# Netscout Systems Inc: Form 10-Q for the period ended Sep 30, 2022

- Company: [Netscout Systems Inc](/companies/ntct.md) (CIK 1078075)
- Form: 10-Q
- Filed: 2022-11-03
- Accepted by EDGAR: Nov 3, 2022, 16:03 ET
- Period: 2022-09-30
- Accession: 0001628280-22-028170
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1078075/000162828022028170/ntct-20220930.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1078075/000162828022028170/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2022-09-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2022-07-01 to 2022-09-30 | $228.1m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Revenue | 6 months, 2022-04-01 to 2022-09-30 | $436.9m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Cost of revenue | 3 months, 2022-07-01 to 2022-09-30 | $57.6m | us-gaap:CostOfRevenue |
| Cost of revenue | 6 months, 2022-04-01 to 2022-09-30 | $115.4m | us-gaap:CostOfRevenue |
| Gross profit | 3 months, 2022-07-01 to 2022-09-30 | $170.4m | us-gaap:GrossProfit |
| Gross profit | 6 months, 2022-04-01 to 2022-09-30 | $321.5m | us-gaap:GrossProfit |
| Research and development | 3 months, 2022-07-01 to 2022-09-30 | $43.9m | us-gaap:ResearchAndDevelopmentExpense |
| Research and development | 6 months, 2022-04-01 to 2022-09-30 | $87.4m | us-gaap:ResearchAndDevelopmentExpense |
| Operating income | 3 months, 2022-07-01 to 2022-09-30 | $21.4m | us-gaap:OperatingIncomeLoss |
| Operating income | 6 months, 2022-04-01 to 2022-09-30 | $12.3m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2022-07-01 to 2022-09-30 | $2.2m | us-gaap:InterestExpense |
| Interest expense | 6 months, 2022-04-01 to 2022-09-30 | $4.1m | us-gaap:InterestExpense |
| Income tax | 3 months, 2022-07-01 to 2022-09-30 | $2.0m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 6 months, 2022-04-01 to 2022-09-30 | −$1.4m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2022-07-01 to 2022-09-30 | $17.4m | us-gaap:NetIncomeLoss |
| Net income | 6 months, 2022-04-01 to 2022-09-30 | $10.3m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2022-07-01 to 2022-09-30 | $0.24 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 6 months, 2022-04-01 to 2022-09-30 | $0.14 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2022-07-01 to 2022-09-30 | $0.24 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 6 months, 2022-04-01 to 2022-09-30 | $0.14 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2022-07-01 to 2022-09-30 | 72,891,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 6 months, 2022-04-01 to 2022-09-30 | 73,494,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 6 months, 2022-04-01 to 2022-09-30 | −$2.4m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 6 months, 2022-04-01 to 2022-09-30 | $5.2m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Share repurchases | 6 months, 2022-04-01 to 2022-09-30 | $150.0m | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Cash and equivalents | at 2022-09-30 | $320.3m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2022-09-30 | $588.4m | us-gaap:AssetsCurrent |
| Total assets | at 2022-09-30 | $2.82bn | us-gaap:Assets |
| Current liabilities | at 2022-09-30 | $402.2m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2022-09-30 | $884.4m | us-gaap:Liabilities |
| Long-term debt | at 2022-09-30 | $200.0m | us-gaap:LongTermDebtNoncurrent |
| Shareholders' equity | at 2022-09-30 | $1.94bn | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 56,030 characters.

*You should read the following discussion and analysis of our financial condition and results of operations in conjunction with the condensed consolidated financial statements and notes thereto included elsewhere in this Quarterly Report and in our Annual Report on Form 10-K for the fiscal year ended March 31, 2022, filed with the Securities and Exchange Commission. This discussion contains forward-looking statements that involve risks and uncertainties. When reviewing the discussion below, you should keep in mind the substantial risks and uncertainties that could impact our business. In particular, we encourage you to review the risks and uncertainties described in Part I, Item 1A "Risk Factors" in our Annual Report on Form 10-K for the fiscal year ended March 31, 2022. These risks and uncertainties could cause actual results to differ significantly from those projected in forward-looking statements contained in this report or implied by past results and trends. Forward-looking statements are statements that attempt to forecast or anticipate future developments in our business, financial condition or results of operations. See the section titled "Cautionary Statement Concerning Forward-Looking Statements" that appears at the beginning of this Quarterly Report. These statements, like all statements in this report, speak only as of the date of this Quarterly Report (unless another date is indicated), and, except as required by law, we undertake no obligation to update or revise these statements in light of future developments.*

### Overview

We are an industry leader with over three decades of experience in providing service assurance and cybersecurity solutions that are based on our pioneering deep packet inspection technology at scale, which is used by customers worldwide to protect 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 and protection 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 their 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 data, thereby reducing meantime-to-resolution of issues and driving compelling returns on their investments in their networks 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 customer 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 and availability 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, expansion into new or adjacent markets, development of strategic partnerships, competition, successful acquisition integration efforts, and our ability to control costs and make improvements in a highly competitive industry.

In response to the Russian military operations in Ukraine, we have ceased business operations in Russia, including sales, support on existing contracts and professional services. The United States and other countries have imposed sanctions on Russia that could impact our future revenue streams. These events did not have a material impact on our financial statements for the six months ended September 30, 2022. We will continue to monitor the impact of these events on all aspects of our business.

### Macroeconomic Conditions and COVID-19 Impact

We continue to closely monitor current global and macroeconomic conditions, including the impact of the coronavirus (COVID-19) pandemic, the war in Ukraine, global geopolitical tension, stock market volatility, exchange rate fluctuations, rising inflation and interest rates, and the risk of a recession, on all aspects of our business, including the manner and extent to which they have impacted and could continue to impact our customers, employees, supply chain, and distribution network. The impacts of these global and macroeconomic trends and the COVID-19 pandemic remain uncertain. For fiscal year 2022 and the first half of fiscal year 2023, we observed that technology and project spending resumed and we focused on advancing our products, growing revenue, enhancing earnings per share, and generating 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 pandemic continues and as a recovery slowly occurs. We expect net cash provided by operations 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 manage 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 September 30, 2022, we had, as of September 30, 2022, an incremental $600 million available to us under our 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 September 30, 2022, we had deferred $4.5 million of employer payroll taxes which is required to be deposited by December 2022.

### Results Overview

Total revenue increased $34.7 million for the six months ended September 30, 2022 as compared to total revenue for the six months ended September 30, 2021 primarily due to an increase in revenue from our radio frequency modeling projects from service provider customers, as well as an increase in revenue from cybersecurity offerings.

Our gross profit percentage remained flat at 74% during the six months ended September 30, 2022, as compared with the six months ended September 30, 2021.

Net income for the six months ended September 30, 2022 was $10.3 million, as compared with a net loss for the six months ended September 30, 2021 of $3.4 million, an increase of $13.7 million. The increase in net income was primarily due to a $34.7 million increase in revenue, a $5.0 million decrease in employee-related costs, a $4.7 million decrease in direct material costs, a $4.3 million decrease in amortization of intangible assets, a $2.3 million decrease in inventory obsolescence charges, and a $1.5 million decrease in income tax expense. These increases to net income were partially offset by a $19.3 million increase in costs to deliver radio frequency propagation modeling projects, a $7.4 million increase in expenses related to trade shows, user conferences and other events, a $5.1 million increase in travel expense attributable to the lifting of some COVID-19 related restrictions, a $3.2 million increase in commissions expense, a $1.7 million increase in restructuring expense, a $1.6 million increase in contractor fees, and a $1.3 million increase in advertising and other marketing-related expenses.

At September 30, 2022, we had cash, cash equivalents and marketable securities of $367.1 million. This represents a decrease of $336.1 million from $703.2 million at March 31, 2022. This decrease was primarily due to $150.0 million used in treasury stock repurchases under an ASR program, $150.0 million used to repay long-term debt, $19.0 million used for tax withholdings on restricted stock units, $5.2 million used for capital expenditures, and $2.4 million used in operations during the six months ended September 30, 2022.

### 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 gross profit, non-GAAP income from operations, non-GAAP net income, non-GAAP net income per share (diluted) and non-GAAP earnings before interest and other expense, income taxes, depreciation, and amortization (EBITDA) from operations. Non-GAAP gross profit removes expenses related to the amortization of acquired intangible assets, share-based compensation, and 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, restructuring charges, and transitional service agreement expenses. Non-GAAP net income includes the foregoing adjustments related to non-GAAP income from operations, and also removes loss on extinguishment of debt, net of related income tax effects. Non-GAAP diluted net income per share removes the share impact of non-GAAP adjustments utilized in the calculation of non-GAAP net 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.

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 margin, net income and diluted net income per share), and may have limitations because 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 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 will 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 to 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 provides useful information to management and investors regarding present and future business trends relating to our financial condition and results of operations.

The following table reconciles gross profit, income from operations, net income (loss) and net income (loss) per share on a GAAP and non-GAAP basis for the three and six months ended September 30, 2022 and 2021, respectively (in thousands, except for per share amounts):

| September 30, 2022 | Three Months Ended 2021 | 2022 | Six Months Ended September 30, 2021 |  |
| --- | ---: | ---: | ---: | ---: |
| Revenue (GAAP and non-GAAP) | $228,081 | $211,918 | $436,893 | $402,190 |
| GAAP gross profit | $170,440 | $160,274 | $321,538 | $296,136 |
| Share-based compensation expense | 2,395 | 2,228 | 4,432 | 4,115 |
| Amortization of acquired intangible assets | 2,312 | 3,352 | 4,640 | 6,712 |
| Acquisition related depreciation expense | 4 | 7 | 11 | 12 |
| Non-GAAP gross profit | $175,151 | $165,861 | $330,621 | $306,975 |
| GAAP income from operations | $21,403 | $12,165 | $12,276 | $1,498 |
| Share-based compensation expense | 16,501 | 16,735 | 32,082 | 30,700 |
| Amortization of acquired intangible assets | 16,113 | 18,322 | 32,322 | 36,688 |
| Business development and integration expense | — | — | — | (5) |
| Compensation for post-combination services | — | — | — | 2 |
| Restructuring charges | (60) | — | 1,714 | — |
| Acquisition related depreciation expense | 59 | 64 | 124 | 124 |
| Transitional service agreement expense | — | 59 | — | 117 |
| Non-GAAP income from operations | $54,016 | $47,345 | $78,518 | $69,124 |

|  |  |  |  |  |
| --- | ---: | ---: | ---: | ---: |
| GAAP net income (loss) | $17,383 | $7,896 | $10,251 | $(3,445) |
| Share-based compensation expense | 16,501 | 16,735 | 32,082 | 30,700 |
| Amortization of acquired intangible assets | 16,113 | 18,322 | 32,322 | 36,688 |
| Business development and integration expense | — | — | — | (5) |
| Compensation for post-combination services | — | — | — | 2 |
| Restructuring charges | (60) | — | 1,714 | — |
| Acquisition-related depreciation expense | 59 | 64 | 124 | 124 |
| Loss on extinguishment of debt | — | 596 | — | 596 |
| Income tax adjustments | (8,691) | (8,315) | (17,136) | (14,404) |
| Non-GAAP net income | $41,305 | $35,298 | $59,357 | $50,256 |
| GAAP diluted net income (loss) per share | $0.24 | $0.11 | $0.14 | $(0.05) |
| Per share impact of non-GAAP adjustments identified above | 0.33 | 0.36 | 0.67 | 0.72 |
| Non-GAAP diluted net income per share | $0.57 | $0.47 | $0.81 | $0.67 |
| GAAP income from operations | $21,403 | $12,165 | $12,276 | $1,498 |
| Previous adjustments to determine non-GAAP income from operations | 32,613 | 35,180 | 66,242 | 67,626 |
| Non-GAAP income from operations | 54,016 | 47,345 | 78,518 | 69,124 |
| Depreciation excluding acquisition related | 5,090 | 5,623 | 10,401 | 11,434 |
| Non-GAAP EBITDA from operations | $59,106 | $52,968 | $88,919 | $80,558 |

28

### Critical Accounting Policies and Estimates

Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with GAAP consistently applied. The preparation of these consolidated financial statements requires us to make significant estimates and judgments that affect the amounts reported in our consolidated financial statements and the accompanying notes. These items are regularly monitored and analyzed by management for changes in facts and circumstances, and material changes in these estimates could occur in the future. Changes in estimates are recorded in the period in which they become known. We base our estimates on historical experience and various other assumptions that we believe to be reasonable under the circumstances. Actual results may differ from our estimates.

While all of our accounting policies impact the consolidated financial statements, certain policies are viewed to be critical. Critical accounting policies are those that are both most important to the portrayal of our financial condition and results of operations and that require management's most subjective or complex judgments and estimates. We consider the following accounting policies to be critical in fully understanding and evaluating our financial results:

- revenue recognition; and
- valuation of goodwill, intangible assets and other acquisition accounting items.

Please refer to the critical accounting policies set forth in our Annual Report on Form 10-K for the fiscal year ended March 31, 2022, filed with the Securities and Exchange Commission (SEC) on May 19, 2022, for a description of all of our critical accounting policies and estimates.

### Three Months Ended September 30, 2022 and 2021

### Revenue

Product revenue consists of sales of our hardware products and licensing of our software products. Service revenue consists of customer support agreements, consulting, training and stand-ready software as a service offerings. During the three months ended September 30, 2022 and 2021, one direct customer, Verizon, accounted for more than 10% of our total revenue, while no indirect channel partners accounted for more than 10% of our total revenue. During the three months ended September 30, 2022 and 2021, the service assurance product line accounted for approximately 73% and 77% of total revenue, respectively, and the cybersecurity product line accounted for approximately 27% and 23% of total revenue, respectively. The service assurance and cybersecurity product line results presented as a percentage of total revenue are not necessarily indicative of future revenue mix.

*(Dollars in Thousands)*

| Revenue: | Three Months Ended September 30, 2022 | % of Revenue | 2021 | % of Revenue | Change $% |  |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Product | $111,816 | 49% | $101,619 | 48% | $10,197 | 10% |
| Service | 116,265 | 51 | 110,299 | 52 | 5,966 | 5% |
| Total revenue | $228,081 | 100% | $211,918 | 100% | $16,163 | 8% |

***Product.*** The 10%, or $10.2 million, increase in product revenue compared with the same period last year was primarily due to an increase in revenue from cybersecurity offerings, an increase in revenue from radio frequency propagation modeling projects, as well as an increase in revenue from service assurance offerings for enterprise customers.

***Service.*** The 5%, or $6.0 million, increase in service revenue compared to the same period last year was primarily due to an increase in revenue from maintenance contracts.

Total revenue by geography was as follows:

*(Dollars in Thousands)*

|  | Three Months Ended September 30, 2022 | % of Revenue | 2021 | % of Revenue | Change $% |  |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| United States | $145,665 | 64% | $133,662 | 63% | $12,003 | 9% |
| International: |  |  |  |  |  |  |
| Europe | 35,322 | 15 | 34,536 | 16 | 786 | 2% |
| Asia | 15,511 | 7 | 15,000 | 7 | 511 | 3% |
| Rest of the world | 31,583 | 14 | 28,720 | 14 | 2,863 | 10% |
| Subtotal international | 82,416 | 36 | 78,256 | 37 | 4,160 | 5% |
| Total revenue | $228,081 | 100% | $211,918 | 100% | $16,163 | 8% |

United States revenue increased 9%, or $12.0 million, primarily due to an increase in revenue from cybersecurity offerings, an increase in revenue from enterprise customers from service assurance offerings, and an increase in revenue from radio frequency propagation modeling projects, partially offset by a decrease in revenue from service provider customers from other service assurance offerings. The 5%, or $4.2 million, increase in international revenue compared with the same period last year was primarily driven by higher revenue from enterprise customers from service assurance offerings, as well as an increase in revenue from cybersecurity offerings.

### 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.

*(Dollars in Thousands)*

| Cost of revenue | Three Months Ended September 30, 2022 | % of Revenue | 2021 | % of Revenue | Change $% |  |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Product | $25,881 | 11% | $20,340 | 10% | $5,541 | 27% |
| Service | 31,760 | 14 | 31,304 | 15 | 456 | 1% |
| Total cost of revenue | $57,641 | 25% | $51,644 | 25% | $5,997 | 12% |
| Gross profit: |  |  |  |  |  |  |
| Product $ | $85,935 | 38% | $81,279 | 38% | $4,656 | 6% |
| Product gross profit % | 77% |  | 80% |  |  |  |
| Service $ | $84,505 | 37% | $78,995 | 37% | $5,510 | 7% |
| Service gross profit % | 73% |  | 72% |  |  |  |
| Total gross profit $ | $170,440 |  | $160,274 |  | $10,166 | 6% |
| Total gross profit % | 75% |  | 76% |  |  |  |

***Product.*** The 27%, or $5.5 million, increase in cost of product revenue for the three months ended September 30, 2022 compared to the same period last year was primarily due to a $9.7 million increase in costs related to the delivery of radio frequency propagation modeling projects. This increase was partially offset by a $1.3 million decrease in inventory obsolescence charges, a $1.2 million decrease in direct material costs, and a $1.0 million decrease in the amortization of intangible assets. The product gross profit percentage decreased by three percentage points to 77% during the three months ended September 30, 2022 as compared with the three months ended September 30, 2021. The 6%, or $4.7 million, increase in product gross profit is attributable to the 10%, or $10.2 million, increase in product revenue, partially offset by the 27%, or $5.5 million, increase in cost of product revenue.

***Service.*** The service gross profit percentage increased by one percentage point to 73% during the three months ended September 30, 2022 as compared with the three months ended September 30, 2021. The 7%, or $5.5 million, increase in service gross profit is attributable to the 5%, or $6.0 million, increase in service revenue, partially offset by the 1%, or $0.5 million, increase in cost of service revenue.

***Gross profit.*** Our gross profit increased 6%, or $10.2 million, during the three months ended September 30, 2022 when compared with the three months ended September 30, 2021. This increase is attributable to the increase in revenue of 8%, or $16.2 million, partially offset by the 12%, or $6.0 million, increase in cost of revenue. The gross profit percentage decreased by one percentage point to 75% for the three months ended September 30, 2022 as compared with the three months ended September 30, 2021.

### Operating Expenses

*(Dollars in Thousands)*

|  | Three Months Ended September 30, 2022 | % of Revenue | 2021 | % of Revenue | Change $% |  |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Research and development | $43,917 | 19% | $44,483 | 21% | $(566) | (1)% |
| Sales and marketing | 66,118 | 29 | 65,185 | 31 | 933 | 1% |
| General and administrative | 25,261 | 11 | 23,471 | 11 | 1,790 | 8% |
| Amortization of acquired intangible assets | 13,801 | 6 | 14,970 | 7 | (1,169) | (8)% |
| Restructuring charges | (60) | — | — | — | (60) | (100)% |
| Total operating expenses | $149,037 | 65% | $148,109 | 70% | $928 | 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 1%, or $0.6 million, decrease in research and development expenses for the three months ended September 30, 2022 compared to the same period last year was primarily due to an $0.8 million decrease in employee-related expenses associated with a decrease in headcount.

***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 1%, or $0.9 million, increase in total sales and marketing expenses for the three months ended September 30, 2022 compared to the same period last year was primarily due to a $1.5 million increase in travel expenses primarily attributable to the lifting of COVID-19 related restrictions, and a $1.4 million increase related to trade shows, user conferences and other events. These increases were partially offset by a $1.4 million decrease in commissions expense, and a $0.6 million decrease in advertising and other marketing related expenses.

***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 8%, or $1.8 million, increase in general and administrative expenses for the three months ended September 30, 2022 compared to the same period last year was primarily due to a $0.9 million increase in the provision for allowance for credit losses.

***Amortization of acquired intangible assets.*** Amortization of acquired intangible assets consists primarily of amortization of customer relationships, definite-lived trademarks and trade names, and leasehold interests related to our acquisitions of Danaher Corporation's communications business (Comms Transaction), Simena, LLC, Network General Corporation, Avvasi Inc. and Efflux Systems, Inc.

The 8%, or $1.2 million, decrease in amortization of acquired intangible assets was largely due to a decrease in the amortization of intangible assets related to the Comms Transaction.

**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.

*(Dollars in Thousands)*

|  | Three Months Ended September 30, 2022 | % of Revenue | 2021 | % of Revenue | Change $% |  |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Interest and other expense, net | $(2,024) | (1)% | $(2,336) | (1)% | $312 | 13% |

The 13%, or $0.3 million, decrease in interest and other expense, net was primarily due to a $0.7 million increase in interest income.

**Income Taxes.** The effective income tax rates were 10.3% and 19.7% for the three months ended September 30, 2022 and 2021, respectively. The effective income tax rate for the three months ended September 30, 2022 differed from the effective income tax rate for the three months ended September 30, 2021, primarily due to research and development tax credits, foreign tax credits, the foreign derived intangible income deduction, and U.S. taxation of foreign earnings, as well as a discrete benefit from stock compensation during the three months ended September 30, 2022.

*(Dollars in Thousands)*

|  | Three Months Ended September 30, 2022 | % of Revenue | 2021 | % of Revenue | Change $% |  |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Income tax expense | $1,996 | 1% | $1,933 | 1% | $63 | 3% |

### Six Months Ended September 30, 2022 and 2021

### Revenue

During the six months ended September 30, 2022, one direct customer, Verizon, accounted for more than 10% of our total revenue, while no indirect channel partner accounted for more than 10% of our total revenue. During the six months ended September 30, 2021, no direct customer or indirect channel partner accounted for more than 10% of our total revenue. During the six months ended September 30, 2022 and 2021, the service assurance product line accounted for approximately 73% and 74% of total revenue, respectively, and the cybersecurity product line accounted for approximately 27% and 26% of total revenue, respectively.

*(Dollars in Thousands)*

| Revenue: | Six Months Ended September 30, 2022 | % of Revenue | 2021 | % of Revenue | Change $% |  |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Product | $210,067 | 48% | $183,569 | 46% | $26,498 | 14% |
| Service | 226,826 | 52% | 218,621 | 54% | 8,205 | 4% |
| Total revenue | $436,893 | 100% | $402,190 | 100% | $34,703 | 9% |

***Product.*** The 14%, or $26.5 million, increase in product revenue compared with the same period last year was primarily due to an increase in revenue from our radio frequency modeling projects from service provider customers, as well as an increase in revenue from cybersecurity offerings.

***Service.*** The 4%, or $8.2 million, increase in service revenue compared with the same period last year was primarily due to an increase in revenue from maintenance contracts.

Total revenue by geography was as follows:

*(Dollars in Thousands)*

|  | Six Months Ended September 30, 2022 | % of Revenue | 2021 | % of Revenue | Change $% |  |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| United States | $280,466 | 64% | $236,555 | 59% | $43,911 | 19% |
| International: |  |  |  |  |  |  |
| Europe | 69,087 | 16 | 73,092 | 18 | (4,005) | (5)% |
| Asia | 29,186 | 7 | 32,316 | 8 | (3,130) | (10)% |
| Rest of the world | 58,154 | 13 | 60,227 | 15 | (2,073) | (3)% |
| Subtotal international | 156,427 | 36 | 165,635 | 41 | (9,208) | (6)% |
| Total revenue | $436,893 | 100% | $402,190 | 100% | $34,703 | 9% |

United States revenue increased 19%, or $43.9 million, primarily due to an increase in revenue from service assurance offerings, including radio frequency propagation modeling projects, as well as cybersecurity offerings for enterprise and service provider customers. The 6%, or $9.2 million, decrease in international revenue compared with the same period last year was primarily driven by lower revenue from service assurance offerings, partially offset by increased revenue from enterprise customers from service assurance offerings, as well as an increase in revenue from cybersecurity offerings.

### Cost of Revenue and Gross Profit

*(Dollars in Thousands)*

| Cost of revenue | Six Months Ended September 30, 2022 | % of Revenue | 2021 | % of Revenue | Change $% |  |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Product | $52,686 | 12% | $43,505 | 11% | $9,181 | 21% |
| Service | 62,669 | 14 | 62,549 | 16 | 120 | —% |
| Total cost of revenue | $115,355 | 26% | $106,054 | 27% | $9,301 | 9% |
| Gross profit: |  |  |  |  |  |  |
| Product $ | $157,381 | 36% | $140,064 | 35% | $17,317 | 12% |
| Product gross profit % | 75% |  | 76% |  |  |  |
| Service $ | $164,157 | 38% | $156,072 | 39% | $8,085 | 5% |
| Service gross profit % | 72% |  | 71% |  |  |  |
| Total gross profit $ | $321,538 |  | $296,136 |  | $25,402 | 9% |
| Total gross profit % | 74% |  | 74% |  |  |  |

***Product.*** The 21%, or $9.2 million, increase in cost of product revenue for the six months ended September 30, 2022 compared to the same period last year was primarily due to a $19.3 million increase in costs related to the delivery of radio frequency propagation modeling projects. This increase was partially offset by a $4.7 million decrease in direct material costs, a $2.3 million decrease in obsolescence charges, a $2.0 million decrease in the amortization of intangible assets, and a $0.9 million decrease in employee-related costs associated with the timing of certain projects. The product gross profit percentage decreased by one percentage points to 75% during the six months ended September 30, 2022 when compared to the six months ended September 30, 2021. The 12%, or $17.3 million, increase in product gross profit is attributable to the 14%, or $26.5 million, increase in product revenue, partially offset by the 21%, or $9.2 million, increase in cost of product revenue.

***Service.*** The service gross profit percentage increased by one percentage point to 72% for the six months ended September 30, 2022 when compared to the six months ended September 30, 2021. The 5%, or $8.1 million, increase in service gross profit is attributable to the 4%, or $8.2 million, increase in service revenue, partially offset by the $0.1 million increase in cost of service revenue.

***Gross profit.*** Our gross profit for the six months ended September 30, 2022 increased 9%, or $25.4 million, compared to the same period last year. This increase is primarily attributable to the increase in revenue of 9%, or $34.7 million, partially offset by the 9%, or $9.3 million, increase in cost of revenue. The gross profit percentage remained flat at 74% for the six months ended September 30, 2022 when compared to the six months ended September 30, 2021.

### Operating Expenses

*(Dollars in Thousands)*

|  | Six Months Ended September 30, 2022 | % of Revenue | 2021 | % of Revenue | Change $% |  |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Research and development | $87,374 | 20% | $87,303 | 22% | $71 | —% |
| Sales and marketing | 142,441 | 33 | 131,143 | 33 | 11,298 | 9% |
| General and administrative | 50,051 | 11 | 46,216 | 11 | 3,835 | 8% |
| Amortization of acquired intangible assets | 27,682 | 6 | 29,976 | 7 | (2,294) | (8)% |
| Restructuring charges | 1,714 | — | — | — | 1,714 | 100% |
| Total operating expenses | $309,262 | 70% | $294,638 | 73% | $14,624 | 5% |

***Sales and marketing.*** The 9%, or $11.3 million, increase in total sales and marketing expenses for the six months ended September 30, 2022 compared to the same period last year was primarily due to a $7.4 million increase in expenses related to trade shows, user conferences and other events, a $3.8 million increase in travel expense primarily attributable to the lifting of COVID-19 related restrictions, a $3.2 million increase in commissions expense, and a $1.3 million increase in advertising and other marketing related expenses. These increases were partially offset by a $4.8 million decrease in employee-related expenses largely due to a decrease in variable incentive compensation.

***General and administrative.*** The 8%, or $3.8 million, increase in general and administrative expenses for the six months ended September 30, 2022 compared to the same period last year was primarily due to an $0.8 million increase in the provision for allowance for credit losses, a $0.7 million increase in legal-related expenses, a $0.6 million increase in employee-related expenses largely due to an increase in variable incentive compensation, and a $0.5 million increase in rent and other facilities-related costs.

***Amortization of acquired intangible assets***. Amortization of acquired intangible assets consists primarily of amortization of customer relationships, definite-lived trademark and tradenames, and leasehold interest related to the Comms Transaction and the acquisitions of Simena LLC, Network General Corporation, Avvasi, Inc. and Efflux Systems, Inc.

The 8%, or $2.3 million, decrease in amortization of acquired intangible assets for the six months ended September 30, 2022 compared to the same period last year was largely due to a decrease in the amortization of intangible assets related to the Comms Transaction.

***Restructuring.*** During the six months ended September 30, 2022, we restructured certain departments to better align functions. As a result of the restructuring program, we recorded $1.7 million of restructuring charges related to one-time employee-related termination benefits for the employees that were notified of their termination during the period. The one-time termination benefits are expected to be paid in full during the fiscal year ending March 31, 2023.

### Interest and Other Expense, Net

*(Dollars in Thousands)*

|  | Six Months Ended September 30, 2022 | % of Revenue | 2021 | % of Revenue | Change $% |  |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Interest and other expense, net | $(3,382) | (1)% | $(4,756) | (1)% | $1,374 | 29% |

The 29%, or $1.4 million, decrease in interest and other expense, net was primarily due to a $0.9 million increase in interest income, and a $0.5 million decrease in interest expense due to a loss on the extinguishment of debt recorded during the six months ended September 30, 2021 partially offset by an increase in interest expense on the credit facility due to an increase in the average interest rate during the six months ended September 30, 2022 when compared to the six months ended September 30, 2021.

**Income Taxes.** Our effective income tax rates were 15.3% and 5.7% for the six months ended September 30, 2022 and 2021, respectively. The effective income tax rate for the six months ended September 30, 2022 differed from the effective rate for the six months ended September 30, 2021, primarily due to research and development tax credits, foreign tax credits, the foreign derived intangible income deduction, and U.S. taxation of foreign earnings, as well as a discrete benefit from stock compensation during the six months ended September 30, 2022.

*(Dollars in Thousands)*

|  | Six Months Ended September 30, 2022 | % of Revenue | 2021 | % of Revenue | Change $% |  |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Income tax expense (benefit) | $(1,357) | —% | $187 | —% | $(1,544) | (826)% |

### 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. Our total backlog at any particular time is not necessarily indicative of future sales levels. Within total backlog, fulfillable backlog includes what we consider to represent orders that are ready and available to be delivered to customers as of the end of the reporting period. Delivery of our fulfillable backlog typically occurs early in the subsequent quarter. However, delivery may be delayed or accelerated due to various other reasons, including but not limited to, changes in timing of customer projects and product delivery schedules, which may or may not be within our control. Our total combined product backlog at September 30, 2022, June 30, 2022 and March 31, 2022 was $60.5 million, $64.5 million and $92.8 million, respectively. Combined product backlog included fulfillable backlog of $43.6 million, $39.1 million and $51.5 million at September 30, 2022, June 30, 2022 and March 31, 2022, respectively. Total backlog includes orders that were received late in the quarter and radio frequency propagation modeling projects. In some cases, we have begun these projects but have not yet hit billable milestones. Radio frequency propagation modeling project orders received in the third quarter of fiscal year 2022 allowed NetScout to bill for the entire projects based upon partial delivery. At September 30, 2022, deferred revenue related to these radio frequency propagation modeling projects included a gross balance $18.4 million compared to a gross balance of $19.9 million at June 30, 2022 and March 31, 2022. A majority of the revenue for these projects is expected to be recognized into revenue throughout the fiscal year ending March 31, 2023.

### Liquidity and Capital Resources

Cash, cash equivalents and marketable securities consisted of the following (in thousands):

|  | September 30, 2022 | March 31, 2022 |
| --- | ---: | ---: |
| Cash and cash equivalents | $320,325 | $636,161 |
| Short-term marketable securities | 46,806 | 67,037 |
| Cash, cash equivalents and marketable securities | $367,131 | $703,198 |

### Cash, cash equivalents and marketable securities

At September 30, 2022, cash, cash equivalents and marketable securities totaled $367.1 million, a $336.1 million decrease from $703.2 million at March 31, 2022. This decrease was primarily due to $150.0 million used in treasury stock repurchases under an ASR program, $150.0 million used to repay long-term debt, $19.0 million used for tax withholdings on restricted stock units, $5.2 million used for capital expenditures, and $2.4 million used in operations during the six months ended September 30, 2022. Cash held outside the United States was approximately $170.3 million.

Cash and cash equivalents were impacted by the following:

*(in thousands)*

|  | Six Months Ended September 30, 2022 | 2021 |
| --- | ---: | ---: |
| Net cash (used in) provided by operating activities | $(2,389) | $47,339 |
| Net cash provided by (used in) investing activities | $14,850 | $(2,352) |
| Net cash used in financing activities | $(319,044) | $(43,068) |

### Net cash from operating activities

Cash used in operating activities was $2.4 million during the six months ended September 30, 2022, compared with $47.3 million of cash provided by operating activities during the six months ended September 30, 2021. The $49.7 million decrease was due in part to a $28.3 million decrease from deferred revenue, a $26.1 million decrease from accounts receivable, an $8.5 million decrease from prepaid expenses and other assets, a $5.4 million decrease from depreciation and amortization, a $2.2 million decrease from income tax payable, a $1.8 million decrease from accrued compensation and other expenses, and a $0.6 million decrease from the loss on extinguishment of debt. These decreases were partially offset by a $13.7 million increase from the change in net income, an $8.2 million increase from inventories, and a $1.4 million increase from share-based compensation during the six months ended September 30, 2022 as compared with the six months ended September 30, 2021.

### Net cash from investing activities

*(in thousands)*

| Cash provided by (used in) investing activities included the following: | Six Months Ended September 30, 2022 | 2021 |
| --- | ---: | ---: |
| Purchase of marketable securities | $(60,914) | $(11,343) |
| Proceeds from sales and maturity of marketable securities | 81,131 | 13,266 |
| Purchase of fixed assets | (5,215) | (4,301) |
| Purchase of intangible assets | (161) | — |
| Decrease in deposits | 9 | 26 |
|  | $14,850 | $(2,352) |

Cash provided by investing activities was $14.9 million during the six months ended September 30, 2022, compared with $2.4 million of cash used in investing activities during the six months ended September 30, 2021. The $17.2 million increase in cash provided by (used in) investing activities was due in part to an $18.3 million increase in cash inflow from marketable securities related to an increase of $67.9 million in proceeds from the sales and maturity of marketable securities, offset by a $49.6 million increase related to the purchase of marketable securities during the six months ended September 30, 2022 when compared with the six months ended September 30, 2021. This increase was partially offset by a $0.9 million increase in cash outflow for capital expenditures, and a $0.2 million cash outflow related to agreements to acquire technology licenses during the six months ended September 30, 2022.

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 through the remainder of fiscal year 2023.

### Net cash from financing activities

*(in thousands)*

| Cash used in financing activities included the following: | Six Months Ended September 30, 2022 | 2021 |
| --- | ---: | ---: |
| Issuance of common stock under stock plans | $2 | $2 |
| Treasury stock repurchases, including accelerated share repurchases | (150,039) | (24,413) |
| Tax withholding on restricted stock units | (19,007) | (14,997) |
| Payment of debt issuance costs | — | (3,660) |
| Repayment of long-term debt | (150,000) | (350,000) |
| Proceeds from issuance of long-term debt | — | 350,000 |
|  | $(319,044) | $(43,068) |

Cash used in financing activities increased by $276.0 million to $319.0 million during the six months ended September 30, 2022, compared with $43.1 million of cash used in financing activities during the six months ended September 30, 2021.

During the six months ended September 30, 2022, we repurchased 3,255,814 shares for $150.0 million under our ASR program.

In connection with the delivery of our common stock upon vesting of restricted stock units, we withheld 550,602 and 523,539 shares at a cost of $19.0 million and $15.0 million related to minimum statutory tax withholding requirements on these restricted stock units during the six months ended September 30, 2022 and 2021, respectively. These withholding transactions do not fall under the repurchase program described above, and therefore do not reduce the number of shares that are available for repurchase under that program.

### Sources of Cash and Cash Requirements

### Credit Facility

On July 27, 2021, we amended and extended the Amended Credit Agreement (Second Amended and Restated Credit Agreement) with a syndicate of lenders by and among: the Company; JPMorgan Chase Bank, N.A. (JPMorgan), as administrative agent and collateral agent; JPMorgan, Wells Fargo Securities, LLC, BofA Securities Inc., RBC Capital Markets, PNC Capital Markets LLC and Mizuho Bank, Ltd., as joint lead arrangers and joint bookrunners; Santander Bank, N.A., U.S. Bank National Association, Fifth Third Bank National Association, Silicon Valley Bank and TD Bank, N.A., as co-documentation agents; and the lenders party thereto.

The Second Amended and Restated Credit Agreement provides for a five-year, $800.0 million senior secured revolving credit facility, including a letter of credit sub-facility of up to $75.0 million. We may elect to use the credit facility for general corporate purposes (including to finance the repurchase of shares of our common stock). The commitments under the Second Amended and Restated Credit Agreement will expire on July 27, 2026, and any outstanding loans will be due on that date.

In connection with the Second Amended and Restated Credit Agreement, during the fiscal year ended March 31, 2022, we paid off the outstanding balance of $350 million under the Amended Credit Agreement by borrowing the same amount under the Second Amended and Restated Credit Agreement. Additionally, we recorded a loss on the extinguishment of debt of $0.6 million, representing the write off of unamortized deferred financing costs, which was included in interest expense in the consolidated statements of operations for the fiscal year ended March 31, 2022. On May 9, 2022, the Company repaid $150.0 million of borrowings under the Second Amended and Restated Credit Agreement. At September 30, 2022, $200 million was outstanding under the Second Amended and Restated Credit Agreement.

At our election, revolving loans under the Second Amended and Restated Credit Agreement bear interest at either (a) an Alternate Base Rate per annum equal to the greatest of (1) the Wall Street Journal prime rate; (2) the New York Federal Reserve Bank (NYFRB) rate plus 0.50%, or (3) an adjusted one month LIBO rate plus 1%; or (b) a Term Benchmark Borrowing rate (for the interest period selected by NetScout, subject to customary provisions regarding succession from LIBO rate to SOF rate in anticipation of the upcoming discontinuation of the LIBO rate), in each case plus an applicable margin. For the period from the delivery of the Company's financial statements for the quarter ended June 30, 2022, until we have delivered financial statements for the quarter ended September 30, 2022, the applicable margin will be 1.00% per annum for Term Benchmark Revolving loans and 0% per annum for Alternate Base Rate loans, and thereafter the applicable margin will vary depending on our consolidated gross leverage ratio, ranging from 1.00% per annum for Alternate Base Rate loans and 2.00% per annum for Term Benchmark Revolving loans if our consolidated gross leverage ratio is greater than 3.50 to 1.00, down to

0% per annum for Alternate Base Rate loans and 1.00% per annum for Term Benchmark Revolving loans if our consolidated gross leverage ratio is equal to or less than 1.50 to 1.00.

Our consolidated gross leverage ratio is the ratio of our consolidated total debt compared to our consolidated EBITDA as defined in the Second Amended and Restated Credit Agreement (adjusted consolidated EBITDA). Adjusted consolidated 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 Second Amended and Restated Credit Agreement.

Commitment fees will accrue on the daily unused amount of the credit facility. For the period from the delivery of the Company's financial statements for the quarter ended June 30, 2022, until we have delivered financial statements for the quarter ended September 30, 2022, the commitment fee will be 0.15% per annum, and thereafter the commitment fee will vary depending on our consolidated gross leverage ratio, ranging from 0.30% per annum if our consolidated gross leverage ratio is greater than 2.75 to 1.00, down to 0.15% per annum if our consolidated gross leverage ratio is equal to or less than 1.50 to 1.00.

Letter of credit participation fees are payable to each lender providing the letter of credit sub-facility on the amount of such lender's letter of credit exposure, during the period from the closing date of the Second Amended and Restated 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 the applicable rate that would be used to determine the interest rate applicable to Term Benchmark Revolving loans assuming such loans were outstanding during the period. 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 Term Benchmark Revolving 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 Second Amended and Restated Credit Agreement at any time, without penalty, subject to certain notice requirements.

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 the Borrower 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 Second Amended and Restated Credit Agreement generally prohibits any other liens on the assets of NetScout and our restricted subsidiaries, subject to certain exceptions as described in the Second Amended and Restated Credit Agreement.

The Second Amended and Restated 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. The Second Amended and Restated Credit Agreement requires us to maintain a certain consolidated net leverage ratio and removes the previous requirement under the Amended Credit Agreement that we maintain a minimum consolidated interest coverage ratio. Our consolidated net leverage ratio is the ratio of our Consolidated Total Debt minus the lesser of unrestricted cash and 125% of adjusted consolidated EBITDA compared to our adjusted consolidated EBITDA. The Company’s maximum consolidated net leverage ratio is 4.00 to 1.00. These covenants and limitations are more fully described in the Second Amended and Restated Credit Agreement. As of September 30, 2022, we were in compliance with all covenants, including the specified total consolidated net leverage ratio range of 4.00 to 1.00.

The Second Amended and Restated 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 Second Amended and Restated Credit Agreement and related documents including a failure to meet the maximum total consolidated net leverage ratio covenant, 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 the commitments and accelerate the maturity of the loans and enforce certain other remedies under the Second Amended and Restated Credit Agreement and the other loan documents.

We had unamortized capitalized debt issuance costs, net of $4.3 million at September 30, 2022, which are being amortized over the life of the revolving credit facility. The unamortized capitalized debt issuance costs balance of $1.1 million was included as prepaid expenses and other current assets and a balance of $3.2 million was included as other assets in our consolidated balance sheet.

### Expectations for Fiscal Year 2023

We are actively managing the business to generate cash flow and believe that we currently have adequate liquidity. We believe that these factors will allow us to meet our anticipated funding requirements.

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 requirement over at least the next twelve months. We believe we will meet longer-term expected future cash requirements and obligations through a combination of cash flows from operating activities, available cash balances, and our revolving credit facility. However, macroeconomic conditions, including rising inflation and a potential recession, could increase our anticipated funding requirements.

A portion of our cash may be used to acquire or invest in complementary businesses or products, to obtain the right to use complementary technologies, to repay borrowings under our Second Amended and Restated Credit Agreement, or to repurchase shares of our common stock through our stock repurchase programs. 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 Pronouncements

For information with respect to recent accounting pronouncements on our consolidated financial statements, see Note 1 contained in the "Notes to Consolidated Financial Statements" included in Part I of this Quarterly Report on Form 10-Q.

## Market risk

As filed, 3,339 characters.

*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. At September 30, 2022, we owed $200 million on this loan with an interest rate of 4.12%. A sensitivity analysis was performed on the outstanding portion of our debt obligation as of September 30, 2022. Should the current weighted-average interest rate increase or decrease by 10%, the resulting annual increase or decrease to interest expense would be approximately $0.8 million as of September 30, 2022.

*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. Periodically, we also enter into forward contracts to manage exchange risk associated with third-party transactions and for which we do not elect hedge accounting treatment. We do not use derivative financial instruments for speculative trading purposes.

At September 30, 2022, we had foreign currency forward contracts designated as hedging instruments with notional amounts totaling $10.8 million. The valuation of outstanding foreign currency forward contracts at September 30, 2022 resulted in a liability balance of $877 thousand, reflecting unfavorable contract rates in comparison to current market rates at this date. At March 31, 2022, we had foreign currency forward contracts designated as hedging instruments with notional amounts totaling $5.6 million. The valuation of outstanding foreign currency forward contracts at March 31, 2022 resulted in a liability balance of $78 thousand, reflecting unfavorable contract rates in comparison to current market rates and an asset balance of $20 thousand, reflecting favorable rates in comparison to current market rates at this date. The effect of a hypothetical 10% change in foreign currency exchange rates applicable to our business would not have a material impact on our historical consolidated financial statements. As our international operations grow, we will continue to reassess our approach to manage our risk relating to fluctuations in currency rates.

## Controls and procedures

As filed, 1,492 characters.

At September 30, 2022, NetScout, under the supervision and with the participation of our management, including the Company's principal executive officer and principal financial officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (Exchange Act)). Based upon that evaluation, our principal executive officer and principal financial officer concluded that, at September 30, 2022, our disclosure controls and procedures were effective at the reasonable assurance level 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.

There were no changes in our internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f) occurred during the period covered by this quarterly report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

## Risk factors

As filed, 751 characters.

In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, Item 1A. “Risk Factors” in our Annual Report on Form 10-K for our fiscal year ended March 31, 2022. The risks discussed in our Annual Report on Form 10-K could materially affect our business, financial condition and future results. There have been no material changes to those risk factors since we filed our Annual Report on Form 10-K. The risks described in our Annual Report on Form 10-K are not the only risks facing us. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially and adversely affect our business, financial condition or operating results.

Filed Nov 3, 2022.
Source: SEC EDGAR, the filing index for accession 0001628280-22-028170. Last ingested by Listed: Oct 30, 2026, 12:42 ET. No prices; not investment advice.