NetScout Beats on Order Timing, Raises Full-Year Outlook

Date of Call: Feb 5, 2026

Financials Results

• Revenue: $250.7M for Q3, relatively consistent with $252M same period last year; $656M for first 9M, up 6% YOY
• EPS: $1 per diluted share for Q3, up 6.4% YOY; $1.96 for first 9M, up 15% YOY
• Gross Margin: 82.8% in Q3, consistent with prior year
• Operating Margin: 35.9% in Q3, up from 35.6% prior year

Guidance:

• Revenue for FY2026 expected in range of $835M to $870M, representing 3.6% YOY growth at midpoint, raised from prior $830M-$870M range.
• Non-GAAP EPS expected in range of $2.37 to $2.45, raised from prior $2.35-$2.45 range.
• Full year effective tax rate expected ~20%.

Business Commentary:

Revenue and Earnings Performance:

• NetScout Systems, Inc. reported third quarter revenue of $251 million, in line with the same period last fiscal year and ahead of expectations. For the first 9 months of fiscal year 2026, revenue was $656 million, reflecting a 6% year-over-year increase.
• The growth was driven by solid performance in both Cybersecurity and Service Assurance offerings, with certain product orders and service renewals accelerating from the fourth quarter.

Service Assurance and Cybersecurity Growth:

• Service Assurance revenue increased approximately 5% year-over-year, while Cybersecurity revenue grew by 9% for the first 9 months of fiscal year 2026.
• This growth was primarily due to strong enterprise customer verticals, especially in federal and nonfederal government-related spending for Service Assurance and increased investments in response to a dynamic cyber threat landscape for Cybersecurity.

Product and Service Revenue Trends:

• Product revenue was $121.7 million, compared with $128.2 million last year, while service revenue increased 4.1% to $129 million.
• The changes in product revenue were due to the timing of certain orders between quarters, and the service revenue increase reflected underlying growth and favorable timing of service renewal orders.

Gross and Operating Margins:

• Gross profit margin was maintained at 82.8%, consistent with the same period in the prior year, and operating margin increased slightly to 35.9%.
• The stability in gross margin was due to consistent performance, and the increase in operating margin reflected disciplined cost management and benefits from shifting certain events to different quarters.

Outlook and Guidance:

• NetScout raised its fiscal year 2026 revenue guidance to $835 million to $870 million, representing a 3.6% year-over-year growth at the midpoint, and adjusted its non-GAAP earnings per diluted share guidance to $2.37 to $2.45.
• The adjustments were based on the company's solid execution, continued demand for its solutions, and the resilience of its business model, despite potential timing-related factors and external challenges.

Sentiment Analysis:

Overall Tone: Positive

• Management stated 'Our third quarter fiscal year 2026 revenue and earnings results were ahead of expectations' and 'we are raising the midpoint of our top and bottom line outlook for fiscal year 2026.' The tone reflects optimism despite acknowledging cautious macro factors.

Q&A:

• Question from Simran Biswal (RBC Capital Markets): Can you comment on if some of those demand signals are actually improving?
  Response: Demand signals are similar or improving, though cautious about potential supply chain delays impacting order timing.

• Question from Simran Biswal (RBC Capital Markets): Could you quantify the pull-ins this quarter? And does your Q4 guide assume any additional deal pull-ins?
  Response: Pull-ins were approximately $15M; the guidance range does not factor in significant additional pull-ins.

• Question from Erik Suppiger (B. Riley Securities): Can you walk through just the -- how the budgets worked where customers were pulling orders from the March quarter into December?
  Response: Customers often have differing fiscal years; they may pull orders to use remaining budgets before new fiscal year starts.

• Question from Erik Suppiger (B. Riley Securities): Can you talk a little bit about the use case that is driving the Service Assurance business?
  Response: AI use cases involve leveraging NetScout's smart data for purposes beyond its own applications, such as for Splunk or Agentic AI, contributing about $15M over the first 9 months.

• Question from Kevin Liu (K. Liu & Company): What you're seeing in terms of kind of their appetite to spend, whether there's any sort of difference between kind of the 2 sides of the coin there?
  Response: Service provider spending is challenging due to layoffs and budget pressures, but Cybersecurity and AI areas present upside opportunities.

• Question from Kevin Liu (K. Liu & Company): How you're feeling about your ability to maintain kind of your product gross margins given the cost environment.
  Response: Increased server costs impact timing and may slightly affect short-term deal margins, but are not material due to software-driven model; tariff impacts have been small.

Contradiction Point 1

Primary Driver of Order Acceleration

Contradiction on whether order timing shifts are due to customer budget cycles or specific event-driven pull-ins.

Are any of those demand signals improving? - Simran Biswal (RBC Capital Markets)

2026Q3: Demand signals are similar or improving... The strong performance is driven more by timing of customer purchases rather than a fundamental shift in demand. - Anthony Piazza(CFO)

What caused the acceleration of second-half orders, and what drove the shift? - Simran Biswal (RBC Capital Markets)

2026Q2: The acceleration was driven by two main factors: 1) Orders from the U.S. federal government were received earlier than typical due to the fiscal year-end (September) and possibly in anticipation of a government shutdown. 2) The timing of maintenance renewals... - Anil Singhal(CEO), Anthony Piazza(CFO)

Contradiction Point 2

Impact of Tariffs on Business Costs

Contradiction on whether tariffs have had any cost impact on the company.

How are supply chain issues (component costs and availability) impacting product gross margins, and are customers ordering with longer lead times increasing backlog? - Kevin Liu (K. Liu & Company)

2026Q3: Tariffs have had a small impact, occasionally leading to minor software discounts. ... Any cost increases can be managed through price adjustments, vendor negotiations, or absorption. Margins are not materially impacted. - Anil Singhal(CEO), Anthony Piazza(CFO)

If tariffs are rolled back, what benefits would you expect for existing customers or your business? - Kevin Liu (K. Liu & Company)

2026Q2: NetScout has not seen any cost impact from tariffs, as its product assembly is largely within the U.S./Mexico/Canada area protected by trade agreements. - Anil Singhal(CEO), Anthony Piazza(CFO)

Contradiction Point 3

Assessment of Macroeconomic and Service Provider Spending Climate

The outlook for service provider spending shifts from stable to facing significant budget pressure.

How does service provider spending appetite differ between wireless carriers and traditional cable MSOs? - Kevin Liu (K. Liu & Company)

2026Q3: The Service Assurance segment faces ongoing budget pressure, particularly in the U.S. due to carrier layoffs. - Anil Singhal(CEO)

How have the macro environment and service provider spending outlook for FY26 changed compared to 90 days ago and last year? - Simran Biswal (RBC Capital Markets)

2026Q1: For service provider spending, comparing year-over-year is challenging due to lumpy deals; however, the overall spending climate looks similar to the previous year. - Anil Singhal(CEO)

Contradiction Point 4

Impact of Tax Bill on Service Provider Investments

The assessment of a tax bill's effect on customer spending shifts from no observed impact to acknowledging potential budget acceleration tactics.

How did budgeting handle orders pulled from the March quarter into December, and what are the AI-driven use cases in the Service Assurance business? - Erik Suppiger (B. Riley Securities)

2026Q3: Customers often have different fiscal years; sometimes they accelerate spending in Q3 (their Q4) to use remaining budgets before new fiscal year planning is finalized. - Anil Singhal(CEO)

How are service provider customers responding to the recent tax bill in terms of planned incremental network investments, and how might this impact your business? - Kevin Liu (K. Liu & Company)

2026Q1: The company has not heard of any specific impact from the tax bill on service provider investments this year. Past tax changes have not translated into significant changes in business for NETSCOUT. - Anil Singhal(CEO)

Contradiction Point 5

Customer Demand Signals and Order Timing

Contradiction on whether demand is fundamentally robust or subject to timing shifts.

Are any of those demand signals improving? - Simran Biswal (RBC Capital Markets)

2026Q3: Demand signals are similar or improving, but caution is advised due to potential supply chain challenges that could affect order timing. - Anil Singhal(CEO)

What are customers' concerns about tariffs, and does the guidance account for macroeconomic risks, uncertainty, or deal delays? - Michael Steven Richards (RBC Capital Markets)

2025Q4: Currently, NetScout sees some delayed sales cycles and quarter-to-quarter timing issues. - Anil Singhal(CEO)