FY ’27 Outlook Boosted by Strong Backlog and Tuck-in Acquisition

NetScout (NTCT) closed its FY ’26 on a high note, delivering Q4 results ahead of our estimates and consensus. Of even more significance than the headline beats, product backlog increased materially on both a sequential and Y/Y basis, providing solid near-term visibility as the company enters a new fiscal year and instilling confidence that the renewed growth seen over the past year is sustainable. In this regard, management’s initial guidance for FY ’27 reflects mid-single digit growth at the midpoint and ongoing margin expansion. While an acquisition completed subsequent to Q4 provides a bit of a boost to the outlook, the guidance for FY ’27 still would have been consistent with our prior assumptions and compared favorably with consensus on an organic basis.

As for what the company bought, NetScout acquired DigiCert’s DDoS protection business, which is expected to add $20 million in annualized recurring revenue and be immediately accretive. NetScout had been leveraging DigiCert for the back-end infrastructure of its Arbor Cloud network, so the acquisition provides both cost savings and control over the scaling of its cloud-based managed services moving forward. Absent the transaction, our model would have remained essentially unchanged but our estimates now increase for this year and next.

Reflecting the company’s robust free cash flow generation in Q4 and the uptick in our forecasts, we raise our price target from $46.00 to $50.00 based on an unchanged FY ’27 EV/EBITDA multiple of 12x. NetScout continues to execute well amid a period of restrained spending among its longstanding service provider customers, and we are encouraged by the company’s early progress in penetrating both new and existing enterprise customers with its expanding portfolio of cybersecurity and observability solutions. NetScout’s differentiated network datasets, deep domain expertise and support for agentic AI interfaces leave the company well positioned to benefit as AI workloads increasingly move towards inferencing, in our opinion, which in turn should translate into higher growth, robust free cash flow generation and greater returns to shareholders.

Exhibit I: Quarterly Results and Guidance Versus Expectations

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

Q4 revenue of $203.0 million (-1.0% Y/Y) was above our estimate of $198.1 million and consensus of $198.6 million. Product sales of $80.7 million (-9.8% Y/Y) accounted for the upside relative to our estimate, while service revenue of $122.3 million (+5.9% Y/Y) was approximately in line with our projection. Recall that a number of orders were pulled forward from Q4 into the prior quarter as customers flushed year-end budgets, resulting in the reported Y/Y declines in product and total revenue. Worth noting, however, NetScout exited Q4 with $50.0 million in product backlog, up significantly on both a sequential and Y/Y basis. In other words, bookings were far stronger than the reported revenue growth rates suggest and should bolster confidence that the renewed revenue growth seen over the past year is sustainable in the new fiscal year. By product, revenue from service assurance solutions comprised 62% of revenue and declined 4% Y/Y, while cybersecurity sales comprised the remaining 38% of sales and increased 5% Y/Y. By vertical, revenue from service providers comprised 44% of total revenue in Q4 and increased 7% Y/Y, while revenue from enterprise customers accounted for 56% of revenue and decreased 6% Y/Y.

Non-GAAP gross margin of 79.7% was consistent with our 79.6% assumption as were total operating expenses, resulting in much of the revenue upside dropping down to the bottom line. Both non-GAAP operating income of $43.9 million (21.6% margin) and adjusted EBITDA of $46.4 million (22.9% margin) beat our estimates of $40.2 million and $42.0 million, respectively. Non-GAAP EPS of $0.52 also exceeded our estimate and consensus of $0.46.

Cash and investments at quarter-end totaled $705.1million, and the company remained debt free. In Q4, NetScout generated $152.3 million in cash flow from operations and used $2.2 million for capital expenditures. The company repurchased nearly $30.0 million in stock during the quarter, bringing total repurchases to approximately $61.0 million in FY ‘26.

Turning to guidance, management’s initial outlook for FY ’27 reflects mid-single digit growth at the midpoint and continued margin expansion. Specifically, guidance calls for revenue of $885.0-$915.0 million and non-GAAP EPS of $2.65-$2.80. Prior to revisions, we were projecting revenue and non-GAAP EPS of $882.3 million and $2.55, respectively, while consensus stood at $876.9 million and $2.53. With the acquisition of DigiCert’s DDoS assets earlier this month adding annualized recurring revenue of $20.0 million, we view the midpoint of guidance on an organic basis as in line with our original assumptions and slightly ahead of Street expectations. For Q1, management anticipates revenue growth in the mid-single digit range and non-GAAP EPS to grow at roughly double that rate, implying revenue and non-GAAP EPS of $194.0-$198.0 million and $0.36-$0.38, respectively.

Exhibit II: Estimate Revisions

Source: K. Liu & Company LLC

Our estimates increase for this year and next as we incorporate the acquisition of DigiCert’s DDoS business into our model. Our prior assumptions for organic growth and margin expansion remain intact aside from some fine-tuning between line items and quarters.

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).