NETSCOUT SYSTEMS, INC.
FORM 10-K
FOR THE FISCAL YEAR ENDED MARCH 31, 20192021
TABLE OF CONTENTS
| PART I | ||||||||
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| PART II | ||||||||
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| PART III | ||||||||
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| PART IV | ||||||||
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| Item 16. | ||||||||
Unless the context suggests otherwise, references in this Annual Report on Form 10-K (Annual Report) to "NetScout," the "Company," "we," "us," and "our" refer to NetScout Systems, Inc. and, where appropriate, our consolidated subsidiaries.
NetScout, the NetScout logo, Adaptive Service Intelligence and other trademarks or service marks of NetScout appearing in this Annual Report are the property of NetScout Systems, Inc. and/or its subsidiaries and/or affiliates in the United States and/or other countries. Any third-party trade names, trademarks and service marks appearing in this Annual Report are the property of their respective holders.
Cautionary Statement Concerning Forward-Looking Statements
This Annual Report contains forward-looking statements under Section 21E of the Exchange Act (as defined below) and other federal securities laws. These statements relate to future events or our future financial performance and are identified by terminology such as "may," "will," "could," "should," "expects," "plans," "intends," "seeks," "anticipates," "believes," "estimates," "potential" or "continue," or the negative of such terms or other comparable terminology. These statements are only predictions. You should not place undue reliance on these forward-looking statements. Actual events or results may differ materially. Factors that may cause such differences include, but are not limited to, the factors discussed under the heading "Risk Factors" and in our other filings with the Securities and Exchange Commission (SEC). These factors may cause our actual results to differ materially from any forward-looking statement. Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make.
Except as required by law, we do not undertake any obligation to release publicly any revisions to these forward-looking statements after completion of the filing of this Annual Report to reflect later events or circumstances or the occurrence of unanticipated events.
PART I
Item 1. Business
Overview
We are an industry leader with over 35 years of experience in providing service assurance and securitycybersecurity solutions that are used by customers worldwide to assure and secure their digital business services against disruption.disruption while preserving the user experience. Service providers and enterprises, including local, state and federal government agencies, rely on our solutions to achieve the visibility and security necessary to optimize network performance, ensure the delivery of high-quality, mission-critical applications and services, gain timely insight into the end user experience, and protect the network from attack. With our offerings, customers can quickly, efficiently and effectively identify and resolve issues that result in downtime, interruptions to services, poor service quality or compromised security, thereby driving compelling returns on their investments in their network and broader technology initiatives. Some of the more significant technology trends and catalysts for our business include the evolution of customers' digital transformation initiatives such as cloud migration, expanding threats associated with the rapidly evolving cybersecurity threat landscape, the advancement of business intelligence and analytics, and the 5G evolution occurring in both the service provider and enterprise verticals.
Our operating results are influenced by a number of factors, including, but not limited to, the mix and quantity of products and services sold, pricing, costs of materials used in our products, growth in employee-related costs, including commissions, and the expansion of our operations. Factors that affect our ability to maximize our operating results include, but are not limited to, our ability to introduce new products and enhance existing products, the marketplace acceptance of those new or enhanced products, continued expansion into international markets, development of strategic partnerships, competition, successful acquisition integration efforts, and our ability to achieve expense reductionsmanage expenses and make improvements in a highly competitive industry.
Markets
Our service assurance solutions are used by enterprises (including government agencies) and service providers to optimize network performance, quickly identify and resolve issues impacting application and service quality and gain insight into the end user experience. We also provide securityOur cybersecurity solutions thatare used by enterprises and service providers use to identify and mitigate advanced, volumetric, and application specificapplication-specific distributed denial of service (DDoS) attacks, as well as assist enterprise security teams in rapidly finding and isolating other advanced network threats.
Enterprise Market
Within the enterprise market, NetScout's nGeniusONE and ISNG offerings along with certain product lines acquired as part of the acquisition of Danaher's Corporation's (Danaher) Communication Business in July 2015 (Comms Transaction), enable IT organizations to support a growing range of performance management and securitycybersecurity use cases including:
•Network Performance Management - Our nGeniusONE analytics and our ISNG real-time information platform provide the necessary insight to optimize network performance, restore service and understand the quality of the users’ experience. By integrating certain acquired product lines and product features from the former Fluke Networks Enterprise business withinto our core offerings, our customers can benefit from a consistent view across their traditional wired network infrastructures, remote offices, and WiFi wireless networks.
networks (WiFi).3
•Application Performance Management: Data Center Transformation and Cloud Computing - We enable information technology (IT) organizations, from their development operations to their infrastructure teams, to manage the delivery of services across virtual and physical environments, providing a comprehensive, unified real-time view into network, application, server, and user communities' performance. We proactively detect emerging issues with the ability to help analyze both physical and virtual service delivery environments within the data center which enables organizations to optimize datacenter infrastructure investments, protect against service degradations, and simplify the operation of complex, multi-tier application environments in consolidated, state-of-the-art data centers. Our solutions are often used by enterprises to support private cloud computing environments that are aimed at enabling greater, more cost-effective accessibility to applications without compromising the reliability and security of those applications and the network. Our solutions portfolio also includes a range of new virtual appliances that can help enterprise customers extend their monitoring of applications deeper into their traditional data centers, confidently migrate applications into public cloud environments and gain a comprehensive, cohesive view into the resulting hybrid cloud environment.
•Unified Communications (UC) - We deliver deep application-level unified visibility into voice, data and video services side-by-side in order to understand the interrelationships of all UC services that traverse the network infrastructure and assess quality and performance of the delivery of these services. As a result, our real-time, actionable intelligence helps customers to deliver a high-quality UC experience as users make calls, video conference and engage in instant messaging. We also help desktop, network, telecom, and application teams manage UC through a common platform across complex, geographically dispersed, and multi-vendor environments.
•Software-as-a-Service and Infrastructure Performance Management - We also provide enterprise customers with active agent-based offerings that can help them determine availability and performance levels for software-as-a-service (SaaS) applications, and gauge the health of servers, routers and switches as well as wireless and virtual infrastructures. As a result, customers can continuously monitor the performance of key business services and the infrastructure used to deliver them, regardless of how applications are deployed or where the user is located. Deployed independently or as part of our broader service assurance solution, these products also play an important role in helping enterprises deliver a superior user experience, achieve outstanding service quality and drive better returns on their application and infrastructure investments.
•Application and Desktop Virtualization -We provide clear and actionable insights that help customers fully realize the operational benefits associated with Application and Desktop Virtualization, and reduce the time it takes to identify and resolve service problems. We offer visibility across all virtual desktop infrastructure (VDI) tiers including remote access, client, virtualization, web, front-end application, and related database systems, and help customers gain actionable metrics and insight from monitoring and analyzing the consumption and performance of VDI services.
•Cybersecurity: DDoS Protection and Cyber Threat Analytics - Computer networks continue to be targeted for cyberattacks, even more aggressively during the COVID-19 pandemic, that are aimed at disrupting, damaging, or otherwise destroying an enterprise’s ability to conduct its business or gaining unauthorized access to corporate applications and stealing valuable information. We provide a range of network security solutions under the NetScout Arbor brand that enable enterprises to protect their networks from high-volume and application-specific DDoS attacks, which are aimed at either overwhelming the network with traffic or over-exercising specific functions or features of a website with the intention to disable those functions or features. We arehave also developingdeveloped new securitycybersecurity solutions for enterprises that provide greater deep-dive forensic capabilities as well as analytics that can provide visibility into anomalous behavior on the network that may be indicative of an advanced threat. These new security analytics will enable existing enterprise customers to leverage their historical investments in NetScout’s service assurance solutions by using the Adaptive Service Intelligence (ASI) data already being generated to support service assurance as well as cybersecurity use cases.
Government Markets
Considered as part of our enterprise vertical, we have built a strong position with federal, state and local government agencies, both in the United States and abroad. Similar to our enterprise customers, government agencies are focused on streamlining and transforming IT into more efficient and more easily managed environments. To accomplish this, agencies are turning to IT solutions that will help simplify managing and assuring their IT environments as well as reduce costs. However, governmental markets differ from enterprise markets primarily due to their purchasing cycles being influenced by potential changes in government administrators, budgetary priorities and allocated funding for key projects.
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Telecommunication Service Provider Markets
Today’s service providers are focused on delivering a compelling set of services and ensuring a high-quality user experience, while also striving to minimize operational complexity, control costs and improve automation. This, coupled with
the challenge of internet protocol (IP) transformation activities and complex technologies such as 5G, Long-Term Evolution (LTE), Network Functions VirtualisationVirtualization (NFV), Internet Protocol Television (IP-TV), wireless network (WiFi) and cloud services drives the need for a more automated and unified approach to managing service delivery and the subscriber experience. Our service provider solutions support an expanding range of use cases including:
•Service Assurance for Mobile, Fixed Line and Cable Operators - The fundamental transformation of the mobile network to all-IP enables mobile operators to build highly-scalable service delivery environments to offer new services to meet the growing subscriber demand for data, voice and video-centric services and to consolidate and simplify network operations. Mobile operators use our offerings to gain real-time, detailed IP packet-level insight and core-to-access visibility, which enables them to ensure services offered over the network and meet certain pre-defined quality levels for an optimal subscriber experience. NetScout’s service assurance solutions help service providers effectively manage capacity, assess overall network quality, take proactive steps to modify the network before issues impact subscribers, and quickly identify and troubleshoot network problems. In addition to improving the overall return on their network infrastructure investments, mobile operators using our solutions also benefit from improved network quality and unique customer insights - both of which contribute to subscriber acquisition, retention, and monetization. The growing demand for high-bandwidth triple-play services, broadband connectivity, content anywhere, IP-TV, on-demand video traffic, new extended WiFi initiatives and carrier Ethernet services presents fixed line and cable multi-system operators with significant revenue opportunities. IP has become the de facto convergence mechanism for access, distribution and core networks, enabling new service offerings and simplifying network operations while reducing total cost of operations. For example, cable operators use our solutions to monitor and manage their local area WiFi connectivity services, ensure the high-quality delivery of video to consumers outside of their homes as well as provide broadband and telephony services targeting small- and medium-sized businesses.
•Business Intelligence for Service Providers - Service providers strive to understand how the performance of their networks impact customer experience, subscriber behavior and related usage trends. By combining network traffic data with other information, including support requests, subscriber calling plans, demographic data and other details, service providers can make more timely decisions about their offerings and sales and marketing initiatives to acquire, retain and further monetize their subscribers. NetScout’s analytics deliver timely insights into a service provider’s subscribers, services, networks, and applications, as well as easy export capabilities so that this information can be integrated into their data lakes and third-party analytic platforms.
•DDoS Protection - Over the past decade, Internet Service Providers (ISPs), including leading telecommunications providers, cable multi servicemulti-service operators and cloud providers, have seen significant increases in the sophistication, scale and frequency of high-volume and application-specific DDoS attacks on their networks. DDoS attacks are aimed at disrupting the online services of an ISP’s business customer by overwhelming the network with traffic or by over-exercising specific functions or features of a website with the intention to disable those functions or features. NetScout Arbor smart DDoS solutions are used by a wide range of ISPs around the world to help protect their networks against DDoS attacks, and to resell certain DDoS offerings to their enterprise customers.
Products Overview
Since our founding in 1984, we have been an industry innovator in using internet protocol-based (IP-based)IP-based network traffic to help organizations manage and optimize the delivery of services and applications over their networks, improve the end-user experience and protect networks from unwanted securitycybersecurity threats. Using our patented ASI technology, our solutions instantaneously convert network traffic data, often referred to as wire data, into high-value metadata, or "smart data," ourdata". Our offerings can help customers quickly identify and troubleshoot network and application performance issues, defend their networks from DDoS and other cybersecurity attacks, and rapidly find and isolate advanced network threats. Our solutions are typically deployed by customers as integrated hardware and software, as software only that is then integrated into commercial off-the-shelf hardware, or in a virtualized environment as software only, or as a Software as a Service (SaaS) form factor. NetScout'sOur solutions help itsour customers meet the increasing demands and ever-changing technology landscape of IP networks, service, applications, and applications.cybersecurity. In recent years, to further elevate our value proposition and address the nearnear- and long termlong-term needs of customers and prospects, we have delivered major product upgrades across our product lines by integrating key functionality from acquired product lines, increasing the deployment flexibility of our solutions, and adding new features and capabilities that enable us to address a broader range of use cases. Our primary products can be categorized as follows:
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Service Assurance Solutions for Network and Application Performance and Business Intelligence Analytics
•nGeniusONE Management Software and Analytic Modules - NetScout'sOur nGeniusONE management software is used to support our enterprise, service provider, enterprise, and government customers enabling them to predict, preempt, and resolve
network and service delivery problems while facilitating the optimization and capacity planning of their network infrastructures. Other products acquired as part of the Comms Transaction are supported by their own respective management software and related analytics. Additionally, NetScout marketswe market a range of specialized platforms and analytic modules that can enable itsour customers to analyze and troubleshoot traffic in radio access network and WiFi networks, as well as gain timely insight into high-value services, applications and systems, and better understand the subscriber’s experience on the network. nGeniusPULSE is an active testing tool that enables enterprises to identify infrastructure performance issues and determine application availability, reliability, and performance. NetScoutWe also markets itsmarket our nGenius Business Analytics solution, which enables service providers to quickly and efficiently analyze their network traffic to gain greater and more timely insights into their subscribers, services, networks, and applications, as well as easily export our smart data into their data lakes and into third-party analytic platforms.
•Visibility Products (Probes, Packet Flow Systems and Taps) - NetScout'sOur ISNG platform provides real-time collection and analysis of information-rich, high-volume packet-flow data from across the network that is displayed through the nGeniusONE Service Assurance Solution. The ISNG is an advanced passive network probe that can be deployed as a traditional appliance with integrated hardware and software, as software-only for use in commercial-off-the-shelf hardware or in virtualized or software only form factors. The virtualized form factor version of our intelligent data source, which is marketed as vSTREAM, can be deployed to support NFV environments as well as to cost-effectively monitor application performance in traditional data center, private cloud, and public cloud environments. NetScoutWe also providesprovide comprehensive packet flow systems (also called network packet brokers or network visibility fabric switches), that deliver targeted network traffic access to a range of monitoring and securitycybersecurity tools and systems, including the nGeniusONE Service Assurance platform. Additionally, NetScout marketswe market a suite of test access points (TAPs) that enable full, non-disruptive access to network traffic with multiple link type and speed options.
Cybersecurity Solutions
•DDoS Protection – NetScout provides securityWe provide cybersecurity solutions that enable service providers and enterprises around the world to protect their networks against DDoS attacks under the Arbor brand. Dozens of service provider customers around the world also resell Arbor's solutions as a managed DDoS service to their enterprise customers. Our portfolio of DDoS solutions offers complete deployment flexibility spanning on-premise offerings and cloud-based capabilities to meet a broad array of customer needs, as well as specialized analytics and comprehensive threat intelligence information. Our smart DDoS offerings for service providers include Arbor Sightline for DDoS visibility and threat detection, product, Arbor Threat Mitigation System for removing DDoS attack traffic from the network without disruption to key network services and Arbor Insight for advanced analytical and forensic information. Our smart DDoS offerings for enterprises include Arbor Edge Defense, a perimeter-based appliance for identifying and blocking incoming DDoS attacks and outbound malicious communications, and Arbor Cloud, a global, cloud-based traffic scrubbing service that quickly removes DDoS attack traffic. We plan to further enhance and expand these capabilities in ways that will enable greater adoption of our solutions by service provider and enterprise customers.
•Advanced Threat Detection – We are in the process ofactively expanding our enterprise securitycybersecurity offerings to better leverage the investment that NetScout’sour enterprise customers have made in our traditional service assurance solutions. By collecting network traffic via our probes, we can expand our value proposition by providing specialized analytics for both service assurance and security. Over the coming quarters, we planWe have introduced and will continue to introduceadvance solutions such as new packet forensic capabilities, such as Omnis Cyber Investigator, designed specifically for security operations teams as well as new anomalous behavior analytics that security teams can use to identify and investigate potential advanced network threats.
Integration with Third-Party Solutions
To have greater operational impact on assuring performance of applications and service delivery, NetScout haswe have integrated itsour technology with third-party management consoles and business service management systems. This integration allows organizations to receive alarms on impending performance problems and to link into the nGenius Service Assurance solution in order to perform detailed problem analysis and troubleshooting. The third-party solution providers that NetScout haswe have integrated itsour solutions with areinclude Cisco Systems, Cisco Sourcefire, Citrix Systems, Dell Technologies, Hewlett-Packard Company, IBM Tivoli, and VMWare. In addition, we have embedded NetScout Arbor DDoS mitigation capabilities on a blade within Cisco's market-leading ASR9000 router and will continue to evaluate partnership opportunities to integrate its smart DDoS capabilities within other network equipment platforms.
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Growth Strategy
The following are key elements in our growth strategy for fiscal year 2020:2022:
•Drive Innovation - In order to support our customers' near-term and longer-term requirements, we plan to continue innovating by enhancing and expanding our product portfolio. In particular, we continue to invest in research and development, and leverage the strong technical and domain expertise across itsour organization. Our engineering teams are focused on advancing technical innovation across itsour broad product portfolio. By capitalizing on our extensive experience with global enterprise, service provider and government organizations with IP-based networks, we remain well positioned to cross-leverage itsour technology development across all major platforms and relevant technologies to address the evolving demands of current and prospective customers.
•Deliver Pervasive Visibility - By making our visibility products available in multiple form factors, including software that can be deployed with commercial off-the-shelf servers and as virtual appliances, we believe that it is easier and more affordable for customers to deploy our technology more broadly across their hybrid network and IT infrastructures. By offering more cost-effective instrumentation options, we are well positioned to help existing and new customers gain greater visibility into more places across their end-to-end network environments and address an even broader range of service assurance and securitycybersecurity use cases.
•Extension into Adjacent Markets -By enhancing and expanding our product portfolio and driving product integration via internal development and acquisitions, we have expanded our reach into complementary adjacent markets such as application performance management, infrastructure performance management, big data analytics, and cybersecurity. We believe that this element of our strategy is integral to gaining access to larger budgets, increasing spending from existing customers, attracting new customers, and increasing our total addressable market. In particular, we plan to broadenare broadening our securitycybersecurity solutions beyond the DDoS market with plans for new enterprise security offerings that can help our customers extract more value from the network traffic that we are already collecting to support service assurance use cases.
•Fortify and Expand Existing Customer Relationships - We have an expansive, global customer base of service providers and enterprises that have purchased our products in support of major technology and network initiatives that they have implemented over the past decade. As a result, we believe we are well positioned to expand the scope of many of these relationships as well as acquire new customer relationships as we identify new opportunities to support new network, cybersecurity, and broader technology projects.
•Expand our Customer Base - The investments we have made over the past several years to expand our product portfolio and support greater deployment flexibility also positions us to win new customers in established geographic markets where we can leverage our global direct sales organization and an extensive network of value-added resellers and systems integrators.
•Increase Market Relevance and Awareness - We plan to continue to implement marketing campaigns aimed at generating high-quality sales opportunities with both current and prospective enterprise and service provider customers, promoting thought leadership and building the NetScout brand.
•Extend our Technology Partner Alliance Ecosystem - We plan to continue to develop and fortify alliances with complementary solutions providers that can help us support a larger, more global and more diverse customer base. We also plan to continue to enhance our technology value, product capabilities and customer relevance through the continued integration of our products into technology partner products.
•Pursue Strategic Acquisitions - We have completed many acquisitions since our inception that have helped broaden our capabilities, enhance our products and technologies, enable us to expand into adjacent markets and better position us to meet the needs of a larger base of customers and prospects.
•Improve Cost Structure and Drive Efficiencies - We plan to balance our investments in key technology, product development, sales and marketing, and other initiatives that will enable us to drive long-term profitable growth with an ongoing focus on controllingmanaging costs and driving efficiencies. During fiscal year 2019, we divested the handheld network test tools (HNT) product lines, reduced personnel costs via a voluntary separation program and other related actions, consolidated certain facilities and carefully managed discretionary spending.
Support Services
Customer satisfaction is a key driver of our success. Our support programs offer customers various levels of high-quality support services to assist in the deployment and use of our solutions. We have support personnel strategically deployed across the globe to deliver 24/7 support to our premium customers. Certain support services, such as on-site support activities, are provided by qualified third-party support partners. In addition, many of our certified resellers provide Partner Enabled Support
to our end users. This is especially prevalent in international locations where time zones and language, among other factors, make it more efficient for end users to have the reseller provide initial support functions. Our support also includes updates to
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our software and firmware at no additional charge, if and when such updates are developed and made generally available to our commercial customer base. If ordered, support commences upon shipment or expiration of the standard warranty for software. For software, which also includes firmware, the standard warranty commences upon shipment and expires 60 to 90 days thereafter. With regard to hardware, the standard warranty commences upon shipment and expires 60 days to 12 months thereafter. We believe our warranties are consistent with commonly accepted industry standards. We expect to continue to provide support services for the acquired platforms under existing agreements and plan to explore opportunities to further simplify and standardize our support obligations over the coming years.
Manufacturing
Our manufacturing operations consist primarily of final product assembly, configuration, and testing. We purchase components and subassemblies from suppliers and construct our hardware products in accordance with NetScout standard specifications. We inspect, test and use process controls to ensure the quality and reliability of our products. We maintain an ISO 9001 quality systems registration, a certification showing that our corporate procedures and manufacturing facilities comply with standards for quality assurance and process control. We also maintain an ISO 9001:2000 quality systems registration, a certification showing that our corporate procedures comply with standards for continuous improvement and customer satisfaction.
We generally use standard parts and components for our products, which can be sourced from various suppliers. We have generally been able to obtain adequate supplies of components in a timely manner from current suppliers. While certain components, such as computer network interface cards, are currently purchased from a single supplier, we have identified alternate suppliers that we believe can be qualified relatively quickly to fulfill our needs should an issue arise with the existing supplier. Our reliance on single source suppliers is further described in Item 1A "Risk Factors."
We manufacture our products based upon near-term demand estimates resulting from sales forecasts and historical fulfillment information. However, since these forecasts have a high degree of variability because of factors that include time of year, overall economic conditions and sales employee incentives, we believe it is prudent to maintain inventory levels in advance of receipt of firm orders to ensure that we have sufficient stock toto satisfy incoming orders. Our inventory management system has thus far enabled us to minimize the effects of the disruption caused by the global COVID-19 pandemic from a supply chain perspective. The potential impact of the COVID-19 pandemic on our business is further described in Item 1A "Risk Factors."
Sales and Marketing
Sales
We sell our products, support and services through a direct sales force and an indirect reseller and distribution channel.
Our direct sales force generally uses a "high-touch" sales model that consists of face-to-face meetings with customers to understand and identify their unique business challenges and requirements. In the current global pandemic environment, our sales teams have been successful in engaging customers virtually to understand their requirements and effectively design solutions. Our sales teams then translate thoseour customers' requirements into tailored business solutions that allow the customer to maximize the performance of its infrastructure and service delivery environment. Due to the complexity of the systems and the capital expenditures involved, our sales cycles typically take between three and twelve months. We build strategic relationships with our customers by continually enhancing our solution to help them address their evolving service delivery management challenges. In addition to providing a comprehensive solution to meet these needs, we continually provide software enhancements to our customers as part of their maintenance contracts with us. These enhancements are designed to provide additional and ongoing value to our existing customers to promote loyalty and the expansion of their deployment of our products. Existing customer growth is also driven by the expansion and changes in their networks as they add new infrastructure elements, new users, new locations, new applications, and experience increasing service traffic volumes. In recent months, we have taken steps to drive more effective cross-selling of our service assurance and security solutions into our installed customer base by consolidating the previously separate security and service assurance salesforces and by realigning existing sales resources accordingly.volumes or encounter incremental cyber threats.
We also maintain an indirect reseller and distribution channel. Sales to customers outside the United States are primarily export sales through channel partners. Our channel partners assist us by improving our reach to customers, extending our presence in new markets, and marketing and selling our products to a broad array of organizations globally. We sell through a range of channel partners including value-added resellers, value-added distributors, resellers, and system integrators, to our enterprise, service provider and government customers. Historically and currently, we have used indirect distribution channels principally as intermediaries on contractual terms for customers with whom we do not have a contract. Our sales force meets with end user customers to present our products and solutions, conduct demonstrations, provide evaluation equipment, recommend detailed product solutions, develop product deployment designs and timelines, and assist in establishing financial and other justifications for the proposed solution. During this selling process, a channel partner, who has contracts with both the end customer and us, may be brought in to facilitate the transaction and to provide fulfillment services. In the case of
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international channel partners, those services usually also include currency translation and support. In the U.S., fulfillment
services are usually limited to invoicing and cash collection. Under this approach, we have limited dependence upon channel partners for the major elements of the selling process. In many cases, there are multiple channel partners with the required contractual relationships, so dependence on any single channel partner is not significant.
During the fiscal yearsyears ended March 31, 20192021, 2020 and 20182019, no direct customers or indirect channel partners accounted for more than 10% of our total revenue. During the fiscal year ended March 31, 2017, one direct customer, Verizon Communications, Inc. (Verizon), accounted for more than 10% of total revenue, while no indirect channel partner accounted for more than 10% of total revenue.
Marketing
Our marketing organization drives our market research, strategy, product positioning and messaging, and produces and manages a variety of programs such as customer forums, trade shows, industry events, advertising, public and analyst relations, social media, direct mail, seminars and webinars, sales promotions and other online marketing programs. These programs are focused on promoting the sale and acceptance of our solutions to further build the NetScout brand as well as the ASI, nGenius, Arbor and other applicable product brand names in the marketplace.
Key elements of our marketing strategy focus on thought leadership, market positioning, market education, go to market strategies, reputation management, demand generation, and the acceleration of our strategic selling relationships with local and global resellers, systems integrators, and our technology alliance partners. During fiscal year 2019, NetScout2021, we continued to invest in the promotion of the NetScout brand as well as the nGenius and Arbor brands as core solution-level brands in their respective markets. We expect to continue these initiatives during fiscal year 2020.2022.
Research and Development
Our continued success depends significantly on our ability to anticipate and create solutions that will meet emerging customer requirements. NetScout worksWe work closely with itsour largest enterprise and service provider customers to better understand and address their near-term and longer-term requirements. By better understanding the key, time-sensitive needs of NetScout'sour global customer base, we believe NetScout'sour development programs will continue to result in enhanced products that are able to meet the increasing challenges of an increasingly complex and dynamic global network environment.
We have invested significant financial resources and personnel into the development of our products and technology. Our continued investment in research and development is crucial to our business and our continued success in the market. We have assembled a team of highly skilled engineers with expertise in various technologies associated with our business and the technologies being deployed by our customers. We plan to continue to enhance and expand our product offerings and capabilities in the near future while integrating key capabilities from acquired product lines as appropriate. As a result, we plan to continue to invest and dedicate significant resources to our research and development activities for both our enterprise and service provider customers. Additionally, we continue to support the legacy product lines that we acquired as a result of the Comms Transaction and work closely with customers on migrating to our next-generation offerings.
We predominantly develop our products internally, with some limited third-party contracting. We have also acquired developed technology through business acquisitions. To promote industry standards and manifest technology leadership, we participate in and support the activities and recommendations of industry standards bodies, and we also engage in close and regular dialogue with our key customers and alliance partners. These activities provide early insight into the direction of network and application performance requirements forand the changing cybersecurity landscape that impacts current and emerging technologies.
Seasonality
We have experienced, and expect to continue to experience, quarterly variations in our order bookings as a result of a number of factors, including the length of the sales cycle, complexity of customer environments, new product introductions and their market acceptance and seasonal factors affected by customer projects and typical IT buying cycles. Due to these factors, we historically have experienced stronger bookings during our fiscal third and fourth quarters than in our fiscal first and second quarters.
Customers
We sell our products to enterprises, service providers and local, state, and federal governmental agencies with large- andlarge-and medium-sized high-speed IP computer networks. Our enterprise customers cover a wide variety of industries, such as financial services, technology, manufacturing, healthcare, utilities, education, transportation and retail.retail as well as government and associated agencies. Our telecommunications service provider customer group includes mobile operators, wireline operators, cable operators, internet service providers, and cloud providers.
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Backlog
We produce our products on the basis of our forecast of near-term demand and maintain inventory in advance of receipt of firm orders from customers. We configure our products to customer specifications and generally deliver products shortly after receipt of the purchase order. Service engagements are also included in certain orders. Customers generally may reschedule or cancel orders with little or no penalty. We believe that our backlog at any particular time is not meaningful because it is not necessarily indicative of future sales levels. Our combined product backlog at March 31, 20192021 was $19.8$27.9 million compared to $28.0$29.4 million at March 31, 2018.2020. A majority of the backlog relates to customization and integration projects from our acquired business units. and radio frequency propagation modeling. In some cases, we have begun these projects but have not yet hit billable milestones. A majority of revenue for these projects is expected to be recognized into revenue throughout fiscal year 2020.2022.
Competition
We compete with many companies in the markets we serve. The service assurance market, including the infrastructure, network, and application performance management markets, is highly competitive, rapidly evolving, and fragmented with overlapping technologies and a wide range of competitors, both large and small, who may deliver certain elements of our solution. Consequently, there are a number of companies who have greater name recognition and substantially greater financial, management, marketing, service, support, technical, distribution and other resources than we do. Additionally, certain competitors, either due to their size and resources or due to their technological strengths, may be able to respond more effectively than we can to new or changing opportunities, technologies, standards and customer requirements.
Principal competitive factors in our service assurance market include scalability; ability to address a large number of applications, locations and users; product performance; the ability to easily deploy into existing network environments; the ability to offer virtualized solutions; and the ability to administer and manage the solution.
While we face multiple competitors within the service assurance industry, we believe that we compete favorably on the basis of the following factors:
•we provide a comprehensive service delivery management solution that is capable of addressing the needs of both enterprise and service provider customers and can be scaled to meet the challenges of today's dynamic service delivery environments;
•we believe that our solutions provide superior data and compete favorably on a broad range of metrics including the ability to recognize and track a large number of applications;
•we believe our solutions possess the scalability to support high and increasing levels of data and network traffic;
•our solutions look at both data and control plane traffic across an entire network; and
•our ASI technology is optimized to provide real-time information about service performance and real-time alerts to emerging service problems whereas traditional solutions are inherently latent, supporting only forensic-trouble shooting after an issue has occurred.
In the enterprise market, our competitors include companies who provide network performance management, application performance management, infrastructure performance management and other related solutions such as Avaya, CA Technologies (a Broadcom Inc. business), Cisco Systems, Dynatrace, Datadog, ExtraHop, InfoVista,IBM, Infovista, Keysight, SevOne, Viavi, Gigamon, Lancope, Corvil, ThousandEyes, New Relic, Riverbed Technology, Splunk and SolarWinds. In addition, we both compete with and partner with large enterprise management vendors, such as HP and IBM, who offer performance management solutions. We also compete with smaller, privately held competitors who often focus on specific vertical markets.
In the service provider market, we compete with traditional probe vendors, network equipment manufacturers, big data and analytics vendors, and virtualization vendors. These vendors include Alcatel-Lucent, Anritsu, Cisco, Empirix, Ericsson, Dell Technologies, EXFO, (which acquired Astellia in March 2018), Guavas, Huawei, IBM, Infovista, Niksun, Polystar (an Elisa Oyj business), Radcom, SevOne, Splunk, Nokia and Viavi. We face additional competitive threats from startups and new entrants that seek to offer innovative solutions in an industry characterized by rapid technological change.
In the cybersecurity market, we face a range of competitors, including those that may have greater name recognition and substantially greater financial, management, marketing, service, support, technical, distribution and other resources than we do. We believe that the scalability of our solutions, flexible deployment, and price-performance of our cybersecurity solutions positions us well to compete against both larger network equipment and security companies and smaller niche security solutions vendors.
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In the DDoS solutions market, we compete under the NetScout Arbor brand with a broad range of vendors including Radware, Akamai, F5 Networks, A10 Networks, Fortinet, Fastly, Cloudflare and Corero Network Security. In the market for specialized threat analysis, packet forensics and protection solutions used to identify advanced network threats, we compete with a range of vendors including Darktrace, Vectra Networks, FireEye, Cisco, Palo Alto Networks, RSA (a Dell Technologies business) and other specialist providers.
Our ability to sustain a competitive advantage depends on our ability to deliver continued technology innovation and adapt to meet the evolving needs of our customers. Competitive factors in our industry are further described in Item 1A "Risk Factors."
Intellectual Property Rights
We rely on patent, copyright, trademark, and trade secret laws and contract rights to establish and maintain our rights in our technology and products. While our intellectual property rights are an important element in our success, our business as a whole does not depend on any one particular patent, trademark, copyright, trade secret, license, or other intellectual property right.
We use contracts, statutory laws, domestic and foreign intellectual property registration processes, and international intellectual property treaties to police and protect itsour intellectual property portfolio and rights from infringement. From a contractual perspective, we use license agreements and non-disclosure agreements to control the use of our intellectual property and protect our trade secrets from unauthorized use and disclosure. In addition to license agreements, we rely on U.S. and international copyright law to protect against unauthorized copying of software programs in the U.S. and abroad. We have obtained U.S. and foreign trademark registrations to preserve and protect certain trademarks and trade names. We have also filed and obtained U.S. patents and international counterparts to protect certain unique NetScout inventions from being unlawfully exploited by other parties. However, there is no assurance that pending or future patent applications will be granted, that we will be able to obtain patents covering all of our products, or that we will be able to license, if needed, patents from other companies on favorable terms or at all. Our proprietary rights are subject to other risks and uncertainties described under Item 1A "Risk Factors."
Employees
Compensation and Benefits
We offer a totalcompetitive compensation and benefits package to attract, retain and motivate our employees. Our compensation package includes market-competitive pay, incentive compensation, restricted stock unit grants (RSU’s), an Employee Stock Purchase Plan, retirement benefits, health benefits, paid time off and leave benefits.
Diversity, Equity & Inclusion
Diversity, equity, and inclusion (DEI) are the cornerstones of 2,585our organizational excellence and complement our core values of performing with integrity, compassion, collaboration, and innovation. We embrace and encourage our employees' differences in age, color, disability, ethnicity, family or marital status, gender identity or expression, language, national origin, physical and mental ability, political affiliation, race, religion, sexual orientation, socio-economic status, veteran status, and other characteristics that make our employees unique. As such, we strive to demonstrate our commitment to DEI at the highest levels. Educating our employees about our DEI initiatives is a priority. In addition, we recently chartered a DEI team to ensure transparent and equitable processes for employee engagement, onboarding, learning and development, policy making, and career planning.
Culture & Values
We believe that our company culture is critical to our success and growth. Our culture complements and acts as a multiplier to our technology, exceptional talent, and forward-thinking innovation. As a result of our philosophy, we have pledged to be considerate, loyal and appreciative of our employees while also enacting decision-making processes and business strategies that result in efficient business outcomes.
We take seriously our mission as Guardians of the Connected World. We recently launched our internal NETSCOUT WITHOUT BORDERS initiative, of which a key component is an employee engagement program to continuously
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communicate our mission and goals to all of our global employees through a series of town hall meetings that provide direct interaction with the CEO, in-depth focus groups, and follow-on development programs. This is a significant investment to stay connected with all employees, and to ensure everyone is equipped with the knowledge and tools and aligned with our mission.
COVID-19 Response
During the COVID-19 pandemic, our top priority has been the safety and well-being of our employees and their families to ensure that they continue to be productive and keep our customers and the world connected. As the severity and scope of the pandemic became known in early calendar year 2020, we curtailed travel and required all employees, in all locations, to work from home, with only a limited numbers of employees with business-critical tasks provided access to our facilities. For those employees who needed to be on-site, we established multiple protective measures to ensure the safety of our employees. Throughout the course of the COVID-19 pandemic, we were able to maintain our unique culture, support our employees with well-being programs and uninterrupted salary and benefits, and maintain our market presence and unfailingly superior service levels to our customers.
Corporate Information
Our corporate headquarters are located at 310 Littleton Road, Westford, Massachusetts, and our telephone number is (978) 614-4000. We were incorporated in Delaware in 1984.
Our internet address is http://www.NetScout.com. Our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to reports filed pursuant to Sections 13(a) and 15(d) of the Exchange Act, are made available free of charge on or through our website at ir.netscout.com as soon as reasonably practicable after such reports are filed with, or furnished to, the SEC. None of the information posted on our website is incorporated by reference into this Report.
We webcast our earnings calls and certain events we participate in or host with members of the investment community. They are made available on our investor relations website at ir.netscout.com//investors/events-and-presentations/events-calendar/default.aspx. Additionally, we provide notifications of news or announcements regarding our financial performance, including SEC filings, investor events, press and earnings releases, as part of our investor relations website. The contents of these sections of our investor relations website are not intended to be incorporated by reference into this report or in any other report or document we file with the SEC.
Item 1A. Risk Factors.
In addition to the other information in this report, the following factors should be considered carefully in evaluating NetScout and our business.
Our operating results and financial condition have varied in the past and may vary significantly in the future depending on a number of factors. Except for the historical information in this report, the matters contained in this report include forward-looking statements that involve risk and uncertainties. The following factors are among many that could cause actual results to differ materially from those contained in or implied by forward-looking statements made in this report. These statements involve the risks and uncertainties identified below as well as additional risks and uncertainties that are not yet identified or that we currently think are immaterial but may also impact our business operations. Such factors are among many that may have a material adverse impact upon our business, results of operations, liquidity, and financial condition.
You should carefully consider carefully the risks and uncertainties described below, together with the information included elsewhere in this Annual Report on Form 10-K and other documents we file with the SEC. The risks and uncertainties described below are those that we have identified as material but are not the only risks and uncertainties facing us. Our business is also subject to general risks and uncertainties that affect many other companies. Additional risks and uncertainties not currently known to us or that we currently believe are immaterial also may impair our business, including our results of operations, liquidity, and financial condition.
Because of the following factors, as well as other variables affecting our results of operations, past financial performance may not be a reliable indicator of future performance, and historical trends should not be used to anticipate results or trends in future periods.
Summary of the Material Risks Associated with Our quarterly revenueBusiness
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These risks include, but are not limited to, the following:
•Our business and operating resultsoperations, and the operations of our customers, partners, and/or suppliers, may fluctuate.be adversely affected by epidemics and pandemics, such as the COVID-19 pandemic.
•Potential product vulnerabilities or critical security defects, prioritization decisions regarding remedying vulnerabilities or security defects, or customers not deploying security releases or deciding not to upgrade products, services, or solutions could result in claims of liability against us, damage our reputation, or otherwise harm our business.
•If we or third parties who we work with experience a security incident, or the confidentiality, integrity, or availability of our information technology, software, services, communications or data is compromised, our business or platform may be outside ofperceived as not being secure, our control, includingreputation may be harmed, demand for our offering may be reduced, and we may incur significant liabilities.
•Our ability to quickly and successfully recover from a disaster, public health crisis (including a global pandemic such as the following:COVID-19 pandemic), or other business continuity event could affect our ability to deliver our products and negatively impact our business reputation.
•If we fail to introduce new products and other industries in which we currently operatesolutions or may operate in the future;
•Our success depends, in part, on our ability to manage our international research and development operations and related partnerships. Our international research and development efforts may achieve delayed or lower than expected benefits and involve competitive and other risks.
•Necessary licenses for third-party technology may not be available to us on commercially reasonable terms or at all.
•Increased customer demands on our technical support services may adversely affect our relationships with our customers and our financial results.
•The success of our business depends, in part, on the continued growth in the market for and the continued commercial demand for service delivery, and network and application performance management solutionsservice assurance and network security solutions;solutions focused on the performance monitoring and management of applications and networks.
•Failure to manage growth properly and to implement enhanced automated systems could adversely impact our business.
•Our growth could suffer if the timingmarkets into which we sell our products and market acceptance of new products or product enhancements by usservices experience cyclicality.
•Our reliance on sole source suppliers could adversely impact our business.
•We or our competitors;suppliers may be affected by new regulations related to climate change or other environmental issues.
•Our success depends, in part, on our ability to manage and leverage our distribution channels. Disruptions to, or our failure to effectively develop and manufacture new productsmanage, these partners and technologies in a timely manner, the competitive positionprocesses and procedures that support them could adversely affect our ability to generate revenues from the sale of our products and the continued acceptance of our products by our customers and in the industries that we serve;services.
•Our success depends on our ability to manage expenses.protect our intellectual property rights.
•Our indebtedness may limit our operations and our use of our cash flow, and any failure to comply with the covenants that apply to our indebtedness could adversely affect our liquidity and financial condition.
•Any failure to meet our debt obligations could damage our business.
•The failure to recruit and retain qualified personnel and plan for and manage the succession of key executives could hinder our ability to meetsuccessfully manage our obligations underbusiness, which could have a material adverse effect on our financial position and operating results.
•We may not successfully complete acquisitions or integrate acquisitions we do make, which could impair our ability to compete and could harm our operating results.
•We face significant competition from other technology companies.
•Uncertainties of regulation of the Amended Credit Agreement will dependInternet and data traveling over the Internet could have a material and adverse impact on market conditionsour financial condition and our future performance, which isresults of operations.
•We are subject to economic, financial, competitivestringent and changing laws, regulations, standards, contractual obligations, and other factors beyond our control. Ifobligations related to privacy, data protection, and data security. The actual, alleged, or perceived failure by us or the partners we are unablework with to remain profitable or if we use more cash than we generate in the future, our level of indebtedness atcomply with such timeobligations could adversely affect our business, results of operations, by increasing our vulnerability to adverse changes in general economic and industry conditions and by limiting or prohibiting our ability to obtain additional financing for additional capital expenditures, acquisitions and generalfinancial conditions.
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•Foreign currency exchange rates may adversely affect our financial statements.
•The current economic and operating results duegeopolitical environment may impact some specific industries into which we sell and may lead our customers to the foreign exchange impact upon translationdelay or forgo technology investments and could have other impacts, any of these transactions into U.S. dollars.
The summary risk factors described above should be read together with the text of the U.S. dollar increasesfull risk factors below and in the effective priceother information set forth in this Annual Report on Form 10-K, including our consolidated financial statements and the related notes, as well as in other documents that we file with the SEC.
Risks Related to Our Business and Industry
Our business and operations, and the operations of our products sold in U.S. dollars into other countries, whichcustomers, partners, and/or suppliers, may require us to lower our prices or adversely affect sales to the extent we do not increase local currency prices. Decreased strength of the U.S. dollar could adversely affect the cost of materials, products and services we purchase overseas. Sales and expenses of our non-U.S. businesses are also translated into U.S. dollars for reporting purposes and the strengthening or weakening of the U.S. dollar could result in unfavorable translation effects. In addition, we may invoice customers in a currency other than the functional currency of our business, and movements in the invoiced currency relative to the functional currency could also result in unfavorable translation effects. We also face exchange rate risk from our investments in subsidiaries owned and operated in foreign countries.
We face risks related to epidemics, pandemics, and other outbreaks of communicable diseases that adversely affect global commercial activity, economies, financial markets, and companies. The outbreak of COVID-19 was declared a "pandemic" by the World Health Organization on March 11, 2020. An epidemic or pandemic or other outbreak of communicable diseases, such as the current COVID-19 pandemic, poses the risk that we or our customers, suppliers, and other business partners may be disrupted or prevented from conducting normal business activities for certain periods of time, the durations of which are outsideuncertain, and may otherwise experience significant impairments of business activities.
In response to the COVID-19 pandemic, many state, local, and foreign governments have put in place, and others in the future may put in place or continue, quarantines, executive orders, shelter-in-place orders, and similar government orders and restrictions to reduce the rate of infection and control the spread of the disease. Such orders or restrictions, or the perception that such orders or restrictions could occur, may continue to result in business closures, work stoppages, slowdowns and delays, travel restrictions and cancellation of events, among other effects that could affect productivity and disrupt our operations and those of our control, including:suppliers, customers, and business partners.
There continues to be uncertainty as to when all of our employees will be able to return to work on-site. Similar to other companies, we have differing statutory tax rates;
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customers, it is possible that we or others may determine that it is necessary to direct that employees engaged in our effective tax ratemanufacturing and support refrain from working on-site for an indeterminate period of time, and that this could have a material andan adverse effect on our financial conditionrevenue and resultsoperating results.
Furthermore, global travel has been sharply curtailed, and in some cases prohibited. Our sales personnel often meet with customers or prospective customers in person to provide greater personalized service. While our employees and customers have adjusted to virtual meetings, the inability of operationsour sales personnel to meet with customers or prospective customers at a customer facility could have an adverse effect on our revenue and operating results.
In addition, we rely on third-party suppliers and manufacturers throughout the globe. The COVID-19 pandemic has resulted in the extended shutdown of certain businesses and the priceclosure of international borders throughout the world, which may result in disruptions to our supply chain. These may include disruptions from temporary closure of third-party supplier and manufacturer facilities, interruptions in product supply or restrictions on the export or shipment of our common stock could decline ifproducts, as well as the import of products into countries in which we operate. Although we have attempted to minimize the effects of these disruptions, it is possible that these attempts will be insufficient, and that these disruptions will likely have an adverse effect on our revenues and operating results.
To the extent the COVID-19 pandemic adversely affects our business and financial results, are materially affected by an adverse changeit may also have the effect of heightening many of the other risks described in this "Risk Factors" section, such as those relating to our effective tax rate.
Unfavorable conditions in our credit ratingindustry or the global economy, or reductions in information technology spending, could affectlimit our ability to obtain additional financinggrow our business and negatively affect our results of operations.
Our results of operations may vary based on the impact of unfavorable changes in our industry or the global economy on us or our customers and potential customers. Unfavorable conditions in the economy both in the United States and abroad, including conditions resulting from financial and credit market fluctuations, international trade relations, political turmoil, natural catastrophes, outbreaks of contagious diseases (such as the ongoing COVID-19 pandemic), warfare and terrorist attacks on the United States, Europe, the Asia Pacific region or elsewhere, could cause a decrease in business investments, including spending on information technology, disrupt the timing and cadence of key industry events, and negatively affect the growth of our business and our results of operations. For example, these types of unfavorable conditions could disrupt the timing of and attendance at key industry events, which we rely upon in part to generate sales of our products. If those events are disrupted, our marketing investments, sales pipeline, and ability to generate new customers and sales of our products could be negatively and adversely affected. In addition, our competitors, many of whom are larger and have greater financial resources than we do, may respond to challenging market conditions by lowering prices in an attempt to attract our customers and may be less dependent on key industry events to generate sales for their products. In addition, the increased pace of consolidation in certain industries may result in reduced overall spending on our products and solutions. We cannot predict the timing, strength, or duration of any economic slowdown, instability, or recovery, generally or how any such event may impact our business.
Potential product vulnerabilities or critical security defects, prioritization decisions regarding remedying vulnerabilities or security defects, or customers not deploying security releases or deciding not to upgrade products, services, or solutions could result in claims of liability against us, damage our reputation, or otherwise harm our business.
The products and services we sell to customers, and our cloud-based solutions, may contain vulnerabilities or critical security defects which have not been identified or remedied. We may also make prioritization decisions in determining which vulnerabilities or security defects to fix, and the timing of these fixes, which could result in an exploit that compromises security.
Customers also sometimes need to test security releases before they can be deployed, which can delay implementation. In addition, we rely on third-party providers of software and cloud-based services, and we cannot control the rate at which they remedy vulnerabilities. Customers may also not deploy a security release or decide not to upgrade to the latest versions of our products, services, or cloud-based solutions containing the release, leaving them vulnerable.
If we or third parties who we work with experience a security incident, or the confidentiality, integrity, or availability of our information technology, software, services, communications or data is compromised, our business or platform may be perceived as not being secure, our reputation may be harmed, demand for our offering may be reduced, and we may incur significant liabilities.
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In the regular course of our business, we collect, use, store, transmit and process data, which can include information about our customers, employees, and others and which may be sensitive, proprietary, or confidential. Security incidents compromising the confidentiality, integrity, and availability of this information or our systems could result from a wide variety of cyberattacks, computer malware, viruses, social engineering (including phishing), ransomware, supply chain attacks, credential stuffing, efforts by individuals or groups of hackers and sophisticated organizations, including state-sponsored organizations, errors or malfeasance of our personnel, security vulnerabilities in the software or systems on which we rely, cyber extortion, and denial of service attacks. Such incidents have become more prevalent in our industry, and may in the future result in the unauthorized, unlawful, or inappropriate access to, inability to access, disclosure of, or loss of the sensitive, proprietary, and confidential information that we handle. Additionally, due to the ongoing COVID-19 pandemic, certain functional areas of our workforce remain in a remote work environment and outside of our corporate network security protection boundaries, which imposes additional risks to our business, including increased risk of industrial espionage, phishing, and other cybersecurity attacks, and unauthorized dissemination of sensitive, proprietary, or confidential information.
We also rely on third parties to operate our business systems and process the sensitive, proprietary, and confidential information that we handle. These third parties may affectnot have adequate security measures and could experience a security incident that compromises the termsconfidentiality, integrity, or availability of any such financing. Ifthe systems they operate for us or the information they process on our existing sourcesbehalf. Cybercrime and hacking techniques are constantly evolving, and we or third parties who we work with may be unable to anticipate attempted security breaches, react in a timely manner, or implement adequate preventative measures, particularly given increasing use of liquidityhacking techniques designed to circumvent controls, avoid detection, and remove or hide forensic information.
Although we have multiple and layered controls and security measures in place designed to prevent cyberattacks, experienced computer hackers are insufficientincreasingly organized and sophisticated and we cannot guarantee that our, or our third-party partners’ security measures will be sufficient to satisfyprotect against unauthorized access to our operating requirements,IT networks, software and systems. Malicious attack efforts operate on a large-scale and sometimes offer targeted attacks as a paid-for service. In addition, the techniques used to obtain access or sabotage networks change frequently and we may needbe unable to seekanticipate such techniques, implement adequate preventative measures, or stop security breaches that may arise from such techniques. As a provider of security solutions, we may be a more attractive target for such attacks. Other individuals or entities, including personnel or vendors, may also intentionally or unintentionally provide unauthorized access to raise capital by oneour IT environments.
If we or morethe third-parties who we work with were to experience a security incident or other incident that results in the compromise of the following:
Additionally, efforts by hackers or that may result in additional dilutionothers could cause interruptions, delays or cessation of our product licensing, or modification of our software, which could cause us to lose existing or potential customers. If these efforts are successful and a third party obtains unauthorized access to our stockholders.
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Our ability to quickly and successfully recover from a disaster, public health crisis (including a global pandemic such as the COVID-19 pandemic), or other business continuity event could affect our ability to deliver our products and negatively impact our business reputation.
The occurrence of a natural disaster, public health crisis (including a global pandemic such as the COVID-19 pandemic) or an act of terrorism, or a decision or need to close any of our internal control over financial reporting mayfacilities without adequate notice or may not identify weaknesses that needtime for making alternative arrangements could result in interruptions in the delivery of our products and services. Our central business functions, including administration, human resources, finance services, legal, development, manufacturing and customer support depend on the proper functioning of our computer, telecommunication and other technology systems and operations, some of which are operated or hosted by third parties.
While we have business continuity programs in place, a disruption or failure of these systems or operations because of a disaster, public health crisis (including a global pandemic such as the COVID-19 pandemic) or other business continuity event could cause data to be addressed inlost or otherwise delay our internal control system. Ifability to complete sales and provide the highest level of service to our customers. In addition, we are unable to conclude that our internal control overcould have difficulty producing accurate financial reporting is effective, investors could lose confidence in our reported financial informationstatements on a timely basis, which could have an adverseimpact on our ability to make timely disclosures and could adversely affect the trading value of our stock. Although we endeavor to ensure there is redundancy in these systems and that they are regularly backed-up, there are no assurances that data recovery in the event of a disaster would be effective or occur in an efficient manner. Our operations are dependent upon our ability to protect our technology infrastructure against damage from business continuity events that could have a significant disruptive effect on the market priceour operations. We could experience material adverse interruptions to our operations or delivery of services to our stock or impact our borrowing ability. In addition, changesclients in operating conditions and changes in compliance with policies and procedures currently in place may result in inadequate disclosure controls and procedures and internal control over financial reporting in the future.a disaster recovery scenario.
If our products contain errors or quality issues, such issues may be costly to correct, revenue may be delayed, we could be sued, and our reputation could be harmed.
Our products are inherently complex, and, despite our quality assurance processes and testing by our customers and us, errors or quality issues may be found in our products after commencement of commercial shipments, especially when products are first introduced or when new versions are released. These errors may result from components supplied by third parties incorporated into our products, which makes us dependent upon the cooperation and expertise of such third parties for the diagnosis and correction of such errors. If errors are discovered, we may not be able to correct them in a timely manner or at all. In addition, we may need to make significant expenditures to eliminate errors and failures. Errors and failures in our products could result in loss of or delay in market acceptance of our products and could damage our reputation. Regardless of the source of these defects or errors, we may need to divert the attention of our engineering personnel from our product development efforts to address the detection and correction of these errors and defects. If one or more of our products fail, a customer may assert warranty and other contractual
claims for substantial damages against us. Our contracts with customers contain provisions relating to warranty disclaimers and liability limitations, which may not be upheld. Defending a lawsuit, regardless of its merit, is costly and may divert management's attention and harm the market's perception of us and our products. In addition, if our business liability insurance coverage proves inadequate or future coverage is unavailable on acceptable terms or at all, our business, operating results, and financial condition could be adversely impacted.
The occurrence or discovery of these types of errors or failures could have a material and adverse impact on our business, operating results, and financial condition. Any such errors, defects, or security vulnerabilities could also adversely affect the market's perception of our products and business.
If we fail to introduce new products and solutions or enhance our existing products and solutions to keep up with rapid technological change, demand for our products and solutions may decline.
The market for application and network performance management, service assurance, and cybersecurity solutions, and business intelligence is highly competitive and characterized by rapid changes in technology, evolving industry standards, changes in customer requirements, a current high level of and increasing competition, and frequent product introductions and enhancements. Our success is dependent upon our ability to meet our customers' needs, which are driven by changes in computer networking technologies, new application technologies, new security risks and the emergence of new industry standards. In addition, new technologies may shorten the life cycle for our products and solutions or could render our existing or planned products and services less competitive or obsolete. We must address demand from our customers for advancements in our products and services applications in order to support our customers' growing needs and requirements. In order toTo meet this challenge and remain competitive in the market, we must introduce new enhancements and additional form factors to our existing product lines and service offerings. If we are unable to develop, introduce and communicate new network and application performance managementand service assurance products, network security products, business intelligence products, and solutions or enhancements to existing
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products , in a timely and successful manner, this inability could have a material and adverse impact on our business, operating results and financial condition.
As our success depends in part on our ability to develop product enhancements and new products and solutions that keep pace with continuing changes in technology, cyber risk and customer preferences, we must devote significant resources to research and development, development and introduction of new products and enhancements on a timely basis, and obtaining market acceptance for our existing products and new products. We have introduced and intend to continue to introduce new products and solutions, including movingincreased migration to higher software content in our"software as a service" and software-deployed products as well as cybersecurity products. If the introduction of these products and solutions is significantly delayed or if we are unsuccessful in bringing these products and solutions to market, our business, operating results, and financial condition could be materially and adversely impacted. We are currently developing and are already deploying a number of new products as well as enhancements to our existing products and offerings, including software only solutions and products available in multiple form factors.
Our success depends, in part, on our ability to manage our international research and development operations and related partnerships. Our international research and development efforts may achieve delayed or lower than expected benefits and involve competitive and other risks.
We must continue to enhance our existing products and introduce new products in order to keep up with rapid technological change. Our international research and development teams play a critical role in these efforts. We must attract, train, motivate and retain our international research and development team members. To maintain this stable international employee research and development talent, we believe we must provide our international engineers with compelling and strategically significant work, coupled with technical and architectural ownership of their respective development projects. We must develop the leaders of these international teams, while ensuring their frequent inclusion and participation in corporate strategic and operational planning. We are likely to recognize the costs associated with these investments earlier than some of the anticipated benefits, and the return on these investments may be lower, or may develop more slowly, than we expect. These development efforts also involve risks, including, knowledge transfer issues related to our technology and resulting exposure to misappropriation of intellectual property or information that is proprietary to us, heightened exposure to economic, security and political conditions abroad, and exchange rate and tax compliance issues. The risks related to our research and development efforts abroad could increase our expenses, impair our development efforts, harm our competitive position, and/orand damage our reputation. If we do not achieve the benefits anticipated from these investments, or if the achievement of these benefits is delayed, our operating results may be adversely affected.
Necessary licenses for third-party technology may not be available to us on commercially reasonable terms or may be very expensive.at all.
We currently and will in the future license technology from third parties that we use to produce or embed in our products. While we have generally been able to license required third-party technology to date, third-party licenses required in the future may not be available to us on commercially reasonable terms or at all. Third parties who hold exclusive rights to technology that we seek to license may include our competitors. If we are unable to obtain any necessary third-party licenses, we would be required to redesign our product or obtain substitute technology, which may not perform as well, be of lower quality or be more costly. The loss of these licenses or the inability to maintain any of them on commercially acceptable terms could delay development of future products or the enhancement of existing products. We may also choose to pay a premium price for such a license in certain circumstances where continuity of the licensed product would outweigh the premium cost of the license. The unavailability of these licenses or the necessity of agreeing to commercially unreasonable terms for such licenses could materially adversely affect our business, financial condition, operating results, and cash flows.
Increased customer demands on our technical support services may adversely affect our relationships with our customers and our financial results.
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We offer technical support services with many of our products. We may be unable to respond quickly enough to accommodate short-term increases in customer demand for support services. We also may be unable to modify the format of our support services to compete with changes in support services provided by competitors. Our customers depend on our support organization to resolve issues relating to our products deployed on their networks. A high level of support is critical for continued relationships with our customers. If we or our channel partners do not effectively assist our customers in deploying our products, succeed in helping our customers quickly resolve post-deployment issues, and provide effective ongoing support, it would adversely affect our ability to sell our products to existing customers and would harm our reputation with existing and potential customers. Any failure to maintain high quality support and services would harm our operating results and reputation. Further, if customers demand these services, and we cannot adequately meet their demand, or if we cannot realize revenues in connection with our provision of services related to product support, it could have a material and adverse impact on our financial condition and results of operations.
The success of our business depends, in part, on the continued growth in the market for and the continued commercial demand for service delivery, service assurance and network security solutions focused on the performance monitoring and management of applications and networks.
We derive nearly all our revenue from the sale of products and services that are designed to allow our customers to assure the delivery of services through management of the performance and network security of applications across IP networks. We have actively expanded our operations in the past through acquisitions and organic growth and may continue to expand them in the future to gain share in the evolving market in which we operate. Therefore, we must be able to predict the appropriate features and prices for future products to address the market, the optimal distribution strategy, and the future changes to the competitive environment. For us to be successful, our potential customers must recognize the value of more sophisticated application management and network security solutions, decide to invest in the management of their networked applications and, in particular, adopt our management solutions. Any failure of this market to continue to be viable would materially and adversely impact our business, operating results, and financial condition. Additionally, businesses may choose to outsource the operations and management of their networks to managed service providers. Our business may depend on our ability to continue to develop relationships with these service providers and successfully market our products to them.
Failure to manage growth properly and to implement enhanced automated systems could adversely impact our business.
The growth in size and complexity of our business and our customer base has been and will continue to be a challenge to our management and operations. Additional growth will place significant demands on our management, infrastructure, and other resources. To manage further growth effectively, we must hire, integrate, and retain highly skilled personnel qualified to manage our expanded operations. We will also need to continue to improve our financial and management controls, reporting systems, and procedures. If we are unable to manage our growth effectively, our costs, the quality of our products, the effectiveness of our sales organization, attraction and retention of key personnel, our business, our operating results and financial condition could be materially and adversely impacted. To manage our growth effectively, we may need to implement new or enhanced automated infrastructure technology and systems.
Any disruptions or ineffectiveness relating to our systems implementations and enhancements could adversely affect our ability to process customer orders, ship products, provide services and support to our customers, bill and track our customers, fulfill contractual obligations, and otherwise run our business.
As a result of the diversification of our business, personnel growth, acquisitions, and international expansion in recent years, most of our employees are based outside of our headquarters. If we are unable to appropriately increase management depth and enhance succession planning, we may not be able to achieve our financial or operational goals. It is also important to our continued success that we hire qualified employees, properly train them and manage out poorly performing personnel, all while maintaining our corporate culture and spirit of innovation. If we are not successful at these efforts, our growth and operations could be adversely affected.
As our business evolves, we must also expand and adapt our information technology (IT) and operational infrastructure. Our business relies on our data systems, billing systems and other operational and financial reporting and control systems. All these systems have become increasingly complex due to the diversification and complexity of our business and acquisitions of new businesses with different systems. To manage our technical support infrastructure effectively and improve our sales efficiency, we will need to continue to upgrade and improve our data systems, billing systems, ordering processes, customer relationship management systems, and other operational and financial systems, procedures and controls. These upgrades and improvements may be difficult and costly, and they may require employees to dedicate a significant amount of time to implement. If we are unable to adapt our systems and organization in a timely, efficient, and cost-effective manner to
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accommodate changing circumstances, our business may be adversely affected. If the third parties we rely on for hosted data solutions for our internal network and information systems are subject to a security breach or otherwise suffer disruptions that impact the services we utilize, the integrity and availability of our internal information could be compromised causing the loss of confidential or proprietary information, damage to our reputation and economic loss.
Our growth could suffer if the markets into which we sell our products and services experience cyclicality.
Our growth will depend in part on the growth of the markets which we serve. We serve certain industries that have historically been cyclical and have experienced periodic downturns that have had a material adverse impact on demand for the products, software, and services that we offer. Any of these factors could adversely affect the business, financial condition, and results of operations of the company in any given period.
Our reliance on sole source suppliers could adversely impact our business.
Specific components that are necessary for the hardware assembly of our instruments are obtained from separate sole source suppliers or a limited group of suppliers. These components include our network interface cards and proprietary hardware. Our reliance on sole or limited suppliers involves several risks, including a lack of control over the manufacturing process and inventory management and potential inability to obtain an adequate supply of required components and the inability to exercise control over pricing, quality and timely delivery of components. For most of our products, we do not have the internal manufacturing capabilities to meet our customers' demands. It is our practice to mitigate these risks by partnering with key suppliers, including distributors, to establish a variety of supply continuity practices. These practices may include, among other approaches, establishing buffer supply requiring suppliers to maintain adequate stocks of materials, bonding agreements with distributors, and use-based and kanban programs to set supply thresholds. We also enter into escrow arrangements for certain technologies. Where possible, we use widely available off the shelf hardware and work with large suppliers with multiple factories and other risk management practices. However, failure of supply or failure to execute effectively on any of these programs, including as a result of a public health crisis (included a global pandemic such as the COVID-19 pandemic) could result in our inability to obtain adequate deliveries or the occurrence of any other circumstance that would require us to seek alternative sources of supply for these components would impact our ability to ship our products on a timely basis. Moreover, if we are unable to continue to acquire from these suppliers on acceptable terms, or should any of these suppliers cease to supply us with components for any reason, we may not be able to identify and integrate an alternative source of supply in a timely fashion or at the same costs. Any transition to one or more alternate manufacturers would likely result in delays, operational problems, and increased costs, and may limit our ability to deliver our products to our customers on time for such transition period. These risks could damage relationships with our current and prospective customers, cause shortfalls in expected revenue, and could materially and adversely impact our business, operating results and financial condition.
We or our suppliers may be affected by new regulations related to climate change and other environmental issues.
We or our suppliers may become subject to new laws enacted with regards to climate change and other environmental issues. If new laws are enacted, or current laws are modified in countries in which we or our suppliers operate, we could face increased costs to comply with these laws. These costs may be incurred across various levels of our supply chain to comply with new environmental regulations, as well as by us in connection with our manufacturing of products, including costs related to incorporation of substitute materials and other product re-design costs, as well as costs associated with product recalls. In addition, we may be unable to service existing products if certain materials are no longer compliant with new regulations, which could cause us to incur increased costs to satisfy service obligations to customers. Additionally, our flow of product may be impacted which could delay the recognition of revenue and have a materially adverse effect on our business.
Our success depends, in part, on our ability to manage and leverage our distribution channels. Disruptions to, or our failure to effectively develop and manage, these partners and the processes and procedures that support them could adversely affect our ability to generate revenues from the sale of our products and services. Managing these distribution channels and relationships requires experienced personnel, and lack of sufficient expertise could lead to a decrease in sales of our products and services, which could cause our operating results to suffer.
Our future success may require us to increase the number and use of our indirect sales efforts through our distributors and channel partners and to leverage those relationships to expand these our distribution channels and to develop new indirect distribution channels to increase revenue. Our channel partners have no obligation to purchase any products from us. Some of our distribution and channel partners also distribute and sell competitive products and services and the reduction in sales by these partners could materially reduce our revenues. In addition, they could internally develop products that compete with our solutions or partner with our competitors and bundle or resell competitors' solutions, possibly at lower prices. The potential
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inability to develop relationships with new partners in new markets, expand and manage our existing partner relationships, the unwillingness of our partners to market and sell our products effectively or the loss of existing partnerships could have a material and adverse impact on our business, operating results and financial condition. Our international operations, including our operations in the United Kingdom, mainland Europe, India, Asia-Pacific and other regions, are generally also subject to the risk of longer sales cycles through our international distribution channels. Sales to customers outside the United States accounted for 42%, 39%, and 39% of our total revenue for the fiscal years ended March 31, 2021, 2020 and 2019, respectively.
The need to develop such relationships can be particularly acute in areas outside of the U.S. Recruiting and retaining qualified channel partners and training them in the use of our technology and services and ensuring that they comply with our legal and ethical requirements requires significant time and resources throughout the relationship.
Risks Related to Our Intellectual Property
Our success depends on our ability to protect our intellectual property rights.
Our business is heavily dependent on our intellectual property. We rely upon a combination of patent, copyright, trademark and trade secret laws and registrations and non-disclosure and other contractual and license arrangements to protect our intellectual property rights. The reverse engineering, unauthorized copying, or other misappropriation of our intellectual property could enable third parties to benefit from our technology without compensating us. Furthermore, the laws of some foreign jurisdictions do not offer the same protections for our proprietary rights as the laws of the United States, and we may be subject to unauthorized use of our products in those countries. Legal proceedings to enforce our intellectual property rights could be burdensome and expensive and could involve a high degree of uncertainty. In addition, legal proceedings may divert management's attention from growing our business. There can be no assurance that the steps we have taken to protect our intellectual property rights will be adequate to deter misappropriation of proprietary information, or that we will be able to detect unauthorized use by third parties and take appropriate steps to enforce our intellectual property rights. The unauthorized copying or use of our products or proprietary information could result in reduced sales of our products and eventually harm our operating results.
Others may claim that we infringe on their intellectual property rights.
Risks Related to Our Liquidity and Financial Condition
Our indebtedness may limit our operations and our use of our cash flow, and any failure to comply with the covenants that apply to our indebtedness could adversely affect our liquidity and financial condition.
On January 16, 2018, we amended and expanded our existing credit facility (Amended Credit Agreement) with a syndicate of lenders. The Amended Credit Agreement provides for a five-year $1.0 billion senior secured revolving credit facility, including a letter of credit sub-facility of up to $75.0 million. We have used the new credit facility for working capital purposes and to finance the repurchase of common stock under a previous accelerated stock repurchase plan. The commitments under the Amended Credit Agreement will expire on January 16, 2023, and any outstanding loans will be due on that date. As of the date of this report, we had approximately $350 million in outstanding indebtedness under the Amended Credit Agreement. Our debt level can have negative consequences, including exposing us to future interest rate risk. We may incur significantly more debt in the future, and there can be no assurance that our cost of funding will not substantially increase. Our current revolving credit facility also imposes certain restrictions on us; for a more detailed description please refer to "Management's Discussion and Analysis of Financial Condition and Results of Operations." Upon an event of default, for example, the administrative agent, with the consent of, or at the request of, the holders of more than 50% in principal amount of the loans and commitments, may terminate the commitments and accelerate the maturity of the loans outstanding under the
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Amended Credit Agreement and enforce certain other remedies under the Amended Credit Agreement and other loan documents, which would adversely affect our liquidity and financial condition. If we take on additional indebtedness, the risks described above could increase.
Interest on the outstanding balances under the Amended Credit Agreement is calculated based on the London Interbank Offered Rate (LIBOR). On July 27, 2017, the U.K. Financial Conduct Authority (FCA), which regulates LIBOR, announced that it will no longer require banks to submit rates for the calculation of LIBOR after 2021. Further, on March 5, 2021, the Intercontinental Exchange Benchmark Administration, the FCA-regulated and authorized administrator of LIBOR, announced, and the FCA confirmed, that one week and two-month USD LIBOR settings will cease on December 31, 2021, and that the USD LIBOR panel for all other tenors will cease on June 30, 2023. The Amended Credit Agreement, which matures on January 16, 2023, prior to the cessation of USD LIBOR publications on June 30, 2023, provides a mechanism pursuant to which we and the administrative agent may agree, under certain circumstances, to transition to an alternate base rate borrowing or amend the credit agreement to establish an alternate interest rate to LIBOR that includes consideration of the then-prevailing market convention for determining interest rates for syndicated loans in the United States at that time.
If the methods of calculating LIBOR change from current methods for any reason, or if LIBOR ceases to perform as it has historically, or if we select an alternative benchmark rate our interest expense associated with our outstanding indebtedness or any future indebtedness we incur may increase.
Any failure to meet our debt obligations could damage our business.
Our ability to meet our obligations under the Amended Credit Agreement will depend on market conditions and our future performance, which is subject to economic, financial, competitive, and other factors beyond our control. If we are unable to remain profitable, or if we use more cash than we generate in the future, our level of indebtedness at such time could adversely affect our operations by limiting or prohibiting our ability to obtain financing for additional capital expenditures, acquisitions and general corporate and other purposes. In addition, if we are unable to make payments as required under the Amended Credit Agreement, we would be in default under the terms of the loans, which could seriously harm our business. If we incur significantly more debt, this could intensify the risks described above.
We may fail to secure necessary additional financing.
Our future success may depend in part on our ability to obtain additional financing to support our continued growth and operations and any downgrades in our credit rating could affect our ability to obtain additional financing in the future or may affect the terms of any such financing. If our existing sources of liquidity are insufficient to satisfy our operating requirements, we may need to seek to raise capital by one or more of the following:
•issuing additional common stock or other equity instruments;
•acquiring additional bank debt;
•issuing debt securities; or
•obtaining lease financings.
However, we may not be able to obtain additional capital when we want or need it, or capital may not be available on satisfactory terms. Furthermore, any additional capital may have terms and conditions that adversely affect our business, such as new financial or operating covenants, or that may result in dilution to our stockholders.
We expect that existing cash, cash equivalents, marketable securities, cash provided from operations and our bank credit facilities will be sufficient to meet ongoing cash requirements. However, our failure to generate sufficient cash as our debt becomes due or to renew credit lines prior to their expiration could materially adversely affect our business, financial condition, operating results, and cash flows.
Other Risks Related to Our Business
The failure to recruit and retain qualified personnel and plan for and manage the succession of key executives could hinder our ability to successfully manage our business, which could have a material adverse effect on our financial position and operating results.
We operate in businesses where there is intense competition for experienced personnel in all our global markets and have, in some instances, experienced attrition of our employees to direct and indirect competitors. We depend on our ability to identify, recruit, hire, train, develop and retain qualified and effective professionals and to attract and retain talent needed to execute our business strategy. Our future success depends in large part upon our ability to attract, train, motivate and retain
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highly skilled employees, particularly executives, sales and marketing personnel, software engineers, and technical support personnel. The complexity of our products, processing functionality, software systems and services require highly trained professionals. While we presently have a sophisticated, dedicated and experienced team of employees who have a deep understanding of our business lines, the labor market for these individuals has historically been very competitive due to the limited number of people available with the necessary technical skills and understanding. If we are unable to attract and retain the highly skilled technical personnel that are integral to our sales, marketing, product development and technical support teams, the rate at which we can generate sales and develop new products or product enhancements may be limited. This inability could have a material and adverse impact on our business, operating results, and financial condition.
In addition, we must maintain and periodically increase the size of our sales force in order to increase our direct sales and support our indirect sales channels. Because our products are very technical, salespeople require a comparatively long period of time to become productive, typically three to twelve months. This lag in productivity, as well as the challenge of attracting qualified candidates, may make it difficult to meet our sales force growth targets. Further, we may not generate sufficient sales to offset the increased expense resulting from growing our sales force. If we are unable to maintain and periodically expand our sales capability, our business, operating results and financial condition could be materially and adversely impacted.
Loss of key personnel could adversely impact our business. Our future success depends to a significant degree on the skills, experience and efforts of Anil Singhal, our President, Chief Executive Officer, and co-founder, and our other key executive officers and senior managers to work effectively as a team. Effective succession planning is also important for our long-term success. Failure to ensure effective transfers of knowledge and smooth transitions involving key employees could hinder our strategic planning and execution. The loss of one or more of our key personnel could have a material and adverse impact on our business, operating results, and financial condition. We must, therefore, plan for and manage the succession of key executives due to retirement, illness, or competitive offers elsewhere.
We may not successfully complete acquisitions or integrate acquisitions we do make, which could impair our ability to compete and could harm our operating results.
We may need to acquire complementary businesses, products, or technologies to remain competitive or expand our business. We investigate and evaluate potential acquisitions of complementary businesses, products, and technologies in the ordinary course of business. We may compete for acquisition opportunities with entities having significantly greater resources than we have. As a result, we may not succeed in acquiring some or all businesses, products, or technologies that we seek to acquire. Our inability to effectively consummate acquisitions on favorable terms could significantly impact our ability to compete effectively in our targeted markets and could negatively affect our results of operations.
Acquisitions that we do complete could adversely impact our business. The potential adverse consequences from acquisitions include:
•the potentially dilutive issuance of common stock or other equity instruments;
•the incurrence of debt and amortization expenses related to acquired intangible assets;
•the potential litigation or other claims in connection with, an acquisition;
•the incurrence of significant costs and expenses to complete the acquisition and integrate the acquired business; and
•the potentially negative impact of poor performance of an acquisition on our earnings per share.
Acquisition transactions also involve numerous business risks. These risks from acquisitions include:
•difficulties in assimilating the acquired operations, technologies, personnel and products;
•difficulties in assimilating diverse financial reporting and management information systems as well as differing ordering processes and customer relationship management systems;
•use of cash to pay for acquisitions that may limit other potential uses of our cash, including stock repurchases and repayment of outstanding indebtedness;
•substantial accounting charges for restructuring and related expenses, write-off of in-process research and development, impairment of goodwill, amortization or impairment of intangible assets and share-based compensation expense;
•the potential loss of key employees, customers, distributors or suppliers; and
•the inability to generate sufficient revenue to offset acquisition or investment costs.
If we are not able to successfully manage these issues, the anticipated benefits and efficiencies of the acquisitions may not be realized fully or at all, or may take longer to realize than expected, and our ability to compete, our revenue and gross margins and our results of operations may be adversely affected.
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We face significant competition from other technology companies.
The service assurance, application performance management, network security and business intelligence markets are highly competitive, rapidly evolving, and fragmented markets that have overlapping technologies and competitors, both large and small, and we expect competition on solutions offerings and pricing to increase. We believe customers make service management system, network security and business intelligence purchasing decisions based primarily upon the following factors:
•product and service performance, functionality and price;
•timeliness of new product and service introductions;
•network capacity;
•ease of installation, integration, and use;
•customer service and technical support;
•name and reputation of vendor;
•quality and value of the product and services; and
•alliances with industry partners.
We compete with a large and growing number of providers of service assurance, application performance management solutions, network security offerings and network traffic analyzers and probes, as well as with providers of business intelligence services. In addition, leading network equipment, network security and service assurance and application technology vendors offer their own management solutions, including products which they license from other competitors. Some of our current and potential competitors have greater name recognition and substantially greater financial, management, marketing, service, support, technical, distribution and other resources than we do. In addition, some of our customers develop their own in-house solutions to meet their technological needs. Further, in recent years some of our competitors have been acquired by larger companies that are seeking to enter or expand in the markets in which we operate. We expect this trend to continue as companies attempt to strengthen or maintain their market positions in an evolving industry. Therefore, given their larger size and greater resources, our competitors may be able to respond more effectively than we can to new or changing opportunities, technologies, standards and customer requirements.
As a result of the competitive factors highlighted in this section and in other risk factors, including the introduction of disruptive technologies, we may not be able to compete effectively with our current or future competitors. If we are unable to anticipate or react to these competitive challenges or if existing or new competitors gain market share in any of our markets, our competitive position could weaken and we could experience a decline in our sales that could adversely affect our business and operating results. This competition could result in increased pricing pressure, reduced profit margins, increased sales and marketing expenses, and failure to increase, or the loss of market share, any of which would likely have a material and adverse impact on our business, operating results and financial condition.
Uncertainties of regulation of the Internet and data traveling over the Internet could have a material and adverse impact on our financial condition and results of operations.
We are subject to stringent and changing laws, regulations, standards, contractual obligations, and other obligations related to privacy, data protection, and data security. The rapid evolutionactual, alleged, or perceived failure by us or the partners we work with to comply with such obligations could adversely affect our business, results of operations, and increasing enforcement of privacyfinancial conditions.
We are subject to numerous domestic and securityforeign laws and regulations around the world could require significant company resources, limit certain functionalities of our products,other obligations relating to privacy, data protection, and harm our business.
data security. The enactment of new federal, state, and foreignregulatory framework for data privacy and security lawsissues worldwide is rapidly evolving, and as a result, legal requirements and enforcement practices are likely to continue to evolve. In many jurisdictions, enforcement activities and consequences for noncompliance are rising. In the United States, these activities include enforcement actions in response to rules and regulations promulgated under the authority of federal agencies, state attorneys general, states' legislation, and changesconsumer protection agencies. In addition, privacy advocates and industry groups in the United States have regularly proposed,
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and may propose in the future, self-regulatory security standards with which we may be required to existing legal frameworkscomply. If we fail to follow these standards, we may incur significant fines or experience a significant increase in costs.
Internationally, the data protection landscape is also rapidly evolving, and we expect there will continue to be new and proposed laws, regulations, and industry standards concerning privacy, data protection, and data security. The General Data Protection Regulation ("GDPR") went into effect in the European Union ("EU") in May 2018 and has been adopted as law in the United Kingdom ("UK"). The GDPR requires companies to give detailed disclosures about how they collect, use, and share personal information; contractually commit to data protection measures in contracts with customers and vendors; maintain adequate data security measures; notify regulators and affected individuals of certain data breaches; meet extensive privacy governance and documentation requirements; and honor individuals’ data protection rights, including their rights to access, correct, and delete their personal information. The GDPR also requires controllers to conduct data protection impact assessments for certain types of processing and requires processors to assist controllers with such assessments, which may be complex and burdensome to conduct. Laws in EU member states and the UK also impose restrictions on direct marketing communications and the use of cookies and similar technologies online.
European data protection laws including the GDPR also generally prohibit the transfer of personal information from Europe to the United States and most other countries unless the parties to the transfer have required an adjustmentimplemented specific safeguards to someprotect the transferred personal information. there is uncertainty regarding how to ensure that transfers of personal information from Europe comply with European data protection laws. As such, any transfers of personal information from Europe by us or our internal processespartners may increase our exposure to the GDPR’s heightened sanctions for violations of its cross-border data transfer restrictions, and increased compliance costs. We expect future changes could require similar efforts and resources with regard to compliance. The adoption of or changes to any such data privacy and laws and regulations could affectmay reduce demand for our products, increase the cost of selling our products and divert time and attentionservices from companies subject to European data protection laws. Loss of our management, allability to transfer personal information from Europe may also require us to increase our data processing capabilities in those jurisdictions at significant expense.
Complying with foreign and domestic data protection laws may cause us to incur additional operational costs or require us to change our business practices. Despite our efforts, we may fail to achieve full compliance either due to internal or external factors such as lack of vendor cooperation. Any actual, alleged, or perceived non-compliance could result in legal proceedings against us by governmental entities, customers, data subjects, or others.
We are or may become subject to the terms of our privacy and security policies, representations, certifications, standards, publications, and contractual obligations relating to privacy, data protection, and data security. Although we endeavor to comply with our obligations, we and the third parties on which we rely may at times fail to do so or may be perceived to have failed to do so. Such failures could have a materialsubject us to regulatory enforcement action as well as costly legal claims by affected individuals or our customers.
We strive to comply with applicable privacy, data protection, and adverse effectdata security laws and other obligations, but we cannot fully determine the impact that current or future such laws and other obligations may have on our business or operations. Such laws or obligations may be inconsistent from one jurisdiction to another or subject to differing interpretations, and courts or regulators may deem our efforts to comply as insufficient. If we or the third parties we rely on to operate our business and deliver our services fail to comply, or are perceived as failing to comply, with our legal, contractual, or other obligations relating to privacy, data protection, or data security, or our policies and documentation relating to personal information, we could face governmental enforcement action; litigation with our customers, individuals or others, fines and civil or criminal penalties for us or company officials, obligations to cease offering our services or to substantially modify them in ways that make them less effective in certain jurisdictions, negative publicity and harm to our brand and reputation, and reduced overall demand for our services. Such developments could adversely affect our business, financial condition, and results of operations.
Foreign data protectioncurrency exchange rates may adversely affect our financial statements.
A material portion of our revenue is derived from international operations. Our consolidated financial results are reported in U.S. dollars. Most of the revenue and expenses of our foreign subsidiaries are denominated in local currencies. Given that cash is typically received over an extended period of time for many of our license agreements and given that a material and increasing portion of our revenue is generated outside of the United States, fluctuations in foreign exchange rates (including the Euro) against the U.S. dollar could result in substantial changes in reported revenues and operating results due to the foreign exchange impact upon translation of these transactions into U.S. dollars.
In the normal course of business, we employ various hedging strategies to partially mitigate these risks, including the use of derivative instruments. These strategies may not be effective in fully protecting us against the effects of fluctuations from movements in foreign exchange rates, including the increased volatility in foreign exchange rates during the COVID-19
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pandemic and future global pandemics and other events. Fluctuations of the foreign exchange rates could materially adversely affect our business, financial condition, operating results, and cash flow.
Additionally, sales and purchases in currencies other than the U.S. dollar expose us to fluctuations in foreign currencies relative to the U.S. dollar and may adversely affect our financial statements. Increased strength of the U.S. dollar increases the effective price of our products sold in U.S. dollars into other countries, which may require us to lower our prices or adversely affect sales to the extent we do not increase local currency prices. Decreased strength of the U.S. dollar could adversely affect the cost of materials, products, and services we purchase overseas. Sales and expenses of our non-U.S. businesses are also translated into U.S. dollars for reporting purposes and the strengthening or weakening of the U.S. dollar could result in unfavorable translation effects. In addition, we may invoice customers in a currency other than the functional currency of our business, and movements in the invoiced currency relative to the functional currency could also result in unfavorable translation effects. We also face exchange rate risk from our investments in subsidiaries owned and operated in foreign countries.
If we violate the U.S. Foreign Corrupt Practices Act or applicable anti-bribery laws in other countries, or if we fail to comply with U.S. export controls and government contracting laws, our business could be harmed.
We earn a material portion of our total revenues from international sales. As a result, we must comply with complex foreign and U.S. laws and regulations, are rapidly evolving. such as the U.S. Foreign Corrupt Practices Act, the U.K. Bribery Act, and other local laws prohibiting corrupt payments to government officials and others, as well as anti-competition regulations.
The European Union (EU) data protection law, the General Data Protection Regulation (GDPR)U.S. Foreign Corrupt Practices Act (FCPA), which became effectivecontinues to see increased enforcement in May 2018, is wide-rangingrecent years, generally prohibits U.S. companies and their intermediaries from making corrupt payments to foreign officials for the purpose of obtaining or keeping business or otherwise obtaining favorable treatment and requires companies to maintain appropriate record-keeping and internal accounting practices to accurately reflect the transactions of the company. Under the FCPA, U.S. companies may be held liable for actions taken by agents or local partners or representatives. In addition, regulators may seek to hold us liable for successor liability FCPA violations committed by companies which we acquire. We are also subject to the U.K. Bribery Act and may be subject to certain anti-corruption laws of other countries in scope. which we do business.
In orderaddition to adaptanti-bribery and anti-corruption laws, we are also subject to these new requirements,the export and re-export control laws of the U.S., including the U.S. Export Administration Regulations (EAR) and the office of Foreign Asset Control (OFAC), as well as to U.S. government contracting laws, rules and regulations, and may be subject to government contracting laws of other countries in which we continuedo business. If we or our distributors, resellers, agents, or other intermediaries fail to invest resources necessary to enhance our policies and controls across our business units and services relating to how we collect and use personal data from customers and employees and how vendors handle personal data we provide to them. Similar privacy and data protection laws have also been proposed in other states and at the federal level.
The current economic and geopolitical environment may impact some specific industries into which we sell and may lead our customers to delay or forgo technology investments and could have other impacts, any of which could materially adversely affect our business, financial condition, operating results and cash flows.
Many of our customers are concentrated in certain industries, including financial services, public sector, healthcare, and the service provider market segment.market. Certain industries may be more acutely affected by economic, geopolitical, and other factors, including public heath crises (including global pandemics such as the COVID-19 pandemic), and changes in U.S. trade policy with China and other countries, than other sectors. Our public sector customers are affected by federal, state, and local budget decisions. To the extent that one or more of the sectors in which our customer base operates is
adversely impacted, whether as a result of general conditions affecting all sectors or as a result of conditions affecting only those particular sectors, our business, financial condition and results of operations could be materially and adversely impacted. If companies in our target markets reduce capital expenditures, we may experience a reduction in sales, longer sales cycles, slower adoption of new technologies as well as downward pressure on the price of our products. There can be no assurance that any decrease in sales resulting from the COVID-19 pandemic will be offset by increased sales in subsequent periods. Although the magnitude of the impact of the COVID-19 pandemic on our business and operations remains uncertain, the continued spread of COVID-19 or the occurrence of other epidemics and the imposition of related public health measures and travel and business restrictions could adversely impact our business, financial condition, operating results and cash flows.
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International economic, political, legal, compliance and business factors could negatively affect our financial statements and growth.
We expect to continue to develop our sales and presence outside the U.S., particularly in high-growth markets. Our international business (and particularly our business in high-growth markets) is subject to risks that are customarily encountered in non-U.S. operations, any of which could negatively affect our business, financial condition, and results of operations.
General Risk Factors
Our actual operating results may differ significantly from our guidance.
We generally release guidance regarding our future performance on our quarterly earnings conference calls, quarterly earnings releases, and otherwise. Such guidance, which includes forward-looking statements, reflects our management’s estimates as of the date of release and is based on projections prepared by our management. We may also decide not to release, or to defer, issuing guidance, where such guidance might not be appropriate or when we do not have sufficient visibility or clarity to issue such guidance. In particular,those situations, we expect to communicate our reasons for not releasing or deferring release of guidance.
Projections are based upon a number of assumptions and estimates that, while presented with numerical specificity, are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond our control and are based upon specific assumptions with respect to future business decisions, some of which will change. The principal reason that we release guidance is to provide a basis for our management to discuss our business outlook with analysts and investors. We are not responsible for any projections or reports published by any such analysts or investors.
Guidance is necessarily speculative in nature, and it can be expected that some or all of the assumptions underlying the guidance furnished by us will not materialize or will vary significantly from actual results. Accordingly, our guidance is only an estimate of what management believes is realizable as of the date of release. Actual results may vary from our guidance and the variations may be material. In light of the foregoing, investors are urged not to rely upon our guidance in making an investment decision regarding our common stock.
Any failure to successfully implement our operating strategy or the occurrence of any of the events or circumstances set forth in this "Risk Factors" section in this report could result in the actual operating results being different from our guidance, and the differences may be adverse and material.
Our effective tax rate may fluctuate, which could increase our income tax expense and reduce our net income.
Our effective tax rate or the taxes we owe could be adversely affected by votersseveral factors, many of which are outside of our control, including:
•changes in the relative proportions of revenues and income before taxes in the various jurisdictions in which we operate that have differing statutory tax rates;
•changing tax laws, regulations, and interpretations in multiple jurisdictions in which we operate as well as the requirements of certain tax rulings;
•changes in the research and development tax credit laws;
•earnings being lower than anticipated in jurisdictions where we have lower statutory rates and being higher than anticipated in jurisdictions where we have higher statutory rates;
•the valuation of generated and acquired deferred tax assets and the related valuation allowance on these assets;
•transfer pricing adjustments;
•the tax effects of purchase accounting for acquisitions and restructuring charges that may cause fluctuations between reporting periods; and
•tax assessments or any related tax interest or penalties that could significantly affect our income tax expense for the period in which the settlements take place.
We are subject to income taxes in the United KingdomStates and in numerous foreign jurisdictions. From time to leavetime, we may receive notices that a tax authority in a particular jurisdiction believes that we owe a greater amount of tax than we have reported to such authority.
While we regularly assess the European Union (EU) has resulted in significant and wide-ranging economic effects across multiple markets. A withdrawal could, among otherlikelihood of adverse outcomes disrupt the free movement of goods, services, and people between the United Kingdomfrom such examinations and the EU, and undermine bilateral cooperation in key policy areas. In addition, a withdrawal could lead to legal uncertainty and potentially divergent national laws and regulations as the United Kingdom determines which EU laws to replace or replicate. Given the lack of comparable precedent, it is unclear what financial, trade, and legal implications the withdrawal of the United Kingdom from the EU would have and how such withdrawal would affect us. We have taken steps to assess our Brexit-related risk and continue to monitor developments to assess potential business impacts.
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adverse impacteffect on demand for the products, software and services that we offer. Any of these factors could adversely affect the business,our financial condition and results of operations ofand the combined company in any given period.
We may be less susceptibleimpacted by changes in taxation, trade, and other regulatory requirements.
We are subject to income tax in local, national, and international jurisdictions. In addition, our products are subject to import and excise duties and/or sales or value-added taxes (VAT) in many jurisdictions. We are also subject to the effectsexamination of our tax returns and other tax matters by the Internal Revenue Service and other tax authorities and governmental bodies. We regularly assess the likelihood of an economic slowdown,adverse outcome resulting from these examinations to determine the adequacy of our enterprise customers may be adversely affected, especially in financial services and consumer industries. Continued volatilityprovision for taxes. Additionally, changes in or disruptionthe improper application of financial markets could limit customers' abilityimport and excise duties and or sales taxes or VAT may negatively impact our operating results. There can be no assurance as to obtain adequate financing to maintain operationsthe outcome of these examinations. Fluctuations in tax rates and
There is increased uncertainty with respect to tax policy and trade relations between the U.S. and other countries. Major developments in tax policy or trade relations, such as the imposition of unilateral tariffs on imported products, could have a material adverse effect on our results of operations, financial condition, and cash flows.
Our estimates and judgments related to critical accounting policies could be inaccurate.
We consider accounting policies related to revenue recognition, marketable securities, valuation of goodwill, intangible assets and other acquisition and divestiture accounting items, and share-based compensation to be critical in fully understanding and evaluating our financial results. Management makes judgments and creates estimates when applying these policies. These estimates and judgments affect, among other things, the reported amounts of our assets, liabilities, revenue and expenses, the amounts of charges accrued by us, and related disclosure of contingent assets and liabilities. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances and at the time they are made. If our estimates or the assumptions underlying them are not correct, actual results may responddiffer materially from our estimates and we may need to, economic conditions by lowering their prices,among other things, accrue additional charges or impair assets that could adversely impact our business. As a result, our operating results and financial condition could be materially and adversely impacted in future periods.
Our disclosure controls and procedures and internal control over financial reporting may not be effective.
Our disclosure controls and procedures and internal control over financial reporting may not prevent all material errors and intentional misrepresentations. Any system of internal control can only provide reasonable assurance that all control objectives are met. Some of the potential risks involved could include, but are not limited to, management judgments, simple errors or mistakes, misinterpretation, and willful misconduct regarding controls. Under Section 404 of the Sarbanes-Oxley Act, we are required to evaluate and determine the effectiveness of our internal control over financial reporting. Compliance with this provision requires management's attention and expense. Management's assessment of our internal control over financial reporting may or may not identify weaknesses that need to be addressed in our internal control system. If we are unable to conclude that our internal control over financial reporting is effective, investors could lose confidence in our reported financial information which could put pressurehave an adverse effect on the market price of our pricing. We could also experience lower than anticipated order levels, cancellations of ordersstock or impact our borrowing ability. In addition, changes in backlog, defaults on outstanding accounts receivableoperating conditions and extended payment or delivery terms. Economic weakness, customerchanges in compliance with policies and procedures currently in place may result in inadequate disclosure controls and procedures and internal control over financial difficulties and constrained spending on IT initiatives have resulted, and mayreporting in the future result, in challenging and delayed sales cycles and could negatively impact our ability to forecast future periods. In addition, some of the markets we serve are emerging and the purchase of our products involves material changes to established purchasing patterns and policies. The purchase of our products is often discretionary and may involve a significant commitment of capital and other resources.future.
Our stock price has been subject to fluctuations, and will likely continue to be subject to fluctuations, which may be volatile and due to factors beyond our control.
The market price of our common stock is subject to wide fluctuations in response to various factors, some of which are beyond our control. In addition to the factors discussed in this "Risk Factors" section and elsewhere in this report, factors that could cause fluctuations in the market price of our common stock include the following:
•ratings changes by any securities analysts who follow our company;
•announcements by us or our competitors of significant technical innovations, acquisitions, strategic partnerships, joint ventures, or capital commitments;
•changes in operating performance and stock market valuations of other technology companies generally, or those in our industry in particular;
•changes in accounting standards, policies, guidelines, interpretations, or principles;
•actual or anticipated developments in our business or our competitors’ businesses or the competitive landscape generally;
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•developments or disputes concerning our intellectual property or our products and platform capabilities, or third-party proprietary rights;
•cybersecurity attacks or incidents;
•announced or completed acquisitions of businesses or technologies by us or our competitors;
•changes in our board of directors or management;
•announced or completed equity or debt transactions involving our securities;
•sales of shares of our common stock by us, our officers, directors, or other stockholders; and
•other events or factors, including those resulting from public health crises (including global pandemics such as the COVID-19 pandemic), war, incidents of terrorism, or responses to these events.
In addition, the market for technology stocks and the stock markets in general have experienced extreme price and volume fluctuations. Stock prices of many technology companies have fluctuated in a manner unrelated or disproportionate to the operating performance of those companies. In the past, stockholders have instituted securities class action litigation following periods of market volatility. If we were to become involved in securities litigation, it could subject us to substantial costs, divert resources and the attention of management from our business, and adversely affect our business, results of operations, financial condition, and cash flows. A decline in the value of our common stock, including as a result of one or more factors set forth above, may result in substantial losses for our stockholders.
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Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
Our headquarters are located in Westford, MA, in approximately 175,000 square feet of space under a lease expiring in September 2030. In addition, we lease office and/or manufacturing space in other locations globally with some of the more significant locations from a cost or size perspective being in in Allen, Texas; San Jose, California; Ann Arbor, Michigan; Berkeley, California; Colorado Springs, CO; Bangalore, India; Pune, India; and Bangalore, India.Shanghai, China.
Item 3. Legal Proceedings
From time to time, we are subject to legal proceedings and claims in the ordinary course of business. In the opinion of management, the amount of ultimate expense with respect to any current legal proceedings and claims, if determined adversely, will not have a material adverse effect on the our financial condition, results of operations or cash flows.
As previously disclosed, in March 2016, Packet Intelligence LLC (Packet Intelligence or Plaintiff) filed a Complaint against usNetScout and two subsidiary entities in the United States District Court for the Eastern District of Texas asserting infringement of five United States patents. Plaintiff’s Complaint alleged that legacy Tektronix GeoProbe products, including the G10 and GeoBlade products, infringed these patents. WeNetScout filed an Answer denying Plaintiff’s allegations and asserting that Plaintiff’s patents were, among other things, invalid, not infringed, and unenforceable due to inequitable conduct. In October 2017, a jury trial was held to address the parties’ claims and counterclaims regarding infringement of three patents by the G10 and GeoBlade products, invalidity of these patents, and damages. On October 13, 2017, the jury rendered a verdict finding in favor of the Plaintiff and that Plaintiff was entitled to $3,500,000 for pre-suit damages and $2,250,000 for post-suit damages. The jury indicated that the awarded damages amounts were intended to reflect a running royalty. The Court also conducted a bench trial on whether these patents were unenforceable due to, among other things, inequitable conduct. In September 2018, the Court entered judgment and "enhanced" the jury verdict in the amount of $2.8 million as a result of a jury finding. The judgment also awards pre- and post judgementpost-judgment interest, and a running royalty on the G10 and GeoBlade products until the expiration of the patents at issue, the last date being June 2022. The Court denied the Plaintiff's motion for fees. Following the entry of final judgment, on June 12, 2019, we filed motionsour Notice of Appeal. On July 14, 2020, the Court of Appeals for judgment asthe Federal Circuit issued a matterdecision vacating the $3,500,000 pre-suit damages award, affirming the $2,250,000 post-suit damages award, and remanding to the district court to determine what, if any, enhancement should be awarded. On March 15, 2021, NetScout filed a petition for a writ of law, seekingcertiorari to both overturn the verdictUnited States Supreme Court, which was subsequently denied, challenging, among other issues, the basis for enhanced damages and the patentability of the claimed technology. NetScout continues to reduce damages. We haveavail itself of its legal options. NetScout has concluded that the risk of loss from this matterassociated with the post-suit damages award is currently neither remote nor probable,"probable" in accounting terms, regardless of the options NetScout may pursue, and therefore, under GAAP definitions,that the risk of loss associated with pre-suit damages is termed "reasonably possible". Therefore, accountingnow remote. Accounting rules require us to provide an estimate for the range of potential liability. WeNetScout currently estimateestimates that the estimated range of liability is between $0 and the aggregate amount awarded by the jury and the Court's awardsum of enhancedpost-suit damages, plus potential additional pre- and post-judgment interest amounts and costs and any royalties owed on post-trial sales of the accused G10 and GeoBlade products. We intendAny potential enhancement is not reasonably estimable but is likely within the range of $0 to continue to vigorously dispute Packet Intelligence’s claims including through appeal, if necessary.$2,800,000.
Item 4. Mine Safety Disclosures
None.
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PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities
Price Range of Common Stock
Our common stock trades on the Nasdaq Global Select Market, under the symbol NTCT.
Stockholders
At May 13, 2019,10, 2021, we had 9992 stockholders of record. We believe that the number of beneficial holders of our common stock exceeds 14,000.12,000.
Stock Performance Graph
This performance graph shall not be deemed "filed" for purposes of Section 18 of the Exchange Act or otherwise subject to the liabilities under that Section, and shall not be deemed to be incorporated by reference into any filing of NetScout under the Exchange Act or the Securities Act of 1933, as amended.
The Stock Performance Graph set forth below compares the yearly change in the cumulative total stockholder return on our common stock during the five-year period from March 31, 20142016 through March 31, 20192021 with the cumulative total return of the Nasdaq Composite Index and the Nasdaq Computer & Data Processing Index. The comparison assumes $100 was invested on March 31, 20142016 in our common stock or in the Nasdaq Composite Index and the Nasdaq Computer & Data Processing Index and assumes reinvestment of dividends, if any.
The stock price performance shown on the graph below is not necessarily indicative of future price performance. Information used in the graph was obtained from Zacks Investment Research, Inc.
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN
Assumes Initial Investment of $100
| 3/31/2016 | 3/31/2017 | 3/31/2018 | 3/31/2019 | 3/31/2020 | 3/31/2021 | ||||||||||||||||||||||||||||||
| NetScout Systems, Inc. | $ | 100.00 | $ | 165.22 | $ | 114.71 | $ | 122.20 | $ | 103.05 | $ | 122.59 | |||||||||||||||||||||||
| Nasdaq Composite – Total Returns | $ | 100.00 | $ | 122.88 | $ | 148.39 | $ | 164.16 | $ | 165.30 | $ | 286.62 | |||||||||||||||||||||||
| Nasdaq Computer and Data Processing | $ | 100.00 | $ | 123.37 | $ | 164.89 | $ | 193.77 | $ | 212.88 | $ | 342.30 | |||||||||||||||||||||||
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| 3/31/2014 | 3/31/2015 | 3/31/2016 | 3/31/2017 | 3/31/2018 | 3/31/2019 | ||||||||||||||||||
| NetScout Systems, Inc. | $ | 100.00 | $ | 116.68 | $ | 61.12 | $ | 100.98 | $ | 70.12 | $ | 74.69 | |||||||||||
| Nasdaq Composite – Total Returns | $ | 100.00 | $ | 118.12 | $ | 118.77 | $ | 145.94 | $ | 176.24 | $ | 194.97 | |||||||||||
| Nasdaq Computer and Data Processing | $ | 100.00 | $ | 109.40 | $ | 138.82 | $ | 171.00 | $ | 234.31 | $ | 279.45 | |||||||||||
Dividend Policy
In fiscal years 20192021 and 2018,2020, we did not declare any cash dividends and do not anticipate declaring cash dividends in the foreseeable future. In addition, the terms of our credit facility limit our ability to pay cash dividends on our capital stock. It is our intention to retain all future earnings for reinvestment to fund our expansion and growth, to pay down our debt, and to fund our stock buyback program further described under Item 7 "Liquidity and Capital Resources." Any future cash dividend declaration will be at the discretion of our Board of Directors and will depend upon, among other things, our future earnings, general financial conditions, capital requirements, existing bank covenants and general business conditions.
Recent Sales of Unregistered Securities
None.
Purchases of Equity Securities by the Issuer
The following table provides information about purchases we made during the quarter ended March 31, 20192021 of equity securities that are registered by us pursuant to Section 12 of the Exchange Act:
Total Number of Shares Purchased(1) | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Maximum Number of Shares That May Yet be Purchased Under the Program | |||||||||
| 1/1/2019 - 1/31/2019 | — | $ | — | — | 14,902,841 | |||||||
| 2/1/2019 - 2/28/2019 | 383,744 | 26.52 | 363,098 | 14,539,743 | ||||||||
| 3/1/2019 - 3/31/2019 | 180,784 | 26.79 | 180,153 | 14,359,590 | ||||||||
| Total | 564,528 | $ | 26.61 | 543,251 | 14,359,590 | |||||||
| Total Number of Shares Purchased (1) | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Maximum Number of Shares That May Yet be Purchased Under the Program | ||||||||||||||||||||
| 1/1/2021 - 1/31/2021 | 413 | $ | 30.23 | — | 7,089,160 | ||||||||||||||||||
| 2/1/2021 - 2/28/2021 | 15,401 | 30.69 | — | 7,089,160 | |||||||||||||||||||
| 3/1/2021 - 3/31/2021 | 1,196 | 27.85 | — | 7,089,160 | |||||||||||||||||||
| Total | 17,010 | $ | 30.48 | — | 7,089,160 | ||||||||||||||||||
(1)We purchased an aggregate of 17,010 shares transferred to us from employees in satisfaction of tax withholding obligations associated with the vesting of restricted stock units during the period. Such purchases reflected in the table do not reduce the maximum number of shares that may be purchased under our previously announced stock repurchase program (our previously disclosed 25 million share repurchase program).
Item 6. Selected Financial Data
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| Year Ended March 31, | |||||||||||||||||||
| 2019 | 2018 | 2017 | 2016 (1) | 2015 | |||||||||||||||
| (In thousands, except per share data) | |||||||||||||||||||
| Statement of Operations Data: | |||||||||||||||||||
| Revenue: | |||||||||||||||||||
| Product | $ | 467,289 | $ | 520,418 | $ | 715,404 | $ | 625,537 | $ | 272,895 | |||||||||
| Service | 442,629 | 466,369 | 446,708 | 329,882 | 180,774 | ||||||||||||||
| Total revenue | 909,918 | 986,787 | 1,162,112 | 955,419 | 453,669 | ||||||||||||||
| Cost of revenue: | |||||||||||||||||||
| Product | 140,938 | 158,628 | 233,275 | 235,996 | 59,037 | ||||||||||||||
| Service | 113,189 | 113,277 | 112,864 | 92,453 | 35,524 | ||||||||||||||
| Total cost of revenue | 254,127 | 271,905 | 346,139 | 328,449 | 94,561 | ||||||||||||||
| Gross profit | 655,791 | 714,882 | 815,973 | 626,970 | 359,108 | ||||||||||||||
| Operating expenses: | |||||||||||||||||||
| Research and development | 203,588 | 215,076 | 232,701 | 208,630 | 75,242 | ||||||||||||||
| Sales and marketing | 291,870 | 312,536 | 328,628 | 293,335 | 136,446 | ||||||||||||||
| General and administrative | 93,572 | 109,479 | 118,438 | 117,714 | 47,296 | ||||||||||||||
| Amortization of acquired intangible assets | 74,305 | 76,640 | 70,141 | 32,373 | 3,351 | ||||||||||||||
| Restructuring charges | 18,693 | 5,209 | 4,001 | 468 | — | ||||||||||||||
| Impairment of intangible assets | 35,871 | — | — | — | — | ||||||||||||||
| Loss on divestiture of business | 9,472 | — | — | — | — | ||||||||||||||
| Total operating expenses | 727,371 | 718,940 | 753,909 | 652,520 | 262,335 | ||||||||||||||
| Income (loss) from operations | (71,580 | ) | (4,058 | ) | 62,064 | (25,550 | ) | 96,773 | |||||||||||
| Interest and other expense, net | (21,332 | ) | (14,601 | ) | (9,879 | ) | (6,889 | ) | (1,808 | ) | |||||||||
| Income (loss) before income tax expense (benefit) | (92,912 | ) | (18,659 | ) | 52,185 | (32,439 | ) | 94,965 | |||||||||||
| Income tax expense (benefit) | (19,588 | ) | (98,471 | ) | 18,894 | (4,070 | ) | 33,773 | |||||||||||
| Net income (loss) | $ | (73,324 | ) | $ | 79,812 | $ | 33,291 | $ | (28,369 | ) | $ | 61,192 | |||||||
| Basic net income (loss) per share | $ | (0.93 | ) | $ | 0.91 | $ | 0.36 | $ | (0.35 | ) | $ | 1.49 | |||||||
| Diluted net income (loss) per share | $ | (0.93 | ) | $ | 0.90 | $ | 0.36 | $ | (0.35 | ) | $ | 1.47 | |||||||
| Weighted average common shares outstanding used in computing: | |||||||||||||||||||
| Net income (loss) per share—basic | 78,617 | 87,425 | 92,226 | 81,927 | 41,105 | ||||||||||||||
| Net income (loss) per share—diluted | 78,617 | 88,261 | 92,920 | 81,927 | 41,637 | ||||||||||||||
| March 31, | |||||||||||||||||||
| 2019 | 2018 | 2017 | 2016 (1) | 2015 | |||||||||||||||
| (In thousands) | |||||||||||||||||||
| Balance Sheet Data: | |||||||||||||||||||
| Cash, cash equivalents and short- and long-term marketable securities | $ | 486,988 | $ | 447,762 | $ | 464,705 | $ | 352,075 | $ | 264,857 | |||||||||
| Working capital | $ | 421,286 | $ | 339,108 | $ | 394,279 | $ | 283,422 | $ | 149,651 | |||||||||
| Total assets | $ | 3,269,994 | $ | 3,368,608 | $ | 3,601,513 | $ | 3,592,843 | $ | 669,049 | |||||||||
| Debt | $ | 550,000 | $ | 600,000 | $ | 300,000 | $ | 300,000 | $ | — | |||||||||
| Total stockholders’ equity | $ | 2,065,433 | $ | 2,068,782 | $ | 2,436,250 | $ | 2,443,382 | $ | 435,750 | |||||||||
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following information should be read in conjunction with the audited consolidated financial information and the notes thereto included in this Annual Report on Form 10-K. In addition to historical information, the following discussion and other parts of this Annual Report contain forward-looking statements that involve risks and uncertainties. You should not place undue reliance on these forward-looking statements. Actual events or results may differ materially due to competitive factors and other factors discussed in Item 1A. "Risk Factors" and elsewhere in this Annual Report. These factors may cause our actual results to differ materially from any forward-looking statement. See the section titled "Cautionary Statement Concerning Forward-Looking Statements" that appears at the beginning of this Annual Report.
Overview
We are an industry leader with over 35 years of experience in providing service assurance and securitycybersecurity solutions that are used by customers worldwide to assureprotect their digital business services against disruption. Service providers and enterprises, including local, state and federal government agencies, rely on our solutions to achieve the visibility necessary to optimize network performance, ensure the delivery of high-quality, mission-critical applications and services, gain timely insight into the end user experience and protect the networktheir networks from attack. With our offerings, customers can quickly, efficiently and effectively identify and resolve issues that result in downtime, interruptions to services, poor service quality or compromised security,data, thereby driving compelling returns on their investments in their networknetworks and broader technology initiatives. Some of the more significant technology trends and catalysts for our business include the evolution of customers' digital transformation initiatives such as the migration to cloud environments, the rapidly evolving cybersecurity threat landscape, business intelligence and analytics advancements, and the 5G evolution in both the service provider and enterprise verticals.
Our operating results are influenced by a number of factors, including, but not limited to, the mix and quantity of products and services sold, pricing, costs of materials used in our products, growth in employee-related costs, including commissions, and the expansion of our operations. Factors that affect our ability to maximize our operating results include, but are not limited to, our ability to introduce and enhance existing products, the marketplace acceptance of those new or enhanced products, continued expansion into international markets, development of strategic partnerships, competition, successful acquisition integration efforts, and our ability to achieve expense reductionscontrol cost and make improvements in a highly competitive industry.
COVID-19 Impact
In March 2020, the World Health Organization declared the novel strain of coronavirus (COVID-19) a global pandemic and recommended containment and mitigation measures worldwide. The pandemic and these containment and mitigation measures have led to adverse impacts on the U.S. and global economies. Due to the critical nature of our products and services, we are considered critical under State and Federal guidelines. While we have begun a phased reopening at some of our facilities, we remain focused on protecting the health and well-being of our employees and continue to maintain work from home policies for a vast majority of our employees where feasible.
We continue to closely monitor the impact of the COVID-19 pandemic on all aspects of our business, including how it has impacted and could continue to impact our customers, employees, supply chain, and distribution network. In fiscal year 2021, the COVID-19 pandemic and resulting challenging macro-economic environment caused elongated purchasing cycles that impacted our revenue. For fiscal year 2022, as people in the world begin to get immunized and return to "normal", we expect that technology and project spending will resume and will be focused on advancing our products, growing revenue, enhancing earnings per share, and generating solid free cash flow.
We believe our current cash reserves and access to capital through our revolving credit facility leave us well-positioned to manage our business as the crisis continues and as a recovery eventually occurs. We expect net cash provided by operating activities combined with cash, cash equivalents and marketable securities and borrowing availability under our revolving credit facility to provide sufficient liquidity to fund current obligations, capital spending, debt service requirements and working capital requirements over at least the next twelve months. We continue to take actions to control costs and increase productivity throughout our company but will invest in areas that advance our business for the future, as necessary. In addition to our cash equivalents, based on covenant levels at March 31, 2021, we have an incremental $336 million available to us under our $1.0 billion revolving credit facility.
On March 27, 2020, the Coronavirus Aid, Relief and Economic Security Act (the CARES Act) was enacted. The CARES Act, among other things, includes provisions relating to refundable payroll tax credits, deferment of employer social security payments, net operating loss carryback periods, alternative minimum tax credit refunds, modifications to the net interest deduction limitations and technical corrections to tax depreciation methods for qualified improvement property. We have elected to defer the employer-paid portion of social security taxes. As of March 31, 2021, we had deferred $8.9 million of
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employer payroll taxes, of which 50% are required to be deposited by December 2021 and the remaining 50% by December 2022.
The extent of the impact of the COVID-19 pandemic on our operational and financial performance will depend on certain developments, including the duration of the pandemic, its impact on our customers and suppliers and the range of governmental and community reactions to the pandemic, which continue to evolve and cannot be fully predicted at this time. We will continue to proactively respond to the situation and may take further actions that alter our business operations as may be required by governmental authorities, or that we determine are in the best interests of our stakeholders.
Results Overview
Total revenue for the fiscal year ended March 31, 2021 as compared to total revenue for the fiscal year ended March 31, 20192020 was primarilyprimarily impacted by lower spending by customersa decrease in revenue from our service assurance offerings in both the service provider customer segment for bothand enterprise verticals, partially offset by an increase in revenue from our cybersecurity offerings, or more particularly, the service assurance andportion of our DDoS solutions, and the timing of the divestiture of the HNT tools business in mid-September 2018.offerings.
Our gross profit percentage remained flat at 73% during the fiscal year ended March 31, 20192021 as comparedcompared with the fiscal year ended March 31, 2018.
2020.
Net income for the fiscal year ended March 31, 2021 was $19.4 million, as compared with a net loss for the fiscal year ended March 31, 20192020 of $2.8 million, an increase of $22.2 million. A decrease in revenue of $60.5 million was $73.3 million,more than offset by a decrease in expenses as compared with net income for the fiscal year ended March 31, 2018 of $79.8 million, resulting in an increase in net loss of $153.1 million. The increase in net lossincome was primarily due to a $78.9$23.5 million decrease in the income tax benefit,travel expenses primarily attributable to COVID-19 related restrictions, a $35.9$16.2 million impairment chargedecrease in direct material costs, a $9.4 million decrease in amortization of certain intangible assets, a $6.9 million decrease in expenses related to the HNT tools business,trade shows and other sales and marketing related events attributable to continued cost control and COVID-19 related restrictions, a $13.5$6.7 million increasedecrease in legal fees and penalties, a $5.2 million decrease in commissions expense, a $5.0 million decrease in inventory-related charges, a $2.6 million decrease in restructuring charges, due to the voluntary separation program, a $13.5 million increase in interest expense due to additional amounts drawn down on the credit facility as well as an increase in the average interest rate on the credit facility, and a $9.5 million loss on the divestiture of the HNT tools business during the twelve months ended March 31, 2019. This increase was partially offset by a net $9.0$2.5 million decrease in employee-relatedadvertising and other marketing related expenses, asand a result of a$2.0 million decrease in headcount partially offset by an increase in incentive compensation.rent expense.
At March 31, 2019,2021, we had cash, cash equivalents, and marketable securities (current and non-current) of $487.0$476.5 million. This represents an increase of $39.2$87.4 million overcompared to the previous fiscal year ended March 31, 2018.2020. This increase was primarily due to $149.8$213.9 million in cash provided by operations during the fiscal year ended March 31, 2019, partially2021. This increase was offset by $50.0$100.0 million used to repay long-term debt, $23.4$13.3 million used for tax withholdings in connection with the vesting of restricted stock units, $12.0 million used for capital expenditures, $14.5$4.5 million used for purchases of intangible assets and $3.3 million used to repurchase shares of our common stock and $11.9 million used for tax withholdings on restricted stock units.during the fiscal year ended March 31, 2021.
Use of Non-GAAP Financial Measures
We supplement the United States generally accepted accounting principles (GAAP) financial measures we report in quarterly and annual earnings announcements, investor presentations and other investor communications by reporting the following non-GAAP measures: non-GAAP total revenue, non-GAAP product revenue, non-GAAP service revenue, non-GAAP gross profit, non-GAAP income from operations, non-GAAP operating margin, non-GAAP earnings before interest and other expense, income taxes, depreciation and amortization (EBITDA) from operations, non-GAAP net income, and non-GAAP net income per share (diluted). Non-GAAP revenue (total, product and service) eliminates the GAAP effects of acquisitions by adding back revenue related to deferred revenue revaluation, as well as revenue impacted by the amortization of acquired intangible assets.revaluation. Non-GAAP gross profit includes the aforementioned revenue adjustments and also removes expenses related to the amortization of acquired intangible assets, share-based compensation, certain expenses relating to acquisitions including depreciation costs, compensation for post-combination services and business development and integration costs and adds back transitional service agreement income.acquisition-related depreciation. Non-GAAP income from operations includes the aforementioned adjustments and also removes business development and integration expense, compensation for post-combination services, legal judgments expense, restructuring charges, intangible asset impairment charges, loss on divestiture and costs related to new accounting standard implementation.implementation and adds back transitional service agreement income. Non-GAAP EBITDA from operations includes the aforementioned items related to non-GAAP income from operations and also removes non-acquisition-related depreciation expense. Non-GAAP net income includes the foregoing adjustments related to non-GAAP income from operations, net of related income tax effects in addition to the provisional one-time impacts of the U.S. Tax Cuts and Jobs Act (TCJA) while removing transitional service agreement income and changes in contingent consideration. Non-GAAP diluted net income per share also excludes these expenses as well as the related impact of all these adjustments on the provision for income taxes.
These non-GAAP measures are not in accordance with GAAP, should not be considered an alternative for measures prepared in accordance with GAAP (revenue, gross profit, operating profit, net income (loss) and diluted net income (loss) per share), and may have limitations in that they do not reflect all our results of operations as determined in accordance with GAAP. These non-GAAP measures should only be used to evaluate our results of operations in conjunction with the
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corresponding GAAP measures. The presentation of non-GAAP information is not meant to be considered superior to, in isolation from, or as a substitute for results prepared in accordance with GAAP.
Management believes these non-GAAP financial measures enhance the reader's overall understanding of our current financial performance and our prospects for the future by providing a higher degree of transparency for certain financial measures and providing a level of disclosure that helps investors understand how we plan and measure our business. We believe that providing these non-GAAP measures affords investors a view of our operating results that may be more easily compared with our peer companies and also enables investors to consider our operating results on both a GAAP and non-GAAP basis during and following the integration period of our acquisitions. Presenting the GAAP measures on their own may not be indicative of our core operating results. Furthermore, management believes that the presentation of non-GAAP measures when shown in conjunction with the corresponding GAAP measures provide useful information to management and investors regarding present and future business trends relating to our financial condition and results of operations.
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The following table reconciles revenue, gross profit, income (loss) from operations, net income (loss) and net income (loss) per share on a GAAP and non-GAAP basis for the fiscal years ended March 31, 2019, 20182021, 2020 and 2017:2019:
| Fiscal Year Ended March 31, (Dollars in Thousands, Except per Share Data) | |||||||||||
| 2019 | 2018 | 2017 | |||||||||
| GAAP revenue | $ | 909,918 | $ | 986,787 | $ | 1,162,112 | |||||
| Product deferred revenue fair value adjustment | 391 | 3,064 | 6,786 | ||||||||
| Service deferred revenue fair value adjustment | 1,199 | 9,409 | 19,476 | ||||||||
| Amortization of acquired intangible assets | — | 9 | 11,439 | ||||||||
| Non-GAAP revenue | $ | 911,508 | $ | 999,269 | $ | 1,199,813 | |||||
| GAAP gross profit | $ | 655,791 | $ | 714,882 | $ | 815,973 | |||||
| Product deferred revenue fair value adjustment | 391 | 3,064 | 6,786 | ||||||||
| Service deferred revenue fair value adjustment | 1,199 | 9,409 | 19,476 | ||||||||
| Share-based compensation expense | 7,422 | 5,983 | 4,890 | ||||||||
| Amortization of acquired intangible assets | 31,238 | 37,332 | 53,455 | ||||||||
| Business development and integration expense | — | 244 | 398 | ||||||||
| Compensation for post-combination services | — | — | 552 | ||||||||
| Acquisition related depreciation expense | 75 | 145 | 240 | ||||||||
| Transitional service agreement income | 2 | — | — | ||||||||
| Non-GAAP gross profit | $ | 696,118 | $ | 771,059 | $ | 901,770 | |||||
| GAAP income (loss) from operations | $ | (71,580 | ) | $ | (4,058 | ) | $ | 62,064 | |||
| Product deferred revenue fair value adjustment | 391 | 3,064 | 6,786 | ||||||||
| Service deferred revenue fair value adjustment | 1,199 | 9,409 | 19,476 | ||||||||
| Share-based compensation expense | 56,328 | 47,317 | 39,189 | ||||||||
| Amortization of acquired intangible assets | 105,543 | 113,972 | 123,596 | ||||||||
| Business development and integration expense | 874 | 2,689 | 12,083 | ||||||||
| New standard implementation expense | 914 | 2,630 | — | ||||||||
| Compensation for post-combination services | 789 | 1,108 | 5,076 | ||||||||
| Restructuring charges | 18,693 | 5,209 | 4,001 | ||||||||
| Impairment of intangible assets | 35,871 | — | — | ||||||||
| Acquisition related depreciation expense | 905 | 2,057 | 3,136 | ||||||||
| Loss on divestiture | 9,472 | — | — | ||||||||
| Transitional service agreement income | 2,186 | — | — | ||||||||
| Non-GAAP income from operations | $ | 161,585 | $ | 183,397 | $ | 275,407 | |||||
| GAAP net income (loss) | $ | (73,324 | ) | $ | 79,812 | $ | 33,291 | ||||
| Product deferred revenue fair value adjustment | 391 | 3,064 | 6,786 | ||||||||
| Service deferred revenue fair value adjustment | 1,199 | 9,409 | 19,476 | ||||||||
| Share-based compensation expense | 56,328 | 47,317 | 39,189 | ||||||||
| Amortization of acquired intangible assets | 105,543 | 113,972 | 123,596 | ||||||||
| Business development and integration expense | 874 | 2,689 | 12,083 | ||||||||
| New standard implementation expense | 914 | 2,630 | — | ||||||||
| Compensation for post-combination services | 789 | 1,108 | 5,076 | ||||||||
| Restructuring charges | 18,693 | 5,209 | 4,001 | ||||||||
| Fiscal Year Ended March 31, (Dollars in Thousands, Except per Share Data) | ||||||||||||||||||||
| 2021 | 2020 | 2019 | ||||||||||||||||||
| GAAP revenue | $ | 831,282 | $ | 891,820 | $ | 909,918 | ||||||||||||||
| Product deferred revenue fair value adjustment | — | — | 391 | |||||||||||||||||
| Service deferred revenue fair value adjustment | 6 | 192 | 1,199 | |||||||||||||||||
| Non-GAAP revenue | $ | 831,288 | $ | 892,012 | $ | 911,508 | ||||||||||||||
| GAAP gross profit | $ | 609,185 | $ | 649,628 | $ | 655,791 | ||||||||||||||
| Product deferred revenue fair value adjustment | — | — | 391 | |||||||||||||||||
| Service deferred revenue fair value adjustment | 6 | 192 | 1,199 | |||||||||||||||||
| Share-based compensation expense | 6,861 | 6,843 | 7,422 | |||||||||||||||||
| Amortization of acquired intangible assets | 19,058 | 24,974 | 31,238 | |||||||||||||||||
| Acquisition related depreciation expense | 23 | 31 | 75 | |||||||||||||||||
| Transitional service agreement income | — | — | 2 | |||||||||||||||||
| Non-GAAP gross profit | $ | 635,133 | $ | 681,668 | $ | 696,118 | ||||||||||||||
| GAAP income (loss) from operations | $ | 37,130 | $ | 17,638 | $ | (71,580) | ||||||||||||||
| Product deferred revenue fair value adjustment | — | — | 391 | |||||||||||||||||
| Service deferred revenue fair value adjustment | 6 | 192 | 1,199 | |||||||||||||||||
| Share-based compensation expense | 51,892 | 50,861 | 56,328 | |||||||||||||||||
| Amortization of acquired intangible assets | 80,189 | 89,479 | 105,543 | |||||||||||||||||
| Business development and integration expense | 2 | 373 | 874 | |||||||||||||||||
| New standard implementation expense | — | 5 | 914 | |||||||||||||||||
| Compensation for post-combination services | 251 | 578 | 789 | |||||||||||||||||
| Restructuring charges | 62 | 2,674 | 18,693 | |||||||||||||||||
| Impairment of intangible assets | — | — | 35,871 | |||||||||||||||||
| Acquisition related depreciation expense | 242 | 312 | 905 | |||||||||||||||||
| Loss on divestiture | — | — | 9,472 | |||||||||||||||||
| Transitional service agreement income | 215 | 1,212 | 2,186 | |||||||||||||||||
| Legal judgments expense | 2,804 | — | — | |||||||||||||||||
| Non-GAAP income from operations | $ | 172,793 | $ | 163,324 | $ | 161,585 | ||||||||||||||
| GAAP net income (loss) | $ | 19,352 | $ | (2,754) | $ | (73,324) | ||||||||||||||
| Product deferred revenue fair value adjustment | — | — | 391 | |||||||||||||||||
| Service deferred revenue fair value adjustment | 6 | 192 | 1,199 | |||||||||||||||||
| Share-based compensation expense | 51,892 | 50,861 | 56,328 | |||||||||||||||||
| Amortization of acquired intangible assets | 80,189 | 89,479 | 105,543 | |||||||||||||||||
| Business development and integration expense | 2 | 373 | 874 | |||||||||||||||||
| New standard implementation expense | — | 5 | 914 | |||||||||||||||||
| Compensation for post-combination services | 251 | 578 | 789 | |||||||||||||||||
| Restructuring charges | 62 | 2,674 | 18,693 | |||||||||||||||||
| Impairment of intangible assets | — | — | 35,871 | |||||||||||||||||
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| Acquisition-related depreciation expense | 242 | 312 | 905 | |||||||||||||||||
| Loss on divestiture | — | — | 9,472 | |||||||||||||||||
| Transitional service agreement income | — | — | (45) | |||||||||||||||||
| Change in contingent consideration | — | 762 | 1,495 | |||||||||||||||||
| Legal judgments expense | 2,804 | — | — | |||||||||||||||||
| Income tax adjustments | (28,977) | (23,415) | (49,877) | |||||||||||||||||
| Non-GAAP net income | $ | 125,823 | $ | 119,067 | $ | 109,228 | ||||||||||||||
| GAAP diluted net income (loss) per share | $ | 0.26 | $ | (0.04) | $ | (0.93) | ||||||||||||||
| Per share impact of non-GAAP adjustments identified above | 1.44 | 1.61 | 2.31 | |||||||||||||||||
| Non-GAAP diluted net income per share | $ | 1.70 | $ | 1.57 | $ | 1.38 | ||||||||||||||
| GAAP income (loss) from operations | $ | 37,130 | $ | 17,638 | $ | (71,580) | ||||||||||||||
| Previous adjustments to determine non-GAAP income from operations | 135,663 | 145,686 | 233,165 | |||||||||||||||||
| Non-GAAP income from operations | 172,793 | 163,324 | 161,585 | |||||||||||||||||
| Depreciation excluding acquisition related | 25,397 | 26,313 | 31,430 | |||||||||||||||||
| Non-GAAP EBITDA from operations | $ | 198,190 | $ | 189,637 | $ | 193,015 | ||||||||||||||
| Impairment of intangible assets | 35,871 | — | — | ||||||||
| Acquisition-related depreciation expense | 905 | 2,057 | 3,136 | ||||||||
| Loss on divestiture | 9,472 | — | — | ||||||||
| Other income | — | (57 | ) | (426 | ) | ||||||
| Transitional service agreement income | (45 | ) | — | — | |||||||
| Change in contingent consideration | 1,495 | — | — | ||||||||
| Income tax adjustments | (49,877 | ) | (142,546 | ) | (67,662 | ) | |||||
| Non-GAAP net income | $ | 109,228 | $ | 124,664 | $ | 178,546 | |||||
| GAAP diluted net income (loss) per share | $ | (0.93 | ) | $ | 0.90 | $ | 0.36 | ||||
| Per share impact of non-GAAP adjustments identified above | 2.31 | 0.51 | 1.56 | ||||||||
| Non-GAAP diluted net income per share | $ | 1.38 | $ | 1.41 | $ | 1.92 | |||||
| GAAP income (loss) from operations | $ | (71,580 | ) | $ | (4,058 | ) | $ | 62,064 | |||
| Previous adjustments to determine non-GAAP income from operations | 233,165 | 187,455 | 213,343 | ||||||||
| Non-GAAP income from operations | 161,585 | 183,397 | 275,407 | ||||||||
| Depreciation excluding acquisition related | 31,430 | 37,474 | 34,131 | ||||||||
| Non-GAAP EBITDA from operations | $ | 193,015 | $ | 220,871 | $ | 309,538 | |||||
Critical Accounting Policies
We consider accounting policies related to revenue recognition, marketable securities, valuation of goodwill, intangible assets and other acquisition and divestiture accounting items, and share basedshare-based compensation to be critical in fully understanding and evaluating our financial results. We apply significant judgment and create estimates when applying these policies.
Revenue Recognition
We exercise judgment and use estimates in connection with determining the amounts of product and servicesservice revenues to be recognized in each accounting period.
We derive revenues primarily from the sale of network management tools and security solutions for service provider and enterprise customers, which include hardware, software, and service offerings. The majority of ourOur product sales consist of software only offerings and offerings which include hardware productsappliances with embedded software that are essential to providing customers the intended functionality of the solutions. We also sell software offerings decoupled from the underlying hardware and software solutions to provide customers with enhanced functionality.
We account for revenue once a legally enforceable contract with a customer has been approved by the parties and the related promises to transfer products or services have been identified. A contract is defined toby us as an arrangement with commercial substance identifying payment terms, each party’s rights and obligations regarding the products or services to be transferred and the amount we deem probable of collection. Customer contracts may include promises to transfer multiple products and services to a customer. Determining whether the products and services are considered distinct performance obligations that should be accounted for separately or as one combined performance obligation may require significant judgment. Revenue is recognized when control of the products or services are transferred to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for products and services.
Product revenue is typically recognized upon shipment, provided a legally enforceable contract exists, control has passed to the customer, and in the case of software products, when the customer has the rights and ability to access the software,software; and collection of the related receivable is probable. If any significant obligations to the customer remain post-delivery, typically involving obligations relating to installation and acceptance by the customer, revenue recognition is deferred until such obligations have been fulfilled. Our service offerings include installation, integration, extended warranty and maintenance services, post-contract customer support, stand-ready software-as-a-service (SAAS) and other professional services including consulting and training. We generally provide software and/or hardware support as part of product sales. Revenue related to the initial bundled software and hardware support is recognized ratably over the support period. In addition, customers can elect to purchase extended support agreements for periods after the initial software/hardware warranty expiration. Support services generally include rights to unspecified upgrades (when and if available), telephone and internet-based support, updates, bug fixes and hardware repair and replacement. Consulting services are recognized upon delivery or completion of performance
depending on the terms of the underlying contract. Reimbursements of out-of-pocket expenditures incurred in connection with
37
providing consulting services are included in services revenue, with the offsetting expense recorded in cost of service revenue. Training services include on-site and classroom training. Training revenues are recognized upon delivery of the training.
Generally, our contracts are accounted for individually. However, when contracts are closely interrelated and dependent on each other, it may be necessary to account for two or more contracts as one to reflect the substance of the group of contracts.
Bundled arrangements are concurrent customer purchases of a combination of our product and service offerings that may be delivered at various points in time. We allocate the transaction price among the performance obligations in an amount that depicts the relative standalone selling prices (SSP) of each obligation. Judgment is required to determine the SSP for each distinct performance obligation. We use a range of amounts to estimate SSP when we sell each of the products and services separately based on the element’s historical pricing. We also consider our overall pricing objectives and practices across different sales channels and geographies, and market conditions. Generally, we have established SSP for a majority of our service elements based on historical standalone sales. In certain instances, we have established SSP for services based upon an estimate of profitability and the underlying cost to fulfill those services. Further, for certain service engagements, we consider quoted prices as part of multi-element arrangements of those engagements as a basis for establishing SSP. SSP has been established for product elements as the average or median selling price the element was recently sold for, whether sold alone or sold as part of a multiple element transaction. We review sales of the product elements on a quarterly basis and update, when appropriate, SSP for such elements to ensure that it reflects recent pricing experience. Our products are distributed through our direct sales force and indirect distribution channels through alliances with resellers and distributors. Revenue arrangements with resellers and distributors are recognized on a sell-in basis; that is, when control of the product transfers to the reseller or distributor. We record consideration given to a reseller or distributorcustomer as a reduction of revenue to the extent we have recorded revenue from the reseller or distributor.customer. With limited exceptions, our return policy does not allow product returns for a refund. Returns have been insignificant to date. In addition, we have a history of successfully collecting receivables from our resellers and distributors.
Marketable Securities
We measure the fair value of our marketable securities at the end of each reporting period. Fair value is defined as the exchange price that would be received for an asset in the principal or most advantageous market for the asset in an orderly transaction between market participants on the measurement date. Marketable securities are recorded at fair value and have been classified as Level 1 or 2 within the fair value hierarchy. Fair values determined by Level 1 inputs utilize quoted prices (unadjusted) in accessible active markets for identical assets or liabilities. Fair values determined by Level 2 inputs utilize data points that are observable such as quoted prices, interest rates and yield curves.
Valuation of Goodwill, Intangible Assets and Other Acquisition and Divestiture Accounting Items
We amortize acquired definite-lived intangible assets over their estimated useful lives. Goodwill and other indefinite-lived intangible assets are not amortized but subject to annual impairment tests; more frequently if events or circumstances occur that would indicate a potential decline in their fair value. We perform the assessment annually during the fourth quarter and on an interim basis if potential impairment indicators arise.
Reporting units are determined based on the components of a company's operating segments that constitute a business for which financial information is available and for which operating results are regularly reviewed by segment management. We have identified twoone reporting units: (1) Service Assurance and (2) Security.unit.
To test impairment, we first assess qualitative factors to determine whether the existence of events and circumstances indicate that it is more likely than not that the intangible asset is impaired. If based on our qualitative assessment it is more likely than not that the fair value of the intangible asset is less than its carrying amount, quantitative impairment testing is required. However, if we conclude otherwise, quantitative impairment testing is not required. During the fourth quarter of fiscal year 2019,2021, we performed a quantitativeour annual impairment analysis for goodwill. We determinedgoodwill at January 31, 2021 using the qualitative Step 0 assessment as we concluded that it was more likely than not that the fair value of the reporting unit's goodwill using established income and market valuation approaches. Goodwill was estimated to be recoverable as of January 31, 2019.unit exceeded its carrying value.
Indefinite-lived intangible assets are tested for impairment at least annually, or on an interim basis if an event occurs or circumstances change that would, more likely than not, reduce the fair value of the indefinite-lived intangible assets below its carrying value. To test impairment, we first assess qualitative factors to determine whether the existence of events and circumstances indicate that it is more likely than not that the indefinite-lived intangible is impaired. If based on our qualitative assessment, we conclude that it is more likely than not that the fair value of the indefinite-lived asset is greaterless than its carrying amount, quantitative impairment testing is required. However, if we conclude otherwise, quantitative impairment testing is not required. WeDuring the fourth quarter of fiscal year 2021, we completed our annual impairment test of the indefinite-lived intangible asset at January 31, 20192021 using the qualitative Step 0 assessment. No impairment indicators were observedassessment as we concluded that it was more likely than not that the fair value of January 31, 2019.the indefinite-lived asset exceeded its carrying value.
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We completed two acquisitions and one divestiture during the three-year period ended March 31, 2019.2021. The acquisition method of accounting requires an estimate of the fair value of the assets and liabilities acquired as part of these transactions. In order to estimate the fair value of acquired intangible assets, we use a relief from royalty model which requires management to estimate: future revenues expected to be generated by the acquired intangible assets, a royalty rate which aeither an income, market participant would payor cost method approach.
Our Level 3 liabilities at March 31, 2020 consisted of contingent purchase consideration related to the projected revenue stream, a present value factor which approximates a risk adjusted rate of return for a market participant purchasing the assets, and a technology migration curve representing a period of time over which the technology assets or some portion thereof are still being used. We are also required to develop the fair value for customer relationships acquired as part of these transactions which requirestwo acquisitions that we create estimates for the following items: a projection of future revenues associated with the acquired company's existing customers, a turnover rate for those customers, a marginoccurred during fiscal year 2020. The contingent purchase consideration related to those sales,the two acquisitions represent amounts deposited into escrow accounts, which were established to cover damages NetScout may have suffered related to any liabilities that NetScout did not agree to assume or as a result of the breach of representations and a risk adjusted ratewarranties of return for a market participant purchasing those relationships.the sellers as described in the acquisition agreements. The contingent purchase consideration of $0.7 million and $1.0 million related to the Gigavation Incorporated (Gigavation) and Eastwind Networks, Inc. (Eastwind) acquisitions, respectively are included as accrued other in our consolidated balance sheet at March 31, 2020. The $0.7 million of purchase consideration related to the Gigavation acquisition was paid to the seller in February 2021. The contingent purchase consideration related to the Eastwind acquisition was paid to the seller in April 2020.
Share-Based Compensation
We recognize compensation expense for all share-based payments. Under the fair value recognition provisions, we recognize share-based compensation net of an estimated forfeiture rate and only recognize compensation cost for those shares expected to vest on a straight-line basis over the requisite service period of the award.
We are required to estimate the expected forfeiture rate and only recognize expense for those shares expected to vest. If our actual forfeiture rate is materially different from our estimate, the share-based compensation expense could be significantly different from what we have recorded in the current period.
Based on historical experience, we assumed an annualized forfeiture rate of 0% for awards granted to our directors, an annualized forfeiture rate of approximately 2% for awards granted to our senior executives, and an annualized forfeiture rate of approximately 5% for all remaining employees. We will record additional expense if the actual forfeitures are lower than estimated and will record a recovery of prior expense if the actual forfeitures are higher than estimated.
39
Comparison of Years Ended March 31, 2021 and 2020
The sections that follow discuss our consolidated statement of operations data for the fiscal years ended March 31, 2021 and March 31, 2020 including results as a percentage of revenue for those periods. For a discussion of (i) our consolidated statement of operations data for the fiscal year ended March 31, 2019 including results as a percentage of revenue for that period, as well as (ii) our liquidity and 2018capital resources for the fiscal year ended March 31, 2019, see "Comparison of Years Ended March 31, 2020 and 2019" and "Liquidity and Capital Resources" in Part II, Item 7 of our Annual Report on Form 10-K for the fiscal year ended March 31, 2020, filed with the SEC on May 20, 2020 (our 2020 Annual Report).
Results of Operations
Revenue
Product revenue consists of sales of our hardware products and licensing of our software products. Service revenue consistsconsists of customer support agreements, consulting, training and stand-ready software as a service offerings. During the fiscal years ended March 31, 20192021 and 2018,2020, no direct customer or indirect channel partner accounted for more than 10% of our total revenue.
| Fiscal Year Ended March 31, (Dollars in Thousands) | |||||||||||||||||||||||||||||||||||
| 2021 | 2020 | Change | |||||||||||||||||||||||||||||||||
| % of Revenue | % of Revenue | $ | % | ||||||||||||||||||||||||||||||||
| Revenue: | |||||||||||||||||||||||||||||||||||
| Product | $ | 377,721 | 45 | % | $ | 438,341 | 49 | % | $ | (60,620) | (14) | % | |||||||||||||||||||||||
| Service | 453,561 | 55 | 453,479 | 51 | 82 | — | % | ||||||||||||||||||||||||||||
| Total revenue | $ | 831,282 | 100 | % | $ | 891,820 | 100 | % | $ | (60,538) | (7) | % | |||||||||||||||||||||||
Fiscal Year Ended March 31, (Dollars in Thousands) | ||||||||||||||||||||
| 2019 | 2018 | Change | ||||||||||||||||||
% of Revenue | % of Revenue | $ | % | |||||||||||||||||
| Revenue: | ||||||||||||||||||||
| Product | $ | 467,289 | 51 | % | $ | 520,418 | 53 | % | $ | (53,129 | ) | (10 | )% | |||||||
| Service | 442,629 | 49 | 466,369 | 47 | (23,740 | ) | (5 | )% | ||||||||||||
| Total revenue | $ | 909,918 | 100 | % | $ | 986,787 | 100 | % | $ | (76,869 | ) | (8 | )% | |||||||
Product. The 10%14%, or $53.1$60.6 million, decrease in product revenue compared with the same period last year was primarily due to a decrease in revenue from network performance management offerings for enterprise and service provider customers, for both the service assurance and security offerings, as well as lower enterprise-related product revenue tied to the divestiture of the HNT tools business.
Total revenue by geography is as follows:
Fiscal Year Ended March 31, (Dollars in Thousands) | Fiscal Year Ended March 31, (Dollars in Thousands) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2019 | 2018 | Change | 2021 | 2020 | Change | ||||||||||||||||||||||||||||||||||||||||||||||||||
% of Revenue | % of Revenue | $ | % | % of Revenue | % of Revenue | $ | % | ||||||||||||||||||||||||||||||||||||||||||||||||
| United States | $ | 553,267 | 61 | % | $ | 581,853 | 59 | % | $ | (28,586 | ) | (5 | )% | United States | $ | 484,129 | 58 | % | $ | 545,620 | 61 | % | $ | (61,491) | (11) | % | |||||||||||||||||||||||||||||
| International: | International: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Europe | 148,036 | 16 | 174,445 | 18 | (26,409 | ) | (15 | )% | Europe | 160,372 | 19 | 154,510 | 17 | 5,862 | 4 | % | |||||||||||||||||||||||||||||||||||||||
| Asia | 72,355 | 8 | 88,917 | 9 | (16,562 | ) | (19 | )% | Asia | 56,562 | 7 | 59,939 | 7 | (3,377) | (6) | % | |||||||||||||||||||||||||||||||||||||||
| Rest of the world | 136,260 | 15 | 141,572 | 14 | (5,312 | ) | (4 | )% | Rest of the world | 130,219 | 16 | 131,751 | 15 | (1,532) | (1) | % | |||||||||||||||||||||||||||||||||||||||
| Subtotal international | 356,651 | 39 | 404,934 | 41 | (48,283 | ) | (12 | )% | Subtotal international | 347,153 | 42 | 346,200 | 39 | 953 | — | % | |||||||||||||||||||||||||||||||||||||||
| Total revenue | $ | 909,918 | 100 | % | $ | 986,787 | 100 | % | $ | (76,869 | ) | (8 | )% | Total revenue | $ | 831,282 | 100 | % | $ | 891,820 | 100 | % | $ | (60,538) | (7) | % | |||||||||||||||||||||||||||||
United States revenue decreased 5%11%, or $28.6$61.5 million, primarily due to declinesa decrease in bothrevenue from network performance management offerings for enterprise and service assurance and cybersecurity products, as well as the divestiture of the HNT tools business.provider customers. International revenue decreased 12%, or $43.8increased $1.0 million primarily due to declinesdriven by an increase in both service assurance and cybersecurity products, as well as the divestiture of the HNT tools business.revenue from network performance management offerings.
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Cost of Revenue and Gross Profit
Cost of product revenue consists primarily of material components, manufacturing personnel expenses, packaging materials, overhead and amortization of capitalized software, acquired developed technology and core technology. Cost of service revenue consists primarily of personnel, material, overhead and support costs.
| Fiscal Year Ended March 31, (Dollars in Thousands) | Change | ||||||||||||||||||||||||||||||||||
| 2021 | 2020 | ||||||||||||||||||||||||||||||||||
| % of Revenue | % of Revenue | $ | % | ||||||||||||||||||||||||||||||||
| Cost of revenue: | |||||||||||||||||||||||||||||||||||
| Product | $ | 95,965 | 12 | % | $ | 122,832 | 14 | % | $ | (26,867) | (22) | % | |||||||||||||||||||||||
| Service | 126,132 | 15 | 119,360 | 13 | 6,772 | 6 | % | ||||||||||||||||||||||||||||
| Total cost of revenue | $ | 222,097 | 27 | % | $ | 242,192 | 27 | % | $ | (20,095) | (8) | % | |||||||||||||||||||||||
| Gross profit: | |||||||||||||||||||||||||||||||||||
| Product $ | $ | 281,756 | 34 | % | $ | 315,509 | 35 | % | $ | (33,753) | (11) | % | |||||||||||||||||||||||
| Product gross profit % | 75 | % | 72 | % | 3 | % | |||||||||||||||||||||||||||||
| Service $ | $ | 327,429 | 39 | % | $ | 334,119 | 37 | % | $ | (6,690) | (2) | % | |||||||||||||||||||||||
| Service gross profit % | 72 | % | 74 | % | (2) | % | |||||||||||||||||||||||||||||
| Total gross profit $ | $ | 609,185 | $ | 649,628 | $ | (40,443) | (6) | % | |||||||||||||||||||||||||||
| Total gross profit % | 73 | % | 73 | % | — | % | |||||||||||||||||||||||||||||
Fiscal Year Ended March 31, (Dollars in Thousands) | Change | |||||||||||||||||||
| 2019 | 2018 | |||||||||||||||||||
% of Revenue | % of Revenue | $ | % | |||||||||||||||||
| Cost of revenue: | ||||||||||||||||||||
| Product | $ | 140,938 | 16 | % | $ | 158,628 | 16 | % | $ | (17,690 | ) | (11 | )% | |||||||
| Service | 113,189 | 12 | 113,277 | 12 | (88 | ) | — | % | ||||||||||||
| Total cost of revenue | $ | 254,127 | 28 | % | $ | 271,905 | 28 | % | $ | (17,778 | ) | (7 | )% | |||||||
| Gross profit: | ||||||||||||||||||||
| Product $ | $ | 326,351 | 36 | % | $ | 361,790 | 37 | % | $ | (35,439 | ) | (10 | )% | |||||||
| Product gross profit % | 70 | % | 70 | % | — | % | ||||||||||||||
| Service $ | 329,440 | 36 | % | 353,092 | 36 | % | (23,652 | ) | (7 | )% | ||||||||||
| Service gross profit % | 74 | % | 76 | % | (2 | )% | ||||||||||||||
| Total gross profit $ | $ | 655,791 | $ | 714,882 | $ | (59,091 | ) | (8 | )% | |||||||||||
| Total gross profit % | 72 | % | 72 | % | — | % | ||||||||||||||
Product. The 11%22%, or $17.7$26.9 million, decrease in cost of product revenue compared to the same period last year was primarily due to a $17.8$16.2 million decrease in direct material costs due to shifts in product mix and thea decrease in product revenue, a $6.4$6.0 million decrease in the amortization of intangible assets, a net $6.3$4.7 million decrease in inventory obsolescence charges, a $1.2 million decrease in employee-related expenses associated withlargely due to the timing of certain projects partially offset by an increase in variable incentive compensation, a $0.8 million decrease in overhead costs, a $0.6 million decrease in shipping costs, and a $0.6 million decrease in shipping costs.supplies. These decreases were partially offset by an $11.6a $2.5 million increase in costs to deliver model calibration products and a $1.8 million increase in capitalized overhead costs.contractor fees. The product gross profit percentage remained flat at 70%increased by three percentage points to 75% during the fiscal year ended March 31, 20192021 as compared to the same period in the prior year. The 10%11%, or $35.4$33.8 million, decrease in product gross profit, corresponds with the 10%14%, or $53.1$60.6 million, decrease in product revenue, partially offset by the 11%22%, or $17.7$26.9 million, decrease in cost of product.product revenue.
Service. The $0.16%, or $6.8 million, decreaseincrease in cost of service revenue compared to the same period last year was primarily due to a $5.0 million increase in employee-related expenses due to an $8.5increase in variable incentive compensation and the timing of certain projects, and a $2.2 million decreaseincrease in contractor fees,fees. These increases were partially offset by a $2.0 million decrease in travel expenses, and a $1.7 million decrease in expenses associated with the timing of certain projects. These decreases were almost entirely offset with a net $12.0 million increase in employee-related expenses associated with the timing of certain projects as well as an increase in variable incentive compensation partially offset by a decrease dueexpense primarily attributable to a reduction in headcount as a result of the voluntary separation program.COVID-19 related restrictions. The serviceservice gross profit percentagepercentage decreased by two percentagepercentage points to 74%72% during the fiscal year ended March 31, 20192021 compared to the fiscal year ended March 31, 2018.2020. The 7%2%, or $23.7$6.7 million, decrease in service gross profit corresponds with the 5%6%, or $23.7$6.8 million, decreaseincrease in service revenue,cost of services, partially offset by the $0.1 million decreaseincrease in cost of services.service revenue.
Gross profit. Our gross profit decreased 8%6%, or $59.1$40.4 million, compared to the fiscal year ended March 31, 2018.2020. This decrease is attributable to the 8%7%, or $76.9$60.5 million, decrease in revenue partially offset by a $17.8the $20.1 million, or 7%8%, decrease in cost of revenue. The gross margin percentage remained flat at 72%73% during the fiscal year ended March 31, 20192021 compared to the same period in the prior year.
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Operating Expenses
| Fiscal Year Ended March 31, (Dollars in Thousands) | Change | ||||||||||||||||||||||||||||||||||
| 2021 | 2020 | ||||||||||||||||||||||||||||||||||
| % of Revenue | % of Revenue | $ | % | ||||||||||||||||||||||||||||||||
| Research and development | $ | 179,163 | 22 | $ | 188,294 | 21 | % | $ | (9,131) | (5) | % | ||||||||||||||||||||||||
| Sales and marketing | 242,730 | 29 | 276,523 | 31 | (33,793) | (12) | % | ||||||||||||||||||||||||||||
| General and administrative | 88,969 | 11 | 99,994 | 11 | (11,025) | (11) | % | ||||||||||||||||||||||||||||
| Amortization of acquired intangible assets | 61,131 | 7 | 64,505 | 7 | (3,374) | (5) | % | ||||||||||||||||||||||||||||
| Restructuring charges | 62 | — | 2,674 | — | (2,612) | (98) | % | ||||||||||||||||||||||||||||
| Total operating expenses | $ | 572,055 | 69 | % | $ | 631,990 | 70 | % | $ | (59,935) | (9) | % | |||||||||||||||||||||||
Fiscal Year Ended March 31, (Dollars in Thousands) | Change | |||||||||||||||||||
| 2019 | 2018 | |||||||||||||||||||
% of Revenue | % of Revenue | $ | % | |||||||||||||||||
| Research and development | $ | 203,588 | 22 | % | $ | 215,076 | 22 | % | $ | (11,488 | ) | (5 | )% | |||||||
| Sales and marketing | 291,870 | 32 | 312,536 | 32 | (20,666 | ) | (7 | )% | ||||||||||||
| General and administrative | 93,572 | 10 | 109,479 | 11 | (15,907 | ) | (15 | )% | ||||||||||||
| Amortization of acquired intangible assets | 74,305 | 8 | 76,640 | 8 | (2,335 | ) | (3 | )% | ||||||||||||
| Restructuring charges | 18,693 | 2 | 5,209 | 1 | 13,484 | 259 | % | |||||||||||||
| Impairment of intangible assets | 35,871 | 4 | — | — | 35,871 | 100 | % | |||||||||||||
| Loss on divestiture of business | 9,472 | 1 | — | — | 9,472 | 100 | % | |||||||||||||
| Total operating expenses | $ | 727,371 | 79 | % | $ | 718,940 | 74 | % | $ | 8,431 | 1 | % | ||||||||
Research and development. Research and development expenses consist primarily of personnel expenses, fees for outside consultants, overhead and related expenses associated with the development of new products and the enhancement of existing products.
The 5%, or $11.5$9.1 million, decrease in researchresearch and development expenses compared to the same period last year was primarily due to a net $4.5 million decrease in employee-related expense due to lower headcount partially offset by an increase in incentive compensation, a $4.3 million decrease in consulting fees, a $3.4 million decrease from depreciation expense and a $1.0$2.6 million decrease in travel expenses. These decreases were partially offset byexpense primarily attributable to COVID-19 related restrictions, a $1.7$2.0 million increasedecrease in depreciation expense, a $1.2 million decrease in rent and other facilities related expenses, associated with the timing of certain projects.and a $0.9 million decrease in contractor fees.
Sales and marketing. Sales and marketing expenses consist primarily of personnel expenses and commissions, overhead and other expenses associated with selling activities and marketing programs such as trade shows, seminars, advertising, and new product launch activities.
The 7%12%, or $20.7$33.8 million, decrease in total sales and marketing expenses compared to the same period last year was primarilyprimarily due to a net $12.2$17.3 million decrease in travel expense primarily attributable to COVID-19 related restrictions, a $6.9 million decrease in expenses related to trade shows, user conferences and other events attributable to continued cost control and COVID-19 related restrictions, a $5.1 million decrease in commissions expense, a $2.3 million decrease in advertising and other marketing related expenses, and a $2.2 million decrease in employee-related expenseexpenses due to lowera reduction in headcount, partially offset by an increase in variable incentive compensation, a $3.1 million decrease in trade shows and other events, a $2.4 million decrease in consulting fees, a $1.7 million decrease in travel expenses, a $1.4 million decrease in depreciation expense and a $1.0 million decrease in commissions expense. These decreases were partially offset by a $2.9 million increase in advertising expenses.compensation.
General and administrative. General and administrative expenses consist primarily of personnel expenses for executive, financial, legal, and human resource employees, overhead, and other corporate expenditures.
The 15%11%, or $15.9$11.0 million, decrease in generalgeneral and administrative expenses compared to the same period last year was primarily due to a $5.5$6.7 million decrease in legallegal-related expenses and penalties, a $3.6$1.6 million decrease in consulting fees,travel expense primarily attributable to COVID-19 related restrictions, a $2.7 million decrease in tax related items, a $2.0$1.0 million decrease in rent and other facilities related expenses, and a $1.5an $0.8 million decrease in business development expenses. These decreases were partially offset bycontractor fees, and a $2.0$0.5 million increasedecrease in employee-related expenses primarily due to an increase in variable incentive compensation.sales and use taxes.
Amortization of acquired intangible assets. Amortization of acquired intangible assets consists primarily of amortization of customer relationships, and definite-lived trademark and tradenames and leasehold interest related to the Comms Transaction, ONPATH Technologies, Inc., Simena, Psytechnics, Ltd, Network General Corporation, Avvasi Incorporated and Efflux.
The 3%5%, or $2.3$3.4 million, decrease in amortization of acquired intangible assets was largely due to a decreasereduction in the amortization of the intangible assets related to the divestiture of the HNT tools business in September 2018.Comms Transaction.
Restructuring. During fiscal yearyears 2020 and 2019, and 2018, we restructured certain departments to better align functions, drive productivity and improve efficiency. During the fiscal year ended March 31, 2019, we also implemented a voluntary separation program (VSP) for employees who met certain age and service requirements to reduce overall headcount. As a result of thethese restructuring programs, we recorded $18.7$0.1 million and $5.2$2.7 million of restructuring charges related to one-time termination benefits as well as facility-related charges during the fiscal years ended March 31, 20192021 and 2018,2020, respectively.
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Interest and Other Expense, Net
Interest and other expense, net includes interest earned on our cash, cash equivalents and marketable securities, interest expense and other non-operating gains or losses.
| Fiscal Year Ended March 31, (Dollars in Thousands) | Change | ||||||||||||||||||||||||||||||||||
| 2021 | 2020 | ||||||||||||||||||||||||||||||||||
| % of Revenue | % of Revenue | $ | % | ||||||||||||||||||||||||||||||||
| Interest and other expense, net | $ | (14,826) | (2) | % | $ | (15,714) | (2) | % | $ | 888 | 6 | % | |||||||||||||||||||||||
Fiscal Year Ended March 31, (Dollars in Thousands) | Change | |||||||||||||||||||
| 2019 | 2018 | |||||||||||||||||||
% of Revenue | % of Revenue | $ | % | |||||||||||||||||
| Interest and other expense, net | $ | (21,332 | ) | (2 | )% | $ | (14,601 | ) | (1 | )% | $ | (6,731 | ) | (46 | )% | |||||
The 46%6%, or $6.7$0.9 million, increasedecrease in interest and other expense,expense, net was primarily due to a $13.3$9.7 million increasedecrease in interest expense due to additional amounts drawn downdebt repayments on the credit facility to fund the ASR as well as an increasea decrease in the average interest rate, on the credit facility and a $1.6$0.7 million increasedecrease in other expense due to thea change in the fair value of the contingent consideration related to the HNT tools business divestiture.divestiture recorded during the fiscal year ended March 31, 2020. These increasesdecreases were partially offset by a $3.4$4.8 million increase in foreign exchange expense, a $3.9 million decrease in interest income received on investments, and a $2.2$1.0 million increasedecrease in transitional services agreement income related to the HNT tools business divestiture, and a $2.2 million decrease in foreign exchange expense.divestiture.
Income Tax Expense
The annual effective tax rate for fiscal year 20192021 was 21.1%13.2%, compared to an annual effective tax rate of 527.7%243.1% for fiscal year 2018.2020. Generally, the effective tax rate differs from the statutory tax rate due to state income taxes and foreign withholding taxes, partially offset by the tax benefit associated with our domestic production activitiesForeign Derived Intangible Income deduction, foreign tax credits, research and development tax credits and earnings in jurisdictions subject to tax rates lower than the U.S. statutory rate. The provisions of the TCJA that affect the Company’s fiscal year 2019 tax rate include the Base Erosion Anti-Abuse Tax (BEAT), the deduction for Foreign Derived Intangible Income (FDII) and the Global Intangible Low Taxed Income (GILTI) inclusion.
The effective tax rate for the twelve months ended March 31, 20192021 is lower than the effective rate for the twelve months ended March 31, 2018, primarily due to the enactment of the TCJA during the prior fiscal year. As a result of the enactment, we recorded a significant tax benefit during the fiscal year ended March 31, 2018. This benefit has the effect of increasing the tax rate due to losses generated in the twelve months ended March 31, 2018.
Fiscal Year Ended March 31, (Dollars in Thousands) | Change | |||||||||||||||||||
| 2019 | 2018 | |||||||||||||||||||
% of Revenue | % of Revenue | $ | % | |||||||||||||||||
| Income tax benefit | $ | (19,588 | ) | (2 | )% | $ | (98,471 | ) | (10 | )% | $ | 78,883 | 80 | % | ||||||
Fiscal Year Ended March 31, (Dollars in Thousands) | Change | |||||||||||||||||||
| 2018 | 2017 | |||||||||||||||||||
% of Revenue | % of Revenue | $ | % | |||||||||||||||||
| Revenue: | ||||||||||||||||||||
| Product | $ | 520,418 | 53 | % | $ | 715,404 | 62 | % | $ | (194,986 | ) | (27 | )% | |||||||
| Service | 466,369 | 47 | 446,708 | 38 | 19,661 | 4 | % | |||||||||||||
| Total revenue | $ | 986,787 | 100 | % | $ | 1,162,112 | 100 | % | $ | (175,325 | ) | (15 | )% | |||||||
Fiscal Year Ended March 31, (Dollars in Thousands) | Change | |||||||||||||||||||
| 2018 | 2017 | |||||||||||||||||||
% of Revenue | % of Revenue | $ | % | |||||||||||||||||
| United States | $ | 581,853 | 59 | % | $ | 722,440 | 62 | % | $ | (140,587 | ) | (19 | )% | |||||||
| International: | ||||||||||||||||||||
| Europe | 174,445 | 18 | 193,441 | 17 | (18,996 | ) | (10 | )% | ||||||||||||
| Asia | 88,917 | 9 | 95,735 | 8 | (6,818 | ) | (7 | )% | ||||||||||||
| Rest of the world | 141,572 | 14 | 150,496 | 13 | (8,924 | ) | (6 | )% | ||||||||||||
| Subtotal international | 404,934 | 41 | 439,672 | 38 | (34,738 | ) | (8 | )% | ||||||||||||
| Total revenue | $ | 986,787 | 100 | % | $ | 1,162,112 | 100 | % | $ | (175,325 | ) | (15 | )% | |||||||
Fiscal Year Ended March 31, (Dollars in Thousands) | ||||||||||||||||||||
| 2018 | 2017 | Change | ||||||||||||||||||
% of Revenue | % of Revenue | $ | % | |||||||||||||||||
| Cost of revenue: | ||||||||||||||||||||
| Product | $ | 158,628 | 16 | % | $ | 233,275 | 20 | % | $ | (74,647 | ) | (32 | )% | |||||||
| Service | 113,277 | 12 | 112,864 | 10 | 413 | — | % | |||||||||||||
| Total cost of revenue | $ | 271,905 | 28 | % | $ | 346,139 | 30 | % | $ | (74,234 | ) | (21 | )% | |||||||
| Gross profit: | ||||||||||||||||||||
| Product $ | $ | 361,790 | 37 | % | $ | 482,129 | 41 | % | $ | (120,339 | ) | (25 | )% | |||||||
| Product gross profit % | 70 | % | 67 | % | 3 | % | ||||||||||||||
| Service $ | 353,092 | 36 | % | 333,844 | 29 | % | 19,248 | 6 | % | |||||||||||
| Service gross profit % | 76 | % | 75 | % | 1 | % | ||||||||||||||
| Total gross profit $ | $ | 714,882 | $ | 815,973 | $ | (101,091 | ) | (12 | )% | |||||||||||
| Total gross profit % | 72 | % | 70 | % | 2 | % | ||||||||||||||
| Fiscal Year Ended March 31, (Dollars in Thousands) | Change | ||||||||||||||||||||||||||||||||||
| 2021 | 2020 | ||||||||||||||||||||||||||||||||||
| % of Revenue | % of Revenue | $ | % | ||||||||||||||||||||||||||||||||
| Income tax expense | $ | 2,952 | — | % | $ | 4,678 | 1 | % | $ | (1,726) | (37) | % | |||||||||||||||||||||||
Fiscal Year Ended March 31, (Dollars in Thousands) | ||||||||||||||||||||
| 2018 | 2017 | Change | ||||||||||||||||||
% of Revenue | % of Revenue | $ | % | |||||||||||||||||
| Research and development | $ | 215,076 | 22 | % | $ | 232,701 | 20 | % | $ | (17,625 | ) | (8 | )% | |||||||
| Sales and marketing | 312,536 | 32 | 328,628 | 28 | (16,092 | ) | (5 | )% | ||||||||||||
| General and administrative | 109,479 | 11 | 118,438 | 10 | (8,959 | ) | (8 | )% | ||||||||||||
| Amortization of acquired intangible assets | 76,640 | 8 | 70,141 | 6 | 6,499 | 9 | % | |||||||||||||
| Restructuring charges | 5,209 | 1 | 4,001 | — | 1,208 | 30 | % | |||||||||||||
| Total operating expenses | $ | 718,940 | 74 | % | $ | 753,909 | 64 | % | $ | (34,969 | ) | (5 | )% | |||||||
Fiscal Year Ended March 31, (Dollars in Thousands) | ||||||||||||||||||||
| 2018 | 2017 | Change | ||||||||||||||||||
% of Revenue | % of Revenue | $ | % | |||||||||||||||||
| Interest and other expense, net | $ | (14,601 | ) | (1 | )% | $ | (9,879 | ) | (1 | )% | $ | (4,722 | ) | (48 | )% | |||||
Fiscal Year Ended March 31, (Dollars in Thousands) | ||||||||||||||||||||
| 2018 | 2017 | Change | ||||||||||||||||||
% of Revenue | % of Revenue | $ | % | |||||||||||||||||
| Income tax expense (benefit) | $ | (98,471 | ) | (10 | )% | $ | 18,894 | 2 | % | $ | (117,365 | ) | (621 | )% | ||||||
Contractual Obligations
At March 31, 2019,2021, we had the following contractual obligations:
Payment due by period (Dollars in thousands)
| Contractual Obligations | Total | Less than 1 year | 1-3 years | 3-5 years | More than 5 years | ||||||||||||||||||||||||
| Long-term debt obligations (1) | $ | 360,268 | $ | 5,713 | $ | 354,555 | $ | — | $ | — | |||||||||||||||||||
| Unconditional purchase obligations (2) | 55,319 | 40,480 | 14,839 | — | — | ||||||||||||||||||||||||
| Operating lease obligations (3) | 85,745 | 14,085 | 23,189 | 19,185 | 29,286 | ||||||||||||||||||||||||
| Pension benefit plan | 37,586 | 485 | 1,158 | 1,648 | 34,295 | ||||||||||||||||||||||||
| Total contractual obligations | $ | 538,918 | $ | 60,763 | $ | 393,741 | $ | 20,833 | $ | 63,581 | |||||||||||||||||||
| Contractual Obligations | Total | Less than 1 year | 1-3 years | 3-5 years | More than 5 years | ||||||||||||||
| Long-term debt obligations (1) | $ | 640,059 | $ | 23,765 | $ | 47,400 | $ | 568,894 | $ | — | |||||||||
| Unconditional purchase obligations (2) | 49,222 | 43,639 | 5,193 | 390 | — | ||||||||||||||
| Operating lease obligations (3) | 98,269 | 16,102 | 20,863 | 17,307 | 43,997 | ||||||||||||||
| Pension benefit plan | 7,011 | 382 | 920 | 1,148 | 4,561 | ||||||||||||||
| Total contractual obligations | $ | 794,561 | $ | 83,888 | $ | 74,376 | $ | 587,739 | $ | 48,558 | |||||||||
(1)Includes estimated future interest at an interest rate of 1.61% for our outstanding term loan at March 31, 2021.
(2)Represents estimated open purchase orders to purchase inventory as well as commitments for products and services used in the normal course of business.
(3)We lease facilities under operating lease agreements extending through September 2030 for a total of $85.7 million.
At March 31, 2019,2021, we have also excluded long-term deferred revenue of $103.3 million as such amounts will be recognized as services are provided.
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At March 31, 2021, the total accrual of our retirement obligation for our chairman and CEO was $1.4 million. The payment stream for this retirement obligation is based upon the retirement date which is currently not determinable.
At March 31, 2021, the total amount of net unrecognized tax benefits for uncertain tax positions and the accrual for the related interest was $1.4$1.0 million. We are unable to make a reliable estimate when cash settlement, if any, will occur with a tax authority as the timing of examinations and ultimate resolution of those examinations is uncertain. We have also excluded long-term deferred revenue of $94.6 million as such amounts will be recognized as services are provided.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements as defined in Item 303(a)(4)(ii) of Regulation S-K.
Commitment and Contingencies
We account for claims and contingencies in accordance with authoritative guidance that requires us to record an estimated loss from a claim or loss contingency when information available prior to issuance of our consolidated financial statements indicates that it is probable that a liability has been incurred at the date of the consolidated financial statements and the amount of the loss can be reasonably estimated. If we determine that it is reasonably possible, but not probable, that an asset has been impaired or a liability has been incurred, or if the amount of a probable loss cannot be reasonably estimated, then, in accordance with the authoritative guidance, we disclose the amount or range of estimated loss if the amount or range of estimated loss is material. Accounting for claims and contingencies requires us to use our judgment. We consult with legal counsel on those issues related to litigation and seek input from other experts and advisors with respect to matters in the ordinary course of business.
Legal - From time to time, we are subject to legal proceedings and claims in the ordinary course of business. In the opinion of management, the amount of ultimate expense with respect to any current legal proceedings and claims, if determined adversely, will not have a material adverse effect on our financial condition, results of operations or cash flows.
As previously disclosed, in March 2016, Packet Intelligence LLC (Packet Intelligence or Plaintiff) filed a Complaint against usNetScout and two subsidiary entities in the United States District Court for the Eastern District of Texas asserting infringement of five United States patents. Plaintiff’sPlaintiff's Complaint alleged that legacy Tektronix GeoProbe products, including the G10 and GeoBlade products, infringed these patents. WeNetScout filed an Answer denying Plaintiff’s allegations and asserting that Plaintiff’sPlaintiff's patents were, among other things, invalid, not infringed, and unenforceable due to inequitable conduct. In October 2017, a jury trial was held to address the parties’ claims and counterclaims regarding infringement of three patents by the G10 and GeoBlade products, invalidity of these patents, and damages. On October 13, 2017, the jury rendered a verdict finding in favor of the Plaintiff and that Plaintiff was entitled to $3,500,000 for pre-suit damages and $2,250,000 for post-suit damages. The jury indicated that the awarded damages amounts were intended to reflect a running royalty. The Court also conducted a bench trial on whether these patents were unenforceable due to, among other things, inequitable conduct. In September 2018, the Court entered judgment and "enhanced" the jury verdict in the amount of $2.8 million as a result of a jury finding. The judgment also awards pre- and post- judgmentpost-judgment interest, and a running royalty on the G10 and GeoBlade products until the expiration of the patents at issue, the last date being June 2022. The Court denied the Plaintiff's motion for fees. Following the entry of final judgment, on June 12, 2019, we filed motionsour Notice of Appeal. On July 14, 2020, the Court of Appeals for judgment asthe Federal Circuit issued a matterdecision vacating the $3,500,000 pre-suit damages award, affirming the $2,250,000 post-suit damages award, and remanding to the district court to determine what, if any, enhancement should be awarded. On March 15, 2021, NetScout filed a petition for a writ of law, seekingcertiorari to both overturn the verdictUnited States Supreme Court, which was subsequently denied, challenging, among other issues, the basis for enhanced damages and the patentability of the claimed technology. NetScout continues to reduce damages. We haveavail itself of its legal options. NetScout has concluded that the risk of loss from this matterassociated with the post-suit damages award is currently neither remote nor probable,"probable" in accounting terms, regardless of the options NetScout may pursue, and therefore, under GAAP definitions,that the risk of loss associated with pre-suit damages is termed "reasonably possible". Therefore, accountingnow remote. Accounting rules require us to provide an estimate for the range of potential liability. WeNetScout currently estimateestimates that the estimated range of liability is between $0 and the aggregate amount awarded by the jury and the Court's awardsum of enhanced post-suit
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damages, plus potential additional pre- and post-judgment interest amounts and costs and any royalties owed on post-trial sales of the accused G10 and GeoBlade products. We intendAny potential enhancement is not reasonably estimable but is likely within the range of $0 to continue to vigorously dispute Packet Intelligence’s claims including through appeal, if necessary.$2,800,000.
Warranty and Indemnification
- We warrant that our software and hardware products will substantially conform to the documentation accompanying such products on their original date of shipment. For software, which also includes firmware, the standard warranty commences upon shipment and generally expires 60 to 90 days thereafter. With regard to hardware, the standard warranty commences upon shipment and generally expires 60 days to 12 months thereafter. Additionally, this warranty is subject to various exclusions which include, but are not limited to, non-conformance resulting from modifications made to the software or hardware by a party other than NetScout; customers’customers' failure to follow our installation, operation or maintenance instructions; and events outside of our reasonable control. We also warrant that all support services will be performed in a good and workmanlike manner. We believe that our product and support service warranties are consistent with commonly accepted industry standards. Warranty cost information is presented and no material warranty costs are accrued since service revenue associated with warranty is deferred at the time of sale and recognized ratably over the warranty period.
Contracts that we enter into in the ordinary course of business may contain standard indemnification provisions. Pursuant to these agreements, we may agree to defend third party claims brought against a partner or direct customer claiming infringement of such third party’s (i) U.S. patent and/or European Union (EU), or other selected countries’countries' patents, (ii) Berne convention member country copyright, and/or (iii) U.S., EU, and/or other selected countries’ trademark or intellectual property rights. Moreover, this indemnity may require us to pay any damages awarded against the partner or direct customer in such type of lawsuit as well as reimburse the partner or direct customer for reasonable attorney’sattorney's fees incurred by them from the lawsuit.
We may also agree from time to time to provide other forms of indemnification to partners or direct customers, such as indemnification that would obligate us to defend and pay any damages awarded to a third party against a partner or direct customer based on a lawsuit alleging that such third party has suffered personal injury or tangible property damage legally determined to have been caused by negligently designed or manufactured products.
We have agreed to indemnify our directors and officers and our subsidiaries’subsidiaries' directors and officers if they are made a party or are threatened to be made a party to any proceeding (other than an action by or in the right of NetScout) by reason of the fact that the indemnified are agents of NetScout. The indemnity is for any and all expenses and liabilities of any type (including but not limited to, judgments, fines and amounts paid in settlement) reasonably incurred by the directors or officers in connection with the investigation, defense, settlement or appeal of such proceeding, provided they acted in good faith.
Liquidity and Capital Resources
Cash, cash equivalents and marketable securities consist of the following (in thousands):
| At March 31, (Dollars in Thousands) | At March 31, (Dollars in Thousands) | |||||||||||||||||||||||||||
| 2019 | 2018 | 2017 | 2021 | 2020 | 2019 | |||||||||||||||||||||||
| Cash and cash equivalents | $ | 409,632 | $ | 369,821 | $ | 304,880 | Cash and cash equivalents | $ | 467,176 | $ | 338,489 | $ | 409,632 | |||||||||||||||
| Short-term marketable securities | 76,344 | 77,941 | 137,892 | Short-term marketable securities | 9,277 | 47,969 | 76,344 | |||||||||||||||||||||
| Long-term marketable securities | 1,012 | — | 21,933 | Long-term marketable securities | — | 2,613 | 1,012 | |||||||||||||||||||||
| Cash, cash equivalents and marketable securities | $ | 486,988 | $ | 447,762 | $ | 464,705 | Cash, cash equivalents and marketable securities | $ | 476,453 | $ | 389,071 | $ | 486,988 | |||||||||||||||
Cash, cash equivalents and marketable securities
At March 31, 20192021, cash, cash equivalents and marketable securities (current and non-current) totaled $487.0$476.5 million. This represents an increase of $87.4 million a $39.2 million increase from $447.8$389.1 million at March 31, 2018.2020. This increase was primarily due to $149.8$213.9 million in cash provided by operations during the fiscal year ended March 31, 2019, partially2021. This increase was offset by $50.0$100.0 million used to repay long-term debt, $23.4$13.3 million used for tax withholdings in connection with the vesting of restricted stock units, $12.0 million used for capital expenditures, $14.5$4.5 million used for purchases of intangible assets, and $3.3 million used to repurchase shares of our common stock and $11.9 million used for tax withholdings on restricted stock units.
At March 31, 2021, cash, short-term and long-term investments in the United States were $320.1were $328.8 million, while cash held outside of the United States was approximately $166.9$147.7 million.
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Cash and cash equivalents were impacted by the following:
| Fiscal Year Ended March 31, (Dollars in Thousands) | |||||||||||||||||
| 2021 | 2020 | 2019 | |||||||||||||||
| Net cash provided by operating activities | $ | 213,921 | $ | 225,023 | $ | 149,838 | |||||||||||
| Net cash provided by (used in) investing activities | $ | 24,698 | $ | (4,309) | $ | (26,252) | |||||||||||
| Net cash used in financing activities | $ | (118,307) | $ | (286,870) | $ | (79,285) | |||||||||||
Fiscal Year Ended March 31, (Dollars in Thousands) | |||||||||||
| 2019 | 2018 | 2017 (1) | |||||||||
| Net cash provided by operating activities | $ | 149,838 | $ | 222,454 | $ | 226,764 | |||||
| Net cash (used in) provided by investing activities | $ | (26,252 | ) | $ | 57,128 | $ | (41,621 | ) | |||
| Net cash used in financing activities | $ | (79,285 | ) | $ | (220,962 | ) | $ | (89,553 | ) | ||
Net cash from operating activities
Fiscal year 20192021 compared to fiscal year 20182020
Cash provided by operating activities was $149.8$213.9 million during the fiscal year ended March 31, 2019,2021, compared to $222.5$225.0 million of cash provided by operating activities induring the fiscal year ended March 31, 2018.2020. This $72.7$11.1 million decrease was due in partpart to a $153.1$14.0 million decrease from deferred income taxes, $10.5 million decrease from deferred revenue, a larger net loss,$10.3 million decrease from depreciation and amortization expense, a $107.1$4.6 million unfavorable impactdecrease from accounts receivable, a $17.1$3.5 million decrease from inventories, a $2.4 million decrease from prepaid expenses and other assets, and a $15.6$0.9 million decrease from depreciationaccrued compensation and amortization.other expenses, and an $0.8 million decrease from the change in fair value of contingent and contractual liabilities. These decreases were partially offset by a $94.3$22.1 million increase from deferrednet income, taxes, a $37.7$7.6 million increase from accrued compensation and other expenses,income taxes payable, a $35.9 million increase due to the impairment of certain intangible assets, a $23.3$2.8 million increase from deferred revenue,operating lease liabilities, a $9.0 million increase from share based compensation expense associated with equity awards, a $7.7 million increase in loss on divestiture of business, a $5.1$2.6 million increase from accounts payable, and a $4.3$1.0 million increase from inventories, and a $2.1 million increase from income tax payable.share-based compensation. Accounts receivable days sales outstanding was 75 days at March 31, 2021 compared to 73 days at March 31, 2020 and 88 days at March 31, 2019 compared to 78 days at March 31, 2018 and 80 days at March 31, 2017.2019.
| Fiscal Year Ended March 31, (Dollars in Thousands) | |||||||||||||||||
| 2021 | 2020 | 2019 | |||||||||||||||
| Cash provided by (used in) investing activities included the following: | |||||||||||||||||
| Purchase of marketable securities | $ | (15,673) | $ | (117,383) | $ | (229,769) | |||||||||||
| Proceeds from maturity of marketable securities | 56,806 | 144,322 | 230,433 | ||||||||||||||
| Purchase of fixed assets | (11,986) | (19,922) | (23,392) | ||||||||||||||
| Purchase of intangible assets | (4,537) | — | — | ||||||||||||||
| Payments related to the divestiture of business | — | — | (3,293) | ||||||||||||||
| Acquisition of businesses, net of cash acquired | — | (11,347) | — | ||||||||||||||
| Decrease (increase) in deposits | 88 | (31) | (97) | ||||||||||||||
| Collection of contingent consideration | — | 52 | — | ||||||||||||||
| Capitalized software development costs | — | — | (134) | ||||||||||||||
| $ | 24,698 | $ | (4,309) | $ | (26,252) | ||||||||||||
Cash provided by operating activities was $222.5investing activities increased by $29.0 million to $24.7 million during the fiscal year ended March 31, 2018,2021, compared to $226.8 million of cash provided by operating activities in the fiscal year ended March 31, 2017. This $4.3 million decrease was due in part to a $116.8 million decrease from deferred income taxes, a $41.2 million decrease from deferred revenue, a $24.5 million decrease from accrued compensation and other expenses, a $21.9 million net decrease from amounts due to and from related parties, an $11.5 million decrease from inventories, a $9.3 million decrease from accounts payable, a $7.4 million decrease from depreciation and amortization, and a $4.7 million decrease from income taxes payable. These decreases were partially offset by a $133.0 million increase from accounts receivable, a $46.5 million increase from net income, a $44.9 million increase from prepaid expenses and other assets and an $8.1 million increase from share-based compensation expense
Fiscal Year Ended March 31, (Dollars in Thousands) | |||||||||||
| 2019 | 2018 | 2017 (1) | |||||||||
| Cash (used in) provided by investing activities included the following: | |||||||||||
| Purchase of marketable securities | $ | (229,769 | ) | $ | (114,178 | ) | $ | (199,841 | ) | ||
| Proceeds from maturity of marketable securities | 230,433 | 196,041 | 181,321 | ||||||||
| Purchase of fixed assets | (23,392 | ) | (15,913 | ) | (29,696 | ) | |||||
| Purchase of intangible assets | — | (544 | ) | (1,031 | ) | ||||||
| Payments related to the divestiture of business | (3,293 | ) | — | — | |||||||
| Acquisition of businesses, net of cash acquired | — | (8,334 | ) | (4,606 | ) | ||||||
| (Increase) decrease in deposits | (97 | ) | (330 | ) | 129 | ||||||
| Contingent purchase consideration | — | 523 | 660 | ||||||||
| Collection of contingently returnable consideration | — | — | 12,864 | ||||||||
| Capitalized software development costs | (134 | ) | (137 | ) | (1,421 | ) | |||||
| $ | (26,252 | ) | $ | 57,128 | $ | (41,621 | ) | ||||
Net cash inflows relating to the purchase and sales of marketable securities decreased $81.2increased $14.2 million during the fiscal year ended March 31, 20192021 relating to the amount of investments held at each respective balance sheet date, from an inflow of $81.9 million during fiscal year ended March 31, 2018 to an inflow of $0.7 million during fiscal year ended March 31, 2019. Net cash inflows relating to the purchase and sales of marketable securities increased $100.4$26.9 million during the fiscal year ended March 31, 2018 relating2020 to the amountan inflow of investments held at each respective balance sheet date, from an outflow of $18.5$41.1 million during the fiscal year ended March 31, 2017 to an inflow of $81.9 million during2021.
During the fiscal yeartwelve months ended March 31, 2018.
2020, there was an $11.3 million cash outflow related to the acquisitions of Eastwind and Gigavation. During the twelve months ended March 31, 2019, there was a $3.3 million cash outflow related to the divestiture of HNT.
During the twelve monthsfiscal year ended March 31, 2018, there was an $8.3 million cash outflow related2021, we entered into agreements to the acquisition of Efflux. During the twelve months ended March 31, 2017, there was a $4.6 million cash outflow related to the acquisition of Avvasi.acquire technology licenses for $4.5 million.
Our investments in property and equipment consist primarily of computer equipment, demonstration units, office equipment and facility improvements. We plan to continue to invest in capital expenditures to support our infrastructure in our fiscal year 2020.
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Net cash from financing activities
Fiscal Year Ended March 31, (Dollars in Thousands) | |||||||||||
| 2019 | 2018 | 2017 (1) | |||||||||
| Cash used in financing activities included the following: | |||||||||||
| Issuance of common stock under stock plans | $ | 3 | $ | 1 | $ | 2 | |||||
| Payment of contingent consideration | (2,851 | ) | (660 | ) | — | ||||||
| Treasury stock repurchases, including accelerated share repurchases | (14,468 | ) | (501,324 | ) | (79,996 | ) | |||||
| Tax withholding on restricted stock units | (11,969 | ) | (13,598 | ) | (9,559 | ) | |||||
| Proceeds from issuance of long-term debt, net of issuance costs | — | 294,619 | — | ||||||||
| Repayment of long-term debt | (50,000 | ) | — | — | |||||||
| $ | (79,285 | ) | $ | (220,962 | ) | $ | (89,553 | ) | |||
| Fiscal Year Ended March 31, (Dollars in Thousands) | |||||||||||||||||
| 2021 | 2020 | 2019 | |||||||||||||||
| Cash used in financing activities included the following: | |||||||||||||||||
| Issuance of common stock under stock plans | $ | 2 | $ | 2 | $ | 3 | |||||||||||
| Payment of contingent consideration | (1,748) | — | (2,851) | ||||||||||||||
| Treasury stock repurchases | (3,275) | (175,000) | (14,468) | ||||||||||||||
| Tax withholding on restricted stock units | (13,286) | (11,872) | (11,969) | ||||||||||||||
| Repayment of long-term debt | (100,000) | (100,000) | (50,000) | ||||||||||||||
| $ | (118,307) | $ | (286,870) | $ | (79,285) | ||||||||||||
Cash used in financing activities decreased $141.7$168.6 million to $79.3$118.3 million during the fiscal year ended March 31, 2019,2021, compared to $221.0$286.9 million of cash used in financing activities during the fiscal year ended March 31, 2018.2020.
During the twelve months ended March 31, 2019, we repurchased 543,251 shares for $14.5 million under the twenty-five million share repurchase program. During the twelve months ended March 31, 2018, we repurchased 13,190,650 shares for $411.3 million under our stock repurchase and accelerated share repurchase (ASR) programs.
During the fiscal years ended March 31, 2021, 2020 and 2019, we repurchased 154,271 shares, 7,116,159 shares and 543,251 shares of our common stock were repurchasedfor $3.3 million, $175.0 million, and $14.5 million under the ASR at an average cost perour twenty-five million share of $27.11.repurchase program.
In connection with the delivery of common shares upon vesting of restricted stock units, we have withheld 451,683506,917 shares for $13.3 million, 519,241 shares for $11.9 million 408,097and 451,683 shares for $13.6 million and 320,572 shares for $9.6$11.9 million related to minimum statutory tax withholding requirements on these restricted stock units during the fiscal years ended March 31, 2019, 20182021, 2020 and 2017,2019, respectively. These withholding transactions do not fall under the repurchase program described above, and therefore do not reduce the amount that is available for repurchase under that program.
During the fiscal yearyears ended March 31, 2021, 2020 and 2019, we repaid $100.0 million, $100.0 million and $50.0 million of borrowings under the Amended Credit Agreement.
Agreement, respectively.
Credit Facility
On January 16, 2018, we amended and expanded our existing credit agreement (Amended Credit Agreement) with a syndicate of lenders by and among: NetScout; JPMorgan Chase Bank, N.A. (JPMorgan), as administrative agent and collateral agent; J.P. Morgan Securities LLC, KeyBanc Capital Markets, Merrill Lynch, Pierce, Fenner & Smith Incorporated, RBC Capital Markets and Wells Fargo Securities, LLC, as joint lead arrangers and joint bookrunners; Fifth Third Bank, Santander Bank, N.A., SunTrust Bank, N.A. and U.S. Bank National Association, as co-documentation agents; and the lenders party thereto.
The Amended Credit Agreement provides for a five-year $1.0 billion senior secured revolving credit facility, including a letter of credit sub-facility of up to $75.0 million. We may elect to use the new credit facility for general corporate purposes or to finance the repurchase of up to twenty-five million shares of our common stock under our common stock repurchase plan. The commitments under the Amended Credit Agreement will expire on January 16, 2023, and any outstanding loans will be due on that date. During the fiscal year ended March 31, 2019,2021, we repaid $50.0$100.0 million of borrowings under the Amended Credit Agreement. At March 31, 2019, $5502021, $350 million was outstanding under the Amended Credit Agreement.
At our election, revolving loans under the Amended Credit Agreement bear interest at either (a) an Alternate Base Rate per annum equal to the greatest of (1) JPMorgan’sJPMorgan's prime rate, (2) 0.50% in excess of the New York Federal Reserve Bank (NYFRB) rate, or (3) an adjusted one month LIBOR rate plus 1%; or (b) such adjusted LIBOR rate (for the interest period selected by us), in each case plus an applicable margin. For the period from the delivery of our financial statements for the quarter ended December 31, 2018,2020, until we have delivered financial statements for the quarter ended March 31, 2019,2021, the applicable margin will be 1.75%1.50% per annum for LIBOR loans and 0.75%0.50% per annum for Alternate Base Rate loans, and thereafter the applicable margin will vary depending on our leverage ratio, ranging from 1.00%0.75% per annum for Base Rate loans and 2.00%1.75% per annum for LIBOR loans if our consolidated leverage ratio is greaterless than or equal to 3.50 to 1.00, down to 0.00% per annum for Alternate Base Rate loans and 1.00% per annum for LIBOR loans if our consolidated leverage ratio is equal to or less than 1.50 to 1.00. As of March 31, 2021, the Company’s maximum allowed consolidated leverage ratio is 3.50 to 1.00.
On July 27, 2017, the U.K. Financial Conduct Authority (FCA) announced that it will no longer require banks to submit rates for the calculation of LIBOR after 2021. On March 5, 2021, the Intercontinental Exchange Benchmark Administration
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(IBA), the FCA-regulated and authorized administrator of LIBOR, announced, and the FCA confirmed, that one week and two-month USD LIBOR settings will cease on December 31, 2021, and that the USD LIBOR panel will cease on June 30, 2023. IBA notes that any publication of the Overnight and 1, 3, 6 and 12 Months USD LIBOR settings based on panel bank submissions beyond December 31, 2021 will need to comply with applicable regulations, including as to representativeness. Based on current information from panel banks, IBA anticipates there being a representative panel for the continuation of these USD LIBOR settings through to June 30, 2023.
Our Amended Credit Agreement, which matures on January 16, 2023 prior to the June 30, 2023 cessation of USD LIBOR publications, provides for the Administrative Agent to determine if (i) adequate and reasonable means do not exist for ascertaining the LIBOR rate or (ii) the FCA or Government Authority having jurisdiction over the Administrative Agent has made a public statement identifying a specific date after which the LIBOR rate shall no longer be used for determining interest rates for loans and the Administrative Agent determines that (i) and (ii) above are unlikely to be temporary, then the Administrative Agent and NetScout would agree to transition to an Alternate Base Rate Borrowingborrowing as described above or amend the Credit Agreement to establish an alternate rate of interest to LIBOR that gives due consideration to the then prevailing market convention for determining a rate of interest for syndicated loans in the United States at such time.
Our consolidated leverage ratio is the ratio of our total funded debt compared to our consolidated adjusted EBITDA. Consolidated adjusted EBITDA includes certain adjustments, including, without limitation, adjustments relating to extraordinary, unusual or non-recurring charges, certain restructuring charges, non-cash charges, certain transaction costs and expenses and certain pro forma adjustments in connection with material acquisitions and dispositions, all as set forth in detail in the definition of consolidated adjusted EBITDA in the Amended Credit Agreement.
Commitment fees will accrue on the daily unused amount of the credit facility. For the period from the delivery of our financial statements for the quarter ended December 31, 20182020 until we have delivered financial statements for the quarter ended March 31, 2019,2021, the commitment fee will be 0.30%0.25% per annum, and thereafter the commitment fee will vary depending on the our consolidated leverage ratio, ranging from 0.30% per annum if our consolidated leverage ratio is greater than 2.75 to 1.00, down to 0.15% per annum if our consolidated leverage ratio is equal to or less than 1.50 to 1.00.
Letter of credit participation fees are payable to each lender on the amount of such lender’s letter of credit exposure, during the period from the closing date of the Amended Credit Agreement to but excluding the date which is the later of (i) the date on which such lender’s commitment terminates or (ii) the date on which such lender ceases to have any letter of credit exposure, at a rate per annum equal to the applicable margin for LIBOR loans. Additionally, we will pay a fronting fee to each issuing bank in amounts to be agreed to between us and the applicable issuing bank.
Interest on Alternate Base Rate loans is payable at the end of each calendar quarter. Interest on LIBOR loans is payable at the end of each interest rate period or at the end of each three-month interval within an interest rate period if the period is longer than three months. We may also prepay loans under the Amended Credit Agreement at any time, without penalty, subject to certain notice requirements.
Debt is recorded at the amount drawn on the revolving credit facility plus interest based on floating rates reflective of changes in the market which approximates fair value.
The loans and other obligations under the credit facility are (a) guaranteed by each of our wholly owned material domestic restricted subsidiaries, subject to certain exceptions, and (b) are secured by substantially all of the assets of us and the subsidiary guarantors, including a pledge of all the capital stock of material subsidiaries held directly by us and the subsidiary guarantors (which pledge, in the case of any foreign subsidiary, is limited to 65% of the voting stock), subject to certain customary exceptions and limitations. The Amended Credit Agreement generally prohibits any other liens on the assets of NetScout and its restricted subsidiaries, subject to certain exceptions as described in the Amended Credit Agreement.
The Amended Credit Agreement contains certain covenants applicable to us and our restricted subsidiaries, including, without limitation, limitations on additional indebtedness, liens, various fundamental changes, dividends and distributions,
investments (including acquisitions), transactions with affiliates, asset sales, including sale-leaseback transactions, speculative hedge agreements, payment of junior financing, changes in business and other limitations customary in senior secured credit facilities. In addition, we are required to maintain certain consolidated leverage and interest coverage ratios. These covenants and limitations are more fully described in the Amended Credit Agreement. At March 31, 2019,2021, we were in compliance with all of these covenants.
The Amended Credit Agreement provides that events of default will exist in certain circumstances, including failure to make payment of principal or interest on the loans when required, failure to perform certain obligations under the Amended Credit Agreement and related documents, defaults under certain other indebtedness, certain insolvency events, certain events arising under ERISA, a change of control and certain other events. Upon an event of default, the administrative agent with the consent of, or at the request of, the holders of more than 50% in principal amount of the loans and commitments may terminate
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the commitments and accelerate the maturity of the loans and enforce certain other remedies under the Amended Credit Agreement and the other loan documents.
In connection with NetScout's Amended Credit Agreement described above, we terminated our previous term loan dated as of July 14, 2015, by and among NetScout; JPMorgan Chase Bank, N.A. (JPMorgan), as administrative agent and collateral agent; J.P. Morgan Securities LLC, KeyBanc Capital Markets, Merrill Lynch, Pierce, Fenner & Smith Incorporated, RBC Capital Markets and Wells Fargo Securities, LLC, as joint lead arrangers and joint bookrunners; Santander Bank, N.A., SunTrust Bank, N.A. and U.S. Bank National Association, as co-documentation agents; and the lenders party thereto.
We have capitalized debt issuance costs totaling $12.2 million at March 31, 2019,2021, which are being amortized over the life of the revolving credit facility. The unamortized balance was $6.6$3.1 million as of March 31, 2019.2021. The balance of $1.7 million was included as prepaid expenses and other current assets and a balance of $4.9$1.4 million was includedincluded as other assets in our consolidated balance sheet.
Expectations for Fiscal Year 20202022
We are actively managing the business to maintain cash flow and believe that we currently have adequate liquidity. We believe that our cash balances, available debt, short-term marketable securities classified as available-for-sale and future cash flows generated by operationsthese factors will be sufficientallow us to meet our currently anticipated funding requirements.
We expect net cash needs forprovided by operating activities combined with cash, cash equivalents, and marketable securities and borrowing availability under our revolving credit facility to provide sufficient liquidity to fund current obligations, capital spending, debt service requirements and working capital and capital expenditures forrequirement over at least the next 12twelve months.
Additionally, a portion of our cash may be used to acquire or invest in complementary businesses or products, or to obtain the right to use complementary technologies.technologies, to repay borrowings under our Amended Credit Agreement, or to repurchase shares of our common stock through our stock repurchase program. From time to time, in the ordinary course of business, we evaluate potential acquisitions of such businesses, products or technologies. If our existing sources of liquidity are insufficient to satisfy our liquidity requirements, we may seek to sell additional equity or debt securities. The sale of additional equity or debt securities could result in additional dilution to our stockholders.
Recent Accounting Standards
For information with respect to recent accounting pronouncements on our consolidated financial statements, See Note 2 contained in the "Notes to Consolidated Financial Statements" included in Part IV of this Annual Report on Form 10-K.
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Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Risk. We hold our cash, cash equivalents and investments for working capital purposes. Some of the securities we invest in are subject to market risk. This means that a change in prevailing interest rates may cause the principal amount of the investment to fluctuate. To minimize this risk, we maintain our portfolio of cash, cash equivalents and investments in a variety of securities, including money market funds and government debt securities. The risk associated with fluctuating interest rates is limited to our investment portfolio. Due to the short-term nature of these instruments, we believe that we do not have any material exposure to changes in the fair value of our investment portfolio as a result of changes in interest rates. Declines in interest rates, however, would reduce future interest income. The effect of a hypothetical 10% increase or decrease in overall interest rates would not have had a material impact on our operating results or the total fair value of the portfolio.
We are exposed to market risks related to fluctuations in interest rates related to our credit facility. As ofAt March 31, 2019,2021, we owed $550$350 million on this loan with an interest rate of 4.25%1.61%. A sensitivity analysis was performed on the outstanding portion of our debt obligation as of March 31, 2019.2021. Should the current weighted average interest rate increase or decrease by 10%, the resulting annual increase or decrease to interest expense would be approximately $2.3 million$564 thousand as of March 31, 2019.2021.
Credit Risk. Our cash equivalents and marketable securities consist primarily of money market instruments, U.S. Treasury bills, certificates of deposit, commercial paper, corporate bonds and municipal obligations.
At March 31, 20192021 and periodically throughout the year, we have maintained cash balances in various operating accounts in excess of federally insured limits. We limit the amount of credit exposure with any one financial institution by evaluating the creditworthiness of the financial institutions with which we invest.
Foreign Currency Exchange Risk. As a result of our foreign operations, we face exposure to movements in foreign currency exchange rates, primarily the Euro, British Pound, Canadian Dollar and Indian Rupee. The current exposures arise primarily from expenses denominated in foreign currencies. We currently engage in foreign currency hedging activities in order to limit these exposures. We do not use derivative financial instruments for speculative trading purposes.
At March 31, 2019,2021, we had foreign currency forward contracts designated as hedging instruments with notional amounts totaling $4.6$11.0 million and foreign currency forward contracts not designated as hedging instruments with a notional amount of $6.4 million. The valuation of outstanding foreign currency forward contracts (both designated and not designated as hedging instruments) at March 31, 20192021 resulted in a liability balance of $68$191 thousand, reflecting unfavorable contract rates in comparison to current market rates at this date and an asset balance of $58$57 thousand, reflecting favorable rates in comparison to current market rates. At March 31, 2018,2020, we had foreign currency forward contracts designated as hedging instruments with notional amounts totaling $11.2$1.7 million. The valuation of outstanding foreign currency forward contracts designated as hedging instruments at March 31, 20182020 resulted in a liability balance of $40$49 thousand, reflecting unfavorable contract rates in comparison to current market rates at this date and an asset balance of $122 thousand reflecting favorable rates in comparison to current market rates.date.
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Item 8. Financial Statements and Supplementary Data
Our Consolidated Financial Statements and Schedule and Report of Independent Registered Public Accounting Firm appear beginning on page F-1 attached to this report.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
There have been no changes in or disagreements with accountants on accounting or financial disclosure matters.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
As of March 31, 2019,2021, NetScout, under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rule 13a-15(b) promulgated under the Exchange Act. Based upon that evaluation, our principal executive officer and principal financial officer concluded that, as of March 31, 20192021 our disclosure controls and procedures were effective in ensuring that material information relating to NetScout, including its consolidated subsidiaries, required to be disclosed by NetScout in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, including ensuring that such material information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
During the year quarter ended March 31, 2019,2021, there were no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as such term is defined in Exchange Act Rule 13a-15(f). Our internal control over financial reporting was designed to provide reasonable assurance regarding reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Our management assessed the effectiveness of our internal control over financial reporting as of March 31, 2019.2021. In making this assessment, our management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control—Integrated Framework in 2013. Based on our assessment, we concluded that our internal control over financial reporting was effective as of March 31, 2019.2021.
The effectiveness of our internal control over financial reporting as of March 31, 20192021 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which appears herein.
Item 9B. Other Information
Not applicable.
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PART III
Item 10. Directors, Executive Officers and Corporate Governance
The information required by this Item 10 will be included under the captions "Directors and Executive Officers," "Election"Proposal 1 Election of Directors," "Delinquent Section 16(a) Reports," "Code"Corporate Governance -- Code of Ethics," "The Board of Directors and its Committees" and "Corporate Governance" in our definitive Proxy Statement with respect to our 20192021 Annual Meeting of Stockholders to be filed with the SEC no later than 120 days after the end of the fiscal year covered by this Annual Report and is incorporated herein by reference.
Item 11. Executive Compensation
The information required by this Item 11 will be included under the caption "Compensation and Other Information Concerning Directors and Executive Officers" in our definitive Proxy Statement with respect to our 20192021 Annual Meeting of Stockholders to be filed with the SEC not later than 120 days after the end of the fiscal year covered by this Annual Report and is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required by this Item 12 will be included under the captions "Security Ownership of Certain Beneficial Owners and Management" and "Equity"Compensation and Other Information Concerning Directors and Executive Officers -- Equity Compensation Plan Information" in our definitive Proxy Statement with respect to our 20192021 Annual Meeting of Stockholders to be filed with the SEC not later than 120 days after the end of the fiscal year covered by this Annual Report and is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information required by this Item 13 will be included, as applicable, under the captions "Director"Corporate Governance --Director Independence," "Employment"Compensation and Other Information Concerning Directors and Executive Officers -- Employment and Other Agreements" and "Transactions with Related Persons" in our definitive Proxy Statement with respect to our 20192021 Annual Meeting of Stockholders to be filed with the SEC not later than 120 days after the end of the fiscal year covered by this Annual Report and is incorporated herein by reference.
Item 14. Principal AccountingAccountant Fees and Services
The information required by this Item 14 will be included under the captions "Auditors Fees and Services" and "Policy"Auditors Fees and Services -- Policy on Audit Committee Pre-approval of Audit and Non-Audit Services" in our definitive Proxy Statement with respect to our 20192021 Annual Meeting of Stockholders to be filed with the SEC not later than 120 days after the end of the fiscal year covered by this Annual Report and is incorporated herein by reference.
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PART IV
Item 15. Exhibits and Financial Statement Schedules
| (a) | 1. | Consolidated Financial Statements. | ||||||||||||
| 2. | Financial Statement Schedule. | |||||||||||||
| No other financial statement schedules have been included because they are either not applicable or the information is in the consolidated financial statements. | ||||||||||||||
| 3. | Exhibits listed in the accompanying Index to Exhibits are filed or incorporated by reference as part of this report. | |||||||||||||
| (b) | We hereby file as part of this Annual Report on Form 10-K the exhibits listed in Item 15(a)(3) above. | |||||||||||||
| (c) | We hereby file as part of this Annual Report on Form 10-K the financial statement schedule listed in Item 15(a)(2) above. | |||||||||||||
53
NetScout Systems, Inc.
Index to Exhibits
| Composite conformed copy of Third Amended and Restated Certificate of Incorporation of NetScout (as amended) (filed as Exhibit 3.2 to NetScout’s current report on Form 8-K, SEC File No. 000-26251, filed on September 21, 2016, and incorporated herein by reference). | ||||||||
| Amended and Restated By-laws of NetScout (filed as Exhibit 3.1 to NetScout’s current Report on Form 8-K, SEC File No. 000-26251, filed on | ||||||||
| Specimen Certificate for shares of NetScout’s Common Stock (filed as Exhibit 4.3 to NetScout’s Annual Report on Form 10-K for the fiscal year ended March 31, 2001, SEC File No. 000-26251, filed on June 29, 2001, and incorporated herein by reference). | ||||||||
| Description of Common Stock (filed | ||||||||
| Form of Amended and Restated Indemnification Agreement between NetScout and each director and executive officer filed as Exhibit 10.1 to NetScout's Quarterly Report on Form 10-Q for the quarterly period ended December 31, 2013, SEC File No. 000-26251, filed January 28, 2014, and incorporated herein by reference). | ||||||||
| Lease between Arturo J. Gutierrez and John A. Cataldo, Trustees of Nashoba Westford Realty Trust, u/d/t dated April 27, 2000 and recorded with the Middlesex North Registry of Deeds in Book 10813, Page 38 and NetScout for Westford Technology Park West, as amended (filed as Exhibit 10.26 to NetScout’s Annual Report on Form 10-K for the fiscal year ended March 31, 2001, SEC File No. 000-26251, filed on June 29, 2001, and incorporated herein by reference). | ||||||||
| Agreement Relating to Employment, dated January 3, 2007, by and between NetScout and Anil K. Singhal (filed as Exhibit 10.2 to NetScout’s Current Report on Form 8-K, SEC File No. 000-26251, filed on January 5, 2007 and incorporated herein by reference). | ||||||||
| Amendment No. 1, dated February 2, 2007, to Agreement Relating to Employment by and between the Company and Anil K. Singhal (filed as exhibit 10.1 to NetScout’s Quarterly Report on Form 10-Q for the quarterly period ended December 31, 2006, SEC File No. 000-26251, filed February 5, 2007 and incorporated herein by reference). | ||||||||
| Amendment No. 2, dated December 22, 2008, to Agreement Relating to Employment by and between the Company and Anil K. Singhal (filed as exhibit 10.1 to NetScout’s Quarterly Report on Form 10-Q for the quarterly period ended December 31, 2008, SEC File No. 000-26251, filed February 6, 2009 and incorporated herein by reference). | ||||||||
| Amendment No. 3, dated May 28, 2012, to Agreement Relating to Employment, by and between the Company and Anil K. Singhal (filed as Exhibit 10.3 to NetScout’s Current Report on Form 8-K, SEC File No. 000-26251, filed on June 1, 2012 and incorporated herein by reference). | ||||||||
NetScout Systems, Inc. 2007 Equity Incentive Plan, as amended (filed as Appendix A to the Registrant’s Definitive Proxy Statement on Schedule 14A, SEC File No. 000-26251, filed with the Commission on July 28, 2015 and incorporated herein by reference) | ||||||||
| NetScout Form of Restricted Stock Unit Agreement with respect to the NetScout 2007 Equity Incentive Plan (filed as Exhibit 99.2 to NetScout’s Registration Statement on Form S-8, SEC File No. 333-148364, filed on December 27, 2007 and incorporated herein by reference). | ||||||||
| Form of Amended and Restated Severance Agreement for Named Executive Officers (other than the CEO and CFO) (filed as Exhibit 10.1 to NetScout’s Current Report on Form 8-K, SEC File No. 000-26251, filed on June 1, 2012 and incorporated herein by reference). | ||||||||
| Amended and Restated Severance Agreement, dated May 28, 2012, by and between the Company and Jean Bua (filed as Exhibit 10.2 to NetScout’s Current Report on Form 8-K, SEC File No. 000-26251, filed on June 1, 2012 and incorporated herein by reference). | |||||||||
54
| Third Amendment Agreement, dated August 10, 2010, to that certain Lease, dated August 17, 2000, as amended, between the Company and Westford West I Limited Partnership, as successor to Arturo J. Gutierrez and John A. Cataldo, Trustees of Nashoba Westford Realty Trust, u/d/t dated April 27, 2000 (filed as Exhibit 10.1 to NetScout’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2010, SEC File No. 000-26251, filed November 9, 2010 and incorporated herein by reference). | ||||||||
| NetScout Systems, Inc. Amended and Restated 2011 Employee Stock Purchase Plan (filed as Exhibit 10.1 to NetScout’s Current Report on Form 8-K, SEC File No. 000-26251, filed on September 13, 2018 and incorporated herein by reference). | ||||||||
| Form of Amendment to Amended and Restated Severance Agreement for Executive Officers (filed as Exhibit 10.9 to NetScout’s Quarterly Report on Form 10-Q for the quarterly period ended December 31, 2014, SEC File No. 000-26251, filed on January 27, 2015 and incorporated herein by reference). | ||||||||
Amendment and Restatement Agreement dated as of January 16, 2018, to the Credit Agreement, dated as of July 14, 2015, by and among NetScout Systems, Inc.; certain subsidiaries of NetScout Systems, Inc. as loan parties; the lenders and issuing banks party thereto and JPMorgan Chase Bank, N.A., as administrative agent attaching the Amended and Restated Credit Agreement, dated as of January 16, 2018, by and among NetScout Systems, Inc.; JPMorgan Chase Bank, N.A., as administrative agent and collateral agent; JPMorgan Chase Bank, N.A., Wells Fargo Securities, LLC, Merrill Lynch, Pierce, Fenner & Smith Incorporated, RBC Capital Markets and KeyBanc Capital Markets Inc., as joint lead arrangers and joint bookrunners; SunTrust Bank, N.A., Santander Bank, N.A., U.S. Bank National Association and Fifth Third Bank, as co-documentation agents; and the lenders party thereto (filed as Exhibit 10.5 to NetScout’s current report on Form 8-K, SEC File No. 000-26251, filed with the SEC on January 18, 2018 and incorporated herein by | ||||||||
| Summary of Non-Employee Director Compensation (filed as Exhibit 10.1 to NetScout's Quarterly Report on Form 10Q for the quarterly period ended September 30, 2018, SEC | ||||||||
| NetScout Systems, Inc. 2019 Equity Incentive Plan, as amended and restated (filed as Exhibit 99.1 to NetScout’s Registration Statement on Form S-8, SEC File No. 333-248786, filed on September 14, 2020 and incorporated herein by reference). | ||||||||
| Form of Restricted Stock Unit Agreement with respect to the NetScout Systems, Inc. 2019 Equity Incentive Plan (filed as Exhibit 10.1 to NetScout’s Quarterly Report on Form 10-Q for the quarterly period ended December 31, 2019, SEC File No. 000-26251, filed on February 6, 2020 and incorporated herein by reference). | ||||||||
| Subsidiaries of NetScout (filed herewith). | ||||||||
| Consent of PricewaterhouseCoopers LLP (filed herewith). | ||||||||
| Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith). | ||||||||
| Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith). | ||||||||
32.1† | Certification Pursuant to Section 906 of the Sarbanes–Oxley Act of 2002 (furnished herewith). | |||||||
32.2† | Certification Pursuant to Section 906 of the Sarbanes–Oxley Act of 2002 (furnished herewith). | |||||||
| XBRL Instance | ||||||||
| 101.SCH | XBRL Taxonomy Extension Schema Document. | |||||||
| 101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document. | |||||||
| 101.DEF | XBRL Taxonomy Extension Definition Linkbase Document. | |||||||
| 101.LAB | XBRL Taxonomy Extension Label Linkbase Document. | |||||||
| 101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document. | |||||||
| 104 | ||||||||
| The cover page from the Company's Annual Report on Form 10-K for the fiscal year ended March 31, 2021 formatted in Inline XBRL | ||||||||
55
| * | Indicates a management contract or compensatory plan or arrangement. | ||||
| Exhibit has been furnished, is not deemed filed and is not to be incorporated by reference into any of the Company's filings under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, irrespective of any general incorporation language contained in any such filing | |||||
Item 16. Form 10-K Summary
Not provided.
56
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| NETSCOUT SYSTEMS, INC. | ||||||||
| By: | /S/ ANIL K. SINGHAL | |||||||
| Anil K. Singhal | ||||||||
President, Chief Executive Officer, and Chairman | ||||||||
| Date: May | ||||||||
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
| Signature | Title(s) | Date | ||||||||||||||
/S/ ANIL K. SINGHAL | President, Chief Executive Officer, and Chairman (Principal Executive Officer) | May | ||||||||||||||
| Anil K. Singhal | ||||||||||||||||
/S/ JEAN BUA | Executive Vice President and Chief Financial Officer (Principal Financial Officer) (Principal Accounting Officer) | May | ||||||||||||||
| Jean Bua | ||||||||||||||||
/S/ MICHAEL SZABADOS | Chief Operating Officer and Vice Chairman | May | ||||||||||||||
| Michael Szabados | ||||||||||||||||
/S/ ROBERT E. DONAHUE | Director | May | ||||||||||||||
| Robert E. Donahue | ||||||||||||||||
/S/ JOHN R. EGAN | Director | May | ||||||||||||||
| John R. Egan | ||||||||||||||||
/S/ ALFRED GRASSO | Director | May | ||||||||||||||
| Alfred Grasso | ||||||||||||||||
/S/ JOSEPH G. HADZIMA, JR. | Director | May | ||||||||||||||
| Joseph G. Hadzima, Jr. | ||||||||||||||||
/S/ CHRISTOPHER PERRETTA | Director | May | ||||||||||||||
| Christopher Perretta | ||||||||||||||||
/S/ SUSAN L. SPRADLEY | Director | May | ||||||||||||||
| Susan L. Spradley | ||||||||||||||||
/S/ VIVIAN VITALE | Director | May | ||||||||||||||
| Vivian Vitale | ||||||||||||||||
57
NetScout Systems, Inc.
Index to Consolidated Financial Statements
F-1
Report of Independent Registered Public Accounting Firm
To the Board of Directors and StockholdersShareholders of NetScout Systems, Inc.:
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of NetScout Systems, Inc. and its subsidiaries (the “Company”) as of March 31, 20192021 and 2018,2020, and the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity and cash flows for each of the three years in the period ended March 31, 2019,2021, including the related notes and schedule of valuation and qualifying accounts listed in the index appearing under Item 15(a)(2) (collectively referred to as the “consolidated financial statements”). We also have audited the Company's internal control over financial reporting as of March 31, 2019,2021, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of March 31, 20192021 and 2018,2020, and the results of its operations and its cash flows for each of the three years in the period ended March 31, 20192021 in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of March 31, 20192021, based on criteria established in Internal Control - Integrated Framework(2013) issued by the COSO.
As discussed in NoteNotes 1 and 3 to the consolidated financial statements, the Company changed the manner in which it accounts for leases in 2020 and the manner in which it accounts for revenues from contracts with customers in 2019.
Basis for Opinions
The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Annual Report on Internal Control Overover Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures
F-2