NETSCOUT Q2 Earnings Rise as Service Revenue Offsets Product Decline

NETSCOUT Systems Inc. (NASDAQ: NTCT) reported modest revenue growth for its fiscal second quarter while higher operating margins lifted earnings at a double-digit rate, as service revenue growth more than offset a decline in product sales. The network performance and cybersecurity company also reaffirmed its fiscal 2027 outlook following what management described as a solid first half.

Revenue for the quarter ended September 30, 2026, rose 1.4% year over year to $222.2 million. Service revenue increased 6.4% to $132.3 million, while product revenue fell 5.1% to $89.9 million.

GAAP net income climbed 33.1% to $34.4 million, or $0.47 per diluted share, from $25.8 million, or $0.35 per share, a year earlier. GAAP operating income increased 15.7% to $37.6 million, expanding the operating margin by 2.1 percentage points to 16.9% as operating expenses declined 2.7%.

On a non-GAAP basis, net income rose 17% to $52.8 million, while diluted earnings increased 14.5% to $0.71 per share. Non-GAAP operating margin widened 1.8 percentage points to 28.3%, although non-GAAP gross margin declined 0.5 percentage point to 80.9%.

First-half growth led by Service Assurance and enterprise customers

For the first half of fiscal 2027, revenue advanced 6.6% to $432.6 million. Product revenue grew 4.9% to $175.9 million, and service revenue increased 7.8% to $256.7 million.

Service Assurance revenue rose 8.2% to $283.8 million and represented 66% of first-half revenue. Cybersecurity revenue increased 3.8% to $148.8 million, accounting for the remaining 34%. NETSCOUT said it plans to rename Service Assurance as Network Observability in fiscal 2028.

Enterprise customer revenue increased 9.1% to $267.7 million, or 62% of the first-half total, while service-provider revenue rose 2.8% to $164.9 million.

Growth was broad across several regions. U.S. revenue increased 7.2% to $248.4 million, while international revenue rose 5.8% to $184.2 million. Europe and Asia recorded increases of 16% and 13.7%, respectively, partly offset by a 5.4% decline in the rest-of-world category.

First-half GAAP operating income more than doubled to $52.1 million, and GAAP net income increased to $56.2 million from $22.1 million. Non-GAAP net income rose 30.8% to $91.3 million, while non-GAAP diluted EPS increased 29.5% to $1.23. The first-half non-GAAP operating margin expanded 3.7 percentage points to 24.6%.

Fiscal 2027 outlook maintained

NETSCOUT reaffirmed its fiscal 2027 forecast for GAAP revenue of $885 million to $915 million. The company expects GAAP net income of approximately $115 million to $126 million and GAAP diluted EPS of $1.55 to $1.70.

Non-GAAP net income is projected at approximately $197 million to $208 million, with non-GAAP diluted EPS of $2.65 to $2.80. The outlook assumes an annual tax rate of about 20% and 74 million to 75 million weighted-average diluted shares.

Management said the company remains focused on profitable growth, free cash flow and shareholder value. It identified longer-term opportunities in network observability, artificial intelligence for IT operations, cybersecurity and distributed denial-of-service attack protection, including opportunities to expand within its installed customer base and win new business.

Cash flow and risks

NETSCOUT reported negative operating cash flow of $15.1 million in the second quarter and negative free cash flow of $17.8 million, compared with positive free cash flow of $44.3 million in the first quarter. At September 30, the company held $571.3 million in cash and securities, had total liquidity of $1.17 billion and carried no long-term debt. Deferred revenue stood at $460.7 million.

The company cautioned that its outlook is subject to economic weakness, lower-than-expected demand, foreign-exchange volatility, competitive pressure and its relationships with strategic partners and resellers. Other uncertainties include customer acceptance of its network performance management products, retention of key personnel and its ability to realize the expected benefit from acquiring assets from DigiCert’s DDoS protection business.