NetScout Systems, Inc. Q1 FY2026 earnings call

• NETSCOUT delivered a solid start to Fiscal 2026 with Q1 performance showing strong execution and positive momentum across top and bottom lines. • Revenue was approximately $187 million, a 7% year-over-year increase fueled by growth in the cybersecurity area and order timing. • Gross and operating profit margins expanded during the quarter, and non-GAAP diluted earnings per share reached $0.34, a 21% year-over-year increase. • Service assurance revenue rose 1.4%, driven by enterprise customers offsetting a decline in the service provider vertical. • Cybersecurity revenue grew 18.3% in both enterprise and service provider verticals. • Showcased the Omnis AI Insights Solution at the TM Forum's NeuroNOC Catalyst, demonstrating AI-driven operations in complex 5G environments. • Announced AI-backed enhancements to cybersecurity solutions like Arbor Edge Defense and Omnis Cyber Intelligence, as well as Adaptive Threat Analytics for Network Detection and Response (NDR).

For the first quarter of Fiscal 2026, service assurance revenue increased approximately 1.4% year-over-year, accounting for approximately 63% of total revenue. Cybersecurity revenue grew by 18.3% year-over-year, making up the remaining 37% of total revenue. Product revenue increased 19.3% to $73 million, while service revenue increased 0.3% to $113.8 million. Gross profit margin climbed by 1.6 percentage points to 78.7% in the first quarter, primarily driven by product volume and mix.

• Reaffirmed fiscal year 2026 revenue outlook in the range of $825 million to $865 million and non-GAAP diluted earnings per share in the range of $2.25 to $2.40. • Full-year effective tax rate expected to be approximately 20%. • Anticipates Q2 revenue growth in the range of 4% to 6% and non-GAAP earnings per share in the range of $0.43 to $0.45, noting the shift in the Engage customer event timing and normalization of operating expenses as prior-year restructuring benefits lapse.

• Ongoing macroeconomic uncertainty which may impact business opportunities and the ability to capture market opportunities as expected.

Q: Could you talk a little bit about what you are seeing in the macro environment relative to 90 days ago? And can you give a little bit more color on the outlook around the service provider spending in fiscal year '26 and compare it to what you were seeing this time last year?

A: If you're talking about the external environment related to tariffs, the jury is still out, and we are not seeing any effect at this point. Also, service provider spending is lumpy, so it's too early to compare this year with last year. The spending climate looks very similar to what we saw last year.

Q: Can you talk a little bit more about the security portfolio this year? What keeps it going? Where are you seeing the most demand around the newer products like mobile security, adaptive DDoS, distributed threat mitigation?

A: The Arbor DDoS business is fully integrated into NETSCOUT. We are cross-breeding technologies like scalable DPI into the DDoS world, which are big differentiators. We have traction on the OCI product repositioned into post-incident response, and our AI sensor product with partnerships like Splunk and Palo Alto is a big area of growth.

Q: How did spending amongst your federal government customers trended within the first quarter? And then as you look towards the September quarter, any initial thoughts on whether you'd expect kind of the usual federal government budget flush and maybe put that in context for kind of the $1 trillion-plus defense bill for next fiscal year as well and how that could benefit you?

A: Fed was strong in the quarter, grew mid-teens, and we had a good order come in earlier. But the timing of federal government orders is always suspect. We see opportunity in the federal area, but it's subject to approvals and timing.

Q: With the strength you're seeing on the enterprise side of the business right now, can you speak to how much of a contributor kind of these investments in AI data centers is impacting that or whether there are other kind of strong secular growth drivers that can help sustain that trend moving forward?

A: Our service assurance market is expanding into the larger observability market with our Omnis AI Insights Solution. AI is making our data more useful, and we have made product improvements in this area. The AI products are showing early interest and momentum, though they are still small in contribution currently.