NetScout Systems (NTCT) Q1 FY27 earnings call: guidance and Q&A

How much of the government-related orders were pulled into Q1, and how does this impact the linearity for Q2?

Approximately $10 million to $15 million in government-related orders were pulled into Q1. Without this acceleration, Q1 growth would have been in the mid-single-digits, consistent with the full-year outlook and expected first-half performance. This pull-in contributes to the expectation of Q2 revenue being broadly consistent with the prior year.

“So the orders that were pulled in were $10 million to $15 million, primarily government related. If I were to normalize the quarter, it would have grown in the mid-single-digits, which would be consistent with where we see the first half of the fiscal year and consistent with where -- our full year outlook.”

asked by Simran Biswal · answered by Anthony Piazza

What is the expected contribution of Omnis Sensor and Streamer for the year, and what aspects are resonating with customers?

Omnis revenue is currently categorized within Service Assurance growth. There are less than 10 customers for this solution, but strong demand exists due to the need for high-quality data for AI algorithms. The company sees a solid pipeline and expects good contribution for the year, noting that customers are still experimenting with their AI strategies. Last year's full-year contribution was about $15 million, and it's growing nicely this year.

“So I believe we see a lot of excitement at the customer level. We see a solid pipeline for this area. But I mean, customers are still experimenting. And so as they do that and decide on what their AI strategy is, then we'll probably start to see more. I think last quarter, we said for the full year it was about $15 million for FY '26. If I were to annualize the first quarter, it's growing nicely for the year. So we expect good contribution. But again, it's still small. So we'll update people as the year goes on.”

asked by Simran Biswal · answered by Anthony Piazza

What are the expectations for Federal government business for the fiscal year-end, and does the decline in Rest of World revenue reflect specific trends like the Middle East conflict?

Federal government revenue ran in the mid-teens as a percentage of total revenue in Q1, higher than its typical mid to high single-digit range. The company has a solid pipeline for Federal deals and is optimistic, noting that Federal revenue is aggregated from multiple customers, so no single customer exceeds 10%. The decline in Rest of World revenue is attributed to deal timing, with no specific negative trends identified.

“So from a Federal government perspective, it tends to run in the mid to high single digits as a percentage of total revenue. For Q1, it ran in the mid-teens area. So it was strong. We have a nice, solid pipeline of Federal deals. But as you know, with the Federal government, it's all about magnitude and timing of funding. But we're optimistic about the Federal government right now. As far as the rest of the world... With regard to Rest of World, from our perspective, it's really just timing of deals. We don't see any trends in that right now.”

asked by Erik Suppiger · answered by Anthony Piazza

How are customers reacting to AI model introductions in Cybersecurity, and is it affecting deal cycles?

In the DDoS area, the AI-enabled automation support (ADP) for their DDoS solution is progressing well, though it's still early in adoption. For Omnis Cybersecurity, the focus has been on Service Assurance with AI, but the Omnis Sensor and Streamer solutions will eventually be used for security use cases. The company sees strong demand for AI-driven solutions, but deal cycles for large AI projects require careful management.

“I think there are two areas, Kevin. So first in the DDoS area, we had announced a option to our product called ADP and which is basically AI-enabled automation support and things like that, for our DDoS solution. So that is going well and it's still early in the adoption cycle. On the Cybersecurity, on the Omnis side, we have not focused on that right now because we see a lot of demand on the Service Assurance side with AI. But at some point, we'll be able to use our Omnis Sensor and Streamer solution for security use cases also. But right now, the focus is on AI and ADP on the DDoS side and on the Service Assurance side with AI.”

asked by Kevin Liu · answered by Anil Singhal

What is driving the increase in inventory to its highest levels in years, and what are the implications for product gross margin?

The inventory increase of about $7 million is a proactive measure to mitigate supply chain challenges, particularly for equipment related to AI data center build-outs. NetScout is securing inventory to ensure customers can acquire necessary hardware, as equipment availability can impact software sales. This strategy aims to control prices and avoid disruptions for customers, and thus far, it has been successful in mitigating issues. The implication for gross margin is not explicitly stated as negative, but rather as a strategic move to support sales.

“Yes. So as you know, there's some supply chain challenges out there resulting from these AI data center build-out. So some of the equipment is more challenging to get and the prices are increasing. And so we are working with our vendors that participate in our COTS program, so customers can buy the software from us and the hardware from the vendors, to try to secure inventory and control the prices on that side. But additionally, NETSCOUT has purchased incremental inventory, which you saw, because the inventory went up about $7 million in the quarter, to secure that inventory so that we can help mitigate any challenges that customers might have as they think about purchasing the equipment.”

asked by Kevin Liu · answered by Anthony Piazza