10-Q 1 ntct-20211231.htm 10-Q ntct-20211231
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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 December 31, 2021
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 January 27, 2022 was 73,830,308.


NETSCOUT SYSTEMS, INC.
FORM 10-Q
FOR THE QUARTER ENDED DECEMBER 31, 2021
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, 2021, 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)
 
December 31,
2021
March 31,
2021
(Unaudited)
Assets
Current assets:
Cash and cash equivalents$548,105 $467,176 
Marketable securities5,349 9,277 
Accounts receivable and unbilled costs, net of allowance for doubtful accounts of $220 and $416 at December 31, 2021 and March 31, 2021, respectively
233,854 197,717 
Inventories and deferred costs21,500 22,813 
Prepaid income taxes4,355 1,906 
Prepaid expenses and other current assets 26,425 23,583 
Total current assets839,588 722,472 
Fixed assets, net42,723 48,474 
Operating lease right-of-use assets56,268 61,512 
Goodwill1,720,713 1,717,554 
Intangible assets, net453,719 511,866 
Deferred income taxes7,817 8,096 
Other assets12,721 15,064 
Total assets$3,133,549 $3,085,038 
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $18,436 $17,964 
Accrued compensation67,332 83,057 
Accrued other31,821 21,127 
Income taxes payable5,382 7,025 
Deferred revenue and customer deposits296,814 269,748 
Current portion of operating lease liabilities11,441 12,354 
Total current liabilities431,226 411,275 
Other long-term liabilities7,499 21,641 
Deferred tax liability80,763 92,287 
Accrued long-term retirement benefits38,576 39,479 
Long-term deferred revenue and customer deposits122,227 103,310 
Operating lease liabilities, net of current portion55,671 61,267 
Long-term debt350,000 350,000 
Total liabilities1,085,962 1,079,259 
Commitments and contingencies (Note 12)
Stockholders' equity:
Preferred stock, $0.001 par value:
5,000,000 shares authorized; no shares issued or outstanding at December 31, 2021 and March 31, 2021
  
Common stock, $0.001 par value:
300,000,000 shares authorized; 126,137,308 and 124,197,974 shares issued and 73,828,546 and 73,751,615 shares outstanding at December 31, 2021 and March 31, 2021, respectively
126 124 
Additional paid-in capital3,003,679 2,955,400 
Accumulated other comprehensive loss(1,795)(1,940)
Treasury stock at cost, 52,308,762 and 50,446,359 shares at December 31, 2021 and March 31, 2021, respectively
(1,373,394)(1,322,496)
Retained earnings418,971 374,691 
Total stockholders' equity2,047,587 2,005,779 
Total liabilities and stockholders' equity$3,133,549 $3,085,038 
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 EndedNine Months Ended
December 31,December 31,
 2021202020212020
Revenue:
Product$144,420 $114,965 $327,989 $278,637 
Service117,774 113,774 336,395 339,256 
Total revenue262,194 228,739 664,384 617,893 
Cost of revenue:
Product 30,338 24,263 73,843 72,392 
Service30,132 31,012 92,681 94,763 
Total cost of revenue60,470 55,275 166,524 167,155 
Gross profit201,724 173,464 497,860 450,738 
Operating expenses:
Research and development41,637 43,769 128,940 135,605 
Sales and marketing 66,048 60,934 197,191 180,668 
General and administrative 23,665 21,718 69,881 67,444 
Amortization of acquired intangible assets14,919 15,273 44,895 45,897 
Restructuring charges   62 
Total operating expenses146,269 141,694 440,907 429,676 
Income from operations55,455 31,770 56,953 21,062 
Interest and other income (expense), net:
Interest income45 73 154 510 
Interest expense(1,748)(2,708)(6,314)(8,497)
Other income (expense), net1,880 (948)1,581 (3,770)
Total interest and other income (expense), net177 (3,583)(4,579)(11,757)
Income before income tax expense (benefit)55,632 28,187 52,374 9,305 
Income tax expense (benefit)7,907 (834)8,094 1,390 
Net income$47,725 $29,021 $44,280 $7,915 
  Basic net income per share$0.65 $0.39 $0.60 $0.11 
  Diluted net income per share$0.64 $0.39 $0.59 $0.11 
Weighted average common shares outstanding used in computing:
Net income per share - basic73,898 73,492 74,048 72,953 
Net income per share - diluted74,899 73,878 74,976 73,618 
The accompanying notes are an integral part of these consolidated financial statements.
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NetScout Systems, Inc.
Consolidated Statements of Comprehensive Income
(In thousands)
(Unaudited)
 
Three Months EndedNine Months Ended
 December 31,December 31,
 2021202020212020
Net income$47,725 $29,021 $44,280 $7,915 
Other comprehensive income:
Cumulative translation adjustments84 1,482 51 3,375 
Changes in market value of investments:
Changes in unrealized gains (losses), net of tax benefit of $0, ($5), ($2) and ($38), respectively
 (15)(5)(122)
Total net change in market value of investments (15)(5)(122)
Changes in market value of derivatives:
Changes in market value of derivatives, net of taxes of $7, $40, $38 and $101, respectively
23 132 120 319 
Reclassification adjustment for net gains (losses) included in net income, net of taxes (benefit) of $9,($24), ($7) and ($47), respectively
29 (79)(21)(150)
Total net change in market value of derivatives52 53 99 169 
Other comprehensive income136 1,520 145 3,422 
Total comprehensive income$47,861 $30,541 $44,425 $11,337 
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 December 31, 2021
 Common Stock
Voting
Additional
Paid In
Capital
Accumulated
Other
Comprehensive
Loss
Treasury StockRetained
Earnings
Total
Stockholders'
Equity
 SharesPar
Value
SharesStated
Value
Balance, September 30, 2021126,108,858 $126 $2,991,704 $(1,931)51,891,197 $(1,362,141)$371,246 $1,999,004 
Net income47,725 47,725 
Unrealized net gains on derivative financial instruments52 52 
Cumulative translation adjustments84 84 
Issuance of common stock pursuant to vesting of restricted stock units28,450   
Stock-based compensation expense for restricted stock units granted to employees11,975 11,975 
Repurchase of treasury stock417,565 (11,253)(11,253)
Balance, December 31, 2021126,137,308$126 $3,003,679 $(1,795)52,308,762$(1,373,394)$418,971 $2,047,587 
Nine Months Ended December 31, 2021
 Common Stock
Voting
Additional
Paid In
Capital
Accumulated
Other
Comprehensive
Loss
Treasury StockRetained
Earnings
Total
Stockholders'
Equity
 SharesPar
Value
SharesStated
Value
Balance, March 31, 2021
124,197,974 $124 $2,955,400 $(1,940)50,446,359 $(1,322,496)$374,691 $2,005,779 
Net income44,280 44,280 
Unrealized net investment losses(5)(5)
Unrealized net gains on derivative financial instruments99 99 
Cumulative translation adjustments51 51 
Issuance of common stock pursuant to vesting of restricted stock units1,688,026 2 2 
Stock-based compensation expense for restricted stock units granted to employees41,389 41,389 
Issuance of common stock under employee stock purchase plan251,308 6,890 6,890 
Repurchase of treasury stock1,862,403 (50,898)(50,898)
Balance, December 31, 2021126,137,308$126 $3,003,679 $(1,795)52,308,762$(1,373,394)$418,971 $2,047,587 

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 December 31, 2020
 Common Stock VotingAdditional Paid In CapitalAccumulated Other Comprehensive Income (Loss)Treasury StockRetained EarningsTotal Stockholders’ Equity
 SharesPar ValueSharesStated Value
Balance, September 30, 2020123,840,945$123 $2,924,757 $(1,258)50,266,910$(1,318,535)$334,233 $1,939,320 
Net income29,021 29,021 
Unrealized net investment losses(15)(15)
Unrealized net gains on derivative financial instruments53 53 
Cumulative translation adjustments1,482 1,482 
Issuance of common stock pursuant to vesting of restricted stock units26,4281 1 
Stock-based compensation expense for restricted stock units granted to employees11,816 11,816 
Repurchase of treasury stock162,439(3,443)(3,443)
Balance, December 31, 2020123,867,373$124 $2,936,573 $262 50,429,349$(1,321,978)$363,254 $1,978,235 


Nine Months Ended December 31, 2020
 Common Stock VotingAdditional Paid In CapitalAccumulated Other Comprehensive Income (Loss)Treasury StockRetained EarningsTotal Stockholders’ Equity
 SharesPar ValueSharesStated Value
Balance, March 31, 2020122,006,077$122 $2,891,553 $(3,160)49,785,171$(1,305,935)$355,339 $1,937,919 
Net income7,915 7,915 
Unrealized net investment losses(122)(122)
Unrealized net gains on derivative financial instruments169 169 
Cumulative translation adjustments3,375 3,375 
Issuance of common stock pursuant to vesting of restricted stock units1,581,4842 2 
Stock-based compensation expense for restricted stock units granted to employees38,545 38,545 
Issuance of common stock under employee stock purchase plan279,8126,475 6,475 
Repurchase of treasury stock644,178(16,043)(16,043)
Balance, December 31, 2020123,867,373$124 $2,936,573 $262 50,429,349$(1,321,978)$363,254 $1,978,235 

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)
 Nine Months Ended
December 31,
 20212020
Cash flows from operating activities:
Net income$44,280 $7,915 
Adjustments to reconcile net income to cash provided by operating activities, net of the effects of acquisitions:
Depreciation and amortization72,047 79,638 
Loss on extinguishment of debt596  
Operating lease right-of-use assets7,589 7,820 
Loss on disposal of fixed assets2 37 
Share-based compensation expense43,381 40,349 
Change in fair value of contingent consideration(837) 
Deferred income taxes(11,093)(10,438)
Other gains(21)(1)
Changes in assets and liabilities
Accounts receivable and unbilled costs(36,211)6,722 
Inventories(1,265)(5,083)
Prepaid expenses and other assets(1,031)2,321 
Accounts payable844 (589)
Accrued compensation and other expenses(13,438)22,694 
Operating lease liabilities(8,855)(7,923)
Income taxes payable(1,861)190 
Deferred revenue46,260 (21,749)
                Net cash provided by operating activities140,387 121,903 
Cash flows from investing activities:
Purchase of marketable securities(11,343)(13,974)
Proceeds from sales and maturity of marketable securities15,264 51,706 
Purchase of fixed assets(7,004)(9,110)
Purchase of intangible assets (4,537)
Decrease in deposits28 105 
                Net cash (used in) provided by investing activities(3,055)24,190 
Cash flows from financing activities:
Issuance of common stock under stock plans2 2 
Payment of contingent consideration (1,000)
Treasury stock repurchases(35,652)(3,275)
Tax withholding on restricted stock units(15,246)(12,768)
Payment of debt issuance costs(3,660) 
Repayment of long-term debt(350,000) 
Proceeds from issuance of long-term debt350,000  
Collection of contingent consideration837  
                Net cash used in financing activities(53,719)(17,041)
Effect of exchange rate changes on cash and cash equivalents(2,684)9,214 
Net increase in cash and cash equivalents and restricted cash80,929 138,266 
Cash and cash equivalents and restricted cash, beginning of period467,176 340,237 
Cash and cash equivalents and restricted cash, end of period$548,105 $478,503 
Supplemental disclosures:
Cash paid for interest$3,716 $6,103 
Cash paid for income taxes$24,677 $8,532 
Non-cash transactions:
Transfers of inventory to fixed assets$2,657 $1,530 
Additions to property, plant and equipment included in accounts payable$361 $231 
Issuance of common stock under employee stock plans$6,890 $6,475 
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, 2021 filed with the Securities and Exchange Commission on May 20, 2021.
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 COVID-19 pandemic, 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.
Under Accounting Standards Update (ASU) 2014-15, Presentation of Financial Statements—Going Concern (Subtopic 205-40), or ASC 205-40, 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 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 at December 31, 2021, the Company had, as of December 31, 2021, 2021, an incremental $450 million available under the 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 has elected to defer the employer-paid portion of social security taxes. As of December 31, 2021, 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 liabilities in the Company's consolidated balance sheet at December 31, 2021.
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
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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. 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.
In January 2020, the FASB issued ASU 2020-01, Investments-Equity Securities (Topic 321), Investments-Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815) - Clarifying the Interactions between Topic 321, Topic 323, and Topic 815. This guidance addresses accounting for the transition into and out of the equity method and provides clarification of the interaction of rules for equity securities, the equity method of accounting, and forward contracts and purchase options on certain types of securities. This standard is effective for fiscal years and interim periods within those fiscal years beginning after December 15, 2020. The Company adopted the guidance as of April 1, 2021. The adoption did not have a material impact on the Company's consolidated financial statements.
In December 2019, the FASB issued ASU 2019-12, Simplifying the Accounting for Income Taxes. ASU 2019-12 simplifies the accounting for income taxes, eliminates certain exceptions within ASC 740, Income Taxes, and clarifies certain aspects of the current guidance to promote consistency among reporting entities. ASU 2019-12 is effective for fiscal years beginning after December 15, 2020. The Company adopted the guidance as of April 1, 2021. The adoption did not have a material impact on the Company's consolidated financial statements.
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.
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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 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. Further, for certain service engagements, the Company considers quoted prices as part of bundled arrangements of those engagements as a basis for establishing SSP. SSP has 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 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 nine months ended December 31, 2021, the Company recognized revenue of $234.8 million related to the Company's deferred revenue balance reported at March 31, 2021.
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 December 31, 2021.
At December 31, 2021, the Company had total deferred revenue of $419.0 million, which represents the aggregate total contract price allocated to undelivered performance obligations. The Company expects to recognize $296.8 million, or 71%, of this revenue during the next 12 months, and expects to recognize the remaining $122.2 million, or 29%, of this revenue thereafter.
There are circumstances for which the Company does not recognize revenue relating to sales transactions that have been billed, and 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 $7.1 million at December 31, 2021 and March 31, 2021, 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
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have material significant financing components, or variable consideration or performance obligations satisfied in a prior period recognized during the nine months ended December 31, 2021.
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 occur before control has transferred for a performance obligation 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.
At December 31, 2021, the consolidated balance sheet included $8.1 million in assets related to sales commissions to be expensed in future periods. A balance of $4.4 million was included in prepaid expenses and other current assets, and a balance of $3.7 million was included in other assets in the Company's consolidated balance sheet at December 31, 2021. At March 31, 2021, the consolidated balance sheet included $7.4 million in assets related to sales commissions to be expensed in future periods. A balance of $4.1 million was included in prepaid expenses and other current assets, and a balance of $3.3 million was included in other assets in the Company's consolidated balance sheet at March 31, 2021.
During the three and nine months ended December 31, 2021 and 2020, respectively, the Company recognized $1.6 million, $1.6 million, $4.7 million and $4.7 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, 2021$416 
Provision for allowance for credit losses49 
Recoveries and other adjustments(1)
Write off charged against the allowance for credit losses(244)
Balance at December 31, 2021$220 

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 December 31, 2021, the Company had two direct customers 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, 2021, 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.
During the three and nine months ended December 31, 2021, one direct customer, 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 and nine months ended December 31, 2020, no direct customers or indirect channel partners accounted for more than 10% of the Company's total revenue.
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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 permitted 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 Equity Incentive Plan (the 2019 Amended Plan) to increase the number of shares authorized for issuance by 4,700,000, 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.
Periodically, the Company grants share-based awards to employees, officers, and directors of the Company and its subsidiaries. During the nine months ended December 31, 2021, 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. 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 EndedNine Months Ended
December 31,December 31,
 2021202020212020
Cost of product revenue$214 $248 $809 $837 
Cost of service revenue1,302 1,371 4,822 4,531 
Research and development3,297 3,862 12,290 12,578 
Sales and marketing4,727 4,253 15,383 13,602 
General and administrative3,141 2,783 10,077 8,801 
$12,681 $12,517 $43,381 $40,349 
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, 2021. 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. During the nine months ended December 31, 2021, employees purchased 251,308 shares under the ESPP and the value per share was $23.31.
NOTE 5 – CASH, CASH EQUIVALENTS, RESTRICTED CASH 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, money market instruments and cash maintained with various financial institutions at December 31, 2021 and March 31, 2021.
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Cash, Cash Equivalents and Restricted Cash
The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the consolidated balance sheets that sum to the total of the same such amounts shown in the consolidated statements of cash flows (in thousands):
December 31,
2021
March, 31, 2021December 31,
2020
March 31,
2020
Cash and cash equivalents$548,105 $467,176 $477,755 $338,489 
Restricted cash  748 1,748 
     Total cash, cash equivalents and restricted cash$548,105 $467,176 $478,503 $340,237 
The Company's restricted cash includes cash balances which are legally or contractually restricted. The Company's restricted cash is included within prepaid and other current assets and consists of amounts related to holdbacks associated with prior acquisitions.
Marketable Securities
The following is a summary of marketable securities held by NetScout at December 31, 2021, classified as short-term and long-term (in thousands):
Amortized
Cost
Unrealized
Gains
Fair
Value
Type of security:
Commercial paper$5,349 $ $5,349 
Total short-term marketable securities5,349  5,349 
Total long-term marketable securities   
Total marketable securities$5,349 $ $5,349 
The following is a summary of marketable securities held by NetScout at March 31, 2021, classified as short-term and long-term (in thousands):
Amortized
Cost
Unrealized
Gains
Fair
Value
Type of security:
U.S. government and municipal obligations$3,571 $7 $3,578 
Commercial paper5,699  5,699 
Total short-term marketable securities9,270 7 9,277 
Total long-term marketable securities   
Total marketable securities$9,270 $7 $9,277 
Contractual maturities of the Company's marketable securities held at December 31, 2021 and March 31, 2021 were as follows (in thousands):
December 31,
2021
March 31,
2021
Available-for-sale securities:
Due in 1 year or less$5,349 $9,277 
Due after 1 year through 5 years  
$5,349 $9,277 
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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 December 31, 2021 and March 31, 2021 (in thousands):
Fair Value Measurements at
 December 31, 2021
 Level 1Level 2Level 3Total
ASSETS:
Cash and cash equivalents$548,105 $ $ $548,105 
Commercial paper 5,349  5,349 
Derivative financial instruments 69  69 
$548,105 $5,418 $ $553,523 
LIABILITIES:
Derivative financial instruments$ $(13)$ $(13)
$ $(13)$ $(13)
Fair Value Measurements at
 March 31, 2021
 Level 1Level 2Level 3Total
ASSETS:
Cash and cash equivalents$467,176 $ $ $467,176 
U.S. government and municipal obligations2,539 1,039  3,578 
Commercial paper 5,699