Company Quick10K Filing
NETSCOUT Systems
Price23.72 EPS-0
Shares76 P/E-58
MCap1,814 P/FCF14
Net Debt204 EBIT6
TEV2,018 TEV/EBIT324
TTM 2019-09-30, in MM, except price, ratios
10-Q 2020-12-31 Filed 2021-02-04
10-Q 2020-09-30 Filed 2020-11-03
10-Q 2020-06-30 Filed 2020-08-06
10-K 2020-03-31 Filed 2020-05-20
10-Q 2019-12-31 Filed 2020-02-06
10-Q 2019-09-30 Filed 2019-10-31
10-Q 2019-06-30 Filed 2019-08-08
10-K 2019-03-31 Filed 2019-05-28
10-Q 2018-12-31 Filed 2019-02-07
10-Q 2018-09-30 Filed 2018-11-08
10-Q 2018-06-30 Filed 2018-08-02
10-K 2018-03-31 Filed 2018-05-22
10-Q 2017-12-31 Filed 2018-02-01
10-Q 2017-09-30 Filed 2017-11-06
10-Q 2017-06-30 Filed 2017-08-03
10-K 2017-03-31 Filed 2017-05-24
10-Q 2016-12-31 Filed 2017-02-02
10-Q 2016-09-30 Filed 2016-11-01
10-Q 2016-06-30 Filed 2016-08-02
10-K 2016-03-31 Filed 2016-05-31
10-Q 2015-12-31 Filed 2016-02-02
10-Q 2015-09-30 Filed 2015-11-05
10-Q 2015-06-30 Filed 2015-08-06
10-K 2015-03-31 Filed 2015-05-20
10-Q 2014-12-31 Filed 2015-01-27
10-Q 2014-09-30 Filed 2014-10-28
10-Q 2014-06-30 Filed 2014-07-29
10-K 2014-03-31 Filed 2014-05-20
10-Q 2013-12-31 Filed 2014-01-28
10-Q 2013-09-30 Filed 2013-10-29
10-Q 2013-06-30 Filed 2013-08-02
10-K 2013-03-31 Filed 2013-05-24
10-Q 2012-12-31 Filed 2013-02-01
10-Q 2012-09-30 Filed 2012-11-02
10-Q 2012-06-30 Filed 2012-08-03
10-K 2012-03-31 Filed 2012-05-25
10-Q 2011-12-31 Filed 2012-02-03
10-Q 2011-09-30 Filed 2011-11-04
10-Q 2011-06-30 Filed 2011-08-05
10-K 2011-03-31 Filed 2011-05-27
10-Q 2010-12-31 Filed 2011-02-04
10-Q 2010-09-30 Filed 2010-11-09
10-Q 2010-06-30 Filed 2010-08-06
10-K 2010-03-31 Filed 2010-05-28
10-Q 2009-12-31 Filed 2010-02-05
8-K 2020-10-29
8-K 2020-09-10
8-K 2020-07-30
8-K 2020-05-07
8-K 2020-05-05
8-K 2020-04-16
8-K 2020-01-30
8-K 2019-10-31
8-K 2019-09-12
8-K 2019-08-01
8-K 2019-05-02
8-K 2019-04-09
8-K 2019-02-12
8-K 2019-01-30
8-K 2018-11-01
8-K 2018-09-12
8-K 2018-07-26
8-K 2018-05-03
8-K 2018-04-23
8-K 2018-02-01
8-K 2018-01-30
8-K 2018-01-16
8-K 2018-01-10

NTCT 10Q Quarterly Report

Part I: Financial Information
Item 1. Unaudited Financial Statements
Note 1 - Basis of Presentation
Note 2 - Revenue
Note 3 - Concentration of Credit Risk and Significant Customers
Note 4 - Share - Based Compensation
Note 5 - Cash, Cash Equivalents, Restricted Cash and Marketable Securities
Note 6 - Fair Value Measurements
Note 7 - Inventories
Note 8 - Acquisitions & Divestitures
Note 9 - Goodwill and Intangible Assets
Note 10 - Derivative Instruments and Hedging Activities
Note 11 - Long - Term Debt
Note 12 - Restructuring Charges
Note 13 - Leases
Note 14 - Commitments and Contingencies
Note 15 - Pension Benefit Plans
Note 16 - Treasury Stock
Note 17 - Net Income (Loss) per Share
Note 18 - Income Taxes
Note 19 - Segment and Geographic Information
Note 20 - Subsequent Events
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part Ii: Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Mine Safety Disclosures
Item 5. Other Information
Item 6. Exhibits
EX-31.1 ntct-ex311_20201231.htm
EX-31.2 ntct-ex312_20201231.htm
EX-32.1 ntct-ex321_20201231.htm
EX-32.2 ntct-ex322_20201231.htm

NETSCOUT Systems Earnings 2020-12-31

Balance SheetIncome StatementCash Flow
3.73.02.21.50.70.02012201420172020
Assets, Equity
0.40.30.20.10.0-0.12012201420172020
Rev, G Profit, Net Income
0.10.0-0.0-0.1-0.1-0.22012201420172020
Ops, Inv, Fin

ntct-20201231
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Table of Contents
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, 2020
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 31, 2021 was 73,438,763.


Table of Contents
NETSCOUT SYSTEMS, INC.
FORM 10-Q
FOR THE QUARTER ENDED DECEMBER 31, 2020
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.




Table of Contents


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, 2020, 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.

1

Table of Contents

PART I: FINANCIAL INFORMATION
Item 1. Unaudited Financial Statements
NetScout Systems, Inc.
Consolidated Balance Sheets
(In thousands, except share data)
 
December 31,
2020
March 31,
2020
(Unaudited)
Assets
Current assets:
Cash and cash equivalents$477,755 $338,489 
Marketable securities12,689 47,969 
Accounts receivable and unbilled costs, net of allowance for doubtful accounts of $719 and $1,350 at December 31, 2020 and March 31, 2020, respectively
208,016 213,514 
Inventories and deferred costs26,040 22,227 
Prepaid income taxes9,566 13,505 
Prepaid expenses and other current assets 28,548 24,039 
Total current assets762,614 659,743 
Fixed assets, net51,265 57,715 
Operating lease right-of-use assets63,257 68,583 
Goodwill1,714,109 1,725,680 
Intangible assets, net535,095 582,179 
Deferred income taxes6,982 6,220 
Long-term marketable securities 2,613 
Other assets13,001 17,770 
Total assets$3,146,323 $3,120,503 
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $19,219 $20,004 
Accrued compensation76,900 75,632 
Accrued other36,801 21,840 
Income taxes payable233 903 
Deferred revenue and customer deposits251,313 270,281 
Current portion of operating lease liabilities11,753 10,337 
Total current liabilities396,219 398,997 
Other long-term liabilities11,568 10,039 
Deferred tax liability105,510 114,394 
Accrued long-term retirement benefits38,264 34,256 
Long-term deferred revenue and customer deposits102,713 104,240 
Operating lease liabilities, net of current portion63,814 70,658 
Long-term debt450,000 450,000 
Total liabilities1,168,088 1,182,584 
Commitments and contingencies (Note 14)
Stockholders' equity:
Preferred stock, $0.001 par value:
5,000,000 shares authorized; no shares issued or outstanding at December 31, 2020 and March 31, 2020
  
Common stock, $0.001 par value:
300,000,000 shares authorized; 123,867,373 and 122,006,077 shares issued and 73,438,024 and 72,220,906 shares outstanding at December 31, 2020 and March 31, 2020, respectively
124 122 
Additional paid-in capital2,936,573 2,891,553 
Accumulated other comprehensive income (loss)262 (3,160)
Treasury stock at cost, 50,429,349 and 49,785,171 shares at December 31, 2020 and March 31, 2020, respectively
(1,321,978)(1,305,935)
Retained earnings363,254 355,339 
Total stockholders' equity1,978,235 1,937,919 
Total liabilities and stockholders' equity$3,146,323 $3,120,503 
The accompanying notes are an integral part of these consolidated financial statements.
2

Table of Contents
NetScout Systems, Inc.
Consolidated Statements of Operations
(In thousands, except per share data)
(Unaudited)
 
 Three Months EndedNine Months Ended
December 31,December 31,
 2020201920202019
Revenue:
Product$114,965 $143,309 $278,637 $321,803 
Service113,774 116,715 339,256 340,666 
Total revenue228,739 260,024 617,893 662,469 
Cost of revenue:
Product 24,263 34,197 72,392 90,500 
Service31,012 31,388 94,763 88,960 
Total cost of revenue55,275 65,585 167,155 179,460 
Gross profit173,464 194,439 450,738 483,009 
Operating expenses:
Research and development43,769 48,606 135,605 142,391 
Sales and marketing 60,934 67,653 180,668 214,245 
General and administrative 21,718 25,048 67,444 72,436 
Amortization of acquired intangible assets15,273 16,120 45,897 48,395 
Restructuring charges 193 62 466 
Total operating expenses141,694 157,620 429,676 477,933 
Income from operations31,770 36,819 21,062 5,076 
Interest and other expense, net:
Interest income73 826 510 3,699 
Interest expense(2,708)(4,629)(8,497)(16,167)
Other income (expense), net(948)(112)(3,770)538 
Total interest and other expense, net(3,583)(3,915)(11,757)(11,930)
Income (loss) before income tax expense (benefit)28,187 32,904 9,305 (6,854)
Income tax expense (benefit)(834)(3,821)1,390 3,236 
Net income (loss)$29,021 $36,725 $7,915 $(10,090)
  Basic net income (loss) per share$0.39 $0.49 $0.11 $(0.13)
  Diluted net income (loss) per share$0.39 $0.49 $0.11 $(0.13)
Weighted average common shares outstanding used in computing:
Net income (loss) per share - basic73,492 74,367 72,953 75,780 
Net income (loss) per share - diluted73,878 74,700 73,618 75,780 
The accompanying notes are an integral part of these consolidated financial statements.
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NetScout Systems, Inc.
Consolidated Statements of Comprehensive Income (Loss)
(In thousands)
(Unaudited)
 
Three Months EndedNine Months Ended
 December 31,December 31,
 2020201920202019
Net income (loss)$29,021 $36,725 $7,915 $(10,090)
Other comprehensive income (loss):
Cumulative translation adjustments1,482 297 3,375 (789)
Changes in market value of investments:
Changes in unrealized (losses) gains, net of (benefit) taxes of ($5), $1, ($38) and $12, respectively
(15)3 (122)40 
Total net change in market value of investments(15)3 (122)40 
Changes in market value of derivatives:
Changes in market value of derivatives, net of taxes of $40, $40, $101 and $6, respectively
132 84 319 18 
Reclassification adjustment for net (losses) gains included in net income (loss), net of (benefit) taxes of ($24), ($7), ($47) and $8, respectively
(79)(30)(150)25 
Total net change in market value of derivatives53 54 169 43 
Other comprehensive income (loss)1,520 354 3,422 (706)
Total comprehensive income (loss)$30,541 $37,079 $11,337 $(10,796)
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
Voting
Additional
Paid In
Capital
Accumulated
Other
Comprehensive
Income (Loss)
Treasury StockRetained
Earnings
Total
Stockholders'
Equity
 SharesPar
Value
SharesStated
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 units26,428 1 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
Voting
Additional
Paid In
Capital
Accumulated
Other
Comprehensive
Income (Loss)
Treasury StockRetained
Earnings
Total
Stockholders'
Equity
 SharesPar
Value
SharesStated
Value
Balance, March 31, 2020
122,006,077 $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 units1,581,484 2 2 
Stock-based compensation expense for restricted stock units granted to employees38,545 38,545 
Issuance of common stock under employee stock purchase plan279,812 6,475 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 Stockholders' Equity
(In thousands, except share data)
(Unaudited)
Three Months Ended December 31, 2019
 Common Stock VotingAdditional Paid In CapitalAccumulated Other Comprehensive Income (Loss)Treasury StockRetained EarningsTotal Stockholders’ Equity
 SharesPar ValueSharesStated Value
Balance, September 30, 2019121,648,747$122 $2,863,003 $(3,699)46,810,700$(1,230,440)$311,278 $1,940,264 
Net income36,725 36,725 
Unrealized net investment gains3 3 
Unrealized net gains on derivative financial instruments54 54 
Cumulative translation adjustments297 297 
Issuance of common stock pursuant to vesting of restricted stock units30,370—  
Stock-based compensation expense for restricted stock units granted to employees10,699 10,699 
Repurchase of treasury stock1,013,196(25,235)(25,235)
Balance, December 31, 2019121,679,117$122 $2,873,702 $(3,345)47,823,896$(1,255,675)$348,003 $1,962,807 


Nine Months Ended December 31, 2019
 Common Stock VotingAdditional Paid In CapitalAccumulated Other Comprehensive Income (Loss)Treasury StockRetained EarningsTotal Stockholders’ Equity
 SharesPar ValueSharesStated Value
Balance, March 31, 2019119,760,132$120 $2,828,922 $(2,639)42,149,771$(1,119,063)$358,093 $2,065,433 
Net loss(10,090)(10,090)
Unrealized net investment gains40 40 
Unrealized net gains on derivative financial instruments43 43 
Cumulative translation adjustments(789)(789)
Issuance of common stock pursuant to vesting of restricted stock units1,621,3502 2 
Stock-based compensation expense for restricted stock units granted to employees38,187 38,187 
Issuance of common stock under employee stock purchase plan297,6356,593 6,593 
Repurchase of treasury stock5,674,125(136,612)(136,612)
Balance, December 31, 2019121,679,117$122 $2,873,702 $(3,345)47,823,896$(1,255,675)$348,003 $1,962,807 

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,
 20202019
Cash flows from operating activities:
Net income (loss)$7,915 $(10,090)
Adjustments to reconcile net income (loss) to cash provided by operating activities, net of the effects of acquisitions:
Depreciation and amortization79,638 87,397 
Operating lease right-of-use assets7,820 7,872 
Loss on disposal of fixed assets37 16 
Share-based compensation expense40,349 39,961 
Net change in fair value of contingent and contractual liabilities 541 
Accretion of contingent consideration (24)
Deferred income taxes(10,438)(8,480)
Other (gains) losses(1)35 
Changes in assets and liabilities
Accounts receivable and unbilled costs6,722 (9,554)
Inventories(5,083)(1,233)
Prepaid expenses and other assets2,321 10,957 
Accounts payable(589)(4,647)
Accrued compensation and other expenses22,694 16,009 
Operating lease liabilities(7,923)(9,690)
Income taxes payable190 24 
Deferred revenue(21,749)(1,304)
                Net cash provided by operating activities121,903 117,790 
Cash flows from investing activities:
Purchase of marketable securities(13,974)(89,840)
Proceeds from sales and maturity of marketable securities51,706 108,413 
Purchase of fixed assets(9,110)(15,207)
Purchase of intangible assets(4,537) 
Decrease (increase) in deposits105 (29)
Acquisition of businesses (4,154)
                Net cash provided by (used in) investing activities24,190 (817)
Cash flows from financing activities:
Issuance of common stock under stock plans2 2 
Payment of contingent consideration(1,000) 
Repayment of long-term debt (100,000)
Treasury stock repurchases(3,275)(125,000)
Tax withholding on restricted stock units(12,768)(11,612)
                Net cash used in financing activities(17,041)(236,610)
Effect of exchange rate changes on cash and cash equivalents9,214 (1,523)
Net increase (decrease) in cash and cash equivalents and restricted cash138,266 (121,160)
Cash and cash equivalents and restricted cash, beginning of period340,237 409,820 
Cash and cash equivalents and restricted cash, end of period$478,503 $288,660 
Supplemental disclosures:
Cash paid for interest$6,103 $14,019 
Cash paid for income taxes$8,532 $10,494 
Non-cash transactions:
Transfers of inventory to fixed assets$1,530 $2,290 
Additions to property, plant and equipment included in accounts payable$231 $119 
Issuance of common stock under employee stock plans$6,475 $6,593 
Contingent consideration related to acquisition, included in accrued other$ $1,000 
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, 2020 filed with the Securities and Exchange Commission on May 20, 2020.
COVID-19 Risks and Uncertainties
The Company is closely monitoring the impact of COVID-19 on all aspects of its business. COVID-19 was declared a global pandemic by the World Health Organization on March 11, 2020 and the President of the United States declared the COVID-19 outbreak a national emergency. The future impacts of the pandemic and any resulting economic impact on the Company's operations are largely unknown and rapidly 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 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 is taking precautionary actions to reduce costs and spending across the organization. This
includes limiting discretionary spending and reducing hiring activities. In addition, based on covenant levels at December 31, 2020, the Company has an incremental $245 million available under the $1.0 billion 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, 2020, the Company had deferred $8.9 million of employer payroll taxes, of which 50% are required to be deposited by December 2021 and the remaining 50% by December 2022. The balance of $4.5 million was included as accrued other and a balance of $4.4 million was included as other long-term liabilities in the Company's consolidated balance sheet at December 31, 2020.
The Company expects net cash provided by operating activities combined with cash, cash equivalents, and marketable securities and borrowing availability under the Company's 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 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. These amendments are effective immediately and may be applied prospectively to contract modifications made and hedging relationships entered into or evaluated on or before December 31, 2022. 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,
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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. Early adoption is permitted. ASU 2020-01 is effective for NetScout beginning April 1, 2021. The Company is currently assessing the effect that ASU 2020-01 will have on its financial position, results of operations, and disclosures.
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, 2021. ASU 2019-12 is effective for NetScout beginning April 1, 2022. Most amendments within the standard are required to be applied on a prospective basis, while certain amendments must be applied on a retrospective or modified retrospective basis. The Company is currently assessing the effect that ASU 2019-12 will have on its financial position, results of operations, and disclosures.
In August 2018, the FASB issued ASU 2018-14, Compensation – Retirement Benefits – Defined Benefit Plans – General (Subtopic 715-20): Disclosure Framework—Changes to the Disclosure Requirements for Defined Benefit Plans. This ASU adds, modifies and clarifies several disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans. The Company adopted the guidance as of April 1, 2020. The adoption has not had a material impact on the Company's consolidated financial statements.
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement. ASU 2018-13 adds, modifies and removes several disclosure requirements relative to the three levels of inputs used to measure fair value in accordance with Topic 820, Fair Value Measurement. The Company adopted the guidance as of April 1, 2020. The adoption has not had a material impact on the Company's consolidated financial statements.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (ASU 2016-13) and also issued subsequent amendments to the initial guidance: ASU 2018-19, ASU 2019-04, ASU 2019-05, ASU 2019-11 and ASU 2020-02 (collectively, Topic 326). Topic 326 requires measurement and recognition of expected credit losses for financial assets held. Topic 326 replaces the existing incurred loss impairment model with an expected loss methodology, which will result in more timely recognition of credit losses. The Company adopted the guidance prospectively as of April 1, 2020. The adoption did not result in a cumulative adjustment to retained earnings and has not had an impact on the Company's consolidated financial statements other than with respect to the updated disclosure requirements.
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 majority of the Company's product sales consist of hardware appliances with embedded software that are essential to providing customers the intended functionality of the solutions. The Company also sells software offerings decoupled from the underlying hardware and software solutions to provide customers with enhanced functionality.
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
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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 on the element’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 elements 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 multi-element arrangements of those engagements as a basis for establishing SSP. SSP has been established for product elements as the average or median selling price the element was recently sold for, whether sold alone or sold as part of a multiple element transaction. The Company reviews sales of the product elements on a quarterly basis and updates, when appropriate, its SSP for such elements 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, 2020, the Company recognized revenue of $228.9 million related to the Company's deferred revenue balance reported at March 31, 2020.
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, 2020.
At December 31, 2020, the Company had total deferred revenue of $354.0 million, which represents the aggregate total contract price allocated to undelivered performance obligations. The Company expects to recognize $251.3 million, or 71%, of this revenue during the next 12 months, and expects to recognize the remaining $102.7 million, or 29%, of this revenue thereafter.
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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, and the related account receivable has not been collected. While the receivable represents an enforceable obligation, 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, except in the case of maintenance renewals. The aggregate amount of unrecognized accounts receivable and deferred revenue was $5.4 million and $11.1 million at December 31, 2020 and March 31, 2020, 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 nine months ended December 31, 2020.
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 payments 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, 2020, the consolidated balance sheet included $7.5 million in assets related to sales commissions to be expensed in future periods. A balance of $4.2 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 December 31, 2020. At March 31, 2020, the consolidated balance sheet included $7.2 million in assets related to sales commissions to be expensed in future periods. A balance of $3.9 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, 2020.
During the three and nine months ended December 31, 2020 and 2019, respectively, the Company recognized $1.6 million, $1.6 million, $4.7 million and $4.8 million, respectively, 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 Doubtful Accounts
The Company continually monitors collections from its customers. The Company evaluates the collectability of its accounts receivable and determines the appropriate allowance for doubtful accounts 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 doubtful accounts (in thousands):
Balance at March 31, 2020$1,350 
Provision for allowance for doubtful accounts50 
Recoveries and other adjustments