Lather, Rinse, Repeat

Another quarter, another beat and another sell-off in response. For those counting, NetScout delivered its third consecutive quarter of positive revenue growth and guided for a fourth. Assuming management delivers on its near-term outlook, a likely scenario given the company’s recent track record and product backlog entering the current quarter, NetScout will post its first full year of positive growth since FY ’23. Moreover, earnings on a TTM basis are already above the amount generated that year and are poised to move higher still. Nonetheless, shares of NTCT are well off the highs reached then and sit near 52-week lows. With a third of the market cap in cash, no debt and no direct tariff concerns, the downside risk seems quite limited here, in our opinion. Couple that with an innovative portfolio of cybersecurity solutions growing double-digits and sustained growth and margin expansion going forward, and we think the market will ultimately come around to our view that NetScout is woefully undervalued. Our price target remains $43.00 based on an unchanged FY ’26 EV/EBITDA multiple of 12x.

As for the details, NetScout’s fiscal Q1 ’26 results beat our estimates and consensus top to bottom. Relative to our model, the revenue upside was attributable to higher product sales, which benefited in part from a high seven-figure order received earlier than anticipated from a U.S. government agency. Importantly, product backlog exiting Q1 remained at levels similar to the start, enhancing near-term visibility. Much like last quarter, growth in Q1 was driven by the enterprise vertical and strong adoption of the company’s cybersecurity products. While operating expenses ran higher than we projected, both non-GAAP operating income and adjusted EBITDA margin still outpaced our expectations. Non-GAAP EPS beat by an even wider margin as NetScout benefited from non-operating gains on a foreign investment and to a lesser extent, a slightly lower tax rate than we projected.

Given the strong start to the fiscal year, management reaffirmed its prior top and bottom line guidance for FY ’26. For Q2, management anticipates revenue growth of 4%-6%, implying revenue in line with our prior estimate and consensus despite the pull-forward of a large government contract in Q1. However, expectations for non-GAAP EPS were set below our previous estimate and consensus. Over half of the variance is due to timing as NetScout’s annual customer and partner conference, ENGAGE, will occur in late September instead of October. The remainder reflects the company’s sale of its foreign investment in August, which effectively offsets the unrealized gain in Q1 and has no impact on earnings for the full year. Reflecting the results and outlook, we raise our revenue estimates for this year and next. With additional growth on the horizon, we expect the company to resume investments in the business. As such, we also increase our operating expense assumptions, resulting in no change to our prior non-GAAP EPS estimates.

Exhibit I: Quarterly Results and Guidance Versus Expectations

Source: NetScout Systems; K. Liu & Company LLC; FactSet Estimates

Q1 revenue of $186.7 million (+7.0% Y/Y) exceeded our estimate of $180.7 million and consensus of $181.1 million. Relative to our model, product sales of $73.0 million (+19.3% Y/Y) accounted for the upside and more than offset slightly lower service revenue of $113.8 million (+0.3% Y/Y). By product, revenue from service assurance solutions comprised 63% of revenue and grew 1.4% Y/Y, while cybersecurity sales comprised the remaining 37% of sales and increased 18.3% Y/Y. By vertical, revenue from service providers comprised 41% of total revenue in Q1 and declined 5.6% Y/Y, while enterprise customers accounted for 59% of revenue with a corresponding 17.7% Y/Y increase in revenue.

Non-GAAP gross margin of 78.7% was a tick above our 78.5% assumption. Total operating expenses were above our forecast with the variance fairly evenly split between research and development and general and administrative expenses. Regardless, both non-GAAP operating income of $26.6 million (14.2% margin) and adjusted EBITDA of $29.3 million (15.7% margin) beat our estimates of $24.0 million and $27.3 million, respectively. Non-GAAP EPS of $0.34, which included an unrealized gain on a foreign investment of $0.03 per share that was not factored into our model, beat our estimate of $0.29 and consensus of $0.30.

Cash and investments at quarter-end totaled $543.5 million and NetScout remains debt free. In Q1, NetScout generated $73.6 million in cash flow from operations and used $1.9 million for capital expenditures. The company also repurchased 761,249 shares at a total cost of $15.0 million during the quarter.

Turning to guidance, management reaffirmed its prior FY ’26 outlook for revenue of $825.0-$865.0 million and non-GAAP EPS of $2.25-$2.40. For Q2, management anticipates revenue growth of 4%-6%, implying revenue of $198.8-$202.6 million, and non-GAAP EPS of $0.43-$0.45. We were previously projecting Q2 revenue and non-GAAP EPS of $200.7 million and $0.52, respectively, while consensus stood at $199.3 million and $0.53. We estimate the shift in the timing of NetScout’s ENGAGE conference negatively impacts non-GAAP EPS in Q2 by $0.04-$0.05 while the sale of its stake in Napatech reduces earnings by another $0.03 per share.

Exhibit II: Estimate Revisions

Source: K. Liu & Company LLC

We raise our revenue estimates for FY ’26 and FY ’27 while also increasing our operating expense assumptions. The net effect is no material change in our non-GAAP operating income and EPS estimates. We continue to expect an acceleration in revenue growth, along with approximately100bps of operating and EBITDA margin expansion, for both this year and next.

Our report with model and disclosures is available here.

Disclosure(s):

The analyst, a member of the analyst’s household, and/or an account in which the analyst exercises discretion hold(s) a long position in the common stock of NetScout Systems (NTCT).