NetScout's Q2 2026: Contradictions Emerge on Tariff Impacts, Software vs. Hardware Demand, and Government Order Effects

Date of Call: November 6, 2025

Financials Results

• Revenue: $219.0M, up 14.6% YOY
• EPS: $0.62 per diluted share, up 31.9% YOY
• Gross Margin: 81.4%, up 1.7 percentage points YOY
• Operating Margin: 26.5%, compared with 23.1% in the same quarter last year

Guidance:

• Full-year revenue raised to $830M–$870M (prior range $825M–$865M)
• Full-year non-GAAP diluted EPS raised to $2.35–$2.45 (prior range $2.25–$2.40)
• Full-year effective tax rate ~20% and ~73M weighted average diluted shares assumed
• Q3 revenue expected $230M–$240M; Q3 non-GAAP diluted EPS $0.83–$0.88
• Company intends to remain active in share repurchases subject to market conditions

Business Commentary:

* Revenue Growth and AI-Driven Innovation: - NetScout Systems reported revenue of $219 million for Q2 FY 2026, up 14.6% year-over-year, driven by solid growth in both cybersecurity and service assurance areas. - The growth was driven by acceleration of certain orders and AI-driven product innovation.

• Federal Government and Service Provider Performance:
• Revenue from the federal government exceeded 10% of total revenue in Q2, with significant growth driven by accelerated orders due to federal government shutdown preparation.

• Service Provider revenue also grew, partially due to favorable timing of maintenance renewals.

• Cybersecurity Market Demand and Solution Adoption:

• Cybersecurity revenue increased by nearly 13% year-over-year, reflecting customer needs to protect against evolving cyber threats.

• Growth was driven by demand for solutions that address sophisticated Distributed Denial-of-Service (DDoS) attacks and provide comprehensive network visibility.

• Gross Margin Expansion and Product Mix:

• NetScout's gross profit margin increased by 1.7 percentage points to 81.4% in Q2, primarily due to product volume and mix.
• The expansion was attributed to the acceleration of certain orders and strategic product focus.

Sentiment Analysis:

Overall Tone: Positive

• Management described a "solid quarter" with "strong top and bottom line performance," raised revenue and EPS outlooks, and cited specific metrics: Q2 revenue $219M (+14.6% YOY) and diluted EPS $0.62 (+~32% YOY). Management highlighted margin expansion and new product momentum (AI/AIOps, Adaptive DDoS) as drivers of confidence.

Q&A:

• Question from Simran Biswal (RBC Capital Markets): Could you talk about the acceleration of orders originally expected in the second half and what drove that shift? And comment on federal demand trends?
  Response: Acceleration was driven by federal fiscal-year timing and the recognition of large maintenance renewals; some customers pulled orders into Q2 to prepare for a potential federal government shutdown, resulting in a strong federal quarter.

• Question from Simran Biswal (RBC Capital Markets): On GenAI, what's resonating with customers on your AIOps offering and how are Enterprise customers leaning into it?
  Response: NETSCOUT is differentiating by providing 'smart data' telemetry (via AI Sensor/AI Insight) to third-party AI and observability platforms so customers can apply their algorithms to higher-fidelity data, improving outcomes rather than relying on proprietary algorithms.

• Question from Erik Suppiger (B. Riley Securities): The >10% customer — was that service provider, federal or enterprise?
  Response: The customer representing over 10% of quarterly revenue was federal, booked via a channel partner.

• Question from Erik Suppiger (B. Riley Securities): Can you discuss how DDoS attacks are evolving and whether end customers can defend against these changes?
  Response: DDoS has evolved into multi-target 'carpet bombing' botnet attacks that overwhelm many machines simultaneously; NETSCOUT combined Arbor with scalable DPI and offers Adaptive DDoS to address these sophisticated, evolving attacks.

• Question from Erik Suppiger (B. Riley Securities): What is the timing of this DDoS evolution and product response?
  Response: Adaptive DDoS was released last year, is sold as a subscription with periodic (about every six months) updates to address new attacks, and is already contributing revenue.

• Question from Kevin Liu (K. Liu & Company LLC): Regarding the government shutdown, what's happening with the pipeline — are deals paused and is there a fulfillable backlog?
  Response: The federal pull-forward created a fulfillable backlog that has been fulfilled; nonfederal and federal businesses haven't been materially affected yet, but management is monitoring potential shutdown risk in the second half.

• Question from Kevin Liu (K. Liu & Company LLC): If tariffs are rolled back, what benefits would you expect for customers or your business?
  Response: To date there has been no material impact; much production is within US/Canada/Mexico and protected by agreements; tariff changes could affect end-user pricing for hardware but haven’t materially affected margins or demand yet.

• Question from Kevin Liu (K. Liu & Company LLC): Product gross margin was high this quarter — what's driving that and is it sustainable?
  Response: The high product gross margin (high-80% this quarter vs typical mid-80s) was driven by a software-heavy mix; management expects continued shift toward software-related sales, supporting elevated margins going forward.

Contradiction Point 1

Impact of Tariffs on Sales Cycles

It highlights differing perspectives on the impact of tariffs on sales cycles, which can affect revenue projections and investor confidence.

What benefits would you expect if tariffs are rolled back, including those from your existing customer base or your own impacted business? - Kevin Liu(K. Liu & Company)

2026Q2: We have not experienced any detriment from tariffs. Our products are sourced from Canada, the U.S., and Mexico, which are protected by various agreements. Potential impacts from changed customer behavior are being monitored. - Anthony Piazza(CFO)

Can you elaborate on customer concerns about tariffs and whether guidance accounts for macroeconomic deterioration, uncertainty, or deal-driven impacts? - Michael Steven Richards(RBC Capital Markets)

2025Q4: Currently, we see some delayed sales cycles, which is evident quarter-to-quarter. We are attending broader conferences in Europe and Asia to gather direct sentiment from customers. Our guidance range covers some uncertainties, but we await further clarity on sales timelines from some customers. - Anil Singhal(CEO)

Contradiction Point 2

Customer Demand for Software vs. Hardware

It involves differing statements on customer preferences for software-only solutions versus hardware-based solutions, which can impact product strategy and revenue streams.

What marketing strategies or product demand are driving the high product gross margin, and how sustainable is this level? - Kevin Liu(K. Liu & Company)

2026Q2: Our solution requires hardware, but we unbundle and promote software as much as possible. Most customers prefer the software version as it offers better pricing and higher discounts. - Anil Singhal(CEO)

Are you seeing increased customer interest in software-only solutions? - Kevin Liu(K. Liu & Co.)

2025Q4: Most customers prefer the software version as it offers better pricing and higher discounts. - Anil Singhal(CEO)

Contradiction Point 3

Government Sales and Federal Order Impact

It addresses the impact of government shutdowns and federal orders on sales cycles and revenue projections.

What drove the acceleration of Q4 orders originally expected in H2? What are the demand trends related to the Fed initiative? - Simran Biswal(RBC Capital Markets)

2026Q2: We expect an impact on our fiscal 2026 results from the October federal government shutdown. The exact magnitude of the impact is not yet ascertainable as we await further clarity on the duration and timing of the federal government orders. - Anthony Piazza(CFO)

Did the headlines impact your government/defense business sales cycles this quarter? How do you expect federal contributions to factor into your fiscal 2026 guidance? - Kevin Liu(K. Liu & Co.)

2025Q4: A product refresh cycle is expected in government sales. So far, we have not seen impacts, but the rest of the year will give more clarity as to whether our pipeline materializes. - Anil Singhal(CEO)

Contradiction Point 4

Future Revenue and Spending Priorities

It relates to the company's expectations for future revenue growth and customer spending priorities, which are crucial for investors and strategic planning.

Can you explain the acceleration of orders originally scheduled for the second half and what caused this change? - Simran Biswal (RBC Capital Markets)

2026Q2: Next fiscal year's spend is expected to focus on 5G, cloud, and slicing opportunities. - Anil Singhal(CEO)

Is there an upswing in service provider spending, and what are the investment areas? - Kevin Liu (K. Liu & Company)

2025Q3: Next year's spend will focus on these areas rather than traditional mobile service assurance. - Anil Singhal(CEO)

Contradiction Point 5

Impact of Government Shutdown on Orders

It involves the effects of a government shutdown on order fulfillment and the impact on government business, which could influence revenue projections.

How is the existing pipeline affected by the government shutdown? - Kevin Liu (K. Liu & Company)

2026Q2: There was backlog related to the federal government order, which has already been fulfilled. - Anthony Piazza(CFO)

Can you elaborate on the $10 million budget pull-forward from service providers and the broader IT spending trends? - Matthew Hedberg (RBC Capital Markets)

2025Q3: The spending has been pushed out and will show up in the second half of this year as we receive the orders compared to the first half. - Anil Singhal(CEO)