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,
2021, 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,
2021. 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 35 years of experience in providing service
assurance and cybersecurity solutions that are 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 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 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 expanding
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
of materials used in our products, growth in employee-related costs, including
commissions, and the expansion of our operations. Factors that affect our
ability to maximize our operating results include, but are not limited to, our
ability to introduce and enhance existing products, the marketplace acceptance
of those new or enhanced products, continued expansion into international
markets, development of strategic partnerships, competition, successful
acquisition integration efforts, and our ability to control costs and make
improvements in a highly competitive industry.

COVID-19 Impact
In March 2020, the World Health Organization declared the novel strain of
coronavirus (COVID-19) a global pandemic and recommended containment and
mitigation measures worldwide. The pandemic and these containment and mitigation
measures have led to adverse impacts on the U.S. and global economies. While we
have begun a phased reopening at some of our facilities, we remain focused on
protecting the health and well-being of our employees and continue to maintain
work from home policies for a vast majority of our employees where feasible.
We continue to closely monitor the impact of the COVID-19 pandemic on all
aspects of our business, including how it has impacted and could continue to
impact our customers, employees, supply chain, and distribution network. During
fiscal year 2021, the COVID-19 pandemic and resulting challenging macro-economic
environment caused elongated purchasing cycles that impacted our revenue. For
fiscal year 2022, as people in the world get immunized and return to "normal",
we expect that technology and project spending will resume and we will be
focused on advancing our products, growing revenue, enhancing earnings per
share, and generating solid free cash flow.
We believe our current cash reserves and access to capital through our revolving
credit facility leaves us well-positioned to manage our business as the crisis
continues and as a recovery eventually 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 control costs and increase productivity
throughout our company but will invest in areas that advance our business for
the future, as necessary. In addition to our cash equivalents, based on covenant
levels at June 30, 2021, we had, as of June 30, 2021, an incremental
$345 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
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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
June 30, 2021, we had deferred $8.9 million of employer payroll taxes, of which
50% are required to be deposited by December 2021 and the remaining 50% by
December 2022.
The extent of the impact of the COVID-19 pandemic on our operational and
financial performance will depend on certain developments, including the
duration of the pandemic, its impact on our customers and suppliers and the
range of governmental and community reactions to the pandemic, which continue to
evolve and cannot be fully predicted at this time. We will continue to
proactively respond to the situation and may take further actions that could
alter our business operations if required by governmental authorities, or that
we determine are in the best interests of our stakeholders.
Results Overview
Total revenue for the three months ended June 30, 2021 as compared to total
revenue for the three months ended June 30, 2020 increased due to an increase in
revenue from the product portion of our service assurance offerings in both the
service provider and enterprise verticals, as well as an increase in revenue
from our DDoS offerings, partially offset by a decrease in revenue from the
service portion of our service assurance offerings.
Our gross profit percentage remained flat at 71% during the three months ended
June 30, 2021 as compared with the three months ended June 30, 2020.
Net loss for the three months ended June 30, 2021 was $11.3 million, as compared
with a net loss for the three months ended June 30, 2020 of $17.4 million, a
decrease of $6.1 million. The decrease in net loss was primarily due to a $6.5
million increase in revenue, a $4.2 million decrease in employee-related
expenses associated with a reduction in headcount and a decrease in variable
incentive compensation, a $2.8 million decrease in legal-related expenses, a
$2.4 million decrease in other expense, and a $1.6 million decrease in
amortization of intangible assets. These decreases were partially offset by a
$3.1 million increase in commissions expense, a $2.0 million increase in direct
material costs, a $1.5 million increase in contractor fees, a $1.2 million
increase in obsolescence charges, a $1.0 million increase in travel expenses
attributable to the lifting of COVID-19 related restrictions, an $0.8 million
increase in advertising expense, and an $0.8 million increase in expenses
related to user conferences.
At June 30, 2021, we had cash, cash equivalents and marketable securities
(current and non-current) of $493.9 million. This represents an increase of
$17.4 million from $476.5 million at March 31, 2021. This increase was primarily
due to cash provided by operating activities of $24.1 million, partially offset
by $4.8 million used for tax withholdings on restricted stock units and $2.6
million used for capital expenditures during the three months ended June 30,
2021.
Use of Non-GAAP Financial Measures
We supplement the United States generally accepted accounting principles (GAAP)
financial measures we report in quarterly and annual earnings announcements,
investor presentations and other investor communications by reporting the
following non-GAAP measures: non-GAAP revenue, 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, amortization, and (EBITDA) from operations. Non-GAAP revenue
eliminates the GAAP effects of acquisitions by adding back revenue related to
deferred revenue revaluation. Non-GAAP gross profit includes the aforementioned
revenue adjustments and also removes expenses related to the amortization of
acquired intangible assets, share-based compensation, 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, legal expenses related to a civil
judgment, restructuring charges, and transitional service agreement expenses.
Non-GAAP net income includes the foregoing adjustments related to non-GAAP
income from operations, net of related income tax effects. 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
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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 revenue, gross profit, income (loss) from
operations, net income (loss) and net income (loss) per share on a GAAP and
non-GAAP basis for the three months ended June 30, 2021 and 2020 (in thousands,
except for per share amounts):
                                                               Three Months Ended
                                                                    June 30,
                                                              2021           2020
      GAAP revenue                                         $ 190,272      $ 183,815

          Service deferred revenue fair value adjustment           -              2

      Non-GAAP revenue                                     $ 190,272      $ 183,817

      GAAP gross profit                                    $ 135,862      $ 130,835
      Service deferred revenue fair value adjustment               -              2

      Share-based compensation expense                         1,887          1,595
      Amortization of acquired intangible assets               3,360          4,735

      Acquisition related depreciation expense                     5              6

      Non-GAAP gross profit                                $ 141,114      $ 137,173

      GAAP loss from operations                            $ (10,667)     $

(14,487)


      Service deferred revenue fair value adjustment               -       

2


      Share-based compensation expense                        13,965       

12,096


      Amortization of acquired intangible assets              18,366       

19,996


      Business development and integration expense                (5)            16

      Compensation for post-combination services                   2             64
      Restructuring charges                                        -             93

      Acquisition related depreciation expense                    60             61

          Transitional service agreement expense                  58              -
          Legal judgments expense                                  -       

2,804


      Non-GAAP income from operations                      $  21,779      $

 20,645


                                       1
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                                                                           Three Months Ended
                                                                                June 30,
                                                                         2021               2020
GAAP net loss                                                        $ (11,341)         $ (17,420)

Service deferred revenue fair value adjustment                               -                  2

Share-based compensation expense                                        13,965             12,096
Amortization of acquired intangible assets                              18,366             19,996
Business development and integration expense                                (5)                16

Compensation for post-combination services                                   2                 64
Restructuring charges                                                        -                 93

Acquisition-related depreciation expense                                    60                 61

Legal judgments expense                                                      -              2,804
    Income tax adjustments                                              (6,089)            (5,496)
Non-GAAP net income                                                  $  14,958          $  12,216

GAAP diluted net loss per share                                      $   (0.15)         $   (0.24)
Per share impact of non-GAAP adjustments identified above                 0.35               0.41
Non-GAAP diluted net income per share                                $    

0.20 $ 0.17



GAAP loss from operations                                            $ 

(10,667) $ (14,487) Previous adjustments to determine non-GAAP income from operations 32,446

             35,132
Non-GAAP income from operations                                         21,779             20,645
Depreciation excluding acquisition related                               5,811              5,952
Non-GAAP EBITDA from operations                                      $  27,590          $  26,597



Critical Accounting Policies
 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;
•share-based compensation;
•valuation of goodwill, intangible assets and other acquisition accounting
items; and
•marketable securities.
Please refer to the critical accounting policies set forth in our Annual Report
on Form 10-K for the fiscal year ended March 31, 2021, filed with the Securities
and Exchange Commission (SEC) on May 20, 2021, for a description of all of our
critical accounting policies.
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Three Months Ended June 30, 2021 and 2020
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 offering. During the
three months ended June 30, 2021 and 2020, no direct customer or indirect
channel partner accounted for more than 10% of our total revenue.
                                  Three Months Ended
                                       June 30,
                                (Dollars in Thousands)
                           2021                         2020                     Change
                                   % of                        % of
                                  Revenue                     Revenue         $            %
Revenue:
Product         $    81,950          43  %    $  71,693          39  %    $ 10,257        14  %
Service             108,322          57         112,122          61         (3,800)       (3) %
Total revenue   $   190,272         100  %    $ 183,815         100  %    $  6,457         4  %



Product. The 14%, or $10.3 million, increase in product revenue compared with
the same period last year was primarily due to an increase in revenue from
network performance management offerings for enterprise and service provider
customers, as well as an increase in revenue from distributed denial of service
(DDoS) offerings.
Service. The 3%, or $3.8 million, decrease in service revenue compared to the
same period last year was primarily driven by non-renewals associated with
service provider consolidation, discontinued product lines, and the timing of
renewal bookings.
Total revenue by geography was as follows:
                                           Three Months Ended
                                                June 30,
                                         (Dollars in Thousands)
                                    2021                         2020                     Change
                                            % of                        % of
                                           Revenue                     Revenue         $            %
United States            $   102,893          54  %    $ 107,323          58  %    $ (4,430)       (4) %
International:
Europe                        38,556          20          34,758          19          3,798        11  %
Asia                          17,316           9          13,696           8          3,620        26  %
Rest of the world             31,507          17          28,038          15          3,469        12  %
Subtotal international        87,379          46          76,492          42         10,887        14  %
Total revenue            $   190,272         100  %    $ 183,815         100  %    $  6,457         4  %


United States revenue decreased 4%, or $4.4 million, primarily due to a decrease
in revenue from network performance management offerings for enterprise and
service provider customers, partially offset by an increase in revenue from DDoS
offerings. The 14%, or $10.9 million, increase in international revenue compared
with the same period last year was primarily driven by higher revenue from
network performance management offerings.
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Cost of Revenue and Gross Profit
Cost of product revenue consists primarily of material components, manufacturing
personnel expenses, packaging materials, overhead and amortization of
capitalized software, acquired developed technology and core technology. Cost of
service revenue consists primarily of personnel, material, overhead and support
costs.
                                               Three Months Ended
                                                    June 30,
                                             (Dollars in Thousands)
                                        2021                             2020                     Change
                                                    % of                        % of
                                                   Revenue                     Revenue         $            %
Cost of revenue
Product                  $              23,165        12  %    $    21,152        12  %    $  2,013        10  %
Service                                 31,245        16            31,828        17           (583)       (2) %
Total cost of revenue    $              54,410        28  %    $    52,980        29  %    $  1,430         3  %
Gross profit:
Product $                $              58,785        31  %    $    50,541        27  %    $  8,244        16  %
Product gross profit %                   72  %                       70  %
Service $                $              77,077        41  %    $    80,294        44  %    $ (3,217)       (4) %
Service gross profit %                   71  %                       72  %
Total gross profit $     $             135,862                 $   130,835                 $  5,027         4  %
Total gross profit %                     71  %                       71  %


Product. The 10%, or $2.0 million, increase in cost of product revenue for the
three months ended June 30, 2021 compared to the same period last year was
primarily due to a $2.0 million increase in direct material costs as a result of
the increase in product revenue, and a $1.2 million increase in obsolescence
charges. These increases were partially offset by a $1.3 million decrease in the
amortization of intangible assets. The product gross profit percentage increased
by two percentage points to 72% during the three months ended June 30, 2021 as
compared with the three months ended June 30, 2020. The 16%, or $8.2 million,
increase in product gross profit is attributable to the 14%, or $10.2 million,
increase in product revenue, partially offset by the 10%, or $2.0 million,
increase in cost of product revenue.
Service. The 2%, or $0.6 million, decrease in cost of service revenue for the
three months ended June 30, 2021 compared to the same period last year was
primarily due to a $2.1 million decrease in employee-related expenses associated
with a decrease in variable incentive compensation as well as a decrease
associated with the timing of certain projects. This decrease was partially
offset by a $1.1 million increase in contractor fees. The service gross profit
percentage decreased by one percentage point to 71% during the three months
ended June 30, 2021 as compared with the three months ended June 30, 2020. The
4%, or $3.2 million decrease in service gross profit is attributable to the 3%,
or $3.8 million, decrease in service revenue, partially offset by the 2%, or
$0.6 million, decrease in cost of service revenue.
Gross profit. Our gross profit increased 4%, or $5.0 million, during the three
months ended June 30, 2021 when compared with the three months ended June 30,
2020. This increase is attributable to the increase in revenue of 4%, or $6.5
million, partially offset by the 3%, or $1.4 million, increase in cost of
revenue. The gross profit percentage remained flat at 71% for the three months
ended June 30, 2021 as compared with the three months ended June 30, 2020.
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Operating Expenses
                                                                          Three Months Ended
                                                                               June 30,
                                                                        (Dollars in Thousands)
                                                             2021                                     2020                                 Change
                                                                        % of                                    % of
                                                                      Revenue                                 Revenue                $                %
Research and development                      $    42,820                   23  %       $  45,381                   25  %       $ (2,561)              (6) %
Sales and marketing                                65,958                   35             59,434                   32             6,524               11
General and administrative                         22,745                   12             25,153                   14            (2,408)             

(10)


Amortization of acquired intangible assets         15,006                    8             15,261                    8              (255)              (2)
Restructuring charges                                   -                    -                 93                    -               (93)            (100)

Total operating expenses                      $   146,529                   78  %       $ 145,322                   79  %       $  1,207                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 6%, or $2.6 million, decrease in research and development expenses for the
three months ended June 30, 2021 compared to the same period last year was
primarily due to a $2.7 million decrease in employee-related expenses associated
with a reduction in headcount and a decrease in variable incentive compensation.
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 11%, or $6.5 million, increase in total sales and marketing expenses for the
three months ended June 30, 2021 compared to the same period last year was
primarily due to a $3.1 million increase in commissions expense, a $1.0 million
increase in travel expense primarily attributable to the lifting of COVID-19
related restrictions, an $0.8 million increase in employee-related expenses
largely due to an increase in variable incentive compensation, an $0.8 million
increase in expenses related to user conferences, and an $0.8 million increase
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 10%, or $2.4 million, decrease in general and administrative expenses for
the three months ended June 30, 2021 compared to the same period last year was
primarily due to a $2.8 million decrease in legal-related expenses, offset by a
$0.5 million increase in 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 2%, or $0.3 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, offset by an increase in the amortization of the
definite-lived trade name.
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.
                                                                  Three Months Ended
                                                                       June 30,
                                                                (Dollars in Thousands)
                                                      2021                                      2020                               Change
                                                                  % of                                   % of
                                                                Revenue                                Revenue               $                %
Interest and other expense, net      $    (2,420)                     (1) %       $ (4,780)                  (3) %       $ 2,360               49  %


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The 49%, or $2.4 million, decrease in interest and other expense, net was
primarily due to a $1.7 million decrease in foreign exchange expense, and a $0.9
million decrease in interest expense due to debt repayments on the credit
facility, as well as a decrease in the average interest rate.
Income Taxes. Our effective tax rates represented an income tax benefit of 13.3%
and an income tax benefit of 9.6% for the three months ended June 30, 2021 and
2020, respectively. The effective income tax rate for the three months ended
June 30, 2021 differed from the effective income tax rate for the three months
ended June 30, 2020, primarily due to the impact of research and development tax
credits, foreign tax credits and the foreign derived intangible income deduction
relative to forecasted profits partially offset by the discrete remeasurement of
certain deferred taxes due to a change in enacted tax rate in the UK during the
quarter ended June 30, 2021.
                                        Three Months Ended
                                             June 30,
                                      (Dollars in Thousands)
                                  2021                          2020                   Change
                                            % of                       % of
                                           Revenue                    Revenue        $         %
Income tax benefit   $    (1,746)             (1) %    $ (1,847)         (1) %    $ 101       5  %

Off-Balance Sheet Arrangements



At June 30, 2021 and 2020, we did not have any off-balance sheet arrangements as
defined in Regulation S-K, Item 303(a)(4)(ii).
Commitments and Contingencies
We account for claims and contingencies in accordance with authoritative
guidance that requires us to record an estimated loss from a claim or loss
contingency when information available prior to issuance of our consolidated
financial statements indicates that it is probable that a liability has been
incurred at the date of the consolidated financial statements and the amount of
the loss can be reasonably estimated. If we determine that it is reasonably
possible, but not probable, that an asset has been impaired or a liability has
been incurred, or if the amount of a probable loss cannot be reasonably
estimated, then, in accordance with the authoritative guidance, we disclose the
amount or range of estimated loss if the amount or range of estimated loss is
material. Accounting for claims and contingencies requires us to use our
judgment. We consult with legal counsel on those issues related to litigation
and seek input from other experts and advisors with respect to matters in the
ordinary course of business.
Legal - From time to time, we are subject to legal proceedings and claims in the
ordinary course of business. In the opinion of management, the amount of
ultimate expense with respect to any current legal proceedings and claims, if
determined adversely, will not have a material adverse effect on our financial
condition, results of operations or cash flows.
As previously disclosed, in March 2016, Packet Intelligence LLC (Packet
Intelligence or Plaintiff) filed a Complaint against NetScout and two subsidiary
entities in the United States District Court for the Eastern District of Texas
asserting infringement of five United States patents. Plaintiff's Complaint
alleged that legacy Tektronix GeoProbe products, including the G10 and GeoBlade
products, infringed these patents. NetScout filed an Answer denying Plaintiff's
allegations and asserting that Plaintiff's patents were, among other things,
invalid, not infringed, and unenforceable due to inequitable conduct. In October
2017, a jury trial was held to address the parties' claims and counterclaims
regarding infringement of three patents by the G10 and GeoBlade products,
invalidity of these patents, and damages. On October 13, 2017, the jury rendered
a verdict finding in favor of the Plaintiff and that Plaintiff was entitled to
$3,500,000 for pre-suit damages and $2,250,000 for post-suit damages. The jury
indicated that the awarded damages amounts were intended to reflect a running
royalty. In September 2018, the Court entered judgment and "enhanced" the jury
verdict in the amount of $2.8 million as a result of a jury finding. The
judgment also awards pre- and post-judgment interest, and a running royalty on
the G10 and GeoBlade products until the expiration of the patents at issue, the
last date being June 2022. Following the entry of final judgment, on June 12,
2019, we filed our Notice of Appeal. On July 14, 2020, the Court of Appeals for
the Federal Circuit issued a decision vacating the $3,500,000 pre-suit damages
award, affirming the $2,250,000 post-suit damages award, and remanding to the
district court to determine what, if any, enhancement should be awarded. On
March 15, 2021, NetScout filed a petition for a writ of certiorari to the United
States Supreme Court, which was subsequently denied, challenging, among other
issues, the basis for enhanced damages and the patentability of the claimed
technology. The case is currently on remand at the District court. NetScout
continues to avail itself of its legal options. NetScout has concluded that the
risk of loss associated with the post-suit damages award is "probable" in
accounting terms, regardless of the options NetScout may pursue, and that the
risk of loss associated with pre-suit damages is
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now remote. Accounting rules require us to provide an estimate for the range of
potential liability. NetScout currently estimates that the range of liability is
the sum of post-suit damages, plus pre- and post-judgment interest amounts and
royalties owed on post-trial sales of the accused G10 and GeoBlade products. Any
potential enhancement is not reasonably estimable but is likely within the range
of $0 to $2,800,000.
Liquidity and Capital Resources
Cash, cash equivalents and marketable securities consisted of the following (in
thousands):
                                                           June 30,       March 31,
                                                             2021           2021

       Cash and cash equivalents                          $ 487,168      $

467,176


       Short-term marketable securities                       6,737         

9,277

Cash, cash equivalents and marketable securities $ 493,905 $ 476,453




Cash, cash equivalents and marketable securities
At June 30, 2021, cash, cash equivalents and marketable securities (current and
non-current) totaled $493.9 million, a $17.4 million increase from $476.5
million at March 31, 2021. This increase was primarily due to cash provided by
operating activities of $24.1 million, partially offset by $4.8 million used for
tax withholdings on restricted stock units, and $2.6 million used for capital
expenditures during the three months ended June 30, 2021.
At June 30, 2021, cash and short-term and long-term investments in the United
States were $321.6 million, while cash held outside the United States was
approximately $172.3 million.
Cash and cash equivalents were impacted by the following:
                                                               Three Months Ended
                                                                    June 30,
                                                                 (in thousands)
                                                               2021           2020

     Net cash provided by operating activities             $   24,056

$ 44,931

Net cash (used in) provided by investing activities $ (32) $ 20,543


     Net cash used in financing activities                 $   (4,777)

$ (4,103)




Net cash from operating activities
Cash provided by operating activities was $24.1 million during the three months
ended June 30, 2021, compared with $44.9 million of cash provided by operating
activities during the three months ended June 30, 2020. The $20.8 million
decrease was due in part to a $23.4 million decrease from accounts receivable, a
$16.2 million decrease from accrued compensation and other expenses, a $7.2
million decrease from prepaid expenses and other assets, a $1.8 million decrease
from depreciation and amortization, and a $1.1 million decrease from income
taxes payable. These decreases were partially offset by a $12.1 million increase
from deferred revenue, a $6.7 million increase from inventories, a $6.1 million
increase from net income, a $1.9 million increase from share-based compensation,
and an $0.8 million increase from deferred income taxes during the three months
ended June 30, 2021 as compared with the three months ended June 30, 2020.
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Net cash from investing activities
                                                                            Three Months Ended
                                                                                 June 30,
                                                                              (in thousands)
                                                                         2021                2020

Cash (used in) provided by investing activities included the following: Purchase of marketable securities

$   (5,696)         $  (5,743)
Proceeds from sales and maturity of marketable securities                 8,230             33,026
Purchase of fixed assets                                                 (2,578)            (2,605)
Purchase of intangible assets                                                 -             (4,237)

Decrease in deposits                                                         12                102

                                                                     $      (32)         $  20,543


Cash used in investing activities was $32 thousand during the three months ended
June 30, 2021, compared with $20.5 million of cash provided by investing
activities during the three months ended June 30, 2020. The $20.5 million
decrease in cash (used in) provided by investing activities was due in part to a
$24.7 million decrease in cash inflow from marketable securities related to a
$24.8 million decrease in proceeds from the sales and maturity of marketable
securities during the three months ended June 30, 2021 when compared with the
three months ended June 30, 2020. This decrease was partially offset by a $4.2
million cash outflow related to agreements to acquire technology licenses for
$4.5 million during the three months ended June 30, 2020.
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 2022.
Net cash from financing activities
                                                                  Three Months Ended
                                                                       June 30,
                                                                    (in thousands)
                                                                  2021           2020
  Cash used in financing activities included the following:

  Payment of contingent consideration                         $        -      $ (1,000)

  Tax withholding on restricted stock units                       (4,777)       (3,103)

                                                              $   (4,777)     $ (4,103)


Cash used in financing activities increased by $0.7 million to $4.8 million
during the three months ended June 30, 2021, compared with $4.1 million of cash
used in financing activities during the three months ended June 30, 2020.
During the three months ended June 30, 2021, we paid $1.0 million of contingent
purchase consideration related to the Eastwind acquisition in April 2020.
In connection with the delivery of our common stock upon vesting of restricted
stock units, we withheld 164,133 and 113,163 shares at a cost of $4.8 million
and $3.1 million related to minimum statutory tax withholding requirements on
these restricted stock units during the three months ended June 30, 2021 and
2020, 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.
Credit Facility
On January 16, 2018, we amended and expanded our existing credit agreement
(Amended Credit Agreement) with a syndicate of lenders by and among: NetScout;
JPMorgan Chase Bank, N.A. (JPMorgan), as administrative agent and collateral
agent; J.P. Morgan Securities LLC, KeyBanc Capital Markets, Merrill Lynch,
Pierce, Fenner & Smith Incorporated, RBC Capital Markets and Wells Fargo
Securities, LLC, as joint lead arrangers and joint bookrunners; Fifth Third
Bank, Santander Bank, N.A., SunTrust Bank, N.A. and U.S. Bank National
Association, as co-documentation agents; and the lenders party thereto.
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The Amended Credit Agreement provides for a five-year $1.0 billion senior
secured revolving credit facility, including a letter of credit sub-facility of
up to $75.0 million. We may elect to use the credit facility for general
corporate purposes or to finance the repurchase of up to twenty-five million
shares of our common stock under our common stock repurchase plan. The
commitments under the Amended Credit Agreement will expire on January 16, 2023,
and any outstanding loans will be due on that date. During the fiscal year ended
March 31, 2021, we repaid $100.0 million of borrowings under the Amended Credit
Agreement. At June 30, 2021, $350 million was outstanding under the Amended
Credit Agreement.
At our election, revolving loans under the Amended Credit Agreement bear
interest at either (a) an Alternate Base Rate per annum equal to the greatest of
(1) JPMorgan's prime rate, (2) 0.50% in excess of the New York Federal Reserve
Bank (NYFRB) rate, or (3) an adjusted one month LIBOR rate plus 1%; or (b) such
adjusted LIBOR rate (for the interest period selected by us), in each case plus
an applicable margin. For the period from the delivery of our financial
statements for the quarter ended March 31, 2021, until we have delivered
financial statements for the quarter ended June 30, 2021, the applicable margin
will be 1.25% per annum for LIBOR loans and 0.25% per annum for Alternate Base
Rate loans, and thereafter the applicable margin will vary depending on our
leverage ratio, ranging from 0.75% per annum for Base Rate loans and 1.75% per
annum for LIBOR loans if our consolidated leverage ratio is less than or equal
to 3.50 to 1.00, down to 0.00% per annum for Alternate Base Rate loans and 1.00%
per annum for LIBOR loans if our consolidated leverage ratio is equal to or less
than 1.50 to 1.00. As of June 30, 2021, the Company's maximum allowed
consolidated leverage ratio is 3.50 to 1.00.
On July 27, 2017, the U.K. Financial Conduct Authority (FCA) announced that it
will no longer require banks to submit rates for the calculation of LIBOR after
2021. On March 5, 2021, the Intercontinental Exchange Benchmark Administration
(IBA), the FCA-regulated and authorized administrator of LIBOR, announced, and
the FCA confirmed, that one week and two-month USD LIBOR settings will cease on
December 31, 2021, and that the USD LIBOR panel will cease on June 30, 2023.
IBA notes that any publication of the Overnight and 1, 3, 6 and 12 Months USD
LIBOR settings based on panel bank
submissions beyond December 31, 2021 will need to comply with applicable
regulations, including as to representativeness.
Based on current information from panel banks, IBA anticipates there being a
representative panel for the continuation of these
USD LIBOR settings through to June 30, 2023.
Our Amended Credit Agreement, which matures on January 16, 2023 prior to the
June 30, 2023 cessation of USD LIBOR publications, provides for the
Administrative Agent to determine if (i) adequate and reasonable means do not
exist for ascertaining the LIBOR rate or (ii) the FCA or Government Authority
having jurisdiction over the Administrative Agent has made a public statement
identifying a specific date after which the LIBOR rate shall no longer be used
for determining interest rates for loans and the Administrative Agent determines
that (i) and (ii) above are unlikely to be temporary, then the Administrative
Agent and NetScout would agree to transition to an Alternate Base Rate borrowing
as described above or amend the Credit Agreement to establish an alternate rate
of interest to LIBOR that gives due consideration to the then prevailing market
convention for determining a rate of interest for syndicated loans in the United
States at such time.
Our consolidated leverage ratio is the ratio of our total funded debt compared
to our consolidated adjusted EBITDA. Consolidated adjusted EBITDA includes
certain adjustments, including, without limitation, adjustments relating to
extraordinary, unusual or non-recurring charges, certain restructuring charges,
non-cash charges, certain transaction costs and expenses and certain pro forma
adjustments in connection with material acquisitions and dispositions, all as
set forth in detail in the definition of consolidated adjusted EBITDA in the
Amended Credit Agreement.
Commitment fees will accrue on the daily unused amount of the credit facility.
For the period from the delivery of our financial statements for the quarter
ended March 31, 2021 until we have delivered financial statements for the
quarter ended June 30, 2021, the commitment fee will be 0.20% per annum, and
thereafter the commitment fee will vary depending on our consolidated leverage
ratio, ranging from 0.30% per annum if our consolidated leverage ratio is
greater than 2.75 to 1.00, down to 0.15% per annum if our consolidated leverage
ratio is equal to or less than 1.50 to 1.00.
Letter of credit participation fees are payable to each lender on the amount of
such lender's letter of credit exposure, during the period from the closing date
of the Amended Credit Agreement to but excluding the date which is the later of
(i) the date on which such lender's commitment terminates or (ii) the date on
which such lender ceases to have any letter of credit exposure, at a rate per
annum equal to the applicable margin for LIBOR loans. Additionally, we will pay
a fronting fee to each issuing bank in amounts to be agreed to between us and
the applicable issuing bank.
Interest on Alternate Base Rate loans is payable at the end of each calendar
quarter. Interest on LIBOR loans is payable at the end of each interest rate
period or at the end of each three-month interval within an interest rate period
if the period is longer than three months. We may also prepay loans under the
Amended Credit Agreement at any time, without penalty, subject to certain notice
requirements.
Debt is recorded at the amount drawn on the revolving credit facility plus
interest based on floating rates reflective of changes in the market which
approximates fair value.
The loans and other obligations under the credit facility are (a) guaranteed by
each of our wholly owned material domestic restricted subsidiaries, subject to
certain exceptions, and (b) are secured by substantially all of the assets of us
and the
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subsidiary guarantors, including a pledge of all the capital stock of material
subsidiaries held directly by us and the subsidiary guarantors (which pledge, in
the case of any foreign subsidiary, is limited to 65% of the voting stock),
subject to certain customary exceptions and limitations. The Amended Credit
Agreement generally prohibits any other liens on the assets of NetScout and its
restricted subsidiaries, subject to certain exceptions as described in the
Amended Credit Agreement.
The Amended Credit Agreement contains certain covenants applicable to us and our
restricted subsidiaries, including, without limitation, limitations on
additional indebtedness, liens, various fundamental changes, dividends and
distributions, investments (including acquisitions), transactions with
affiliates, asset sales, including sale-leaseback transactions, speculative
hedge agreements, payment of junior financing, changes in business and other
limitations customary in senior secured credit facilities. In addition, we are
required to maintain certain consolidated leverage and interest coverage ratios.
These covenants and limitations are more fully described in the Amended Credit
Agreement. At June 30, 2021, we were in compliance with all of these covenants.
The Amended Credit Agreement provides that events of default will exist in
certain circumstances, including failure to make payment of principal or
interest on the loans when required, failure to perform certain obligations
under the Amended Credit Agreement and related documents, defaults under certain
other indebtedness, certain insolvency events, certain events arising under
ERISA, a change of control and certain other events. Upon an event of default,
the administrative agent with the consent of, or at the request of, the holders
of more than 50% in principal amount of the loans and commitments may terminate
the commitments and accelerate the maturity of the loans and enforce certain
other remedies under the Amended Credit Agreement and the other loan documents.
We have capitalized debt issuance costs totaling $12.2 million at June 30, 2021,
which are being amortized over the life of the revolving credit facility. The
unamortized balance was $2.7 million as of June 30, 2021. The balance of $1.7
million was included as prepaid expenses and other current assets and a balance
of $1.0 million was included as other assets in our consolidated balance sheet.
Expectations for Fiscal Year 2022
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 currently 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.
Additionally, 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 Amended Credit Agreement, or to
repurchase shares of our common stock through our stock repurchase program. From
time to time, in the ordinary course of business, we evaluate potential
acquisitions of such businesses, products or technologies. If our existing
sources of liquidity are insufficient to satisfy our liquidity requirements, we
may seek to sell additional equity or debt securities. The sale of additional
equity or debt securities could result in additional dilution to our
stockholders.
Recent Accounting 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.
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