Ladies and gentlemen, thank you for standing by, and welcome to NetScout's Second Quarter Fiscal Year 2023 Financial Results Conference Call. [Operator Instructions] As a reminder, this call is being recorded. Tony Piazza, Senior Vice President of Corporate Finance and his colleagues at NetScout are on the line with us today. [Operator Instructions] I would now like to turn the call over to Tony Piazza to begin the company's prepared remarks.

Thank you, operator, and good morning, everyone. Welcome to NetScout's second quarter fiscal year 2023 conference call for the period ended September 30, 2022. Joining me today are Anil Singhal, NetScout's President and Chief Executive Officer; Michael Szabados, NetScout's Chief Operating Officer; and Jean Bua, NetScout's Executive Vice President and Chief Financial Officer. There's a slide presentation that accompanies our prepared remarks. You can advance the slides in the webcast viewer to follow our commentary. Both the slides and the prepared remarks can be accessed in multiple areas within the Investor Relations section of our website at www.netscout.com, including the IR landing page under Financial Results, the webcast itself and under Financial Information on the Quarterly Results page. Moving on to Slide #3. Today's conference call will include forward-looking statements. Examples of forward-looking statements include statements regarding our future financial performance or position, results of operations, business strategy, plans and objectives of management for future operations and other statements that are not historical facts. You can identify forward-looking statements by their use of forward-looking words such as anticipate, believe, plan, will, should, expect, or other comparable terms. We caution listeners not to place undue reliance on any forward-looking statements included in this presentation, which speak only as of today's date. These forward-looking statements involve risks and uncertainties, and actual results could differ materially from the forward-looking statements due to known and unknown risks, uncertainties, assumptions and other factors, including, but not limited to, those described on this slide and in today's financial results press release. For a more detailed description of the risk factors associated with the company, please refer to the company's annual report on Form 10-K for the fiscal year ended March 31, 2022, on file with the Securities and Exchange Commission. NetScout assumes no obligation to update any forward-looking information contained in this communication or with respect to the announcements described herein. Let's now turn to Slide #4, which involves non-GAAP metrics. While this slide presentation includes both GAAP and non-GAAP results, unless otherwise stated, financial information discussed on today's conference call will be on a non-GAAP basis only. The rationale for providing non-GAAP measures, along with the limitations of relying solely on those measures, is detailed on this slide and in today's press release. These measures should not be considered in isolation from or as a substitute for financial information prepared in accordance with GAAP. Reconciliations of all non-GAAP metrics with the applicable GAAP measures are provided in the appendix of the slide presentation, in today's earnings press release and on our website. I will now turn the call over to Anil for his prepared remarks. Anil?

Thank you, Tony, and good morning, everyone. Welcome, and thank you all for joining us today. Let's now turn to Slide #6 for a brief recap of our non-GAAP financial results in the second quarter and the first half of our fiscal year 2023. Focusing first on the second quarter of fiscal year 2023, we delivered strong financial results and drove progress across our strategic growth priorities during the quarter. Importantly, this included further expanding our cybersecurity business. Second quarter revenue was $228.1 million, representing year-over-year growth of nearly 8%. Our revenue expansion was driven by 10% product revenue growth and more than 5% service revenue growth, both on a year-over-year basis. Of note, our cybersecurity and service assurance product lines continued to grow in the quarter on a year-over-year basis. With this revenue growth and our healthy operating leverage, we delivered $0.50 per diluted share in the second quarter of fiscal year 2023, representing diluted earnings per share growth of approximately 21% year-over-year. Now moving on to the first half of fiscal year 2023. During the period, revenue was $436.9 million, growing by nearly 9% year-over-year. This increase was driven by product revenue growth of more than 14% and service revenue growth of nearly 4%. During the same period, cybersecurity revenue grew by 14%, while service assurance revenue grew by more than 6%. All comparisons are on a year-over-year basis. Additionally, we delivered $0.81 of diluted earnings per share in the first half of the fiscal year 2023, representing diluted earnings per share growth of approximately 21% year-over-year. Now let's move to Slide #7 for some further perspective on marketing -- market and business insights. Starting on the cybersecurity front, we recently released our DDoS threat intelligence report for the first half of 2022. In it, we highlighted many…

Thank you, Anil, and good morning, everyone. Slide 10 outlines the areas that I will be covering today, starting with customer wins. In our service provider customer's vertical, we continue to expand our installed base by leveraging both our incumbency and rich portfolio of offerings to better support providers as they steadily advance their 5G build-outs. As an example, during the quarter, we received a mid-7-figure order from a Tier 1 North American carrier that has consistently increased their 5G-related purchasing from us. This order was a combination of additional radio frequency propagation modeling, service assurance for their radio access network and other 5G-related products in the migration and capacity expansion of their network. Importantly, in addition to leveraging our solutions within their mobile business, this customer is also utilizing our service assurance platform within their corporate IT systems. In our enterprise customer vertical, we received a low 8-figure order from a large North American health insurance organization during the second quarter. Last year, this customer placed a 7-figure order with us for service assurance solutions. And this quarter, they added a full Omnis cybersecurity suite and additional service assurance solution to further utilize our platform's integrated capabilities. With the convenience of our shared visibility platform and power of our deep packet inspection at scale, we continue to see our comprehensive suite of enterprise solutions attention among our customers. Finally, as Anil mentioned in his discussion of our recent Threat Intelligent report, we continue to see an increased awareness around DDoS attacks and capacity expansion stemming from the rapid growth in the application traffic and the increasing retent geopolitical situation around the world. For example, in the second quarter, we received a mid-7-figure order from a large global financial institution that is based in the U.S. and is also a…

Thank you, Michael, and good morning, everyone. I will review key metrics for our second quarter and first half of fiscal year 2023 and provide some additional commentary on our fiscal year 2023 outlook. As a reminder, this review focuses on our non-GAAP results, unless otherwise stated, and all reconciliations within our GAAP results appear in the presentation appendix. Regardless, I will note the nature of such comparisons. Slide #12 details the results for the second quarter and first half of our fiscal year 2023. Focusing on our quarterly performance, total revenue grew 7.6% year-over-year to $228.1 million. Product revenue grew 10% and service revenue grew 5.4%, both on a year-over-year basis. At the end of the quarter, our total backlog was approximately $80 million, consisting of approximately $45 million of fulfillable orders and approximately $35 million of radio frequency propagation modeling projects, with nearly $20 million of the radio frequency propagation modeling amount categorized as deferred revenue from an accounting perspective. As a reminder, while fulfillable orders are those we believe can be readily converted into revenue upon shipment or fulfillment, the radio frequency propagation modeling projects require certain execution steps in conjunction with the carrier's timing before they can convert to revenue. Gross profit margin was 76.8% in the second quarter, down 1.5 percentage points year-over-year. This quarter's gross margin was impacted by approximately $15 million of radio frequency propagation modeling projects, which had an average gross margin of less than 30%. Quarterly operating expenses increased 2.2% year-over-year, mostly due to the return of pre-pandemic activities such as in-person events and travel and partially due to a competitive employment market. We reported an operating profit margin of 23.7% compared with 22.3% in the same quarter last year. Diluted earnings per share was $0.57. Clarifying earlier statements, I'll repeat,…

[Operator Instructions] We will take our first question from Matt Hedberg with RBC.

Nice consistency in the quarter here. You're reiterating guidance for the year, which is nice to see. Jean, thanks for the added color on expectations for the second half just there. With a lot going on, maybe could you talk to some of your confidence points for the second half?

Sure. I think as we mentioned in our earlier comments, that we've been seeing good activity across a wide variety of the trends that we participate in, the trends being 5G. So we have some 5G projects that have come in from Tier 1s. We have still calibration that we are executing on, which is in part of the backlog. In the enterprise, we have been seeing digital transformation and some customers going through what I would call a not necessarily a refresh but maybe a reconsideration phase of things they had purchased in the past that didn't work out as well in this much more complicated digital environment. And then finally, within security, as mentioned, we have been updating the road map and coming out with the new products that Anil talked about as well as the initiation of the Omnis. So we have a combined portfolio of solutions now that works well for 5G digital transformation, the threats of cybersecurity. As you'll note, the backlog in the shippable portion and that, again, is the portion that was not available -- was not able to be shipped at the end of the quarter but probably has already been shipped and will convert into revenue was still consistent with the prior year -- prior quarters entering backlog. The only thing that changed was the execution of calibration. So when we look forward to the end of this year, at this point, we are comfortable with reaffirming our revenue ranges.

That's great. And then could you talk to federal business in the quarter with the fiscal year-end? I think you've previously commented to most of those projects being funded. Just anything around federal worth pointing out for us?

I think as Jean is looking at this, Matt, it was better than last year but that's because last year was not that great. So I mean, there is still uncertainty in terms of the project budgets and timing and the fiscal year was just over. But since it's not a big portion of our total revenue, I think this is probably not -- I mean, there are other factors which could impact things in the future than the federal business.

Yes. Just to add, some numerics to that. I would say basically, the service revenue in the U.S. federal government, so the portion that is support, has been consistent on a year-over-year basis, which is good, which means that they're still using our products and they still want to use -- still want to have support on those. Product revenue was probably slightly flat with what it was in Q2. So overall, on a dollar basis, it was relatively consistent with prior year's Q2. That's the U.S. federal government piece.

We will take our next question from James Fish with Piper Sandler.

I want to follow up on the question before that, before the Fed. With the reiterated guide, I just want to understand the puts and takes you're thinking about here, given the macro environment, especially on the international side where budgets are a little bit tighter, you have elongating sales cycles. Obviously, you got a benefit from the 5G builds. But we did hear from some of your networking peers that have cited weakness here already. Just trying to understand how you guys are thinking about order growth in the back half of the year.

So Jim, thanks for the question. So I think there's another dynamic plays out on our business in addition to the very good backlog we had entering this year. When we look at the networking peers, they are mostly infrastructure companies, and we have a trailing effect on both spending cuts and spending opportunities once the network build-out is done. Then you use tools. So I think if we see some headwinds on the macroeconomic side, we'll probably see that, and we'll update that at the end of the fiscal year. So we feel comfortable the range which we have allows us to manage this and with all the other pipeline and other information and visibility we have. And despite some of the things you are seeing in the international side, we, at this point, feel comfortable with the guidance.

That's helpful, Anil. Obviously, still elevated backlog, I'll agree, but how are you guys thinking about that backlog returning to kind of normal as supply chain does start to open up? Is it by fiscal year-end of '24, earlier or later? And then Jean, it sounds like there was a little bit more professional services mix this quarter in the service revenue. Is that right? Or is it just kind of the natural flow-through of maintenance starting to pick up as products grew last year?

What is flowing through this quarter in service revenue is something that happens almost every year. We have back maintenance people that sign up for contracts after their original due date. And so any period of service that you've provided flows right through revenue at that time. So I think in Q3 of last year, we had some -- a lot of back maintenance or some back maintenance. Q2 of this year, I would say the delta between -- the delta in back maintenance was probably maybe attributed to about $5 million.

Okay. And then on the backlog timing, like when we go back to the -- I think the historical range was about $25 million, $30 million historically, where you sit around $80 million today. I guess are you guys thinking about it as like a 6-quarter or 8-quarter kind of time frame?

Well, I think overall, it will be somewhere in between because of hopefully higher growth because of our cybersecurity initiatives. So some of the new initiatives, even though this year, we feel comfortable with the guidance, a lot of the new things have not really significantly contributed to this. And we have a general feeling that cybersecurity is less prone to macroeconomic challenges than service assurance. So the investment we made last year, so our plan is that our backlog will be somewhere between the traditional one, which we had, like you talked about $30 million, $40 million to the elevated one, mainly because of calibration. I mean, calibration business is still possible this year, but nowhere will be at the size of what it was last year. So it's hard to predict what the backlog is going to be like this or lower or higher in the next 18 months. But I think when we talk about the guidance for next year, it will reflect our insights into that.

We will take our next question from Kevin Liu with K. Liu & Company.

Just wanted to clarify some comments around kind of the macroeconomic impacts on your business. Have you guys seen anything to date in terms of delays or project cancellations that are concerning at all? And then I was just wondering, with cybersecurity maybe being a little bit more insulated, whether you're expecting your service provider business to hold up fairly well.

Overall, I think we see, Kevin, that so far, at least, we have not seen any delays which has got to my attention any big deals or anything. And how this changes over the next 3, 4 months, we'll see. But we are still benefiting here and there from the -- we have very little supply chain problem because being a corporate company and the way we package our software and we have some partners, we take care of that. So we think that we might -- even in this environment, we might benefit from some supply chain dollars coming from other vendors to us in this last quarter. So right now, I think we are not seeing those effects. But like I said earlier, that we'll have to carefully watch it and make -- and when we provide the guidance for next fiscal year, we will keep that into account. But so far, luckily, we are not seeing any real issues. We keep hearing in other earnings calls, but fortunately, we are not seeing anything so far.

Understood. That's good to hear. And then just on the expense side of things, you guys talked about things starting to return to kind of pre-pandemic types of spend with in-person activities. Just wondering as we look out to next year and maybe in the future, do you feel like this is kind of a more normalized baseline that should recur from year to year? Or do you think there's even more kind of interest in activities that will continue to pick up and that we should account for?

I would say that the amount of travel is not as high as we would have originally thought in this fiscal year. So next year, I could see where some travel would repopulate in the P&L. Also depending on economic times and as everyone -- a lot of people have experienced significant compensation rate increases, we would have to see if that occurs in our next fiscal year also. Barring that, those 2, off the top of my head, I don't see any other operating expenses that would come through. And so as the company generates incremental revenue, we will continue to have traditionally strong flow-through to our operating margin and our earnings per share.

Great. Congrats on the quarter end.

We have no further questions on the line at this time. I will turn the program back over to Tony Piazza for any additional or closing remarks.

Thank you, operator. That concludes our call for today. Thank you for joining us, and have a good day.

This does conclude today's program. Thank you for your participation. You may disconnect at any time.