Strong Start to FY ’27; Guidance Reaffirmed

NetScout (NTCT) reported fiscal Q1 ’27 results well above our estimates and consensus. The strong performance was attributable to the earlier than anticipated closure of multiple government deals, which exceeded over $10 million in aggregate and drove growth in service assurance solutions to nearly 20% Y/Y. We note that even absent these awards, revenue would have exceeded expectations. The strength in product sales combined with a favorable mix yielded record high product gross margin. Operating expenses also compared favorably with our projections, resulting in strong flow-through to the bottom line. Both adjusted EBITDA and non-GAAP EPS beat our estimates and consensus by considerable margins. 

With only one quarter in the books thus far, management reaffirmed its prior FY ’27 guidance. Reflecting the pull-forward of several government-related deals into Q1, management’s outlook for Q2 calls for revenue to be flat to down modestly from the year-ago period. However, non-GAAP EPS is still expected to grow in the high-single digit range. If achieved, the 1H ’27 results would outpace our previous expectations and instill further confidence in the company’s ability to post solid growth for a second consecutive year. We raise our estimates slightly for this year and next to reflect the strong start to FY ’27, an uptick in our expectations for product growth and modestly higher operating leverage. All told, we continue to anticipate mid-single digit growth on an annual basis along with steady margin expansion. 

In an oft-repeated pattern with NetScout, shares traded lower despite the stellar start to the year. Once again, we would be remiss if we failed to mention that pull-forwards should be rewarded in NetScout’s case given how back-end loaded its fiscal year tends to be. Of late, the company has consistently executed against its near-term targets, delivering upside in the subsequent quarter and enhancing visibility into its full year growth aspirations. Ultimately, the stock has reacted in kind, and we see a similar setup at this juncture. Our price target remains $50.00 based on an unchanged FY ’27 EV/EBITDA multiple of 12x.

Exhibit I: Quarterly Results and Guidance Versus Expectations

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

Q1 revenue of $210.4 million (+12.7% Y/Y) easily exceeded our estimate of $196.5 million and consensus of $196.2 million. Product sales of $86.0 million (+17.8% Y/Y) accounted for the upside relative to our projection, while service revenue of $124.4 million (+9.4% Y/Y) was consistent with our forecast. Per management, approximately $10-$15 million in aggregate deal value with several government agencies was secured earlier than expected. By product, revenue from service assurance solutions comprised 67% of revenue and grew 20% Y/Y driven by the government-related wins. Cybersecurity sales comprised the remaining 33% of sales and were flat from the prior year due to a challenging comp. By vertical, revenue from enterprise customers, which includes government agencies, accounted for 63% of revenue and rose 19% Y/Y, while revenue from service providers comprised 37% of total revenue in Q1 and increased 3% Y/Y. NetScout exited Q1 with $32.9 million in product backlog, up from $30.9 million at this time last year. 

Non-GAAP gross margin of 80.6% was ahead of our 79.2% projection as product gross margin on a non-GAAP basis rose to 89.7% versus our 86.5% assumption. Total operating expenses also compared favorably with our estimates. Both non-GAAP operating income of $43.7 million (20.8% margin) and adjusted EBITDA of $46.9 million (22.3% margin) beat our estimates of $31.7 million and $34.7 million, respectively. Non-GAAP EPS of $0.52 also beat our estimate of $0.37 and the Street’s $0.38.

Cash and investments at quarter-end totaled $668.5 million, and the company remained debt free. In Q1, NetScout generated $50.8 million in cash flow from operations and used $6.4 million for capital expenditures and capitalized software development costs. The company also completed the previously announced acquisition of DigiCert’s DDoS attack protection assets for $55.0 million. 

Reflecting the benefit to Q1 from the early closure of government deals, management’s outlook for Q2 was below our prior estimate and consensus. The company continues to expect mid-single digit growth for 1H ’27, which implies Q2 revenue of $211.6-$219.7 million and flattish Y/Y growth at the high-end. Despite the lack of revenue growth in Q2, non-GAAP EPS is expected to increase in the high-single digit range, which implies non-GAAP EPS of $0.66-$0.67. For the full year, management reiterated its prior guidance for revenue of $885.0-$915.0 million and non-GAAP EPS of $2.65-$2.80. 

Exhibit II: Estimate Revisions

Source: K. Liu & Company LLC

We raise our estimates slightly for this year and next to reflect the strong start to FY ’27, an uptick in our product growth assumptions and modestly higher operating leverage. We continue to expect annual top and bottom line growth in the mid-single digit and high-single digit range, respectively, across our forecast horizon.

Our report with model and disclosures is available here.

Disclosure(s):

K. Liu & Company LLC (“the firm”) receives or intends to seek compensation from the companies covered in its research reports. The firm has not received any compensation from NetScout Systems (NTCT) in the past 12 months.

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).