What NetScout Systems (NTCT) Said on Its Q2 Earnings Call

Key Points

• Q2 results were modestly higher: Revenue rose 1.4% to $222.2 million and non-GAAP diluted EPS increased to $0.71 from $0.62. Lower operating expenses helped lift the non-GAAP operating margin to 28.3%.
• NetScout reaffirmed its fiscal 2027 outlook of $885 million to $915 million in revenue and $2.65 to $2.80 in non-GAAP diluted EPS. Federal order timing boosted first-half results, but management cautioned that government orders can be unpredictable.
• AI products are an emerging growth opportunity: NetScout reported a sharp increase in its sales funnel for Smart Data and Omnis, though long sales cycles mean the impact may be more visible next fiscal year. Management also expects cybersecurity revenue to grow at a mid-single-digit rate in fiscal 2027.

NetScout Systems NASDAQ: NTCT reported modest revenue growth and higher adjusted earnings for its fiscal second quarter, as cost discipline helped expand operating margins. The company reaffirmed its full-year outlook while pointing to early customer interest in its artificial intelligence products.

Revenue for the quarter ended September 30, 2026, rose 1.4% to $222.2 million from $219 million a year earlier. Non-GAAP diluted earnings per share increased to $0.71 from $0.62. President and CEO Anil Singhal said the results were consistent with the company’s expectations and that first-half performance kept it on track for its fiscal 2027 objectives.

NetScout said the quarter reflected the timing of government-related orders that came in earlier than anticipated and benefited the first quarter. Product revenue fell 5.1% to $89.9 million, while service revenue rose 6.4% to $132.3 million.

Margins Improve as Operating Expenses Decline

Non-GAAP operating margin expanded to 28.3% from 26.5% a year earlier, while operating expenses declined 2.7% to $116.9 million. Executive Vice President and CFO Tony Piazza said the expense comparison benefited from continued cost discipline and the shift of NetScout’s ENGAGE user summit into the third quarter from the second quarter last year.

Non-GAAP gross margin slipped to 80.9% from 81.4%, reflecting overhead costs associated with a DDoS asset acquisition. Adjusted net income rose to $52.8 million from $45.1 million.

For the first half, revenue increased 6.6% to $432.6 million, and non-GAAP diluted earnings per share rose to $1.23 from $0.95. Service Assurance revenue grew 8.2%, supported by the timing of federal government-related orders, while cybersecurity revenue increased 3.8%.

Piazza said federal revenue represented a percentage in the low teens of total first-half revenue, compared with its usual mid- to high-single-digit share. He said the company had a good federal pipeline for the second half but cautioned that the timing and size of orders can be less predictable.

Full-Year Outlook Reaffirmed

NetScout maintained its fiscal 2027 revenue forecast of $885 million to $915 million and non-GAAP earnings guidance of $2.65 to $2.80 per diluted share. The outlook assumes a non-GAAP effective tax rate of approximately 20% and 74 million to 75 million weighted average diluted shares outstanding.

For the third quarter, the company expects revenue of $240 million to $250 million and non-GAAP diluted earnings per share of $0.90 to $0.95. Piazza said the year-earlier quarter included approximately $15 million in orders pulled forward from the fourth quarter, creating a tougher comparison. Excluding that amount, the revenue outlook would imply low- to mid-single-digit growth, he said.

Free cash flow was a use of $17.8 million in the second quarter, driven by working capital timing. NetScout repurchased approximately 2 million shares for about $77 million during the quarter and said it intends to remain active in the market for the rest of the fiscal year, subject to market conditions.

The company ended the quarter with $571.3 million in cash, cash equivalents and short- and long-term marketable securities, down from $705.1 million at the end of fiscal 2026. It had no outstanding balance on its $600 million revolving credit facility.

AI Pipeline and Cybersecurity Opportunities

Singhal said customer adoption of AI remains in its early stages, but NetScout has seen a “dramatic increase” in its sales funnel for Smart Data and Omnis products. He declined to provide a fiscal 2027 growth estimate for those offerings, citing long sales cycles, and said the company may have more to share toward the end of the fiscal year.

The company recently introduced nGenius Copilot, a conversational AI extension to its nGeniusONE product, and announced connectivity that lets AI assistants and agents access its operational data. Piazza said NetScout initially offered some Omnis AI solutions to a select group of pilot customers before reintroducing them to a broader audience at ENGAGE.

Singhal said the impact of the newer AI products is likely to be more visible in the next fiscal year, with customer governance issues and hardware investment contributing to longer sales cycles. He identified AI and Omnis as potential sources of revenue growth upside, while Piazza also cited long-term cybersecurity opportunities.

Piazza said he expects cybersecurity revenue to grow in the mid-single digits for fiscal 2027. Beginning in fiscal 2028, NetScout plans to rename its Service Assurance business Network Observability to align with industry terminology.

Spending and Supply Constraints

Management described service provider spending as disciplined, with consolidation creating challenges. Singhal also said business in selected Middle Eastern countries has been affected by war and other factors, while Piazza said enterprise demand and the pipeline were healthy.

Singhal said rising server prices have created supply-chain challenges. Piazza said NetScout temporarily increased inventory to reduce its exposure and expects levels to normalize as secured materials are consumed and supply conditions improve.

Singhal also noted that Chief Operating Officer Sanjay Munshi resigned effective October 22. Members of the leadership team have assumed additional responsibilities, he said.

About NetScout Systems (NASDAQ:NTCT)

NetScout Systems, Inc NASDAQ: NTCT provides network performance management, service assurance and cybersecurity solutions for enterprises, communications service providers, government organizations and other large institutions. Its technologies are designed to help customers monitor network traffic, identify performance issues, maintain service availability and detect or respond to cyberthreats.

The company's offerings include the nGeniusONE service assurance platform, InfiniStream network monitoring and packet-based visibility technologies, and solutions associated with its Arbor portfolio for distributed denial-of-service protection, network detection and response, and other cybersecurity applications.

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