10-Q 1 ntct-20220630.htm 10-Q ntct-20220630
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2022
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
         
Commission file number 000-26251
NETSCOUT SYSTEMS, INC.
(Exact Name of Registrant as Specified in Its Charter)
Delaware 04-2837575
(State or Other Jurisdiction of
Incorporation or Organization)
 (IRS Employer
Identification No.)
310 Littleton Road, Westford, MA 01886
(978) 614-4000
Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered:
Common Stock, $0.001 par value per shareNTCTNasdaq Global Select Market

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes      No  
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes      No  
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):
        Large accelerated filer              Accelerated filer                 
        Non-accelerated filer                Smaller reporting company    
                            Emerging growth company    
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes      No  
The number of shares outstanding of the registrant's common stock, par value $0.001 per share, as of July 27, 2022 was 71,484,137.


NETSCOUT SYSTEMS, INC.
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 2022
TABLE OF CONTENTS
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
Item 1.
Item 2.
Item 3.
Item 4.
Item 1.
Item 1A.
Item 2.
Item 3.Defaults Upon Senior Securities
Item 4.Mine Safety Disclosures
Item 5.Other Information
Item 6.

Unless the context suggests otherwise, references in this Quarterly Report on Form 10-Q, or Quarterly Report, to "NetScout," the "Company," "we," "us," and "our" refer to NetScout Systems, Inc. and, where appropriate, our consolidated subsidiaries.

NetScout, the NetScout logo, Adaptive Service Intelligence and other trademarks or service marks of NetScout appearing in this Quarterly Report are the property of NetScout Systems, Inc. and/or its subsidiaries and/or affiliates in the United States and/or other countries. Any third-party trade names, trademarks and service marks appearing in this Quarterly Report are the property of their respective holders.






Cautionary Statement Concerning Forward-Looking Statements

In addition to historical information, the following discussion and other parts of this Quarterly Report contain forward-looking statements under Section 21E of the Securities Exchange Act of 1934, as amended, and other federal securities laws. These forward-looking statements involve risks and uncertainties. These statements relate to future events or our future financial performance and are identified by terminology such as "may," "will," "could," "should," "expects," "plans," "intends," "seeks," "anticipates," "believes," "estimates," "potential," or "continue," or the negative of such terms or other comparable terminology. These statements are only predictions. You should not place undue reliance on these forward-looking statements. The outcome of the events described in these forward-looking statements is subject to risks, uncertainties, and other factors, including those described in Part I, Item 1A. Risk Factors in our Annual Report on Form 10-K for our fiscal year ended March 31, 2022, filed with the Securities and Exchange Commission, and elsewhere in this Quarterly Report. These factors may cause our actual results to differ materially from any forward-looking statement. Moreover, we operate in a very competitive and rapidly changing environment. New risks and uncertainties emerge from time to time, and it is not possible for us to predict all risks and uncertainties that could have an impact on the forward-looking statements contained in this Quarterly Report on Form 10-Q. We cannot assure you that the results, events, and circumstances reflected in the forward-looking statements will be achieved or occur, and actual results, events, or circumstances could differ materially from those described in the forward-looking statements.
The forward-looking statements made in this Quarterly Report on Form 10-Q relate only to events as of the date on which the statements are made. We undertake no obligation to update any forward-looking statements made in this Quarterly Report on Form 10-Q to reflect events or circumstances after the date of this Quarterly Report on Form 10-Q or to reflect new information or the occurrence of unanticipated events, except as required by law. We may not actually achieve the plans, intentions, or expectations disclosed in our forward-looking statements and you should not place undue reliance on our forward-looking statements. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures, or investments we may make.

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PART I: FINANCIAL INFORMATION
Item 1. Unaudited Financial Statements
NetScout Systems, Inc.
Consolidated Balance Sheets
(In thousands, except share data)
 
June 30,
2022
March 31,
2022
(Unaudited)
Assets
Current assets:
Cash and cash equivalents$332,502 $636,161 
Marketable securities42,144 67,037 
Accounts receivable and unbilled costs, net of allowance for doubtful accounts of $1,614 and $1,649 at June 30, 2022 and March 31, 2022, respectively
112,889 148,245 
Inventories and deferred costs22,840 28,220 
Prepaid income taxes21,271 9,349 
Prepaid expenses and other current assets 31,749 32,927 
Total current assets563,395 921,939 
Fixed assets, net40,328 41,337 
Operating lease right-of-use assets52,473 54,996 
Goodwill1,726,200 1,723,156 
Intangible assets, net414,950 433,419 
Deferred income taxes6,646 6,883 
Other assets12,643 12,979 
Total assets$2,816,635 $3,194,709 
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $19,848 $21,959 
Accrued compensation51,000 75,788 
Accrued other33,194 32,064 
Income taxes payable2,924 4,353 
Deferred revenue and customer deposits297,243 330,585 
Current portion of operating lease liabilities10,985 11,411 
Total current liabilities415,194 476,160 
Other long-term liabilities7,642 7,470 
Deferred tax liability75,192 78,899 
Accrued long-term retirement benefits33,688 34,737 
Long-term deferred revenue and customer deposits126,621 133,121 
Operating lease liabilities, net of current portion51,409 53,927 
Long-term debt200,000 350,000 
Total liabilities909,746 1,134,314 
Commitments and contingencies (Note 13)
Stockholders' equity:
Preferred stock, $0.001 par value:
5,000,000 shares authorized; no shares issued or outstanding at June 30, 2022 and March 31, 2022
  
Common stock, $0.001 par value:
300,000,000 shares authorized; 127,371,813 and 126,425,383 shares issued and 71,483,821 and 74,102,293 shares outstanding at June 30, 2022 and March 31, 2022, respectively
127 126 
Additional paid-in capital2,993,163 3,023,403 
Accumulated other comprehensive income (loss)(147)141 
Treasury stock at cost, 55,887,992 and 52,323,090 shares at June 30, 2022 and March 31, 2022, respectively
(1,489,687)(1,373,840)
Retained earnings403,433 410,565 
Total stockholders' equity1,906,889 2,060,395 
Total liabilities and stockholders' equity$2,816,635 $3,194,709 
The accompanying notes are an integral part of these consolidated financial statements.
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NetScout Systems, Inc.
Consolidated Statements of Operations
(In thousands, except per share data)
(Unaudited)
 
 Three Months Ended
June 30,
 20222021
Revenue:
Product$98,251 $81,950 
Service110,561 108,322 
Total revenue208,812 190,272 
Cost of revenue:
Product 26,805 23,165 
Service30,909 31,245 
Total cost of revenue57,714 54,410 
Gross profit151,098 135,862 
Operating expenses:
Research and development43,457 42,820 
Sales and marketing 76,323 65,958 
General and administrative 24,790 22,745 
Amortization of acquired intangible assets13,881 15,006 
Restructuring charges1,774  
Total operating expenses160,225 146,529 
Loss from operations(9,127)(10,667)
Interest and other expense, net:
Interest income276 63 
Interest expense(1,864)(2,154)
Other income (expense), net230 (329)
Total interest and other expense, net(1,358)(2,420)
Loss before income tax benefit(10,485)(13,087)
Income tax benefit(3,353)(1,746)
Net loss$(7,132)$(11,341)
  Basic net loss per share$(0.10)$(0.15)
  Diluted net loss per share$(0.10)$(0.15)
Weighted average common shares outstanding used in computing:
Net loss per share - basic72,452 73,859 
Net loss per share - diluted72,452 73,859 
The accompanying notes are an integral part of these consolidated financial statements.
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NetScout Systems, Inc.
Consolidated Statements of Comprehensive Loss
(In thousands)
(Unaudited)
 
Three Months Ended
 June 30,
 20222021
Net loss$(7,132)$(11,341)
Other comprehensive income (loss):
Cumulative translation adjustments(251)19 
Changes in market value of investments:
Changes in unrealized losses, net of tax benefit of ($3), and ($1), respectively
(11)(5)
Total net change in market value of investments(11)(5)
Changes in market value of derivatives:
Changes in market value of derivatives, net of (benefit) taxes of ($46), and $40, respectively
(148)129 
Reclassification adjustment for net gains (losses) included in net loss, net of taxes (benefit) of $38, and ($25), respectively
122 (80)
Total net change in market value of derivatives(26)49 
Other comprehensive income (loss)(288)63 
Total comprehensive loss$(7,420)$(11,278)
The accompanying notes are an integral part of these consolidated financial statements.
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NetScout Systems, Inc.
Consolidated Statements of Stockholders' Equity
(In thousands, except share data)
(Unaudited)
Three Months Ended June 30, 2022
 Common Stock
Voting
Additional
Paid In
Capital
Accumulated
Other
Comprehensive
Income (Loss)
Treasury StockRetained
Earnings
Total
Stockholders'
Equity
 SharesPar
Value
SharesStated
Value
Balance, March 31, 2022126,425,383 $126 $3,023,403 $141 52,323,090 $(1,373,840)$410,565 $2,060,395 
Net loss(7,132)(7,132)
Unrealized net investment losses(11)(11)
Unrealized net loss on derivative financial instruments(26)(26)
Cumulative translation adjustments(251)(251)
Issuance of common stock pursuant to vesting of restricted stock units946,430 1 1 
Stock-based compensation expense for restricted stock units granted to employees14,760 14,760 
Repurchase of treasury stock(45,000)3,564,902 (115,847)(160,847)
Balance, June 30, 2022127,371,813$127 $2,993,163 $(147)55,887,992$(1,489,687)$403,433 $1,906,889 

Three Months Ended June 30, 2021
 Common Stock VotingAdditional Paid In CapitalAccumulated Other Comprehensive Income (Loss)Treasury StockRetained EarningsTotal Stockholders’ Equity
 SharesPar ValueSharesStated Value
Balance, March 31, 2021124,197,974$124 $2,955,400 $(1,940)50,446,359$(1,322,496)$374,691 $2,005,779 
Net loss(11,341)(11,341)
Unrealized net investment losses(5)(5)
Unrealized net gains on derivative financial instruments49 49 
Cumulative translation adjustments19 19 
Issuance of common stock pursuant to vesting of restricted stock units496,763  
Stock-based compensation expense for restricted stock units granted to employees13,231 13,231 
Repurchase of treasury stock164,133(4,777)(4,777)
Balance, June 30, 2021124,694,737$124 $2,968,631 $(1,877)50,610,492$(1,327,273)$363,350 $2,002,955 


The accompanying notes are an integral part of these consolidated financial statements.
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NetScout Systems, Inc.
Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
 Three Months Ended
June 30,
 20222021
Cash flows from operating activities:
Net loss$(7,132)$(11,341)
Adjustments to reconcile net loss to cash provided by operating activities, net of the effects of acquisitions:
Depreciation and amortization21,585 24,237 
Operating lease right-of-use assets2,663 2,679 
Loss on disposal of fixed assets 1 
Share-based compensation expense15,581 13,965 
Deferred income taxes(3,290)(2,896)
Other losses 217 
Changes in assets and liabilities
Accounts receivable and unbilled costs35,266 51,773 
Inventories4,156 1,132 
Prepaid expenses and other assets(10,793)(7,416)
Accounts payable(2,483)(1,084)
Accrued compensation and other expenses(23,772)(29,432)
Operating lease liabilities(3,085)(2,984)
Income taxes payable(1,607)(1,461)
Deferred revenue(39,610)(13,334)
                Net cash (used in) provided by operating activities(12,521)24,056 
Cash flows from investing activities:
Purchase of marketable securities(27,691)(5,696)
Proceeds from sales and maturity of marketable securities52,570 8,230 
Purchase of fixed assets(2,201)(2,578)
Purchase of intangible assets(161) 
Decrease in deposits5 12 
                Net cash provided by (used in) investing activities22,522 (32)
Cash flows from financing activities:
Issuance of common stock under stock plans1  
Treasury stock repurchases, including accelerated share repurchases(150,039) 
Tax withholding on restricted stock units(10,808)(4,777)
Repayment of long-term debt(150,000) 
                Net cash used in financing activities(310,846)(4,777)
Effect of exchange rate changes on cash and cash equivalents(2,814)745 
Net (decrease) increase in cash and cash equivalents(303,659)19,992 
Cash and cash equivalents, beginning of period636,161 467,176 
Cash and cash equivalents, end of period$332,502 $487,168 
Supplemental disclosures:
Cash paid for interest$1,310 $1,393 
Cash paid for income taxes$13,179 $12,730 
Non-cash transactions:
Transfers of inventory to fixed assets$1,212 $949 
Additions to property, plant and equipment included in accounts payable$382 $76 
The accompanying notes are an integral part of these consolidated financial statements.
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NetScout Systems, Inc.
Notes to Consolidated Financial Statements
(Unaudited)
NOTE 1 – BASIS OF PRESENTATION
The accompanying unaudited interim consolidated financial statements have been prepared by NetScout Systems, Inc. (NetScout or the Company). Certain information and footnote disclosures normally included in financial statements prepared under United States generally accepted accounting principles (GAAP) have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). In the opinion of management, the unaudited interim consolidated financial statements include all adjustments, consisting of normal recurring adjustments, necessary for a fair statement of the Company's financial position and stockholders' equity, results of operations and cash flows. The year-end consolidated balance sheet data and statement of stockholders' equity were derived from the Company's audited financial statements, but do not include all disclosures required by GAAP. The results reported in these unaudited interim consolidated financial statements are not necessarily indicative of results that may be expected for the entire year. All significant intercompany accounts and transactions are eliminated in consolidation.
These unaudited interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements, including the notes thereto, included in the Company's Annual Report on Form 10-K for the fiscal year ended March 31, 2022 filed with the Securities and Exchange Commission on May 19, 2022.
COVID-19 Risks and Uncertainties
The Company is closely monitoring the impact of the COVID-19 pandemic on all aspects of its business. The future impacts of the pandemic and any resulting economic impact on the Company's operations are evolving. It is possible that the measures taken by the governments of countries affected and the resulting economic impact may materially and adversely affect the Company's future results of operations, cash flows and financial position as well as its customers.
The Company has the responsibility to evaluate whether conditions and/or events raise substantial doubt about its ability to meet its future financial obligations as they become due within one year after the date that the financial statements are issued. The Company has taken and continues to take precautionary actions to manage costs and spending across the organization. This includes managing discretionary spending and hiring activities. In addition, based on covenant levels, the Company had, as of June 30, 2022, an incremental $600 million available under its 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 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. The Company had elected to defer the employer-paid portion of social security taxes. As of June 30, 2022, the Company had deferred $4.5 million of employer payroll taxes, which is required to be deposited by December 2022. The balance of $4.5 million was included as accrued other in the Company's consolidated balance sheet at June 30, 2022.
The Company expects net cash provided by operations combined with cash, cash equivalents, and marketable securities and borrowing availability under the 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.
Recent Accounting Pronouncements
In October 2021, the FASB issued ASU 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers, which requires companies to recognize and measure contract assets and contract liabilities acquired in a business combination as if the acquiring company originated the related revenue contracts. ASU 2021-08 is effective for fiscal years beginning after December 15, 2022, with early adoption permitted. ASU 2021-08 is effective for the Company beginning April 1, 2023. Amendments within the standard are required to be applied on a prospective basis from the date of adoption. The adoption is not expected to have a material impact on the Company's financial position, results of operations, and disclosures. We will apply the provisions of ASU 2021-08 after adoption to future acquisitions, if any.
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. The amendments provide optional guidance for a limited time to ease the potential burden in accounting for reference rate reform. The new guidance provides optional expedients and exceptions for applying U.S. GAAP to contracts, hedging relationships and other transactions affected by reference rate reform if certain criteria are met. The amendments apply only to contracts and hedging relationships that reference LIBOR or another reference rate expected to be discontinued due to reference rate reform. In January 2021, the FASB issued ASU 2021-01, Reference Rate Reform, which clarifies the scope and application of certain optional expedients and exceptions regarding the original guidance.
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ASU 2021-01 may be applied prospectively through December 31, 2022. The expedients and exceptions provided by the amendments do not apply to contract modifications made and hedging relationships entered into or evaluated after December 31, 2022, that an entity has elected certain optional expedients for and that are retained through the end of the hedging relationship. The adoption is not expected to have a material impact on the Company's financial position, results of operations, and disclosures.
NOTE 2 – REVENUE
Revenue Recognition Policy
The Company exercises judgment and uses estimates in connection with determining the amounts of product and service revenues to be recognized in each accounting period.
The Company derives revenues primarily from the sale of network management tools and security solutions for service provider and enterprise customers, which include hardware, software and service offerings. The Company's product sales consist of software only offerings and offerings which include hardware appliances with embedded software that are essential to providing customers the intended functionality of the solutions.
The Company accounts for revenue once a legally enforceable contract with a customer has been approved by the parties and the related promises to transfer products or services have been identified. A contract is defined by the Company as an arrangement with commercial substance identifying payment terms, each party’s rights and obligations regarding the products or services to be transferred and the amount the Company deems probable of collection. Customer contracts may include promises to transfer multiple products and services to a customer. Determining whether the products and services are considered distinct performance obligations that should be accounted for separately or as one combined performance obligation may require significant judgment. Revenue is recognized when control of the products or services are transferred to the Company's customers, in an amount that reflects the consideration the Company expects to be entitled to in exchange for products and services.
Product revenue is typically recognized upon shipment, provided a legally enforceable contract exists, control has passed to the customer, and in the case of software products, when the customer has the rights and ability to access the software, and collection of the related receivable is probable. If any significant obligations to the customer remain post-delivery, typically involving obligations relating to installation and acceptance by the customer, revenue recognition is deferred until such obligations have been fulfilled. The Company's service offerings include installation, integration, extended warranty and maintenance services, post-contract customer support, stand-ready software-as-a-service (SAAS) and other professional services including consulting and training. The Company generally provides software and/or hardware support as part of product sales. Revenue related to the initial bundled software and hardware support is recognized ratably over the support period. In addition, customers can elect to purchase extended support agreements for periods after the initial software/hardware warranty expiration. Support services generally include rights to unspecified upgrades (when and if available), telephone and internet-based support, updates, bug fixes and hardware repair and replacement. Consulting services are recognized upon delivery or completion of performance depending on the terms of the underlying contract. Reimbursements of out-of-pocket expenditures incurred in connection with providing consulting services are included in services revenue, with the offsetting expense recorded in cost of service revenue. Training services include on-site and classroom training. Training revenues are recognized upon delivery of the training.
Generally, the Company's contracts are accounted for individually. However, when contracts are closely interrelated and dependent on each other, it may be necessary to account for two or more contracts as one to reflect the substance of the group of contracts.
Bundled arrangements are concurrent customer purchases of a combination of the Company's product and service offerings that may be delivered at various points in time. The Company allocates the transaction price among the performance obligations in an amount that depicts the relative standalone selling prices (SSP) of each obligation. Judgment is required to determine the SSP for each distinct performance obligation. The Company uses a range of amounts to estimate SSP when it sells each of the products and services separately based primarily on the performance obligation's historical pricing. The Company also considers its overall pricing objectives and practices across different sales channels and geographies, and market conditions. Generally, the Company has established SSP for a majority of its service performance obligations based on historical standalone sales. In certain instances, the Company has established SSP for services based upon an estimate of profitability and the underlying cost to fulfill those services. SSP has primarily been established for product performance obligations as the average or median selling price the performance obligation was recently sold for, whether sold alone or sold as part of a bundle transaction. The Company reviews sales of the product performance obligations on a quarterly basis and updates, when appropriate, its SSP for such performance obligations to ensure that it reflects recent pricing experience. The Company's products are distributed through its direct sales force and indirect distribution channels through alliances with resellers and distributors. Revenue arrangements with resellers and distributors are recognized on a sell-in basis; that is, when
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control of the product transfers to the reseller or distributor. The Company records consideration given to a customer as a reduction of revenue to the extent they have recorded revenue from the customer. With limited exceptions, the Company's return policy does not allow product returns for a refund. Returns have been insignificant to date. In addition, the Company has a history of successfully collecting receivables from its resellers and distributors.
During the three months ended June 30, 2022, the Company recognized revenue of $114.1 million related to the Company's deferred revenue balance reported at March 31, 2022.
Performance Obligations
Customer contracts may include promises to transfer multiple products and services to a customer. Determining whether the products and services are considered distinct performance obligations that should be accounted for separately or as one combined performance obligation may require significant judgment. The transaction price is allocated among performance obligations in bundled contracts in an amount that depicts the relative standalone selling prices of each obligation.
For contracts involving distinct hardware and software licenses, the performance obligations are satisfied at a point in time when control is transferred to the customer. For standalone maintenance and post-contract support (PCS) the performance obligation is satisfied ratably over the contract term as a stand-ready obligation. For consulting and training services, the performance obligation may be satisfied over the contract term as a stand-ready obligation, satisfied over a period of time as those services are delivered, or satisfied at the completion of the service when control has transferred, or the services have expired unused.
Payments for hardware, software licenses, one-year maintenance, PCS and consulting services, are typically due up front with payment terms of 30 to 90 days. However, the Company does have contracts pursuant to which billings occur ratably over a period of years following the transfer of control for the contracted performance obligations. Payments on multi-year maintenance, PCS and consulting services are typically due in annual installments over the contract term. The Company did not have any material variable consideration such as obligations for returns, refunds or warranties at June 30, 2022.
At June 30, 2022, the Company had total deferred revenue of $423.9 million, which represents the aggregate total contract price allocated to undelivered performance obligations. The Company expects to recognize $297.3 million, or 70%, of this revenue during the next 12 months, and expects to recognize the remaining $126.6 million, or 30%, of this revenue thereafter.
Because of NetScout's revenue recognition policies, there are circumstances for which the Company does not recognize revenue relating to sales transactions that have been billed, but the related account receivable has not been collected. While the receivable represents an enforceable obligation, the Company does not believe its right to payment is unconditional, therefore for balance sheet presentation purposes, the Company has not recognized the deferred revenue or the related account receivable and no amounts appear in the consolidated balance sheets for such transactions because control of the underlying deliverable has not transferred. The aggregate amount of unrecognized accounts receivable and deferred revenue was $5.5 million and $9.4 million at June 30, 2022 and March 31, 2022, respectively.
NetScout expects that the amount of billed and unbilled deferred revenue will change from quarter to quarter for several reasons, including the specific timing, duration and size of large customer support and service agreements, varying billing cycles of such agreements, the specific timing of customer renewals, and foreign currency fluctuations. The Company did not have material significant financing components, or variable consideration or performance obligations satisfied in a prior period recognized during the three months ended June 30, 2022.
Contract Balances
The Company may receive payments from customers based on billing schedules as established by the Company's contracts. Contract assets relate to performance obligations where control has transferred to the customer in advance of scheduled billings. The Company records unbilled accounts receivable representing the right to consideration in exchange for goods or services that have been transferred to a customer conditional on the passage of time. Deferred revenue relates to scenarios where billings with an unconditional right to payment occur before all performance obligations are delivered or payments are received in advance of performance under the contract.
Costs to Obtain Contracts
The Company has determined that the only significant incremental costs incurred to obtain contracts with customers within the scope of Topic 606 are sales commissions paid to its employees. Sales commissions are recorded as an asset and amortized to expense ratably over the remaining performance periods of the related contracts with remaining performance obligations. The Company expenses costs as incurred for sales commissions when the amortization period would have been one year or less.
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At June 30, 2022, the consolidated balance sheet included $9.6 million in assets related to sales commissions to be expensed in future periods. A balance of $5.2 million was included in prepaid expenses and other current assets, and a balance of $4.4 million was included in other assets in the Company's consolidated balance sheet at June 30, 2022. At March 31, 2022, the consolidated balance sheet included $8.8 million in assets related to sales commissions to be expensed in future periods. A balance of $4.6 million was included in prepaid expenses and other current assets, and a balance of $4.2 million was included in other assets in the Company's consolidated balance sheet at March 31, 2022.
During the three months ended June 30, 2022 and 2021, respectively, the Company recognized $1.7 million and $1.6 million of amortization related to this sales commission asset, which is included in the sales and marketing expense line in the Company's consolidated statements of operations.
Allowance for Credit Losses
The Company continually monitors collections from its customers. The Company evaluates the collectability of its accounts receivable and determines the appropriate allowance for credit losses based on a combination of factors, including but not limited to, analysis of the aging schedules, past due balances, historical collection experience and prevailing economic conditions.
The following table summarizes the activity in the allowance for credit losses (in thousands):
Balance at March 31, 2022$1,649 
     Provision for allowance for credit losses(130)
     Recoveries and other adjustments136 
     Write off charged against the allowance for credit losses(41)
Balance at June 30, 2022$1,614 

NOTE 3 – CONCENTRATION OF CREDIT RISK AND SIGNIFICANT CUSTOMERS
Financial instruments that potentially subject the Company to concentration of credit risk consist primarily of investments, trade accounts receivable and accounts payable. The Company's cash, cash equivalents, and marketable securities are placed with financial institutions with high credit standings.
At June 30, 2022, the Company had one direct customer which accounted for more than 10% of the accounts receivable balance, while no indirect channel partners accounted for more than 10% of the accounts receivable balance. At March 31, 2022, the Company had no direct customers or indirect channel partners which accounted for more than 10% of the accounts receivable balance.
During the three months ended June 30, 2022, two direct customers, AT&T and Verizon, accounted for more than 10% of the Company's total revenue, while no indirect channel partners accounted for more than 10% of total revenue. During the three months ended June 30, 2021, no direct customers or indirect channel partners accounted for more than 10% of the Company's total revenue.
Historically, the Company has not experienced any significant failure of its customers' ability to meet their payment obligations nor does the Company anticipate material non-performance by its customers in the future; accordingly, the Company does not require collateral from its customers. However, if the Company's assumptions are incorrect, there could be an adverse impact on its allowance for doubtful accounts.
NOTE 4 – SHARE-BASED COMPENSATION
On September 12, 2019, the Company's stockholders approved the 2019 Equity Incentive Plan (2019 Plan), which replaced the Company's 2007 Equity Incentive Plan, as amended (Amended 2007 Plan). The 2019 Plan permits the granting of incentive and nonstatutory stock options, stock appreciation rights, restricted stock awards, restricted stock unit awards, and other stock awards, collectively referred to as "share-based awards."
On September 10, 2020, the Company's stockholders approved an amendment and restatement of the 2019 Plan (2019 Amended Plan) to increase the number of shares reserved for issuance by 4,700,000 shares, established a one-year minimum vesting requirement for awards granted on or after September 10, 2020, and changed the factor used to calculate the increase or reduction in the number of shares available for issuance under the 2019 Amended Plan.
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Periodically, the Company grants share-based awards to employees, officers, and directors of the Company and its subsidiaries. During the fiscal year ended March 31, 2022, the Company granted performance-based restricted stock units to certain executive officers that vest based upon the Company's total shareholder return as compared to the Russell 2000 Index over a three-year period ending in June 2024. The performance-based restricted stock units were valued using the Monte Carlo Simulation model. The measurement and recognition of compensation expense is based on estimated fair values for all share-based payment awards made to its employees and directors. Share-based award grants are generally measured at fair value on the date of grant based on the number of shares granted and the quoted price of the Company's common stock. Such value is recognized as a cost of revenue or an operating expense over the corresponding vesting period.
The following is a summary of share-based compensation expense including restricted stock units and performance-based restricted stock units granted pursuant to the Company's Amended 2007 Plan, the 2019 Plan, and the 2019 Amended Plan and employee stock purchases made under the Company's 2011 Employee Stock Purchase Plan, as amended (ESPP), based on estimated fair values within the applicable cost and expense lines identified below (in thousands):
Three Months Ended
June 30,
 20222021
Cost of product revenue$292 $274 
Cost of service revenue1,745 1,613 
Research and development4,431 4,091 
Sales and marketing5,750 4,814 
General and administrative3,363 3,173 
$15,581 $13,965 
Employee Stock Purchase Plan – The Company maintains the ESPP for all eligible employees as described in the Company's Annual Report on Form 10-K for the year ended March 31, 2022. Under the ESPP, shares of the Company's common stock may be purchased on the last day of each bi-annual offering period at 85% of the fair value on the last day of such offering period. The offering periods run from March 1st through August 31st and from September 1st through the last day of February each year.
NOTE 5 – CASH, CASH EQUIVALENTS AND MARKETABLE SECURITIES
The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents and those investments with original maturities greater than three months to be marketable securities. Cash and cash equivalents mainly consisted of U.S. government and municipal obligations, commercial paper, certificate of deposits, money market instruments and cash maintained with various financial institutions at June 30, 2022 and March 31, 2022.
Marketable Securities
The following is a summary of marketable securities held by NetScout at June 30, 2022, classified as short-term and long-term (in thousands):
Amortized
Cost
Unrealized
Losses
Fair
Value
Type of security:
U.S. government and municipal obligations$14,981 $(43)$14,938 
Commercial paper21,035  21,035 
Corporate bonds827 (3)824 
Certificates of deposit5,347  5,347 
Total short-term marketable securities42,190 (46)42,144 
Total long-term marketable securities   
Total marketable securities$42,190 $(46)$42,144 
11

The following is a summary of marketable securities held by NetScout at March 31, 2022, classified as short-term and long-term (in thousands):
Amortized
Cost
Unrealized
Losses
Fair
Value
Type of security:
U.S. government and municipal obligations$40,895 $(32)$40,863 
Commercial paper23,353  23,353 
Corporate bonds823 (2)821 
Certificates of deposit2,000  2,000 
Total short-term marketable securities67,071 (34)67,037 
Total long-term marketable securities   
Total marketable securities$67,071 $(34)$67,037 
Contractual maturities of the Company's marketable securities held at June 30, 2022 and March 31, 2022 were as follows (in thousands):
June 30,
2022
March 31,
2022
Available-for-sale securities:
Due in 1 year or less$42,144 $67,037 
Due after 1 year through 5 years  
$42,144 $67,037 
NOTE 6 – FAIR VALUE MEASUREMENTS
The fair value hierarchy has three levels based on the reliability of the inputs used to determine fair value. Level 1 refers to fair values determined based on quoted prices in active markets for identical assets. Level 2 refers to fair values estimated using significant other observable inputs, and Level 3 includes fair values estimated using significant non-observable inputs. The following tables present the Company's financial assets and liabilities measured on a recurring basis using the fair value hierarchy at June 30, 2022 and March 31, 2022 (in thousands):
Fair Value Measurements at
 June 30, 2022
 Level 1Level 2Level 3Total
ASSETS:
Cash and cash equivalents$291,084 $41,418 $ $332,502 
U.S. government and municipal obligations12,933 2,005  14,938 
Commercial paper 21,035  21,035 
Corporate bonds824   824 
Certificate of deposits 5,347  5,347 
$304,841 $69,805 $ $374,646 
LIABILITIES:
Derivative financial instruments$ $(91)$ $(91)
$ $(91)$ $(91)
12

Fair Value Measurements at
 March 31, 2022
 Level 1Level 2Level 3Total
ASSETS:
Cash and cash equivalents$617,734 $18,427 $ $636,161 
U.S. government and municipal obligations40,863   40,863 
Commercial paper 23,353  23,353 
Corporate bonds821   821 
Certificate of deposits 2,000  2,000 
Derivative financial instruments 20  20 
$659,418 $43,800 $ $703,218 
LIABILITIES:
Derivative financial instruments$ $(78)$ $(78)
$ $(78)$ $(78)
This hierarchy requires the Company to use observable market data, when available, and to minimize the use of unobservable inputs when determining fair value. On a recurring basis, the Company measures certain financial assets and liabilities at fair value, including marketable securities and derivative financial instruments.
The Company's Level 1 investments are classified as such because they are valued using quoted market prices or alternative pricing sources with reasonable levels of price transparency.
The Company's Level 2 investments are classified as such because they are valued using observable inputs other than Level 1 quoted prices that are observable for the asset or liability, either directly or indirectly, including quoted prices for similar assets or liabilities in active markets, or quoted prices for identical or similar assets in markets that are not active.
NOTE 7 – INVENTORIES
Inventories are stated at the lower of actual cost or net realizable value. Cost is determined by using the first in, first out (FIFO) method. Inventories consist of the following (in thousands):
June 30,
2022
March 31,
2022
Raw materials$16,181 $14,779 
Work in process324 695 
Finished goods5,930 5,761 
Deferred costs405 6,985 
$22,840 $28,220 
NOTE 8 – GOODWILL AND INTANGIBLE ASSETS
Goodwill
The Company has one reporting unit. The Company assesses goodwill for impairment at the reporting unit level at least annually, or on an interim basis if an event occurs or circumstances change that would, more likely than not, reduce the fair value of the reporting unit below its carrying value. The Company completed its annual impairment test on January 31, 2022 using the qualitative assessment as the Company concluded that it was more likely than not that the fair value of the reporting unit exceeded its carrying value.
At June 30, 2022 and March 31, 2022, the carrying amount of goodwill was $1.7 billion. The change in the carrying amount of goodwill for the three months ended June 30, 2022 was due to the impact of foreign currency translation adjustments related to asset balances that are recorded in currencies other than the U.S. Dollar.
13

The following table summarizes the changes in the carrying amount of goodwill for the three months ended June 30, 2022 as follows (in thousands):
Balance at March 31, 2022$1,723,156 
     Foreign currency translation impact3,044 
Balance at June 30, 2022$1,726,200 
Intangible Assets
The net carrying amounts of intangible assets were $415.0 million and $433.4 million at June 30, 2022 and March 31, 2022, respectively. Intangible assets acquired in a business combination are recorded under the acquisition method of accounting at their estimated fair values at the date of acquisition. The Company amortizes acquired intangible assets over their estimated useful lives.
Intangible assets include the following amortizable intangible assets at June 30, 2022 (in thousands):
Estimated Useful Life in YearsCostAccumulated
Amortization
Net
Developed technology
3 - 13 years
$249,305 $(225,894)$23,411 
Customer relationships
8 - 18 years
766,048 (395,470)370,578 
Distributor relationships and technology licenses
1 - 6 years
11,511 (9,164)2,347 
Definite-lived trademark and trade name
2 - 9 years
57,601 (39,207)18,394 
Core technology
10 years
7,192 (7,192) 
Non-compete agreements
3 years
292 (292) 
Capitalized software
3 years
3,317 (3,317) 
Other
1 - 20 years
1,208 (988)220 
$1,096,474 $(681,524)$414,950 

Intangible assets include the following amortizable intangible assets at March 31, 2022 (in thousands):
Estimated Useful Life in YearsCostAccumulated
Amortization
Net
Developed technology
3 - 13 years
$250,247 $(224,426)$25,821 
Customer relationships
8 - 18 years
769,404 (384,347)385,057 
Distributor relationships and technology licenses
1 - 6 years
11,408 (8,896)2,512 
Definite-lived trademark and trade name
2 - 9 years
57,748 (37,944)19,804 
Core technology
10 years
7,192 (7,192) 
Non-compete agreements
3 years
292 (292) 
Capitalized software
3 years
3,317 (3,317) 
Other
1 - 20 years
1,208 (983)225 
$1,100,816 $(667,397)$433,419 

14

Amortization included as cost of product revenue consists of amortization of developed technology, distributor relationships and technology licenses, core technology and software. Amortization included as operating expense consists of all other intangible assets. The following table provides a summary of amortization expense for the three months ended June 30, 2022 and 2021, respectively (in thousands):
Three Months Ended
June 30,
20222021
Amortization of intangible assets included as:
    Cost of product revenue$2,653 $3,662 
    Operating expense13,886 15,011 
$16,539 $18,673 
The following is the expected future amortization expense at June 30, 2022 for the fiscal years ending March 31 (in thousands):
2023 (remaining nine months)$49,531 
202457,837 
202550,676 
202646,323 
202743,447 
Thereafter167,136 
$414,950 

NOTE 9 – DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
NetScout operates internationally and, in the normal course of business, is exposed to fluctuations in foreign currency exchange rates. The exposures result from costs that are denominated in currencies other than the U.S. Dollar, primarily the Euro, British Pound, Canadian Dollar, and Indian Rupee. The Company manages its foreign cash flow risk by hedging forecasted cash flows for operating expenses denominated in foreign currencies for up to twelve months, within specified guidelines through the use of forward contracts. The Company enters into foreign currency exchange contracts to hedge cash flow exposures from costs that are denominated in currencies other than the U.S. Dollar. These hedges are designated as cash flow hedges at inception.
NetScout also periodically enters into forward contracts to manage exchange rate risks associated with certain third-party transactions and for which the Company does not elect hedge accounting treatment as there is no difference in the timing of gain or loss recognition on the hedging instrument and the hedged item.
All of the Company's derivative instruments are utilized for risk management purposes, and the Company does not use derivatives for speculative trading purposes. These contracts will mature over the next twelve months and are expected to impact earnings on or before maturity.
The notional amounts and fair values of derivative instruments in the consolidated balance sheets at June 30, 2022 and March 31, 2022 were as follows (in thousands):
 Notional Amounts (a)Prepaid Expenses and Other Current AssetsAccrued Other
 June 30,
2022
March 31,
2022
June 30,
2022
March 31,
2022
June 30,
2022
March 31,
2022
Derivatives Designated as Hedging Instruments:
     Forward contracts$1,997 $5,578 $ $20 $91 $78 
$