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Bear of the Day: NetScout Systems (NTCT)

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NetScout Systems, Inc. (NTCT - Free Report) , a Zacks Rank #5 (Strong Sell) is a leading provider of business assurance - a powerful combination of service assurance, cybersecurity, and business intelligence solutions - for today's most demanding service provider, enterprise and government networks. NETSCOUT's Adaptive Service Intelligence (ASI) technology continuously monitors the service delivery environment to identify performance issues and provides insight into network-based security threats, helping teams to quickly resolve issues that can cause business disruptions or impact user experience.

Recent Earnings Data

In the most recently reported quarter, the company met the Zacks consensus earnings estimate, and beat the revenue estimate.  On a year over year basis, the company saw losses in total revenues -5.6%, and product revenue -11.6%.  Further, the NTCT posted $1.2 million in losses from operations vs. a $0.8 million income from operations in the year ago quarter.  Also, the company’s operating margins was -0.5%, much lower than the +0.3% margins in the year ago quarter.  Lastly, cash and cash equivalents fell to $313.4 million from $464.7 million in just two quarters.  

Management’s Take

According to Anil Singhal, President and CEO, “NETSCOUT’s second-quarter fiscal year 2018 results demonstrate solid execution on multiple fronts. We exceeded our quarterly targets primarily due to stronger-than-expected orders from certain service provider customers. We have continued to see good adoption of our new ISNG platform in its software form factor from service providers who are using it to cost-effectively extend visibility. We were also pleased by the growing interest of customers and prospects in the many new products that we’ve recently launched.”

Management Reduces Guidance for Q3 18

Before its January 30th, earnings report for Q3 18, management gave preliminary guidance for the quarter; the company now expects revenues to come in between $270-274 million, well below the previously expected range of $300-320 million.  This quarterly revision is also expected to cause total FY 2018 revenues to come in below the previously anticipate area of $1.2 billion, to between $1.0-1.025 billion.  Management stated that the reason for the decline in revenues was due to continued slowness in CAPX spending for its network assurance products.  This includes both enterprise, and service provider markets.  

Management did mention that they would increase it stock buy-back program, but as you can see in the graph below, this was not enough to support the stock price and future earnings estimates.  

Price and Earnings Estimates Graph

As you can see below, the stock price had been tending downwards before management reduced revenue guidance, but the announcement caused the stock price to drop even further.

NetScout Systems, Inc. Price and Consensus

NetScout Systems, Inc. Price and Consensus | NetScout Systems, Inc. Quote

Decreasing Earnings Estimates

Over the past 30 days, earnings estimates for Q3 18, Q4 18, FY 18 and FY 19 have all seen negative estimate revisions; Q3 18 fell from $0.69 to $0.67, Q4 18 plummeted from $0.84 to $0.35, FY 18 was cut from $1.93 to $1.59, and FY 19 dropped from $2.18 to $1.44.

Other Options

If you are inclined to invest in the computer networking segment, you would be best served by looking into NETGEAR Inc. (NTGR - Free Report) , who currently carries a Zacks Rank #1, or Cisco Systems (CSCO - Free Report) who currently carries a Zacks Rank #2 (Buy) rating.

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