,172			2,102
Deferred income taxes		1,687			1,667
Prepaids and other current assets		2,283			2,175

Total current assets		91,183			89,604
Fixed assets, net		5,686			5,415
Goodwill, net		28,839			28,839
Capitalized software development costs, net		718			884
Deferred income taxes		8,208			8,378
Long-term marketable securities		5,968			6,016
Other assets		36			45

Total assets	$	140,638		$	139,181

Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	2,435		$	1,984
Accrued compensation		5,018			4,481
Accrued other		2,334			2,140
Income taxes payable		490			490
Deferred revenue		15,536			15,968

Total current liabilities		25,813			25,063

Deferred revenue		887			1,006

Total liabilities		26,700			26,069

Commitments and contingencies (Note 6)
Stockholders’ equity:
Preferred stock, $0.001 par value: 5,000,000 shares authorized; no shares issued or outstanding at June 30, 2004 and March 31, 2004		-			-
Common stock, $0.001 par value: 150,000,000 shares authorized; 34,720,360 and 34,584,577 shares issued and 30,517,137 and 30,381,354 shares outstanding at June 30, 2004 and March 31, 2004, respectively		35			34
Additional paid-in capital		111,341			110,683
Accumulated other comprehensive (loss) income		(123	)		7
Treasury stock at cost, 4,203,223 shares at June 30, 2004 and March 31, 2004		(26,490	)		(26,490	)
Retained earnings		29,175			28,878

Total stockholders’ equity		113,938			113,112

Total liabilities and stockholders’ equity	$	140,638		$	139,181

The accompanying notes are an integral part of these condensed consolidated financial statements.

NetScout Systems, Inc.

Condensed Consolidated Statements of Operations

(In thousands, except per share data)

(Unaudited)


	Three Months Ended June 30,
	2004		2003
Revenue:
Product	$	11,560	$	8,628
Service		8,105		6,557
License and royalty		432		418

Total revenue		20,097		15,603

Cost of revenue:
Product		3,653		2,781
Service		1,065		1,044

Total cost of revenue		4,718		3,825

Gross margin		15,379		11,778

Operating expenses:
Research and development		4,319		3,009
Sales and marketing		8,783		7,944
General and administrative		1,954		1,649
Amortization of other intangible assets		-		272

Total operating expenses		15,056		12,874

Income (loss) from operations		323		(1,096	)
Interest income and other expenses, net		179		197

Income (loss) before income tax expense (benefit)		502		(899	)
Income tax expense (benefit)		205		(347	)

Net income (loss)	$	297	$	(552	)

Basic net income (loss) per share	$	0.01	$	(0.02	)
Diluted net income (loss) per share	$	0.01	$	(0.02	)
Shares used in computing:
Basic net income (loss) per share		30,448		30,034
Diluted net income (loss) per share		31,710		30,034

The accompanying notes are an integral part of these condensed consolidated financial statements.

NetScout Systems, Inc.

Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)


	Three Months Ended June 30,
	2004			2003
Cash flows from operating activities:
Net income (loss)	$	297		$	(552	)
Adjustments to reconcile net income (loss) to cash provided by operating activities:
Depreciation		558			729
Amortization of other intangible assets		-			272
Amortization of capitalized software		166			-
Loss on disposal of fixed assets		19			15
Compensation expense associated with equity awards		-			47
Deferred income taxes		153			(174	)
Changes in assets and liabilities:
Accounts receivable, net		(670	)		3,267
Inventories		381			594
Refundable income taxes		(70	)		(250	)
Prepaids and other current assets		(127	)		294
Other assets		9			-
Accounts payable		451			(108	)
Accrued compensation and other expenses		731			131
Deferred revenue		(551	)		(911	)

Net cash provided by operating activities		1,347			3,354

Cash flows from investing activities:
Purchase of marketable securities		(14,958	)		(32,964	)
Proceeds from maturity of marketable securities		24,884			27,396
Purchase of fixed assets		(848	)		(486	)
Software development cost expenditures		-			(1,068	)

Net cash provided by (used in) investing activities		9,078			(7,122	)

Cash flows from financing activities:
Proceeds from issuance of common stock		656			237
Repurchase of common stock as treasury stock		-			(124	)

Net cash provided by financing activities		656			113

Net increase (decrease) in cash and cash equivalents		11,081			(3,655	)
Cash and cash equivalents, beginning of year		19,011			43,823

Cash and cash equivalents, end of period	$	30,092		$	40,168

Supplemental disclosure of cash flow information:
Cash paid for interest	$	11		$	-
Cash paid for income taxes	$	129		$	86

Non-cash financing activities:
Tax benefits of disqualifying dispositions of incentive stock options	$	3		$	7

The accompanying notes are an integral part of these condensed consolidated financial statements.

NetScout Systems, Inc.

Notes to Condensed Consolidated Financial Statements

(In thousands, except share and per share data)

(Unaudited)

1. Basis of Presentation

The accompanying unaudited interim condensed consolidated financial statements as of June 30, 2004 and for the three months ended June 30, 2004 and 2003, respectively, have been prepared by NetScout Systems, Inc. (“NetScout”) in accordance with generally accepted accounting principles for interim financial reports and the instructions for Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, certain information and footnote disclosures normally included in financial statements prepared under generally accepted accounting principles have been condensed or omitted pursuant to such regulations. In the opinion of NetScout’s management, the unaudited interim condensed consolidated financial statements include all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of NetScout’s financial position, results of operations and cash flows. The results of operations for the three months ended June 30, 2004 are not necessarily indicative of the results of operations for the year ending March 31, 2005. The balance sheet at March 31, 2004 has been derived from the audited consolidated financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.

For further information, refer to the consolidated financial statements and footnotes thereto included in NetScout’s Annual Report on Form 10-K for the year ended March 31, 2004, as filed with the Securities and Exchange Commission on June 14, 2004.

2. Stock-Based Compensation

NetScout accounts for stock-based awards to employees using the intrinsic value method as prescribed by Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations. NetScout has adopted the disclosure provisions of Statement of Financial Accounting Standards (“SFAS”) No. 148, “Accounting for Stock-Based Compensation—Transition and Disclosure, an Amendment to FAS No. 123.” All stock-based awards to non-employees are accounted for using the fair value method in accordance with SFAS No. 123 and Emerging Issues Task Force (“EITF”) Issue No. 96-18, Accounting for Equity Instruments that are Issued to Other than Employees for Acquiring, or in Conjunction with Selling, Goods or Services.

Had compensation cost for NetScout’s option plans been determined based on the fair value at the grant dates, as prescribed in SFAS No. 148, NetScout’s net income (loss) and basic and diluted net income (loss) per share on a pro forma basis would have been as follows:


	Three Months Ended June 30,
	2004			2003
Net income (loss) as reported	$	297		$	(552	)
Add: stock-based compensation under APB No. 25		-			47
Deduct: stock-based compensation expense determined under fair value-based method for all awards, net of tax		(1,515	)		(2,273	)

Pro forma net income (loss)	($	1,218	)	$	(2,778	)

Basic net income (loss) per share:
As reported	$	0.01		($	0.02	)
Pro forma	($	0.04	)	($	0.09	)
Diluted net income (loss) per share:
As reported	$	0.01		($	0.02	)
Pro forma	($	0.04

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