Thank you for your continued patience. Your meeting will begin shortly. A member of our team will be happy to help you. Thank you for your continued patience. Your meeting will begin shortly. Please standby. Your meeting is about to begin. Thank you for standing by, and welcome to NetScout Systems, Inc. Third Quarter Fiscal Year 2026 Financial Results Conference Call. At this time, all parties are in a listen-only mode. A question and answer session will follow the management team's prepared remarks. As a reminder, this call is being recorded. If you require operator assistance at any time, please press 0. I would now like to turn the call over to Scott Dressel, NetScout's VP of Corporate Finance. Scott, please go ahead.

Thank you, operator, and good morning, everyone. Welcome to NetScout Systems, Inc.'s third quarter fiscal year 2026 Conference Call for the period ended December 31, 2025. Joining me today are Anil Singhal, NetScout's President and Chief Executive Officer, and Tony Piazza, NetScout's Executive Vice President and Chief Financial Officer. Please note that a slide presentation 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 and the quarterly results page. As discussed in detail on slide number three, today's conference call will include certain forward-looking statements about NetScout Systems, Inc.'s views on expected results of future performance and business strategy. These statements speak only as of today's date and involve risks, uncertainties, and assumptions that may cause actual results to differ materially, including, but not limited to, those described in the company's most recent annual report on Form 10-K and subsequent filings with the Securities and Exchange Commission. As discussed in detail on slide number four, today's conference call will also include discussion of certain non-GAAP financial measures that the company believes to be useful for investors. While the slide presentation includes both GAAP and non-GAAP results, other than revenue and balance sheet information, which are presented in accordance with GAAP, we will focus our discussion on non-GAAP financial information. 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 to the nearest GAAP measures are provided in the appendix of the slide presentation, in today's financial results press release, and on our website. I will now turn the call over to Anil for his prepared remarks. Anil?

Thank you, Scott, and good morning, everyone. Thank you for joining us today. Our third quarter fiscal year 2026 revenue and earnings results were ahead of expectations. These results were enhanced by certain product orders and service renewals that had been anticipated for the fourth quarter as customers used their remaining calendar year budgets. Year-end budget acceleration supported solid year-over-year results for the first nine months of our fiscal year, driven by growth across both our cybersecurity and service assurance offerings. Given our year-to-date performance, including the acceleration of certain orders, and our current pipeline, we are raising the midpoint of our top and bottom line outlook for fiscal year 2026. Let's turn to slide number six for a brief recap of our financial performance for the third quarter and the first nine months of fiscal year 2026. For the third quarter, total revenue was approximately $200.151 million, ahead of expectations and in line with the same period last fiscal year. Diluted earnings per share totaled $1, an increase of approximately 6% year over year. For the first nine months ended December 31, 2025, revenue was approximately $656 million, an increase of approximately 6% year over year, driven by solid growth in both our cybersecurity and service assurance offerings, which included the previously mentioned acceleration of certain logs. We expanded both our gross and operating margins during the first nine months of the fiscal year and delivered diluted earnings per share of $1.96, up approximately 15% from $1.70 for the year-ago period. Now let's turn to slide number seven for some perspective on our business and some market insights. Starting with our service assurance offering, revenue in the first nine months of the fiscal year increased approximately 5% year over year, driven by growth in the enterprise customer vertical, with…

Thank you, Anil, and good morning, everyone. Thank you for joining us. I'll start by walking you through the key financial metrics for both the third quarter and the first nine months of our fiscal year 2026. After that, I'll share some additional commentary on our outlook for the full fiscal year. As a reminder, other than revenue and balance sheet information, are on a GAAP basis, this review focuses on our non-GAAP results. All reconciliations with our GAAP results appear in the presentation appendix. I will note the nature of any such comparisons accordingly. Also, all comparisons are on a year-over-year basis unless otherwise noted. Slide number 10 details the results for the third quarter and first nine months of our fiscal year 2026. Focusing on the quarterly performance, total revenue for the third quarter was $250.7 million, which was relatively consistent with the same period last year at $152 million and ahead of our outlook provided last quarter. This outcome reflects the impact of timing-related shifts in customer purchasing behavior. As we noted last quarter, we had originally expected certain orders to land in the third quarter. However, a number of those were received earlier than anticipated in the second quarter. Similarly, in Q3, we observed some orders that we expected for Q4 being pulled forward as customers leveraged their remaining calendar year-end budgets. In some cases, this included service contract renewals, including backdated maintenance components. While this dynamic provides short-term support to revenue this quarter, it's important to note that it can also create unevenness across reporting periods. We monitor and manage such changes closely, and we remain guardedly optimistic given the dynamic macro environment and the potential for variability in buying patterns as customers continue to manage their budgets conservatively. Product revenue totaled $121.7 million, compared…

Operator?

Thank you. At this time, if you would like to ask a question, please press 1 on your telephone keypad. If you wish to remove yourself from the queue, press 2. In the interest of time, we ask that you limit yourself to one question and one follow-up. Our first question is from Simran Biswal with RBC Capital Markets. Your line is open.

Hey, guys. This is Simran on for Matt Hedberg. Thanks for taking our questions, and congrats on the quarter. I guess to start, so can I Q3 performance was good relative to expectations, realizing that the quarter benefited from some deal pull-in? And it sounds like you guys are seeing healthy demand trends, but can you comment on if some of those demand signals are actually improving?

Well, we talked about the demand being similar or improving. But we also are cautious about some of the supply chain challenges which could delay the timing of the orders because even though we are a software company, they have to run our software on servers. And if there are delays in procuring the servers, which we don't control, then that could delay the software procurement process also. But in terms of demand for both our current solution and future offering and interest in AI-based solutions, user for data for those use cases, I think it's equal or better than versus maybe six months ago.

Yeah. I would just comment that it's really about timing versus demand because demand remains strong. We have a robust pipeline. And so we've benefited from acceleration, and it's just a matter of timing in some of these deals given the dynamic environment and some of the factors that Anil had mentioned.

Okay. Got it. That makes sense. And then as a follow-up, could you quantify the pull-ins this quarter? And does your Q4 guide assume any additional deal pull-ins?

So the pull-ins were, say, approximately $15 million. A combination of product revenue and service revenue would impact both. And right now, what we've given that range, timing, again, is really the factor, and although we're not guiding to a particular number, what we see right now is something around the midpoint, and so it doesn't factor in a lot of pull-ins or anything at this point.

Okay. Great. Thanks, guys. We'll take our next question from Erik Suppiger with B. Riley Securities. Your line is open.

Yes. Thanks for taking the question. Congrats on a solid quarter. Thank you. First off, can you walk through just how the budgets work where customers were pulling orders from the March quarter into December because I don't typically think of pulling budgets from one calendar year into another calendar year the way they do maybe from Q4 of the calendar year into Q3. But then secondly, can you talk a little bit about the use case that is driving the service assurance business? It seems like your enterprise business was strong. And could you just provide some detail about what kind of maybe AI use cases are driving the service assurance uptick that you saw?

Good. Thanks, Erik. So I think, first of all, it's always interesting because many of our customers are not on the same fiscal year as we are. And that has left our budget for them even though it's a quarter three for us, it's a quarter four for them. And sometimes, it takes time for the budget to set in in the new fiscal year. So if they have a demand and they want to use up all the budget they can. And that's what happens typically all the time. This time, we saw even in Q2, because of the federal fiscal year ends at that time. Now coming back to service assurance, at some point, we might start separating some of the revenue, but it's too small right now. But if you look at there are two use cases of our data in the service assurance market. One is the traditional service triage. Somebody says, you know, I have an IT issue and why don't you use NetScout Systems, Inc.'s product to troubleshoot? And so our smart data, which is our differentiator, we have over 100 patents in that area, which converts in real-time packet data or conversation data to telemetry that was not benefiting the use case outside of our own applications because they didn't have the ability to consume that. And in the future, even agentic AI can take advantage of that. So AI use cases simply mean that you can use the slightly enhanced data which is used only by our own application in service assurance, can now be mixed with other use cases for companies like Splunk or, as I mentioned, the Genetic AI. And so now IT people and other businesses can use it for similar data for other purposes. And that's our AI use case. So now we are not just limited to the use case of the application NetScout Systems, Inc. had developed, which is the ingenious one, but can also be used for AI-related use cases, which is a big variety of those.

Can you quick comment on how much that was a contributor in the quarter?

I don't know in the quarter, but maybe for the nine months, it was about $15 million. Yeah.

Very good. Thank you.

Yep.

We'll take our next question from Kevin Liu with K. Liu and Company. Your line is open.

Hi, good morning, guys, and let me add my congrats as well here. Maybe starting with your service provider business. Obviously, there are various competitive dynamics, and they're all kind of impacting both wireless folks and the traditional cable on the so a little differently. So just wondering, you know, what you're seeing in terms of kind of their appetite to spend, whether there's any sort of difference between kind of the two sides of the coin there.

Alright. So there is no they may have their own competitive dynamic between the carriers. There is no dynamic versus NetScout Systems, Inc. I mean, most of the players are privatized companies. They're much smaller than us, and in some sense, they're struggling for budgets and things like that. Yeah. We do have price pressures from them. And so when there is RFP, we have to deal with the next best player. And, usually, the competition is pricing, which sometimes affects our deal size. What is happening on the service provider side is, especially in the US, there have been big layoffs. And at some of the many companies, and despite some of the monetization opportunities of 5G slicing, there's constant pressure certainly in the service assurance area. But we are hoping there'll be less pressure even for these people in the cybersecurity and AI area. But our AI initiative is in its very early stage. So we think that the service assurance portion of the service provider will continue to be challenging next year also. But it'll be more than made up by good or better environment in DDoS. And definitely in the new areas of AI is all upside.

Understood. Appreciate the color there. And just wanted to parse out, you know, some of the impacts to you guys on the supply chain, specifically around component costs and availability. I know you guys ship more of it software only nowadays, but just wondering, you know, how you're feeling about your ability to maintain kind of your product gross margins given the cost environment. And then to your point on the kind of shortages potentially impacting timing, are your customers starting to order product from you with longer lead times and you'll you guys will carry more backlog? Or how are they responding to kind of the current shortages?

So lead time for NetScout Systems, Inc., very few people buy our appliance-based product with hardware comes from us, and we have enough supply there to deal with that. But we sell less and less of those nowadays. So the lead times of the hardware, buy directly from the server vendors like Dell and all those, those are really impacted, they might impact the timing of software orders also. And so far, we have not seen a big impact related to that, but moving forward, they could be tied together, and we might see some delayed orders. As it comes to margins, since we are not shipping the hardware, the increased cost for the servers which they use to run our software doesn't really impact our margins. It affects the timing and timing of the orders, definitely timing for deployment. But it doesn't affect the margin. Tariff impact has been very small, but yes, that impacts some margin only for short-term deals when a customer says I have allocated only so much money for the hardware, and so we may have to discount the software slightly, and it may have a small impact on the margin, but we have not seen much so far.

And I would just echo what Anil says. It's really more about does it affect our customers' timing and behavior versus our direct cost because the majority of our revenue is in services and software. And so in our cost of sales, the direct material cost isn't that significant. And so yeah, any implications on that can be managed or mitigated through either price increases, working with our vendors on absorption, or if we had to absorb something ourselves. So we don't see the cost element as material to us.

Understood. Thanks for taking the questions.

Thank you.

And this does conclude the question and answer portion of today's call. And this does conclude the NetScout Systems, Inc. Third Quarter Fiscal Year 2026 Financial Results Conference Call. Thank you for your participation. You may now disconnect.