Netscout Systems Inc: Form 10-Q for the period ended Jun 30, 2025

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, 2025, filed with the Securities and Exchange Commission (SEC) on May 15, 2025 (Annual Report). 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. 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 four 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 many Fortune 500 companies 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 to 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 and the edges of their networks, the rapidly evolving cybersecurity threat landscape, artificial intelligence and business analytics advancements, and the 5G technology 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 volume, 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 and integration efforts, and our ability to control costs, and make improvements in a highly competitive industry.

Global and Macroeconomic Conditions

We continue to closely monitor current global and macroeconomic conditions, including the impacts of the ongoing war in Ukraine and hostilities in the Middle East, global geopolitical tension, stock market volatility, industry-specific capital spending trends, exchange rate fluctuations, inflation, interest rates, international trade relations (including trade protection measures, such as tariffs and other trade barriers), and the risk of a recession, including the manner and extent to which they have impacted and could continue to impact our business, customers, employees, supply chain, and distribution network. The full extent of the impacts of these global and macroeconomic conditions remain uncertain. In response to the war in Ukraine, we ceased business operations in Russia, including sales, support on existing contracts and professional services. We remain cautiously optimistic amid ongoing macroeconomic uncertainty and constrained customer spending in the service provider market and firmly focused on driving product innovation, returning to annual revenue growth, and enhancing margins through continued disciplined cost management as we navigate the current macroeconomic landscape that may persist through fiscal year 2026. As a result, we have continued our efforts to manage discretionary costs and align spending with the current environment while we continue to execute on our long-term strategic plans.

Though we continue to monitor the impacts of evolving global and macroeconomic conditions on our business, we believe our current cash reserves and access to capital through our revolving credit facility leave us well-positioned to manage our business in today's environment. We expect net cash provided by operations combined with cash, cash equivalents, marketable securities and investments 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, including managing discretionary spending and hiring activities, but are continuing to invest in areas that advance our business for the future. In addition to our cash equivalents, based on covenant levels at June 30, 2025, the Company had $600 million available under a revolving credit facility.

Results Overview

Total revenue increased $12.2 million, or 7%, for the three months ended June 30, 2025, as compared to total revenue for the three months ended June 30, 2024, due to an increase in revenue from both enterprise customers and service provider customers from cybersecurity offerings and enterprise customers from service assurance offerings.

Our gross profit percentage increased two percentage points to 76.7% during the three months ended June 30, 2025, as compared with the three months ended June 30, 2024, primarily due to product revenue growth and lower product and support costs.

Net loss for the three months ended June 30, 2025 was $3.7 million, as compared with net loss for the three months ended June 30, 2024 of $443.4 million. The decrease of $439.7 million in net loss was primarily due to a $427.0 million decrease in goodwill impairment charges, a $16.0 million decrease from restructuring charges, a $12.2 million increase in revenue, a $5.2 million decrease in other income primarily due to the change in fair value of the equity investment in Napatech, a $4.8 million decrease in employee related expenses as a result of a decrease in headcount, partially offset by an increase in variable incentive compensation, a $1.4 million decrease in interest expense due to repayment of outstanding loan balance and a $1.1 million decrease in amortization expense of intangible assets. These decreases to net loss were partially offset by an $11.2 million increase in income tax expense, a $2.3 million increase in foreign exchange expense, and a $1.0 million increase in salaries associated with executive transition costs.

At June 30, 2025, we had cash, cash equivalents, marketable securities and investments (current and non-current) of $543.5 million. This represents an increase of $51.0 million from $492.5 million at March 31, 2025. This increase was primarily due to $73.6 million of net cash provided by operations, $4.7 million increase from the exchange rate changes and $3.5 million increase from the change in fair value of an equity investment, partially offset by $15.0 million used to repurchase shares of our common stock, $13.8 million used for tax withholdings on restricted stock units and $1.9 million used for capital expenditures during the three months ended June 30, 2025.

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 operating margin, 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 EBITDA from operations). Non-GAAP gross profit removes expenses related to the amortization of acquired intangible assets, share-based compensation expense, and acquisition-related depreciation expense. Non-GAAP income from operations includes the aforementioned adjustments related to non-GAAP gross profit and also removes goodwill impairment charges, executive transition costs and restructuring charges. Non-GAAP operating margin includes the foregoing adjustments related to non-GAAP income from operations. Non-GAAP net income removes the foregoing adjustments related to non-GAAP income from operations, and also removes the income tax effects of such adjustments. Non-GAAP EBITDA from operations removes the aforementioned items related to non-GAAP income from operations and also removes non-acquisition related depreciation expense.

These non-GAAP measures are not prepared 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. These non-GAAP measures should not be used to evaluate our results of operations against those of our peers or other companies, as the definitions and calculations of our non-GAAP measures may not be the same as those used by other companies, even if the measures share the same name.

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 (loss) from operations, net income (loss) and net income (loss) per share on a GAAP and non-GAAP basis for the three months ended June 30, 2025 and 2024, respectively (dollars in thousands, except for per share data):

25

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.

Please refer to the critical accounting policies set forth in our Annual Report for a description of all of our critical accounting policies and estimates.

Three Months Ended June 30, 2025 and 2024

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, subscription-based services, and stand-ready software as a service offerings. During the three months ended June 30, 2025 and June 30, 2024, no direct customers or channel partners accounted for more than 10% of our total revenue.

(Dollars in Thousands)

Product. The 19.3%, or $11.8 million, increase in product revenue compared with the same period last year was primarily due to an increase in revenue from both enterprise customers and service provider customers from cybersecurity offerings and enterprise customers from service assurance offerings.

Service. The 0.3%, or $0.4 million, increase in service revenue compared with the same period last year was primarily due to an increase in revenue from maintenance contracts as well as cloud and subscription services.

Total revenue by geography was as follows:

(Dollars in Thousands)

United States revenue increased 1%, or $0.6 million, primarily due to an increase in revenue from enterprise customers from both service assurance and cybersecurity offerings, partly offset by a decrease in revenue from service provider customers from both service assurance and cybersecurity offerings. The 16%, or $11.6 million, increase in international revenue compared with the same period last year was primarily driven by an increase in revenue from service provider customers from cybersecurity offerings and an increase from enterprise customers from service assurance offerings.

Total revenue by product line was as follows:

(Dollars in Thousands)

The 1%, or $1.6 million, increase in revenue from the service assurance product line was due to an increase in product revenue from enterprise customers, partially offset by a decrease in both product and service revenue from service provider customers. The 18%, or $10.6 million, increase in revenue from the cybersecurity product line was due to higher product revenue from both enterprise and service provider customers, and an increase in service revenue from both enterprise customers and service provider customers.

Total revenue by customer vertical was as follows:

(Dollars in Thousands)

The 6%, or $4.5 million, decrease in revenue from the service provider customer vertical was due to a decrease in product and service revenue from the service assurance product line, partially offset by an increase in both product and service revenue from the cybersecurity product line. The 18%, or $16.7 million, increase in revenue from the enterprise customer vertical was due to an increase in product and service revenue from both the service assurance and cybersecurity product line.

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)

Product. The 1%, or $0.1 million, decrease in cost of product revenue for the three months ended June 30, 2025 compared to the same period last year was primarily due to a $0.6 million decrease in the amortization of intangible assets, a $0.2 million decrease in depreciation and a $0.1 million decrease in inventory obsolescence charges, offset by $0.8 million increase in direct material costs. The product gross profit percentage increased by 24 percentage points to 84% during the three months ended June 30, 2025 as compared with the three months ended June 30, 2024. The 24%, or $11.9 million, increase in product gross profit was attributable to the 19%, or $11.8 million, increase in product revenue and by the 1%, or $0.1 million, decrease in cost of product revenue.

Service. The 3%, or $0.9 million, decrease in cost of service revenue for the three months ended June 30, 2025 compared to the same period last year was primarily due to a $1.6 million decrease in employee-related costs associated with a reduction in headcount. The decrease in cost of service revenue was partially offset by an increase of $0.8 million in the cost of materials used to support customers under service contracts. The service gross profit percentage increased by two percentage points to 72% during the three months ended June 30, 2025 as compared with the three months ended June 30, 2024. The $1.2 million increase in service gross profit was attributable to the 3%, or $0.9 million, decrease in cost of service revenue and by a $0.4 million increase in service revenue.

Gross profit. Our gross profit increased by 10%, or $13.1 million, during the three months ended June 30, 2025 when compared with the three months ended June 30, 2024. This increase was attributable to the increase in revenue of 7%, or $12.2 million and the 2%, or $0.9 million, decrease in cost of revenue. The gross profit percentage increased by two percentage points to 77% for the three months ended June 30, 2025 as compared with the three months ended June 30, 2024.

Operating Expenses

(Dollars in Thousands)

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 6%, or $2.7 million, decrease in research and development expenses for the three months ended June 30, 2025 compared to the same period last year was primarily due to a $2.5 million decrease in employee-related costs 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 0.4%, or $0.3 million, increase in total sales and marketing expenses for the three months ended June 30, 2025 compared to the same period last year was primarily due to a $1.5 million increase in commissions expense. This increase was partially offset by a $0.5 million decrease in advertising expenses, $0.4 million decrease in trade shows and $0.3 million decrease in employee-related costs associated with a decrease in cost due to a reduction in headcount.

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 9%, or $2.3 million, increase in general and administrative expenses for the three months ended June 30, 2025 compared to the same period last year was primarily due to a $1.0 million increase in salary expense associated with the cost of the one-year Senior Advisor roles of our retiring Chief Financial Officer and Chief Operating Officer that commenced on June 1, 2025, a $0.7 million increase in legal expenses, a $0.6 million increase in software licenses and maintenance expenses and a $0.6 million increase in contractor expenses. This increase was partially offset by a decrease of $0.5 million in variable incentive compensation expense.

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

The 4%, or $0.5 million, decrease in amortization of acquired intangible assets was largely due to a decrease in the amortization of intangible assets acquired as part of the Comms Transaction and the Network General Corporation transaction.

Restructuring charges. During the third quarter of fiscal year 2025, we entered into transition agreements that provided termination benefits for certain employees to ensure an orderly transition of responsibilities for continuity purposes. As a result of this related workforce change, during the three months ended June 30, 2025, we recorded restructuring charges totaling $0.5 million. During the three months ended June 30, 2024, we recorded restructuring charges totaling $16.6 million related to one-time termination benefits for one hundred sixteen employees who voluntarily terminated their employment through our voluntary separation program that was implemented in the first quarter of fiscal year 2025.

Goodwill impairment. During the first quarter of fiscal year 2025, due to a decrease in our stock price and overall market capitalization, along with other qualitative considerations including the continued impact from the conditions in the macroeconomic environment, it was determined a Triggering Event occurred, indicating goodwill may be impaired.

Accordingly, we conducted an interim quantitative impairment test of its goodwill at June 30, 2024 using the market approach to estimate the fair value of its reporting unit. As a result of that interim impairment test, we recorded a $427.0 million goodwill impairment charge during the three months ended June 30, 2024.

The key assumption in the market approach was the company-specific control premium, which was estimated using expected synergies that would be realized by a hypothetical buyer. We also compared the implied control premium to recent control premiums paid in the industry, as evidenced by guideline public company comparable transactions. This information corroborated that the company-specific control premium was within the range of premiums for other companies operating in the industry. Changes in the estimates or assumptions used in its quantitative impairment test could materially affect the determination of fair value and the associated goodwill impairment assessment. Potential events and circumstances that could have an adverse impact on our estimates and assumptions include, but are not limited to, continued increases in costs, and high interest rates and other macroeconomic factors. An increase or decrease of 1% in the company-specific control premium used in the determination of the fair value of the reporting unit under the market approach would have resulted in an increase or decrease in the goodwill impairment recorded during the three months ended June 30, 2024 of approximately $13.0 million.

Interest and Other Income (Expense), Net. Interest and other income (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)

The 61%, or $5.9 million, decrease in interest and other income (expense), net for the three months ended June 30, 2025 compared to the same period last year was primarily due to $5.2 million decrease from the change in fair value of the equity investment in Napatech and a $2.3 million increase in foreign exchange expense, partially offset by a $1.4 million decrease in interest expense.

Income Tax Expense (Benefit). The effective tax rates were 30.1% and 2.3% for the three months ended June 30, 2025 and 2024, respectively. The effective tax rate for the three months ended June 30, 2025 differed from the effective tax rate for the three months ended June 30, 2024, primarily related to a decrease in foreign withholding taxes offset by a $427.0 million goodwill impairment charge incurred during the three months ended June 30, 2024 which was not deductible for tax purposes.

(Dollars in Thousands)

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 unfulfilled 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 generally 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 not be within our control. Our total combined product backlog at June 30, 2025 was $30.9 million compared to $33.1 million at March 31, 2025. Combined product backlog included fulfillable backlog of $23.3 million and $25.1 million at June 30, 2025 and March 31, 2025, respectively. Total backlog includes orders that were received late in the quarter and radio frequency propagation modeling projects, as well as multi-year enterprise license agreements. In some cases, we have begun these projects but have not yet hit billable milestones. At June 30, 2025 and March 31, 2025 deferred revenue contained a gross balance of $6.3 million and $8.3 million, respectively, related to these radio frequency propagation modeling project orders.

Liquidity and Capital Resources

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

Cash, cash equivalents, marketable securities and investments

At June 30, 2025, cash, cash equivalents, marketable securities and investments (current and non-current) totaled $543.5 million, a $51.0 million increase from $492.5 million at March 31, 2025. This increase was primarily due to $73.6 million of net cash provided by operations and $13.6 million proceeds from sales and maturity of marketable securities, partially offset by $29.0 million used to purchase marketable securities, $15.0 million used to repurchase shares of our common stock, $13.8 million used for tax withholdings on restricted stock units, and $1.9 million used for capital expenditures, during the three months ended June 30, 2025. Cash and short-term investments held outside of the United States was approximately $227.7 million.

Cash and cash equivalents were impacted by the following:

(in thousands)

Net cash from operating activities

Cash provided by operating activities was $73.6 million during the three months ended June 30, 2025, compared with $38.4 million of cash provided by operating activities during the three months ended June 30, 2024. The $35.1 million increase was primarily driven by a $439.7 million decrease in net loss related to a reduction of $427.0 million in a goodwill impairment charge. Also contributing to the increase was a $28.1 million increase due to change in deferred revenue, a $10.6 million increase associated with deferred income tax, and a $9.1 million increase from accounts receivable. Partially offsetting these increases was a $18.9 million decrease associated with accrued compensation and other expenses, a $5.4 million decrease associated with change from accounts payable, a $5.3 million decreased related to a change in prepaid expenses and other assets for the three months ended June 30, 2025 as compared with the three months ended June 30, 2024.

Net cash from investing activities

(in thousands)

31

Cash used in investing activities was $17.3 million during the three months ended June 30, 2025, compared with $3.1 million of cash used in investing activities during the three months ended June 30, 2024. The $14.2 million increase in cash used in investing activities was partially due in part to an additional $16.9 million purchase and sale of marketable securities during the three months ended June 30, 2025 as compared with the three months ended June 30, 2024, an additional $0.6 million in fixed asset purchase, partially offset by a $3.3 million increase in proceeds from maturity of marketable securities in the three months ended June 30, 2025 as compared to the three months ended June 30, 2024.

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 2026.

Net cash from financing activities

(in thousands)

Cash used in financing activities changed by $33.4 million to $28.8 million during the three months ended June 30, 2025, compared with $62.2 million of cash used in financing activities during the three months ended June 30, 2024.

During the three months ended June 30, 2025, we repurchased a total of 761,249 shares for $15.0 million in the open market under the 2022 Share Repurchase Program. During the three months ended June 30, 2024, we repurchased a total of 1,347,900 shares for $25.0 million in the open market under the 2022 Share Repurchase Program.

In connection with the delivery of our common stock upon vesting of restricted stock units, we withheld 597,115 and 617,826 shares at a cost of $13.8 million and $12.2 million related to minimum statutory tax withholding requirements on these restricted stock units during the three months ended June 30, 2025 and 2024, 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.

During the three months ended June 30, 2025, there were no amounts outstanding under the Third Amended and Restated Credit Agreement (as defined below) and therefore no amounts repaid. During the three months ended June 30, 2024, we repaid $25.0 million of borrowings under the Second Amended and Restated Credit Agreement (as defined below).

Sources of Cash and Cash Requirements

Credit Facility

On July 27, 2021, we amended and extended our existing credit facility (as amended, the Second Amended and Restated Credit Agreement), which provided 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. The commitments under the Second Amended and Restated Credit Agreement were set to expire on July 27, 2026, and any outstanding loans were due on that date. On May 13, 2024, we repaid $25.0 million of borrowings under the Second Amended and Restated Credit Agreement.

On October 4, 2024, we amended and restated the Second Amended and Restated Credit Agreement (as amended and restated, the Third Amended and Restated Credit Agreement) with a syndicate of lenders by and among: us, as borrower; certain subsidiaries of NetScout Systems, Inc., as borrower; JPMorgan Chase Bank, N.A., as administrative agent and collateral agent; JPMorgan Chase Bank, N.A., Bank of America, N.A., RBC Capital Markets, PNC Capital Markets LLC and Mizuho Bank, Ltd, as joint lead arrangers and joint bookrunners; TD Bank, N.A. and Silicon Valley Bank, a division of First-Citizens Bank & Trust Company, as co-documentation agents; and the lenders and issuing banks party thereto.

The Third Amended and Restated Credit Agreement provides for a five-year, $600.0 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 amended credit facility for working capital and other general corporate purposes (including to repurchase shares of our common stock). The commitments under the Third Amended and Restated Credit Agreement will expire on October 4, 2029, and any outstanding loans will be due on that date.

In connection with the Third Amended and Restated Credit Agreement, we paid off the outstanding balance of $75.0 million under the Second Amended and Restated Credit Agreement on October 4, 2024 by borrowing the same amount under the Third Amended and Restated Credit Agreement. Additionally, we recorded a loss on the extinguishment of debt of $1.1 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, 2025. On February 3, 2025, we paid the outstanding balance of $75.0 million in full under the Third Amended and Restated Credit Agreement. At June 30, 2025, there were no amounts outstanding under the Third Amended and Restated Credit Agreement.

At our election, revolving loans under the Third Amended and Restated Credit Agreement bear interest at either (a) a term SOFR rate plus a credit spread adjustment of 0.10% or (b) an Alternate Base Rate (defined in a customary manner), in each case plus an applicable margin. For the period from the delivery of our financial statements for the year ended March 31, 2025, until we have delivered financial statements for the quarter ended June 30, 2025, the applicable margin will be 1.00% per annum for term SOFR 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 SOFR 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 SOFR 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 Third Amended and Restated Credit Agreement (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 Third 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 our financial statements for the quarter ended March 31, 2025, until we have delivered financial statements for the quarter ended June 30, 2025, 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 Third 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 a rate per annum equal to the applicable margin for term SOFR 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 term SOFR 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 Third 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) 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 Third 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 Third Amended and Restated Credit Agreement.

The Third 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 Third Amended and Restated Credit Agreement provides for certain baskets that are available to us and our restricted subsidiaries to incur additional indebtedness, to repay junior financing, for asset sales and to make investments and restricted payments. Such baskets are substantially similar to the baskets set forth in our previous amended credit agreement.

The Third Amended and Restated Credit Agreement requires us to maintain a certain consolidated net leverage 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 its adjusted consolidated EBITDA. Our maximum consolidated net leverage ratio is 4.00 to 1.00. These covenants and limitations are more fully described in the Third Amended and Restated Credit Agreement. At June 30, 2025, we were in compliance with all covenants, including the specified total consolidated net leverage ratio range of 4.00 to 1.00.

The Third 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 Third Amended and Restated 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 may, or at the request of the holders of more than 50% in principal amount of the loans and commitments shall, terminate the commitments and accelerate the maturity of the loans and enforce certain other remedies under the Third Amended and Restated Credit Agreement and the other loan documents.

We had unamortized capitalized debt issuance costs, net of $3.1 million at June 30, 2025, which are being amortized over the life of the revolving credit facility. The unamortized capitalized debt issuance costs balance of $0.7 million was included as prepaid expenses and other current assets and a balance of $2.4 million was included as other assets in our consolidated balance sheet at June 30, 2025.

Cash Requirements

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 for at least the next twelve months.

We have contractual obligations for long-term debt, operating leases, unconditional purchase obligations, pension benefits plans and certain other long-term liabilities. Our obligations related to these items are described further within Management’s Discussion and Analysis of Financial Condition and Results of Operations within our Annual Report. We expect net cash provided by operating activities combined with cash, cash equivalents, marketable securities and investments and borrowing availability under our revolving credit facility will provide sufficient liquidity to fund current obligations, capital spending, debt service requirements and working capital requirements 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 high inflation and interest rates, international trade relations (including trade protections measures, such as tariffs and other trade barriers), and a potential recession, could increase our anticipated funding requirements or make it more difficult for us to access capital.

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 Third 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. Macroeconomic conditions, including high interest rates and volatility in the capital markets, may make it difficult for us to secure additional financing on favorable terms or at all. Any 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.

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 currently not exposed to any market risks related to fluctuations in interest rates related to our credit facility as we had no debt as of June 30, 2025.

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 June 30, 2025, we had foreign currency forward contracts designated as hedging instruments with notional amounts totaling $11.9 million. The valuation of outstanding foreign currency forward contracts at June 30, 2025 resulted in a liability balance of $28 thousand, reflecting unfavorable contract rates in comparison to current market rates at this date. At March 31, 2025, we had foreign currency forward contracts designated as hedging instruments with notional amounts totaling $10.6 million. The valuation of outstanding foreign currency forward contracts at March 31, 2025 resulted in a liability balance of $55 thousand, reflecting unfavorable contract rates in comparison to current market rates and an asset balance of $197 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.

At June 30, 2025, 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 (as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act. Based upon that evaluation, our principal executive officer and principal financial officer concluded that, at June 30, 2025, 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) that occurred during the period covered by this quarterly report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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. The risks discussed in our Annual Report 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. The risks described in our Annual Report 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.